SSI Newsletter - 2020 - Software Stack Investing

I publish a free newsletter for interested readers, sent out roughly every two weeks. In it, I summarize posts from the prior period and include a link to them. This allows readers to catch up on any blog updates they missed. Also, I list recent news items regarding covered companies, competitive activity or the software space in general. These range from analyst events to new product announcements – smaller, but timely, items that don’t merit a full blog post. As with all content on the SSI web site, subscription to the newsletter is free. You can use the link below to sign up.

Newsletter Sign Up Page

Newsletter Content Archive – 2020

For those who missed prior newsletters, I will compile the list of news items from past weeks below. If you want to receive these directly to your inbox before the start of the trading week, sign up for the email newsletter directly.

News Items from Week of Nov 23 – Dec 13 (DOCU, MDB, NET)

On December 3rd, DocuSign (DOCU) released Q3 FY 2021 results. The results represented a major beat. Revenue grew 53.5% year/year and 11.9% sequentially. This beat analyst expectations for 44.8% growth. More impressively, revenue growth represented an acceleration from Q2’s value of 45.2%. Forward guidance for Q4 and full year were raised as well. Q4 (Jan 2021 end) revenue is projected to grow 47.7%, and the estimate was almost 7% over analyst projections. With a similar beat in magnitude to Q3, revenue growth for Q4 should be over 50% again. Similarly, full year revenue growth was raised by over 4% to 46.6%. Q3 billings grew 63% year/year, up slightly from Q2 growth of 61%. This further supports the high revenue expectations looking forward.

The outperformance in revenue translated into strength in profitability. Non-GAAP EPS came in at $0.22, beating estimates by about $0.10. Gross margin landed in the target range at 79%. Operating margin surged to 13% (up from 10% last quarter) and FCF margin was about 10%. On a rule of 40 basis, DocuSign would be over 60.

Customer activity was strong as well, and would support future growth. Total customer count was up 46% year/year and nearly 10% sequentially. Enterprise and commercial customer count grew faster by 64% year/year. These represent larger companies that are serviced through a direct sales channel (versus self-serve on the web site). Net Expansion Rate hit its highest mark over the last 2 years at 122%. Record customer growth over the last few quarters should continue to drive revenue in 2021. DocuSign leadership stated that they usually revisit a customer after 12 months to land new upsells.

With all these positive results, price action on DOCU has been lukewarm. On the day of earnings and the day following, DOCU stock appreciated nicely by about 6% and 5% respectively, reaching a peak around $243 on Dec 4th. However, the following week, the price dipped to the $220 – $230 range and sits at about $228 now, which is below the close before the earnings release. This may be tied to some conservative commentary by the leadership team at subsequent analyst events. Also JP Morgan downgraded several software names on Dec 9th on valuation concerns, which included DOCU.

While the market’s reaction has been a little disheartening, I can appreciate there is likely concern around the sustainability of DocuSign’s growth after COVID-19 recovery in 2021. It is being lumped in with other COVID beneficiary stocks. While COVID drove acceleration of DocuSign adoption, I don’t see electronic contract processing reverting to paper after COVID recovery. Enterprises will still have a lot of digital workflows to enable. Beyond continued growth of eSignature in 2021, DocuSign should see renewed enterprise spend on the broader CLM solution, as well as new revenue drivers in international and their nascent notary offering. I plan to publish a detailed analysis of DocuSign’s results next. in the meantime, I was happy with their performance and am maintaining my position.

MongoDB (MDB) also released earnings recently, reporting Q3 (Oct end) FY2021 results on December 8th. Like DocuSign, they outperformed expectations. Revenue growth was 37.8%, roughly inline with Q2, and ahead of analyst expectations by 11%. Q4’s revenue target was raised by 8% for 26% growth. Atlas, MongoDB’s cloud offering, grew revenue by 61% year/year and now makes up 47% of the total. This is down from 66% in Q2, but still well above overall growth. As Atlas makes up a greater portion of overall revenue, its growth rate will determine overall revenue growth for the company. Leadership contends that this is driven by new customer demand, versus migrations from on-premise licenses.

Profitability, on the other hand, showed only slight improvement. MongoDB leadership talked about investing for the large opportunity ahead on the earnings call. For Q3, Non-GAAP gross margin was 72%, which was inline with a year ago. Operating margin was -10.6% versus -13.0% a year ago and -7.4% in Q2. On an absolute basis, operating loss was greater this year. This translated into Non-GAAP EPS of ($0.31) versus ($0.26) a year ago and analysts estimates for ($0.44).

Customer growth was strong. MongoDB added 2,400 customers in Q3 for a total of 22,600 customers. This was up 42% year/year and 12% sequentially. Atlas customers made up the majority of these. Customers spending over $100k in ACV was up 31% year/year and 10% sequentially. Customer growth for Atlas in particular was cited by several analysts as a strong indicator of future revenue acceleration, as we look to next year. Finally, MongoDB released a major feature improvement in the quarter, adding support for multi-cloud clusters on Atlas.

Following these results, MDB stock is up over 20%. Its P/S ratio is now over 36. This compares to ESTC, with a P/S ratio of about 23. Yet, Elastic is growing revenue faster than MongoDB and has better profitability measures in terms of both gross margin and operating margin. This disparity in valuation doesn’t make sense to me. I realize that the market has generally been confused about Elastic’s product strategy and value proposition, but this overhang in valuation continues after Elastic’s strong Q2 results. Comparing the two names, I feel like Elastic offers more upside over the next couple of quarters. Therefore, I shifted my MDB allocation to ESTC in my personal portfolio. I am still bullish on MDB long term and may re-invest once revenue growth accelerates back over 40%.

