This is my summary of my positions at the end of October. As usual, I do my summaries at the last weekend of the month. As always, I’d welcome questions or comments on what I did or didn’t do, and I will try to respond. Please note also that in my discussions of company results, I almost always use the adjusted values that the companies give.
By the way, if you have a tendency to skip through parts of my monthly summaries, feeling they look familiar from the month before, I’d suggest that you read through instead, as I constantly make changes and include new reflections, thoughts, and observations each month, even in parts which superficially may seem repetitive. Also some ideas are worth reminding yourself of, even if you’ve read them before. This month the report is largely rewritten and revised.
This has been a tumultuous few months. I was up 77% at the end of July, up 64% at the end of August, and then a meltdown of our SaaS stocks hit and I finished September up only 22% ! I hit a low this month (this last Tuesday, actually) of up just 9.9%, and finished October (just 3 days later) at up 19.7%.
If you want to learn more about why our companies have such high valuations , I really suggest you reread the explanation in June’s summary.
MY RESULTS YEAR-TO-DATE
I said at the beginning of this year, that I would be happy with a gain of 25% for the whole year, after the huge gains the last two years. Well, my portfolio closed this month up only 19.7% year-to-date, after hitting a high of 77.4% at the end of July. It seemed remarkable to me that while literally all of my stocks were hit hard, and some were down more than 50% from their highs, I was never concerned, undoubtedly because I had lived through many of these drops previously, and especially because, in spite of the drops, I was always in positive territory for the year, with my lowest daily reading being up 9.9% year-to-date (roughly 2% more than the average annual rise for the S&P to put it in perspective).
How upset could I reasonably be, when at the bottom of a horrendous meltdown for all my stocks to way-oversold levels, I was still up for the year? It sure says a lot about the validity of our investing premise! Others on the board were still up lot more than me. Being up for the year, on top of the two hugely positive past years, and having confidence in one’s companies, sure helps one’s peace of mind.
At any rate, I stayed consistent with my investing plan of staying fully invested and not trying to time the market, a plan which has paid off for me very well over 30 years of investing.
Here is the monthly progress of my portfolio results since the beginning of 2019:
**End of Jan +16.5%**
**End of Feb +28.0%**
**End of Mar +36.9%**
**End of Apr +40.7%**
**End of May +42.2%**
**End of Jun +57.7%**
**End of Jul +77.4%**
**End of Aug +64.0%**
**End of Sep +22.1%**
**End of Oct +19.7%**
A LITTLE PERSPECTIVE
This is a little reminder for those who haven’t been through this before, and for those who have but don’t remember. Although this has been scary, it’s not unique, and we tend to forget it happens with some regularity and doesn’t mean the world is coming to an end. For example let’s look at last year, 2018:
On Sept 11 last year my portfolio of SaaS stocks was up 96%.
On Oct 29, a month-and-a-half later, it was up just 45%. (That’s 51 points less)
Two weeks later, on Nov 7, it was up 85%! It had bounced 40 points from that up 45% in two weeks. Even though the market as a whole melted away again, hitting a huge low on Dec 24, my portfolio finished the year at up 71.4%, just a few trading days later, up over 20 points in the last three-and-a-half trading days.
And for those saying that the SaaS stocks will never again see this year’s highs again, and other such foolishness, let’s check: Let’s look at last year’s 51 point drop from up 96% to up 45%. They certainly could have said the same thing then: that our stocks would never see 2018’s highs again!.
But at this year’s high of up 77%, my portfolio had gained 204% from the beginning of last year, or more than twice that 96% gain that it topped out at last year. And it was more than four-and-a-half times the gain I would have had if I got scared out at the up 45% bottom last year. I hope that that helps put things in perspective. This drop was NOT the end of the world.
A LITTLE WAGER FROM A NON-BETTING MAN
I wrote last month that I felt that our stocks were massively oversold, and said that if I was a betting man I’d bet that my portfolio will finish this year up 10 points, at least, from Sept’s close. That meant finishing the year up 132.1% or more. I felt that the chances that the market for our rapidly growing stocks would be able to maintain a massively oversold position for three months is infintesimaly small. I still feel the same way.
ON WHAT’S GOING ON WITH OUR STOCKS
At the end of August I thought our SaaS companies would have clear sailing for the rest of the year. Well that shows how little I can time the market. I was totally wrong. There was a 20% to 30% fall for our stocks in Sept, and more in Oct, and a lot of talk about repricing of SaaS stocks, sector rotation, recession coming, and all the rest. It’s been pretty scary, if it’s the first time for you. I’ve felt annoyed, but this time I’ve never been scared. What’s to be scared about? We aren’t investing in high capital expense, low margin companies, with high debt, that make things like automobiles, refrigerators, sneakers, and houses, that people can decide to just go another year or two with the old ones, or even with microchips or tech appliances, where orders can totally dry up, and revenue can actually FALL. Our companies are in the biggest wave of our time, the wave to bring all the enterprises of the world into the Cloud and AI. And they sell subscriptions to the software that enterprises use to run their businesses. This software saves the customer costs, rather than costing it 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 they use to run their business, and that is saving it money. Our companies may see their RATE of revenue growth fall, but they are extremely unlikely see their REVENUE fall unless we see a repeat of 1929, and half their customer companies go bankrupt .
And where else is someone going to go to look for companies growing at 50% to 90%? And which have high gross margins too? And have subscription-based recurring revenue? And most with over 120% net retention rates? And which reduce costs for their customers so they are valuable additions and not extravagances? But that’s just the way I see it, and you have to decide for yourselves.
