My portfolio at the end of June 2020
Here’s the summary of my portfolio at the end of June. (As usual, I figure it as of the last weekend of the month. You can think of it as a four week summary if you prefer.). If you have tended to skim certain sections in the past, thinking they are the same as last month, I’d suggest you read all the way through this time as there are likely to be new thoughts throughout. Please note that when I discuss company results, I almost always use the adjusted values that the companies give.
By the way, this is an enormous amount of work to put together and format and all the rest, and I hope that it’s worth it to you all
WOW! WHAT CAN I SAY!? WHAT IN THE HECK CAN I POSSIBLY SAY??
This has just been totally crazy. What a wild four months! And what unbelievable results! And I’m sure that many of you have done just about as amazingly well as I have. Well, here’s how it happened:
March was a terrible month, because the coronavirus turned into a really, REALLY, scary pandemic, which caused the market and the economy to tank even worse than they had in February. It was an awful month for the markets. My portfolio finished March UP 13.4% two weeks after hitting a low of DOWN 16% YTD on March 16th. Does that make any sense. That was a 35% rise of the entire portfolio in two weeks!!! The five market indexes finished March averaging down 26.6% year-to-date, which must truly have been catastrophic for many people. To put it in perpective, someone who invested in our companies at the beginning of the year, finished March 54% ahead of someone who put their money in the Indexes!!!
April was a better month, as the market started anticipating that there will be an end to this eventually. My portfolio gained 20 percentage points and finished April up 33.3% year-to-date. The market indexes also came back a little from the depths, but the average of the five indexes still finished down 18.8% year-to-date.
Then May turned out to be an extraordinary month for us. While the averages ended still down 11.0% YTD, incredibly, my portfolio finished May up 73.6%.
Finally we come to June, with my portfolio up over 120% intraday last Tuesday morning, I really, REALLY, felt that this was surreal. I understand that Covid was accelerating the Cloud and digital adoption by perhaps three years compressed into one, but it was still truly bizarre to have my entire portfolio up over 120% in six months. And six months in which the market as a whole was losing money, still negative, and the economy had tanked in the middle of a horrible pandemic.
Well on Tuesday, with more than double the money in my account than I started the year with, I decided to permanently remove about 4.6% of my portfolio value from my portfolio. I turned it into cash and set it aside and won’t be reinvesting it in the market to take advantage of pullbacks. It’s a safety nest-egg. I obviously don’t ordinarily do this, but up 120% in six months in a down market isn’t ordinary times.
If we look back to my portfolio low on March 16, of 84.0% (down 16.0%) and compare it to the end of June, at 215.9% (up 115.9%) you will see that my ENTIRE portfolio finished up 157% from its low (more than two and a half times its low) in just three and a half months. Who would have believed it in March? Not me! Not you either probably! Again showing the futility of trying to time the market!
What our overvalued stocks have done 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.
Finishing the six months up 116% when the market is DOWN 11% almost doesn’t sound plausible to me, but this is the third year out of the last four with this kind of implausible results.
Here’s why it is happening: Back in February I predicted that, while old economy stocks could have severe revenue loss from the then just starting virus pandemic (retail, travel, hotels, concerts, theatre, manufacturing [supply chain problems, shipping to customer problems, and customers closing down for the duration of the epidemic]), I expected that our “wildly overpriced” SaaS companies would be seen as a safe refuge, a port in a storm as their revenue is recurring, and that Zoom especially might have a huge increase in revenue while other companies were bleeding revenue. I acted on my own advice. I stayed fully invested and added to my highest confidence stocks.
A SUGGESTION, REPEATED
We have been very fortunate, while many people have been suffering from the effects of the pandemic, and I’d suggest that you consider giving a portion of our extraordinary profits to charities, food banks, non-profits, etc, and even helping your favorite small businesses, restaurants, etc, in your neighborhood who seem to be having a truly hard time.
REFLECTIONS I
I find it wonderful that there are still people around talking about how overpriced our stocks are. If everyone realized what was going on I’d be worried. When Zoom, for instance, had just announced earnings earlier in this month (June) and was priced at $207.60, I pointed out that all eight articles on Seeking Alpha were telling us to sell or short Zoom, because it was overvalued. That didn’t sound to me like a bubble. In a bubble you’d have seven out of eight telling you to buy!. At any rate Zoom is now at $256.80, which is up $49 and 24% in less than a month since all those “sell it now” articles.
