In this post I’ve pulled commentary from Dynatrace, Fortinet, ZoomInfo, Confluent earnings calls today. There may be some pointers we can glean to extrapolate forward to companies we own. The one liner summary is that macro is hitting hard and fast within these company examples of (?hardware) cybersecurity, cloud observability, and B2B sales…and one ‘bright spot’ was strength within ‘mission critical’ cloud data products.
But first, I’ve also included in this post, a very cool article by ETR research that was published on October 28. I’m sharing it today as NET/DDOG will report tomorrow, so we can see how accurate their research becomes!
here’s the link to the article: Ghastly Earnings Gauntlet
And below, I have shamelessly quoted from the relevant sections:
Cloudflare (and Fastly). We follow a data set that warranted a step down with one that warranted a step up based on the relational analysis described above. In this survey, the updated 2H22 spend on Cloudflare was down slightly from both the data collected in JUL22 and one year ago; however, the declines in the company’s Net Score are not as severe as the decline in the overall survey and were largely driven by a flattening of customer spend, with negativity remaining low. The detailed vendor report examines the strong performance in the information security sector, growth among Global 2000 accounts, and rising customer acquisition rates. In sum, the ETR Research team stated: “Stable overall and improving among Global 2000 organizations, Cloudflare’s Information Security sector outlook, coupled with expanding Pervasion and above Consensus forecasts, puts the vendor’s data set into the Positive outlook bucket once again.”
Cloudflare is scheduled to report earnings on Thursday, November 3rd, but first, we will see numbers from its CDN peer, Fastly, which will report the evening before. As a way of comparison between the two vendors, we will leverage ETR’s Expansion vs. Contraction ratio. Simply explained, Expansion is defined by the percentage of survey respondents indicating plans to Adopt + Increase as compared to the percentage of Decrease + Replace indications. For Cloudflare, the Expansion vs. Contraction ratio stands at a very robust 42:4. For Fastly, that ratio drops to 36:20. The negative spend intent for Fastly resulted in an all-time low Net Score of 15% in this survey period.
Lastly, below is a sneak peek at ETR’s proprietary Sales Forecaster, which uses its forward-looking spending intentions data along with publicly available market data to produce a forward estimate for sales. As the chart illustrates, ETR’s Sales Forecaster, with a 90 Confidence Score, estimates the largest upside to Consensus for the vendor in over a year.
Well, Fastly just reported afterhours today, and whatever they reported (I didn’t dig into their results), the market didn’t punish them: FSLY stock is up +5.19% afterhours.
Hopefully, NET will deliver their consistent beat and raise as usual.
Datadog & Dynatrace. These two companies that play in the observability space also are expected to report earnings next week. As the saying goes, “age before beauty,” so we begin with the more mature and established Dyntrace who is expected to print numbers on Wednesday, November 2nd before the market opens. The backdrop for the entire observability group in this survey was one of declining spend across the board. If a rising data tide lifted all observability boats throughout the last two boon years, we are clearly seeing the tide ebb right now. With that said, Dynatrace ebbed more than most of its peers on a relative basis, resulting in a Negative outlook on the vendor’s data set.
The ETR Research team had the following to say when analyzing the data: “Among all customers, Dynatrace’s Net Score is down from one year ago across both sectors in which ETR tracks the vendor; however, the decrease among Fortune 500 customer data is particularly concerning for Dynatrace. Furthermore, while it’s worth noting that other observability vendors are seeing a y/y decline in Net Score as well, the lower Net Scores for both Datadog and Elastic are driven by more ‘flat’ spending plans, whereas Dynatrace’s lower score is driven by more plans to decrease spend or replace the vendor.”
Meanwhile, Datadog retained its Positive outlook on the recent data set, but just barely. The data set for Datadog this survey was dichotomous at best, with Net Score seeing declines in both sectors in which we track the vendor, but Pervasion (customer growth) showed meaningful increases. Further pushing the bi-directional nature, Datadog holds the top position among its observability peers within the Analytics sector but showed massive declines from its strong debut within the Information Security sector last year.
Ultimately the ETR Research team stated: “Amidst broad budget declines, Datadog is seeing reduced spend intent; however, the vendor remains well positioned relative to its peer group, and Pervasion rates are robust. As such, we cautiously retain the Positive outlook while awaiting JAN23 data.” Below is an image illustrating the relative spending intention positioning mong observability peers within ETR’s Analytics, Big Data sector. This particular analysis shows Contraction rates for the group where you see Dyntrace having the second highest spending contraction (behind Cisco’s AppD) whereas Elastic (also a Positive data set) has the lowest spending contraction in this survey.
