Here’s the summary of my portfolio at the end of March. As usual, for my own convenience, I figure it as of the last weekend of the month. You can think of it as a four week summary if you prefer. (April will have five weeks).
Well, March was a heck of a month! I finished February at about flat for the year (up 0.3%), and a week and a half later I was down 17%, to 83% of what I started with. And three days later I was back up from that -17% to -2%. And then drifted back down and finished at -13%. It was wild and crazy. There was no bad news! Every one of our companies reported excellent earnings.
In fact, if I look at these six positions (which make up 87% of my portfolio*), here’s what their rates of revenue growth looked like in their most recent quarters:
**Crowdstrike 74%**
**Cloudflare 50%**
**Datadog 56%**
**Inari 144%**
**Snowflake 117%**
**Twilio 65%**
Their revenue growth rates average up 84% !!! With growth averaging 84%, and the “weakest” growing at 50%, it’s clear that these companies are doing just fine, irrespective of transient fluctuations in their stock prices.
In 2020 our companies stood out as a safe port in a storm, and their stock prices got bid up quite high. Right now, a lot of the people who hopped on SaaS companies, without really understanding much about them, are selling them and rushing off to invest in cyclicals as their next fad. I am no good at timing the market and I won’t try, but will just stick with strong rapidly growing high-confidence companies.
This year will have more ups and downs, and we are more likely to grow at a more normal rate, more related to the rate of growth of our companies’ revenue growths, or a little less (which is my current guess, anyway), which won’t be bad 
, but it certainly won’t be like last year.
*Even if I look at all nine of my positions, including the bottom of my portfolio, their last quarter revenue growth rates average to growth of over 75%. As I said before, these companies are very successful and are doing very well, irrespective of transient fluctuations in their stock prices.
A BIT OF IRONY HERE
In looking through the Knowledgebase (which was updated at the end of 2019), I came across this paragraph that I had written in 2019:
Please note: I wrote in the 2015 edition of the KB that I can no longer get in and out of a stock position on a dime as I could when my portfolio was a tiny fraction of the size it is now. I just can’t be as nimble as I was, and I said that I’ll be very happy now if I can average 22% growth per year instead of 32%.
Well, in the four years of 2016 through 2019, since I wrote that I’d be happy with 22% instead of 32%. I compounded at a rate of a little over 42% instead of 22%. I really don’t think that is a realistic expectation going forward.
So what happened? In 2020, instead of growing at 42%, my portfolio grew at 233%, and here I am again saying: “Please don’t expect me to duplicate that, or anything like it, every year. It just ain’t gonna happen!”
Those two Knowledgebase entrees prove that I’m not a very good future prognosticator about my results, but NO! I’m not going to grow by 200% this year, probably not by 100%. Don’t expect it! “It just ain’t gonna happen!”
WHY DID OUR STOCKS DROP?
I don’t know for sure, but it’s happened many times before. I suspect some investors, some bots, and some hedge fund managers said to each other: “Hey, people are finally getting vaccinated. Let’s move into cyclicals.”
As I said above, there has been no bad news for the companies in my portfolio. In fact it’s all good news. Companies are moving to the cloud at an accelerating rate. Companies are finally taking security seriously after those massive breaches. Our companies results have been good, and are likely to remain good in the future.
I can’t tell you what the market will do Monday, or next month, or the next three months, or six months, but I can tell you that these companies are very successful, and that I can sleep well with them in my portfolio.
MY RESULTS YEAR TO DATE
My portfolio closed this month down 13.0% (at 87.0% of where it started the year)! Here’s a table of the monthly year-to-date progress of my portfolio for 2021.
**End of Jan + 2.5%**
**End of Feb + 0.3%**
**End of Mar - 13.0%**
HOW DID THE INDEXES DO?
Here are the results year to date:
The S&P 500 (Large Cap)
Closed up 5.8% YTD. (It started the year at 3756 and is now at 3975).
The Russell 2000 (Small and Mid Cap)
Closed up 12.5% YTD. (It started the year at 1975 and is now at 2221).
