NET

Investment Analysis Clubs Saul’s Investing Discussions
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And NET showed what they promised to do in the cash flow (thanks Bnh)…they showed positive improvement. There was never any question about the rest of their metrics!

Cash Flow: Net cash flow from operating activities was $38.3 million, compared to $7.5 million for the second quarter of 2021. Free cash flow was negative $4.4 million, or 2.0% of total revenue, compared to negative $9.8 million, or 6.0% of total revenue, in the second quarter of 2021.

Again, this is the reason why Saul says never trade these stocks.

This is a LTBH for me.

For sure, the prices may keep going up or down, or sideways for the near future…who knows…but given their clockwork revenue growth and nice operative metrics, I have a very positive feeling about this for a nice outcome in 5 years.

Peter

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I probably wouldn’t be in NET based on the numbers alone. And I think you can see that Saul, Bear and others admitted that they were relying on the techies who remained so bullish on NET. The valuation has always been ahead of the numbers.

But this ER really was breakthrough (along with the bullish forecast). It looks pretty clear to me now that NET is in an enviable position to continue to grow for a very sustained period of time (i.e. durable growth, the most important kind).

And despite it being up a good chunk today, at $67.xx, it was well over $100 in late April. Most of our SaaS stocks are back to those levels. Cloudflare is deeply discounted from 3 months ago.

So if you believe in the long-term growth story, you haven’t missed the boat here.

Props to Peter Offringa’s service for keeping my conviction high when I had lots of reasons to doubt!

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CEO, Matthew Prince, has never minced words when he speaks publicly. Sometimes it gets him into trouble, while most of the time, his candidness helps shareholders truly understand what’s going on behind the scenes.

These are some quotes from the Q2 earnings call that stood out to me:

In Q1, our pipeline generation slowed, sales cycles extended, and customers took longer to pay their bills. We watched those metrics closely throughout Q2 and saw them all at least stabilized. They’re not where we throw up hooray yet, but the metrics are trending in the right direction.

14 years ago, in 2008, at the onset of the last global recession, Google pulled their full-time offers for all their summer interns, which included my co-founder at Cloudflare, Michelle Zatlyn. If that hadn’t happened, Cloudflare would have never been born. At the same time, I learned what a margin call was and, simply embarrassingly, literally had to borrow money from my mom to pay my rent. That’s when I got an extremely personal lesson on the importance of free cash flow, and it’s why I’m ensuring right now in this uncertain time that Cloudflare is prioritizing being free cash flow positive.

Let me be clear. I think that the economy is still in really rough shape. And I don’t know – and again, I’m not a member of the – I’m not an economist. But from what we hear from customers, customers are really still suffering, And the economy, I wouldn’t say that the economy itself has stabilized. What I would say is we have had the flexibility in our business to be able to adapt to a very difficult environment. That environment continues to be difficult, and I think it will be difficult at least through the rest of the year.

CFO, Thomas Ceifert: We will be diligent in balancing operational discipline moving forward. We have a heightened focus on free cash flow while maintaining profitability at or near breakeven with continued investment to address the enormous opportunity in front of us. As mentioned in prior quarters, we continue to expect to return to positive free cash flow in the second half of 2022.

My two cents:

Given that they have more than 150k mostly SMB customers, Cloudflare’s visibility into and comments above on how their customers are struggling is worth paying attention to, especially if one owns shares of other companies serving the SMB cohort…ahem…BILL…ahem…

And I like the renewed focus by NET and their mgmt team on operational discipline and cash flow management. This has been one of my pet peeves and I hope to see their efforts reflected in better margin and cashflow metrics going forward. After all, we don’t want Prince needing to borrow money from his Mom again to pay the rent for one of his data centers :slight_smile:

I am long NET.

Beachman (Beachman.substack.com)

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Hi Beach, thanks for your write up. I also recognized this hint from Prince - but in stark contrast to that in DDOG’s call were made comments about SMB spending holding up very well.
So it seems there is no obvious conclusion to make.

When looking at the whole earnings season and macro numbers, my feeling is that sentiment is much worse then the actual state of the economy. Doesn’t mean this is still true six months from now.

What makes me optimistic about BILL:

  • higher prices and wages could lead to higher transaction volume and offset a possible increase in churn.

  • higher interest rates will lead to higher float revenue.

  • one of BILL’s competitors has closed it’s doors. Some say this is a sign of SMB weakness. But could be also a tailwind if their customers use BILL as a replacement.

  • lastly the added job numbers were absolutely hot. Wages are up, too. Part of this is paid through BILL’s channels.

So as I see it, the positives will outweigh the negatives there.

(Long BILL with a big position - was a small one before, cause I shared your concerns. But I gradually changed my mind in the last weeks)

Hannes

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Forgot to say: Back to NET now.

(Sorry for jumping in here, but wanted to add a little context about the subtile warning on BILL)

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Hannes,

I just read through the transcripts for both DDOG and NET’s earnings calls. The comments by DDOG about SMB strength/weakness were confusing, and I think there were a few analyst questions about it to try and clarify. In the end I think what DDOG was saying is that they saw weakness in certain verticals (like consumer discretionary) rather than in certain business sizes. So when they said they did not see weakness in SMB, I think they meant in SMB as a whole.

On the other hand I think NET has an order of magnitude more customers than DDOG, and most of them bill month to month, so they probably have a lot more visibility into what is happening generally to companies of all sizes.

Thanks for your context on BILL.

  • Justin
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Hi, Justin. I agree that cloudflare has more visibility due to the points you mentioned.

But there is one big difference - cloudflare has customers all around the world (“only” around 50% of revenue from US region). Datadog generates significantly more revenue in the US region (around 73%). It’s obvious the economies in Europe and the Asian region are struggling much more right now, so this could be part of the explanation. At least for now, the US economy seems to hold up well compared to other regions.

Should be also a plus for BILL as most of their revenue comes from the US. And we should keep in mind these are all short-term risks.

The real question for me is how they deal with their strong competitors (ramp etc.) and if their customers are truly happy with the product and support (looking at you some bad reviews).

But for now I like what I see.

Hannes

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DDOG internal classification of SMBs - all companies at or less than 1000 employees. Mid market for DDOG 1000-5000 employees.

I think that BILL’s primary target is more classical SMB - 100 and less employees. The credit card product targets mainly mid market which typically is 100-1000 employees.

Not sure how to reconcile DDOG’s and NET’s comments and if these have any real indication to BILL’s results as BILL provides relatively sticky back-office software. Perhaps the question is on new customer acquisition although BOFA partnership will be a tailwind this whole year.

Noteworthy is that consumers remain pretty strong and if they don’t have cash they borrow (perhaps UPST will show strength again). This could bode well for transactional revs.

A lot of open questions here but I’d keep in mind that in a base case downturn scenario small businesses suffer more than bigger ones. On the other hand, current “downturn” - if there is one - is atypical with record low unemployment and record job openings.

Good luck to BILL longs.

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