Shipping Port Backlogs & DOCN, APPS, EXAS, and NARI Conference Notes
Important updates from Digital Ocean, Digital Turbine, Exact Sciences, and Inari Medical
First thing’s first… should we keep the above font for the index each week? Let me know by commenting or replying to this email.
Second, what is this newsletter? Great question…it has changed a lot (my bad). For now, I’m committing to providing a weekly review of the events that matter for the Founder-led/tech companies I follow. Quick disclaimer, I will talk about non-Founder-led companies…but I invest with a Founder’s mentality in companies that have the traits of some of the best Founder-led companies in history.
This isn’t going to be a curated list of news headlines about the companies everyone is talking about.
It will be my notes about the things that truly matter for the companies I follow each week. I’ll also provide longer-form analysis of important industries, companies, and big events. As an example, there is a lot of important stuff going on in the adtech world so I plan to go deeper there. Digital Turbine, Magnite, and Outbrain are three innovators in that space, I intend to do deep dives on those three companies.
I can’t commit to a regularly scheduled deep dive because I have a full-time job and I don’t want to sacrifice quality to get a “deep-dive” sent out each week. I will publish those when I think they deserve your time.
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Speaking of deserve your time. Let’s get to this week’s important events. This week has more events than usual because I’m going back to September 15th.
Shipping Port Backlogs
This has been going on for a while now. Headlines about chip shortages and supply chain issues have been all over the news. I highly recommend following Ryan Petersen because he’s the CEO of Flexport a logistics company that sits right at the heart of the industry.
Ryan was on CNBC on September 22nd and shared:
Roughly 20% of cargo ships on the Pacific Ocean are idle/waiting to unload.
Current backlogs will likely cause many companies to miss Christmas demand.
Shipping prices are extremely high. It usually costs $3,000 to ship a container from Asia to the United States. Right now it costs roughly $15,000 and that does not guarantee loading. To guarantee loading, it costs roughly $20,000.
Ryan believes this is a national security concern and the government may have to step in to do something like provide assistance to get major U.S. ports to run 24/7 to clear the backlog.
Flexport is struggling to meet customer demand. It’s hard for them to get any extra capacity. Flexport grew volumes 40% YoY and had to turn away volume that would have allowed them to grow more like 70%.
My takeaways:
This is why I generally favor companies with asset and inventory-light business models. When/if I own companies that depend heavily on physical logistics, I prefer them to source mostly from their home country or develop their products, chips, etc in house.
This is really unfortunate for a lot of companies. Right now, there is a lot of demand across the board. However, they can’t meet customer demand and it’s likely much of this will simply be lost revenue because customers may not be looking for the same products in 6+ months when this all gets sorted out.
It feels like Etsy is positioned to benefit because their model relies on individual sellers creating and selling hand-made products which generally don’t need to be shipped overseas.
Digital Ocean (DOCN) at Jefferies Software Conference
Comments from CEO Yancey Spruill and CFO Bill Sorenson:
We help early-stage businesses with the right set of infrastructure and the right set of applications on top of the infrastructure that enables them to test an idea, build a business and grow and scale
It's a big opportunity, there are 30 million software developers in the world, going to 50 million. There are about 100 million small/medium-sized businesses in the world today growing at 14 million new businesses net a year. So huge pool of opportunity, $50 billion in spend, and so that's what excites me.
Digital Ocean focuses on four key things that Yancey believes differentiate them from larger competition (AWS, Azure, Google Cloud, etc)
Simplicity & price transparency with no big bulky, complex contracts
Community: over 35,000 tutorials online that teach people to code which attracts 5 million + people per month to the website leading to tens of thousands of paying customers
Customer support: $5/month & $500k month customers can speak to a human being to get individualized support.
Commitment to open-source software: integration with open-source software tools makes Digital Ocean easy to use for developers.
In 2019, 100% of revenue was from infrastructure. Today, 90% of revenue is from infrastructure and 10% is from platform-as-a-service (PaaS) which consists of managed database services, serverless capabilities to manage and deploy code, a Kubernetes marketplace, etc. Yancey sees infrastructure being 80% and PaaS revenue growing to 20% as the company grows from $400M ARR to over $1B in the next “many” years.
Example customer journey moving from just infrastructure to needing PaaS services: as you start to launch into a business and go from 0 customers to 100 or 1,000, the whiteboard or an Excel spreadsheet is not good enough to manage your customer analytics and targeting; you need a database solution. As you go from 2 people with an idea to 20, 40, 50, 60 people/teams of engineers, you need deployment software tools. That's what serverless and Kubernetes is about. You need security. You need other applications that help you with productivity. We have that in our marketplace.