The IJS ETF (The S&P 600 of Small Cap Value stocks)
Closed up 25.3% YTD. (It started the year at 81.3 and is now at 101.9)
The Dow (Very Large Cap)
Closed up 8.1% YTD. (It started the year at 30606 and is now at 33073).
The Nasdaq (Tech)
Closed up 1.9% (It started the year at 12888 and is now at 13139).
These five indexes
Averaged up 10.7% YTD. The IJS was a again a surprise at up 25.3%. Last year they held down the average of the indexes, up only 1% for the whole year. But it makes sense as they are the value stocks that got beaten down last year. On the other hand, the Nasdaq is a surprise on the low side, up 1.9%, as last year it was a real outlier, closing up 43%, which was 33 points above the average of the other four.
So far this year it’s the world turned upside down. But the IJS being way up, and the Nasdaq lagging by considerable, just means that this month the movement was from tech to cyclicals. I never try to time the market like that but just invest in great companies and they take care of themselves.
YOU WILL HEAR KNOW-NOTHINGS TELL YOU
You will hear know-nothings tell you that this fall proves how dangerous the “bubble” in our “overpriced” stocks was. Let’s see… I finished last year at 333% of what I started the year with. So am I supposed to be repenting my sins because this year I am down all of 13%? Really??? What a joke!
In my End of February Summary I posted my Four Year Results for 2017, 2018, 2019, and 2020. I finished the four years up 1251% (at thirteen and a half times of what I started with). In those four years the S&P finished up all of 67%. That’s 67% to 1251% !!! - Wow, was I punished for investing in those silly overpriced high-growth companies! Tell me about it!
Relax! Our companies are strong and powerful and doing incredibly well. They will be fine, and so will their stocks.
LAST FOUR MONTHS REVIEW
December. After Zoom announced I sold one-fifth of my total shares in the pre-market the next day (down $32 from the previous close). Unfortunately for the other 80% of my position, Zoom closed that day down $40 more. I continued to gradually reduce my position size, which shrank mostly due to my reducing my position but also due to its stock price falling relative to the others. My sales were from $508 to about $384 (with a single sale at $351), and my average sale price was about $440. It closed December at $337.
Since I had cash from my Zoom sales I reinvested the money in Cloudflare, Docusign, a little more Crowdstrike. I continued to add to Cloudflare all month. I also added back to Datadog earlier in the month
I also again took a little 2% position in Snowflake. It was strange to take a position on a Tues morning and have the stock finish up 28% by the end of the week. I added some more at the higher prices. But then Snowflake fell over 33% when part of the lock-up was being released. The fall represented no fundamental change in the company’s business so I added about 40% additional shares in three purchases at $315, $312, and $307. I continued adding small amounts subsequently. It finished December at $281.
Early in the month I took a little position in JFrog when Bert Hochfeld recommended it. However I sold out at a small loss (4%). I sold out because what JFrog sells is a tool for developers to use, and it is thus obviously not infinitely scalable like the others that I have high confidence in.
I almost started a position in Peloton too. They were down because they couldn’t keep up with orders, but I thought that that was a positive more than a negative. However, when I compared them to Crowdstrike and Cloudflare and Snowflake, that could grow forever, I decided I preferred my money in the expansion of data which will go on forever, rather than the number of people who could or would buy and keep a Peloton bike and subscription, which number was inherently limited. That’s just my bias. PS – They now are doing an acquisition (Precor) so that they can start manufacturing their equipment. So with this they are becoming even more of a hardware company. This is not my kind of company to invest in! Sorry if that hurts anyone’s feelings. For the month of December, by the way, I would have been better off in Peloton than most of the others.
January. At the end of December I mentioned that I had taken a tiny position that I wasn’t ready to discuss as it was just to put it on my radar. That was Inari, and I decided to keep it and I built it up to a 4% position, where I thought I’d stop, but I added a little more in January.
Looking at my big three positions, Crowdstrike, Cloudflare, and Datadog, they are still in just about the same percentages of my portfolio as a month ago. I added small amounts to Cloudflare, but not enough to really budge the needle. I also added to my fourth position, Snowflake, and to Inari which is now in fifth place.