Right now, I wouldn’t dream of having a large cash position. Why would I raise cash when my stocks are lots cheaper than they had been with no company specific bad news at all? I’ve just been selling lower conviction stocks and adding to higher conviction ones).
Look, I don’t know the future, but I am surely not going to sell out of great companies because their share prices have fallen, or because the market is going down, unless to put the money in companies I like a little better…My portfolio closed 2018 up 71.4% in the midst of the biggest meltdown of stocks in ten years. Many others on the board had similar results, a little better or a little worse. We are not magicians. We just invested in great companies.
Picking good companies makes much more sense to me than trying to pick good companies AND trying to time the market too. I have stocks in a small group of remarkable companies, in which I have high confidence for the most part. I feel that they mostly dominate their markets or their niches, they are category crushers or disruptors, they have customers that really need them, they have long runways, and they will have great futures.
All enterprises, whatever industry they are in, use more and more software. Most of our companies provide the picks and shovels for enterprise companies switching over to the cloud, and the enterprise companies NEED what our companies have to offer.
HOW DID THE MARKET INDEXES DO?
Let’s look at results year-to-date. The three indexes that I’ve been tracking against for ages closed year-to-date as follows.
The S&P 500 (Large Cap)
Closed up 20.6% year-to-date. (It started the year at 2507 and is now at 3023).
The Russell 2000 (Small and Mid Cap)
Closed up 15.6% year-to-date. (It started the year at 1349 and is now at 1559).
The IJS ETF (Small Cap Value)
Closed up 16.6% year-to-date. (It started the year at 131.9 and is now at 153.8).
These three indexes
Averaged up 15.3% year-to-date. The average was up 1.9% last month.
If you throw in:
the Dow, which is up 15.6%, and the Nasdaq, which is up 24.2%, the average of the five indexes is up 17.1% year to date.
Since the beginning of last year (2018), when the average of the indexes was down 8.5%, the five indexes are up 7.1%. (0.915 x 1.171 = 1.071).
My portfolio’s gain of 105.2% in those 22 months (1.714 x 1.197= 2.052), is still immeasurably ahead of the averages’ gain of 7.1%, but that doesn’t change the fact that this was a very challenging couple of months.
And 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, a little more, or a little less, but about the same.
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.
LAST FOUR MONTHS REVIEW
July was a quiet month which means I was basically happy with my positions. I did take back a small position in Crowd at $73, and then grew it to 4% after great earnings. I got the funds for the most part by trimming my Trade Desk position and taking a little from my small Square position. Trimming Trade Desk turned out to be very bad timing as Amazon announced later in the month that it will open its platform to Trade Desk. It’s just a reminder that I don’t always get it right. However, my Trade Desk position was still twice the size of my Crowd position, so no worries and no regrets.
August. Let’s look at it alphabetically. In the first half of the month I added a little to my Crowd position. Then I finally started to lose patience with Mongoand I trimmed just a little. I’m well aware that losing patience is not a valid reason for trimming, but I’m human too, and when I needed cash, that’s one of the places I looked. I added some back to Trade Desk after their great earnings, replacing some of the shares that I had prematurely sold last month, and brought it back to a 10% position. Then there is Twilio. I was really a bit disappointed having been taken in by all the exaggerated hype about how Flex and Sendgrid were going to explode their revenue. I guess I was expecting a lot more than we got. So when I wanted money to add to my Trade Desk position, I reduced my position in Twilio a bit. It was still about tied with Okta for 3rd place but at 13.1% down from 17.5% in July.
Zscaler suffered a decline due to a negative article by a boutique analyst company and I added more shares even though it was my largest position at the time. I added a small amount to Smart.
I made no significant changes in Alteryx, Okta, or Zoom. And finally I took a little 0.8% position in Guardant Health after their excellent results.
And how about Square ??? You’ll remember that at the end of last month it was in last place at 2.5%. When the share price fell precipitously after earnings (dropping its position size even further) I thought that it was ridiculous and I added a goodly sized amount at about $69. But it just seemed too complicated for me, and I sold out of my small position completely. I didn’t look back, and it never crossed my mind to get back in. I almost felt a feeling of relief that I was out.
Why? Well, look, Square was still bouncing around slightly lower than where it was well over a year ago … while at least four of my other nine companies were up over 100% just from the beginning of this year. I seem to have been correct last December when I sold most of my previously large Square position.
My reasons at that time were: First that its customers were unbanked tiny merchants, and also restaurants, both of which would be hit hard in a recession. Second, they were really in a small niche, and while they could move upstream somewhat, there was no way they could “take over the world” the way some of my other companies could. Third, Sarah Friar left, and although she was adequately replaced, it now seems possible that, as CFO, she saw the handwriting on the wall… that Square might continue to be a successful company, but that the glory days were over. That’s a complete speculation of course. She may have also disagreed with the focus on bitcoin. Back when she left I couldn’t understand why she would leave a prominent successful company like Square, where she got enormous exposure and became an icon in the investing world, to join a little no-name company that no one ever heard of. Fourthly, Square has plenty of competition (PayPal, Shopify, etc), while companies like Alteryx, Twilio, Okta, Zscaler, etc, don’t seem to have much effective competition. Fifthly, Square’s market cap was over $20 billion and that is much harder to quadruple than a company with a market cap of $3 billion. And you can add two more factors, first, their relatively low gross margin compared to our other companies, and second, Jack Dorsey in a recent conference call saying “I love bitcoin!” which promises even more focus on bitcoin. Well, I probably should have listened to those reasons and put the money somewhere more profitable sooner, but I often have to bounce around a little before I get it right. At any rate I sold out at an average price of about $69.50. Remember that I first bought it in March 2017 at $17.50, which comes out to about a quadruple in under two and a half years. It is currently at $62.90 (end of Oct).