We bought Nimbella, we announced 2 weeks ago. Nimbella as a service is one of the top five requested products from our customers. So we have an aspect to our product innovation process we call “voice of the customer” where we aggregate support ticket data, sales data, data in our self-serve process and feed that into the prioritization for new features and new products on the platform.
Growth of PaaS drives the growth of infrastructure which leads to higher average revenue per user (ARPU) which is up roughly 25% YoY.
On the path to $1B in revenue by 2024 and $2B by 2026: “ARPU growing at 20% plus; net dollar retention low teens, although it was improving during the quarter, so call it mid-teens; and customer growth was 9%. We think we could do a little better. But just those three: 9% customer growth, low teens net dollar retention, and 20%-plus ARPU, that's a mid-30s grower. And so if you just play that out, we'd be north of $1 billion in 2024. Frankly at that growth rate, we'd be $2 billion in 2026. So that's the roadmap”
Virtually all of the churn that happens with customers on our platform is in the first 12 months. In other words, if a customer makes it 300 days, 365, they never leave. What they do is they go multi-cloud. As a good example, people have grown and scaled their infrastructure with us for many years but wanted a serverless option functions as a service, and they've been using AWS for that. One of the top five asks for customers on our platform was to add serverless function as a service. We have now added it through Nimbella. Another example, a lot of our customers run infrastructure on DigitalOcean but wanted Mongo as a database engine. We had Redis, PostgreS, MySQL, didn't have Mongo. Now we have Mongo, and we are seeing a lot of uplift.
Our long-term model is really to be north of 40% from an adjusted EBITDA perspective. We think there's a lot of efficiencies we can still yield from the infrastructure, and we also think there's opportunities in terms of the customers. At that point, we would be expecting to generate free cash flow north of 20%. And I think that's one of the things that's most misunderstood about the business. We are indeed capital-intensive, but yet we are incredibly efficient with that capital. We make investments in servers that effectively are paying us back in less than 9 months that we run for another 5 to 6 years.
My Takeaways:
Monitoring website visitors + conversion rate if the company officially shares that will be an important data point for investors.
The Nimbella acquisition example is very similar to Twilio’s approach with its Engagement Cloud (off the top of my head) that has led to many of Twilio’s product innovations. This is common with cloud software these days, but the companies that can execute best will have the edge.
I think it’s important for investors to not automatically assume the numbers laid out in Yancey’s roadmap to $2B in revenue by 2026 will happen. Economic downturns and competition or lack of execution could derail that…so we will monitor how the business is performing (as always).
Yancey coming in as CEO and Bill coming in as CFO have transitioned Digital Ocean from the minor leagues to the major leagues. They are being more efficient with the business and analyzing customer data to drive innovation which has accelerated ARPU, net dollar retention, and new customer growth.
The stock is up 68% in 3-months and trading at a PS ratio of 20 which shows investors are expecting strong growth for a number of years.
Digital Turbine (APPS) at Jefferies Software Conference
Comments from CEO Bill Stone:
We are currently a $1 billion annual revenue company. We've put our Ignite software on 700 million devices with AdColony and Fyber's -- footprint of their technology inside applications; they are touching 1.8 billion users a month. So we're able to operate this business at global scale, which is important if we are going to go attack this market.
Secular tailwinds behind us: Apps are part of our lives. The average person looks at their phone 100 to 200 times a day. For better or for worse, we as humans are now spending one month of our lives right now inside applications. And as we've seen for the last 200 years, media dollars are following those eyeballs and eyeballs are inside mobile and so there's just this great market growth
We think about this from a market opportunity perspective, it's a $300 billion-plus market. It's going to $500 billion market over the next few years
We like to think about the market is in terms of when people want to get new customers in the app economy we call that advertising paid and then the advertising that those app publishers will make during the advertising. So you can think about apps like Candy Crush or Pandora. They will pay to get users. Once they get those users, they will offer whatever experience that is a game or streaming audio or whatever it happens to be, and then they will make advertising off that. So if you think about spending a dollar of advertising that they will pay to get users, they will turn around and make $3 or $4 in advertising from those users over the life of the device.
3 key growth drivers for Digital Turbine. First is how do we add more devices to our footprint. Second is how do we add more products to that. Third is how do we add more media partners to that (advertisers and brands or publishers of apps).
