Stocknovice's April 2023 Portfolio Review

[qazulight]

@stocknovice

Shockingly, Matthew Prince absolutely torched the sales team by calling out 100+ salespeople who “consistently missed targets” in his opening remarks. That’s not a good look, especially after all his we-know-our-levers comments the last few quarters.

Stocknovice,

While your stock picks currently do not make it onto my spreadsheet for company weighting, I always eagerly look forward to your write ups either monthly or on quarterly reports.

However, after reading this thread and the transcripts I tend to have a less absolute take.

I was technician, now I am a scowler, I scowl for a living. The pay is decent, the
work it easy and I get a decent tan. Can’t complain. A few years ago my company was moving our network support group from purely insuring network reliability to some customer facing work, I commented that it had been so long since I had seen a customer that I forgot what they look like. Personally, I want to keep it that way.

Some years ago I thought I could be a good customer facing person, sales, sales support or customer facing technical support. For the most part I failed at those jobs. In at least two of them I was terminated. In both cases it was a relief and a life upgrade.

I say all this to say, if you are selling all that you can put out, having incompetent order takers is better than having no one
answer the phone. However, once the infrastructure of the company catches up, either because the economy slowed down or the you start reaching TAM, then the quality of the customer facing team starts mattering. I say all this to say that the under performing sales personnel may have been pushed into sales work when they should be doing something else, being thrown off the bus when you don’t fit in and don’t want to go that way anyway is not a terrible thing.

Second, in an environment where there are no bodies available, you take what you can get, when the environment changes, you realign. We do it here. (Mostly) I do it in my
personal life, my employer does it, shouldn’t the CEO do it also?

My guess it that identifying removing and replacing customer facing people at scale would take in excess of 120 days, maybe as much as 180 days in a well run nimble
company, a couple of year or never in a company like AT&T.

Just laying off 100 people takes minimum of 60 days, then on boarding and bringing sales people up to speed probably another 120 days. I cannot imagine trying to come aboard my technical job and trying to be anything more than a warm body in 120 days, typically when I change job titles, staying within network reliability, it takes 3 to 4 years to become a technician leader. Even moving from territory to territory can take 3 years to become a full journeyman.

Worse, reading the glass door reviews, it appears that there is no well made sales organization to bring a new hire into and train them and mentor them up to
speed.

As the CEO was able to go to the report with a fairly detailed assessment, maybe he is already into the 120 to 180
day time frame to get better results out of the sales organization.

The question that you and others have had a difference of opinion on is: Can he engineer, and manage this change? Is it outside his skills tool box?

He has proven to be a good CEO so far, but is this situation overwhelming?

Cheers
Qazulight (Glad I am paid to be a grouchy old man and scowl at people while they work)

[coldmountain]

In the sales world (management of sales, that is) there is a common report called the ‘rank and sp@nk’, that can be built to run on any slice of a business – region, product, sales person, etc. What Prince did was present a generic review by rep. There is nothing unusual about this, and in no way was he ‘torching’ or calling out by name anyone. Those 100 reps know they are likely on there way out. For a company the size of NET, to have 100 sales reps of suspect initiative/skill/luck etc is par. Nothing to see here…

[stocknovice]

@silviocast

Perfect example of how we see things differently and place emphasis on different bits. And this is ok and the beauty of this game.

An important point for newer readers, and what I’ve been trying to say all along. Yet you keep spinning back to comments like this:

@silviocast

Have you listened to the call? Or maybe read the transcript?

Every quarter. Many times both. Those quotes I keep referencing don’t come from thin air, including this one:

Prince in Q4: My initial reaction, if I’m honest with embarrassment, over some of the basic things we should have been doing better, but my second reaction was excitement is there are so many opportunities for us to improve.

So yes, Prince did call it embarrassing. And just 90 days later he has switched from embarrassment about basic things to a significant change requiring the hiring and ramp of possibly 100+ news salespeople (who never produce right away anyway) in a tough economic environment. That will be neither quick nor easy.

That’s after:

• reading the room incorrectly on cash flows last year and getting his wrist slapped by the market

• customer adds and NRR clearly lagging as the year went on (thanks for acknowledging)

• floating a guide suggesting acceleration in the face of those lagging numbers that later had to be restated (if you really want to engage, you can walk me through how those numbers suggested an acceleration in the first place; it’s easy to say Prince “couldn’t know” but again he’s fully responsible for the stated number)

• changing a large customer revenue metric from a specific 61% and 63% in prior Q’s to the more general “>60%” this one (a subtle change but one my past experience suggests is often a yellow flag especially given the other declining metrics like NRR)

• admitting a significant portion of any recent underperformance is due to salespeople who weren’t up to snuff (which is 100% on the company itself)

You can view each of these as nothing more than the usual bumps in the road for a big-company CEO (which you seem to be saying). I can view those in aggregate as a sign I might prefer to put our money elsewhere. Both views are valid.

@silviocast

My point was exclusively on the importance of looking at the big picture.

My point is that’s only your view of the picture. Others are entitled to theirs. You keep implying we aren’t zooming out enough when looking at Cloudflare (and possibly others with your QoQ hopping comment). I happen to disagree. I have no issue with a different interpretation of NET’s quarter or string of recent quarters. I also have no issue with a different decision on owning shares. I do, however, take issue with insinuations anyone coming to a different conclusion than yours either hasn’t taken the right perspective or considered the big picture. And I believe that’s a point worth making for newer readers as well.

[silviocast]

You keep saying that everybody’s entitled to their opinion, as if my replies to you were some sort of weird imposition of truth from above. OF COURSE, everybody’s entitled to their opinions, no need to write it every other line (in bold), stocknovice.

