SaaS stocks in the pandemic. Amazing Report

You’ll remember how I predicted that our SaaS stocks would be a safe haven, a welcome port in a storm. Many of our group, like Gaucho Chris who found this report, agreed. A big thanks to Chris!

Zuora, a company which provides support for subscription companies, produced the following report on the effect of the Pandemic on SaaS companies. You’ll be astounded at how correct we were:

COVID-19 Subscription Impact Report
The worldwide spread of coronavirus (COVID-19) has had a quick and damaging effect on the global economy. However, amongst operational disruptions, supply chain restrictions, and a global recession, subscription businesses are proving to be resilient

In an analysis of hundreds of subscription-based companies, more than half have not seen an impact on their subscriber growth, while one quarter are actually seeing subscriber acquisition rates accelerate even faster than before. And, of the remaining companies who are seeing their growth slow, half of those are still growing….

Key Findings
Subscription companies prove their resilience. Overall,
22.5% of companies are seeing their subscription growth rate accelerate,
53.3% of companies have not seen a significant impact to their subscriber acquisition rates.
12.8% of companies are seeing slowing growth, but are still growing, and the remaining
11.4% of companies are starting to see subscriber churn outpace their subscriber acquisition rates.

Of the companies Accelerating, Slowing, and Contracting, we found trends across industries:
• Accelerating: OTT Video Streaming, Digital News & Media, E-Learning, Communications Software
• Limited Impact: B2B & B2C Software, Information Services
• Slowing: Consumer IoT, Business IoT Services, Software for Small Businesses, Memberships
• Contracting: Travel & Hospitality, Sports Related Services"

https://www.zuora.com/2020/04/08/subscription-impact-report-…

At the end of my March End of the Month Summary, I wrote:

“Outlook
This last quarter the average growth rate for my six stocks, which make up all of my portfolio, was 70%. (If you don’t believe me, calculate it yourself). Even if they slow down more than I expect, it’s hard to see the six companies with an average revenue growth rate of less than 35% to 40%, especially since Zoom and Crowdstrike are two of the companies. So I would guess that that may make make our companies very desireable to any mutual fund or hedge fund portfolio manager who wants to show good results for the year.”

I may have been way too conservative!

Saul

A link to the Knowledgebase for this board is in the Announcements panel that is on the right side of every page on this board.

For some additions to the Knowledgebase, bringing it up to date, I’d advise reading several other posts linked to on the panel, especially “How I Pick a Company to Invest In,” and “Why My Investing Criteria Have Changed,” and “Why It Really is Different.”

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Wowza! For the Roku thread.

OTT Video Streaming. The subscription growth rate for OTT Video Streaming companies grew 7x in March 2020 compared to the growth rate over the previous 12 months.

Darth

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Key Findings
Subscription companies prove their resilience. Overall,
22.5% of companies are seeing their subscription growth rate accelerate,
53.3% of companies have not seen a significant impact to their subscriber acquisition rates.
12.8% of companies are seeing slowing growth, but are still growing, and the remaining
11.4% of companies are starting to see subscriber churn outpace their subscriber acquisition rates.

Many of our companies fall into the category that is bolded above. In the report the Saul referenced you actually have to look at the and in the Appendix to see what “not seen a significant impact” means. Well, it means that they saw (in March 2020) a +/- CHANGE in the PERCENTAGE GROWTH RATE of 1.5% (compared to the previous year)!!! That’s not +/-1.5% in the absolute growth but the previous growth rate. So if we had for example a company that was previously growing 65% it is now growing 63.5% to 66.5%!!! WOW! I think many of our companies are in for a huge rally after earnings and a HUGE rally after the coronavirus all clear signal is sounded.

For the 11.4% of companies that saw more churn than subscriber acquisitions, we should remember that the are SaaS programs related to travel and such that will be under pressure. I have 2 gym memberships that was were both put on hold by the gyms so I am not paying. My car insurance premium for the next 6 months was dropped by 15%. I did not ask these companies to reduce my rate or stop charge me. They did it on their own. Companies that are based on a subscription model realize that it is better to treat the customer right and keep them. Think about the stocks that you own and consider which of them offer services that will still be used just as much in the time of coronavirus as before the coronavirus.

