I mentioned my PE background solely because evaluating and dealing with top management is pretty much all PE investors do during the life cycle of a portfolio investment. No intention whatsoever to brag about my background, which by the way I often deem non-conducive to particularly good investment judgement on public companies (it’s a completely different ball game). Having said that, PE has a long term, highly operational, management-focused approach, that I try to adopt when looking at public companies. Having lived many companies from the inside, I know that value doesn’t get created – or destroyed – in a quarter. Also, value creation is not a linear process: it goes up and to the right through ebbs and flows, if execution is right. All this to say that I do not really understand all this fuss after one quarter’s results. I don’t understand how NET could be consistently one of the top three positions in virtually every portfolio here up until last week (with large position sizes), and now all of the sudden it’s become a bad company, led by a guy who’s no longer trustworthy. Prince is not a new figure to this board, we know about his style in earnings call, we know he likes to have an unorthodox way of conveying things about his company and the future of the business. So, nothing new there, as far as I’m concerned. And this thing about the underperforming sales people, to me, is really no big deal. As I said, I see it as a way of being transparent with shareholders.
You say “I personally find it borderline disingenuous to brag about his bold macro vision at the same time he was apparently blindsided by an underperforming sales apparatus right under his own nose”. We’re not talking about an underperforming sales apparatus; these apparently were just 100 people. I don’t know how many people work in sales at NET, but I think we’re talking about a small percentage of the total. And I don’t understand your “right under his nose”: he analysed it, he judged it, and he reported it. It doesn’t seem that things happen under his nose: I see someone well aware and cognizant of the situation. Also, your bolded text “especially since it was obvious customer adds and NRR trends had been lagging for multiple quarters” is not true. Total customer adds in the last 4 quarters were (from the most recent) 6073, 6086, 4197, and 3619. Big customer adds were 114, 134, 159, 212 (but the PRIOR 4 Q were 121, 156, 172, 143 – so, basically all over the place). NRR has decreased, yes, but is still 117% and it hasn’t really lagged “for multiple quarters”. Over the 4 preceding Q’s it was 122, 124, 126, 127, showing a slight decreasing trend but nothing dramatic, imo.
As I said above, I find it hard to be so dramatic after a quarter of so-so results in a tough macro environment. I too was disappointed when I saw that they decreased their year guidance, but again, it was a 4% reduction. I think we’re so used to see large beats and ever increasing guidances that we lost sight of the fact that things cannot go always linearly up and to the right. Especially when companies get big, especially in uncertain times like these. I think we need to be able to ascertain whether a business will grow durably and profitably and will continue to play a leadership role in their market over the next decade. Also, on the reported numbers, they basically hit the high of their guidance range for the Q (ok, one million lower), but this is NOT a tragedy. They also reported record profitability and cash flow, so all good there.
My view is that this is still a great company that makes products/services that are necessary to their customers, must-have products/services, and that this year will grow to be a 1.2/1.3bn company in terms of revenues, likely with good profitability and cash flow. They have their unique infrastructure that makes the business capital intensive but at the same time hard to replicate overnight. And, yes, I like Matthew Prince and his top management people. I think he has very clear where this company needs to go and develop into a multibillion revenue player a few years from now. I’m just not willing to jump around every Q from company to company. Maybe I’ll lose something in terms of momentum, but in the grand scheme of things (especially after all we’ve suffered over the last year and a half) it won’t make a huge difference.