@stocknovice

I do, however, take issue with insinuations anyone coming to a different conclusion than yours either hasn’t taken the right perspective or considered the big picture. And I believe that’s a point worth making for newer readers as well.

And there’s no insinuation whatsoever in my words, believe me. I really do not understand why you’re being so defensive on this whole thing as if I was attacking you or your thoughts. There’s nothing of that, really.

My thoughts are simple. I’ve decided to reply to your initial post because I believe that this whole sales rep layoff thing has been misread and exaggerated. But, again, that is my opinion and it’s important that I state it.

And I also think that NET is a great company in a great market led by – yes! – a capable founder/CEO. And that the current environment makes it hard for everyone to navigate, and that they’re all doing their best. Period.

We can get into the details on the numbers and the quotes from several earnings calls back (I’m sure someone used the word “embarrassment” again, somewhere – there wasn’t in this LAST call, which was the subject of this whole exchange, and what I was commenting on), and the commas and the semi-colons, but this doesn’t change the substance of my view, nor yours.

But now I have a question for you, if I may: as you’re citing instances and quotes and numbers from prior quarters to essentially depict a picture of unreliability for this CEO, why have you held on to the shares until now?

[nilvest]

this has turned out to be very informative and useful debate.

Clearly there are merits to both Silvio and Stocknovice points…
However, it seems to be getting personal…
Would love to keep getting both of your inputs on this board… hopefully you can overcome emotions and consider keep expressing your valuable points in a bit detached manner and focused on stock / management etc.

[stocknovice]

Excellent request, @nilvest. Here’s my initial attempt at a detached response. I hope it comes off that way.

@silviocast

But now I have a question for you, if I may: as you’re citing instances and quotes and numbers from prior quarters to essentially depict a picture of unreliability for this CEO, why have you held on to the shares until now?

I’m happy to answer that question. Answering purely from an investment perspective (which has honestly been my intent all along), the trend from prior quarters has lessened my conviction in the strength of NET’s business. This has been reflected in smaller allocations over recent months. This just happens to be the quarter that conviction level fell below my threshold for continuing to own the shares at all. Any comments from Prince aren’t taken personally. They are simply data points from which I believe NET’s narrative is trending in the same weakening direction as its numbers. Nothing more, nothing less.

Any defensiveness in tone was meant solely as clarification in response to statements either information was incorrect or those selling weren’t seeing the larger picture. I’ll take full responsibility for anything which sounded defensive because that’s not the spirit of the board. However, I fail to see how a direct suggestion my numbers weren’t true or I didn’t read the transcript doesn’t merit a direct response if we are debating the quality of the quarter.

[silviocast]

Ok, stocknovice. Thank you.
On a final note, as I said in my prior reply, my intention has never been to attack or discredit your view. And if I came across that way, I sincerely apologize.
I think our exchange, besides a few colorful clarifications from both sides, was respectful and civilized. As it should be.
Good luck with your investments.
S.

[stocknovice]

And thank you, @silviocast.

That’s ultimately the way this board is supposed to work. I sincerely appreciate the conversation.

[AnalogKid70]

I don’t know why I never noticed this before, but it sprang into my mind last night. One of the great things about this board is that almost no one ever swears. People can have a passionate debate with each other without resorting to foul language. Novel.

Thanks for being civil.

This is completely off topic, but I hope it will not be deleted.

[jonwayne235]

@jonwayne235

Below are quoted from two reddit threads and reviews from the Blind site on Cloudflare:

Another very interesting quote:

"I pinged my friend who works at Cloudflare and shared this thread. Here are some of her insights:

1. Cloudflare product is top notch, must have. Historically, this had made selling Cloudflare easy. They’re also in an industry that’s doing good. Everyone is moving to the cloud. Or wants to. However, a majority of their business is still represented by people on the cheap plans you can buy on the website, not contracted B2B customers. And usually the CF sales reps have to compete against their own freemium plans and this makes selling and acquiring new logos difficult.

2. That said, it’s common knowledge that the CEO does not respect salespeople. If there are any investments to be made, it’s to the Product and Engineering teams. They recently brought on the Twilio CRO and things might change now. But until now most of the focus has been on product, not sales.

3. The sales team has no strategy or resources. There is no territories or set of accounts. If you want to find business, you have to go source the internet for your own book of business. There is also zero sales enablement, sales methodology, etc. Little to no segmentation / verticals to help the salespeople focus on CLOSING business. No unified sales methodology either. Everyone is pretty much a lone wolf.

4. Steep learning curve and large product suite. You’re responsible for selling all the SKUs (about 15-20 products) and the product training is abysmal. You get some training in the beginning during the onboarding bootcamp but outside of that the product knowledge you need to have is insane. Takes about 1 year to ramp up. The worst part is there is no Gong so reps have to learn everything from scratch which makes learning difficult.

Overall, Cloudflare has excelled by the sheer amount of users who use their freemium services. The product is GOOD. There is no denying that. However, the lack of sales leadership and sales investments make it difficult for the sales team to perform their job. Cloudflare sales is a culture of excellence where you are already excepted to be a top performer by the time you join. But they do not want to train you or enable you.

Laying off the 100 salespeople makes sense if they were at the bottom of the totem pole. But as of now, leadership has no plan to help the newcomers succeed and the same thing will happen if they don’t step up their sales strategy."

[AnalogKid70]

I shared this chart last week, and here is the updated version after the last few days. The price touched the long term trend line and bounced off it (slightly). This does not mean it won’t go down more, but for now it stopped where it should have IMO.