Saul’s Portfolio at the end of Nov 2022 — Part 2
Please note that when I discuss company results, I almost always use the adjusted values that the companies give.
I sometimes mention what I might do about each position, but DON’T just follow me. Make your own decisions. I may change my mind tomorrow and probably not mention it for a month. And what I invest in may not be right for you. And besides, I don’t understand anything about the tech. Agreements or disagreements with what I think about the companies, are of course welcome on the board if you include some reasons and it’s not just a one-liner.
Bill announced Sept quarter results on Nov 2nd. It is a high confidence position for me, in 2nd place in my portfolio, at 20.5%.
They had what I considered to be great results and I added to my position during the month. Total revenue was up 94%. Core revenue was up 83%. And they had a record number of net customer adds.
Transaction fees were 2/3 of total revenue and grew at 94%.
Adj gross profit was $197 million up from $99 million yoy
Adj gross margin was 85.8%, compared up from 83.6%, a year ago.
Adj operating income was positive $9.1 million, up from a LOSS of $9.2 million a year ago.
Adj net income was positive $17 million up from a LOSS of $12 million.
Adj EPS was 14 cents, up from a LOSS of 13 cents, a year ago.
Op Cash Flow was $18 million
Free Cash Flow was $12 million
While other companies seemed worried, they said that looking ahead, they expect to deliver strong revenue growth and adj profitability in fiscal year 2023, while continuing to invest in their platform to create more value for SMBs.
Alliances with CPA.com (a subsidiary of the American Institute of CPAs), and with Bank of America, and a bunch of other big banks, and also with 85% of top 100 CPA firms, seems a considerable moat.
Jason posted in August that he had had dinner with an ex-VP of Bill who told him, “No one that doesn’t work at Bill understands how deeply integrated Bill becomes in the internal processes of each enterprise customer… No one is ever going to change out of Bill for another option, even if there was a better one.”
Still up 35% from its sell-off low of $89.90
It seems to me to be a very strong company, with a strong future and I am happy with my position.
Cloudflare also announced Sept quarter results on Nov 2nd.
Here’s my quick summary: This company has been delivering revenue growth in the high 40% to mid 50% range for many quarters sequentially. In addition they innovate and come out with new products and improvements at a pace that neither I, nor anyone else, has ever seen before. However, they disappointed this quarter. Revenue growth was only 47%, still in that high 40% to mid 50% range, but was a disappointment after a number of quarters that were sequentially in the 50%s.
To overcome the disappointment they said : “Now, we’re focused on the path to organically achieve $5 billion in annualized revenue in 5 years, and we’re confident we have the products already in-market to get us there.”
Adj gross margin was 78.1%, down a little from 79.2% a year ago.
Adj op income was $15 million, or 6% of total revenue, up from $2 million, or 1% of total revenue, a year ago
Adj net income was $19.1 million, up from $1.4 million a year ago.
Adj EPS was 6 cents, up from 0 cents a year ago
Operating cash flow was positive $43 million, up from a LOSS of $7 million a year ago.
Operating cash flow margin was 17%
Free cash flow was minus $5 million, improved from minus $40 million a year ago.
Free cash flow margin was MINUS 2%, improved from MINUS 23% a year ago
Cash was $1,636 million
Paying customers were up just 3% sequentially [disappointing] and up 18% yoy. (Sentinel, for instance, grew total customers by over 60% yoy)
$100k customers were up 51% yoy, and only 9% sequentially (Sentinel’s $100k customers were up 28%, or 3x as much)… $100k customers now make up 61% of revenue though.
$500k customers were up 88% yoy
$1m customers were up 63% yoy
Net Retention Rate (NRR), was 126%, down a little from last quarter’s record.
Higher capex than others because it has to build and service all its world-wide endpoints, etc
Moving rapidly into security and competing with Zscaler and PaloAlto in Zero Trust. They announced that they also equipped their partners to deliver the Zero Trust solution.