September. I sold out of my very small Guardant Health position when I needed cash. On the drop of our Saas companies, I added a little to my Alteryx, a lot more to Crowd, a little to Mongo, a lot to Okta, to Zoom and to Zscaler. I also took a little position back in Elastic (2%), and on the last day of my month, a little 1% position in DataDog. To raise the cash, I sold a bunch from my Trade Desk position, and cut my very large Twilio position in half, and sold out of Smartsheets. The reasons I chose those are: Trade Desk because it’s part of a complicated advertising scene instead of a SaaS company, and Twilio because its relatively low margin, and because it acquired a large, much slower growing company. Comparing the combined revenue to last year’s revenue makes it look like it’s growing at 90%, but it grew organically at 56% and Sendgrid was growing at 20%-ish, so that in three quarters when you are comparing apples to apples it will look as if revenue growth dropped from 90% this year to 40% next year. Finally, I sold Smart because I felt that they weren’t making any progress towards arriving at breakeven. Not saying I was correct with any of these sales, just telling you what I did when a bunch of super companies were on sale.
October. Datadog just started the last day of Sept, and it is now a 12.3% position, and my third largest, in just a month. I can’t remember ever building a position as quickly as that, except perhaps Alteryx, almost two years ago. Coupa wasn’t even a position last month, and it is now my sixth largest at 8.7%. I didn’t keep those a secret but I wrote them both up during the month. Where did the money come from? A lot from Zscaler, as I described earlier this month, and as I described it again in my Zscaler summary below, and the rest partly from Trade Desk, for reasons I have described several times. I also trimmed a little Mongo, and a little more Twilio, and sold out of my tiny Elastic position (see my mid-month summary). I trimmed 2% from Alteryx, as 22% was too large a position. I feel happy with my current portfolio allocations.
HOW THE INDIVIDUAL STOCKS HAVE DONE
Here’s how my current positions have done year-to-date. I’ve arranged them in order of percentage gain. 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 2019, and not from when I originally bought them if I bought them in earlier years.
**TradeDesk from 116.10 to 202.62 up 74.4%**
**Okta from 63.80 to 107.99 up 69.3%**
**Alteryx from 59.47 to 93.27 up 56.8%**
**Twilio from 89.30 to 106.98 up 19.8%**
**Zscaler from 39.21 to 42.86 up 9.3%**
**DataDog from 31.92 to 34.30 up 7.5% new in Oct**
**Coupa from 129.20 to 133.90 up 3.6% new in Oct**
**MongoDB from 131.47 to 125.78 down 4.3% 3rd time**
**Zoom from 77.63 to 63.45 down 18.3% new in May**
**Crowd from 73.06 to 50.11 down 31.4% new in July**
As you can see from this, Alteryx, TradeDesk, and Okta are each still up more than 50% so far this year, while Zscaler has lost almost all its gains and Mongo just never got going. On the other hand, the smaller positions that I have taken since May, like Zoom and Crowd, and that missed the first half of the year gains, are down considerably. Crowd especially got hit hard. It and Zscaler seem to have been hit the hardest in the decline.
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 2019, and not from when I originally bought them if I bought them in earlier years. You’ll note that almost all of these were tiny little try-out positions that I ended up deciding against, and don’t represent actual churn of the body of my portfolio
**Square from 56.09 to 69.50 up 23.9%**
**Docusign from 43.75 to 56.80 up 23.4%**
**Zuora from 19.80 to 24.00 up 21.2%**
**Elastic from 71.48 to 83.80 up 17.2%**
**Guardant from 37.59 to 41.50 up 10.4% 1st time**
**Anaplan from 28.75 to 31.05 up 8.0%**
**CrowdStrike from 60.80 to 64.81 up 6.6%**
**Mongo from 95.0 to 99.9 up 5.2% 1st time**
**Coupa from 91.95 to 93.13 up 3.0%**
**Abiomed from 325.0 to 334.0 up 2.8%**
**EverBridge from 73.58 to 73.95 up 0.5%**
**SmartSheets from 39.21 to 39.22 up 0.0%**
**Vericel from 17.40 to 17.38 down 0.1%**
**Guardant from 70.70 to 69.50 down 1.7% 2nd time**
**Mongo from 83.74 to 76.20 down 9.0% 2nd time**
**Nutanix from 41.59 to 36.00 down 13.4%**
**Guardant from 99.20 to 82.90 down 16.4% 3rd time**
**Elastic from 90.64 to 74.60 down 17.7%**
MY HERO COMPANIES.
Alteryx, Twilio, Okta, Trade Desk and Zscaler have all been in my portfolio for a year or more now. In spite of this huge sell off, they’ve done well since I bought them
Twilio is a quadruple in a year and ten months, at 4.2 times what I paid for it in January a year ago ($25.70). It is up 316%.
Okta is well over a triple, at 3.6 times what I paid for it ($29.95), also a year and ten months ago. It is up 261%.
Alteryx is a triple, at 3.36 times what I paid for it in December 2017, a year and eleven months ago, at $27.72, or up 236%.