Finally, Cloudflare (NET) held another “Release Week” last week. This was dubbed Privacy and Compliance Week. Like other Release Week events of the past, it included a smattering of product announcements. Interested investors should review all the activity on the Cloudflare blog. I will highlight major feature additions below:

Data Localization Suite. As data transport outside of country of origin becomes a more sensitive compliance consideration for global operations, Cloudflare is offering customers more control over data locality. For network traffic, they can manage where that traffic is inspected and where private cryptographic keys are stored. For serverless workloads specifically, customers can designate where their applications store data. The new Durable Objects store will allow users to pin data to a specification jurisdiction.
Workplace Records. This is an interesting extension to Cloudflare for Teams. As employees work remotely and outside of sanctioned office locations, companies still need to track and report on which legal jurisdiction the employee resides for that work period. This can be for payroll tax payments and even have IP implications. To help companies solve this problem, Cloudflare is adding a module to Cloudflare for Teams that tracks the location and application usage of any employee by day. This data is then made available to system administrators. The feature even offers compliance enforcement to prevent employees from connecting to certain applications in specific countries.
Expanded Web Analytics Support. After launching their privacy-first Web Analytics service in September, Cloudflare received many requests from customers wanting to utilize the service without needing to move their site’s hosting infrastructure (like DNS) onto the Cloudflare network. Cloudflare is making this possible by providing an HTML snippet (similar to the one used by Google Analytics) for customers to embed to connect their site to Cloudflare’s Web Analytics service. This should make Cloudflare’s Web Analytics service available for more users. Benefits to Cloudflare are more exposure to potential customers and broader visibility into Internet activity, which could drive insights for future products like security. At the end of the blog post, the author also hints that Analytics may evolve into a stand-alone product in the future.

With these releases, Cloudflare continues to demonstrate the rapid cadence of their product development cycle. Data locality and compliance are becoming important considerations for global internet-based companies. These tools will help Cloudflare build competitive advantage by offering customers easy mechanisms to address them.

News Items from Week of Nov 9 – 22 (AYX, DOCU, ESTC)

On November 18, we received a preview of e-commerce activity for the Holiday season. Verizon released the first batch of data from their annual Business Retail Trends Report, which tracks e-commerce traffic across Verizon’s broadband networks using a sampling of traffic to 20 of the Top 100 retailers. They initially compared online traffic from the first week of November 2020 to that of 2019. They found that online retail traffic increased 82% year/year for the sites monitored. They also measured a 28% increase in the use of online payment sites year/year.

While they don’t provide specific details on which retailers or the relative performance of each, we can assume this higher level of activity will translate into increased usage of services from software providers that power these online experiences. For example, Elastic (ESTC) has a heavy penetration within online retail for search, security and observability use cases, counting Walmart (#1), Home Depot (#6), Walgreens (#5) and Kroger (#3) as customers that appear on the Top 100 list. Fastly (FSLY) has strong online retail penetration as well, and had Foot Locker (#73), Discount Tire (#87) and Target (#8) as attendees at their recent user conference. These same trends would benefit Datadog (DDOG), Zendesk (ZEN), MongoDB (MDB) and Twilio (TWLO).

In other news, AWS launched a new visual data prep tool, called AWS Glue DataBrew. The tool is designed to help analysts visualize, clean and normalize data sets, in advance of conducting more advanced analytics or applying machine learning models. DataBrew can connect to any data store on AWS or third-party databases with standard connectors. Once prepped, the data can be exported to a number of services, like Amazon SageMaker for machine learning, Redshift for analytics or Tableau for BI. It includes 250 built-in data transformations. The main limitation is that most of the connectors are currently for AWS hosted services.

In parallel, Snowflake published a blog post promoting the use of a “modern data stack” to unlock insights for marketing teams. What was interesting were their recommendations for tools to assist with data ingestion and transformation. Snowflake promotes the combination of Snowflake, Fivetran and dbt for analysts to access, model and understand all enterprise data in order to make marketing decisions. Fivetran provides an automated data pipeline, which allows the user to connect to any data source (like Marketo or Salesforce) and import the necessary customer data into the Snowflake data warehouse. dbt packages integration with the Fivetran import process to perform transformations on the data in order to cleanse and prep it as it is loaded into Snowflake. These three tools provide all the capabilities needed to power a modern data analytics workflow, according to Snowflake.

The reason I highlight these developments from Amazon and Snowflake is that they look a lot like major features provided by the Alteryx toolset, specifically their mainstay Designer product. In my Q2 recap of Alteryx from September, I highlighted the fact that I was concerned that the Snowflake ecosystem of tooling providers could encroach on the need for Alteryx. Alteryx had not created a formal Technology Partnership with Snowflake at the time, while competitors like DataRobot, Dataiku and FiveTran have. While Alteryx leadership claims they work well with Snowflake and have a connector to it, the lack of a formal relationship seems to be putting them at a disadvantage for these types of promotional opportunities. Given the visibility and momentum of Snowflake, Alteryx risks becoming silo’ed into a narrower set of use cases within data analytics. During the period from 2018 – 2019, it seemed that Alteryx was leading the data analytics space. Now, they now seem to be at risk of getting relegated into a secondary role.

