I’ve been lurking for more than a year now, and learned a lot since. But I’m fully prepared to still have it all wrong, and learn even more when being shot down
Bear introduced the metric of Rev/OpEx. That is an interesting metric, but it also implies that Revenue and OpEx are closely linked. So any increase in OpEx must show in Revenue in the very same quarter, or the metric will go down. (I think XMFALieberman made that point as well)
I don’t think that assumption fairly represents the ZS business model.
Let’s take again DDOG as a comparison. They have a go-to-market that targets the developers and project teams, so it’s much like a self-service checkout without need for sales staff. Also new customers generate revenue quickly once subscribed. And they can add new modules with the click of a button - again no extra sales staff required.
ZS, as I understand it, goes for the big enterprise. Sales decisions are made far higher up the chain, perhaps CxO level, and usually for large parts of the company in one swoop. So sales take a lot longer, but contracts also have a larger volume, and longer duration. With ramping up sales for federal, they need even more sales people. And with such long sales cycles those OpEx increases cannot show up immediately.
Now, with that in mind, I changed the metric. Let’s assume an increase in OpEx takes one year (4 quarters) to actually show up in revenue. So we compare the OpEx from 4 quarters ago, with each quarter’s Revenue, and we get this:
Now the overall trend is definitely going down, with a lapse in Q2-22. Increase in OpEx does generate more and more revenue, but not immediately.
One could still argue that this makes it harder to have visibility into the company’s future, because you don’t see the benefit from increased OpEx for another 3 quarters. You basically have to trust management. And perhaps that is why Bear doesn’t want to hold it. But one could also argue, as Monkey did, that this could be a leading indication of future revenue growth.
To me, this opens up a key question: how much insight can we have into our companies. We don’t get all the data, and we aren’t management.
So to some degree we have to trust management until real red flags show up.
Or we can only invest in businesses with full visibility into the next quarter - every quarter. There aren’t that many of those around. And maybe they are the worst investments anyway, because the market prices them always just right, with no upside, and only downside if they slip.
(long DDOG and ZS)
Allow me a personal statement in closing:
I’ve understood Saul’s method and the knowledge base to trust management to run the business well. To stay invested long term, and let management run the business. Until the numbers indicate a real problem, and then get out immediately and ruthlessly. It’s Foolish investing with an added exit clause.
In those past months in which I’ve been reading this board, I often wondered if I got that wrong. So much talk about “taking companies to the woodshed”, and “XYZ has no place in my best of the best portfolio”, and “I’m out” after not delivering on unreal expectations. I didn’t get that spirit from Saul’s posts or knowledge base. His approach seems more lenient. More like a gardener who gets rid of weeds and deadwood, but also gives every plant a chance to flourish before he replaces it with a new specimen.
So, for what it’s worth, I have decided for myself that I did get it right. But then I have only losses to show for, so what do I know