Zscaler is up 20% since I bought it a year and four months ago in June 2018, at $35.84. It got killed in this decline.
And finally Trade Desk is up 67%, in a year, from when I bought it at $121.0 last October.
This is how you make money in the stock market, buying exceptional companies and holding them as long as the story doesn’t change. As you see just above, the great majority of my portfolio’s profit came from companies that I bought and held on to, and let them double, triple or quadruple.
And another great point from this is:
Do you think I care, or even remember, if I bought Twilio (for example) at $25.90, $25.70, or $25.50, now that it’s a quadruple and its price is $106.98? Think about that for a moment! The decision that matters as far as making money in the market is “Do I want a position in this company?” and not “Can I buy it 25 cents cheaper?” If you have a stock that you want to buy because you believe it will triple or quadruple, and then you put in a buy order for it 25 cents, or 50 cents, or even a couple of dollars below the market, and hope that it will FALL to your price, you are out of your mind! But that’s just my opinion.
If you want to be in a company because you think it’s a great company and that its stock will go up, at least take a starter position that you can add to. Don’t wait around for the sell-off that may never come.
POSITION SIZES.
I’m still trying to keep my portfolio concentrated and streamlined. I’m at ten positions now which is still quite concentrated. My top two positions (Alteryx and Okta), make up about 34% of my portfolio, so the portfolio is less concentrated than a month ago when the top two made up 41%. The next two positions (Datadog and Mongo), at 12.3% and 10.4%, make up about another 23% of my portfolio, again less concentrated than last month when the 3rd and 4th positions came to 27%. Then come five still good sized positions (Zscaler, Coupa, Twilio, Zoom and Crowd), at 9.4% down to 6.9%, making up 40%, and finally TradeDesk at 3.9%. By the way, keeping my number of 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. Alteryx didn’t fall as much as the others in September, but didn’t rise as much as some this month as a consequence. Zscaler is reduced, partly because it fell a great deal, but also because I trimmed it quite a bit, and finally because it hasn’t bounced the way some have, but continued to fall this month. The big changes are the additions of Datadog and Coupa in 3rd and 6th places
**.**
**Alteryx 18.7%**
**Okta 15.2%**
**Datadog 12.3%**
**Mongo 10.4%**
**Zscaler 9.5%**
**Coupa 8.7%**
**Twilio 7.7%**
**Zoom 7.4%**
**Crowdstrike 6.9%**
**The Trade Desk 3.9%**
STOCK REVIEWS
Alteryx is now at 18.7% of my portfolio, and in first place. They will announce earnings next week. What they do is to enable non-techies to quickly and easily analyze data. Their clients therefore love them.
Their revenue percentage growth looks like this:
**2016: 57 67**
**2017: 61 50 55 55**
**2018: 50 54 59 57**
**2019: 51 59**
As you can see, it looks solid as a rock. Revenue not only is growing, but the rate of growth is growing.
Their adjusted gross margins were 90% and 91% for the last two quarters!
Their dollar based net retention rates were 134 and 133.
Their number of customers, which is almost triple the number of customers that they had three years ago, was up 35% and 34% yoy.
They feel they have no competition. From one of their earlier conference calls: “We are in a space where there’s little to no competition and a much larger TAM.”
We’ve had some discussion on the board about whether Alteryx is really a SaaS company, since it’s not on the cloud, and whether or not it really matters as its revenue is recurring and its net expansion rate is 134%.
Here’s a paraphrase of Ethan’s post from the Analyst Day in June.
AYX has a Net Expansion Ratio of 134% overall, but 143% with global 2000 customers which is pretty crazy. Customers with over $500,000 annual recurring revenue (ARR) have a 70% increase per year!!! That is an insane number. Customers with over $1,000,000 have a 50% increase.
They really harped how Alteryx simplifies and automates complex processes They identify their ease of use as the number one reason people choose Alteryx. If you look at the Gartner peer review website you will see similar things in the reviews.
Long term goals are:
Gross margin 90-92%
Operating Margin 35-40%
FCF Margin 30-35%
The stock finished 2018 year up 135% for the year, and they are up 57% this year on top of that, in spite of the big sell-off. I feel very justified in calling Alteryx a Category Crusher, with very high confidence level. I’d give it six confidence stars out of six. It seems to control its space and is growing like mad.
Okta in second place, is a 15.2% position, and is at a five star confidence level. 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. Last quarter the rate of revenue growth “fell” from 58% to 50% sequentially. That’s the bad news. The good news is that it became evident from the conference call, and from their recent acquisitions, that they do a lot more than smart sign in, more than I can understand, for sure, and it seems likely their revenue growth will take off again. I only sell out if the story has changed for the worse. I don’t see that the story has changed. This is a Disruptor and Category Leader, and a Cloud-based New Market Stock.
Datadog is a new position that I built from zero to 3rd place, at 12.3% of my portfolio in a month. That’s really extraordinary for me, so let me tell you a bit about Datadog: It is a SaaS software company that leases subscriptions to software that monitor infrastructure, analyze application performance and provide log management. Recently it has added new products that provide what it calls experience monitoring (what the experience of your customers are, as close as I can figure it), and a network performance management product.
What makes it unique is that its competitors have single products that work in silos, while Datadog intergrates them all and its “three pillars of observability can be observed on a single pane of glass.” That’s hard to beat. As Bert says, “DataDog basically set out to create a platform that has broad appeal to developers and operations managers. To accomplish that, it built a product that is self-serve in nature and supposedly can be installed in minutes. And having a platform that offers all the monitoring and analysis of logs in a single platform is more unique than you imagine.” And that ability users have to look at their entire IT operation holistically and on a single pane of glass is a great differentiator.
