Another manic month in the markets!

After global equities inexplicably bounced following the outbreak of war at the end of last month, the realities of a prolonged conflict and its potential effects on inflation set in at the start of March with the Nasdaq entering official bear market territory by the middle of the month.

Since then, despite the continued macro uncertainty, we’ve seen a significant rebound from the lows, with growth stocks in particular seeing strong gains. Why? On the 16th, the Federal Reserve announced its first rate increase in 3 years, with 6 more likely to come as the year progresses. The reaction to the news suggests market participants are now confident that the Fed has a strong plan to tackle out-of-control inflation and there’s now marginally less uncertainty on this front (see the interesting links section for a great opinion piece on why that confidence may be misplaced).

Business Updates

While a quiet month on the portfolio side of things, it’s been a very busy time in terms of business updates with Snowflake, Crowdstrike and SentinelOne all reporting Q4 earnings, a whirlwind of new product/partnership announcements, and several companies presenting at conferences, attempting to woo investors for the year ahead.

Snowflake

Q4 Earnings & Acquires Streamlit - March 2nd

Alongside their earnings release, Snowflake also announced the acquisition of Streamlit, a Python-based app-building platform, which will give users the ability to visualise data within the Snowflake itself (if you have a spare 60 seconds, this is a cool demonstration of their platform).

Below are some of the earnings highlights that stood out to me:

Earnings Notes

  • Acquiring Streamlit to accelerate data app development on Snowflake. 1.5M apps already built on Streamlit - paying $800M in cash and stock. Roughly 80% stock, 20% cash.
  • Huge increase in Remaining Performance Obligations (RPO) (46% QoQ, 99% YoY)
  • Net Revenue Retention (NRR) continues to grow. Now at record high, 178%, although CFO expects this between 150%-170% next year due to performance improvements.
  • Big improvement in FCF generation (guiding for 15% FCF FY23 at midpoint).
  • Slower-than-expected return to normal consumption in January. CFO says a more pronounced holiday effect was observed in January than usual.
  • 15 new $1M+ customers.
  • Q4 largest bookings quarter to date. Closed 7 $30+M contract value deals in the quarter, up from one in Q4 last year.
  • 5% Op margin, 27% adj. fcf margin. Expect outsized adjusted fcf in Q1.
  • Performance improvements range from between 10-20% per customer. Assumed $97M impact on FY23 revenue. Negatively impacts revenue in short term but leads customers to deploy more workloads in the long run.
  • Large account sales now vertical-focussed - conversations have gone from architecture and migrations to industry specific.
  • Co-sold $1.2B with cloud vendors for full year. This was an addition of $700M QoQ! Vast majority was AWS.
  • Expecting much higher contribution and partnership with Accenture going forward. Expect this and KPMG relationship to become very large over time.

JMP Securities Technology Conference - March 7th (Mike Scarpelli, CFO)

  • Built a number of engineering tools in-house and emphasised renegotiating cloud vendor contracts in order to expand margins.
  • Points out the difference in IPO ‘23 guide vs Q4 ‘23 guide: $1.68B then vs $1.9B now. Start of ‘22, guided to breakeven cashflow. $140M in reality.
  • Fairly scathing assessment of GCP - ‘Google is not an open platform.’ Don’t partner well vs AWS or Azure.
  • Highlights an example where a retailer with a loyalty program can, by sharing a ‘clean (data) zone’ with a streaming platform (i.e. Hulu), specifically target the overlap between platform subscribers and retail loyalty customers. No cookies, avoids GDPR.
  • 82% of revenue associated with AWS.
  • Streamlit wanted acquisition paid in stock -‘we wanted to give them cash.’

