Saul’s Portfolio at the end of Sept 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 is a high confidence position for me, at 14.8%. It announced results in August, and bounced up 15% the next day (on a day when almost everything else was down 3% to 4%, so you could consider that the equivalent of an 18% rise).
To quote from Stocknovice:
All things considered this was a great quarter, especially given some of the uncertainty heading into it. We got a bigger beat, continued customer growth, strong guides, and the stated expectation FY23 will be the company’s first-ever profitable year. As a shareholder, I’m not sure what more you can ask for…and best of all, the market seems to wholeheartedly agree. Congratulations to everyone holding it.
Growing like mad and made great acquisitions which have been jet propelling it. Total revenue was up 156% for instance, and organic core revenue was up 71%. I’ll take it.
84.2% gross margins, up from 79.7% a year ago!!
Not profitable but just below break-even and spending more to get more customers.
NRR was 131% for this fiscal year up from 125% a year ago !!!
Strong guidance and very enthusiastic.
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 last month that he 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 going to ever change out of Bill for another option, even if there was a better one**.”**
Stocknovice let us know that Brex , a business card competitor of Bill, announced that it would stop serving traditional small business customers to focus on its startup segment instead. It will be dropping “tens of thousands” of traditional brick-and-mortar companies which had two months to migrate to another service. Undoubtedly, Bill will get some of these.
A little quote from Bert Hochfeld back in 2020, “BILL’s software is already integrated with BofA, Chase, American Express and Wells Fargo. The banks use the BILL software on a white-label basis as part of their own platform… These are very early days for this kind of offering which I believe is likely to become a major revenue tailwind.”
Down 62% from its high of approx $350, but up 47% 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.
Here’s the story with Cloudflare. This is a company that has been delivering revenue growth in the high 40% to mid 50% range for 14 or 15 quarters in a row (I’ve lost count). Talk about reliability! In addition they innovate and come out with new products and improvements at a pace that neither I, nor anyone else, have ever seen before.
At the end of the March quarter they indicated that the incipient recession would cause a lot of caution by customers. This caused a lot of worry among investors, but by the end of the June quarter they said they got it all worked out and grew by 54% again, and reiterated that thay would be cash flow positive in the second half of the year, and for the year as a whole. Their stock rose 27% the day after June quarter results were announced, but it has settled back down this month with the rest of the market. They have one of the most charismatic CEO’s you could want, and they move into new fields regularly and with success.
They have gross margins of 79%
Cloudflare is not really profitable, nor is it desiring to be so right now, because it is plowing it all back in to growth, but is right above break-even. Idealistic about saving the cloud.
Adj Op Loss was just 0.4% of Revenue.
FCF was -30% for the March quarter because of a special accounting effect, but it scared everyone, but this quarter it was back to -2%
They added a record number of $100k customers this quarter (“What recession?”)
Net Retention Rate (NRR), was 126%.
Higher capex than others because it has to build and service all its world-wide endpoints, etc
Very innovative and putting out new products like mad, certainly faster than any other company I know. In fact it seems to be constantly innovating and adding new products or upgrades. In addition, they made a big acquisition for email security.
Moving rapidly into security and competing with Zscaler and PaloAlto in Zero Trust. This is from their announcement:
Cloudflare One provides a comprehensive Zero Trust SASE solution that is built natively into Cloudflare’s global network, spanning more than 270 cities in over 100 countries. This deeply integrated approach ensures a simple deployment in just a few clicks, lightning fast performance wherever users are, and robust security across endpoints, networks, and email .
They announced that they also equipped their partners to deliver the Zero Trust solution.
Also moving rapidly into data storage, processing, and distribution. I can’t resist including a little quote from Software Stack Investing https://softwarestackinvesting.com (which I advise subscribing to):
…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. Granted, it won’t replace large, centralized database solutions that run heavy analytics and ML workloads, but there is a growing demand with similar potential for facilitating the transmission, in-flight processing, and distribution, of data across the globe… [which] would benefit from Cloudflare’s global network of data centers, distributed compute and localized storage…It puts compute and data storage within 50ms transit to 95% of the world’s population…They are already landing deals for these capabilities with customers like Meta and Atlassian.
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 was done even without FedRAMP certification. That’s not to say Cloudflare won’t get FedRAMP, Moderate, soon. But, even without FedRAMP, Cloudflare won these high profile wins.
And Muji wrote:
Cloudflare has added extensible policies in Access, which can tie Cloudflare One into any API to make Zero Trust decisions. This greatly opens the door to how organizations can manage their Zero Trust. This makes Zero Trust programmable, and it feels like a disruptive change over other Zero Trust providers.
