By Austin Lieberman
The podcast currently has 33 episodes available.
Disclosure: I am long GitLab. Here is the real-money portfolio I run alongside this newsletter.
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On Monday, June 06, GitLab (NASDAQ: GTLB) reported Q1 Fiscal Year 2023 Financial Results. I shared my confidence in GitLab in an earnings preview before the report (link). Shares are up 26% after strong results.
Quick Takeaways
* The company reported $87.4 million in revenue, up 75% year over year (YoY) which beat analyst expectations by $9.28 million.
* Non-GAAP EPS was -$0.18 compared to -$0.44 in Q1 2022, which beat analyst expectations by $0.08.
* Dollar-based net retention rate remained above 130% which means customers are spending 30% more on average from one year to the next.
* Management increased FY 2023 revenue guidance to $400 million, up from their previous guidance of $397 million.
If I had to judge the quarter on these numbers alone, I’d be a happy shareholder. But let’s dive into the rest of the quarter.
First Quarter Fiscal Year 2023 Financial Highlights
First Quarter Fiscal Year 2023 Business Highlights:
* Customers with more than $5,000 of ARR increased to 5,168, up 64% YoY.
* Customers with more than $100,000 of ARR increased to 545, up 68% YoY
* Dollar-Based Net Retention Rate remained above 130%.
* Awarded software licensing program reseller agreements with the State of California.
Second Quarter and Fiscal Year 2023 Financial Outlook
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Management Commentary
On revenue acceleration
Underpinning this acceleration in revenue growth is both a higher velocity of new customer wins as well as larger strategic commitments. We achieved momentum in growth in both $1 million deals and $500,000 deals. In addition, we continue to experience strong success in upgrading existing customers and signing new customers to our Ultimate tier.
Ultimate adoption represented the highest proportional mix of new logos landed during our first quarter of 2023. And Ultimate remains our fastest-growing tier by addressing use cases for security, compliance and portfolio management.
Four reasons management believes GitLab is well-positioned to achieve durable growth with improving unit economics
First, we believe the business imperative for digital transformations remain strong regardless of macro conditions.
Second, we believe the market we are targeting is very large and early-stage in nature. We believe our One DevOps Platform is addressing an estimated $40 billion opportunity. We're focused on selling a business outcome and a time to value.
Third, we are addressing this estimated large market opportunity with a compelling platform. GitLab's One DevOps Platform provides one interface, one data store, one set of reports, one spot to secure your code, one location to deploy to any cloud and one place for everyone to contribute.
Fourth, one of our core values is that we strive to do the smallest thing possible as quickly as possible. This leads to more improvements that address customer problems in a shorter time frame.
On Ultimate Tier adoption
The Ultimate tier is our fastest-growing tier, now representing 39% of annual recurring revenue for the first quarter of FY 2023 compared with 26% of annual recurring revenue for the first quarter of FY 2022 and continuing to grow in excess of 100%.
We see tremendous business outcomes from our customers who adopt Ultimate. And so we, as a company, GitLab, believe that every customer should adopt Ultimate over time, given the tremendous value with a price point of only $1,200 per developer per year. So Ultimate gives our customers enhanced security features, compliance, vulnerability management and so forth, just to name a few
On how customers are reacting to fears of recession/inflation in terms of development projects
We believe that every company needs to become a software company regardless of what the macroeconomic environment is. And the way to do that is DevOps. And maybe I can share a story, what happened during the pandemic. Global airlines saw their revenue crash 90%-plus reduction in revenue. And at that time, we partnered with 3 global airlines to help them expand their GitLab footprint and to help them make that transformation.
The platform approach helps customers to consolidate tools. And with that, they save money, both on licensing and on integration costs
On competition and balance of growth/profitability moving forward
We're really, really early in the $40 billion market. Our main competition continues to be DIY DevOps.
Companies need a way to plan, build and secure and deploy software. In about half the deals, we don't see anyone else in the deal. We're competing against DIY or what they currently have.
When we do see companies, we typically most run into Microsoft, Atlassian and Jenkins. They are the 3 that make up over 70% of what we run into on the deals.
It's important to note that our win rate against Microsoft, whether they're in a deal or not in a deal, is almost identical. And if you look at the total amount of deals that we're in, Microsoft accounts for less than 20% of the deals that we see them in.
On profitability, I just want to go back and remind everyone, we land small and expand over time. And the quarterly cohorts from over 6 years ago are still expanding today, which is remarkable, which helps us with our net dollar retention rate.
And these cohorts, not only are they still expanding, they're extremely predictable. So we're continuing to show improving unit economics in the business. We are committed to responsible growth.
On risk of smaller-VC backed private companies reducing headcount hurting GitLab
Together, GitLab and GitHub, we believe to be less than 5% of the $40 billion market. And as customers are forced to slow down hiring, they want to get more out of their existing people. And that's what GitLab can bring, they can do more with the people they already have instead of hiring without an end.
