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Hyperscaler Q3 2022 Earnings Review

November 2, 2022 / poffringa

As we kick off Q3 earnings season for software infrastructure companies, the hyperscalers set the tone with mixed results. AWS and Azure experienced further deceleration in revenue growth, while Google Cloud surprised with a slight acceleration. On the surface, one could conclude that the growth story for cloud infrastructure is coming to an end. However, I think the broader behaviors we are witnessing are expected reactions to tightening macro conditions following periods of robust spending over the last two years. Additionally, some other factors may be impacting the growth of the hyperscalers that are separate from demand for cloud infrastructure and digital transformation in general. Let’s look at the results.

Datadog Dash 2022 Recap

October 25, 2022 / poffringa

Datadog introduced a number of new products and enhancements at their annual user conference last week. Expectations were high coming into the event, as Datadog often holds back new releases for several months in order roll out a parade of goodies. Once again, they stepped up the pace, highlighting 18 separate product announcements versus 10 at Dash a year ago. The breadth and scope of their product reach continues to expand.

While the feature list is sprawling, Datadog’s product strategy is consistent. They remain focused on serving all needs of a modern DevSecOps function from a unified interface and shared data set. This creates advantages in efficiency and clarity over bundling together multiple open source and commercial point solutions, eliminating toggling between tools and reconciling inconsistent performance indicators. While Datadog reaches further into new areas like developer tooling and security, they are disciplined about delivering what is relevant for a DevOps context. This deliberate strategy should allow them to continue to grow their addressable market without infringing on core offerings of entrenched competitors in adjacent categories.

Snowflake Cybersecurity Vertical and the Powered By Program

October 18, 2022 / poffringa

One of Snowflake’s newer growth strategies, beyond their core data platform, is to enable other companies to build their businesses on top of Snowflake. The value proposition is that new companies with a heavy data processing function in their product can bootstrap their launch by leveraging Snowflake’s platform. There are multiple benefits in taking this approach, including reducing time to market, eliminating infrastructure overhead and avoiding hiring dedicated technical staff. Snowflake has invested years building out and refining their data platform for high scale operations.

In most cases, it doesn’t make sense for a new vertical software provider to build their own data platform, which arguably duplicates a lot of Snowflake’s functionality. Given Snowflake’s high volume, they are likely able to provide a new business with data processing capabilities for the same or lower cost than if they tried to manage their data platform themselves. This allows the new business to focus on their core competency, not figuring out how to build a big data solution.

Cloudflare Birthday Week Recap

October 13, 2022 / poffringa

After promoting 20 products and enhancements to general availability during GA Week, Cloudflare rolled through Birthday Week with even more announcements. The pace of product execution is staggering. As is typical with Birthday Week, we got a view into what to expect next from the Cloudflare product team, along with some interesting new go-to-market programs. These were all couched under Cloudflare’s mission to help build a better Internet, with a thoughtful balance of monetized and free services.

As with GA Week, I was impressed by the breadth of announcements. These spanned multiple product categories and several stand to leapfrog product capabilities forward, potentially ahead of competition. We are also seeing more examples of disruptive pricing models, where Cloudflare is leveraging their massive network scale and ownership of infrastructure to undercut competitive offerings. They appear poised to capitalize on their long time investments in data centers and global network capacity.

To get caught up on Cloudflare’s announcements from GA Week, readers can check out my prior coverage. For Birthday Week, Cloudflare provided a treasure trove of information through their blog, Cloudflare TV and press releases. This content was consolidated into a Birthday Week landing page and a handy end-of-week listing of all announcements.

In this post, I’ll try to review all the major announcements from Birthday Week and provide some perspective on what each implies for Cloudflare’s business growth. Our partners over at Cestrian Capital Research recently published an update on Cloudflare, including financials and technical analysis. Interested readers can check out that coverage as they consider an investment in NET.

Cloudflare GA Week Recap

September 27, 2022 / poffringa

After a break of just a few months, Cloudflare scheduled two of their Innovation Weeks back to back. The first was dubbed GA Week and brought a number of beta products to general availability. This served to clear the decks for Birthday Week, which is when Cloudflare traditionally introduces their next wave of future products. While expectations are always high, Cloudflare really delivered A LOT.

They announced so much, that I have to break my coverage into two posts and limit the depth to the major announcements. I consolidated all the GA Week news into this blog post summarizing the major changes, including perspective on what this means for Cloudflare’s evolving product offering. As I write this, Birthday Week is ongoing, delivering even more exciting announcements. I plan to cover that as well and will publish a summary sometime next week.

