After a brief hiatus last month to visit the Yorkshire Dales on holiday and securing a new job (woohoo!), we’re now back to regularly scheduled programming just as Q2 reporting season kicks off.

[Yorkshire Dales Image.jpeg] No sign of SNOW here

Though general market sentiment has remained poor since my last post, we’re starting to see some acknowledgement that in some cases prices had possibly been pushed too far to the downside. Netflix were the prime example last week: they reported a quarterly subscriber loss of 970,000 customers (their biggest ever) yet the stock has reacted positively in the last few days.

On the other hand with a recession looking more likely by the day, there aren’t many sectors in which to hide and tech is no exception. There were rare earnings misses for both Microsoft and Alphabet in recent days following a particularly horrible Q2 from Snap Inc last week (they issued a warning pre-earnings and still missed estimates as well as announcing a cut in its rate of hiring).

Zooming out a little further, June’s FOMC meeting resulted in a rise of 0.75% for the federal funds rate with no sign of slowing down going into today’s meeting (hot off the press: another 0.75% rise). The current level of global inflation is clearly one of the single biggest issues for central banks (not to mention governments) around the world but this line in a Bankrate article really underlined (to me, someone that didn’t live through the 80s, at least) the historical significance of the Fed’s actions:

If this comes to fruition (3.25-3.5% rate by the end of the year), it would mean the most rate hikes in a single year since the 1980s

The general story research tells us on this topic is that a high-inflationary environment is usually a bad one in which to own stocks but it’s still my view that if you’re committed to holding for the long-term, periods like this will come and go and fundamental business quality is of far greater importance. Speaking of:

Business Updates

After a largely solid round of business updates in May (nobody mention Upstart), those reporting at the start of June also turned in some surprisingly solid reports given all the macro noise.

MongoDB

Up first, Mongo reported alongside SentinelOne on June 1st. Atlas (their cloud-hosted offering) was once again the standout growth segment with management predicting this will become a far higher portion of revenue over time. Though the tone was largely positive, the mention of slowdown in european self-serve customers is something to keep an eye on, especially given the fact that guidance now bakes in the assumption that this spreads to enterprise customers.

Earnings Notes

  • Solid revenue growth of 57% with increasing non-gaap income.
  • Atlas growth continuing to plow along (82% YoY).
  • Healthy balance sheet with $1.8B in cash.
  • Atlas 60% of revs.
  • Ended quarter with > 35,200 customers.
  • Deal cycles in first quarter in line with normal patterns (find it slightly concerning that they’re addressing this at all).
  • Similar to Crowdstrike’s call, ‘mission critical’ is the buzz-phrase.
  • In past downturns, MDB have prioritised more essential use cases. Emphasis is on the flexibility of sales team.
  • Atlas business can be thought of as ‘portfolio of applications’. Growth driven by underlying demand for these apps. Growth of existing apps a bigger contributor than new adds.
  • Boots (UK) chose Atlas to power their order management system during the pandemic and is now expanding its use of MDB (search, analytics, mobile). Also new deal with Yodel.
  • Enterprise Advanced grew 30% YoY, sequential increase - indicates strength of adds.
  • Saw slower-than-normal expansion of self-serve and mid-market customers in Europe towards end of the quarter. Enterprise was typical.
  • 1,379 $100K+ ARR customers.
  • Gross margins of 75% driven by increased cloud efficiencies.
  • 6% operating margin - benefitted from timing of expenses which are now expected to occur later this year.
  • Some of largest S&M expenses in Q2, including MDB World.
  • Baked into guidance that reduced growth rate in lower end of the market spreads to all geographies and that enterprise offering will be impacted by macro - -$4-5M for Q2 revs and -$30-35M for FY23.
  • Seeing second order effects of macro slowdown i.e. reduced usage of apps built with MDB
  • More focussed on organic growth than M&A opportunities currently (‘potentially’ look at companies that accelerate the road-map).
  • Slower self-serve growth noticable in US by May, though EMEA stabilised.
  • Expect Atlas to become significant portion (90%+) of revs over time.
  • Still seeing migration projects from Oracle etc.
  • More downloads this year than the first 11 of the company’s history.
  • Didn’t see any impact from ‘next-gen cloud fintech companies’ (Coinbase mentioned)
  • Lots of emphasis on diversification of customers in response to ‘what if macro slows significantly’ questions.
  • Now on the console of both GCP and AWS - additive channels.