We looked at sort of the VC-backed startup community and to see how much of our current ARR [was comprised at] and how much we think it will be. It was less than 5% every way that we looked at it. So really small by ARR and absolute volume.
Austin’s Takeaways
This was a great quarter and I believe GitLab is still in the very early innings of its growth curve. The company has beaten analyst expectations for Adjusted EPS and revenue in each of its three quarters as a public company.
It’s trading at what I believe are very reasonable FW P/S ratios if we look out to FY 23 and FY 24 given its growth potential and improving unit economics.
I have no idea what happens over the short term, but all signs point to this being a great long-term investment.
Let me know your thoughts on GitLab’s quarter and any stocks I should be following!
Growth Curve By Austin Lieberman is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
Bottom line up front (BLUF): Crowdstrike posted great results and I’m expecting the same from GitLab when they report after the market closes today. I have no intention of trimming either position.
Disclosure: I am long Crowdstrike (CRWD) and GitLab (GTLB). Here’s a look at the $10k to $1 million portfolio positions. Follow me on Commonstock (link) if you’re looking for an awesome investment community and research without the bots and trolls of Twitter.
Crowdstrike (CRWD) Q1 2023 Results Review
BLUF: Crowdstrike earnings were strong and the thesis is still intact. I’d look at any sell-off as an opportunity for investors to build a position if they want to make it larger.
Shares are down 18% YTDNTM P/S down from 39 in July to 17 todayFwd P/S based on FY 23 rev of $2.15B = 17Fwd P/S based on FY 24 rev: $2.98B = 12.6
Paying members have access to my live database that has complete spreadsheets for all of the companies I follow. Access it at this link
Q1 FY 23 Results
Revenue: $487.8M, beat management’s guidance by $25 million, beat analyst expectations by $23MNon-GAAP EPS: $0.31, beat analyst expectations by $0.08
Annual Recurring Revenue (ARR) increased 61% year-over-year to $1.92 billion, of which $190.5 million was net new ARR added in the quarter
Subscription Gross Margin: GAAP subscription gross margin was approximately 77% in both the first quarter of fiscal 2023 and 2022. Non-GAAP subscription gross margin was approximately 79% in both the first quarter of fiscal 2023 and 2022.
Income/Loss from Operations: GAAP loss from operations was $23.9 million, compared to $31.3 million in the first quarter of fiscal 2022. Non-GAAP income from operations was $83.0 million, compared to $29.8 million in the first quarter of fiscal 2022.
Cash Flow: Net cash generated from operations was $215.0 million, compared to $147.5 million in the first quarter of fiscal 2022. Free cash flow was $157.5 million, compared to $117.3 million in the first quarter of fiscal 2022.
Cash and Cash Equivalents was $2.15 billion as of April 30, 2022.
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Business Highlights
Added 1,620 net new subscription customers in the quarter for a total of 17,945 subscription customers as of April 30, 2022, representing 57% growth year-over-year.
Subscription customers that have adopted four or more modules, five or more modules and six or more modules increased to 71%, 59%, and 35%, respectively. Customers with seven or more modules reached 19% as of April 30, 2022.
Expanded its strategic partnership with Cloudflare with technology integrations to strengthen the Zero Trust posture of joint customers.
Financial Outlook
Q2 2023 Revenue: $515MNon-GAAP EPS: $0.28FY 2023 Revenue: $2.198B, increased $50M from managements previous guide of $2.148B. *Implies continued momentum ($50M increase vs $25M beat this quarter)*Non-GAAP EPS: $1.20
Management Commentary
George R. Kurtz CrowdStrike Holdings, Inc. – Co-Founder, CEO, President & Director
I will start today's call by summarizing 3 key points. First, fiscal 2023 is off to a fantastic start. We believe our Q1 results exemplify that we have a winning formula that includes scale, growth, profitability and free cash flow.
Second, we saw strength across the platform, including a record quarter for modules deployed in the public cloud and over 100% year-over-year ending ARR growth for our emerging product group, which includes our Discover, Spotlight, Identity Protection and Log Management modules.
And third, we are seeing more and more customers standardize on the Falcon platform. The number of customers adopting 6 or more and 7 or more modules both grew more than 100% year-over-year. We believe this underscores our wide competitive moat and our opportunity to drive long-term sustainable growth in both our core and expansion markets.
On demand
The demand environment we see is more robust today than this time last year as cybersecurity is not discretionary. Additionally, the competitive environment has remained favorable to CrowdStrike. Our growing leadership in the market is reflected in IDC's most recent report where CrowdStrike leapfrogged to the #1 position amongst all vendors in the 2021 market share for worldwide corporate endpoint security and once again took the top spot in modern endpoint security.
Moving to the market dynamics and threat environment, we continue to see powerful tailwinds fueling our market, and we do not currently see any indication that these trends will abate anytime soon. These tailwinds include a rapidly expanding attack surface and digital supply chain as organizations embrace digital transformation and move more workloads to the cloud, the cybersecurity skills gap in a heightened threat environment.