I continued to trim Docusign and Zoom, and didn’t change Okta. I also took small (under 2% positions in Zscaler and Unity Software. This brought me to 10 positions, which was more than I am really comfortable with, but it wasn’t as spread out as it sounds as my top three made up 76% of my portfolio, and the top four make up 87%, with the rest making up a tail of the remaining 13% of the portfolio.
I cut my position in Docusign further the last week of the month for cash to buy more Snowflake in the $270 to $275 range… My Zscaler, Zoom, and Docusign postions are now really small and make up only 3.5% of my portfloio between the three of them, so I really have six positions and three little fleas. There were no earnings reports in January so nothing to report on that scene.
February I’m up to eleven positions inspite of my attempts to reduce the number. I sold out of what was left of my Docusign position. Early in the month I reduced my Crowdstrike from 33% to 30%, just being uncomfortable with a full third of my assets, and growing, in one company. I decided I’d be happy with just 30%. I used the money from the little bit of Docusign, and from the Crowdstrike, to add to my positions in Zoom, Zscaler, and a little more to my Inari position. These are away from the top three which so dominate my portfolio. I then trimmed my position in Snowflake to take a starter position in LightSpeed, and finally, as Crowdstrike was again up to 31.6%, I trimmed it back again towards 30% to take a starter position in Twilio. I guess what the issue is, is that I had 72% of my portfolio in three positions: Crowdstrike, Cloudflare, and Datadog, and if I could have found two or three other companies in which I had similar confidence, I would be happy to have a five or six stock portfolio. I do have 7% in Snowflake, and about 6.4% in Inari, but then I have a five stock diminishing tail in Okta, Zscaler, Lightspeed, Twilio and Zoom, and (and a tiny less than 1% tryout position in Etsy I won’t talk about at this time, or count as a position). I added a few percent to my Zscaler position Friday after they announced great earnings on Thursday.
March has been a wild month for me. At one point I was up to an unmanageable 12 positions, having added positions in Etsy and Peloton. However during the month I sold back out of Etsy, Peloton, and the last of my Zoom.
Why? I again decided I’d rather invest in Data, and the Cloud, which can increase forever, than in people’s subscriptions which are inherently finite and limited. I’m back down to 9 positions. Here’s how it went this month:
As I developed more confidence in some of my smaller positions, I decided that it made no sense to carry 30.3% in Cloudstrike and 22.3% of my portfolio in Cloudflare, while I had other strong companies in my portfolio with much, MUCH, smaller positions. It just didn’t make sense to me. I cut Cloudflare to what is now an 17.7% position.
My highest confidence position is, and remains, Cloudstrike but I also trimmed it from a 30.2% position to what is now a 27.2% position. It was 5 to 6 times as large as many of my smaller positions which were also great opportunities and that big a gap didn’t seem to make sense. Part of its fall is that it has descended more than some of the others.
I also cut my Snowflake position in half, down to 3.5%, as it seemed that its huge growth was at war with its huge price, and I could see other places I’d like to put my money. Then after Snow annouced earnings, I didn’t get around to looking at the results for several days, but when I did, I decided I had to be in a company with results like that, and I added some back at $215, and then continued to add more and it’s now a 9.4% position.
I continued to slowly trim Okta. Then Okta made a large acquisition and at first I worried that it made the story more complicated and uncertain. After spending time studying it and reading the conference call, I decided it could turn out to be a really terrific acquisition that would energize and transform Okta. I stopped trimming and added some back, and Okta is now about 5% of my portfolio.
And finally, I gradually completely tapered out of Zoom. I was long ambivalent about Zoom. I think that noone currently using Zoom for video is going to quit it post-pandemic, but I don’t think that even Zoom phone will budge the needle. (See discussion of Zoom below). So I had better places for my money and exited.
So what did I do with the money? Well I decided that I had a brilliant group of smaller contenders.
My favorite is Inari, which has grown to a 10.3% position, in 4th place, but well behind my big three. It announced rather spectacular results in March. Its revenue was up 144%, it had gross margins of 92%, it is quite profitable, it just paid off all its longterm debt. It is low capex, and has a form of recurring revenue as once they sell one of their products to a cardiovascular surgeon, they don’t need to go back and sell him again next year. He will keep buying it (they are single use), and probably will buy even more more the second year.