Morgan Stanley Conference - March 8th (Mike Scarpelli, CFO)

  • Only about 50 Snowflake customers have fully shutdown their legacy system. Indicates size of opportunity in terms of workloads still to be moved across.
  • Feel that every year there will be 5% revenue headwinds associated with performance improvements.
  • Says 80% of Snowflake and Databricks offerings don’t overlap. With ‘vast majority of customers we coexist’
  • Focussed on growth but it’s going to be efficient growth - will continue to show leverage every year because “don’t think we could spend the money faster and get the productivity we’d want to get out of it”

As if that wasn’t enough for one month, Snowflake then followed up with separate announcements of healthcare and retail data clouds, further highlighting the segmentation of their sales organisation in order to focus on specific verticals. On the retail side they also announced a deeper tie-in with AWS, offering Amazon Forecast data (used to forecast business outcomes with the help of machine-learning) within the aforementioned retail data cloud.

Crowdstrike

Q4 Earnings - March 9th

Crowdstrike’s Q4 earnings were about as run-of-the-mill as you could expect. 63% YoY revenue growth was good but not great, operating margins continue to show impressive leverage but guidance for next quarter indicates a continuing drop in performance (low 50s% YoY).

That was my initial impression. Then I looked at the guidance for next year. It suggests 49% growth, which given the SaaS tendency towards conservative estimates is very interesting. Compared against the 51% high-end guidance given for FY22 given in the year-ago quarter (which turned out at 66% in reality) this suggests management are expecting a very similar year of topline growth, despite the business as a whole now being significantly larger. With net income also due to grow faster than revenue, and the global backdrop strengthening the cybersecurity tailwind, 2022 looks set to be a good opportunity for the company.

Earnings highlights

  • Non-endpoint growth (IT hygiene, vulnerability mgmt, identity protection, log mgmt) now growing over 100% YoY and accounts for 17% of Q4 net new ARR.
  • Ending ARR through AWS grew >100% YoY in FY22. CS one of the top software partners for AWS by transaction volume. (Maybe I should just cut out the middle-man and buy Amazon shares…)
  • Landed a 7-figure deal with a financial services company, whose existing log management solution resulted in ‘prohibitive’ costs given the growth in their log data. Given Datadog have yet to make their cost management solution GA, could this allude to their displacement?
  • Cloudflare adopted Falcon Complete and Horizon.
  • 82% increase in ransomware-related data leaks in 2021.
  • 30% FCF margin for 2nd year in a row. Plan is for this to be maintained.
  • DBNRR 123.9% by end of year.
  • Excluding IP transfer tax related to Humio acquisition, FCF would have been 46% of revenue!!
  • More to come on the CISA deal - perhaps this is a factor in FY guidance?
  • Some Humio wins are not security related. Simply observability - confirmation that they’re competing directly with DDOG.
  • Now have over 50% of F500 customers.

SentinelOne

Q4 Earnings & Acquires Attivo Networks - March 15th

If Crowdstrike is the cyber-security industry stalwart with the battle scars to prove it, SentinelOne is the scrappy new recruit attempting to follow in its path. It’s following the Crowdstrike playbook closely (even when it comes to acquisitions) and is delivering growth in spades but the jury is still out as to whether it will have enough operating leverage in the long-term to reward share-holders.

Their Q4 results convinced me to leave my relatively small position alone for now but I think there is some truth to a recent Barclays note that stated ‘there was no CRWD when CRWD was in its hyperbolic growth stage’. SentinelOne is going to have its work cut out to achieve the same level of success.

Earnings highlights

  • Maintained triple digit revenue growth (120% YoY) and top-end guide of 80% for FY ‘22 is very strong.
  • Massive YoY improvement in FCF and continuing to reduce operating losses.
  • Attivo Networks acquisition announced. Gives the S1 platform Identity Threat Detection and Response. Seemingly directly competes with the Identity module Crowdstrike built on top of their Pre-empt acquisition
  • Attivo acquisition is $617M cash & stock. Not factored into guidance but expect deal to close in Q1. Management then explicitly mention expected Attivo ARR of $40M for the full year. i.e expect 100+% (non-organic) growth.
  • Gross Margins expanded 12% YoY, operating margin improved 38% for full year while doubling total workforce. Further margin improvement planned in 2022. Expecting high 60s by end of 2022.
  • Used previous acquisition, Scalyr, to build DataSet - data platform built for petabyte scale. Seems to compete with CRWD’s Humio.
  • Remote Script Orchestration (newest endpoint mgmnt module) achieved fastest ramp of any module in S1 history - used by incident response partners.
  • International revenue 31% of revs, grew 140%.
  • Operating margin still concerning at -66% but very slowly trending towards profitability.
  • Gross margin impact on migrating customers to Dataset was around 4%.