Number of modules new customers start with
Yes. So our bigger customers, those over $1 million, as we talked about on the webinar in April, we -- each of those customers has about 7 on average, just over 7 modules. In terms of landing new, we talked about in FY '22, it's 4.7. And that's up from 4.3 from the year before.
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GitLab Q1 2023 Earnings Preview
BLUF: Next-twelve-months price to sales (NTM P/S) has come down from 30 in January, 2022 to 15.62 on 6/3/22 with analysts expecting revenue growth of 53%, 39%, and 35% in FY 23 - FY 25.
Judging by the results of other cloud/software companies I expect GTLB results and guidance to be strong. I have no idea how the stock will react after earnings even if they beat and raise.
For Q1 2023, analysts are expecting revenue of $78 million, gross margin of 87%, non-GAAP EPS of -$0.26, and free cash flow of -$24 million.
For FY 2023, analysts are expecting revenue of $387 million, gross margin of 87%, non-GAAP EPS of -$0.96, and free cash flow of -$86 million
These are the numbers analysts will be paying attention to as well as any indication as to when management expects to be profitable on a non-GAAP basis.
Paying members have access to my live database that has complete spreadsheets for all of the companies I follow. Access it at this link
Thanks for reading. Do me a favor and “like” this by hitting the heart above and jump into the comments to let me know your thoughts and any companies I should be considering for the portfolio!
If you listen to the recording, the featured background audio is an original track of my 18-month-old daughter crying. I think you can still hear me just fine. I promise she was okay and was being supervised. No wonder why Elon wants everyone back in the office!
Shares of Okta traded up 5% today closing at $98.38. Year-to-date, shares are down 55% and the next twelve-month enterprise value to revenue (NTM EV/R) has dropped from 28 in July 2021 to 7.6 today.
That’s a 76% contraction in NTM EV/S multiple.
Since Okta’s IPO in April, 2017 the shares have increased from $23.51 to 98.38, a compound annual growth rate (CAGR) of 31% which would have turned a $10,000 investment into $40,000, beating the SPY CAGR of 13% over the same period.
Okta is currently trading at a trailing-twelve-month (TTM) EV/R of 10.8, roughly 20% higher than its all-time low of 9.0 in 2017.
Revenue per share (which takes into account share dilution due to acquisitions and stock-based compensation) has grown 30% per year since IPO and analysts are expecting revenue per share to grow roughly 32% per year from FY 23 to FY 25.
This could either be an incredible buying opportunity or a falling knife.. so lets dive in.
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Okta First Quarter Fiscal Year 2023 Financial Results
“We delivered solid first-quarter results highlighted by strength in new customer additions, dollar-based net retention rate, and the success we’re having with large customers as they continue their journey to the cloud,” - Todd McKinnon, Chief Executive Officer and co-founder of Okta.
First Quarter Fiscal 2023 Financial Highlights:
* Revenue: Total revenue was $415 million, an increase of 65% year-over-year. This beat analyst expectations by $26 million or roughly 6.7%. Subscription revenue was $398 million, an increase of 66% year-over-year. Organic revenue grew 39%.
* Remaining Performance Obligations (RPO): RPO, or subscription backlog, was $2.71 billion, an increase of 43% year-over-year. cRPO, which is contracted subscription revenue expected to be recognized over the next 12 months, was $1.41 billion, up 57% compared to the first quarter of fiscal 2022.
* GAAP Net Loss: GAAP net loss was $243 million, compared to a GAAP net loss of $109 million in the first quarter of fiscal 2022. GAAP net loss per share was $1.56, compared to a GAAP net loss per share of $0.83 in the first quarter of fiscal 2022.
* Non-GAAP Net Loss: Non-GAAP net loss was $43 million, compared to non-GAAP net loss of $13 million in the first quarter of fiscal 2022. Non-GAAP basic and diluted net loss per share was $0.27, compared to non-GAAP basic and diluted net loss per share of $0.10 in the first quarter of fiscal 2022. This beat analyst expectations by $0.07 or 20%.
* Cash Flow: Net cash provided by operations was $19 million, or 5% of total revenue, compared to net cash provided by operations of $56 million, or 22% of total revenue, in the first quarter of fiscal 2022. Free cash flow was $11 million, or 3% of total revenue, compared to $53 million, or 21% of total revenue, in the first quarter of fiscal 2022.
* Cash, cash equivalents, and short-term investments were $2.49 billion at April 30, 2022.
Financial Outlook:
For the second quarter of fiscal 2023, the Company expects:
* Total revenue of $428 million to $430 million, representing a growth rate of 36% year-over-year. This beat analyst expectations of $423 million by $6 million or 1.4%.
* Current RPO of $1.48 billion to $1.49 billion, representing a growth rate of 35% to 36% year-over-year;
* Non-GAAP operating loss of $44 million to $43 million; and
* Non-GAAP net loss per share of $0.32 to $0.31, assuming weighted-average shares outstanding of approximately 156 million. This beat analyst expectations by $0.02.
