Okta is 7% of our portfolio and ESTC is around 1.5%
|Aug 29|| 4|
Two strong reports. Here is a quick summary, followed by my earnings notes on Okta, then Elastic.
Okta was near all-time highs going into the report and as of Thursday August 29 at 7:09EST the stock is relatively flat after the report. That response makes sense to me.
Elastic was trading 15% - 20% below its all-time high and it’s currently up 12% in pre-market trading. This type of response also makes sense given the fact it had traded down without any apparent business related reason.
I actually added more to our Elastic position yesterday before earnings because it was such a small position and appeared to be on sale for no good reason. This could be looked at as “timing” and maybe it is to some extent but I believed in the business and took the opportunity to add before earnings knowing I would likely add more if earnings we strong whether to stock went up or down.
And that’s my plan once we have new funds to invest. Continue adding to ESTC and build it up to a medium-sized position (around 5% of our portfolio).
Okta Q2 Fiscal Year (FY) 2020 Report
First, let’s review Q1 FY20: total revenue grew 50% year-over-year (YoY), subscription revenue grew 52% YoY, customers spending over $100k/yr grew 53%, and dollar-based net retention rate (DBNER) for the trailing 12 month period was 119% (a one point sequential decrease).
Now, let’s look at Q2FY20 (my comments are below each set of bullet points)
Q2 revenue grew 49% year-over-year; subscription revenue grew 51% year-over-year.
GAAP operating margin improved 10 percentage points year-over-year; Non-GAAP operating margin improved 13 percentage points year-over-year
We’re seeing revenue begin to slightly slow which is normal as companies grow larger. That’s known as “the law of large numbers”. But more importantly, the company is operating more efficiently as they grow large with GAAP and Non-GAAP operating margins improving far more than revenue is slowing on a percentage basis.
Cash Flow: Net cash used in operations was $1.1 million, or 0.8% of total revenue, compared to net cash used in operations of $5.3 million, or 5.6% of total revenue, in the second quarter of fiscal 2019. Free cash flow was negative $4.3 million, or 3.1% of total revenue, compared to negative $11.3 million, or 12.0% of total revenue, in the second quarter of fiscal 2019.
Cash, cash equivalents, and short-term investments were $557.5 million as of July 31, 2019.
This is exactly what we want to see. The company only “burnt” $4.3 million (3.1% of revenue) with a cash equivalent position of $557 million which gives them a massive cushion.
Remaining Performance Obligation (RPO): Total RPO was $913.6 million, an increase of 68% year-over-year. Current RPO, which is RPO expected to be recognized over the next 12 months, grew 52% compared to the second quarter of fiscal 2019, and represented 50% of total RPO.
This RPO growth is fantastic. Okta’s Chief Financial Officer (CFO) Bill Losch summarized it much better then I can on the conference call:
The exceptional growth in total RPO reflects the success we've been experiencing with large enterprise customers, where the contracts tend to be much larger in total contract value and longer in length up to five years in some cases. As we continue to see success with winning the world's largest organizations, we expect the average contract size and term length to trend upwards over time. Earn RPO, which represent subscription revenue, we expect to recognize over the next 12 months also experienced strong growth of 52% to $461 million. As I mentioned last quarter, RPO should be viewed as an additional metric to gauge our performance in the quarter. Year-over-year growth in current RPO is the more meaningful metric when viewed along with subscription revenue and billings growth.
Non-GAAP subscription gross margin was 82.6% (up 2.3%) and total gross margin was 77.2% (up 3.9%).
Non-GAAP Total operating expenses grew 34% which included 40% headcount growth
Non-GAAP Operating loss was down to $10million (negative 7%) vs negative 20% last year. This was better than the company expected.
To summarize, the quarter was better than management expected and management raised full-year guidance and increased the full-year profitability outlook.
Notes from Q&A: (paraphrased and my emphasis added in bold)
Q: Competitive environment?
A: Very good at landing deals when company is transitioning to the cloud and Okta is very differentiated from other solutions because they were built “cloud-first” (this is a recurring theme from many of our companies)
Q: Concern of a slowdown?
A: Not seeing those types of things. We’re seeing very strong macro demand for our product.
Q: Could you help us square maybe billings growth came in around 42%, current RPO and subscription were above 50% year-on-year. Is that just duration? I know that there was some early renewals in Q1 as well, if you could help us sort of understand the puts and takes there?
A: RPO is a very meaningful metric when you view it with billings growth. Our current RPO did grow 52% and the reason we think it's a meaningful metric in conjunction with looking at billings is really the reasons you just said, which is RPO, current RPO really eliminates some of that timing that you'll see with invoices, invoice timing and invoice direction and actually is a good metric to look in conjunction with billings because it eliminates that type of timing that we did see over the Q1, Q2 period.
Q: How long does it take to ramp up new hires to full productivity?
A: With our success, we’re getting better and better quality of talent. We are attracting the quality of sales people we weren’t able to 24 months ago. (remember our thesis: Great companies continue getting better. Attracting the best talent is key to that idea)
Q: Deceleration in dollar-based net retention?
A: Impacted by larger initial deal sizes. RPO growth of 68% indicates longer term and bigger deals. Average contract size of top 25 contracts booked in Q2 doubled compared to Q2 last year. (I bolded this whole question because it was probably one of the most important parts of the entire release/call)
Elastic Q1 Fiscal Year 2020 Report
Too lazy to do a Q4 FY19 review. This was a great quarter with one area to keep an eye on which is non-GAAP operating margin at -27%. Sales and Marketing expenses and Research and Development expenses continued to be 52% of revenue and 33% of revenue respectively. If we don’t see these metrics come down as a % of revenue over time, I will be concerned.
