My portfolio at the end of May 2020
Here’s the summary of my portfolio at the end of May (it included five weeks this time). Please note that when I discuss company results, I almost always use the adjusted values that the companies give.
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 new thoughts throughout.
It’s been a wild and wooly Spring for the markets, and even wilder for our stocks, but generally in the opposite direction, and we finished up on a blow-out Friday!
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% year-to-date, while the five market indexes finished March averaging down 26.6% year-to-date, which must truly have been catastrophic for many people.
April was a better month, as perhaps 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.
That brings us to May, the month we just finished, and it turned out to be an extraordinary month for us. While the averages were still down 11.0% YTD, my portfolio finished up an incredible 73.6%. If we look back to my portfolio low on March 16, of 84.0% (down 16.0%) and compare it to now, at 173.6% (up 73.6%) you will see that my ENTIRE portfolio is up over 100% (one of those “2-baggers”) in just two 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.
With our stocks up almost 74% you might ask me “Should we take profits and raise cash?” But you could have legitimately asked that when we were up 30%, or 40%, or 50%. The way to make money in the market is to be in high confidence stocks and stay in them.
Our companies have really turned in a remarkable performance in a terrible general market, and it goes against everything you’ve always been told, about how “overvalued” and “overpriced” stocks like ours would fall much faster than the “safer” stocks in a falling market.
In fact, my portfolio results seem surreal to me in the midst of a pandemic and a collapsing economy and stock market. To be up 73.6% when the market is down 11% almost doesn’t sound plausible, but this is the third year out of the last four with this kind of implausible results.
Let me remind you that I posted multiple times back in February that, while old economy stocks could have severe revenue loss from the, then just developing, virus pandemic (retail, travel, hotels, concerts, theatre, manufacturing [supply chain problems, shipping to customer problems, and customers closing down of the duration of the epidemic]), I expected that our “wildly overpriced” SaaS companies would be seen as a safe refuge, 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
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 small businesses in your neighborhood who are having a truly hard time (for example one of our favorite little restaurants did a crowd-funding to help it get through paying its rent and employees while it was shut down).
SIDE THOUGHTS
I find it wonderful that there are still people around on the board talking about how overpriced our stocks are. If everyone realized what was going on I’d be worried.
I also find it amazing that there are people around telling us they are so glad that they stayed in their losers, because they finally came back, and they feel vindicated. But what if one of the ones you stayed in was Nutanix? After all, it is back up over 50% to $24.06 from $15.60. However its high was at $63 in 2018, and $54 in 2019. Would you be glad that it’s now up to $24??? while you’ve been sitting in it for a couple of years now, with all that opportunity loss, while our stocks went up and up. Let me put it into simple-to-understand terms.
Nutanix’s high was on Aug 30, 2018, a year and nine months ago.
On that day NTNX closed at $60.82. Today it closed at $24.06.
On that day AYX closed at $56.65. Today it closed at $143.94.
On that day OKTA closed at $61.69. Today it closed at $195.58
Nutanix is DOWN 60.4% since then.
Alteryx is UP 153.0% since then.
Okta is UP 221.1% since then.
And what does that mean in dollar terms?
$100 left in Nutanix since then is worth only $39.60
$100 left in Alteryx since then is worth $253.00
$100 left in Okta since then is worth $331.10
So would you feel so vindicated if one of the losers you decided to stay in was Nutanix when everyone else got out? Or would you have been better off putting the money in one of our other companies? That is the question? How would you know for sure which one of the losers will come back, and even then, their gains would probably be much less than the companies that just kept going. To paraphrase a quote from draj in a recent post: You have no way of knowing whether a slowing growth stock will re- accelerate at some future date. Most often it does not. All you can do is pick a replacement that gives you confidence.
EARNINGS COMING UP
Both Crowdstrike and Zoom will announce earnings on this coming Tues, June 2nd. I expect they will both be blowouts, but that Zoom, especially will be huge. I think all these major hires of big names, and opening up new engineering centers in Arizona and Pennsylvania, with 500 hires in each, means that they are expecting revenue on a whole new level, probably multiples of what it was last year (but that’s just my guess, and I’ve been wrong before, and you should make your own decisions).