For the full-year fiscal 2023, the Company now expects:
* Total revenue of $1.805 billion to $1.815 billion, representing a growth rate of 39% to 40% year-over-year. This beat analyst expectations by $30 million or 1.7%.
* Non-GAAP operating loss of $167 million to $162 million; and
* Non-GAAP net loss per share of $1.14 to $1.11, assuming weighted-average shares outstanding of approximately 157 million. This beat analyst expectations by $0.12 or 9.6%.
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Management Commentary: Todd McKinnon, Co-Founder, Chairman & CEO
On the Lapsus$ security hack in Q4
While we've done a lot of analysis, it's difficult to attribute any quantifiable impact on our solid Q1 results. When looking at key indicators, our competitive win rates and renewal rates have remained strong. In Q1, RPO grew 43% and current RPO grew 57%. Total revenue grew 65% and Okta standalone revenue grew 39%. New customer additions remain strong at 800, bringing our total customer base to 15,800, representing growth of 48%. We also continue to do well with large customers.
Notable customer win
A Fortune 500 insurance company was a great Okta SIEM and Workforce win. What's more, this customer was sourced through the AWS Marketplace, which has been doing well for Okta since we became available there in late 2020. The company sought best-of-breed tools to modernize the organization's aging IT infrastructure. Their legacy on-prem tools lack the capacity and stability to meet the needs of the business. Okta will provide a cloud-native identity solution to support their modernization efforts, while also addressing their on-prem infrastructure needs with Okta Access Gateway.
Management Commentary: Brett Tighe, CFO
On dollar-based net retention rate
Our dollar-based net retention rate for the trailing 12-month period remains strong at 123%. This was driven by the strong upsell motion we are seeing with our existing customers across both Okta and Auth0 as they expand on both products and users.
On FY 26 financial goals
Our long-term financial goals anchor on at least $4 billion of revenue in FY '26 with organic growth of at least 35% each year and 20% free cash flow margin in FY '26. To achieve these targets, we will continue to scale the company from a people and processes standpoint, including investing in talent across all areas of the company as well as in systems to prepare us for the next phase of growth.
Investor Q & A
On the future of identity and federal/department of defense interest
Just yesterday, we had the global CIO of one of the major branches of the DoD in our office with his entire executive team talking to us for the entire day about the future of identity and what it was going to look like. And I mean these are just the kinds of conversations, frankly, that regardless of what happened in Q1 with that security event or not, we were not having these conversations 6 or 12 months ago, and I think it portends very well for the future.
The federal government opportunity is a massive one for us.
Federal was the biggest deal of our quarter this year -- this quarter in terms of ARR. And that federal division was specifically focused on customer identity and access management. And you really see that the government is thinking about how they can adopt more of these modern solutions for a lot of their forward-thinking initiatives. You -- we've been working for a long time on bolstering up our federal capabilities. And we've got -- we've been FedRAMP Medium, Moderate for some time. We've got FedRAMP High and IL4 that are scheduled for this summer.
Austin’s takeaways
* This was a strong quarter considering the macro fears and Okta’s security incident in Q1
* Management seems confident and excited about both international and federal opportunities
* Management reiterated FY26 goal of $4 billion in revenue with 35% organic growth and 20% free cash flow margin representing a score of 55 on the rule of 40
* This is on my watchlist due to its low multiple, important market, and growth expectations but I’m hesitant to start a position because of questions around profitability at scale.
* I have no position in Okta at the time of this writing.
* Paying members are always first to find out what I’m buying (before I buy it)
Price Multiples, FY 18 - FY 22 Results, & FY 23 - FY 27 analyst expectations
Paying members have access to my live database that has these spreadsheets for all of the companies I follow. Access it at this link
HAPPY TUESSSSSDAY
Today we’re covering some news stories about Upstart, Shopify, Okta, and The Trade Desk then diving into my notes from GitLab’s (GTLB) earnings call last week.
TLDR I was very impressed, opened a position, and tend to DCA in overtime keeping it a “large” position in my portfolio.
BUT FIRST
This newsletter would not be possible without Commonstock. In my mind, Commonstock is like Twitter without the bots and people trolling you because they think they are the ruler of all opinions on stocks/investing. This isn’t an advertisement, but I love the platform so much that I badgered the team so much over the last couple of years that they basically had to give me a job so I’d stop bothering them.
In all seriousness, I joined because the team is focused on improving the world’s financial health by creating a platform that amplifies transparency and accountability alongside people’s opinions on everything from crypto to stocks.
My portfolio is linked securely on Commonstock and you can always see my positions, trades, and performance at this link.
Portfolio News
Upstart (UPST) is down 7% after Wedbush downgraded it to underperform with a $75 price target (Down from $110). The analyst noted weakening delinquency trends. This doesn’t concern me at all and I intend to keep dollar-cost averaging (DCA) into UPST so I’ll take lower prices due to short-term fears all day!