The IPO said that 60% of their new customers are landing with more than a single product, up from 15% just a year ago, and 40% of all customers use more than one product, up from 40% a year ago. That implies both that their new products are incredilby good, and that they are very efficient in selling them.
They have a calendar fiscal year and in 2018 they grew revenue at 97%. They will probably grow at about 80% this year in spite of being distracted by the IPO. That’s a little behind Crowd and Zoom, the two superstocks, but not by much. They’ve had positive operating cash flow both of the last two years, at least, and their adjusted net loss was only about 5% of revenue.
MongoDB is now in 4th place at 10.4% of my portfolio. I’ve been in and out a couple of times, each time having to buy back at a significantly higher price than the one I had sold at. That’s life! I won’t sell out again except for bad operational results, which I don’t think will happen.
Mongo has pretty much invented its solution and category, although it does have competition. It’s the leader in NoSQL data storage. It has chosen to put almost all its money into growing, and thus is still running an adjusted loss, which was 28% of revenue for 2018, down from a loss of 49% of revenue in 2017. I really don’t like that. (Under the new ASC 606, the loss was only 19.5% of revenue for 2018).
What has changed Mongo is Atlas, which gives it a fully managed cloud solution, and Atlas is growing at about 240%, although off a small base.
Here are some highlights from the last quarter:
• Total revenue was $99 million, up 67%.
• Subscription revenue was $94 million, up 71%.
• Adj gross profit was $71 million, for a 72% adj gross margin.
• Adj op loss was $15 million, improved from $18 million
• Adj op margin was minus 15% up from minus 30% a year ago.
• Adj net loss was $15 million or 26 cents per share, improved from $17.5 million or 34 cents a year ago.
• Cash was $437 million
• Op cash flow was minus $13 million
• Free cash flow of minus $14 million, improved from minus $18 million a year ago.
They adopted ASC 606 effective Jan 31, 2019 and applied it on a full retrospective basis.
• They made significant product announcements in June: MongoDB 4.2 added… extended its expertise beyond the database to a data platform with Atlas Data Lake and Atlas Full-Text Search, and Charts. We also unveiled our vision for Realm, the mobile database acquired in May.
• Saw growing momentum with all three major cloud providers.
Conference Call – [Last month I included a lot more but my post became so long I had to split it in half, so for more information on the conference call read last months summary].
One of our key competitive differentiators is the freedom to run anywhere, and our customers can choose Atlas to take advantage of the benefits of each major cloud provider as they see it fit. We continue to see rapid adoption of Atlas, which grew over 240% and now represents 37% of total revenue compared to 18% a year ago and 35% last quarter.
We grew our customer base by over 800 customers sequentially, bringing our total count to over 15,000, up from over 7,400 a year ago, or up over 100%. The growth in our total customer count is being driven in large part by Atlas, which had over 13,200 customers at the end of the quarter, compared to over 5,300 a year ago.
Our net ARR expansion rate in the quarter remained above 120% for the 18th consecutive quarter. We ended the quarter with 622 customers with at least 100,000 in ARR, up from 438 a year ago.
We continue to expect that we will see some modest reduction in overall gross margin, as Atlas continues to be a bigger portion of our revenue. Atlas revenues are recorded on a consumption basis, whereas Enterprise Advanced includes a term license component that is recognized upfront. Atlas also has a lower overall gross margin than Enterprise Advanced because of its infrastructure component. That said, Atlas is accretive to dollars of gross profit. Finally, many Atlas customers pay us monthly in arrears versus annually upfront for Enterprise Advanced. In other words, Atlas which is an increasing portion of our overall business, usually does not involve an upfront cash payment nor does it impact our deferred revenue balances. We believe that offering customers the ability to pay as they go is a key benefit of the cloud model. We’re seeing a lot of interest from very, very large organizations. I think previously we talked about banks, insurance companies, tech companies and so forth, all very, very interested in Atlas. And we’re really, really excited about the interest level.
We expect to burn cash in the third and fourth quarter of fiscal 2020, as we continue to make significant investments in the business.
We don’t see any headwinds in terms of competition. It is a big market. There are a lot of competitors, but we feel really good about a competitive differentiation, as evidenced by our growth rates, as evidenced by some of the most sophisticated customers in the world choosing MongoDB for some very, very mission critical workloads.
I’ll call Mongo a Disrupter, a Category Leader, and a Big Data New Market Stock, and I’ll give it four and a half confidence stars for now.
Zscaler was my second largest position at 18.8% of my portfolio last month. I reduced it greatly this month and it’s currently a 9.5% position and my 5th largest. Here’s the story, reprinted from my post on the 14th of this month.
Zscaler hit its peak at about $89 in July. It was tied for my largest position with Alteryx at about 18%. Over the next few weeks it drifted down with the market to about $82, but then, near the end of August, it suffered a large decline attributed to a negative article by a boutique analyst company, and I increased my number of shares at $72.50 even though it was one of my largest positions. I thought that that was a ridiculous response to an analyst article.
However, over the next two weeks, leading into earnings it continued to fall, with panic feeding into itself, so that five weeks ago it closed at $64 dollars. (Down from a high of $89, remember!) Even excellent earnings didn’t help as the sell off in SaaS stocks in general hit, and it dropped in the next week to $47.50!!! It was down almost 47% from its high on no clear bad news at all.