MY RESULTS YEAR TO DATE
My portfolio closed this month up 73.6% (at 173.6% of where it started). Here’s a table of the monthly year-to-date progress of my portfolio for 2020.
**End of Jan +21.3%**
**End of Feb +22.9%**
**End of Mar +13.4%**
**End of Apr +33.3%**
**End of May +73.6%**
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 5.8% YTD. (It started the year at 3231 and is now at 3044).
The Russell 2000 (Small and Mid Cap)
Closed down 16.4% YTD. (It started the year at 1668 and is now at 1394).
The IJS ETF (Small Cap Value)
Closed down 27.4% YTD. (It started the year at 160.8 and is now at 116.7).
These three indexes
Averaged down 16.5% YTD.
If you throw in the Dow, which started the year at 28538, is now at 25383, and is down 11.1%, … and the Nasdaq, which started the year at 8973, is now at 9490, and is up 5.8%, … you get down 11.0% for the average of the five of them YTD. (And if you remove the two outliers, the Nas and the IJS, it’s practically the same result, down 11.1%).
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, and at the end of May they improved again, but are still in the red, while our stocks are up over 73%!!! What does that tell you?
Clearly, that picking stocks that will be winners, the way we do, has beaten 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.
ON WHAT’S GOING ON WITH OUR STOCKS
With the pandemic, companies in the travel and entertainment industries are collapsing. Companies in traditional retail are going bankrupt. Companies that make things are having a tough time. The oil industry… well you can read the news. Pretty much the only traditional companies that are making money are those who sell food and staples. Companies who sell things online, like Amazon, can’t keep up with demand. Companies who have their own supply chains to deliver groceries are doing fine.
So how are our companies doing? Well, we aren’t investing in companies that require a customer to come into a store. We aren’t investing in high capital expense, low margin companies, or companies with high debt, or that have maintain high-rent retail outlets, or have to build factories or wrestle with supply chains in order to make things like automobiles, refrigerators, sneakers, and houses, all things that people can decide to just go another year or two with the old ones, or even companies that make tech appliances, where orders can totally dry up, and revenue can actually FALL…. A Lot!
Our companies’ revenue comes from subscriptions and thus doesn’t require cash registers and retail outlets. Besides, they are in the biggest wave of our time, the wave to bring all the enterprises of the world into the Cloud and AI. They sell subscriptions to the software that enterprises use to run their businesses. This software saves their customers money, rather than costing them extra money. People may hold off on buying a new refrigerator in a recession, but no enterprise is going to pull out the software that it uses to run its business, and that is saving it money.
Our companies may see their rate of revenue growth fall , but they are extremely unlikely see their actual revenue fall unless their customer companies go out of business. Right now everyone 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 should do MUCH better than the economy as a whole.
”YOU CAN’T TELL ANYTHING IN FIVE MONTHS!”
Yes, there are always the people who say you can’t tell anything in five months, so I thought I’d give you three years and five months.
In 2017, 2018, 2019, and the first five months of 2020, my portfolio was up
84.2%,
71.4%,
28.4% and now
73.6%.
That compounds to up 604% in three years and five months. That’s more than a septuple, a seven-bagger.
In those same periods of time, the market indexes were
up 14.4%,
down 8.5%,
up 26.4% and now
down 11.0%.
That compounds to up 18% in the same time.
So in the three years and five months, while our portfolios were up over 600%, the market as a whole went basically nowhere, and was up all of 18%. (You might ask why I said 18% in three years and a half was going nowhere. Look at it this way: our stocks rose over 7% on…. Friday! They rose over 30% just this month!)
That kind of difference is no fluke! Yes, intelligent stock picking DOES work!!!
LAST FOUR MONTHS REVIEW
February started for me as another fairly quiet month, but it turned into the first month of the coronavirus sell-off in the general market. I did very little until the big sell off near the end of the month. I sold out of my remaining small position in Zscaler after their disappointing earnings. I agree that they have a better solution, and they hired a great person to try to get them back on track, but they have structural differences (pretty much having to sell an entire business to senior management, instead of land-and-expand), which will keep them from ever growing as fast as the other companies to which I moved the money, so why would I hold on and hope.