REFLECTIONS II
I think that we have enough distance now that we can look back at what happened with the troll and short attack that hit Zoom in mid March. We are three months away, and Zoom is up over $140 per share, about 127% (more than doubled) in three months, from when those guys were trying to scare you out. Those guys, for the most part, had never posted on our board before, had rarely if ever posted on the MF anywhere before, and then suddely show up to say very earnestly, over and over again, how they are SO concerned because you can’t trust the “integrity” (I remember that that was the word they used), of Zoom’s CEO. Several of them kept using the same word, “integrity,” as if it was in a script that they had been directed to use. It was almost comical to me, for if there was one thing people who knew Zoom would swear on, it was Eric’s integrity. He might have been naïve about how many awful people might show up to Zoombomb little kids with pornography, but “integrity”???
I want you to notice that after their four or five days of multiple posts about Zoom’s security lapses and integrity, they NEVER have posted on our board again. Never posted before the troll attack, then they show up for several days of repeated attack posts, then they never post again, on Zoom or anything else. They were gone. They finished their job. Bye-bye !.
I tried on several occasions to warn the board about what was going on, to prevent people getting scared out by these guys who just showed up out of nowhere, but some well-intentioned people on the board kept saying we shouldn’t shut out opposing points of view.
If the opposing points of view came from respected members of the board, if we were getting urgent warnings from Muji or GauchoChris for instance, that would be true, but opposing points of view from guys who just showed up to troll, was an entirely different thing. That’s the way I saw it anyway. And I suggest you be aware if people you’ve never seen before show up suddenly to earnestly attack our stocks
EARNINGS COMING UP
No earnings coming up in July.
MY RESULTS YEAR TO DATE
My portfolio closed this month up 115.9% (at 215.9% of where it started the year)! 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%**
**End of May + 73.6%**
**End of Jun + 115.9%**
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 6.9% YTD. (It started the year at 3231 and is now at 3009). Down about a point in June, a stupendous month for us!
The Russell 2000 (Small and Mid Cap)
Closed down 17.3% YTD. (It started the year at 1668 and is now at 1379). Also down about a point in June!
The IJS ETF (Small Cap Value)
Closed down 29.3% YTD. (It started the year at 160.8 and is now at 113.7). Down about two points in June! So much for value stocks outdoing overpriced stocks!!!
These three indexes
Averaged down 17.8% YTD. Down about 1.3 points in this extraordinary month for us!
If you throw in the Dow, which started the year at 28538, is now at 25016, and is down 12.3%, … and the Nasdaq, which started the year at 8973, is now at 9757, and is up 8.7% (the only market index that’s up at all) … you get down 11.4% for the average of the five of them YTD, down 0.4 points for the month. And if you remove the two outliers (the Nasdaq and the IJS), it’s practically the same result, down 12.2%.
So the market averages got killed in March. In April they reduced their year to date losses, but were still very much in the red, in May they improved again, but were still in the red, while our stocks were up over 73%!!! And at the end of this month, June, they were still down 11% on the year, while a portfolio made up of our stocks is up 116%.
What does that tell you? Clearly, that picking concentrated portfolios of stocks that will be winners, the way we do, beats investing in Indexes and ETF’s, 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.
WHAT’S GOING ON WITH OUR STOCKS
With the pandemic, companies in the travel and entertainment industries collapsed. 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 tech appliances, where orders can totally dry up, and revenue can actually FALL…. A Lot!
Our companies’ revenue comes from subscriptions and doesn’t require 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 has been in a justified panic about the coronavirus, and our companies are concerned that they may be affected somewhat and are guiding conservatively, 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.
Paradoxically, this pandemic, with so many working from home and ordering from home, has accelerated the move to digitalization and move to the cloud that our companies benefit from, so some are feeling tailwinds instead of headwinds. We’ll have to wait and see, but our companies seem to ve doing MUCH better than the economy as a whole.
”YOU CAN’T TELL ANYTHING IN SIX MONTHS!”
Yes, there are always the people who say you can’t tell anything in six months, and that six months doesn’t prove anything, so I thought I’d give you three years and six months.
In 2017, 2018, 2019, and the first six months of 2020, my portfolio was up 84.2%, 71.4%, 28.4% and now 115.9%, so far this year. That compounds to up 775% in three years and six months. That’s 875% of what you started with, more than a octuple, an eight-bagger, and almost a nine-bagger.