On November 12, DocuSign announced Agreement Cloud, 2020 Release 3. They described it as their “biggest Agreement Cloud announcement to date”. It was packed with 12 new features for existing products eSignature, CLM and Click. Highlights among these were a Slack integration, SMS notifications, a drawing capability, additional language and vendor notation for CLM, clickwrap agreement transmittal via URL and improvements to the iOS app. The release also included several new product offerings on the Agreement Cloud:

DocuSign Analyzer. Provides an AI-driven tool for the pre-execution stage of agreements, streamlining negotiation and reviewing inbound contracts for risk.
DocuSign CLM+. Embeds the AI-driven capabilities from Analyzer and DocuSign Insight into broader contract lifecycle management workflows.
DocuSign Monitor. A service that monitors activity tied to a customer’s DocuSign accounts, looking for malicious behavior associated with login attempts, deleting envelops or accessing a broad array of documents. Alerts with user activity details can be sent to security personnel to review.

Not to be outdone, Elastic launched version 7.10 on November 11. This followed the 7.9 release in August. Given that this release was held for almost 3 months, versus the normal 1-2 month release cadence, it was packed with enhancements across the Elastic stack. I won’t try to describe all of them – the Elastic blog provides sufficient detail. With that said, these were the noteworthy items in my opinion:

Searchable Snapshots. Allows data to be searched from a lower cost, external storage tier like Amazon S3, Azure Storage or Google Cloud Storage. This can lower the cost of maintaining this data by up to 50%.
User Experience Monitoring. Extends observability by providing a dashboard that reports on metrics specific to a positive user experience, like page load and render times tracked by core Web Vitals. It also reports on user device attributes like connection type, browser, operating system, etc. This is a common feature of other commercial observability platforms.
Synthetics Monitoring. Adds multi-step user journeys to the Elastic Uptime solution to ensure application users can navigate through complex workflows. Developers can create these test paths as scripts that are then executed by Elastic against test or production environments. Adding this capability to Elastic’s observability offering brings it to closer parity with other commercial observability solutions.
Kibana Lens. Made Lens generally available. Kibana Lens provides an intuitive drag-and-drop interface for users to easily set up visualizations of any data in the Elastic system. This latest version of Lens added a number of new features for display and formatting.

The 7.10 release also included several enhancements to security monitoring and protection. Elastic continues to close the feature gap for search, observability and security use cases on its broad platform with the point solutions offered by competitors. In general cases, enterprises may consider the Elastic feature set to be complete enough for their needs to leverage Elastic for multiple IT categories, reducing their vendor sprawl and realizing cost savings. This probably explains why 75% of Elastic’s customers with >$1M ACV utilize more than one Elastic solution (Enterprise Search, Observability or Security).

News Items from Week of Oct 26 – Nov 8 (FSLY, NET, TTD)

Fastly announced Q3 earnings results on October 29th. As investors will recall, this followed a pre-announcement on October 14th, in which they lowered revenue guidance by about $4M at the midpoint. They attributed this reduction to two causes – a substantial reduction in usage from their largest customer (TikTok) and lower usage from a few other customers. This shocker knocked the stock price down by 25-30% the next day, albeit from an all-time high in the $120 range.
The actual Q3 results provided a bit more clarity, but generally left investors lukewarm. Q3 revenue landed at $71M for about 42% year/year growth. Due to the lower revenue performance, operating margin dropped into the negative range to -5.6%, but they did deliver positive adjusted EBITDA of $0.8M. Non-GAAP gross margin was 59.8%, showing year/year improvement of 3.7%.

For Q4, Fastly projects revenue in the range of $80-84M, for growth of 39% at the midpoint. This includes up to $8M of deferred revenue from Signal Sciences. If we back out a full $8M contribution from the midpoint of the Q4 estimate, organic growth is projected at about 26%. On the surface, this seems low, but Fastly leadership clarified that they are expecting little revenue contribution from TikTok. I imagine this guidance is very conservative, given the disappointment generated by the Q3 miss.

In terms of customer metrics, Fastly’s performance was mixed. They added 9 more enterprise customers in Q3, bringing the total to 313 for about 14.2% annual and 3.0% sequential growth. These represent customers that spent $100k or more over the trailing 12 months. The total customer count increased by 96 customers to 2047, representing growth of 21.5% annually and 4.9% sequentially. Recall that in Q2, Fastly added a record 114 customers, so Q3 represents a slight deceleration, but is higher than earlier quarters.

While enterprise customer growth is marginal, DBNER shot up to 147% for Q3, representing an increase from 137% in Q2. However, DBNER excludes customers who churned in the period. To account for churn, Fastly provides NRR, which came in at 122%, and was down from 138% in Q2. NRR only measures revenue in the last month of the quarter (September), which had some unusual adjustments specific to that month. To smooth this out, Fastly provided Last-twelve-month NRR, which hit 141% in Q3, up from 136% in Q2.

These different customer retention/growth metrics feel a little like a shell game, but the core take-away should rightfully be that Fastly can drive extreme revenue expansion for customers that stay on the platform. DBNER of 147% is best in class. Enterprise customer acquisition needs focus and lags the rates of other software peers. If Fastly can ramp up new customer adds, then their strong expansion motion for existing customers will drive high revenue rates over the long term.

Arguably, Fastly’s go-to-market motion is nascent. Leadership has talked in the past about how they have done little marketing. Additionally, their head of sales is due to leave the company in November. The CEO claims he is covering this role for now, but obviously would benefit from a dedicated leader who could focus on building out the sales motion. I think Fastly has relied on a “build it and they will come” approach to sales and marketing in the past. Given their traction to date, this actually provides optimism around the impact that a more structured sales effort could make.

Looking forward, I think Fastly’s big opportunity lies in its new offerings. Initially, this was Compute@Edge. With the Signal Sciences acquisition, we add Secure@Edge. As part of the Q3 earnings release, Compute@Edge moved out of beta into Limited Availability release. Customers are already using the platform for production use cases. Access is still controlled, though Fastly recently updated the Compute@Edge customer access page to reflect the fact that the program is now at “maximum capacity”, which appears to reflect high customer interest.