I added to Alteryx at an average price of $140 even though it was already my largest position, to Crowd at $60.80, and to Datadog at $44.50, and to Zoom at $101, all during the meltdown a week ago Friday. This last week I added further to Zoom at $104, $106 and $108. I also added a tiny position in a new company that I’m still deciding about, and am not ready to discuss.
To raise money for these purchases, in addition to selling out of Zscaler, I sold back half of my small Afterpay positions, feeling that as a company focussed on clothing retail, while 2019 results, just announced, seemed great, their sales may be substantially below expectations during this next six month period (January through June of 2020), because of disruptions due to the virus. I also sold some Okta for cash to buy more Zoom, feeling that Zoom was a remarkable opportunity at present.
March continued the sell off because of the coronavirus pandemic. I finished selling out of Afterpay, see my reasons above which are based on the results I expected due to the virus pandemic. I added an enormous amount of Zoom, between $102 and $111, and a tiny bit above that too. I could see, from a myriad of sources that Zoom was going to explode upwards with people around the world working remotely.
I also added a lot also to my Crowdstrike, position after their amazing earnings report and conference call, but probably not quite as much as I added to Zoom. I made an atypical purchase and rapid exit from a tiny 0.5% position in Amcor.
To get money for some of these purchases I sold out of my Red Violet, not because I saw any bad news, but because a considerable part of their effort was leasing apps to real estate salesmen and I thought there were not going to be many houses shown in this kind of economic climate, and I had other companies that were knocking it out of the park, and upon which I had more confidence. I finished selling out of Trade Desk, for the reasons I explained in my discussion of the stock in 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 this week at an average price of about $163. I added to Zoom, Alteryx, Crowdstrike, and Okta during the month, and took a small try-out position in Roku after some excellent discussion on the board.
May was another very positive month for the portfolio, and I made some changes during the month. I exited Roku early in the month at an average price of about $124.50 (currently at $109.50). Exiting Roku turned out to be a very fortunate decision as Roku has fallen steadily since I sold, while the companies that I replaced it with have gone up with the rest of my portfolio. (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). It’s now at $227.50, up a substantial 32% since that first purchase early this month. It’s currently a relatively small 3.6% position.
I sold close to 40% of my Alteryx at roughly $130 for reasons I discussed on the board, and took a 4.0% position in Livingo at $53. I added to Datadog after its spectacular earnings report. All of the above was concentrated near the beginning of the month, but this past week I took a 3.6% position in Fastly at about $39.98, thanks to all the intelligent discussion on the board. It closed the month at $43.14.
For those who would like to catch up on my rationales for my buys and sells, I wrote a brief two-week update here:
https://discussion.fool.com/a-brief-2-week-update-interesting-ti…
And a reassessment of Roku here (and why I sold):
https://discussion.fool.com/a-reassessment-of-roku-34492292.aspx…
I wrote here about my biggest mistake in April (selling Coupa), and a deep dive into Coupa and why I was buying it back:
https://discussion.fool.com/my-biggest-mistake-in-april-was-sell…
Another update about why I was selling Alteryx and buying some Livingo and Datadog:
https://discussion.fool.com/sorry-but-here-is-another-update-345…
And finally, why I bought Livingo:
https://discussion.fool.com/why-i-took-a-position-in-livingo-thi…
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 179.48 up 163.7%**
**DataDog from 37.78 to 71.27 up 88.6%**
**Crowd from 49.87 to 87.81 up 76.1%**
**Okta from 115.37 to 195.58 up 69.5%**
**Alteryx from 100.07 to 143.94 up 43.8%**
**Coupa from 172.50 to 227.51 up 31.9% (Buy in May)**
**Livingo from 53.00 to 59.93 up 13.1% (Buy in May)**
**Fastly from 39.98 to 43.14 up 7.9% (In less than a week)**
As you can see, it wasn’t all due to Zoom. All of my eight stocks are actually up in this horrible market.