In those same periods of time, the market indexes were
up 14.4%, down 8.5%, up 26.4% and now down 11.4%. That compounds to up 17% in the same time.
So in the three years and six months, while our portfolios were up almost 800%, the market as a whole went nowhere, and was up all of 17%.
That kind of difference is no fluke! Yes, intelligent stock picking DOES work!!!
This is the last month I’ll post this summary, at least for a while. I think I’ve over-made my point.
LAST FOUR MONTHS REVIEW
March continued the sell off because of the coronavirus pandemic. I finished selling out of Afterpay (see my reasons in my End of February summary, which were based on the results I expected due to the virus pandemic, and which were clearly erroneous). 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.
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 ballpark, 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 February’s end of the month 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 the last week of April 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.
May was another very positive month for the portfolio, and I made some changes during the month. I exited Roku early in May at an average price of about $124.50 (currently at $122.50). Exiting Roku turned out to be a fortunate decision as Roku hasn’t moved in two months, while the stocks in my portfolio rose from up 33% at the end of April to up 116% in two months. (Note: that doesn’t always happen. Sometimes I exit and the stock goes straight up!)
I went back into Coupa, starting at $172.50, and adding as it went up, after exiting my last big chunk of it in April at about $163.00. (Note that I didn’t even think about the fact that I was buying it at a higher price than the one I had sold it at. That was irrelevant). At the end of June it was at $227.50, up a substantial 32% since that first repurchase early in May.
I sold almost 40% of my Alteryx at roughly $130 for reasons I discussed on the board, and took a 4.0% position in Livongo at $53. I added to Datadog after its spectacular earnings report. All of the above was concentrated near the beginning of the month, but in the last week of May I took a 3.6% position in Fastly at about $39.98, thanks to all the intelligent discussion on the board. It closed June at $86.51, up a rather astonishing 116% in a month…
In my End of the Month Summary for May I linked to what I thought was my biggest mistake in April (selling Coupa), and a deep dive into Coupa and why I was buying it back, to another update about why I was selling Alteryx and buying some Livongo and Datadog, and finally, to why I bought Livongo. The link to that End of the Month Summary is:
https://discussion.fool.com/my-portfolio-at-the-end-of-may-2020-…
In June I added no new positions and deleted no positions. I increased my Fastly position as much as I could, but I was limited because I didn’t have anything I was really anxious to sell. I mostly trimmed Livongo, as I felt that Fastly’s growth potential, like many of our companies, was based on the growth of data and usage and thus was basically unlimited, while Livongo’s was large but that they’d eventually come to the end of it in several years. There is a limit to how many illnesses can be usefully managed by little devices on-line, but data increases forever. It may be a mistake but that’s what I did. I also trimmed a tiny bit of my Okta and Alteryx for cash to buy more Fastly.
I decided to increase my Fastly largely because they gave guidance for revenue growth of 54% next quarter, which is up 16 percentage points sequentially(!) from the 38% growth in the quarter they just announced. They implied that this was due to increased usage because of the move to the Cloud, accelerated by the pandemic. Well, This was an extraordinary sequential gain in the growth rate, but in the world we live in, no CEO going out on a limb and forecast 54% growth unless he’s
“sure” they will have revenue growth of 60%, at least, next quarter. I’m happy with my purchases. As you remember, my initial 3.6% purchase was at $39.98 at the end of May. I bought more this month at $45 and $47, and added small bits at various prices from $51 to $64, and this week, a couple of tiny adds even higher, happily adding at “worse and worse value points”
, as Fastly continued to rise. I bought at the price it was at. It closed the month at $86.51, up over 100% in one month, and up 33% even from my $64 purchase a week ago. It is worth reflecting that if I HAD waited for “better vaue points”, I would have missed the entire 100% rise trying to save 2% or 3%…
And then, last Tuesday, with my portfolio up 120% in six months, when I decided to set 4.6% aside in cash, I sold out of my Livongoat $75.56 to raise part of the cash. That was up 26% from my May purchase price. Livongo closed Friday at $74.99.