Inari is followed by Snowflake and Okta, at 9.4% and 5%, which I have already mentioned.
The remaining three are tightly packed between 4.5% and 4.8% positions. They include Zscaler which just announced results and accelerated revenue growth, again, this time to 55%! Billings were up 71%, RPO was up 68% to $1.025 billion. That’s enormous for a company whose revenue last quarter was just $157 million.
And Twilio which is again reaccelerating, and has been well discussed on the board. Remember though to consider their organic revenue growth (without the acquisition), as they are also digesting a large acquisition.
Finally Lightspeed, which is a cross between an ecommerce company and a recovery from the pandemic company, as it serves a lot of restaurants and hospitality companies as well as regular retail. It announced another acquisition this quarter, whichgives it an entry into Australia and New Zealand.
So it was a very busy month for me. To summarize what I did: I took 3% to 4% positions in Etsy and Peloton, and then exited them. I also exited Zoom, all three being companies with huge revenue growth rates during Covid, but with a reasonable likelihood of enormously slower growth rates a year from now.
I reduced my Cloudflare position from 22.3% to 17.7%, and my Crowdstrike from about 30.2% to 27.2%. I increased my Inari position by almost 50%. I first reduced my Snow position but then built it back to 9.4% which was larger than it started the month. I increased my postions in Okta, Twilio, Zscaler and Lightspeed to where they are all roughly between 4.5% and 5.1% positions. I didn’t make any significant changes in Datadog.
Please remember that I could change my mind about any one or more of them tomorrow, depending on new information, and I won’t do another update until the end of April. Make your own decisions. Don’t just follow mine. I make mistakes at times! Guaranteed!
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 2021, and not from when I originally bought them if I bought them in earlier years.
**Inari from 87.30 to 103.23 up 18.2%**
**Cloudflare from 75.99 to 67.57 down 11.1%**
**Zscaler from 193.73 to 169.78 down 12.4% bought in Jan**
**LightSpeed from 70.29 to 60.35 down 14.1% bought in Feb**
**Crowdstrike from 211.82 to 177.69 down 16.1%**
**Okta from 254.26 to 212.45 down 16.4%**
**Snowflake from 281.40 to 235.00 down 16.5%**
**DataDog from 98.44 to 80.29 down 18.4%**
**Twilio from 406.20 to 319.79 down 21.3% bought in Feb**
You will notice that Inari is my big winner for these three months at least.
POSITION SIZES
I now have 9 positions (a little more than I am really comfortable with, but none that I want to sell out of), with an extremely large position in Crowdstrike, and almost identical very large positions in Cloudflare and Datadog, and the three of them make up 63% of my portfolio. Adding in Inari and and Snowflake and we have five companies making up 82%, and a tail of four smaller positions, all roughly between 4.5% and 5.1% making up the rest.
Here are my positions in order of position size, and bunched by size groups.
**.**
**Crowdstrike 27.2%**
**Cloudflare 17.7%**
**Datadog 17.7%**
**Inari 10.3%**
**Snowflake 9.4%**
**Okta 5.1%**
**Zscaler 4.8%**
**Twilio 4.6%**
**LightSpeed 4.5%**
STOCK REVIEWS Please note that when I discuss company results, I almost always use the adjusted values that the companies give.
Crowdstrike is currently my largest and highest confidence position at an enormous 27% of my portfolio. It is a security company built entirely on the cloud which started out securing endpoints, but now is expanding into many other aspects of security, and seems to be heading towards being one of the world’s dominant security companies. A key advantage it has is its AI. When it detects an attempt at an intrusion in one of its customer clients it instantly flags and stops that intrusion in that customer, but at the same time stops that intrusion from occuring in each and every one of its customers pretty much instantly. It has a record of everything that has ever been tried on any of its customers so it keeps increasing its knowledge base. That’s a Wow! Feature, and no on-premises firewall company can come even close to what it does.
