I’ve not done an update last month, so here goes for April and March.
It’s been a roller-coaster for many of us (except the wise/lucky ones who drove Tesla and the large tech caps to greatness this year).
I will not discuss all my companies, but I include write-ups for the companies I own that have reported up to yesterday: Cloudflare, Enphase, Celcius Holdings and Transmedics. So if those are of interest to you, read on!
What I did in March
I made a bunch of big changes in March. Some of which were not great, some of which were. I jumped into 4 new relatively big positions, all of which I’ve been following for a while, some of which I’ve own previously and all of which have been discussed/mentioned on the board before: Global-e, Celcius Holdings, Monday, Enphase energy and Samsara. I felt that I was going in circles with the same companies and wanted to try new positions outside of my normal wheelhouse. There was certainly a risk of jumping from the SaaS frying pan into the non-SaaS fire…but I felt that what I was doing wasn’t working so well, especially after having gone in with such a big Snowflake position and gotten burnt when they released results. Like Saul, outsized positions have not worked well for me. I got out of BILL, TTD and DDOG.
What I did in April
In April I trimmed that outsized Global-e position, trimmed Transmedics and Samsara, and, after re-reading the Cloudflare Q4 call decided to up that position and have it as my top position going into earnings…and given that I’m writing this after they’ve announced Q1 results, there’s that big position thing biting me again…I also built my Snowflake and Crowdstrike positions up again.
2023 YTD Return :
| Month | YTD |
|---|---|
| January | +7.2% |
| February: | +17.3% |
| March: | +15.1% |
| April: | +2.1% |
Portfolio end April
| Company | 30/4 | 31/3 | 28/2 |
|---|---|---|---|
| Cloudflare | 15.1% | 10.4% | 8.3% |
| Monday | 12.1% | 10.0% | |
| Snowflake | 12.1% | 6.2% | 24.3% |
| SentinelOne | 11.9% | 11.4% | 11.3% |
| Celcius Holdings | 11.8% | 10.2% | |
| Crowdstrike | 10.8% | 3.0% | 0.6% |
| Global e-online | 10.4% | 16.3% | |
| Enphase | 8.1% | 11.5% | |
| Transmedics | 3.9% | 14.1% | 12.1% |
| Samsara | 2.2% | 10.4% | - |
| Bill | - | 5.3% | 16.4% |
| The Trade Desk | - | - | 3.6% |
| Datadog | - | - | 5.8% |
| Cash | 1.9% | -8.8% | 17.7% |
| YTD return | 2.1% | 15.1% | 17.3% |
Cloudflare
I’m not rehashing the great debate about Cloudflare’s quarter here. I still think Prince is a good CEO, I still think they have an incredible innovation engine and I still think it’s a great company. But the numbers were bad enough vs the past that I had to seriously consider what was going on and to re-evaluate the size of the position (it was my biggest going into earnings).
On the numbers, I felt it was a bad quarter. I think they guided too high and I think their sales performance was not great. Their cRPO of the prior quarter was pointing to revenue of around $292m and they hit $290m but guided higher. NRR was already falling for many Q’s. So why did they guide so aggressively? Were they not paying attention?
And then we have Zscaler’s pre-release of earnings which points to revenue growth of at least 46% vs Cloudflare’s 37%. So Zscaler is by no means the big old laggard here…their sales machine clearly seems to be outstripping Cloudflare’s in complex Zero Trust boardroom sales.
Clearly Prince’s messaging this Q was not as good as prior quarters (but hey, good news is always an easy sell). So what was Prince thinking? Apparently Y Combinator asks their founders one key question, namely “What’s slowing you down?” and ignores many other questions. It seems that is what Prince was attempting to answer, in as transparent a way as he could. So clearly he saw the same things as us: growth slowing down, them not hitting their guidance for the first time in forever, customer growth slowing, etc. etc. This quote is key to me, in terms of his thinking:
As I take stock, we are not limited by the size of our market for our products, we are not limited by our ability to innovate, we are not limited by pipeline opportunity, and we are not limited by sales capacity. So what are we limited by?
He then goes on to say it’s the sales team broadly and some 100 people specifically, and that they are fixing that. There are two views here: the CEO is publicly throwing the GTM team under the bus, or he’s being extremely transparent as is the culture at Cloudflare. My take? A bit of both. If the new CRO does not fix this, he’s gone. Clearly the pressure is on.
This whole narrative and the focus on, and importance given, to the new CRO worried me though. Is the new CRO part of the cause of the poor sales performance? Did he go bulldozing into the GTM team and cause confusion and demotivation? His appointment in November last year and the subsequent decline in new customer acquisition is correlated. Is correlation causation in this case? Or did he in stead come in just in the nick of time and is now maturing the GTM machine to be able to sell more complex products like Zero Trust?