Exited positions this year showing my gain or loss from the beginning of this year, or from when I first bought if it was during the year, and my average exit price. Please remember that these are from the beginning of 2020, and not from when I originally bought them if I bought them in earlier years.
**Zscaler from 46.50 to 54.00 up 16.1%**
**Coupa from 146.25 to 149.00 up 1.9% (1st time)**
**Roku from 128.10 to 124.50 down 2.8%**
**Afterpay from 20.50 to 17.00 down 17.1%**
**TradeDesk from 259.78 to 202.00 down 22.2%**
**Red Violet from $23.50 to $16.75 down 28.7%**
Please note that the last four of these were small, almost trivial positions.
POSITION SIZES
As often happens at times of great stress and uncertainty, I sell off lower conviction positions and concentrate my funds in my highest conviction companies. This brought me down in April to just five large positions, but I guess that I relaxed a little in May as my portfolio shot up, and I’ve added three small tryout positions, each in the range of about 3.6% to 4.0% in size. The top five make up over 89% of the portfolio. 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…
**.**
**Datadog 22.4%**
**Crowdstrike 21.4%**
**Zoom 19.8%**
**Okta 14.2%**
**Alteryx 11.5%**
**Livingo 4.0%**
**Coupa 3.6%**
**Fastly 3.6%**
STOCK REVIEWS
Crowdstrike had its last earnings report in March, covering the January quarter, so we have no actual news during the pandemic yet, but there is an assumption that it will receive a tailwind due to all the need for security with WFH. It will report the April quarter on June 2nd. It is in 2nd place in my portfolio at 21.4%. It hit a low of $33 in the March panic and is now about $88, so it is up 167% from that low!!! Its March earnings report was an enormous, blow-out Jan quarter, but that was before the pandemic. The hope is that it will get a tailwind as there are so many more WFH endpoints to monitor and protect.
Let me start with a few paraphrased quotes from the CEO and CFO. As they were in March at the time of the report they were able to give some comments on the effect of the pandemic so far, up to then:
The competitive landscape is the best I have seen in my 27-year career. We believe this is the beginning of a multi-year trend as being driven by the industry consolidation that took place last year along with the seismic shift to cloud technologies.
We are landing bigger with more modules..
With our cloud native platform, our lightweight agent that is easily deployed at scale, and our frictionless go-to-market engine, we are uniquely positioned to meet their cybersecurity needs
The seismic shift to cloud native technologies and cloud workloads has created an environment with massive greenfield opportunities. While our competitors are distracted trying to integrate acquired technologies, rationalizing their workforce or retooling their on-prem offerings, our mission, platform and brand are clearly resonating with customers and partners.
Furthermore, as Broadcom began integrating Symantec, we saw an increase in inquiries among both customers and partners. This has expanded our pipeline. We have seen significant demand as our partners try to protect customers who are left searching for alternatives as Symantec abandons large segments of the market. Several partners have launched Symantec replacement campaigns. We are closely collaborating with them. One of our partners submitted a list of several thousand of their customers that will be migrating away from Symantec in the next year and we found that there was very little overlap between these prospects and our existing customer base.
Saul here: while other companies brag about increasing their number of customers by 30% per year, Crowdstrike increases theirs by over 100%.
CEO or CFO again: Within new enterprise customers, we are landing bigger with more modules and in this quarter we more than doubled the number of new customers starting out with greater than $1 million of ARR compared to a year ago. Additionally, across all new customers, the average number of modules increased every quarter this past fiscal year.
We also continued to expand module adoption within our existing customer base. This quarter, the percent of our customers with four or more modules once again increased, and those using five or more cloud modules grew to one-third of our customer base.
As we add new modules after the first module is sold to a customer, virtually every other module after that is pure gross margin!!!
Saul here: When companies use more of their modules it obviously deepens their relationship with the companies and makes them more sticky.
CEO and CFO again: As far as the impact of the coronovirus, Crowd was built to thrive with a remote workforce. Even in normal times 70% of our workforce is remote. They use Zoom.