They just had an outstanding earnings report. It included the number of subscription customers up 70% yoy, and subscription revenue up 77%.
• New customer growth accelerated, up a record 1,480 new subs
• Record op cash flow and free cash flow
• Total revenue was $265 million, up 74%.
• Subscription revenue was $245 million, up 77%, and was 92.5% of total revenue.
• Annual Recurring Revenue (ARR) was up 75% to $1.050 billion up $143 million sequentially.
• Adj subscription gross margin was 80%, up from 77% a year ago.
• Adj op income was $34 million, up from a LOSS of $7 million a year ago.
• Adj net income was $32 million, up from a LOSS of $4 million
• Adj EPS was 13 cents up from a LOSS of 2 cents.
• Op cash flow was $114 million, up from $66 million.
• Free cash flow was $97 million, up from $51 million.
• Cash was $1,920 million.
It’s easy to see why Crowdstrike is a very high confidence position.
DataDog, is tied with Cloudflare for 2nd and 3rd of my big three high confidence companies, at 17.7% of my portfolio. Datadog announced their Dec quarter in February and had excellent and encouraging results, although we are still waiting for them to lap their Covid second quarter with their June results to be able to see what they are really doing year over year. For this quarter:
• Revenue was $177.5 million, up 56%, and up about $23 million sequentially
• Gross margin was 78%.
• Adj operating margin was 10%.
• Adj EPS was 6 cents
• Operating cash flow was $24 million
• Free cash flow was $17 million
• Net retention rate was over 130% for 14th consecutive Q.
• Remaining performance obligations or RPO was $434 million, up 78% yoy
• Cash was $1.5 billion.
For the full year, Free Cash Flow was $83 million, or 14% of revenue.
• We had 97 million dollar customers, up 94% from 50 a year ago, and more than triple the 29 we had two years ago
• We had 1,253 hundred thousand dollar customers, up 46% from 858. They generate more than 75% of ARR.
• We have about 14,200 total customers up from about 10,500 last year. We added about 1,100 customers in the quarter making it another strong quarter after the 1,000 we added in Q3.
Acquiring Sqreen, a SaaS based security platform that enables enterprises to detect, block and respond to application level attacks. Adding Sqreen will provide development, security and operations teams a unified platform to deliver and manage and secure applications.
Acquiring Timber Technologies, the developers of Vector, a vendor-agnostic and high-performance observability data pipeline. We expect this technology to further empower our customers to control their observability data, while providing broader points of entry to our platform.
• Launched the general availability of Incident Management, which allows users to declare incidents, investigate root cause and dependencies, collaborate around a shared view of the incident, follow to resolution, and auto-generate post-mortem documentations, all within the Datadog platform.
• Enhanced our security solutions with the beta introductions of Runtime Security and Threat Intelligence.
• Introduced Log Rehydration, part of our Logging Without Limits feature set. This feature allows customers to efficiently archive all logs, and later easily pull archived logs back into the Datadog platform to analyze and investigate old events.
• Delivered additional product innovations and integrations, including enhanced Live Containers functionality to provide a multidimensional look into Kubernetes workloads, expansion of Network Performance Monitoring (NPM), ability to share Datadog dashboards securely outside the organization, as well as new or enhanced integrations with AWS Network Firewall, Azure Monitor, Azure Stack HCI, etc, etc.
• Announced support for a bunch of Amazon programs.
Cloudflare (NET) has become a high confidence company for me. I suggest you read muji’s deep dive here (https://hhhypergrowth.com/flare-ups/)
Here are some results from the December quarter, just announced in February. I would have preferred even higher revenue growth, but I’ll settle for 50% growth (Boy am I spoiled!), as they have a huge number of new customers to digest and expand, and RPO was up 75% as well.
• Revenue) of $126 million, up 50%
• Remaining performance obligation (RPO) was $384 million, up 12% sequentially and up 75% yoy.
• Current RPO) was 75% of total RPO.
• Adj gross margin) was 78.1%.
• Adj operating loss) was 4% of revenue, improved from 22% of revenue, a year ago.
• Adj net loss) was 4% of revenue, improved from 18% of revenue a year ago.