Also moving rapidly into data storage, processing, and distribution. Here’s a little quote from Software Stack Investing (which I advise subscribing to): https://softwarestackinvesting.com
…the progress in data services has been a welcome surprise. A year ago, I wouldn’t have considered Cloudflare to be a data company. Yet, if we fast forward 5 years, it could become one of the larger providers of data services…
Jason pointed out in a post on our board:
*I can’t help thinking about the fact that Cloudflare’s Zero Trust services are already being used across the Federal government, including the FBI, State Dept, and Library of Congress. That’s even without FedRAMP certification…. *
Here’s an interesting story: They have 40 venture capital firms funding startups to build out their businesses on Cloudflare’s Workers program. Cost to Cloudflare, zero. Benefit to Cloudflare, huge.They started out trying to find FIVE Venture Capital fims for a total of $250 million. They got FORTY firms so far, for a total of over **$2.0 billion.**That’s 40 venture capital firms investing $50 million each. That’s 50 million dollars each!
In October they had Birthday Week where they introduced over 30 new products or upgrades. I recommend that you read Software Stack Investing’s amazingly good summary Cloudflare Birthday Week Recap - Software Stack Investing
Very enthusiastic, and doing what it does very well, but still assuring us that they’re not trying to be profitable and will stay around break even while they build out the business, which is not what I really want to hear. I reduced my position from over 19% to 15%, and tied for 3rd and 4th place with Datadog.
They will report next week.
They gave July results at the end of August. Here’s a recap :
Crowdstrike slowed down quite a bit a year ago because of the law of big numbers, but it has leveled off now, growing last quarter still at 58% with its growth rate descending much more slowly, turning out lots of cash in both FCF and net income, and is also nimble and innovating as a bonus for investors.
I thought that they reported an excellent July quarter.
Growing subscription revenue at 60% and slowly slowing, but dominant in its field and quite profitable.
Total subscription customers were up 51% yoy
Subscription gross margin was 78%
Op cash flow margin was 39% of revenue, and a lot of money, $210 million dollars.
Free cash flow margin was 25% of revenue and $136 million
Net profit margin was 16%
They are thus very profitable, and pouring out cash as well as growing rapidly.
Got Impact Level 4 Authorization from the US Defense Information Systems Agency and received German Federal Office for Information Security Approval, which is important for E.U. sales. In June it announced general availability of Falcon Identity Threat Protection for U.S. Public Sector Organizations requiring FedRAMP Moderate or IL-4 authorization.
Crowd has very enthusiastic management, and has started to innovate almost like Cloudflare. Please take into consideration that not being a techie, I have no idea about the significance of their new innovations, but still.
They just expanded their alliance with Ernst & Young.
They also announced Sept quarter results on Nov 2nd. I thought that their results were good allowing for being usage based with some expected slowing of growth considering the macro environment. Datadog is truly dominant in its field, but they may struggle for a couple of quarters. Longer term they will do just fine.
Revenue was up 61%, and up 7.4% qoq. That was really a slowdown, coming down from 75% and 16% a year ago, and down from 74% and 12% a quarter ago. However, do they really have to apologize for “only” growing revenue at 61%???
Adj gross margin was 80%, up from 78% a year ago
Adj operating income was positive $75 million;
Adj op margin was 17%.
Adj EPS was 23 cents
Op cash flow was positive $84 million, with
Free cash flow was positive $67 million.
Cash , was $1.8 billion
Total Customers 22,200, up from 17,500 yoy, up 27%.
$100k customers up to 2,600 up 44% from 1,800 yoy. They provide 85% of Revenue
Every quarter more of their customers are using more of their modules.
They are moving into security in a big way and succesfully.
In October, at their DASH conference, they announced 30 or so new products and new features, looking like another Cloudflare for innovation. Datadog is shifting further left, giving developers observability and security earlier in their product development
A big problem for many people was their conservative guidance (well what do those people expect in a recession?) Here’s what they said (paraphrased):
Q4 has quite a bit more seasonality than other quarters. It had the DASH conference with all its expenses. In addition, December tends to be a little bit weaker as a lot of our customers take time off and rest their development environment and things in it. It’s also been a little bit harder to forecast in recent years with the pandemic and the vacation behavior that changed after the pandemic. So we are a little bit careful with that, and that’s all incorporated in our guidance.