I essentially reduced my number of holdings to five recently. Here’s what I think about which category they will fall into in the Zuora report:

AYX: no significant impact
CRWD: acceleration
DDOG: either no significant impact or acceleration
OKTA: either no significant impact or acceleration
ZM: significant acceleration

Since the first 3 companies have sold off significantly and I see no impact or an acceleration, I am being more aggressive in adding. I am not adding to OKTA because it is growing more slowly, hasn’t sold off as much, and doesn’t seem as good of an opportunity compared to AYX, CRWD, and DDOG. ZM is not only fast growing but it also serves as a hedge in the event we have an extended lockdown.

Chris

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this is excellent find, thank you Chris.

Two points seems to be different from discussions so far on this board.

  1. OTT video streaming: grew to 7x: As Darth pointed out, this is amazingly big number… seems like all the bears on drop in overall advertisement $ are missing this big transition. Roku should be a standout beneficiary of this transition that may come as a big surprise to the street!

  2. Video conferencing: is lumped in “communication software” and pegged as grew to 1.4x: This is substantially smaller number to whats been discussed as 38x for Zoom on this board… also much smaller than 2x to 3x that even Webex and others claiming to see.

There may be various reasons for this discrepancy - May be video conferencing has been smaller portion of overall communication software category to start out and its large uptick really lifting the whole category… may be non-Zoom companies lost terribly that overall average is much smaller. Or may be actual paid subscribers gain for Zoom is much smaller than 38x that is number of download / user growth…

Looking at explanation of methodology towards end of that linked page, this report is really build using data from anonymized subset of Zuora customers. Naturally next step is to look at who are Zuora’s customers… thankfully, they have a full page listing (I would think a subset) of customers…
https://www.zuora.com/our-customers/

Some of the familiar names in that list are Zoom, Okta, Docusign and Sendgrid (Twilio is not listed).

Roku is not listed, neither Netflix or Hulu or Disney+…
Neither Cisco / Webex nor Microsoft / Teams…

So going back to the two points I mentioned at the beginning…

  1. OTT growth - I am not sure if this report really represents upside Roku is experiencing… I am not going to get excited on this one…

  2. Video conferencing - Zuora clearly listing Zoom as their customer and identifying 1.4x growth for the category means it reflects heavily on Zoom. Its also possible that large amount of growth for Zoom comes in from schools and thats categorized as part of E-learning which grew 3x per this report.
    Either way, this report does increase probability of Zoom’s paid customer growth being much smaller than 38x in my mind…

Would be curious on what others think.

nilvest
Top 4 positions: CRWD, LVGO, DDOG, ROKU

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I’ve been having my own personal high side to “what to expect” for Zoom revenue growth being about 150% of what I was expecting prior to anything Covid. I was expecting 70-75% growth. So about 105% YOY growth or high side of revenue being about $245M. Around that and I will be very happy.

And a lot of deals in pipeline for remainder of year. I hope we realize how much of an acceleration in business that is. It takes time to close deals and issue Billings and enterprise level even for a simple software like Zoom. And then you have 606 billing accounting. I think Billings is going to be the really big number. And that will be good news. That’s the one we should really see, and RPO growth.

Darth

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1. OTT video streaming: grew to 7x: As Darth pointed out, this is amazingly big number… seems like all the bears on drop in overall advertisement $ are missing this big transition. Roku should be a standout beneficiary of this transition that may come as a big surprise to the street!

2. Video conferencing: is lumped in “communication software” and pegged as grew to 1.4x: This is substantially smaller number to whats been discussed as 38x for Zoom on this board… also much smaller than 2x to 3x that even Webex and others claiming to see.

It’s not clear to me what the report means by “subscription growth rate grew by 7x”. Does that mean the growth rate of, say, Netflix subscribers grew from 10% to 80%? This is what I interpret literally when they say growth rate grows 7x. Or they added 7x as many customers as they added in the year ago period? So they added 10 million subscribers last year, this year they added 70 million or 80 million. Or something completely different. Does the addition of Disney+ make a difference here? How many are just signing up for the free trial?

Videoconferencing growing 1.4x also isn’t really clear. I don’t think there’s any way videoconferencing is only 40% more than before. Does growing by 1.4x mean adding 1.4x or just adding .4x? This goes back to the “10 bagger” definition debate.