To try to find out I spent some time looking at the achievements and plans of the new CRO, Marc Boroditsky. Prince and the company seem to have a lot staked on this single individual atm. Boroditsky was CRO at Twilio from mid 2020 to Aug 2022. What did Twilio’s revenue growth look like in this period? Starting in Q2 2020 to Q3 2022 this was Twilio’s revenue growth yoy:
52%->66%->62%->67%->65%->54%->48%->41%->33%
The last number above, 33%, is Q3 2022, basically when he left. Twilio gross margin also went from 56% to 51% in this time. Not good. So he took over the CRO reins at Twilio in the midst of the pandemic which drove a lot of demand for Twilio and he left when revenue growth kept going down. His leaving coincided with a restructuring of the GTM team at Twilio (September 2022), and the new CRO who replaced him there had this to say about the mistakes made by her predecessor (i.e. by Boroditsky):
These principles drove the changes that we implemented as part of our restructuring that we announced at September. We believe this will set up our go-to-market team for long-term selling success. One of the key things I did when I joined Twilio was to dig deep into the lessons learned from the initial integration of Segment into Twilio, and while I don’t think that the end goal was off-base, our approach for integration of the sales force and sales process were overly aggressive.
We didn’t properly enable Twilio field sales. We also made some decisions that led to significantly elevated attrition across the sellers that were most knowledgeable of the Segment product. […] We’ve learned a number of lessons from these missteps. We’ve now hired the capacity we need and we’re onboarding new segment and engaged focused talent, while we also enable our enterprise sellers to originate segment and engage business. As such, we’ve stabilized the team.
So turning back to Cloudflare again. What are Borditsky’s plans? He laid them out in quite a bit of detail in this slide deck at their recent investor day. You can watch him here timestamp 1:04.
It’s worth looking at the whole thing (Broditski’s piece is in the middle of the prezzo) as he paints a picture of a relatively broken GTM machine which does not conform to a normal distribution of sales per sales rep but rather one in which a tiny number of sales reps carry the whole org - a so-called bimodal distribution. From 1:12 timestamp in the presentation he positively rips into the GTM org…
This is what he believes needs fixing. That’s a lot:
And this is what he’s planning for this year:
The first of those 5 initiatives is a new organisational structure, which looks like this:
And then there are slides for the other 4 initiatives too. Is he being overly aggressive? Are the changes causing some of the most talented and knowledgeable sales people to look elsewhere? I.e. is this a repeat of what happened at Twilio on his watch?
I did not like the extent to which he ripped into the sales team. If I worked at Cloudflare in sales I would feel threatened regardless of whether I performed well: my entire part of the organisation has just been made to look very bad by the CEO and my new boss. The message to the whole org is that everything else in the company is great, but the GTM team is terrible. And that’s where I work…This is not just a quick fix of 100 underperforming sales execs, this is a complete revamp of the GTM machine imho. Can they out-execute themselves out of this?
I’m not sure, but I don’t like the lingering questions I have about the new CRO, the causes of the poor performance and the scope and messaging of the GTM changes. In addition they touted strong cash flow…but wait a minute. Their capex as a % revenue was only 5% this Q and for the year they guided back to the normal 11%-13%-ish which they have always had - there will be catch-up capex in the rest of the year. So they boosted CF this Q by curtailing capex, but this is not structural; it’s temporary. If capex was at more normal levels, CF would have been negative. I struggle to see many positives in the short term. Which is why I’ll be watching from the sidelines for a while. I’m mostly out of NET as we speak.
Enphase Energy
Revenue in Q1 grew to $726m, up 0.2% qoq. This is the lowest qoq growth I have except for the first two COVID quarters of 2020 when revenue went negative qoq. There’s been a lot of good discussion about the results, but I guess the crux is that the yoy performance looks great but qoq is not great (even when adjusting for seasonality).
And the CEO said that he expects Q2 to be the low point for batteries and for the pressure on inverter sales also remaining in Q2. Then they guided for a pretty wide $700-750m for next Q. So that’s -3.6% to 3.3% qoq for next Q. So not awe-inspiring stuff growth-wise expected next Q either, even though the operating and FCF margins were fantastic at >30% for both and will probably continue to be so. So what are the headwinds? Interest rates in the US and NEM3.0 in California. And probably the interplay between the two. And the CEO said a number of times that he expects demand to pick up strongly when interest rates go down again. However when will that be?