Well, it looks like the above ‘forecast’ by ETR was ‘generally correct’, in my opinion.
Dynatrace reported premarket today and lowered their ARR guidance. The stock finished today down -6.35%
As already called out on many earnings conferences earlier this year, macro headwinds are hitting hardest in Europe, and we’re probably sick of hearing the theme of sales elongation and increased deal scrutiny. But it’s become quite real.
We have, however, begun to see additional macro impact, particularly in Europe. Clearly, enterprises are working to navigate the rapidly changing economic environment that is leading to increased caution in spending and as a result lengthening of our average close cycle.
Consequently, we are bringing down our ARR guidance to reflect increased pressure on new logos and net expansion rates
…as I mentioned, new logos continues to be an area of the business that is most impacted by the weakening of the economy. Given that, we now expect new logo additions in fiscal '23 to be down roughly 5% over last year, reflecting tighter budget scrutiny and elongated sales cycles.
One analyst asked about how hyperscaler growth slowdown is impacting Dynatrace. The CFO thought there wasn’t “as dramatic” of a slowdown for them, so fingers crossed this may mean DDOG came out less hurt than the market is currently fearing…
Analyst: We saw a notable slowdown out of the hyperscalers. How did you factor that into your ARR?
CFO: I will say that our hyperscaler component of our business continues to grow nicely. So we didn’t see a dramatic of a slowdown as they did some of them printed publicly.
An analyst astutely pointed out that Dynatrace’s newly lowered guidance may imply a falling NRR below their 120% target:
Analyst: Regarding the net expansions, we should be thinking about that playing out over the remainder of the year? Is there a potential for that to actually dip below that 120% plus you guys have been posting on a consistent basis?
CFO: …unfortunately, based on our guidance, there’s – mathematically, the net expansion rate in the fourth quarter would fall below 120%. Again, that’s based on what we have currently guided…we wanted to derisk the number in Q4. Mathematically, net expansion rate could drop below Q4 for a period of time.
Other commentary points out DIY remains the biggest competitor to Dynatrace (which DDOG has also frequently said), and that the sales elongation going on could mean potential new customers are just deciding to stick to DIY for another quarter or two:
Analyst: I’m wondering if you can share some nuances as to what these customers are doing in lieu of launching onto the Dynatrace platform? Is it more of sticking to DIY lower-cost, open source environment?
CEO: It is absolutely just sticking with what you currently have, typically DIY. We always say that DIY is our biggest competitor. And it is companies that just think I can get by for another quarter or another 2 quarters, doing what they have been doing with DIY deployments and trying to manage through that without taking advantage of sophisticated AIOps and performing capabilities such as those that Dynatrace delivers.
Fortinet is a cybersecurity company, and its products include firewall/physical hardware products. So, their results and commentary may not be completely applicable to the rest of others in the cybersecurity sector.
The company beat on the top and bottom line today, but the stock still fell -11% in the after hours.
An analyst on the call commented to explain why, which is lighter billings than expected:
Just to get all the fear out there because aftermarket move suggests there’s a lot of fear --from a billings basis, you’re mixing towards larger deals, which is obviously a good thing for the business, but your average contract term is flat at 29 months. A number of software companies are seeing durations decline in a large multiyear deals.
Other commentary provided by FTNT executives and what they’re seeing on their earnings conference call today:
as part of the Q4 guidance setting process, we considered several factors, including the greater macro uncertainty today and with it, the increased risk of forecasting the timing of certain larger transactions…I would really just point to the macro environment and what we’ve seen really in the – over the last 90 days in terms of economic activity, if you will, I think when you look at how that manifests somewhat specifically, I think I’m getting a little more cautious in some of the forecasting of close timing on some of the very large deals.
I certainly do feel that there’s caution is corporate America and the rest of the world is probably going through their budgeting cycles right now and looking at what they’re planning for, not only the end of 2022 and 2023… I don’t think it’s a good time to really get in a position of forecasting some sort of significant budget flush in the fourth quarter. If it develops, that would be fantastic. But I think prudence is a little bit appropriate here.
ZoomInfo got crushed today after reporting premarket, and the stock finished today a whopping down -29%. There was lots of commentary from the execs that emphasized a huge macro slowdown to their business:
…as we made our way through Q3, we began to see increased macro pressure on deals, causing the level of deal review to increase and sales cycles to elongate further. Since this started very late in the quarter, it only modestly impacted Q3 results. This elongation trend has continued into Q4, and we do expect it to impact growth in the short term
…All deals, including straight renewals are requiring more effort to reach an outcome, which stretches our sales team and capacity.
Even the NRR is anticipated to fall BACKWARDS. Yikes!