Shopify (SHOP) was down 12% yesterday after an announcement that Google intends to offer “Last Mile Fleet Solution” to help business owners optimize deliveries/logistics. At this point, I’m not concerned and SHOP will move towards the top of my list for new contributions if prices drop more from here. If we see Shopify’s results suffer in the next few quarters, then it could indicate they’re losing part of their competitive advantage. I’ll research this new offering from Google and share it in a future email.
Okta (OKTA) is currently down 8% pre-market after hacking group Lapsus$ posted screenshots on its Telegram claiming to have hacked Okta. Okta has stated it sees no signs of a breach. As of right now, I’m not concerned and I certainly trust Okta’s track record + management to quickly fix anything (and make the platform better) if there was a breach. Okta is currently at the top of my list to buy when my next contributions hit. I talked about that in yesterday’s email.
Adobe (ADBE) reports earnings this afternoon. I own a starter position in Adobe because it is a fantastic company with a very long track-record of success. I don’t intend to add to my position because its multiple is a bit high considering forward growth estimates and I believe there are better opportunities elsewhere (see link to yesterday’s email). I’d start to get interested in adding shares if the P/E gets down to around 29-30. It’s currently at a blended P/E of 35.3. That’d be about a 20% drop from here down to around $390/sh. I have no idea what happens with earnings.
The Trade Desk (TTD) launches new certified service partner program for SMBs. “This program expands self-service access to The Trade Desk’s demand-side platform, as client demand for data-driven advertising continues to rise. As part of this announcement, Goodway Group becomes The Trade Desk’s first certified service partner to help meet this rising demand.” I own TTD and won’t be selling my shares anytime soon, but I’d love for the multiple to come down a bit before adding.
GitLab (GTLB) Conference Call Notes
After Gitlab’s earnings last week I sent an email saying I intended to buy shares with the new contributions that were coming into my account (link). I ended up purchasing shares on Tuesday and Wednesday and the position is up nicely. It’s currently a large position for me and I have some catching up to do in building other positions so I won’t be buying more in the next month or two but I’m very bullish on the company’s future.
Here are my notes from the earnings conference call
CEO Sid Sijbrandij opening remarks:
* Beat revenue expectations with revenue of $77.8 million, 69% year-over-year
* Dollar-based net retention rate exceeded the 152% we reported in S-1 filing
* Strength was broad-based across enterprise, mid, and SMB customers
* Ultimate remains fastest growing tier of product offering
* Strength indicates the market is moving from DIY DevOps to a DevOps platform which plays to GitLab’s strength
* Gartner Market Guide for value stream delivery platforms states that by 2024, 60% of organizations will have switched to a platform approach, up from 20% in 2021
* Management believes “the source of our product differentiation is our platform approach to DevOps.”
* “We believe our single application helps companies to deliver software faster, improve organizational efficiency and reduce security and compliance risk. The DevOps platform also enables our customers to manage and secure the entire DevOps workflow across any hybrid and multi-cloud environment.”
* “Acquisition of Opstrace, a pre-revenue open-source observability solution will allow GitLab to offer robust monitoring and observability capabilities that will enable organizations to lower incident rates, increase developer productivity and reduce mean time to resolution.”
* Management believes DevOps platform addresses a $40B market opportunity. Bain & Company study showed 90% of companies believe DevOps is a priority but only 12% believe they have mature DevOps practices
* Added over 500 net new base customers. New logos/expansions include U.S. Army, Deutsche Telekom and Travis Perkins.
* Travis Perkins expansion: “Travis Perkins is the U.K.'s largest distributor of building materials. They accelerated their migration to the cloud using GitLab Premium by consolidating their software to it. Doing so increased their velocity, cut down overall cost by 20% and it allowed their team members to focus on building new customer-facing digital services and capabilities instead of managing their toolchain. This quarter, they upgraded from Premium to Ultimate licenses and more than doubled the number of users on the system. This will expand usage of GitLab to their security teams and allow development operations and security to collaborate on a single DevOps platform.”
CFO Brian Robbins remarks:
* Revenue is the key metric to evaluate the health and performance of the business. Because approximately 90% of revenue is ratable, it serves as a predictable and transparent benchmark for how we are growing.
* “Cohorts from six years ago are still expanding today. This is a testament to how we're constantly adding value to our customers. Most of our customers start using GitLab with small teams with just one to two stages of our platform. From there, they typically increase their spend with us 2x over the first year as our platform is adopted across multiple teams. Customers then continue to increase their spend as our platform expands to more teams across their organizations or they upgrade to a higher paid tier.”
* “We are also effective at retaining our customers. When our customers deploy the DevOps platform, it becomes a central platform from which all their DevOps workflows originate from, making it sticky and difficult to replace. The result is that we ended our fourth quarter with a dollar-based net retention rate exceeding 152% which is higher than the disclosure we provided in our S-1 at the time of our IPO.”