I had not added since that purchase at $72.50 because I didn’t understand what was going on. I knew that they had guided conservatively but all these companies do that so that they can beat. I knew that they were encountering longer sales times with larger enterprises, but I also knew that they had hired a superstar to take over sales and marketing motion. I added a considerable amount at an average price of about $49 or so.
But then I reconsidered, and over the past six weeks I greatly reduced my position. Well why?
First of all, I do feel that the old firewall paradigm, as represented by Palo Alto, is obsolete. The CEO of Palo Alto, the number one in security, making a huge point of crowing about how his company beat out Zscaler, a little company one-tenth the size of Palo Alto, in a few sales, shows how scared they are. Think about it! Why would a really dominant company even mention, or care about, beating out a little company a tenth their size, ordinarily? Unless they fear that that little company has a better product!
But now that the legacy security companies are aware of the threat to their very existence, they will fight tooth and nail, with lies, and false and distorted claims, and whatever they can, to hold on to the bulk of their business for as long as they can. Zscaler may take over a large part of the security world, but it definitely won’t do it overnight. It will be a long struggle.
Second, Zscaler was clearly worried about their lengthening sales cycles as the early adopters have been worked through and they have to sell to the C-level executives of larger enterprises, who may know nothing about security but will worry about changing their security system, may have IT departments worried about losing all their beloved hardware (and maybe their jobs, some of which will become unnecessary), and who have the CEO’s of their legacy security companies, who they have known for years,whispering in their ears. Clearly Zscaler made the right move in hiring someone really competent in order to deal with this situation, but you don’t overhaul a sales process overnight. There may be a couple of disappointing quarterly reports before things pick up (or don’t pick up).
So here I am, with Zscaler, with a tailwind of inevitability, sure, but who is asking huge enterprises to revamp their entire security systems, and which has a lot of temporary obstacles in its path which may cause growth rates to diminish in the near term, like desperate large competitors, customer IT departments that don’t want to lose their jobs, and enterprise CEO’s who don’t really understand security… while I have other companies, growing like mad, and without these execution problems, so it made sense for me to reduce the size of my Zscaler position from huge to just large (and it is still a large position), and to use the cash to buy into companies like Coupa and Datadog. There isn’t any relationship at all to “momentum,” but rather it’s evaluating what is going on and acting on it. So far it’s been a good call as Zscaler is currently at $42.86, considerably lower than it was when I sold.
Coupa is another new stock this month and is now in 6th place at 8.7% of my portfolio. You’ll remember that it had been one of the four little second-tier Saas companies that I had taken trial positions in but sold out of in March. My reason for selling was that they were all growing at 30% to 40% and had net retention rates of just 110% to 120% and I could do better elsewhere.
I had lost sight of Coupa until recently when one of the portfolio summaries that others have joined me in posting alerted me. When I sold in early March, the percentage revenue increases for the past two years had looked like this:
**2017: 44% 41% 43% 34%**
**2018: 41% 37% 38% 42%**
**2019: 39%**
**It looked very unexciting. But since then the two quarters that have reported have given a different picture:**
**2017: 44% 41% 43% 34%**
**2018: 41% 37% 38% 42%**
**2019: 39% 44% 54%**
Thus we had 44%, up from 37% yoy, and up from 39% sequentially… Which was followed by 54%, up from 38% yoy, and up from 44% sequentially. That was very impressive.
Subscription revenue was up 46% and 51% for the two quarters.
Adjusted Op Income for the two quarters was $2.2 million, up from $0.3 million, and $4.8 million up from $4.0 million (all positive numbers).
Adjusted Net Income for the two quarters was $2.1 million, up from a loss of $0.1 million, and $5.3 million up from $3.3 million (last two quarters again were positive numbers).
Adjusted TTM EPS was positive 23 cents
Calculated Billings were up 50% and 57% for the two quarters.
This was a different picture than the one I had been looking at, and I decided to take a position.
For a little background on the company, here’s a little paraphrased excerpt from the introduction to Bert’s multi-page write-up in January. Bolding is mine.
Coupa is a leader in the e-procurement space. It has continued to exceed its targets for growth, earnings, and free cash flow. It has built a substantial competitive moat that may not be fully appreciated. It has grown its TAM prodigiously by expanding into ancillary spaces that enhance the value of e-procurement. At this point, it seems destined to become the absolute leader in its space, and to achieve the kind of profitability that leaders often deliver in the enterprise software world.
Twilio is down to a 7.7% position, down from 17.5% position three months ago, and has dropped to seventh place. I explained in my four-month summary above why I halved my position size.
Twilio provides communication services and it seems to have no viable competition in what it does besides “do-it-yourself”. For the March and June quarters its reported base revenue growth accelerated from 46% a year ago to 88%, and from 54% to 90%. The last seven quarters’ growth rates have been:
40%, 46%, 54%, 68%, 77%, 88%, 90%
However the 88% jump was partly due to one big customer, and partly due to the acquisition of Sendgrid, and the 90% jump was from combining the revenue from two companies for the entire quarter, and comparing it with Twilio’s revenue by itself the year before. The organic growth increased from 54% a year ago to 56% now, which looks much less exciting, and is down from the 68% and 77% growth rates which followed that 54%. And the reported growth rates will plummet in 3 quarters when they start comparing to quarters where Sendgrid was already included.
Now the dollar based net retention rate: The last four quarters have all been above 140%, but that’s not including Sendgrid either, and will be lower in the future.