Fastly is holding their annual customer conference, Altitude, on Nov 10th and 12th. This will feature customer demos and presentations from Fastly leadership. The two days are divided into one session for EMEA and one for North America (time zones aligned). Each session has its own agenda, with most Fastly leadership presentations duplicated, but different customer highlights. We will receive updates on the product roadmaps for both Compute@Edge and Secure@Edge, as well as see demos of customer use cases on Fastly’s platform, including a few for edge compute. I plan to participate in the conference and will be looking for updates that help clarify the opportunity for 2021.

While I am still optimistic about Fastly’s potential, I have acknowledged the near term execution risk and reduced my oversized allocation to FSLY in my personal portfolio. I am maintaining a 9% allocation for now, and may increase that based on what I learn at Altitude and as the quarter progresses. Overall, I think Fastly’s potential market is large and the story will unfold over years (one way or another). In the meantime, I had moved the proceeds from FSLY into NET over the course of the last month, building up a rather large position in NET prior to their Q3 earnings report. I plan to publish a full analysis on Fastly’s quarter in the next week, after the Altitude conference.

Cloudflare (NET) reported their Q3 earnings on November 5th. They delivered a phenomenal report, with revenue growth accelerating 6% sequentially to 54.5%. This beat the consensus estimate for 39.6% growth by almost 15%. They also improved on the bottom line, delivering ($0.02) Non-GAAP EPS, which was up $0.14 from Q3 2019. FCF margin, while still negative at -16%, improved from -45% a year ago.

The Q4 outlook appears to continue the trend of high revenue growth. Cloudflare raised their Q4 revenue target to represent 40.6% growth, beating analyst estimates by about 7%. For Q3 revenue, the company had originally projected 39.4% growth as part of the Q2 report. With the large beat in the actual revenue delivered for Q3, we could see a similar beat in Q4, pushing revenue growth over the 50% mark again. Leadership also raised their Non-GAAP EPS target by about $0.02. For the full year, they are now projecting 47.4% revenue growth, which was raised by 5.5% in the Q3 report.

Beyond the financial outperformance, Cloudflare delivered strong customer growth. Total paying customers increased to nearly 101k, up 24.7% year/year or 5.0% sequentially. More impressive was the growth in large customers, which increased to 736 in Q3. This is up 63.2% year/year and 15.5% sequentially. Large customers are defined as having annualized revenue greater than $100k in that quarter (current quarter revenue x 4). Keep in mind, this is not directly comparable to Fastly’s enterprise customer count, as that includes customers exceeding $100k revenue in the prior 12 months. Cloudflare’s DBNRR was 116%, down from 121% a year ago and up slightly from Q2.

As I highlighted in prior newsletters, Cloudflare’s product release cadence has been extraordinary. Over the course of the last several months, they grouped major product releases around three events – Serverless Week, Birthday Week and Zero Trust Week. These included enhancements across several product lines, with highlights representing Cloudflare One, Workers Unbound, Magic Firewall, IDS, Browser Isolation and Durable Objects. I particularly like Cloudflare’s move into full-featured enterprise security, with Cloudflare One as the umbrella and Magic Transit as the connector. Once an enterprise agrees to hook their corporate network up with Cloudflare’s, then it is straightforward for that customer to consume other Cloudflare services.

Given their rapid product execution and strong marketing motion, I had been building a position in NET since August. This reached a 22% allocation prior to Q3 earnings. After the post-earnings surge, it now represents my largest holding. I plan to publish a full analysis of NET in the next couple of weeks and will set a 5 year price target at that time. I will also be monitoring FSLY’s performance over the next couple of quarters and may rebalance these two holdings.

As a final update, The Trade Desk (TTD) delivered their Q3 report on November 5th. While I don’t formally cover TTD, I have a medium-sized position. The Q3 report blew out expectations, driving the stock up almost 27% the next day. Revenue grew 31.5% over Q3 2019, which beat analyst expectations for 10.3% growth by over 21%. Similarly, EPS hit $1.27, which was nearly triple the analyst estimate for $0.45. For Q4, leadership anticipates revenue growth of nearly 34%, beating analyst projections for 18% growth by about 16%. Q4 is seasonally The Trade Desk’s best quarter, so it’s likely they will beat this estimate as well.

This growth is primarily being driven by a large increase in Connected TV (CTV) spend, which increased over 100% annually in Q3. Mobile Video and Audio spend accelerated as well to about 70% annualized growth each. The Trade Desk is benefiting from shifts in the advertising landscape, away from broadcast TV to streaming. The big benefit with CTV is targeting and measurability. With economic distress, advertisers are under pressure to demonstrate ROI from their ad spend. Connected TV makes this possible. Additionally, brand advertisers have traditionally preferred the television medium, but were drawn to online advertising due to its granularity. With the controversy around user generated content on social channels, large brand advertisers prefer the safety of television. With CTV, they can achieve similar measurement. These landscape shifts are playing well for The Trade Desk’s position as the leading demand-side advertising platform.

News Items from Week of Oct 12 – 25 (FSLY, NET, TWLO)

Fastly pre-announced Q3 revenue results on Oct 14th. This was triggered by the close of the Signal Sciences acquisition and the requirement to file a resale registration statement for the stock shares that Signal Sciences shareholders received as part of the acquisition. Specifically, Fastly made the following announcements:

Q3 Revenue is expected to range between $70 – 71M, versus their prior guidance of $73.5 – $75.5M. At the midpoint, this is about a $4M reduction and would represent 41.6% year/year growth (versus 49.6% previously).
They also revoked any other Q3 and full year guidance previously issued.
They will report Q3 results on October 28th, which will include updated full year guidance to include the contribution from Signal Sciences.