* “Our platform is offered with a free version and two paid subscription tiers which we call Premium and Ultimate. Our paid tiers are priced per user with different features per tier. Every user within an organization is on the same plan which helps keep our business model transparent and easy to understand. The Ultimate tier is our fastest-growing tier, now representing 37% of our annual recurring revenue for the fourth quarter compared with 26% of annual recurring revenue in the fourth quarter of FY 2021 and growing in excess of 100%. In FY '22, our non-GAAP gross margin held steady at 89%. Over time, we expect this to compress as our SaaS offering becomes a larger portion of our business and associated hosting costs will increase.”
* Over 4,500 customers with ARR of at least $5,000 per customer compared to over 4,000 customers in the prior quarter and over 2,700 customers in the prior year. This represents a year-over-year growth rate of approximately 67%. Currently, customers with greater than $5,000 in ARR represent approximately 95% of our ARR.
* Over 490 customers with ARR of at least $100,000, up from 420 customers and over 280 customers compared to the prior quarter and year, respectively. This represents a year-over-year growth rate of approximately 74%
* 39 customers with ARR of at least $1 million compared to 20 customers at the end of the prior fiscal year which represents a year-over-year growth rate of 95%.
* Total RPO grew 95% year-over-year to $312 million.
* Non-GAAP gross margins were 89% for the quarter which compares to 90% in the immediately preceding quarter and 89% in the fourth quarter last year. As we move forward, we're estimating a moderate reduction in this metric due to the rapid year-over-year growth rate of our SaaS offering
* Non-GAAP operating loss was $27.4 million or negative 35% of revenue compared to a loss of $22.2 million or negative 48% of revenue in Q4 of the last fiscal year. Q4 includes $5 million of expenses related to our JV and majority-owned subsidiary.
Guidance:
* For first quarter of FY 2023, we expect total revenue of $77 million to $78 million, representing a growth rate of 54% to 56% year-over-year.
* We expect a non-GAAP operating loss of $38.5 million to $37.5 million.
* We expect a non-GAAP net loss per share of $0.28 to $0.27, assuming 147 million weighted average shares outstanding.
* For the full year FY 2023, we expect total revenue of $385.5 million to $390.5 million, representing a growth rate of 53% to 55% year-over-year.
* We expect a non-GAAP operating loss of $142 million to $138 million.
* We expect a non-GAAP net loss per share of $1.02 to $0.97, assuming 148 million weighted average shares outstanding.
* Our annual FY 2023 guidance implies non-GAAP operating margin improvement of almost 300 basis points year-over-year at the midpoint of our guidance ranges. Over the longer term, we believe that a continued targeted focus on growth initiatives and scaling the business will yield further improvement in unit economics.
Q&A
Question about where strength in 152% net-dollar retention rate is coming from
Answer: Ultimate is driving a lot of upsell because of the advanced security capabilities. Create and verify are used heavily; so they are important too. Apart from create, verify and secure, we see growth in packaging and release. Packaging, for example, is replacing JFrog Artifactory at more and more customers.
Question on acquisition of Opstrace, the pre-revenue open source application in the category of observability.
Answer: Observability lets you close the loop. You plan to make something, you make it, you roll it out and then you see how it does. So it's a really important element of a DevOps platform and we're really early. But because it's so important, we wanted to accelerate how fast we got there and we love the team and the product that Opstrace already built. So we acquired them to rebuild that inside GitLab and we think that closing that loop will help our customers achieve better business outcomes. If you get feedback faster, you reduce your cycle time and you get better outcomes. And it's really important to note that we'll do it in an iterative fashion. So in the beginning, our solution will not so much compete with existing vendors but with nonconsumption. People haven't set up monitoring yet and we'll start from a simple product and work with our users and customers contributing to expand the functionality over time.
Links to company news articles
Upstart downgraded by Wedbush
Shopify - Google “Last Mile Fleet Solution”
Okta potential security breach
Adobe Investor Relations Page
The Trade Desk Launches New Certified Service Partner Program for Small and Medium-Sized Businesses
Happy Friday,
Welcome to a different kind of weekly update. I’m not going to talk about the weekly performance of the market or my portfolio. Thinking about that is a distraction from my goal of relentlessly finding, studying, and owning the best companies I can for the next 30 years. I’ll do performance updates once a month (or quarter).
Instead, we’re going to cover
* My current portfolio
* Any meaningful news from my companies this week
* What I’m buying with next week’s contributions
* Upcoming posts for subscriber
* Bonus section: Mean tweets from the haters
1. My current portfolio
You can always see my latest transactions & current portfolio on Commonstock (link)
The rest: Mercardolibre (MELI) 4.3%, Twilio (TWLO) 4.3%, Zoom (ZM) 4.2%, Fidelity National Financial (FNF) 2.7%, Mastercard (MA) 2.7%, Broadcom (AVGO) 2.6%, American Tower (AMT) 2.6%, Advanced Auto Parts (AAP) 2.6%, Lowes (LOW) 2.6%, Abvie (ABBV) 2.6%, 3m (MMM) 2.5%, Raytheon (RTX) 2.5%, Amgen (AMGN) 2.5%
A quick thought about my allocation strategy
I think about my portfolio in two buckets on a sliding scale.