In July introduced Cloudforce One, an internal team to track and disrupt online threats, led by a guy who has worked at CrowdStrike and at the National Security Agency.
In Sept they announced (and I certainly may have missed some):
Launching their Data Localization Suite in Australia, India, and Japan.
Making R2 Storage generally available and with no egress fees for all users.
Developing a Zero Trust SIM Card for mobile devices.
A $1.25 billion Workers Launchpad Funding Program for startups building applications on Workers. All funded by Venture Capital Firms.
Announced Turnstile, a user friendly alternative to CAPTCHA’s.
Makes Hardware Security Keys more accessible than ever for millions of customers “because it’s good for the internet.”
Very enthusiastic, and doing what it does very, very, well
So its mixed picture is definitely improving: still growing revenue slower than others but growing it very steadily. Very innovative, high valuation, higher capex than others, no desire to be very profitable any time soon (plowing profits back into increasing revenue), negative FCF, Net Retention Rate steadily rising, it is rapidly and strongly moving into new fields with new products, especially Zero Trust security, and data services, etc, etc.
Down an enormous 75% from its high of approx $222, but up 42% from its sell-off low of $38.96, it’s now a 16.2% position
They reported July results at the end of August.
I think of Crowdstrike as the big gorilla of its security space, while I see SentinelOne as the new kid on the block who is growing a lot faster, but is not yet profitable. They are both nimble, both adding new functions all the time. Crowd’s emphasis seems to be more on teams of people solving problems, while Sentinel’s seems more on having AI instantly solving the problems, but I’m sure that they overlap a lot. I also think that there is plenty of room for both of them.
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.
It’s back to being a high confidence position for me, at a 13.4% position, and it is back to being one of my large positions. 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
A strategic partnership with Mandiant to benefit joint customers, and expanded the partnership with Cloudflare with technology integrations.
They also announced Crowd Asset Graph, Humio for Falcon, Graph Visualization, new Partners, and most recently their AI powered Indicator of Attacks, and a host of minor products and updates.
Crowd has started to innovate almost like Cloudflare. It came out with all these press releases below within 24 hours in mid-Sept. Please take into consideration that not being a techie, I have no idea about their significance, but still… here they are:
CrowdStrike introduces Falcon Discover for IoT to help organizations gain visibility and reduce risk across IoT and OT environments
CrowdStrike expands CNAPP capabilities with introduction of CIEM to monitor, discover and secure identities across multi-cloud environments
CrowdStrike and Coalition join forces to transform cyber insurance readiness
CrowdStrike unlocks XDR for all EDR customers and expands third-party integrations across all key security domains
CrowdStrike drives the convergence of security and observability with introduction of Falcon LogScale and Falcon Complete LogScale
CrowdStrike to acquire Reposify to bolster visibility and reduce risk exposure of external assets
They have very enthusiastic management.
Down only 45% from its high of approx $301, but that’s partly because it didn’t go up as high as the others in 2021. It is, however, up 27% from its sell-off low of $130.
Datadog is truly dominant in its field, but is less high confidence in this recession as its revenue is largely based on usage. They had results that most companies would drool over, but they were down a bit for for their effort.
Grew revenue at 74%, which was up from 67% a year ago, but down fron 83% the quarter before.
Gross margins 81%, up from 76% a year ago, and from 80% sequentially
Quite profitable :
Trailing EPS is 81 cents, with 24 cents last quarter, which was up from just 9 cents a year ago, and flat with 24 cents sequentially.
Adj Operating margin was 21%!
Op Cash Flow was $73 million ! and
FCF was $60 million ! Believe it or not, those were both considerably down sequentially, although way up from a year ago.
NRR continues “over 130%.”
Moving into security in a big way and succesfully.
In June they announced monitoring and security for Kubernetes and Open Telemetry Protocol Support
They also announced Observability Pipelines.
They also launched Audit Trail and Service Catalog
They acquired Seekret for improved API observability
Every quarter more companies are using more of their modules.
The big problem for many people was their conservative guidance (well what did they expect in a recession? Companies are cautious about guidance!) The concern was because they had a substantial decrease in growth in the Covid quarter, because they are somewhat usage based, and people were afraid it would happen again. Here’s what they said about their guidance (It may be paraphrased, as I’m taking it from my notes).
…in July, we did see an improvement on those trends, but we still remain conservative in our outlook for the short termbecause of the noisiness of the data we’re seeing there. We have always been conservative in our guidance by using lower organic growth and other metrics than we’ve seen historically, and we continue to maintain that philosophy. So I would say there was some incremental conservatism put into this guidance.
So what they are saying (the way I read it, anyway), is that you shouldn’t pay much attention to our ridiculously low guidance, but we are giving it to cover ourselves in case of unforeseen disaster.