Regarding the reduction in revenue, Fastly published the following short explanation:

Due to the impacts of the uncertain geopolitical environment, usage of Fastly’s platform by its previously disclosed largest customer did not meet expectations, resulting in a corresponding significant reduction in revenue from this customer.
During the latter part of the third quarter, a few customers had lower usage than Fastly had estimated.

As could be expected, this news had a dramatic effect. The stock dropped around 25-30% after hours. Since then, it has moved down further to the high $70 range (from a peak in the $120’s). Lots of speculation emerged regarding explanations for the drop in revenue from analysts and investors, ranging from it being largely expected to concerns that customers were dropping Fastly in favor of competitors. Fastly leadership hasn’t been able to offer any more details and promises a full update in the Q3 report.

Like everyone else, I was somewhat disappointed by the news. As investors, we prefer that our companies put up stellar earnings every quarter and provide a linear growth track without any hiccups. However, these are not normal circumstances, between COVID-19 and the political backdrop. Additionally, I like Fastly’s team, innovation and market opportunity for a long term play. I will share some perspective now and look forward to the Q3 report for a full explanation from management and analyst Q&A.

First, the previously disclosed largest customer is obviously TikTok. The reference to the uncertain geopolitical environment tells me that TikTok significantly reduced its usage of Fastly as a CDN at some point during Q3, in order to mitigate risk. On Aug 6th (the day after Q2 earnings), the Trump administration announced their intent to block TikTok in the U.S. I won’t replay the full sequence of events, as most investors are aware of the back-and-forth and latest outcome. What I will point out is that while there was no ban in the U.S., at least one of the DOJ’s published memorandums in opposition to TikTok referenced prohibitions against companies providing content delivery network (CDN) services to TikTok, in addition to listing the app for download on various mobile app stores. I suspect that once TikTok became aware of this intent to block CDN services from U.S. companies, they aggressively diversified their reliance on any particular CDN. This likely resulted in spreading the traffic across several CDN’s and even trying to serve some traffic themselves. This would explain why TikTok usage dropped, without an actual U.S. ban. Given the backdrop, I wouldn’t be surprised if TikTok even tries to run their own CDN going forward. They just can’t take the chance that their service becomes unusable due to an action outside their control.

Second, regarding the few customers that had lower usage than Fastly had estimated, this seems more concerning. Investors might fairly infer that these customers shifted traffic away from Fastly, possibly to competitors. However, what strikes me is the comment about the “latter part of the quarter”. If these were competitive losses, why would they all occur at the end of quarter? The other explanation might be related to some exogenous event associated with COVID-19. The latter part of the quarter is September, when school openings and Fall sporting events were set to resume. We know that Fastly serves many live streaming events, having supported Fox Sports previously in streaming the SuperBowl. Fastly likely reserves capacity for these kinds of events. If certain scheduled events (college football, NFL, etc.) were postponed or had lower ratings, that would have an impact. I am just speculating here, and perhaps there were customer usage reductions for other reasons, like pricing pressure, multi-CDN strategies or competitive wins.

Regardless, I would have hoped that in these cases Fastly could have reacted quickly enough to backfill this demand. We know from comments at prior analyst events that the API traffic is easier to replace as there is a ready backlog of that, but the video traffic takes more time. To serve all customers and maintain a reasonable margin profile, Fastly tries to balance traffic across different types. Obviously, customer concentration is causing variability in revenue delivery. It’s possible they did ramp up spend with other customers, but the gap was too large to offset.

Looking forward, we will get more details in the Q3 report on guidance for Q4 and the full year. That will likely have more impact on the stock price going forward. For total revenue, Q4 will have the benefit of revenue from Signal Sciences. As investors will recall, Signal Sciences had $28M of ARR at end of June with a reported growth rate greater than Fastly’s 62% in Q2. Assuming some further increase from Q2, Signal Sciences’ Q4 revenue contribution could be somewhere between $8-10M. Fastly’s Q4 2019 revenue was $59M, so this addition would provide a meaningful contribution to annualized growth. Of course, organic revenue growth will be important to watch and will likely reflect ongoing uncertainty with TikTok and other impacts. Seasonally, Q4 is Fastly’s largest quarter, so in this regard, sequential organic growth has a tailwind. But the comp to Q4 2019 sets a high hurdle.

Most importantly for me, though, will be to gather inputs about how 2021 will shape up. Beyond an expectation for continued growth of Fastly’s existing lines of business, I will want to understand what incremental contributions we can expect from new product offerings. Specifically, this relates to Compute@Edge and the integration of the Signal Sciences’ platform into the new, combined Secure@Edge offering. Also, updates around go-to-market and cross-sell opportunities will be important. Fastly and Signal Sciences have about 360 enterprise customers total (spent more than $100K in last 12 months between them), of which less than 20 are shared. Finally, I’d like commentary on the head of sales role. As announced in Q1 results, the current head of sales is departing in November. A new sales head might create momentum to drive customer growth.

For Compute@Edge and the product roadmap, we will get more detail at Fastly’s virtual customer conference, Altitude, on Nov 10th and 12th. This will feature customer demos and presentations from Fastly leadership. The two days are divided into one session for EMEA and one for North America (time zones aligned). Each session has its own agenda, with most Fastly leadership presentations duplicated, but different customer highlights. I think it is worthwhile for investors to read through the agendas for each session, as they include some existing customer use cases. Particularly of note is the number of customers that appear to have a production use for Compute@Edge, including Loveholidays, Vox Media, Mux, Mediapro and PerimeterX (and possibly more).