Datadog

Morgan Stanley Conference - March 8th (Olivier Pomel, CEO, David Obstler, CFO)

  • See DevSecOps as an emerging trend in a similar way to DevOps around the time of the company founding in 2010.
  • There are not enough software engineers for hire - it’s getting worse. Each individual engineer is growing in importance and requires more tooling.
  • Pomel thinks this will lead to more buying versus building in future, as engineers are directed at areas where businesses can differentiate themselves rather than building tooling internally.
  • In scaling the sales team, the constraint is the ability to hire rather than the market.
  • Unbundling allows each individual product to prove its worth. Tells management which products are being adopted, have they got the price right etc.
  • Seeing adoption of security products with a unified salesforce but don’t rule out setting up a specialised team in future.

Cloudflare

Morgan Stanley Conference - March 9th (Thomas Seifert, CFO)

  • Covid was if anything a headwind to business, at least initially. Traffic went up 60% - as it’s a SaaS model, no ability to pass on those costs to customers.
  • More than 30 Ukranian government sites now on Cloudflare network.
  • Partnered with Crowdstrike and Ping to offer free service to critical enterprises for next few months in light of global threat.
  • They’ve been struggling with forecasting a TAM for Workers as the numbers get ‘awfully big, awfully fast’.
  • See significant momentum in Workers use cases around data sovereignty and privacy.
  • Traction for R2 is ‘overwhelming’. More than 9,000 customers signed up to private beta.
  • Don’t see R2 having impact on long-term margins

Cloudflare held their Security Week for 2022 throughout March and in typical Cloudflare fasion announced a boatload of new products. I’d be impressed if there’s another public company out there that has a more impressive rate of execution (or communicates it as well to investors)!

Coinbase

Morgan Stanley Conference - March 9th (Brian Armstrong, CEO, Alesia Haas, CFO)

  • Alesia re-affirms short-term uncertainty of 2022 outlook highlighted in Q4 letter.
  • Point made that 5 years ago ‘where is the use case’ was commonly heard. Now there’s DeFi, DAOs, NFTs. Armstrong says this reduces the chance of future crypto winters.
  • Plan to hire 6,000 employees this year (addition of ~1.6x their current headcount)
  • Re NFTs, “Why isn’t every single piece of digital content out there something that people could own?” - sounds like the capitalisation of everything, almost a Black Mirror episode…

Airbnb

Morgan Stanley Conference - March 10th (Brian Chesky, CEO)

  • An idea to book an Airbnb in Ukraine without the intention of staying there (to help house Ukrainian refugees went viral. Within 2 nights, people had booked 60,000 nights and sent $2M.
  • Operations suspended in Russia and Belarus.
  • ‘Travel is incredibly aspirational. When we get married, we travel. When we retire, we travel. We graduate, we travel, all these incredible experiences. And so why do we sell it like it’s a casino product?’ I’m reminded of this tweet. Chesky’s story-telling is very compelling.
  • Looking at how they can provide the best customer service guarantee of anyone in the travel space - expect more in coming months
  • Pre-pandemic EBITDA was ~-5%. Now at 27%.
  • Marketing will generally be focussed on new products rather than the brand. Contrasts with online travel agencies (OTAs) who are spending more on paid search. 90% of traffic still unpaid or direct.
  • Hiring 00s rather than 000s in 2022.
  • 70% of guests that use the platform leave a review at the end of the stay.