• Adj EPS) was minus 2 cents, improved from minus 6 cents yoy.
• Op cash flow) was minus $8.8 million, compared to minus $8.6 million a year ago.
• Free cash flow) was negative $23.5 million, or 19% of revenue, compared to negative $23.5 million, or 28% of revenue, a year ago
• Cash) was $1,032 million.
In four weeks during October, November and December, Cloudflare announced a staggering number of exciting new products. For more on this, see Stocknovice’s post: https://discussion.fool.com/cloudflare39s-crushing-it-34646557.a…
Conference Call
Our paying customer accounts grew to over 111,000 up 10% quarter-over-quarter and our strongest quarterly growth in several years. [This means they grew paying customers by 10,000 sequentially! That’s a net 10,000 additional customers!.. In a quarter!.. By comparison, last quarter they grew by “only” 4800. That’s amazing!]
Companies over $100,000) continues to be our strongest growth area adding 92 new customers in Q4 and bringing our total large customer account to 828. Revenue from these large customers increased sequentially to 49% of total revenue, up from 47% sequentially as our sales team continues to close larger and larger enterprise accounts.
As you look across customer segments by side, our large customer segment is growing the fastest. This is because of new logo wins and also because our land and expand motion is picking up steam. We saw initial evidence of this earlier in the year but are now seeing it reflected in lagging indicators like dollar-based net retention) which increased sequentially from 116% to 119% in Q4.
In particular we’re seeing more of our existing customers adopt Teams, our zero trust network security solution, as well as Magic Transit.
Snowflake. It’s now a 9.4% position and in 5th place in my portfolio. Most of my purchases are currently underwater. I have been ambivalent about whether I should have such a large position, and early in the month I continued trimming it for cash to invest in some of my new small positions. I felt that its huge growth and huge stock price seem to be warring with each other, as well as a large unlocking of shares in March. Then it announced Jan quarter results and fiscal year results in March. When I got around to examining the results, I realized that they were pretty awesome.
Revenue up 117% and up 19% sequentially.
RPO up 213%, and up 40% sequentially. RPO was 6.8 times quarterly revenue, up from 5.8 times just a quarter ago
Free cash flow was positive 9% of revenue for the quarter.
For the TTM, free cash flow was -12% of revenue, up from -75% last year, and from -152% the year before that.
Net retention rate was 168%, up from 162% sequentially, and the highest I’ve ever seen.
For the TTM, Product Gross Margin was 69%, up from 63% a yr ago and 59% two yrs ago. This quarter it was 70%.
They have 77 customers with TTM product revenue over $1 million!!! Up from 41 customers a year ago.
Cash was more than $5 billion
I quit tapering after going through all this and started adding back at about $215. How could I not invest in a company with results like that?
Bear also pointed out in a great post that since they only charge when contracted usage is actually used, new customers don’t usually count in their revenue until six months later, so even their huge revenue growth, as shown, is an undercount in a way.
By the way, when they talk of Product Revenue, it seems roughly the equivalent of when a SaaS company gives Subscription Revenue. It excludes Service Revenue and other revenue like Interest Revenue, etc.
This is a VERY high confidence company, it’s its stock price that I’m not as confident in because of its already high valuation. But a company with huge fundamental growth like that will grow into and past its stock price.
Inari is in 4th place at 10.3% of my portfolio. I took an initial position in late December at $86.50 and built it up in early January, and added to it in February and March too. It’s now at $103.23. I wrote it up on the board on January 19th. https://discussion.fool.com/inari-nari-a-new-position-for-me-347… You should read the whole thread though as a number of people were very skeptical (as I usually am about any little biotech or biopharma), and you should definitely make your own decision about this company. Don’t buy it because I did! At any rate this is a company that is growing revenue over 140% per year (and up 20 times in two years), and revenue was up 28% sequentially this last quarter (reported in March). It has 92% gross margins, is profitable, turned cash flow positive, and has plenty of cash. I have a LOT of confidence in this company in the short and medium term. And it has the only positive stock price growth in my portfolio so far this year.