In spite of the Q3 revenue adjustment, I am still optimistic about Fastly’s potential over the long term. I admire their approach to hard-core engineering, resulting in a better technology solution for each category they enter. They have assembled an impressive customer list, with discerning, engineering-led cultures. These are the types of companies that seek out and validate the most performant and advanced technology solutions when assembling their software stack. As Fastly moves beyond CDN, I think the opportunity is vast. Compute, storage and security services will increasingly be distributed towards the network edge. Given their existing investment in a software-defined, distributed network of global edge delivery infrastructure, Fastly is well-positioned to capture a share of this. Compute@Edge will provide a platform upon which Fastly plans to build other monetizeable product solutions, as this job description for an Edge Application Engineer reveals. I think CDN simply provides a proof-of-concept of a base use case preceding future applications for their platform. A bet on Fastly is akin to a bet on AWS in the early days (2010), when self-managed data center hosting was the norm. It also brings the same risk profile, just like there were other independent hosting providers at that time that didn’t ultimately realize the full opportunity for cloud (Rackspace, Digital Ocean, etc.).

While I am bullish on Fastly’s potential over the long term, because of the revenue miss, I acknowledge the execution risk is higher and investor sentiment has shifted. Coming into the Q3 announcement, I had about a 39% portfolio allocation to Fastly. That now stands at about 18-20%. The reduction has two causes. First, the drop in share price by about 1/3 contributed to half of my relative allocation reduction. The other half was driven by my own portfolio management to bring other positions more inline with my allocation to FSLY. I was postponing this pruning to 2021, to avoid a large capital gains tax for this year. I further increased my allocation to NET, which is now one of my top positions. I also added to TWLO, DOCU and ESTC on dips. My latest portfolio percentage allocations are available on my coverage page, which I update at least weekly.

Given my increased position in NET, it’s worth moving on to cover some updates from Cloudflare over the past two weeks. I initiated a position in NET back in August, after their product improvements to the Workers offering, coming out of Serverless Week. They followed this with Birthday Week from Sept 28 – Oct 2, and then Zero Trust Week from Oct 12-16. This product release cadence has been extraordinary and is the main reason for the increase in my optimism for Cloudflare. They combine these releases with strong product marketing communications on their blog and through social media. These are creating a lot of buzz in the industry and momentum for the company.

I covered the releases from Birthday Week in my prior newsletter. Zero Trust Week added another set of impressive enhancements. Here is a brief run-down of the major announcements. There were a number of other announcements, that I didn’t include for brevity:

Cloudflare One. The week kicked off with the announcement of Cloudflare One, which provides a unified set of tools to enable a Zero Trust security posture for customers. It provides a cloud-based, network-as-a-service to protect enterprise devices, data and employees. While this represented some packaging of existing products like Access, Gateway and Magic Transit, it also adds browser isolation, a next-gen firewall and intrusion detection. Cloudflare One is the umbrella product offering, with these other tools roll into it. The product release announcement included quotes from a number of customers, like JetBlue, OneTrust, Discord and INSEAD. These probably drove the market’s reaction, which resulted in NET closing the day up 23%.
Partnerships. In order to round out the Zero Trust capabilities of the platform, Cloudflare announced partnerships with leading providers in identity management and endpoint protection. Cloudflare allows customers to preserve their existing identify management tools, with integrations between Cloudflare One and providers like Okta, Ping Identity, and OneLogin. Similarly, for device security (endpoint protection), Cloudflare is partnering with CrowdStrike, VMware Carbon Black, SentinelOne and Tanium. Cloudflare One also works across different identity providers, which provides an interesting capability that might enable future extensions.
Magic Firewall. This provides a network-defined firewall for an enterprise to secure users, offices and data centers. Like a typical hardware firewall, users can specify allow/block rules based on IP, port, protocol, packet length, etc. This is integrated wtih Cloudflare One making these capabilities automatically available. The product has been launched as a limited beta for existing customers.
Cloudflare Browser Isolation. This product addresses the risk that a script downloaded from an infected web site might introduce a vulnerability into a user’s device. To prevent this, Cloudflare actually runs a copy of the user’s browser in a sandboxed environment on one of Cloudflare’s distributed data centers. The results are then streamed to the user’s local browser instance as a set of draw commands to render the page. This prevents the user’s browser from actually running any code. If a vulnerability is encountered, it only installs on the sandboxed version of the browser, which is then destroyed on the cloud. This product is in beta now, and will be an offering within the Cloudflare One product.
Intrusion Detection System (IDS). Cloudflare’s IDS product is a natural extension of the visibility enabled by Cloudflare One. Once a customer has connected their employees, devices and data centers to Cloudflare’s network, Cloudflare can actively inspect that traffic for threats. This takes the form of traffic shaping and traffic inspection. Shaping observes normal, expected behaviors and flags anything unusual, like a particular user accessing many resources in rapid sequence. Traffic inspection involves examining each user request for something malicious, revealing a targeted attack. For both types of detection, IDS can alert security personnel or take proactive action, like blocking a user’s source IP address.

These new capabilities with Cloudflare One are exciting, as they represent a big step forward in providing a network-first security solution for enterprises. Given that almost all security exploits start by traveling over the Internet, if Cloudflare can get customers to connect all their endpoints to the Cloudflare network, they are in a unique position to provide enhanced security services. This could reduce the need for endpoint protection over time, as EPP agents look for malicious activity on a device before taking action. In an ideal case, that activity could be stopped at the network level first, before the exploit even starts. Granted, this will take some time to realize and we will probably always see some light endpoint protection in place as a back-up, but the positioning for Cloudflare competitively is favorable. It is worth mentioning that Fastly uses a similar network-driven approach, but focuses primarily on application security.