What they seem to be saying (the way I read it, anyway), is that you shouldn’t pay too much attention to our ridiculously low guidance, but we are giving it to cover ourselves in case of unforeseen disaster.
A 15% position, I added this month at what I considered ridiculously low prices.
Monday reported results in November too. Another mixed picture, improving some metrics but others are plummeting.
Revenue up 65% (68% FX-adjusted), down from 95% a year ago. That’s a BIG drop!
Gross margin was 89%
Customers over $50k up 116% yoy… BUT they were up 231% a year ago and this quarter it only grew 14% sequentially, which was also way down from 30% a year ago.
Now some good stuff. Paying accounts from new Work OS products have already surpassed 3,000.
Adj operating margin was -2% improved from -11% a year ago
Adj EPS was positive 5 cents, up from a LOSS of 26 cents a year ago
Op cash flow was $20.0 million, up from $3.8 million a year ago
Adj free cash flow was $14.0 million, up from $2.9 million yoy.
NRR was over 120%.
NRR for customers with over 10 users was over 135%.
NRR for customers over $50,000 was over 145%.
Coming off historical highs, our NRR declined slightly in the quarter, negatively impacted by both a strong U.S. dollarand by our increasing ability to land larger initial deals.
Guidance for the next quarter was ridiculously low
Total revenue of $142 million, up 49% (which probably means below 60%
Adj operating loss of $20 million and negative operating margin of 14%.
They expect FX to negatively impact their full year revenue growth by about 3 points.
Here’s what is troubling me: This is still a small company that is barely profitable (if at all). They blew $7 or $8 million on a Super Bowl ad last fall (which wasn’t even a good ad). And then they are spending $9 million PER YEAR on prestige Park Ave offices, as well as offices in London, Chicago, Miami, Tokyo, Tel Aviv, and who knows where else. They are probably seeing few, if any, actual customers in these offices. They are spending all that money not so much to get new revenue, but to pamper their employees. And then add on that they will be planting 265,000 trees for the good of the planet…
The company obviously has great products that its customers love. That’s not the problem. I have no real problem with their business. After all, growing revenue at 65% with a 89% gross margin! The problem seems to be management not knowing (or not caring) about how to manage the money after it comes in so as to make a profit instead of showing off.
Stockholders come last, after employees, fancy offices, trees, and the Super Bowl. And I believe that this was complicated by the apparent euphoria they had when they were growing over 100%, and which probably was when they contracted for all these extravagances, and now the financial crisis has hit and revenue growth is tumbling, and they still have all these contracted expenses. Oh well. That’s why I’m down to a 1.4% position.
Sentinel will announce again in two weeks. They last announced results on August 31st. They were excellent.
ARR was up 122%. Sure they are including Ativa, but still…up 122%!
Revenue was up 124%. Six or seven years ago, I would have been elated with a company growing revenue at 24%, and here I have a company growing at 124%!!!
Gross margin was up 4 points sequentially and up 10 points yoy to 72%.
Op margins were minus 57% of revenue, improved from minus 98% a year ago.
Total customers grew more than 60% yoy to over 8600 customers.
Customers with ARR over $100K grew 117% yoy to 755. Up 117% means that they have more than twice as many as they had a year ago. They were up 28% sequentially!
NRR hit a record of 137%, up from 129% a year ago.
Operating Cash Flow and FCF margins are still terribly negative, but improved from a year ago.
Cloud security is their new field and has grown to more than 20% of their business from practically nothing a year ago. Endpoint security had been their main business and they are adding one market after another (like Cloud Security and Identity, etc), but Endpoint is still growing like mad too, as is everything else. This company is growing incredibly fast.
They increased annual guidance, bringing it over 100% again (with three more quarters to raise in), but it’s hard to evaluate as they will be including Attivo from now on. All in all you can say that they will be reporting annual revenue growth probably over 110%, which is enormous, but organic growth about 95% or 100%, as a piece of revenue will be from the acquisition.