Okta is a 5.1% position in 6th place. A lot of people I respect sold out because they felt it’s slowing down, but it just kept chugging along hitting new highs. Here are the results of the Jan quarter, just announced in March.
• Total revenue was up 40% yoy.
• Subscription revenue was up 42%
• Subscription revenue was 96% of total revenue
• RPO, or subscription backlog, was $1.8 billion, up 49% yoy
• Calculated Billings were up 40%
• Adj operating income was 3.4% of total revenue, up from a LOSS of 3.3% of revenue, a year ago.
• Adj Net Income was $8.0 million, up from a LOSS of $1.1 million a year ago.
• Adj EPS was 6 cents up from minus 1 cent a year ago.
• Op cash flow was 15% of revenue, up from a LOSS of 15% of revenue a year ago.
• Free cash flow was $32 million, or 14% of revenue, up from $18 million, or 11% of revenue, a year ago.
• Customers over $100,000 – added 170, a quarterly record, and up from “almost 100” a quarter ago. The number of these large enterprise customers is now approaching 2,000 and contributes approximately 80% of total annual revenue.
• Cash was $2.6 billion.
My Take) – They are obviously doing well as you can see from the numbers above, and although they seemed to be getting mature, they were clearly not fading away. The biggest number for me was RPO or Remaining Performance Obligations, which was $1.80 billion!!! And up 49% yoy. This is subscription revenue backlog, and that’s an enormous number, eight times this quarter’s all-time-high subscription revenue! I’ve never seen a company with that much Remaining Portfolio Obligation! It comes because their customers have made a decision to stay with them long term and have set up long-term multiyear contracts.
Maybe they were worried that they were starting to get old in the tooth, because they just decided to make a great acquisition! Okta acquired AuthO and got 25% more revenue for 16% more stock, so the acquisition is accretive right from the start. Add the fact the AuthO is growing at over 50%, while Okta is growing at 40%, and it means that the acquisition will be doubly accretive going forward. I’m not a techie, but since
A. AutoO apparently has a better, more modern, platform https://discussion.fool.com/i39m-admittedly-no-techie-but-it-mak… )
B. AuthO will be kept as a separate unit
C. AuthO was willing to take all stock in Okta rather than cash, and
D. The AuthO C-level people will stay on at Okta with the CEO of AuthO as CEO of the AuthO unit
tells me that:
A. They plan to stay long term
B. The Okta platforms will gradually be migrated over to the new superior technology
and
C. Perhaps the CEO of AuthO is being groomed as the next CEO of Okta. He was given a prominent place in the Okta earnings conference call. It’s rare to see an acquired company CEO given a starring role in the acquirer’s earnings conference call.
Here’s what the CEO of AuthO said during the Okta conference call in response to a question, “And as you’ve all heard, this is an all-stock deal, which means that we are completely vested and committed to seeing this happening in the long run because this is an infinite game. There’s no end to this game. It’s a game where we’re going to be around for a long, long time.”
Saul here: In consequence I stopped trimming my 3.65% position in Okta, and built it back to a 5% position. (By the way, AuthO currently specializes in customer authentication, while 75% of Okta is in workplace authentication. It will double the size of Okta’s cutomer authentication.
Zscaler. I re-took a small position last month as Zscaler has been reaccelerating revenue growth again, which was up 55% last quarter, up from 52% sequentially. I added to it in February and March after what I thought were great quarterly results and it’s now a 4.8% position pretty much tied for 7th, 8th, and 9th place with Twilio and Lightspeed. My take is that they are much slower in implementation than companies like Cloudflare and Crowdstrike, but that their new hot-shot CRO has decided to focus on old economy companies whose C-team doesn’t know anything anything about tech or the cloud, so they are happy with going slow, and they trust Zscaler because it’s been around for a while, and because their CRO is part of the old-boys network. That works for me if it works for them, and it seems to be working.
Zscaler announced results near the end of February, and I was quite happy with them. Revenue accelerated, calculated billings and deferred revenue were up nicely, RPO was enormous, and they were profitable and cash flow positive.