The two engines of growth are the US: 65% of revenue and Europe: 35%. Europe remains in hypergrowth, but as long as the US stays in a funk, revenue growth will disappoint. And that is the crux of the matter for me. Whereas there is Russia’s antics in Europe giving people the resolve to do as much as possible right now to get off gas and to invest in energy self-sufficiency, in the US I would guess it is easy to wait a year or two with one’s solar installation if things are a little tight. So US demand could possibly be softer for longer.
On the plus side, though, there’s the potential upside from the IRA benefit which they estimate at between $20 and $30 per inverter and which is explicitly excluded from guidance. And they gave us an expectation of doing 50k in this quarter, ramping up to 4.5m end 2024 assuming robust demand. The CEO suggested doing a linear extrapolation between the points to get to an estimate of the ramp to one of the analysts. So let’s do that to see what they could end up getting as benefit, per quarter going forward:
| IRA benefit | Q2 2023 | Q3 | Q4 | Q1 2024 | Q2 | Q3 | Q4 |
|---|---|---|---|---|---|---|---|
| Unit shipped | 50,000 | 791,667 | 1,533,333 | 2,275,000 | 3,016,667 | 3,758,333 | 4,500,000 |
| Benefit ($m) | $1.3 | $19.8 | $38.3 | $56.9 | $75.4 | $94.0 | $112.5 |
That seems like a lot of gravy…$59.4m of benefit expected this year, and $338.8m next year. Am I calculating this right??
I think the long-term tailwinds are intact and there is a ton of upside from here if the US recovers, but I worry that it may take longer than expected. However on the flip-side we have Europe hypergrowing along and the huge expected IRA benefit.
On balance, I don’t feel comfortable with too large a position, and I trimmed it somewhat.
Celcius Holdings
Celcius reported Q1 yesterday and I’m including some more information here. It was a fantastic quarter.
Intro to the company: https://www.celsiusholdingsinc.com/wp-content/uploads/2023/03/CELHPPTMARCH_2023.pdf
Q1 2023 Results: https://www.celsiusholdingsinc.com/wp-content/uploads/2023/05/Q123EarningsSuppDraftFINAL-REVIEW5.9.23.pdf
All SEC filings incl latest 10-Q: SEC Filings - Celsius Holdings Inc.
This twitter link sums up the quarter vs expectations: https://twitter.com/stockmarketnerd/status/1656089954118774784?s=46&t=XFm-z7Y6Jr1FsdLyNtgzfQ
I’m going to just leave everyone with the numbers here, and let that speak for itself. This is a company rapidly gaining market share, with very limited SBC and which is profitable and growing faster than Snowflake was at similar revenue levels. Don’t believe me? Here’s the graph:
Two negatives: they sell stuff, so there is inventory, debtors and all that normal stuff to think of and manage, and they have gross margins in the mid 40%'s - similar to ENPH and Global-e. The good thing about those? They are managing them well, and margins are on the up.
| Revenue $m | Q1 | Q2 | Q3 | Q4 | Q1 QoQ | Q2 | Q3 | Q4 | Q1 YoY | Q2 | Q3 | Q4 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 28.2 | 30 | 36.8 | 35.7 | 6% | 23% | -3% | |||||
| 2021 | 50.0 | 65.1 | 94.9 | 104.3 | 40% | 30% | 46% | 10% | 77% | 117% | 158% | 192% |
| 2022 | 133.4 | 154 | 188.2 | 178 | 28% | 15% | 22% | -5% | 167% | 137% | 98% | 71% |
| 2023 | 259.9 | 46% | 95% |
Wow. Just wow. The massive revenue growth was driven by them getting into many more stores in the US than they were in previously, driven by their Pepsi partnership - ACV was up significantly. They upped ACV from the 60% range to above 90% in a single quarter (in MULOC and Convenience channels). The revenue growth story is all US; Europe is only planned for 2024 - probably starting with the largest markets UK and Germany. In the US they doubled their market share from 3.7% a year ago to 7.5% now, with an aim to get to 10% (an analyst seemed to imply that this should be “imminent”).
Gross margins are in the mid 40-s and holding steady even as they grow at breakneck pace:
| GP % | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2020 | 46.0% | 43.3% | 47.6% | 48.7% |
| 2021 | 41.2% | 43.3% | 39.7% | 39.9% |
| 2022 | 40.4% | 38.5% | 41.8% | 44.4% |
| 2023 | 43.8% |
EBITDA is kicking very nicely and they had a record 19% EBITDA margin in Q1:
| EBITDA $m | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2020 | 2.7 | 2.6 | 6.7 | 3 |
| 2021 | 4.7 | 8.0 | 10.3 | 10.9 |
| 2022 | 14.8 | 17.1 | 24.8 | 13.4 |
| 2023 | 48.7 |
Net profit margin sits at 13% for the quarter - another record.