Unveiled a new product in August
… XDR Ingest, a disruptive step in democratizing XDR, it provides our customers with a limitless data platform to ingest, retain, correlate, search, and act on all enterprise security data – real time and historical, from any source…. SIEM has been the technology for retaining security data and applying security analytics to uncover and respond to threats. But the data ingestion process is arduous and retention costs are high. It requires too many operators and too much manual interaction to be effective at scale. XDR Ingest solves the people, process, and technology challenges, and we’re excited for our customers to thrive in the XDR era.
Sounds awesome to me! but remember that I’m not a techie and don’t understand the tech at all, but people who are techies that I talked to also felt that it was “awesome”. We’ll have to see.
In Sept they launched a venture fund for startups that already bring interesting new uses to the Singularity Marketplace.
Our Mission. Some wait and react. At SentinelOne, we innovate. Our mission is to defeat every attack, every second, of every day. Our Singularity Platform instantly defends against cyberattacks – performing at a faster speed, greater scale, and higher accuracy than possible from any single human or even a crowd. . So, if our tech seems like something from the future, good — that’s exactly what it is.
Not being currently profitable is definitely out of favor in the current market, which makes it hard for the small very rapidly growing companies like Sentinel, but this is a very impressive company and I’m sticking with it. It’s now a 13% position in 6th place.
Snowflake will announce Oct quarter results next week. I felt that their July quarter was an excellent quarter:
Revenue growth was up 18% sequentially. That’s a lot, and it was up from 10% in the April quarter and from 15% in the Jan quarter (two quarters back).
Dollars of revenue added sequentially were $75 million, up from just $38 million added in the Apr quarter.
YoY revenue growth only gradually descended from 85% to 83% sequentially, and part of that is from their increased computing speed without increasing price…
Million-dollar customers exploded to 246, up by 40 or up 19.4% sequentially, That number, 246 of the million-dollar customers, is up 112% from just 116 a year ago.
Adj FCF was “only” $59 million with a 12% margin, but they are guiding to 17% for the year, so they will undoubtedly finish with over 17% for the year. They are churning out money.
NRR is staying at nosebleed levels at 171%, although two quarters ago they told us it wouldn’t be able to stay in the 170’s.
Gross margin is 75%.
Dominant in its field but potential competitors arising.
Share price and valuation are both way down from their heights.
Snowflake is setting up vertical silos for data sharing (healthcare, retail, finance, etc), which will make their platform much more sticky.
Moving into new international markets
Taking advantage of the need for security monitoring with CyberSecurity Workload, which serves as a platform for the data from companies who want to do their own security analysis, or who want to hire one of Snow’s partners to do it. Snow gets more data storage, and more data analysis, on their system, without the cost and headache of creating their own security analysis. The customer benefits from cheaper and easier.
New products for new fields. A new Cloud Native Application Protection Platform to allow developers to develop, deploy and monetize applications, all on Snowflake.
From Frank Slootman, CEO: “Our next frontier of innovation is aimed at reinventing cloud application development. Our ambition is far reaching. Our aim is to transform how cloud applications are built, deployed, sold and transacted. To help achieve this, we launched our Powered by Snowflake program. Today, we have 590 Powered by Snowflake registrants, for 35% QoQ growth” .
Snowflake was ranked first in JP Morgan’s survey of where CIO’s planned to spend additional funds in 2022 (ahead of Microsoft, Google cloud, and Crowdstrike).
Buying back employee RSUs to prevent dilution, which is already under 1% per year.
Management is very enthusiastic . Snow is going to become a behemoth of a company, long term. Heck, it already ISbecoming a behemoth !
It’s usage based, so it could be hit a bit more in a recession than a pure SaaS company who gets the same subscription revenue come what may.
It’s up 31% from its sell-off bottom of $110.30.
Overall, to me it’s a very positive picture. It’s my top position, now at 20.7%. I have no intention of trimming it at present.