Also as their customers and potential customers have more and more people working remotely they need more end point security. Crowd has seen a 13% increase in initial appointments since the pandemic. The people their salesmen need to contact aren’t so busy in the office, but are at leisure, more or less, at home and more willing to take time and talk.
They point out that they are all in the cloud, while with the pandemic it’s even harder for their competitorsto to set up their on-premise systems, and especially for their competitors to service customers whose people are working remotely.
Now, quarter results, very summarized
ARR was $601 million, up from $313 million a year ago, and from $502 million sequentially. It was up 20% sequentially, which was up from 18% sequentially the quarter before, which was up from 16% sequentially the quarter before that. In other words it was reaccelerating. Revenue was up 89%. Subscription revenue was up 90%, and was 91% of revenue.
Now the GOOD stuff:
Subscription gross margin was 77%, up from 70% a year ago.
Operating Cash Flow of $66 million, up from $16 million a year ago. (That’s not a misprint).
Operating cash flow margin was 43% !!!
For the year Operating Cash Flow was $100 million, up from a LOSS of $23 million a year ago!!!
Free Cash Flow was $50 million, up from $0 million a year ago.
Free Cash Flow margin was 34% !!!
Net Profit Margin was -3%, improved from -35% a year ago!!!
Growth in subscription customers was 116% !!! In fact, in four years they’ve gone from 165 customers to 5431 customers. That’s about a “33-bagger” in four years! In two years they went from 1242 customers to 5431. That’s more than a quadruple in two years!!! People obviously like what they are selling.
Zoom is in 3rd place at 19.8% of my portfolio. Zoom is a company that has had an existential event change its entire world. It has gone from being a rapidly growing and successsful little niche company that most people had never heard of, to probably the most talked about company in the world, in two months!!!
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 having 200,000 downloads of new users a day, up 20x from the previous level of 10,000).
The price tanked for a while in March down to $113, but it came back, and is now at $179, and a new all-time high, as Zoom demonstrated that they got the message and have greatly worked on and improved their security, as well as making other changes to inspire confidence, like opening two large security complexes.
Obviously all the myriads of new users won’t all stick, and they certainly won’t all become paying, but Zoom being the go-to name for video conferencing and video communication will stick!
I think that perhaps Zoom could grow revenue 200% this year (triple it), or more. They were probably going to grow by about 80% without all this!!! So that isn’t quite so crazy an idea.
Here are the results of Zoom’s January quarter, which was announced in March. Remember that this Jan quarter had zero benefit yet from “work at home” and “stay at home” so, while it was a terrific quarter, it is basically way outdated. The April quarter will be announced in a couple of days on June 2nd.
Total revenue of $188 million, up 78%
Adj operating income was $38 million, up 292% from a little under $10 million a year ago.
Adj operating margin was 20%.
Adj net income was $43 million, up from $10 million.
Adj EPS was 15 cents, up from 4 cents
Cash was $855 million.
Operating cash flow was $37 million up 129% from $16 million
Free cash flow was $27 million up from $6
Customers with more than 10 employees was 81,900, up 61%
Customers contributing more than $100,000 were 641, up 86%.
Net dollar expansion rate in customers with more than 10 employees was over 130% for the 7th consecutive quarter.
Remaining Performance Obligation (RPO) is $604 million, up 94% from $312 million [Saul here: That’s almost as much as the whole of last year’s revenue!!!]
Conference call
They closed Zoom Phone deals with 2,900 customers with more than 10 employees.
They signed up Johnson and Johnson and VMWare.
Okta said that Zoom had had 876% growth in the Okta network over the past 3 years!
[Saul here: The CEO of Crowdstrike also talked about Zoom as if it was the obvious choice, as did the ex-CEO of Cisco].
In Gartner Peer Ratings, Zoom received the top overall rating in the “Voice of the Customer” category.
Adj gross margin was 84%, up from 82% and from 83% sequentially. Due to the coronavirus, they have seen huge increased usage of they platform and they will expand their capacity to meet the increased demands of both paid and free users. Next quarter they thus believe that their gross margins will be closer to 80%.