They hit adjusted profit in the June quarter last year unexpectedly, and have stayed profitable since.
They had 162,000 Active Customer Accounts, a little less than triple the number they had a year ago. This was driven partly by customer acquisition but mostly by their SendGrid acquisition.
They continue to have euphoric conference calls:
… I think that that means there’s a runway for us for many, many years to be replacing old legacy technology… I think there is going to be no shortage of opportunity for us to do that for years to come. …It’s still day one of this journey.
There was a lot of obsessing on our board and elsewhere about “weak” guidance. For the life of me I don’t understand why anyone even looks at the guidance figures for these companies. Why waste your time unless reduced guidance is due to an actual problem with the business (ie Nutanix). Follow the actual results! There has also been concern that Twilio is too big, that the Sendgrid acquisition caused dilution, or that it would slow down growth. Some of that is valid, and is part of why I reduced my position. We’ll have to see what happens.
In July Twilio announced the first roll-out of its Narrowband IoT collaboration with T-Mobile. Not one that moves the needle by itself, but just another reminder that Twilio isn’t sitting still, and that IoT could become another large market for them. They then announced a half dozen more new products at their conference a week after earnings. I’ll give Twilio four and a half confidence stars now, down from six. With the way they were enthusiastically talking about Flex 18 months ago (an “oversubscribed beta”, etc), I expected it would be doing somethng significantly by now, and four months after the acquisition of Sendgrid there was nothing to show for it (which may be just impatience on my part, again.) No further plans to taper my position. At 7.7% it remains good sized.
In 8th place at 7.4% of my portfolio is Zoom, which at first I said was multiples too high. What happened? Well, I thought about the reasons for the high valuations of our SaaS stocks, and that changed my mind.
There were a couple of long write-ups on Zoom a few months ago, around the time of their IPO, which you might want to look at. Here are some financials, which include their July quarter results, and which will probably amaze you.
**Fiscal Q1 Q2 Q3 Q4 YR**
**Revenues**
**2017: xx xx xx xx 61**
**2018 27 33 41 51 151**
**2019 60 75 90 106 331**
**2020 122 146**
**% Increase**
**2018 149%**
**2019 122 127 120 108 119%**
**2020 103 96**
**Adj Gross Margins %**
**2018 81 82 82 80 81%**
**2019 82 84 84 86 84%**
**2020 81 82**
**Gross margins look great.**
**Op Cash Flow (millions of dollars) Yr Total ($)**
**2017: 9**
**2018: 19**
**2019: 03 14 51**
**2020: 22 31**
**TTM Op Cash Flow is thus currently $87 million**
**Free Cash Flow (millions of dollars) Yr Total**
**2018: xx**
**2019: -01 08 30**
**2020: 15 17**
**TTM Free Cash Flow is thus $55 million.Note that those cash flow numbers are positive numbers! I don’t think that any other of our SaaS companies have cash flow numbers like those**
**Cust with ARR over $100,000 At year end**
**2017 54**
**2018 143**
**2019 184 344**
**2020: 405 466**
**% Increase !!!!!!!!**
**2018 165%**
**2019 141%**
**2020 120% 104%**
**These figures don’t need any explanation and show how well the business is doing.**
**Customers with over 10 employees (in thousands)**
**2017: 11**
**2018 26**
**2019 32 37 51**
**2020 59 66**
**% Increase**
**2018 137%**
**2019 97%**
**2020 86% 78%**
**Dollar based net retention rate**
**2019 138 139 140**
**2020 >130 >130**
• Adj Operating Income was $20.7 million, up from $4.5 million a year ago.
• Adj Operating Margin was 14.2% up from 6.7% sequentially.
• Adj net income was $24 million up from $5 million, and up from $9 million sequentially
• Adj EPS was 8 cents, up from 2 cents
• Cash was $755 million
• Op Cash Flow was $31 million up from $14 million a year ago.
• Free cash flow was $17 million, up from $8 million.
For a word on customer wins:
HSBC is one of the largest financial services organizations in the world with over 3,900 offices in 67 countries. It will standardize on Zoom’s platform by deploying to 290,000 hosts and to 5,500 conference rooms. HSBC will consolidate onto Zoom’s video-first unified communications platform for both internal and external meetings. This enterprise-wide deployment represents one of the largest customer commitments to Zoom in our history and reflects our growing momentum with global customers. (Awesome) In the financial sector Moody’s and Morgan Stanley also became Zoom customers in Q2
One example of Land and Expand was with a large luxury brand. This customer began their relationship with us last year and quickly deployed Zoom meetings to approximately 3,800 users to replace their legacy conferencing provider. Because of their trust in Zoom, they then invited us to provide a modern solution for the phone service in their corporate offices and stores. After a full evaluation, they selected Zoom Phone in Q2. They cited call quality, ease of use, cost savings, and the unified Zoom platform of meetings, chat and phone as important benefits to their organization. They have already begun the rollout of 4,700 Zoom Phone licenses within their organization. They also plan to roll out Zoom Phone to their 750 domestic retail stores starting in early 2020, and in the rest of the world soon thereafter. (Also awesome)
I doubled the size of my Zoom position in Sept. I was very impressed with the HSBC win. “290,000 hosts and 5,500 conference rooms” is enormous in a single sale. I’m also impressed that this company is so profitable at such an early stage. Yes, I know that there is a lot of argument about whether or not they have a moat.