HOW THE INDIVIDUAL STOCKS HAVE DONE YTD
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 256.80 up 277.4%**
**DataDog from 37.78 to 84.50 up 123.7%**
**Fastly from 39.98 to 86.51 up 116.4% (Buy end of May)**
**Crowd from 49.87 to 98.79 up 98.1%**
**Okta from 115.37 to 203.49 up 76.4%**
**Alteryx from 100.07 to 162.42 up 62.3%**
**Coupa from 172.50 to 275.70 up 59.8% (Buy in May)**
Reflections: As Robert Burns said “The best laid plans of mice and men go oft astray,” and the same thing often happens to me when what I thought were sensible decisions turn into mistakes. However, I think that the decisions I made in the past couple of months have turned out pretty well, all things considered: concentrating on Zoom and later on Fastly (great), greatly trimming Alteryx after earnings (okay), trimming Okta for cash (okay), cutting Coupa for cash (so-so, keeps going up) , selling out of Livongo on Tuesday morning (don’t know yet), and sticking with Datadog and Crowdstrike (fine).
POSITION SIZES
As often happens at times of great stress and uncertainty, I sold off lower conviction positions and concentrated my funds in my highest conviction companies. This brought me down in April to just five large positions, but I guess that I relaxed a little in May and June as in May I added three small tryout positions, each in the range of about 3.6% to 4.0% in size. Then in June I focussed on Fastly and built it up to what is now a 10.4% position (it grew into part of that by itself), and deleted Livongo and reduced Coupa.
My portfolio now has three positions clustered around 21.5%, three others clustered around 10.5%, and Coupa at about 2%. Keeping the number of my stocks down really makes me focus my mind and decide which are really the best and highest confidence positions.
Here are my positions in order of position size, and bunched by size groups…
**.**
**Zoom 22.9%**
**Datadog 21.8%**
**Crowdstrike 19.8%**
**Okta 11.5%**
**Fastly 10.4%**
**Alteryx 9.9%**
**Coupa 2.1%**
STOCK REVIEWS
Crowdstrike is in 3rd place in my portfolio at a 20% position. It hit a low of $33 in the March panic and is now about $99, so it is up 200% from that low!!! It would be up even more except Barclay’s Bank offered a large block of shares on Friday for an undisclosed shareholder which dropped the price $7.
Crowd reported a very strong quarter this month, but it was on the same day that Zoom reported so it somewhat paled by comparison. Crowd had results that would have been wildly great for any normal company, but for Crowd some of us were slightly disappointed that they weren’t even better. Here’s what they looked like:
“Our results exceeded our expectations across the board. We achieved 88% ARR growth and 105% subscription customer growth. We drove substantial operating leverage, achieved adj operating profitability for the first time, and generated record positive operating cash flow and free cash flow.
Total revenue was $178 million, up 85%
Subscription revenue was $162 million, up 89%. It was 91% of total revenue.
Annual Recurring Revenue (ARR) was up 88% to $686 million, of which $86 million was added in the quarter.
Adj Subscription Gross Margin was 78%, up from 73% a year ago
Adj operating income was $1.2 million, up from a LOSS of $21.9 million a year ago.
Adj net income was $4.5 million, up from a LOSS of $22.1 million
Adj EPS was 2 cents, up from a LOSS of 47 cents!!!
Operating Cash Flow was was $98 million, up from a LOSS of $16 million!!!
Cash rose to $1,005 million.
Dollar based net retention rate (DBNRR) exceeded 120%
Added 830 net new subscription customers in for a total of 6,261, and 105% growth year-over-year.
Subscription customers with four or more cloud modules increased to 55% and those with five or more increased to over 35%.
Our Falcon endpoint protection platform was named a Leader in The Forrester Wave. It received the highest possible score in 11 criteria.
For the 2nd consecutive year, we earned the highest overall rating in Gartner’s Customers’ Choice for Endpoint Detection and Response (EDR) with an overall rating of 4.9 out of 5 from 106 verified customer reviews.
Announced partnerships which make the Falcon platform widely available across Germany, Austria, and Switzerland.
Conference Call (edited from sjo’s notes)
100% of our workforce are now WFH. Hiring like crazy and most people they interview and make offers to are accepting the offers.
Customers continue to prioritize cybersecurity spend as mission critical. The heightened threat environment is worst they’ve ever experienced.
CRWD is easy to deploy and manage from a remote location, no matter where employees are located.
75% increase in ARR sequentially.
Symantec is rapidly being abandoned by their customers and CRWD is onboarding them.
We continue to innovate and spend on R&D. We get $3.77 of ARR for every $1 spent
73% of revenue from US
AWS has been a fantastic partner who has removed a lot of the friction experienced previously.
Falcon for containers and AWS: ARR is up 75% over last year. This is a greenfield opportunity. Big difference between what CRWD does and competition, because there is zero friction since CRWD can navigate outside the containers.
dollar based net retention remained over 120%.