Investors will get insight into how these product enhancements are translating into business growth in NET’s upcoming Q3 earnings release on Nov 5th. Cloudflare has been a steady grower in the high 40% range. After delivering 48% revenue growth in Q2, they are projecting 39% for Q3. With a similar sized beat as Q2, they could get to the same growth rate in the high 40% range. Cloudflare has some tailwinds for Q3 and Q4. In addition to recent product improvements, the free Teams product incentive introduced in March lapsed in September. Hopefully, this drives incremental revenue as some customers convert to a paid relationship.

Finally, after some speculation, Twilio made the formal announcement on October 12 that they will acquire Segment for $3.2B in class A stock. The deal will close in Q4. In terms of valuation, Twilio shared that they paid a similar multiple to that of the SendGrid acquisition in 2019. At the time of that acquisition closing in 2019, the deal was worth about $3B (up from $2B at time of announcement due to share appreciation). SendGrid’s quarterly revenue in the Nov 2018 report was $37M, up 31.4% year/year. For 2019, Twilio expected revenue from SendGrid of about $170M. This places SendGrid’s multiple between 13.5 (time of announcement) and 17.6 (deal close). If we assume a top-end multiple of 18, then Segment’s annual revenue would be about $180M.

Twilio conducted an analyst call and published a presentation detailing Segment business performance and their combined vision going forward. Segment currently has 5,000 customers with 250k developers using the platform and 350 integrations to external systems. Given that Twilo has over 200k customer and 10M developer relationships, there is likely opportunity for future cross-sell and evangelism of the Segment offering. Segment is already a high performance business with revenue growth greater than 50% and 75% non-GAAP gross margins. Both of these metrics are higher than Twilio’s comparable values. At time of acquisition, SendGrid revenue growth was 31% and has increased to 36% most recently, presumably through cross-sell. This could bode well for Segment’s potential revenue growth from its 50% base.

Segment offers a Customer Data Platform (CDP), which consists of software tools and APIs to enable online businesses to collect, clean, combine and distribute their customer data. The primary use case is to instrument web sites and mobile apps to create a single view of all customer activity and then pipe that to a data warehouse, marketing tools and/or a CRM system. Twilio and Segment leadership size the market for CDP at about $17B, which means the total TAM for the combined company would be $79B. According to IDC, Segment had the largest share of this market in 2019, which was 2x the size of their largest competitor.

Beyond the immediate financial contribution, this acquisition represents a strategic move by Twilio in my opinion. Combining Segment’s customer data collection capabilities with Twilio’s own communication tools and extensive contact data set would create a powerful platform to address the full lifecycle of customer engagement. Twilio’s communications tools are “single shot” currently. They rely on other systems to measure customer behavior resulting from an SMS or email communication. With Segment, Twilio will be able to close the loop on their communications and offer enhanced services to drive the effectiveness of an omni-channel customer engagement campaign. This would be very powerful, as they could optimize customer response based on measured preferences for communication channel (SMS, email, voice, etc.), frequency, messaging, etc. This data could be fed into marketing communications tools and provide incremental value for Flex.

We will get more details in Twilio’s Q3 earnings report on Oct 26th. This will also provide additional updates on progress for Twilio’s core business, after favorable commentary in their Investor Day on Oct 1st. Overall, I am bullish on Twilio’s long term growth prospects. While performance can vary from quarter to quarter, I think Twilio offers a reasonable bet on the need for enterprises to improve the effectiveness and reach of their customer communications.

News Items from Week of Sept 28 – Oct 11 (NET, TWLO, AYX)

In recognition of their 10 year anniversary, Cloudflare (NET) hosted their Birthday Week from September 28 – Oct 2. This included a number of product announcements and a long list of speakers in interviews on Cloudflare TV. The speaker list was very impressive, including many CEO’s of leading Internet companies like Slack, Zoom, Upwork, Stripe, Rent the Runway, Box, DocuSign, OpenTable and PagerDuty.

The biggest take-aways for investors were associated with the product announcements. I liked the variety and depth across Cloudflare’s many product lines. Additionally, this further demonstrates Cloudflare’s rapid product development cycle, as these follow Serverless Week in late July, which also included a number of product releases. Here is a list of the major product announcements from Birthday Week, with links to posts on Cloudflare’s blog for more detail.

