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Fastly (FSLY) Q2 2022 Earnings Review

August 23, 2022 / poffringa

Continuing my series of looping back on a few companies that I had held previously, I thought it would be instructive to revisit Fastly (FSLY). I had owned Fastly stock during its heyday in 2020, entering in early 2020 and ramping up my position after their strong Q1 2020 results and initial guide for Q2. By May 2020, FSLY was one of my largest positions with a cost basis of $32. The stock took off over the summer, jumping from the low $20 range in May to break $100 by August.

It eventually reached a peak of $128, before pre-announcing weak Q3 results, stunning the market. Yet, FSLY still managed to break $100 again in early 2021, as investors assumed it might recapture its prior momentum. Unfortunately, it didn’t, delivering one poor quarterly report after another. Following the disappointing Q3 2020 earnings, I began reducing my allocation in the $80-$90 price range and still managed to capture a favorable upside. I finally closed my position in early 2021.

Checking in on Twilio (TWLO)

August 18, 2022 / poffringa

I like to keep tabs on stocks that I have owned previously, in the event that their execution catches back up with the potential I had identified previously. When I invest in a company, it is because I see an opportunity in which a strong product strategy could drive durable revenue growth and operating leverage over the long term. However, that thesis may not always play out as expected, or may take longer to align with execution. Companies can also experience different product adoption curves, cycling through rapid and slowing growth, as each product category achieves market fit.

Twilio (TWLO) is one such stock that I rotated in and out of, first entering in mid-2018 and exiting in 2021. During that time period, I watched the stock ascend from about $60 to an all-time-high of $443 in February 2021. Since its 2021 highs, the stock has descended back into the $80’s, putting it well below the price range going back to 2019 (pre-Covid). It’s Price/Sales ratio is now below 5, an all-time low over the prior 5 years. This ratio was above 10 for most of 2018-2019, reaching as high as 20 in mid-2019 and even peaked at 37 in 2021.

Cloudflare (NET) Q2 2022 Earnings Report

August 15, 2022 / poffringa

Cloudflare (NET) announced Q2 FY2022 earnings on August 4th, demonstrating better than expected resilience to the macro backdrop, in contrast to many software infrastructure peers struggling with more acute softening of demand. Cloudflare beat revenue projections for Q2 and raised estimates for the remainder of the year. More significantly, they demonstrated a renewed commitment to deliver positive free cash flow, reversing the backsliding in Q1’s report. Growth in large customer additions hit a new record, illustrating Cloudflare’s ability to cross-sell their product suite to enterprises across multiple categories. While DBNRR ticked down a point, leadership is committed to crossing the rarefied threshold of 130%. The market favored the results as the stock popped 27% the following day.

I will share a summary of my reactions to the report, structured around financial performance, product activity and Cloudflare’s broader strategy. I won’t rehash all of the metrics, as those are readily available online in the earnings report and Investor Presentation. Additionally, investors new to the Cloudflare story can catch up on the narrative through my prior coverage.

Datadog’s Q2 2022 Earnings Report

August 8, 2022 / poffringa

Datadog (DDOG) announced Q2 FY2022 earnings on August 4th. In contrast to their strong report from Q1, this quarter’s results were mixed. The impact of the macro environment on enterprise spend was pronounced, resulting in a slowdown in commitments from large customers. This weighed on next quarter and full year revenue estimates as well as profitability measures. With that said, we observed a similar pattern in 2020, which provided a nice set-up for outperformance in 2021. Datadog is rapidly expanding their product footprint and demand for software infrastructure overall remains high. I don’t see any other factors contributing to Datadog’s deceleration. This implies that as the macro environment normalizes, Datadog should be in a favorable growth position looking forward to 2023.

I will share a summary of my reactions to the report, structured around financial performance, product announcements and the competitive landscape. I won’t rehash all of the metrics, as those are readily available online in the earnings report and Investor Presentation. Additionally, investors new to Datadog can catch up on the narrative through my prior coverage.

Software Infrastructure Earnings Summaries Q2 2022 – FFIV, NOW, FIVN

August 2, 2022 / poffringa

As quarterly earnings season is beginning for software infrastructure companies, I like to monitor the results of providers in adjacent categories for signals about the overall demand environment for the stocks that I currently own. While not a direct replacement, these related software companies can reveal how enterprise spending is trending and raise any warning flags or surface potential tailwinds. Additionally, in the segments in which smaller providers compete with the hyperscalers, we can understand where the large public cloud vendors are consolidating share and where spending trends are benefiting all companies. The reports thus far have been instructive, showing that enterprise spend on software and cloud is slowing, but seems to be surprisingly resilient given the macro backdrop.