Gross margins - More modules mean more gross margin for CRWD. In the future, they see even more opportunities to expand margins.
Lots of growth is coming from new endpoints, with so many new laptops being sold. Workload protection (cloud, on-prem, etc.) is really what we are focused on, and it’s a much broader market than endpoint protection. We have an advantage due to the digital transformation because of our cloud architecture vs. legacy systems.
Seeing more people asking for CRWD services on their personal home computers.
CRWD spends a lot of time working on Kubernetes, very differentiated product that goes into the run time of Kubernetes. Lot of future opportunities to streamline this. It’s so easy to deploy.
Opened up the platform and now have 11 high-quality, vetted partners who produce results.
11 modules now, and always working on more modules based on feedback from customers.
What’s driving our exceptional performance?
Customers have suffered breaches and are looking for a system that just works.
Incumbents losing market share,
Cloud adoption, digital transformation
Work from home
It’s simple and easy to use and the mobile tool has great traction.
Do you expect to see churn? Yes, they are expecting more contraction and churn. It’s reflected in their guidance.
They’ve been able to get to their customers via WFH very, very effectively.
Zoom is in 1st place, at 23% of my portfolio. As you all know, in the last quarter Zoom 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, and the most rapidly growing, company in the world!!!
They suffered from a sudden, very organized, hacker and short attack from mid-March through early April, with a stream of attacks dealing with Zoom’s security (which was set up for enterprises who had IT departments, but just wasn’t set up for the huge flood of unsophisticated users.
The price tanked for a while in March down to $113, but it came back, and is now at $257 (up well over 100% since then), and a new all-time high, as Zoom has greatly worked on and improved their security, as well as making other changes to inspire confidence, like opening two large engineering complexes in the US.
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 Zoom will grow revenue at least 200% this year (triple it), or probably considerably more. That’s only $1,870 million, and it is VERY hard to see how they will not beat that. They are already predicting (and thus expecting to beat) $1,800 million already, and they will raise that in each of the second and third quarters, and beat in the fourth.
Here are the results of Zoom’s Apr quarter, which was announced this month. It has been widely seen as the most astonishing and best quarter ever seen by mankind.
Total revenue of $328 million, up 169%
Adj op income was $55 million, up from $8 million yoy!!!.
Adj op margin was 16.6%.
Adj net income was $58 million, up from $9 million!!!
Adj EPS was 20 cents, up from 3 cents
Cash was $1.1 billion.
Op cash flow was $259 million up from $22 million !!!
Free cash flow was $252 million up from $15 million !!!
Customers with more than 10 employees were 265,400, up 354%
Customers with than $100,000 in TTM revenue up 90% to 769 from 404 a year ago, and up 128 or 20% sequentially from 641. [But this was in older customers, and looking backward, because it was Trailing Twelve Month Revenue. They also told us they signed up over 500 NEW customers with more than $100,000 in ARR in the quarter, which weren’t counted in the TTM figure because they haven’t been around for 12 months. (This is forward looking contracts over $100,000). This was huge, coming off a base of 641, and will show up in the TTM metric in future quarters.]
Net dollar expansion rate in customers with more than 10 employees was over 130% for the 8th consecutive quarter.
Remaining Performance Obligation (RPO) is $1068 million, up 183% from $377 million last year, and up 77% sequentially !!!.
Saul here: And keep in mind that they accomplished all this while they had to support an unimaginable number of millions and millions of NEW free accounts during the quarter, fought off attacks on their reputation by their competitors and shorts, and had to redo their entire security set-up to accomidate all these new free accounts. They predicted $500 million in revenue for this next quarter we are now in, which means they are sure of let’s say 7% more or $535 million. That will be up 266% from $146 million last year!!! It will also be up 63% sequentially!!! (That’s not a misprint, it’s up 63% sequentially. Of course the sequential rises will slow in the October quarter when sequential comparisons will no longer be New Zoom vs Old Zoom, but New Zoom vs New Zoom.) They will be raising estimates every quarter.
I wouldn’t get all carried away by that $252 million Free Cash Flow. A lot of those new customers they signed up must have paid in advance, and that gave them $552 million in deferred revenue (RPO already paid in but not yet billed). I don’t think we’ll see anything like $252 million each quarter, because I don’t see them signing up that many NEW customers each quarter.