SentinelOne

SentinelOne has always been in an unfavourable spot as a public company, living in the shadow of its more mature and profitable bigger brother, Crowdstrike. As a result, I’ve often caught myself almost trying to find a reason to trim my position. Why would I own an endpoint security business when I already own another that’s 2 or 3 years down the road and has already proved itself to be a cash cow?

Alas, SentinelOne keep producing very enticing metrics. Is it as impressive as Crowdstrike was at the same level of turnover? No. It is however consistently reducing its losses each quarter whilst increasing net retention rate and gross margins. That’s enough to keep me interested for now but as the least profitable business in my portfolio, I’m not expecting the market will allow management much room for error in the current environment and will be keeping it on a short leash.

Earnings Notes

  • Nice up-tick in DBNRR to ath of 131%
  • Increase of around $40M in annual guidance due to inclusion of Attivo acquisition.
  • Gross margin guidance also revised upwards to ~70%
  • GMs hit new high of 68%.
  • Added record new customer numbers.
  • Cloud security was fastest growing product offering, followed by data retention and Ranger (network discovery).
  • Singularity XDR acheived 100% prevention, 100% attack detection in MITRE ATT&CK evaluation.
  • Platform represents ‘one of the largest operational implementations of AI in the real world’ (the sort of talk that after the Upstart experience, makes me wary).
  • Doubled headcount in the past year (as does this).
  • Vats Srivatsan joined as COO.
  • ARR growth of 110%. Customers with ARR >$100k grew 113%.
  • Cloud security grew 50% sequentially.
  • Offering identity security (Attivo) as part of Singularity platform.
  • SentinelLabs team discovered 2 Russian cyber campaigns that were launched in tandem with the invasion.
  • International now accounts for 33% of revenue (grew 129% YoY).
  • Long-term gross margin target of 75-80% or higher.
  • Dataset migrations now immaterial to GMs.
  • NG Operating margin -73% vs -127% in year-ago quarter…
  • Attivo revs won’t be broken out going forward.
  • Expect organic growth for Q2 of low-mid 90s%. Organic growth expectations for full year up from 80% to mid 80s.
  • Net new ARR for Q2 should be ~20% sequentially.
  • Expect to finish year with 70% GMs or above.
  • Extrapolating margin expansion suggests path to profitability in fiscal ‘25.
  • Avoids directly answering the ‘restate existing stock compensation’ for existing employees question but implication is no changes around sbc.
  • Often deployed side by side with endpoint competitors but win on cloud security. View cloud as ‘greenfield’.
  • Expect redesign of platform in the next 12 months away from bundles towards holistic XDR platform.
  • Seeing ‘wholesale’ movement away from Kapersky due to Russia. Represents opportunity.
  • Broadcom’s VMware acquisition represents opportunity for next-gen vendors. Have already started to ‘replace’ Carbon Black in a variety of situations. Have a platform that can automate transition from CB, so expect this to accelerate in future quarters.
  • Attivo revenue for the year should be ~$30M.
  • Calls out Microsoft when asked about bigger displacement opportunities.
  • Win rates at or above 70%. Seems an odd stat to call out when these are the competitive scenarios that they will want to be involved in. Why isn’t it higher?
  • Federal deal was multimillion-dollar.