Revenue up 55% to $157 million, accelerating from 52% sequentially
Calculated billings up 71% to $232 million
Deferred revenue up 60% to $447 million
RPO was an enormous $1,025 million ($1.025 billion). This for a company with quarterly revenue of just $157 million. It was up 68% yoy.
Adj operating income was $14.8 million, or 9% of revenue, compared to $12.4 million, or 12% a year ago. They made it clear that they were going to continue to invest to take advantage of their growth opportunity.
Adj net income of $14.0 million up slightly from $13.5 million
Adj EPS was 10 cents, flat with a year ago.
Op Cash flow was $30 million, or 19% of revenue,
Free cash flow was $18 million, or 11% of revenue
Net retention rate was 127%, up from 122% sequentially, and from 116% a year ago.
It was a good report.
LightSpeed Was a new position for me in February. It’s now at 4.5%. It’s a company that is aiming to provide an all in one platform for small-to-medium sized business, which means it’s combining parts of what Square and Coupa and Shopify are doing, and a bit more into a single platform. It does a lot of small acquisitions which seem to work out well. Ethan and Chris have both talked about it. Here is Ethan’s writeup:
https://discussion.fool.com/lspd-a-new-position-34744143.aspx?so…
Twilio has retaken a position in February in my portfolio after being out for a long time, as it has come back to life and apparently has become more honest in how it reports revenues when acquisiitions play a part. It’s a 4.6% position at present.
Zoom, why I exited! Zoom’s April and July quarters were two of the most amazing quarters ever seen by man, with revenue up 169% yoy, and then up 355% yoy. Those revenues were up SEQUENTIALLY by 74%, and then by 102%!
However, then came the October quarter 
and their sequential revenue growth fell from 102% to just 17%. Their sequential growth of free cash flow in those three quarters fell from 826% to 48%, and then to just 4%. After you have conquered the world, what can you do for an encore?
While they “grew” revenue by 367% if you consider it yoy, they didn’t actually GROW revenue by 367% in the Oct quarter. As I posted on the board, that was “a dead man walking”. They grew revenue 17% during the quarter. The rest of that revenue represents what their recurring subscription revenue had grown to during the April and July quarters. You have to understand that revenue being up 367% year-over-year sounds very impressive, but it was basically their steady state recurring revenue now, plus 17%. Remember that that recurring revenue just keeps coming in, and almost all of that 367% was customers they signed up in the April and July quarters.
I felt that Zoom was still a terrific company, and I really don’t believe anyone will cancel their Zoom subscriptions after Covid. Would you? But their video business can’t grow that fast any more. It’s already done the big growth. And it’s so big that new products will have trouble budging the needle. Which is why I cut my position way down.
Then in March they announced Jan quarter results, and sequential revenue growth was now down to about 13.5%. But worse, they guided for only a $20 million increase sequentially.
“What’s wrong with that?”, you ask. Well, first of all, that’s just a 2% sequential increase. “But they will beat it,” you say. Well, here’s some arithmetic.
The last four quarters revenue in millions of dollars was:
328
664
777
882
Look at the sequential increase in dollars. (Usually the percent increase will go down as a company grows in size, but the dollar amount of increase keeps growing off a larger and larger base, so I’m making it harder for myself by using dollars instead of percent increase. We all know that percent sequential increase is going down). The dollar amount of the sequential increase has gone, in millions of dollars:
336
113
105
So the sequential dollar increase is falling each quarter TOO, even coming off a larger and larger base. And now, for next quarter, they are guiding to just a $20 million sequential increase!
If they quadruple that sequential increase they guided to, to $80 million (last quarter they guided to a $32 million sequential increase, and came in at just 3.3 times that sequential increase guide, so assuming 4.0 times this quarter seems reasonable, fair and generous), that sequence of sequential increases will look like this:
336
113
105
80
Thus their dollar sequential increases are continuing to fall even coming off a larger and larger base, and at $80 million it now will be down to 9% sequentially. You can make your own guess as to where that sequence will level off.
To me this is no longer “a high-growth company”. So I exited! Who knows, I may be completely wrong. But I have high-confidence, high-growth companies with accelerating sequential gains to put my money in.
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