As reps are spending more time on renewals, we see that their capacity to drive incremental upsells is becoming a limiting factor to growth of existing customers. As a result of the more challenging environment, we now expect dollar-based net retention in 2022 to retrace the gains that we were able to achieve in 2021.
Like with other companies who have commented, the slowdown is prominent in Europe. But, interestingly, ZI notes certain industries are “immune” so far.
I think in the second quarter, we saw more of this materialize or more of the environment pressure materialize in Europe and in larger deals. I think in Q3, you saw sort of these cycles elongate really across the board, and so there isn’t an area of specific concentration. But then you saw industries that were largely immune to this. And so you saw transportation and logistics and media and insurance and financial services stay largely unaffected here. And so there are areas of opportunity that we are focusing on, focusing our sales teams on to sort of shift away from the areas that are less immune right now.
Some fun granular detail into how exactly increased deal scrutiny is messing up their sales efficiency and deal closes:
I think what we’re seeing as part of the macro environment – of the macro changes here is just sort of broader based additional levels of scrutiny and review. And so instead of a deal getting done at a director level or a VP level, you see that deal go to a U.S.-based CFO than a global CFO. That not only drags the deal out, but it also drags the time and effort that our account managers are spending per deal. It limits their capacity in that way, more calls, more e-mails, more executive business reviews. And that’s really what we’re seeing affect our ability to continue to upsell within the customer base.
Confluent results appear to soundly ‘beat’ expectations. They exceeded their revenue and bottom line guidance and had the largest increase in sequential revenue add for Confluent Cloud. The CEO noted robust expansion of large customer cohorts and another quarter of greater than 130% NRR.
The stock is up +9.4% in after hours.
I have my fingers crossed that CFLT demonstrates any company (such as SNOW in particular) with truly mission critical and high value delivering products will prevail in the short term macro uncertainty. (Meanwhile, we’ve seen MongoDB show the exact opposite disappointment in its last couple earnings report.)
CFLT’s executive commentary highlights from today’s call:
On our last earnings call, we called out some deals that were taking longer to close in Q2 due to additional scrutiny in pockets across geographies. While this dynamic has continued, I’m pleased to report that the vast majority of those deals were closed as expected in Q3. A period of tough economic times is when the real durability of demand for our product is tested and we think our consistent and strong NRR is a testament to our total cost of ownership advantage and the mission criticality of our use cases.
We are raising our revenue and bottom line guidance for Q4 in FY '22. The magnitude of the raise incorporates what we’ve experienced since June, where deal cycles are elongated due to the additional scrutiny on budget approvals. Our forecast assumes that this macro dynamic persists in Q4.
What we’re seeing is the same parroted phrase from the other companies: sales cycle elongation and increased deal scrutiny.
Curiously, on the call today an analyst asked about the public cloud and other consumption model companies like MongoDB’s slowdown, and why it didn’t reflect into CFLT:
Analyst: …We’ve seen some other companies, obviously, Azure, AWS, Mongo, get hit by the sort of consumption impact related to macro. It doesn’t seem like it’s affected you guys as much. Maybe can you talk through that and why?
CEO: I think no matter what the business model is, when there’s tight economic times, customers look at, hey, are we really getting the value out of this? Is there a way to use less seats, less instances, less servers or in a consumption model, can we dial down overall usage in some way, right? I think the reason that you see less of that with Confluent, a few things like one, we tend to serve mission-critical use cases, and there’s a lot of use cases, right? So the opportunity to expand is very large. And that counterbalances any headwind from optimization that we’ve seen. Beyond that, I think these mission-critical use cases are important. You’re not going to turn it off in one quarter. And they usually come out more or less preoptimized. And so we haven’t seen a huge amount of that in our customer base. Obviously, economic pressure does create a kind of a headwind. I think the tailwind in this area is strong enough that it just doesn’t show up, and that’s kind of shown in the overall NRR that’s remained strong.
It’s also clear that CFLT was able to expand growth from all 3 public cloud platforms despite AMZN/GOOG/MSFT taking a hit in their cloud growth. Could we see similar strength in other cloud companies frequently mentioned on this board?
…what I can tell you is we saw tremendous growth from all the 3 main cloud service providers through the marketplaces. We saw like the best growth that we’ve seen in a long time from all 3.
I don’t pretend to understand the technicalities of CFLT and how it fits in with SNOW, but I found this comment on the call to be interesting:
We do have an interaction with the analytics world. We’re often kind of a very significant feed into the Snowflakes and Databricks and BigQueries of the world. But we’re not really competing with those technologies or replacing them. I think to them, we would just be an upstream feed…