Saul here: This was obviously a terrific quarter, and it was all pre-pandemic. It’s hard to imagine what revenue will be this quarter. I was also impressed that Zoom was so profitable at such an early stage. Yes, I know that there is a lot of discussion about whether or not they have a moat, but they will have enormous growth this year, because enterprises all over the world will be avoiding travel to meetings and using video conferencing instead, and because Zoom is simply better at video conferencing than anyone else. Given that videoconferencing instead of travel and hotels will save enterprises gobs of money, as well as avoiding risk, it’s hard to see videoconferencing and WFH just going away.
Alteryx is at 11.5% of my portfolio, and in 5th 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.”
We’ve had some discussion on the board about whether Alteryx is really a SaaS company, since it’s not on the cloud, and whether or not it really matters as its revenue is recurring and its net expansion rate has been over 130% for many quarters and just fell this quarter to 128%.
Datadog is now in 1st place at a 22.4% 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 the price up enormously, which in turn moved it up to be my largest position. 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 the last Crowd report was the best earnings report I’d ever seen, but this Datatdog report came close. In other words, they have 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%]
Okta in 4th place, is a 14.2% 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.
On Thursday 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 this month. It finished the month at $195.60.
Livingo in 6th place and a 4.0% position. I wrote up why I invested in Livingo here, and won’t repeat it:
https://discussion.fool.com/why-i-took-a-position-in-livingo-thi…
Coupa in 7th place and a 3.6% position. I also 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…
Fastly in 8th place and also a 3.6% position. I accidently bought it this week on the day that they were placing a secondary, and got it down a few dollars. I haven’t had a chance yet to write anything of my own, except to say that I followed people’s advice and listened to the conference call, and management did indeed seem like very happy campers.
FINISHING UP
I feel that most of my portfolio is made up of a bunch of great companies. But that’s just my opinion, and I can’t say often enough that I’m not a techie and I don’t really understand what most of them actually do at all ! I just know what great results look like. I figure that if their customers clearly like them and keep buying their products in hugely increasing amounts, they must have something going for them and, as I’ve often said, I follow the money, the results. And I listen to smart people about the prospects of these companies.
When I take a regular position in a stock, it’s always with the idea of holding it indefinitely, or as long as circumstances
seem appropriate, and never with a price goal or with the idea of trying to make a few points and selling. I do, of course, eventually exit. Sometimes it’s after months, and sometimes after years, but I’m talking about what my intention is when I buy.
I do sometimes take a tiny position in a company to put it on my radar and get me to learn more about it. I’m not trying to trade it and make money on it, I’m just trying to decide if I want to keep it long term. If I do try out a stock in a small position and later decide that it’s not what I want, I sell it without hesitation, and I really don’t care whether I gain a dollar or lose one. I just sell out to put the money somewhere better. If I decide to keep it, I add to my position and build it into a regular position.
You should never try to just follow what I’m doing without making up your own mind about a stock. In these monthly summaries I’m giving you a static picture of where I am currently, but I may change my mind about a position during the month. In fact, I not infrequently do, and I make changes in the position. I usually don’t announce these changes until the end of the month, and if I’m busy or have some personal emergency I might not announce them even then. And besides, I sometimes make mistakes, even big ones! Don’t just follow me blindly! I’m an old guy and won’t be around forever. The key is to learn how to do this for yourself.
THE KNOWLEDGEBASE
Since I began in 1989, my entire portfolio has grown enormously.
If you are new to the board and want to find out how I did it, and how you can try to do it yourself, I’d suggest you read the Knowledgebase, which is a compilation of words of wisdom, and definitely worth reading (a couple of times) if you haven’t yet.
A link to the Knowledgebase is at the top of the Announcements panel that is on the right side of every page on this board.
For some additions to the Knowledgebase, bringing it up to date, I’d advise reading several other posts linked to on the panel, especially:
How I Pick a Company to Invest In,
Why My Investing Criteria Have Changed,
Why It Really is Different.
Illogical Investing Fallacies
I hope this has been helpful.
Saul