Total revenue was $89.7 million, an increase of 58% year-over-year, or 62% on a constant currency basis.
Subscription revenue grew 60% YoY and represented 92% of total revenue.
Total subscription customer count was over 8,800 (increase of 700 since last quarter).
Total customer count with ACV greater than $100,000 was over 475 (an increase of 35 from last quarter).
Revenue from SaaS products grew 71% YoY
Net Expansion Rate continued to be greater than 130%.
Total gross margin 73.3%, subscription gross margin 80.2% (subscription revenue is growing slightly faster than total revenue so total gross margin should improve slightly over time)
Deferred revenue was $169.8 million, an increase of 64% year-over-year.
GAAP operating loss was $42.3 million; GAAP operating margin was -47%.
Non-GAAP operating loss was $24.3 million; non-GAAP operating margin was -27%.
Operating cash flow was -$1.7 million with free cash flow of -$3.3 million.
Cash and cash equivalents were $315.2 million as of July 31, 2019.
Notes from Q&A
Q: One of the hyper cloud guys, obviously, tried to offer like its own open-source, kind of save or whatever around that. Do you see that in the market? Do you see any impact there?
A: There's an effort, one of the most recent one we've seen it for many years since the company started, there's an effort by AWS to create something called an Open Distro, which repackages our open-source -- our pure open-source solution together with a few additional plug-ins. We haven't seen that really affect any of our metrics when it comes to downloads, community adoption or as you see, our sales numbers. Actually, I'm very encouraged about -- and what I mentioned on the call about our investments in our proprietary tier, especially the free one. We also opened the code and folded it to a single distribution, which I'm even more excited about it. And, obviously, that helps us significantly invest in this area and increase our competitive mode versus certain cloud providers.
Austin here: I copied and pasted this fully question and answer because it gets at Amazon or AWS (or anyone else) competing with our companies that are hyper-focused on their markets. We have seen it with Shopify, Zoom, MongoDB, Elastic, etc. This certainly can be a threat but there is often a lot of fear as soon as rumor comes out about larger companies competing with our smaller ones. I prefer to wait until we see it impact their businesses before letting it impact my investing.
Q: How are you managing the implications to gross margins? And do you feel like the mix -- the change in the mix of the business has us all modeling the gross margin trajectory accurately? Or are there other puts and takes? And that's it for me. Thank you.
A: I think as we continue to invest in the SaaS business, you will continue to see a near-term headwind to gross margin, and that's just reflective of the cost associated with SaaS and as we make investments in the SaaS business as fixed cost that we then improve the gross margin on as we scale. There's a couple of other drivers there of course, as we get more efficient than the professional services side, then that drives us to scale.
And then the SaaS business itself, once that starts to become a bit more profitable, will be a bit more of a tailwind. So in the near term, I think there is a continuing headwind and we're comfortable with where we are right now. The plan is playing out as we expected it would.
Q: Customers have preferred your pricing model versus the competition for a long time. Recently, Splunk has described some upcoming changes toward all-you-can-eat and I think core-based pricing, and I think we'll be learning more. I think Shay might have mentioned something in passing about a simplified or unified pricing model at least for a part of your products.
What is your view of the pricing environment currently and just your ability to provide this superior value prop which you've been doing so well?
A: If I had to summarize it in a short sentence, so I'll just say our strategy is working nicely. We've had the unified pricing model, which is really a node-based or a capacity-based pricing model, for quite some time now, and it allows us to provide the same pricing model to customers regardless of the use case. It's really compelling from the standpoint of logging as well.
And we all know that from a competitive standpoint, the market logging in particular has been ripe for disruption and there's been some level of dissatisfaction out there among the customer base in terms of the alternatives that they've had in the past. And so that's playing nicely to our advantage. From our perspective, we continue to believe that we deliver enormous value to the customer. So it's not just about being a low-cost provider, if you will.
In fact, if anything, we believe that in many instances, we can actually win transactions at significantly higher levels of aggregate realization because that's the level of value that we deliver to the customer. In terms of recent trends, what we've seen, I've not seen any particular shifts in terms of our own business, in terms of deal sizes or discounting trends or anything else that I'd highlighted. It's just more of the same. Our strategy is working nicely and we're just continuing to execute to it.
Gotta start the day with the kiddos (that’s what you get for following a free newsletter 😃 ). Elastics release notes and calls are pretty detailed. They talk a lot about their products which are pretty tech heavy. I admittedly don’t understand all the jargon, but we don’t have too. If the business continues to operate strongly and they keep expenses in check, this could be a very rewarding company to own for multiple years
Our monthly review for August will be out tomorrow or Saturday. I’ll share updated MTD, YTD, and since inception performance, as well as notable current thoughts on our companies.
MongoDB and Slack report earnings on September 4th. We own both companies we own. MDB is a 14% position and Slack is a 1% position
Sarah’s (spouse) Roll-over IRA is now funded so we will be investing that cash over the next few months into individual stocks. We’re going to do it together and might even record some podcasts or something to record her journey learning about investing and track the results of her portfolio to help inspire other couples to invest together.
Thank you all so much for reading and helping to support my goal of making investing accessible to anyone with an internet connection. We are now at 742 total subscribers and 39 paid subscribers. If you enjoy this please hit the ❤️ at the top of the page (this helps others find us on substack.com), share with friends, and/or start a paid subscription for $5/month or $50/year.