In this post, I will go through the take-aways of interest from F5, ServiceNow and Five9. For these posts, I won’t rehash all the performance for a particular company, as some include categories of IT spend that aren’t relevant. Rather, I will summarize and cherry-pick the items that are applicable for software infrastructure and security providers. This supplements a prior post I published recently reviewing the performance of the hyperscalers in Q2.

Hyperscaler Q2 Earnings Take-aways

July 31, 2022 / poffringa

As quarterly earnings season kicks off for independent software infrastructure companies, I like to review the performance and announcements from the larger technology providers for signals about the demand environment and trends that may impact the smaller software companies that I cover. The hyperscalers (AWS, GCP, Azure) provide the most obvious corollary. Commentary from adjacent providers can also be useful, whether in consulting, hardware or enterprise software vendors. Thus far, the reports have been instructive.

In this post, I will go through the take-aways of interest from Microsoft Azure, Google Cloud Platform, Amazon Web Services and IBM. In future posts, I will try to batch up earnings reports from other software infrastructure providers taking the same approach of picking out the signals that might be interesting for general trends in the industry. For these posts, I won’t rehash the full performance for a particular company, as the hyperscalers in particular address a lot of unrelated industry segments. Rather, I will try to summarize and cherry-pick the items that are relevant for independent software infrastructure and security providers.

MongoDB Version 6.0 Released

July 25, 2022 / poffringa

On July 19th, MongoDB 6.0 was officially released. A number of the features were introduced during MongoDB World in June and are now available for customers to activate. This version continues MongoDB’s vision of providing a single data platform for developers to build modern software applications. It adds new capabilities to the platform that address additional application workloads, reducing the overhead of relying on point solutions for some data access patterns. The release also adds capabilities that improve security, ease of use and accessibility to new user types.

First Look at GitLab – the One DevOps Platform

July 23, 2022 / poffringa

GitLab stock has nearly doubled since bottoming in May and reporting strong Q1 FY2023 results on June 6th. Analysts followed through with Buy ratings and increased price targets. The stock has been on a downward trajectory since the IPO in October 2021 and is still more than 50% below their ATH price in November, a trait shared with many other software infrastructure plays. As we are three quarters into their life as a public company, I wanted to dig into the story and begin considering it for an investment. Personally, I have used the product with a previous engineering team and was impressed by the ease of use and integration of multiple steps in the software development lifecycle. Since then, GitLab has expanded their offering and are setting a broader vision to become the “One DevOps Platform”.

As I typically do, my focus will be on the product offering, platform roadmap, market position and competitive landscape. For a great summary of the financial drivers and some technical analysis, I recommend checking out this article from Cestrian Capital Research (who is also a sponsor). It provides a nice balance to my coverage for investors considering a position.

Considerations for IT Spend Consolidation

July 17, 2022 / poffringa

As we approach the next set of earnings for software infrastructure companies, we are receiving some signals that overall IT spending is lagging, primarily as a consequence of recession fears and consumer demand slowdown. There is a likelihood of spending pullback, similar but perhaps less acute than what we saw in early 2020. Some software companies have already telegraphed this, with examples like ServiceNow and Microsoft recently commenting on the tough demand environment.

Going forward, as this trend manifests, it will likely impact the valuations of software infrastructure companies. Analyst targets for revenue growth and profitability will be adjusted downward, or will remain static absent the typical beat and raise cadence. I can’t offer any additional insight into macro drivers and how those will play out over the next 12 months. However, I think it is worth considering some characteristics in software infrastructure spend that could help counterbalance overall adjustments to IT budgets. These factors may help some companies limit the impact more than others. Further, as macro headwinds subside, these factors will ensure that well-positioned software companies can return growth to previous levels.

Zscaler Zenith Live Conference 2022

July 15, 2022 / poffringa

Zscaler unveiled a number of product enhancements during their Zenith Live conference in June, demonstrating why they are still the leader in Security Service Edge. They continue to expand the capabilities of their core Zero Trust platform, extending secure connectivity for enterprise users into application workloads and now IoT devices. They also introduced several AI-enabled features to streamline threat identification and resolution. While I no longer own the stock, I am impressed by the breadth and depth of their offering. For customers seeking a complete and robust solution for a Zero Trust migration today, Zscaler provides an enterprise-ready, hardened platform that checks all the boxes.

In this post, I will review the announcements made during Zenith Live and discuss how these further solidify Zscaler’s position in Zero Trust. I will also draw some comparisons to Cloudflare’s progress and share my investment approach for this space.

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