Datadog is down 56% from its Nov high of approx $200, and up just 10% from its sell-off low of $81.
A 12% position, down from 15% last month because the rest of my portfolio was growing faster, because I made some small trims, and because it wasn’t where I looked when I had more money to invest. I have no current plans to reduce it.
I really like Monday’s growth and its growth of $50k customers, but it has a lot of competition, it’s not considered mission critical in the way that some other of our companies are, and companies in this field have a tough time becoming profitable, so I’ve kept my position a lot smaller than the others. Thus another mixed picture, but certainly improving.
I wrote last month that it is my smallest position and my lowest confidence position, but that the market’s expectations are very low, and if they beat them significantly I’d expect a strong response. Well, this quarter they rose 18% the day after announcing earnings, and have gradually given it all back, and more since then. Expectations are apparently still very low. The below is from a post I placed on the board after earnings:
How I see Monday . I have the feeling that, as with many of our companies, people “can’t see the forest for the trees.” What I mean by that is that (in my opinion) they can’t see the shape and health of the forest because they get lost examining every little tree. In other words lots of people have a long list of metrics that the company has to satisfy each quarter and they are looking for perfection on each of 15 or 20 details. They get lost in the details. No company will meet all 20 metrics you set out for it so there will always be things to be unhappy about.
Here’s what I see in Monday:
We have a company growing revenue at 75% per year . That’s basics, not details. Yes it’s down from over 100% growth at one point, but how many companies are growing at 75%? They are being very conservative in guidance because a lot of their business is in Europe which is in a certain amount of economic chaos at present due to Russia’s invasion of Ukraine, and the cut off of oil and natual gas to Europe, but all of that doesn’t mean that there is anything wrong with Monday, the company,or its business model. The invasion was in March, and they just grew at 75% in their April to June quarter, for gosh sakes!
Then we have their enterprise customers, customers spending over $50k per year, which are growing at 147% this quarter, and with a record number of new $50k customers (200 this quarter).
Now, it can be a little bit difficult to grasp what growing enterprise customers at 147% means. It doesn’t mean they have 47% more of these customers than they had a year ago. It means that they now have roughly two and a half times as many $50k customers as they had a year ago. I’ve never before seen ANY company grow enterprise customers that quickly, or anywhere close to that quickly, and I doubt you have either.
Then there is their net retention rate . For the whole company it is over 125%. For companies with more than 10 employees it’s over 135%. (That means excluding the tiny 3 or 4 employee companies). And for their enterprise customers (over $50k), the NRR is over 150%.
They are also pivoting to making their Work OS into a platform, not just for collaboration but for doing just about anything.
They announced it a quarter ago and released four new products during this quarter: Monday Sales CRM,
Monday Projects, and
Monday Marketer ,
All work through Work OS. Customers can switch between them within Work OS. Although these products were released so recently, they already had over 1000 paying users. That’s pretty remarkable in itself.
Monday has a consistent gross margin around 89% (!) That’s a high, high, gross margin, which shows clearly that they do not need to give major discounts to get customers.
In the first quarter they had high operating expenses and an operating margin of -40%, very possibly due to the cost of producing and preparing to introduce all those new products. This quarter op margin had improved back to -12%.
After the first quarter they guided to 54% revenue growth for the year, and everyone who took it seriously was shocked. This quarter they raised that guidance by 9 points (!) to 63%. To me that says at least 70% by the end of the year. Talk about conservative, it’s basically impossible to average as low as 63% for four quarters with the first two quarters at 84% and 75%. (Figure it out for yourself).
Finally, for a view from another source, Google’s President of Americas and Global Partners showcased Work Os’s momentum in his Keynote Speech at Google Marketing Live. There’s a link to his talk in Monday’s Investor Letter which came out with the earnings.
So that’s how I see Monday . I could be totally wrong. And it’s still only a 6.2% position and my second smallest.
As I mentioned in my three month summary above, I sold out of Mongo in the pre-market right after earnings were announced. I’ll let my paraphrased comments from WSM (Wilhelm) and Finally Foolin tell the story.
Here was Wilhelm’s take: I sold MDB but unfortunately only after the stock had dropped like a rock after earnings, and deservedly so imo… even though revenue came in ok at 53% yoy, The guide was for revenue to remain flat in the next quarter, and any semblance of operating leverage disappeared.
Customer growth stalled. Gross margin dropped by 1.6% sequentiall. Operating margin deteriorated by 7.4% sequentially. FCF deteriorated by 18.9% sequentially, to -16% for the quarter, the worst FCF margin in 4 years. I really didn’t need to look much further than that to sell.