Inventory turn was 3.8 pa this quarter - a record of the last two years. However this explains a “negative” in the numbers. Cash flow was negative. Why? Because their debtors spiked as they sold so much into the channels. This is however normal for any rapidly growing company that sells stuff, and the extent of the cash used this quarter to finance this massive growth - only $13.8m - is very small compared to the cash they have on hand of $596m.
I thought it was a great quarter and I’m impressed with their execution. Keeping all of my shares.
Transmedics
@AnalogKid70 knows this company well and wrote up the recent results nicely here.
The top-line was fantastic, and showed a marked change/step-up in two revenue constituents: US OCS liver, which grew 192% yoy bu 43.5% just in the last quarter! The other big one is Non-US revenue which seems like a drag as it grew by “only” 78% yoy, but it also grew 78% qoq after having been stagnant before that. So a pretty big upward inflection there. OCS Lung is still a drag on growth:
| Revenue $m | Q | US Liver | US Heart | US Lung | Non-US | Total |
|---|---|---|---|---|---|---|
| 2021 | Q4 | 1.5 | 4 | 1.8 | 2.5 | 9.8 |
| 2022 | Q1 | 7.9 | 3.7 | 2 | 2.3 | 15.9 |
| 2022 | Q2 | 9.6 | 5.9 | 2.6 | 2.4 | 20.5 |
| 2022 | Q3 | 12.4 | 8.2 | 1.3 | 2.4 | 24.3 |
| 2022 | Q4 | 16.1 | 11 | 1.9 | 2.3 | 31.3 |
| 2023 | Q1 | 23.1 | 13 | 1.4 | 4.1 | 41.6 |
| yoy | 192.4% | 251.4% | -30.0% | 78.3% | 161.6% | |
| qoq | 43.5% | 18.2% | -26.3% | 78.3% | 32.9% |
In terms of the durability/runway left, I believe that from the demand side there is a lot of room left, and all they need to do is make sure they have capacity. To that end the CEO indicated that the expected capacity increase from new clean room, which got FDA approval in Q1, is 4x in next 18 months. So plenty being done to ensure they capitalise on the runway left in their existing “TAM”.
On margins there is also great progress towards profitability. Operating profit margins improved by 54%pts in one year!
| Op % | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2020 | -107% | -232% | -65% | -78% |
| 2021 | -92% | -121% | -217% | -116% |
| 2022 | -59% | -47% | -21% | -21% |
| 2023 | -5% |
However the big discussion was their plan to own the distribution - i.e. the jets flying organs from donors to OCS centres. This is quite a game-changer for them obviously and has potential risk and changes the business model quite significantly ito capital intensity. The CEO spent a lot of time on this, so this is no mere intention. By my read they will discuss this in detail and actually do this towards the end of this year. And the recent convertible loan issue of $400m plus the cash they have on hand will probably be used to fund this - that’s north of $1bn that they have on hand…that’s a lot of cash but given that they want to potentially own or lease the jets and buy a company, I don’t know how far that will go. Anyway, this move will fundamentally alter this business and will require keeping a keen eye on.
In the Q&A the CEO stated:
We evaluated all different options of how to build the TransMedics aviation business in TransMedics. We have completely eliminated the organic option of adding one plane at a time because it will take significantly long time for TransMedics to secure a Part 135 charter operating license is going to take at least 12 to 18 months. So our two most efficient paths are either acquiring a Part 135 operator that had significant assets of jets that we can leverage quickly or creating a joint venture with one operator that had, again, a license and a significant number of assets. These are the two options that we are actively pursuing across the United States.
So it sounds to me like they are going to buy someone. The CFO stated that he would expect GM to come down and for revenue to increase by between $20k and $30k per transplant if they were to do this.
So how much is that? Assuming $100k per transplant currently, that’s a 20%-30% increase in revenue, but for how much capital? How much incremental opex? I guess we’ll have to wait and see on this one but it does add a level of uncertainty.
Lastly, about why they are going to do this, it sounds like they have to, the CEO had this to say about why:
But more importantly, we are very concerned that our volume by year-end is going to literally be at a much higher scale that could actually start becoming a bottleneck finding airplanes. We’re having problems finding airplanes for our missions today. Not at the end of the year, and we know our volume is going to be significantly higher by year-end and definitely into 2024.
I thought it was a great quarter, but the added risk of their logistics/jet fleet plans makes me want to keep this one relatively small. I won’t be upping my stake much from the current ±4% level.
Finishing up
I, like, Saul and probably many others have also been feeling rather despondent of late. And this last month gave no respite. Cloudflare disappointed and got punished, Enphase disappointed (a bit less) and got punished (also a bit less). My portfolio lost value. Hopefully things get a little less surprising in the months ahead.
Onward and upward!
-WSM