Some notes from ZS and MDB earnings calls

I listened to the ZS and MDB earnings calls live yesterday, although I missed the beginning of MDB while ZS was ending.

Although I didn’t take detailed notes on my thoughts (I was in an airport waiting for a flight at the time), a few overall impressions:

ZS - My first thought right away was that Jay didn’t sound natural. However, he was well spoken and he sounded very rehearsed. The CFO, on the other hand sounded very natural. At first I didn’t like the way Jay came across, as he sounded more like a salesman than someone being open with the audience. But as the call went on, I started thinking more and more that a “salesman” is exactly what we need heading up this company in the stage that it’s in, looking to grow their sales tremendously in coming years. I believe Jay is from an IT, technical background, so the fact that he may not be as “natural” speaking on the earnings call, but still sounded so well prepared is probably an analogy for how he goes into any big client meeting (which again, being really well prepared and well spoken, isn’t a bad thing at all). So I ultimately came away viewing this as a positive.

I didn’t like that ZS started their call late. It was only a couple of minutes, but it’s not a great look, regardless of whether it was their tech that wasn’t working (this is a tech company after all) or their people that we’re ready on time. I can’t remember the last time I’ve been on the line waiting for a call to start when the admin had to jump on and let everyone know “thanks for your patience” as we’d be starting a little late.

The other thing I don’t like is ZS adjusting the expected growth in billings to back out the big $16 million billing they had in Q4. That’s fine and all that it was a huge, unusual transaction and that you don’t expect to have those every quarter, but we want and expect you to be going for more huge jobs with huge billings next year and in years going forward. If every company I own backed out the biggest customer out of their prior year’s number in order to calculate their expected go-forward growth rate, they would all have higher forward growth rates than they do. Don’t tell us how great you were for getting that big job (when it wasn’t even this quarter that you are announcing now) and not to ding them for it because it was a good thing to get that big job…tell us you’re gonna work your butts off to get the next big new client and try to get them to pay you ever more than $16 million next year!

MDB - I was a bit more distracted while trying to listen to their call, but I really liked how many clients they were able to list out by name in describing their wins. It shows not only their success, but that these clients are comfortable being named by management publicly assicted with Mongo. I especially liked that HMRC (essentially the UK’s IRS) was a big win, government wins are always good as far as I’m concerned. Also liked how they said that the change to their terms they made this quarter to require anyone using the free version to share their code when selling MDB as a service, wasn’t really a change. They say they believe that, legally it was always required, but they just made that fact more explicit in the legalese going forward to try to prevent others, especially overseas from taking advantage of it unfairly.

Nothing really stood out as a negative on the MDB call, I especially liked that they signed off when there were no more questions by saying “We’re gonna get back to work”. I’ve been a part of many board of directors meeting and investor earnings calls where the mindset of everyone after they ended was “we deserve a drink now”. But the fact that MDB management said “back to work”, really came across super positively to me. Really driving home that the investor presentation is something they have to do, but that their head is always in the operations and that’s immediately where they were turning their attention back to (driving forward and building the company) the moment that the call ended. Sure, it could have been scripted, but it felt natural and real to me, and I really liked that. This team is not going to take a break when it comes to working for their owners and getting the business to where they think it should be.

I can’t recall if it was ZS or MDB, but one of them called out the fact that, in nearly all of their customers, the customer is only using their services for a small percentage of where they could be rolling it out to, suggesting that there is lots of room to grow within companies they are already in, by getting them to roll out their product across more and more divisions (I think it was ZS that said this but probably applicable to both regardless even if MDB didn’t say it too).

Ultimately, these are two of my largest holdings (after Amazon), and I am very comfortable keeping them that way for the foreseeable future.

-mekong

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The other thing I don’t like is ZS adjusting the expected growth in billings to back out the big $16 million billing they had in Q4. That’s fine and all that it was a huge, unusual transaction and that you don’t expect to have those every quarter, but we want and expect you to be going for more huge jobs with huge billings next year and in years going forward.

Maybe I misunderstood how they talked about this, but it seemed to me that pointing this out was to kind of ear mark a potential headwind to Net Retention Rate, not billings growth. I’m not sure it’s something to worry about and I don’t get the sense that they’re not going to stop going for big jobs. The CFO pointed out that… “on a contract basis (as opposed to large upfront deals) over the last four or five quarters, for new business it’s been over 70%”

From the Q & A:
Does it become increasingly incumbent upon additional large deals like that to kind of keep that retention rate where it was or is that not the case?

Remo Canessa
Yes, I got it. Good question. So yes, we called out before is that more customers are going transformation. So as more customers go transformation, that’s ZIA. They typically purchase that for all employees. So as that happens that will put a downward impact potentially on our net retention rate. Related to that also is what we’re seeing more customers upgrading sooner. So we calculate NRR. We look at customers we had a year ago and for those same customers what is their ARR. So, what we’re seeing is that if customers are upgrading withing that period, we’re not picking that up potentially in that retention rate. As we go forward though, ZPA could have a positive impact, DLP could have a positive impact and as we get more services under our platform, those can have positive impacts.

Jay Chaudry added that they’re less focused on the metric of NRR and more on growth and reducing customer churn, even if NRR fluctuates and dips lower that the current 118%

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These are the quotes that made it come across the way it did to me:

The sequential decline in Q1 is higher than prior years due to a difficult comparison from a large upfront deal we had in Q4. Excluding the $16.5 million upfront deal from Q4, billings would have declined sequentially by 18% which is an improvement over the 25% declines seen in the prior two years

and

As you model billings for fiscal 2019, I want to remind you that in Q4 2018 we had a large upfront billing of $16.5 million from one customer. This will produce a difficult year-over-year comparison in Q4 2019. If we exclude this large upfront billing of $16.5 million from fiscal 2018 results, we believe total billings growth in fiscal 2019 would be comparable to our guided revenue growth, which would imply a billings range of 340 million to 345 million for the year.

If they want me to think of their growth rate as better than it was by backing out the $16.5m, then I would also have to back the $16.5m out of last year’s billings total, making a lower starting base, in doing any kind of valuation.

I didn’t mean to suggest that they wouldn’t be going for big new big deals. However, forewarning us now that there will be a tough comparison at the end of next year due to that big deal, seems weird when it’s too early to know if you’ll have another huge deal at the end of this year too. Just assuming that you won’t because it was “so big”, isn’t the impression I want to come away with. I want to know that you are trying to do even bigger ones.

-mekong

I would much rather have them point out the 16 million outlier than to be under the impression growth is slowing down if they don’t get another one this quarter.

I personally don’t pay too much attention to tone, excitement, etc on con calls because it assumes animated personalities are better at growing businesses. I only read transcripts.

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I would much rather have them point out the 16 million outlier than to be under the impression growth is slowing down if they don’t get another one this quarter.

but…it is slowing down if they don’t get another one. I would argue that the false impression would be making investors think growth is accelerating, simply by adjusting the prior year’s comparative number, without a good reason to do so.

I’m not trying to be difficult. I do understand what you are saying, but in my mind, they have to continue to land big deals in order to make ZS investable. To get to $1 billion annually in a few years, they’re going to need their share of $10m+ deals along the way, so why are we trying to look at the numbers as if they aren’t going to get more big deals like this in the near future.

Unless they are emphasizing this for M&A reasons, e.g. they are looking to get acquired soon. That’s the reason that seems most plausible to me, but hopefully that’s not the case, as ZS is one of my larger investments and I hope they stay public and let the story play out.

-mekong

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