Bucket #1 is dividend growth stocks: I currently have 25% of the portfolio and future contributions allocated to dividend growth stocks. This bucket consists of 10 stocks at a 2.5% allocation of my total contributions each.
Bucket #2 Growth Stocks: I currently have 75% of the portfolio and future contributions allocated to growth stocks. This bucket consists of 25 stocks at roughly a 5% allocation each. You can see the exact numbers at the link above.
This scale will slide between 75% growth stocks and 25% dividend growth stocks to the other extreme of 75% dividend growth and 25% growth stocks. Right now it is weighted towards the growth extreme because I believe there is very good risk/reward in high-quality growth stocks. As (or if) those multiples start to come up, then I’ll adjust my portfolio to be weighted more towards dividend growth stocks as I see fit.
I will generally try to make these adjustments over time through new contributions instead of by selling to avoid taxes.
2. Company News
Twilio (TWLO) CEO Jeff Lawson at Morgan Stanley 2022 Conference
No major announcements from this conference, but here are my key takeaways
* Believes their customers’ digital roadmaps were accelerated by 6 years due to Covid. However, that doesn’t mean all of the work was piled into year 1 or 2.
* Even brick and mortar businesses have drastically accelerated digital projects which likely would not have happened nearly as quickly pre-covid.
* Twilio roadmap is informed by customer needs/demand from data on their platform
* Twilio’s customer data platform (CDP) Segment is #1 in market and growing very fast because of two tailwinds. #1 was need to move to digital #2 was need to understand all of the new data companies had on customers from new digital intiatives.
* Lawson believes there is still tremendous growth ahead for Twilio but that they should, can, and will do it as a profitable company starting in 2023. He’s committed and excited for that for the company.
* When asked about domestic growth slowing (direct quote here) “The biggest thing is messaging is obviously a big part of our business. In the U.S., there's been about trusted communications. So, when you get a text message from I don't know, you're a pharmacy or your kid's school, you know that it's authentic. Right now, you get text messages from businesses, what are they? They're a 10-digit number or like a 6-digit number, claiming to be the pharmacy. You're like is this my kid's school? Is this the pharmacy, or is this just a robo dialer or a hacker or some fraud scheme going on, right?
The ecosystem needs trust. So, we need to attach identity to these phone numbers. We need to verify who those customers are, and then we need to pass it through. So, when you get a text message, it doesn't say from +1 415, something. It says from pharmacy. It's coming from the school. And there's a green pad mark on it that says, you trust it. That will open up so many more avenues of interest in commerce that can be done over these channels. But, it's a bit of a painful evolution. As we've been retooling our product, it has not been without pain. And so, we are working every day to remove friction from that process, but I think it has impacted some of our domestic growth.”
* Jeff also spoke about the recent executive turnover and emphasized that it’s a natural part of a company growing and that they made those transitions very thoughtfully up to a year in advance. I’m comfortable with those answers.
ServiceNow (NOW) CFO Gina Mastantuono at MS Media & Telecom Conference
* Customer/partner retention has been very strong as NOW evolves from a set of products to a platform company. 7 out of 10 large partners have committed to $1 billion businesses with them over the next few years with the remaining 3 planning to commit this year.
* Have seen no slowdown in demand from situation in Ukraine/Europe.
* ServiceNow wants to be the defining enterprise software company of the 21st century. Revenue target is $10 billion in subscription revenues by 2024, $15 billion by 2026. For reference, NOW earned $5.57B in subscription revenue for 2021. If they hit these targets they will be tripling revenue in 5 years.
Here’s a direct quote from the CFO of how they intend to get there:
with our current customers and current products, there's the ability to grow 5x our ACV. And that's all about the platform, right? It's all about really leaning into customers who only have one or two workflows and really being able to help accelerate time to value, help accelerate productivity and efficiency. Less than 20% of our customers today have three or more workflows, right? So, the white space for up-sell and cross-sell remains phenomenal. So that's one vector.
If you think about our penetration in the US, which is by far our largest penetration, I think Gartner says IT is like 50% penetrated. We're taking out legacy homegrown systems. There's no reason why that 50% is not 80% and 100%, so a lot of continued white space on IT. And then if you think about outside the US, where penetration is quite low comparatively, there's such opportunity in both Europe and APJ.
And then if you think about the innovation that we've been pulling through the platform, if you think about AI, machine learning, you think about our enterprise and pro SKUs, there's continued upside and penetration that we can continue to drive there. So those are three levers that I would say are pretty meaningful in our path to $10 billion by 2024 and $15 billion plus in 2026.
