Many of our companies will start having their ECs next week. A bunch of related companies has already reported. This could portend what our companies will do. I do not follow any of the companies below in detail so more details by others will surely help.
MSFT, AMZN - Both of their cloud rev grew but at a sharply slower level. We heard from many CEOS last Q that 2 years of digital transformation was happening in 2 months. Shouldn’t this have accelerated cloud rev growth? Along the same lines:
Service Now reported a 27% rev growth. The company has been a consistent 33% grower for the last 4 Qs.
Atlassian reported a 29% rev growth. The company has been a consistent 35% grower for the last 4 Qs.
So, why is faster digital transformation not accelerating rev growth in these cloud stocks? After all, that was one of the main reasons for the outperformance of SAAS stocks in recent months IMO.
Both TEAM and NOW were punished slightly after their ECs. But these are much bigger companies and had not run as much - only about 50% YTD. In contrast, Datadog, Docu, and CRWD have run up an average of 155%. It seems to me if they do not report substantially better growth than recent Qs the market may be in a more punishing mood.
From AMZN earnings call transcript: “I’ll give you the backlog number. It grew 65% year-over-year and 21% quarter-over-quarter. So that’s healthy, and we have the average contract length is over three years for our AWS contracts. I would say contract volume and negotiations are strong and have maintained through this period. So it is – that’s a good sign. It really does boil down to short-term versus long-term incentives here for a lot of our customers.”
The growth of AWS revenue seems lukewarm, but backlog growth is monstrous.
Texmex, I agree the market is going to punish revenue slowdowns (even as the cloud keeps growing). To organize my own thinking, I offer this broad-brush summary of pricing models. I’m sure I’ve misunderstood things. And companies have multiple GTM models.
The usage based models (& pricing per transaction) aren’t as easy to throttle as pricing by seat. So, using the 3 examples you mention, DOCU would be more at risk than CRWD or DDOG.
Pricing per user/seat (TEAM, ZS, AYX, MDB, DOCU, ZM**, OKTA**, LVGO**)
Pricing by usage (FSLY, DDOG)
Pricing per (eCommerce) transaction (TTD, MA, MELI, SHOP*)
Pricing by infrastructure/enterprise(CRWD, COUP, ANET)
- a substantial chunk of their revenue
** consumer (not just enterprise seats). OKTA hopes to transition to consumer identity management which would be explosive
What is clear is that not all SaaS companies are benefiting equally from the current situation. It looks like companies which are based off of usage are doing far superior to others. Zoom may be the exception to this usage vs seats debate.
For TEAM and NOW I am wondering if they are beginning to saturate their respective niches. NOW is the standard solution for IT support desk, and TEAM’s JIRA solution is the standard for project management. Additionally, I don’t believe either of them directly benefits that greatly from work from home trends.
TWLO and FSLY should give a clear picture this week if revenue is still accelerating or have flattened out now. Expectations for both of them are massively high and both CEOs went all in on the acceleration story last earnings call.
SHOP results were interesting in that I thought the stock would have rallied more. The market seems to be indicating a spectacular quarter was priced in.
TEAM and NOW have a much larger share of their main target market… so slower growth makes sense…
I would think CRWD would deliver even larger growth for Q2… but that may be seen as a result of big pull-in and analysts may fret on Q3… hope the management dont decide to be skittish in their guidance… I am keeping my position as it is since I think the beat will be so big that people will skip over their forecast EVEN IF they decide to be skittish…
FSLY should continue to deliver and forecast above expectation as they should be seeing tremendous tailwinds of all digital-first companies realizing benefits of using FSLY… their strong confidence in investing in higher capacity this quarter gives me more confidence…
TWLO has addition tailwind of election… so they should be delivering strong guidance as well…
And DDOG… just like last quarter… they are quiet through the quarter, just delivering fantastic report and will probably do so again with even better guidance…
yeah… so I dont see TEAM or NOW as harbinger for these cloud companies which are still at really small % of their market share and mostly competing with non-cloud players… IMO, this is true for next 2 or 3 years…
Just think about how long did it take SHOP to become a monster to contend with in e-commerce space and even they have huge runway… and for that matter TEAM and NOW have been growing for a decade now… whereas CRWD, DDOG, FSLY are just a couple of years in public market, much smaller revenue base but more importantly, much small share of their market…
Time will tell but IMO, this is the moment of cloud and these companies… dont want to get talked out with un-related dynamics in the market…
It really does boil down to short-term versus long-term incentives here for a lot of our customers. The growth of AWS revenue seems lukewarm, but backlog growth is monstrous
So, AWS gave short term incentives which slowed its Q rev but its RPO went up. Do you know if Azure and GCP have the same experience? Cloud consumption is essential but AWS has to give incentives. Why do we think DDOG, CRWD do not have to give incentives?
I started this thread a few days back.
- Numerous CEOs commented in the previous conf. calls that “2 years of digital transformation was being compressed in 2 months”.
- Investors assumed this should lead to further accelerate revenue growth
- So, they drove SAAS stocks to higher and higher valuations. DDOG’s PS today is 50% higher than it was at the start of the year.
Yesterday, with DDOG reporting just 68% growth vs 87% growth in the previous Q and projecting 50% growth for the reminder of the year this whole assumption seems questionable. The question now is will the high valuation (P/S of 50) of DDOG still hold or will there be a reset of that as well. My bet is on the latter. I am not selling my 6% DDOG position though. But I am not adding either at this point.
Numerous CEOs commented in the previous conf. calls that “2 years of digital transformation was being compressed in 2 months”.
Hey Tex, personally I think there’s a lot of hyperbole built into this statement and I don’t take it literally. Perhaps smaller, more nimble companies can delivery this quickly, but in large enterprises a decent-sized IT project is rarely completed in 2 months. And it’s those large enterprises that are moving the revenue needle.
I work in a large financial services organisation which now has a cloud-first approach, so any project involving on-prem needs to jump through a lot of hoops. So pretty much any project nowadays involves cloud making debate over what “digital transformation” means a moot point.
Even so, use of cloud infrastructure is subject to a myriad of approvals (external hosting, data transfer, regulatory compliance, privacy), especially when data is involved. If you are just moving content or a UI it’s much easier but these “quick wins” have probably already been done. Maybe I’m generalising too much based on my own experience in an organisation that moves like a sloth, but the meat and potatoes of applications has yet to be moved to cloud.
I would venture that the CEOs were talking in terms of accelerating their budget allocations to digital transformation type projects, rather than actual delivery of the same, which would mean there is plenty of work still in the pipeline.