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Hi Gaucho,

I wanted to address Alteryx specifically.

Before I start, I want to be clear - I am pretty bullish on the long term opportunity here, and indeed I owned it until mid February as a substantial position for me. And if you have a point of view here longer than 12 months, you really shouldn’t care what I write. The only long term change I’ve observed here has been in my conversations around the Snowflake ecosystem and their ambitions there which probably dampens the super bullish case a bit here (i.e. reaching $5bln+ revenue). I don’t want to discourage people from owning the stock, I’m just going to explain why I sold it and what I expect to see. I plan to own it again this year, hopefully at a much cheaper price.

Alteryx has seen tremendous growth in recent years from

  1. Broad budget increases in data analytics, often in a spray and pray kind of way. I think there are a lot of deployments here that didn’t come with a lot of in-depth thought and analysis.
  2. They have basically been the only player in their niche, which is still mostly true just not as much as it used to be.
  3. Their accounting standard allows them to recognise 3x recurring revenue from a contract in signing year, and this has been increasing over time as contracts lengthen on average.

here are the headwinds
First, I suspect a lot of the weak hands deployments are going to cut.
Second, I see a lot of software budget flowing from the broad data spectrum towards business continuity, commmunications, and work from home enablers and infrastructure.
Third, Alteryx only has 40% of revenue from 2019 as true recurring revenue (combo of the upfront recognition and consulting - which means you get probably 50% after the expansion rate here). Among the entire 10x Sales+ software cohort this is the lowest by some distance.

My guess is the reported numbers of Alteryx are going to suffer a lot in Q2 and Q3, even if the business itself is fine. But I am not taking a short position as I like it over 12 months, and also there was unbelievably strong momentum prior to the coronavirus hit and I don’t short winners.

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I guess it’s also worth remember that Alteryx is not based on a public cloud model which makes remote deployment quite a bit more challenging and it won’t benefit from the acceleration in public cloud models as a result of the virus.

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Alteryx users just need to install the software on their computer and with a working license are able to use the software is very seamless.

So why is remote deployment more difficult? Can see “new enterprise customer” wins slowing down but that idea probably applies for a lot of our Companies for the next Q.

I’m not saying it’s a big thing. But it is incrementally more challenging to install and maintain the software yourself. Especially when in-person resources are much more scarce.

I guess it’s also worth remember that Alteryx is not based on a public cloud model which makes remote deployment quite a bit more challenging

The flip side to which is that a developer just needs a license on his or her home PC to do development as long as the data is available in the cloud. Yes, there is a potential problem with access to data which is not on the cloud, but there are solutions like VPNs to provide that.

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I guess it’s also worth remember that Alteryx is not based on a public cloud model which makes remote deployment quite a bit more challenging.

I will present the “bull” side to this argument. My daughter is a “citizen data analyst” for a large multinational consulting firm that has more than 70 offices and more than 5,000 employees worldwide. She has relocated from her urban high rise apartment to our suburban home during these past few weeks of quarantining. She has been deep into the WFH routine and has been putting in 60 hours/week with the various teams she is on and supports from a data analysis standpoint. She works exclusively in Alteryx and has not experienced any disruption to her work routine or changes to her productivity using Alteryx and no issues accessing data sets.

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I think the comment was about “deploying” or probably about installing on a computer being more difficult these days because it’s not on the cloud. This too is not an issue. Businesses do not go around with a bunch of disks physically loading software on a computer. This is all remotely installed anyways.

The cloud really has nothing to do with where the user may be, but where the software is stored, that’s all. Either on the desktop itself installed remotely or on a server.

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I think the comment was about “deploying” or probably about installing on a computer being more difficult these days because it’s not on the cloud. This too is not an issue. Businesses do not go around with a bunch of disks physically loading software on a computer. This is all remotely installed anyways.

The cloud really has nothing to do with where the user may be, but where the software is stored, that’s all. Either on the desktop itself installed remotely or on a server.

This is an interesting nuance that is worth clarifying. Why do we care whether something is truly ‘cloud’ software or not? What advantages does it give us over ‘deploying’ application code to desktops and laptops? Hopefully I can demystify this a little…

The big difference between the two models is that when you are developing an application that is served up from one central instance ‘in the cloud’, you only have one instance to update. Whenever you develop a new feature, you only have to roll it out to one place and then every user instantly has access to the new features. Think about any website or application you access through your browser as an example.