On competition in the marketplace from Salesforce, Pegasystems, Appian, and even Microsoft:
Yes. I think we're seeing all of them in the marketplace. I mean they all have platform capabilities and low-code capabilities. Where I think we differentiate is we're able to build complex applications in days as opposed to months, right? Simple applications are easier to do. But the more complex ones, I think we're winning where the more complex applications are what they're trying to build. And so again, it's a one-platform approach. It's really being that trusted platform of the IT organization. And it's really where complex workflow orchestration is required. It's where you're seeing us win.
Upstart launches mobile-first auto-retail online platform and a big partnership with Volkswagen.
This is an exciting development and shows how Upstart is innovating and leveraging its AI-lending model to grow into new markets. Link to press release
Upstart Auto Retail adoption among car dealers grew nearly 4X1 in 2021 thanks to its unique combination of in-store customization for dealers and online access for customers. In addition, VW is the latest OEM to announce support for Upstart Auto Retail. Upstart introduced AI-powered financing in 2021, so dealerships could offer affordable financing to more of their customers.
Dealers on our online platform see 66 percent of their traffic come from mobile devices. If you want to deliver the modern buying experience that today's car buyers expect, you absolutely need a world class mobile experience,” said Michia Rohrssen, GM of Upstart Auto Retail, “Buying a new car is not always a linear process, so we designed the new, mobile-first, online platform not only to adapt to the mobile usage of customers, but also to give the dealer more options to customize for each type of shopper and the pace of purchase.
Upstart Auto Retail is also slated to introduce a new device-agnostic in-store platform and make its AI-powered financing solution available to more customers around the country later this year.
Upstart Auto Retail’s digital retail platform seamlessly combines the online and in-store experience with financing and manager tools, making it easy for car buyers to browse, shop, and build deals any way they choose. The Upstart Auto Retail digital retail platform consists of four key components — Online, In-Store, Real-Time Approvals, and Manager Portal. Pricing for the complete platform is $599 per month
Salesforce and Sprout Social Partner to Manage Full-Social Media Presence
This really isn’t that big of an announcement for Salesforce, but it does show they are still leaning into finding ways to improve their platform and offer deeper CRM capabilities in new areas for customer.
Today, Sprout Social, Inc. (Nasdaq: SPT) and Salesforce (NYSE: CRM) announced a global partnership to make it easy for Salesforce customers to manage their full social media presence - engagement, publishing & scheduling, analytics, listening, advocacy and platform integrations - through Sprout’s industry-leading social suite.
3. What I’m buying with next week’s contributions
I’ll have contributions coming into the portfolio next week so I’ll be opening a new position in Amazon (AMZN) in my growth bucket and Magna International (MGA) in my dividend growth bucket.
Why Amazon? Amazon’s business doesn’t need much explanation. They sell books.
Okay but seriously, Amazon has a proven track record, and a lot of growth ahead in Cloud, advertising, and who knows what other lines of business in the future. Over the last 10ish years, Amazon has traded at an avg P/OCF ratio of 27. It’s currently sitting right around that point as shown by the black line (representing current share price) intersecting the blue line (representing average P/OCF ratio). According to Fastgraph’s data OCF is expected to grow by 88% in FY 2022, 22% in FY 23, and 30% in FY 24. If that happens and Amazon trades at 27x P/OCF by 12/24, shares will be trading around $7,200 (not split-adjusted).
That’s a 38% annualized return from here. Obviously no guarantees, but I’m happy with a 10% annualized rate of return in this crazy market.
Why Magna International? MGA pays a 3% dividend yield (FWD) and is relatively undervalued (see chart).
Shares are currently trading at a P/E of 11 with expected EPS growth of 23%, 34%, and 20% in FY 22, 23, and 24 respectively. If shares trade at a PE of 10 by 12/24 the annualized return would be 22%. If they trade at a PE of 15, the annualized return would be 40%. I’m happy with 10% and some nice dividends.
Here’s a look at the company’s earnings history from the last 20 quarters. 15 EPS beats and 15 revenue beats.
Over the past 10 years, annualized return has been 15% vs 14% for the S&P and the Average annual dividend growth rate has been 13%. Pretty solid return considering how much shares have sold off recently.
Now you know what I’ll be buying next week (and probably in the first week of April) so you can front run me!
4. Upcoming Posts
I’m getting tired of typing so you must be getting tired of reading. Weekly updates will be more focused on covering my companies and new companies on my radar than today’s was since I won’t have big changes to the portfolio.
March 23rd: Snowflake (SNOW) Deep Dive (paying subscribers only)
March 25th: Weekly Update (free)
April 1st: Weekly Update (free)
April 6th: Digital Ocean (DOCN) Deep Dive (paying subscribers only)
* Missing next week’s update due to scheduling conflicts but you already know what I’ll be buying and I won’t be selling anything.
5. Mean Tweets
😅 This is just a reminder not to take ourselves too seriously and to be good to others. Take care of yourselves, your loved ones, random strangers, and your finances
The podcast currently has 33 episodes available.