One more thing: Share Count guidance for 2nd Q is 299 million and for fiscal year is 300 million, guiding to almost no dilution
Datadog is now in 2nd place at a 22% position. 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 it all 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 March quarter, which was an incredible quarter which shot Datadog’s price up enormously. Please keep in mind that March (the peak of the pandemic) was included in these amazing quarterly results, and that March and April are often included in the conference call remarks.
Revenue of $131 million, up 87% (which is up from 76% growth a year ago.)
Gross margin was 80%, up from 73%, and up from 78% sequentially.
Customers, with over $100,000 ARR at 960, up 89% from 508.
Total Customers of 11,500 up 40% from 8,200.
Customers added: about 1000, which is twice the number added last year.
Op Cash Flow was $24 million, for a 18.5% margin.
Free Cash Flow of $19 million, or 15% margin.
Cash was $800 million
Dollar-based net retention rate was over 130, as usual.
Customers using two or more products was 63%, almost double the 32% last year, and up from 58% sequentially. About 75% of our new logos landed with two or more products.
Remaining Performance Obligations or RPO was $256 million, up 82%. Billing was only up 50% because some customers switched to quarterly payments instead of annual to manage their cash in the pandemic. The higher growth of RPO indicates increases in longer-term commitments even when billing terms may be altered.
Regarding the way the pandemic may affect Datadog, there are a few important structural points to understand about our business.
First, we have a very diverse customer base and less than 10% of our ARR comes from the most negatively impacted such as hospitality and travel airlines and in person entertainment. On the other hand we also have customers who have experienced increasing traffic in streaming media, gaming, food delivery, e-commerce, and collaboration.
Second, we have a great diversity of customers. We have low concentration and about 75% of our ARR comes from customers that pay us $100,000 or more. Less than 15% of our ARR comes from a long tail of small businesses.
Third, we price according to our customers’ infrastructure footprint and not per seat. So, our product usage is not directly affected by reductions in the workforce.
Fourth our business model is low-friction land-and-expand and our platform is adopted bottom up. We often land fast and small as enterprises begin their cloud migration and then we frictionlessly expand from there as more workloads move to the cloud. This makes our sales effort less dependent on physical meetings and makes our model is extremely efficient and less reliant on large upfront deals.
Fifth, we are pure SaaS and require no professional services or in-person implementation.
Turning to what we saw in March and April.
First of all, the pandemic did not seem to materially affect our financial results for the quarter. Throughout the quarter, we saw consumption continue to increase across the platform and growth has remained consistent with historical trends.
We started to see some negative effects in impacted industries such as travel, hospitality and airlines. But we’ve also seen substantially increased usage from other categories of customers who scaled up their operations in this environment.
We saw a surge of usage and surge in accounts in March in response to COVID that could be more transitory in nature and may normalize over time. In terms of new deals, we did have a strong end of the quarter with limited impact from COVID.
Enterprise sales teams, who are serving companies of more than 5,000 employees, have been especially successful in adapted to selling by phone and video.
Our user conference Dash is going virtual, likely in Q3.
We believe it is more important than ever for businesses to operate online, and that the trends of digital transformation and cloud migration may even be accelerated or amplified.
We believe we are well positioned to be a primary beneficiary of this trend and continue to win in the market. And we also believe that the efficiency of our business, and our ability to innovate will be advantages in a difficult market.
As such our plans remain clear. We are investing across the board.
We’re investing in the development of existing and new products including aggressive R&D recruiting targets and taking advantage of the opportunity to attract talent that would otherwise not be on the market.
We’re investing in the growth of our S&M team across segments and geographies.
We’re investing in our relationship with customers as some of them go through difficult times, and it is more important than ever for them to operate digitally.
And we’re investing in our existing employees to keep them safe and sane through this crisis.
To conclude on this point, I would say that while I can’t promise for macro reasons that we’ll see the same incredibly fast return on these investments as we have historically. We are very confident in the mid and long-term opportunity in front of us and in our strategic plan to live up to it.
Saul here: I thought that this Datatdog report was extraordinary. They accelerated right through March and April and are going great guns. However, because of uncertainty they are being a little cautious as to guidance. A very different picture than Alteryx, which dropped from 75% growth to 40-something percent, and guided to 14% at the midpoint.