Oracle Cloud in Hypergrowth

September 23, 2022 / poffringa

I was recently surprised to see that Oracle’s Cloud Infrastructure offering is accelerating its revenue growth at a fairly large scale (approaching $4B annual run rate). For the past several years, we have neatly defined the hyperscalers as the Big Three of AWS, Azure and GCP. This has been convenient for investors and analysts alike, as we have only had to track activities within these three. Analysis of independent software infrastructure and security providers could limit consideration of each company’s products in relation to similar offerings from the Big Three hyperscalers.

Zscaler (ZS) Q4 FY2022 Earnings Report

September 18, 2022 / poffringa

Zscaler delivered an impressive earnings report to cap off their fiscal year, demonstrating their ability to capitalize on strong demand for their leading Zero Trust solution. Coming into the report, investors were concerned about decelerating billings, worsening operating leverage and the need to provide an out of cycle fiscal year guide. Additionally, competitors like Palo Alto and Cloudflare had been increasingly vocal about customer wins. None of these factors appeared to impact the Q4 report, however, with Zscaler re-accelerating billings growth and highlighting several enormous enterprise and federal customer lands.

I had shared similar concerns and gradually reduced my allocation to Zscaler stock over the course of this year. Based on the Q4 results, this move appears to have been premature. While I still wonder about the longer term play for Zscaler, in the immediate term, they are feasting on the heightened demand environment for Zero Trust, as large enterprises and government agencies scramble to upgrade their network security. In this post, I’ll dig into the details from Zscaler’s quarter, revisit their product strategy and consider the path forward.

Revisiting IT Platform Consolidation

September 13, 2022 / poffringa

Prior to Q2 earnings, I had a thesis that macro-induced pressure on enterprise IT budgets would result in consolidation of point solutions, favoring platform providers with a suite of product offerings. The idea is that technology budget owners (CIO, CTO, CISO) look for opportunities to reduce costs by eliminating redundant services and trying to concentrate spend onto fewer vendor platforms. This consolidation usually results in savings through volume discounts, fewer contracts and less operational overhead. It can also allow staff to be repurposed, who may have been dedicated to managing a particular vendor point solution.

The scope of consolidation can extend to open source projects or DIY internal solutions as well. These efforts are often appealing on the surface – the software license is free. However, they require commitment of the most expensive resource in an IT organization, namely engineers, to make them work. Faced with hiring freezes, IT leaders can repurpose software engineers who were managing these internal efforts to fill staffing needs supporting applications tied to revenue. They can then replace the open source service with a commercial managed service, often reducing cost. A fully loaded software engineer expense can reach $200-300k per year or more (considering total package of salary, benefits, office support, SBC, etc.). It doesn’t take many engineers to cover the cost of a commercial product.

MongoDB (MDB) Q2 FY2023 Earnings Report

September 6, 2022 / poffringa

After fairly positive earnings in Q1, MongoDB’s Q2 report reflected increased pressure from the macro environment. Product-market fit, competitive position and GTM motion with large customers all remain consistent. What appears to have changed is a marked slowdown of utilization expansion for specific customer segments, compressing revenue growth as a consequence of MongoDB’s consumption model. This impact is being compounded by the mix shift of EA license revenue to Atlas.

In spite of this, management is continuing to invest heavily to drive large customer growth. Sales and Marketing spend increased significantly in Q2, highlighted by a surge in sales headcount and the resumption of in-person events, particularly the MongoDB World conference. These are resulting in growth of Direct Sales customers, which hit record net additions in Q2 and now account for 86% of total revenue. As new salespeople ramp up, more customers should push over the $100k ARR spending threshold.

In this post, I review the results, unpack how these are related to customer behavior and provide some signals that investors can monitor to track MongoDB’s progress going into 2023. For the next couple of quarters, I think that MDB stock will be under pressure. However, when headwinds to customer expansion abate, the reversal could be swift, reflecting a similar pattern that we observed in 2021, magnified by the greater mix of Atlas revenue. This could provide a favorable set-up for second half of 2023, as the company laps this year’s results. However, that means investors would need to stay invested and have faith in MongoDB’s product vision.

Snowflake (SNOW) Q2 FY2023 Earnings Report

August 29, 2022 / poffringa

After two quarters of mixed results, Snowflake reignited investor sentiment with their Q2 earnings report. Revenue beat prior estimates for the quarter by a large margin, with management upping forward projections as well. Customer activity was the highlight of the quarter with record additions of $1M customers and surprising linearity in DBNRR. As we are two quarters past platform optimizations, Snowflake may be starting to benefit from additional workload migrations by large customers. Looking forward, their product strategy to expand the reach of the Data Cloud and bring application development directly onto customer data should provide additional drivers of platform utilization.

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