And Finally Foolin’s take: I was very disappointed. The larger slowdown in Atlas especially . I thought their workloads were much more mission critical but now I’m wondering if a large percent of applications running on them are more ancillary rather than mission-critical. To the point where their usage was effected.
The only other rationalization I can come up with is that the Serverless that became generally available had a bigger negative effect than they expected. This allows companies to only pay for what they used (similar to Snowflake).
The call was a lot of talk about Macro, Macro, Macro, & tough comps. None of my other companies talked about macro like they did.
I have closed out my MDB position and moved most of that money to SentinelOne. Will probably lower my Sentinel position but it’s now my #2 spot.
Saul: I couldn’t have said it better myself
As I wrote above, Sentinel is the young blood in its security space while Crowdstrike is the big gorilla. They are both nimble, both adding new functions all the time. Crowd’s emphasis seems to be more on well trained teams of people solving the problems, while Sentinel’s seems more on having AI instantly finding the breach and stopping it without needing human intervention, but I’m sure that they overlap a lot. I think that there is plenty of room for both of them.
Sentinel 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 28%, and here I have a company growing a hundred and 28%!!!
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.
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 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. Cybersecurity is a data problem.
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.
New alliances and acquisitions including an integration with Okta just announced this quarter.
All our security companies have great tailwinds of worries about hostile breaches with the Ukraine war, as well as new exciting products, and the acquisition of Attivo.
In Sept they launched a venture fund for startups that already bring interesting new uses to the Singularity Marketplace.
In Sept they also announced the first annual SentinelOne LABScon Security Research Conference. Just look at this partial list of speakers!!!
Mark Russinovich, Microsoft Azure CTO
Dmitri Alperovitch, CrowdStrike’s Co-Founder and former CTO
Morgan Adamski, Director of NSA’s Cyber Collaboration Center
Chris Krebs, the first director of the Dept of Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA)
And just think! Sentinel was able to round up all these ultra-big names! Even a Crowdstrike co-founder. To me it sounds like it’s SentinelOne announcing: We’re in the big-time now!!! We’re no longer a little catch up company.
And they described their mission as follows (the emoji is mine):
Our Mission. Cybersecurity is constantly changing. Time favors the adversary. Today’s challenges are nothing like tomorrow’s. Threats are becoming more and more advanced leveraging the power of automation.
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.
The stock is **down 68%**from its high of approx $79, but up 37% from its sell-off bottom of $18.64. 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 14% in 4th place.
My take on their July quarter was that it was an excellent quarter which should relax everyone.
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.
Very rapid revenue growth. It had been over 100%, but last quarter the growth rate was cut to 85% by allowing faster computing by customers without raising prices, and this quarter it fell slightly to 83%. Also some minor usage cut back by consumer facing companies.
Share price and valuation are both way down from their heights.
New partnerships with AWS, Dell, Stripe, etc
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, representing 35% quarter-over-quarter growth .
Introduced UniStore and Hybrid Tables to allow analyzing transactional SQL data on Snow. Here’s a little excerpt from FinallyFoolin’s post on the Hybrid Tables. (He’s a techie and I’m not).
Just finished watching a webinar of Snowflake’s Hybrid Tables. IMO, this is a HUUUUUUUGE deal !!! Companies can build applications, using row-store (good for lots of small transactions; think booking an airline or checking out at the grocery store). capabilities of it and it AUTOMATICALLY gets copied to a column-store (Good for analytical workloads & faster BIG queries). Snowflake under the hood automatically determines which version of the hybrid table to use to return the query.
The BIG, BIG, BIG, benefit of using Snowflake is that it will be MUCH, MUCH, MUCH, easier & cheaper to do analytics. There’s no need to move data regularly and maintain these mega operations; especially when needing up-to-second accuracy on their reports. ETL processing [Extract, Transform, and Load] is very time consuming and expensive. The most expensive and time consuming part of big reporting & analytics.
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.
Investment in, and partnership with, Tecton announced in July.
Management is very enthusiastic .
Snow is going to become a behemoth of a company, long term. Heck, it already IS becoming a behemoth !
To quote Morningstar’s headline from its report after results: Snowflake’s Q2 beats by taking its upmarket by storm; shares attractive even with shares up 18% in premarket .
Usage based, so it could be hit a bit more in a recession than a SaaS company who gets the same subscription revenue come what may.
Snow is down 58% from its high of appox $408, but up 54% from its sell-off bottom of $110.30.
Overall, to me it’s a very positive picture. I’ve built it into my top position, now at 19.8%. I have no intention of trimming it at present.
Finally, Zscaler is just a small position, and a company which has been much discussed on the board. I leave it at that for now.