Alteryx is at 10% of my portfolio, and in 6th place. It announced March quarter results in May. Revenue growth dropped from 51% yoy, and from 75% sequentially, to 43%, and I reduced my position size by almost 40%. For more on why I did so, I’d suggest reading two of my posts on the subject:
https://discussion.fool.com/sorry-but-here-is-another-update-345…
https://discussion.fool.com/saul-mentioned-quotalteryx-is-pullin…
What Alteryx does 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.”
Okta in 5th place, is a 11.5% position. It was up 81% in 2019, and is over a sextuple since I first bought it over two years ago at $29.95. 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 the March meltdown it got as low as $96 and it’s now up over 100% from there.
In May they announced their April quarter results. Here’s My Take: This quarter included the two worst pandemic months, March and April. Okta did great in the pandemic, and almost all their metrics were very good. They accelerated revenue growth slightly. They seemed very positive and excited for the future, but felt they had to be conservative in their guidance for the next two quarters because of the uncertainty of the Covid progression in the next two quarters. I got the impression that they made that decision to guide very conservatively a couple of weeks ago, before things lightened up. I wasn’t the least bit disappointed. And obviously neither was the market. Okay, starting below is my greatly edited, shortened and paraphrased version of their press release, investor presentation, and conference call:
Okta is at the forefront of aiding adaptation to this environment where secure remote access has become a top priority across industries. Our strong performance reflects our market leadership and ability to effectively and quickly shift to a fully remote workforce. This shift is enabled through our core technology, which allows secure access to any technology from anywhere. When this crisis is over, we don’t expect organizations to revert to their prior ways of working. We hope to seize the opportunity to emerge in an even stronger position.
Total Revenue was $183 million, up 46%. This accelerated slightly from 45% sequentially.
Subscription revenue was $174 million, up 48%, and made up 95% of total revenue. Growth accelerated by 2% from 46% sequentially.
Remaining Performance Obligations (RPO) was $1.24 billion, up 57%.
Current RPO, which is contracted subscription revenue that will be recognized in the next 12 months, was $619 million, up 49% yoy. [Note that this is already 112% of the $553 million in subscription revenue they had in all of last year!!!]
Adj gross margin was 77.5%, up almost 2% from 75.7% a year ago
Subscription adj gross margin was 81.8%, flat with a year ago.
Adj operating loss was -$12 million, or 7% of total revenue, improved from -$25 million, or 20% of revenue, a year ago
Adj net loss was -$8 million, improved from -$21 million a year ago.
Adj EPS was -7 cents, improved from -19 cents a year ago.
Op cash flow was a record $39 million, or 21% of revenue, up from $21 million, or 17% of revenue, a year ago.
Free cash flow was a record $30 million, or 16% of revenue, up from $13 million, or 11% of revenue, a year ago.
Cash was $1.45 billion.
TTM Dollar Based Net Retention Rate was 121%, up 2%, and highest level in seven quarters.
Total Customers were 8400, up 28%
Customers over $100,000 were 1580, up 38%
While we believe it’s prudent to continue to expect some near-term business headwinds as the economic impacts from the pandemic further unfold, we remain highly confident in our long-term success as the leader in the massive identity and access management market… we have a very strong and robust pipeline right now, not just for Q2, but also Q3 and Q4.
For the second quarter, we expect adj operating loss of $5.0 million to $4.0 million and adj net loss per share of 1 to 2 cents.
Conference Call
Fedex rolled out Okta for 85,000 employees in 36 hours!!! Okta also announced new and expanded partnerships with Australian Red Cross, Moody’s, State of Illinois, T-Mobile, Workday, Zoom, etc.
We made the early decision to close our offices around the world and transition 100% of our 2,000-plus employees to work from home. We were able to transition rapidly and seamlessly because over a year-ago we began an initiative that we call Dynamic Work, in which our employees utilize our core technology to enable secure access to any technology from anywhere. This allowed us to build a more agile, flexible workstyle into our culture, ensuring our employees around the world can be successful regardless of their location. This agility helped us continue to execute as we entered this new environment and we are very pleased with our Q1 results.
The vast majority of our overall business is generated from large enterprise companies. Within these customers, we did experience some projects getting more scrutiny, but believe the project decisions have been pushed out to a later date rather than canceled. These delayed decisions were primarily within the industries most impacted by the pandemic.
We also experienced demand from both new and existing customers that needed to fast track their identity and access management plans as a key element of their emergency response.
Fedex called us and said, “Instead of doing it gradually over a few months, as we had planned, we want to do it next weekend”. In just 36 hours, we helped them deploy the Okta Identity Cloud to enable more than 85,000 remote and essential employees to connect to critical applications amid increased demand during the crisis. This was a massive deployment accomplished in just days.
