The past several months, I have found myself making changes to my portfolio. Part of this has been reducing or getting out of companies that make “stuff”. To paraphrase Saul, companies with subscription/service/recurring revenue don’t have to “resell” at same level+ 30% to grow. In fact, a lot of companies can not sell anything more and still grow revenue by having 120%-plus recurring revenue.
That was part of my reasoning when I reduced NVDA from 10% to 7% position. Also why I am no longer in ANET, MU, SWKS. When evaluating PSTG, I liked the last earnings report and what I was reading about how things are looking for them for at least the short term. So, I decided I would hold until this release, and then decide to either lighten or get out depending on the report. In my mind, I expected a decent report, but know that market reaction doesn’t always follow.
When I saw the numbers yesterday afternoon and subsequent after hours pop, I thought - Nice! A little extra $ before I exit or at least substantially trim my position.
This morning, I decided to actually read the release, NOT JUST LOOK AT THE NUMBERS! This caused me to step back, rethink, and decide hmmm, maybe this deserves a deeper look. At least don’t just pull the trigger on exiting because you had already “decided” that. So I followed up here, to see how others felt about the quarter, prospects going forward, and if I perhaps missed or misunderstood anything. I am happy to say I changed my mind, and while I have not decided to add to position yet, am happy to leave it where it is as a 3% position after today’s nice run up.
It really drove home the fact that investing is so much more than just looking at numbers!!! I have learned, and continue to learn so much here. Thank you all for that. Especially Saul.
There’s a couple posts from yesterday and today with a lot of thoughts on how people feel. Do a quick search you should find them. Also some thought on the NPI board under Investing Strategies.
Pure does have a subscription model that has been growing at a consistent 50%ish pace for the past 5 quarters.
The puzzling part is that subscription revenues remain 22% of total revenues over that same timeframe, even as overall revenues have grown at a pace less than 50%
If they have a 78/22 split on Non-Subscription/Subscription revenues and they are growing revenues at 33%, but subscriptions are 50% for the past year, should I assume they have lost some subscriptions from the front end?
Yes, this is one of the things that gave me pause.
The growing subscription model factored into me holding off on selling any/all.
Needing to look into it more because it seems it should be increasing in terms of % of total revenue one of things I need better understanding of before I would add any.
If they have a 78/22 split on Non-Subscription/Subscription revenues and they are growing revenues at 33%, but subscriptions are 50% for the past year, should I assume they have lost some subscriptions from the front end?
No, I do not believe they have lost subscriptions. I believe that product revenues are brought into the income statement immediately upon shipment, but that subscription revenues must be booked as the subscriber receives each element (monthly) of the subscription. The amount the subscriber pays up front goes into deferred revenue and is amortized over the subscription period paid for.
The deferred revenue growth on the balance sheet corroborates this theory.
The puzzling part is that subscription revenues remain 22% of total revenues over that same timeframe, even as overall revenues have grown at a pace less than 50%
This is due to the seasonality of the “product” revenue. The subscription revenue chunk of revenue has been growing sequentially every quarter for every quarter you can find. But the “product” revenue varies greatly depending on which quarter you look at, smallest being first, largest being fourth. This means that subscription revenues of that overall total vary depending on what quarter you look at but are growing each relative comparison.
Q2 2018 subs were 20% of total. Q2 2019 they were 22%
This is making me think of the chapter I just read in Nate Silver’s book, The Signal and the Noise, about baseball statistics. Originally, new players were studied by scouts, who used their experience to watch players and decide who was worth recruiting. Then trhe quants came along, and found that certain neglected statistics were significant, such as on-base percentage,
Now they have a hybrid system, where there’s plenty of scouting and good use of stats.
Here, with stocks, we have the story and we have the numbers, and if we use both wisely, we’ll do better.