Upstart

JMP Securities Conference - March 8th (Dave Girouard, CEO)

  • “40 plus banks and credit unions in our platform” Up from 25 reported in Q2 and since the conference have publically announced 2 new credit unions, meaning in just over 2 quarters (~7 months) Upstart has nearly doubled the number of lenders on its platform.
  • After Covid stimulus, default rates have now increased to the point where they are close to pre-covid levels.
  • “The first quarter is a trough of demand. It’s usually our seasonally slowest quarter”
  • Auto retail product now in ~400-500 dealerships (up from 100 last year) - full market penetration at ~20,000.

Morgan Stanley Conference - March 9th (Dave Girouard, CEO)

  • ‘Generally what you see is that we can double or even triple approval rates at similar loss rates.’
  • ‘We don’t see a lot of evidence of other building similar models’.
  • Rest largely a repeat of the JMP conference.
  • New directive from Biden administration - 60 days for each federal agency to submit a plan to move to zero trust and 2 years to complete that.

Zscaler

Berenberg Conference - March 2nd (Jay Chaudry, CEO, Remo Canessa, CFO)

  • Chaudry almost makes Zscaler sound like the Upstart of cybersecurity - ‘we check the risk score, then we connect’ (connecting users and applications via the Zscaler Zero Trust Exchange).
  • In installed base, if selling existing products ‘we can take our ARR by 6x’ without selling to new customers.
  • More investment into lower-spend customers going forward.

JMP Securities Conference - March 8th (Jay Chaudry, CEO, Remo Canessa, CFO)

  • Strong synergies with the Crowdstrike sales team.
  • After passing $1B ARR, goal now is $5B.
  • The confidence when discussing the level of ease to reach 20% operating margin almost comes across as arrogant.
  • ZDX growing faster than ZPA.

Announced improvements to its Security Service Edge framework - March 22nd

YTD return vs benchmarks

(Index source: Koyfin)

Portfolio Nasdaq S&P 500 FTSE 100
-17.41% -8.32% -4.29% 1.48%

Portfolio

Holding Ticker(s) Weighting (%)
🐶 Datadog DDOG 22.5
❄️ Snowflake SNOW 21.1
🦅 Crowdstrike CRWD 13.8
💸 Upstart UPST 10.0
🕸 Cloudflare NET 6.9
🗂 Monday.com MNDY 6.7
🪙 Coinbase COIN 4.9
🏡 Airbnb ABNB 4.9
🛑 Zscaler ZS 4.8
🔐 SentinelOne S 3.8
💰 Cash - 0.3

Adjustments

On the portfolio management side of things, there’s been little action this month with only 2 moves - increasing both Snowflake and Cloudflare positions.

The Snowflake decision was a fairly simple one to make. They had a quarter that came in lighter than expected on revenue and (judging from the after-market reaction) far lighter than expected on full-year guidance for the next financial year, implying 67% product revenue growth at the high-end versus 106% for 2021 (fiscal 2022).

However the earnings call offered vastly more colour on Q4 revenue - the platform enhancements rolled out during the quarter improved efficiency more than expected, lowering credit consumption. Basically, they are sacrificing a small amount of growth today for increased demand and more durable future growth. That’s the sort of revenue slowdown I’m completely ok with (if you can call a decrease to 101% YoY growth a slowdown…)

Regarding full year guidance, with all due respect to CFO, Mike Scarpelli, why should I believe this year’s 67% guide any more than last year’s 84% (which in reality clocked in at 106%)? It’s the usual SaaS sandbagging game.

Anyway, the market hated the quarter and sent the stock down 30% after hours but unfortunately for me, realised it wasn’t all that bad by the market open the following day, at which point I was able to pick up shares at only a 10% discount. Still, could be worse!

Cloudflare was a small buy just because it seemed unfairly beaten down, although this was back at the start of March with the stock price now looking distinctly rosier (and the valuation looking distinctly steep).

Closing Remarks

With earnings season now concluded and so many company announcements, I’m expecting next month to be much quieter on the business updates front, while there may be a few changes in portfolio composition due to the start of a new UK tax year.

Until next time!