We're only less than 20% penetrated against the broader Android market right now. So we've got a lot of room to grow to hit our head on the ceiling despite the fact we've probably added more devices in the last 12 months than iPhones have been sold globally. We've activated more devices in the last quarter than I think a company like Roku has activated in the history of their company. And so this scale is really important but a lot of room to go.
That doesn't include other device types, whether that's connected televisions, wearables, automobiles and those types of things that we absolutely see opportunities for expansion in, and also doesn't include other operating systems so whether that's iOS or Kai or other operating systems that may be out in the marketplace right now. We see a lot of opportunity to continue to grow devices.
A few years ago, and 70% - 80% of our revenues would come from Dynamic Installs (when a user first activates their phone). That business has been great, growing 50% + a year. Now it's in the 20% - 30% range of our total revenues because of the diversification from our acquisitions of Fyber, AdColony, and our new products that earn revenue over the life of a user’s device (not just the first day).
About a year ago, we really cracked the code on our proprietary SignleTap product. We took it from a $1 million a quarter product to a $1 million a month product to a $1 million a week in revenue. Today, it's rapidly approaching a nine-figure annualized business for us. Now as we announced on our last earnings call, we are going to be expanding our relationship with Samsung to be able to do this now globally. We think that's a real nice catalyst to continue growth with this product. And so we're really excited about the prospects for this as being a growth catalyst for our business.
3 things that make us unique in the marketplace. Number one is this access to on-device. Once we are on that device and an operator or OEM partner decides to put us on their device, that's not something where we are competing with anybody else for that specific thing. It allows the advertiser direct access to the device without going through a lot of hoops. Second is our transparency and independence. We're not a business like many that may have game studios or other competing interests from some of the advertisers and publishers that they work with. So we can offer full independence and transparency to our publishers. Third is really being able to offer one-stop-shop to app publishers and brand advertisers we think is really important and compelling versus having to engage in a multitude of solutions to get their products to market.
Comment on Apple Vs Epic ruling and overall advertising regulatory situation in the U.S. and the EU right now: “at least today is there aren't any headwinds. And I get a lot of questions from investors around some of these things being headwinds versus tailwinds.”
My Takeaways:
There wasn’t much “new” information in this presentation, but what I noticed is that Bill is getting better at describing his strategic vision for the acquisitions and his vision moving forward (both verbally and in their presentation). I believe analysts have been a bit confused/hesitant because of the acquisitions and providing clarity + showing execution will help Digital Turbine the company (and the stock).
They appear to be positioned very well to benefit from the growth of mobile advertising and potential regulatory changes around tracking because of their relationships with phone manufacturers and service providers with their software having direct access to the firmware of devices.
Exact Sciences (EXAS) at Baird Healthcare Conference
Comments from CEO Kevin Conroy and CFO/COO Jeffrey Elliott
Context on hiring 400 reps from Pfizer: what we're trying to build here is an end-to-end solution for patients and physicians that provide the greatest amount of digital connectivity, physician health care provider education, and the best portfolio of tests. We believe that this might be one of the most exciting steps in the direction of adding to our broad reach that will support the very ambitious goals that we're confident we can achieve in the near term and the long term. It starts with the broad reach of Cologuard, which continues to be an incredibly strong brand that continues to grow. Then when you think about the pipeline that goes into the bag of now a 900-plus person field force, we have the ability to bring multi-cancer screening coupled with Cologuard, coupled with a blood-based colon cancer screening test, eventually hereditary cancer screening, liver cancer in a smaller population of people who need to be screened more frequently and then eventually pancreatic cancer and esophageal cancer and others. What we're doing will change cancer forever.
We believe that cancer screening is going to change forever, and it's going to start with patients having a baseline understanding of their germline risk of cancer. Based on that risk, there are going to be different avenues taken from a screening perspective. And that may mean, if you have an elevated personal risk of cancer, you're tested more frequently with a blood-based multi-cancer screening test. Cologuard will be a part of that. A blood-based colon cancer screening test may be offered at the same time as a multi-cancer screening test in a hereditary cancer test, in a colon cancer test. So somebody who's 45 years old who comes into an office is going to have an array of tests that starts a lifelong relationship with Exact Sciences.
Access to physicians is somewhat choppy still because of the COVID pandemic. It's probably down 50% from where it was. Despite that headwind, the team delivered 25% growth last quarter relative to the start of the pandemic.