Crowdstrike is in 9th place at a 6.9% position. It’s a recent IPO and there were a couple of extended threads on Crowd in July on the board, so I’ll just give you my take on their earnings report (which caused them to sell off).
Let’s start off with revenue. It was $108 million, up up 94% from $56 million yoy, and up from $96 million sequentially. If you just look at those numbers in isolation they look fantastic, but I have to admit I was expecting considerably more. The last four quarters they had grown by $9, $10, $14, and $16 million sequentially, so growing by only $12 million sequentially was a disappointment.
Then we’ll look at subscription revenue. That was up 98%, and made up roughly 91% of total revenue. Can’t complain about that.
And their ARR (Annual Recurring Revenue) is $424 million, up from $208 million a year ago, and from $90 million two years ago. That’s zowie!
But how to reconcile the “paltry” $12 million in sequential total revenue growth with the huge, accelerating customer growth? I’m not kidding about huge. January fiscal year-end customers in 2016 thru 2019 were
**165**
**450**
**1242**
**2516**
Just look at that stack for a minute. And in the last two quarters they already grew by a little more than they grew all last year, and they now have 3789. And they say that they are focusing on larger customers, and those customers are asking for longer contracts.
Let’s see if that makes sense. Longer contracts mean more dollars that they have signed up but can’t recognize yet, so that helps us to understand. Also, they have a land and expand sales plan so those new customers will increase their spend in the future.
Okay, Gross margin! Was 36%, 54%, and 65% of total revenue for the past three years. This quarter it was 71%, and subscription gross margin was 74%, up from 70% yoy.
Adjusted net profit margin was -173%, -114%, and -56% the last three fiscal years, and this quarter it was -21%. That gives an idea where it is going.
Dollar based net retention rate was “over 120%” for the umpteenth consecutive quarter.
Op Cash Flow was neg $6 million, improved from neg $29 million a year ago.
Free cash flow was neg $29 million, improved from neg $36 a yr ago.
Cash was $827 million.
That gives you a thumbnail sketch.
Now here are some quotes and paraphrases from the conference call:
CrowdStrike stops breaches, and we are transforming endpoint security. Our clear technology differentiation is driving our growth which continues to significantly outpace the industry. In addition to stopping breaches, we help customers simplify their security stack with our single agent architecture and cloud modules. This sets us apart from others in the security industry. We reached a new milestone with 50% of our subscription customers having adopted four or more cloud modules. The strength of our Falcon platform is also rapidly gaining industry recognition.
To help foster innovation within the CrowdStrike store ecosystem, we have established the Falcon Fund. Our cloud-native open architecture was built to provide a shared security ecosystem where developers and partners could dramatically shape the future of security in IT operations. Through the Store, third-party applications can be developed utilizing the massive amounts of endpoint data that our lightweight agent already collects. The Falcon Fund will invest in the next generation of innovators, leveraging the Falcon platform to solve the most pressing security and IT challenges.
CrowdStrike was cloud native from day one and we enjoy first mover advantage in cloud delivered endpoint protection. We have the architecture that others strive to emulate and we possess unique technology that allows us to operate effectively at scale. We are putting growing distance between ourselves and competitors. This is reflected in our position in the Gartner Magic Quadrant versus all other fossilized and NexGen players.
Our rapidly growing international business highlights the global nature of the security industry, the massive market opportunity in front of us, and our continued success penetrating these markets
We’ve seen a tremendous increase in Spotlight. And why are we seeing that? Well, it just works. Companies don’t want other agents on their system if they have a scalable agent, which is going to deliver real time vulnerability information. That’s what they’re looking for. And the ability to actually have a customer try it with their own data, with our frictionless in-app trial, I think has been a big boon to us. So we’re seeing a lot of activity there.
If you look at our threat intelligence modules, our Falcon X, the ability to automate a triage process and take something that would normally take eight hours and reduce that time to five minutes with our Sandbox technology, and our malware search capabilities and our integrated intelligence, these have been very, very well received. And again a tremendous - we’ve seen tremendous adoption in those areas.
So the feedback has universally been customers actually accelerating moving to CrowdStrike from our competitors as they try to transition from an on-premise solution which has been slow and cumbersome.
And as other competitors try to accelerate their move to the cloud it actually just creates another opportunity for us. If they are going to look at a cloud vendor they might as well look at the best out there. So we like that dynamic.
Q - But it would be really great to hear from you guys in terms of where and when you actually do see Palo Alto and how they stack up?
A - Well, we don’t see much of them to be candid, and if you look at the Gartner Magic Quadrant rather than me saying where they stack up, you can tell where the analysts think they stack up. And it’s not even close to us. So I’ll the reader be the judge of that.
Saul here: Okay, so what did I do? I roughly doubled my Crowd position too on the way down. But please don’t just follow me. Decide for yourself. I make mistakes I can assure you.
The Trade Desk is in 10th place at 3.9% of my portfolio.
They had incredibly strong earnings report and conference call in August, which was extensively discussed on the board.
Revenue was $160 million, up 42%
Adj EBITDA was $58 million, up 57% from $37 million yoy, and was 36% of revenue.
Adj Net income was $46 million, up 68%, and was 28.5% of revenue.
Adj EPS was 95 cents, up 58% from 60 cents a year ago.
I’d rate it four confidence stars now, because of my mistrust of a complicated advertising milieu, but I feel that this is a very unique innovative and creative company. The Trade Desk seems to be a Leader in a Rapidly Growing niche Market within the larger field of advertising, which up to now is controlled by the behemoths.
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