Recently, T-Mobile successfully completed its merger with Sprint, creating the second largest U.S. wireless provider… Given its prior success with Okta, T-Mobile is relying on Okta to be a foundational part of their day-one architecture helping onboard an additional 30,000 employees.
The total number of 100,000K plus customers is now nearly 1,600 and the annual contract value of this cohort increased nearly 50%.
A much smaller portion of our overall business is generated from SMBs. As expected, we did see some business activity slow in the sector, but this sector has less impact on our overall business.
We had nearly 20,000 registrations for the virtual Oktane20 Live, which is over 3x what we had expected for the in-person event.
During Oktane, we also announced important new strategic technology partnerships with leading endpoint protection and management providers, VMware Carbon Black, CrowdStrike and Tanium.
While we are excited about the current state of our business and believe the future is extremely bright for Okta, we understand that we are in the midst of an uncertain economic environment, and that millions of people and businesses around the world are facing difficult times. We don’t expect organizations to revert to their prior ways of working. We have no doubt that a much higher percentage of workforces will be connected remotely and we see that as an inevitable long-term trend. I believe that this pandemic is fast-forwarded the adoption or at least the mindset around adoption of cloud in general, by five years.
Usage overall is really accelerating, which is exciting. We’re a company built on customer success and we’re seeing our usage of all our products shoot up as people work-from-home, particularly in the Multi-Factor Authentication product… Customers are having a ton of success with that, which is great.
Competition: Our leadership position in Identity has positioned us really well. I think you see a very large bifurcation in the market. It was clear before the recent pandemic, but if anything you see it accelerating now as customers are really differentiating between legacy on-premises vendors where it’s difficult to implement, difficult to maintain and in this day and age, difficult to even access your servers and modern cloud solutions.
A great example this quarter was we had an upsell Zoom, where they obviously were massively expanding the number of servers that they were using as well as servers under management. And they turned to our Advanced Server Access product for thousands of servers across multiple different platforms that they have, because it’s a very easy, scalable way to deploy modern next-generation technology. Saul here: glad to see that Zoom is again getting the best in security.
Landing: with the depth of the different products, we’re really starting to get the opportunity to land in a whole bunch of different ways. And you’re seeing a lot of these products becoming so feature complete that you can land with something like Multi-Factor Authentication, you can land with a Customer Identity and Access Management project and then crossover.
Albertsons, obviously, one of the largest food retailers in United States, has over 20-plus banners like Safeway, Vons, Jewel-Osco. And they turned to us to create exactly what you’re talking about, a streamlined omni-channel experience for the millions of shoppers they interact with each week. So that you as a end consumer are going to have one way to authenticate whether you’re going into a Safeway or whether you’re paying with your Vons card at the gas station.
Saul: I added to Okta at $118, $124, and $130 in April, and at $151 in May. It finished June at $203.49. I trimmed some for cash to add to Fastly during the month
Fastly in 5th place and grew from a 3.6% at the end of May to a 10.4% position now. I decided to increase my Fastly position so “fastly” this month largely because they gave guidance for revenue growth of 54% next quarter, which is up 16 percentage points sequentially(!) from the 38% growth in the quarter they just announced. They implied that this was due to increased usage because of the move to the Cloud, accelerated by the pandemic.
Well, This was an extraordinary sequential gain in the growth rate, but in the world we live in, a CEO going out on a limb and forecasting 54% growth means that he is ‘sure’ they will have revenue growth of 60% at least, next quarter. After all, he could have predicted 44% (up from the current 38%) and everyone would have thought it was spectacular. But he chose to predict 54%.
I’m happy with my purchases, which at the current price of $86.51, is up well over 100% from the $39.98 that I started buying at, and up 100% in one month from $43.14 at the end of May.
Coupa in 7th place and a 2.1% position. I wrote up why I went back into Coupa and it’s too long to repeat here.
https://discussion.fool.com/my-biggest-mistake-in-april-was-sell…
Livongo. I sold out in June. I wrote up why I invested in it here, and won’t repeat it.
https://discussion.fool.com/why-i-took-a-position-in-livingo-thi…
I explained why I sold out of it above
FINISHING UP
Let me remind you first, that I have NO IDEA what our stocks will do next month. I’m terrible on predictions. But I know that the businesses of our companies will do just fine for the most part.
I feel that 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