On Exact’s position to compete in multi-cancer screening: one of the most exciting things over the last 12 months has been the power of bringing together 2 technology approaches, mutation coupled with protein, along with methylation on a sequencing platform and bringing in base genomics. It's -- the team says, we assure you we will have the best performance in the multi-cancer screening. Now that's bold, and we'll see what the team delivers, but it's a pretty amazing team. And we like the data that we're seeing internally.
There are 100 million people getting older, that's a lot of people to get screened. And there are 350,000 primary care docs out there. There are going to be a lot of people who choose different approaches. What we think we bring a value is this electronic value -- an electronics platform that we've invested approximately probably north now of $500 million into in building, and you can't do that overnight.
Upon FDA approval and Medicare coverage and all of those prerequisites for a full launch, we believe this will be like no other diagnostic test launch even compared to Cologuard, which we're awfully proud of. You could see 10 million people getting screened pretty quickly in a relatively short period of time because why wouldn't you want to get this test?
My Takeaways:
Kevin and Exact Science’s have put a lot of time and money into building out Exact’s scale with Cologuard and now additional cancer screening platforms. The business appears to be held back by a lack of profitability, but I believe Exact is positioned very well to be a big winner over the next several years.
It also feels really good to own a company that’s trying to help cure cancer….so there’s that.
Inari Medical (NARI) at the Morgan Stanley Healthcare Conference
Comments from the Inari CEO, COO, CFO, and Chief Medical Officer:
COVID causes Venous Thromboembolism (VTE). Some patients unfortunately get blood clots because they're not moving around as much. The difference between the first wave and the second wave if we're in a third way now was: a. awareness, b. a willingness to "procedure" these patients. I think also we did a good job communicating the potential to get these patients treated and out of the hospital quickly to save beds (specifically ICU beds) using our devices without the use of thrombolytic drugs.
We've been able to grow our sales organization and conduct training in the most difficult environment that probably we'll ever face in our careers. We've been able to increase penetration in various hospitals. That's our second growth driver that is really compromised during COVID. We've been able to share new data on both our FlowTriever and our ClotTriever systems almost every single quarter. That will be continuing even this quarter.
We've been able to do all of this without consuming cash. We're continuing to operate in the black. And you can see from our P&L, we've invested extremely aggressively on R&D, both engineering side and on the clinical side. At some point, there is a post-COVID environment, and we are extremely well-prepared.
As of the end of the quarter, we were in about 1,100 active accounts. And across those 1,100, about 60% of those accounts are using both technologies, 40% of the accounts are using one versus the other. The goal at that point is to really begin driving adoption and penetration. That's where the real growth opportunity is for us.
We believe we have only reached about 5% of all the patients that can and should benefit from our devices,. Those are patients that have a big clot, somewhere between the mid-thigh and belly button or a clot in their lungs that was significant enough to blow up the heart like a balloon. That's a really significant clot. We think only about 5% of those patients have been treated with our technology. In Pulmonary Embolism (PE), only 10% of all patients who have what I described, get anything other than anticoagulation alone.
In just the first month of usage for Flowsaver, we've seen almost 1,000 cases. I think that proves the demand. What we see is a substantial reduction in the amount of blood loss for FlowTriever procedures. Because of that, what we see is an increase in the efficacy of removing more clot. Even before FlowSaver, we did not think that the amount of blood loss was clinically relevant. But what we found was that physicians were holding back on complete thrombectomy due to concerns about blood loss. Now with FlowSaver, they don't have to. So we see a 30% increase in aspiration runs that are performed with any given procedure. I think that's going to continue to result in clinical improvements that further differentiate us from any potential competition.
My Takeaways:
Things appear to be progressing as planned for the Inari team. There has been some confusion on the impact of COVID on Inari’s business which I’ll monitor over the coming quarters. Besides that, we could see some favorable catalysts for the business as more data is released from their ongoing studies & FlowSaver helps to improve the outcomes of FlowTriever procedures.
Upcoming Events:
September 28: Pure Storage Virtual Financial Analyst Day
Wrap it Up:
Alright, it’s 4:00pm on a Friday. That’s enough for this week. Expect this newsletter to evolve and improve (with your help) in the future. Starting next week I’ll have audio embedded into these emails (or on the web) so you can listen directly from your inbox or on your favorite podcast player.
What did you think this week? Leave a comment below or reply to this email and let me know what’s on your mind/tell me how I can improve the newsletter.
Thanks and have a great weekend!