Contrast that to desktop software, which has to be updated on every machine it’s installed on in order to get the latest features. The ‘latest features’ might not sound like that big of a deal, new features are new innovations. The faster a company can get functionality into the hands of their users, the faster they can respond to market needs, security vulnerabilities etc.

Now, having software installed on devices doesn’t necessarily mean that it’s going to be that much slower to bring new changes to market, but it’s a lot harder to get right. Apple for example is very good at it. New versions of their iOS software usually get very quick market update because of the fantastic software update infrastructure they have. Android on the other hand is very slow to get new updates out to their user base for a number of reasons (which are a little OT). Some manufacturers have been a year or more behind in getting those new updates out.

So, back to AYX. Is it bad that they’re device-based rather than cloud-based? The only way to answer that is to find out what proportion of their users are on the latest versions of their software. How long does a released feature take to reach the vast majority of their users? If their update infrastructure is poor then it will take longer and as a result their pace of innovation will be slow. I haven’t managed to find that piece of information specifically but I did find this page on their support website:

https://community.alteryx.com/t5/Alteryx-Designer-Knowledge-…

They release a new version of their software four times a year and they support any release of their software for 18 months. This means people could (through choice, circumstance or negligence) lag behind the latest features by up to 18 months.

Four times a year is also pretty slow compared to what could be achieved if this were ‘cloud-based’. Oftentimes, SaaS companies are doing deployments of new features and fixes every day and are therefore able to respond to market demand very quickly.

What does this mean for our stock? If another player comes along that can do all that AYX does AND can deploy daily because they’re ‘cloud-based’ then they could have a big advantage. This is hardly make-or-break though and right now, there’s not much competition in sight so I don’t think we have too much to be worried about.

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Thanks bobbbino,Great post.

What if AYX wanted to transition to cloud based SW. In your opinion or anyone, how difficult would that be? We always hear that our SAAS companies were built from the ground up and were built for the cloud etc… And that other companies PANW for example just can’t compete with CRWD. I know it’s not an apples to apples but just an example. I have no idea whats it’s like to develop SW for the cloud.

I guess the other question is how much would it benefit AYX to even be cloud based. Would a cloud based competitor have an advantage that would really cut into AYX’s business? I don’t think near as much as a security company but sure there is some advantage…

Thanks, Chris.

What if AYX wanted to transition to cloud based SW. In your opinion or anyone, how difficult would that be?

We seem to go over this over and over and over again.

The data is where the data is - local, cloud, whatever. Put it where it makes the most sense in terms of cost, ease of access, and security.

The server is where you want it - local, cloud, whatever. Same considerations. If a significant part of the data is local only, then one often would put the server locally because one would not want to make such data accessible from outside. But, if all the data is in the cloud, put the server in the cloud.

The designer is on the PC in front of the analyst. It makes no sense for it to be anywhere else. He or she might store designs in the cloud, e.g., if they need to be available both from home and the office, but the software itself is going to be local.

SaaS is not a universal good. It makes sense for applications where there is a body of data and code shared by a group of people. It often does not make sense where each user is interacting with their own data.

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tamhas,

I agree the data is where the data, don’t see a problem with that. I was thinking more along the lines of what Bobbbino was explaining. Updates to AYX SW and the ability for customers to take advantage of that instantly which could potentially increase customer use acceleration and NRR or just answering customers needs in a changing environment instantly vs 4 times a yr for available updates. It’s clearly and advantage to have cloud based SW but for AYX I’m just not sure how much. So was just curious how painful it would be for them to switch to cloud based SW down the road if need be…

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Many programs on the desktop right now are updated remotely on a regular basis. Think of your anti-virus program that is likely updated weekly by the manufacturer. I would think Alteryx would figure out how to update all their users remotely, usually in the middle of the night.

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It’s possible that not being cloud based hurts the performance of AYX the stock more than it hurts the performance of Alteryx the company. Institutions are prone to invest in baskets of stocks and AYX does not fit directly into the SaaS basket.

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Updates to AYX SW and the ability for customers to take advantage of that instantly

Lots of locally installed software gets frequent updates. It really would be negatively useful to have the design tool remote.