Crowdstrike

Now onto the favourite son… there’s not a lot to say about Crowdstrike’s quarter. One of my notes reads: ‘Overall a solid beat and raise quarter with little cause for concern’, which is about as much as you can ask for at the moment. More below:

Earnings Notes

  • OpEx increased slightly as % of revenue to 60%.
  • Net income margin also dropped marginally to 15% from 16% last quarter.
  • Seeing standardisation on Falcon platform - 6+ and 7+ module customers grew > 100% YoY.
  • ARR growth of 61%, FCF margin of 32%.
  • Demand environment ‘more robust’ than this time last year as ‘cybersecurity is not discretionary’
  • Significantly expanded trial program in Q4, increasing modules available from 4 to 12. Led to record quarter for e-commerce engine.
  • 4, 5, 6, 7 module customers imcreased to 71%, 59%, 35% and 19% respectively. Retiring 4+ after this quarter.
  • Falcon Complete net new ARR reached new high as did public cloud deployments (accelerated QoQ).
  • Cloud Native Application Protection Platform (CNAPP) introduced during the quarter to accelerate threat hunting for cloud environments
  • Mention of Humio ‘momentum’ and ‘excitement’ but no solid numbers or records discussed.
  • Gross retention rate reached new ath.
  • 57%, 71% YoY growth in US, international respectively.
  • Record number of net new hires during quarter.
  • $2.15B on balance sheet.
  • Expect seasonality from Q1 to Q2 to be similar to 2021 but with increasing operating margin leverage - Q2 is generally lowest cash flow generation quarter of the year.
  • Mgmt excited about Identity Threat Detection, Horizon, and Cloud Workload Protection modules, which are growing faster than the overall business.
  • > $1M customers have about 7 modules on average. New customers land with average of 4.7, up from 4.3 the prior year.
  • Have had many lands in cloud-only organisations before cross-selling to internal network.
  • Commenting on VMware acquisition by Broadcom: ‘happy to see Carbon Black and VMware to be acquired.’ Had interest from Carbon Black customers after the acquisition. Indicates it could play out similarly to displacement of Symantec (bought by Broadcom in 2019).
  • Re-iterates long term operating margin goal of 20-22%.
  • Haven’t seen any slowdown in ‘willingness to buy security’. Number one risk factor for any BoD.
  • Still a long way to go in adding new customers. Compares to Symantec (300,000) vs current (18,000)
  • Given recent layoffs in private peers, CS will be ‘opportunistic’ in hiring + M&A.
  • Burt hits on the key point: security is ‘recession-resilient’.
  • Crowdstrike’s endpoint market share in 2019: 6.3%. Now at 12.6%

YTD return vs benchmarks

(Index source: Google Finance)

Portfolio Nasdaq S&P 500 FTSE 100
-52.29% -24.81% -17.09% -2.09%

Portfolio

Holding Ticker(s) Weighting (%)
🐶 Datadog DDOG 20.7
❄️ Snowflake SNOW 18.8
🦅 Crowdstrike CRWD 13.3
🕸 Cloudflare NET 13.3
🕹 TakeTwo TTWO 9.0
🔐 SentinelOne S 8.4
🔁 MongoDB MDB 7.8
🛍 Amazon AMZN 6.0
💰 Cash - 2.9

Adjustments

None! Much to the disappointment of my broker, I haven’t bought or sold a single stock over the past couple of months and with my new job starting soon, that’s a trend that may well continue for a week or two, although the act of writing this post has me itching to put that 3% cash position to work…

Closing Remarks

With the bulk of SaaS companies’ Q2 earnings reports sprinkled throughout August, next month should be intriguing as we find out whether weakness in the big tech giants filters through to their smaller counterparts. If the Q1 to Q2 slowdowns in Microsoft Azure (46% -> 40%) and Google Cloud (44% -> 36%) show up in AWS as part of Amazon’s report tomorrow, Datadog and Crowdstrike in particular will feel the knock-on effects.

My expectation for this earning’s season is that we’re likely to see very slight beats on the topline with guidance for the full year either held steady or slightly downgraded. In contrast to the past couple of years of beat-and-raise utopia I think there’s a good chance we see some earnings that miss the heavily sand-bagged guidance that we’ve come to expect from the SaaS sector. Fingers-crossed they won’t be my holdings…

Until next time!