Workers – Durable Objects. Durable objects provide persistent, consistent storage of data for Worker processes. Storing some sort of state between requests is foundational to most applications. The breadth of use cases where processing can be moved to the edge is expanded by having data storage available. Durable objects enables this, by allowing any set of data to be persisted with guaranteed consistency across multiple requests. Objects can be shared between multiple application clients (users). This consistent and sharable data object storage enables many common use cases for multi-user Internet applications, like chat, collaboration, document sharing, gamlng, social feeds, etc.
Workers – Cron Triggers. Cron triggers allow worker processes to be kicked off based on a time schedule. This differs from the current method in which a user has to make a request in order to trigger a worker. This scheduling of tasks is common for many use cases, like downloading new data updates or sending out communications. With this capability, developers can set a worker to run on a time frequency, like every hour or daily.
Privacy-first Analytics Service. Many free web site analytics packages are available on the Internet. Google Analytics is probably the most popular and familiar. However, most of these free services also track users across multiple sites and then combine that activity data to improve ad targeting. This raises privacy concerns. Cloudflare’s new Analytics Service provides the same level of free web site analytics, but without the inherent cost of giving up the privacy of that site’s users. This is a noble gesture by Cloudflare and will make their service slightly more sticky for small to medium sized web site that are looking for an inexpensive tool to generate analytics.
Cloudflare Radar. Given that Cloudflare processes a large portion of the traffic that traverses the Internet, they have insight into usage patterns globally. Radar provides a dashboard of Internet activity showing traffic flows, domain usage, DDOS attacks, protocols, browser usage, device preferences, etc. This can be sliced by country or even down to individual web site URLs. This service is free to the public. The benefit to Cloudflare would be increased visibility of their products.
API Shield. API’s are code modules hosted on a server that provide access to application business logic and data for remote clients, like mobile devices. They deliver a standard interface to which client applications can connect. However, bad actors can also locate these API’s and try to manipulate them to extract data. Cloudflare’s API Shield product provides a way to protect API endpoints from exploit by requiring client certificates to authenticate and monitoring traffic for unauthorized behavior. This will provide another layer of protection for the WAF product line.

While these new releases don’t represent stand-alone revenue streams at this point, they do provide meaningful incremental improvements to existing products and bring additional visibility to Cloudflare as a whole. I think these should lead to increased adoption over time and new customer adds. They also underscore Cloudflare’s rapid product development pipeline across a breadth of categories. As I write this, Cloudflare’s CEO has already teased another set of releases for next week around Zero Trust Security and the Cloudflare for Teams product.
As a result of these announcements, I have increased the allocation to NET in my personal portfolio by 3%. With recent gains, it stands at about 9%. Combined with my oversized 41% allocation to Fastly (FSLY), I now have half of my portfolio directed at NET and FSLY. I consider this to be prudent, as edge computing and programmable networks represents a major growth area for software delivery and security infrastructure over the next 3-5 years. I believe FSLY and NET are well-positioned to capture both share from legacy providers and pursue greenfield opportunities as new categories of spend emerge.

Along the same lines, Twilio hosted their annual Signal event from Sept 30 – Oct 1. The event was packed with informative sessions focused on helping developers and other users at customer companies maximize their benefit from Twilio products. As is usually the case, Twilio scheduled major product releases to coincide with the Signal event. This year did not disappoint. Here is a brief summary of the new product releases:

Microvisor. Delivers a managed IoT device builder platform that includes many of the common IoT software infrastructure components needed like security, version updates and network connectivity. This leverages the Electric Imp acquisition from July and represents a big step forward in Twilio’s support for IoT developers. This product offering is starting as a closed private beta.
Frontline. Provides a mobile app for sales support and delivery workers that connects them seamlessly with customers who are inquiring about products and services via SMS, Whatsapp or voice. While the app is installed on the worker’s mobile device, the login, messaging and phone number are tied to their corporate identity. This allows the workers to have the convenience of their mobile device, without having to rely on their personal phone number. This product was highlighted in a use case with Nike during the keynote. It is being tested in private beta currently.
Video WebRTC Go. Twilio has already generated significant enterprise interest with their Video API offering, attracting health care providers like MDLive and Epic. They want to further capitalize on the migration of previously in-person 1:1 experiences to online video. Video WebRTC Go provides developers with a toolkit, sample code for mobile devices and documentation to enable them to address 1:1 video use cases like tutoring, dating, counseling, etc. The service is being offered for free with fairly high usage limits. The assumption is that if a company builds a video product that really takes off, they would eventually graduate to a paid tier. Also, any online product might also leverage other communications API’s like SMS, email, voice, etc.
Event Streams. This provides a single API that consolidates event data from all Twilio touchpoints into a single data stream. This can be connected to a data streaming tool, like Amazon Kinesis, that would eventually feed back to a company’s data warehouse for analysis. This dramatically simplifies activity data collection and processing for large Twilio customers. The product is being offered as a private beta initially.

Twilio also held an Investor Day event on October 1st. That was packed with a number of business updates and financial projections. Twilio hadn’t held one of these for a couple of years, so analysts were eagerly anticipating the event. Here is a list of the most relevant take-aways for investors. Twilio also published a detailed slide deck to accompany the presentation.

Expect Q3 revenue to be ahead of the high end of the previous guidance range of $401 – 406M.
Revenue growth will exceed 30% for the next 4 years. They further clarified in the Q&A that this is not a CAGR, but that growth would be over 30% in each year (an important distinction).
Application Services are growing faster than the core revenue streams and make up 12% of revenue now. These constitute the high-margin software solutions like video, Flex and Conversations.
Huge year/year growth in several solutions – video up 599%, software messaging up 208%.
Flex revenue up 184% year/year with 600+ customers. Highlighted a new Fortune 100 insurance customer that moved 10k agents to Flex. Nike also is a new Flex customer.
Even email usage is accelerating with 36% revenue growth so far in 2020, versus 31% in 2018.
Broke out gross margin for several products – voice is 74%, email is 87% and App Services is 89%. This provides evidence that Twilio has a path to improved gross margins over time as solutions make up a larger percentage of revenue.
Provided a long-term profitability model of 60-65% gross margin and 20%+ operating margin. S&M expense already shows strong leverage at just 24% of revenue with a long term goal of 16-19%.

The markets were clearly pleased with the announcements. TWLO stock enjoyed a 13% jump on October 2nd, most likely tied to the Q3 revenue guidance update and 4 year growth projections. Analysts also reacted favorably with nine raising their price targets and maintaining a Buy rating. RBC had the largest raise from $320 to $375.

As I write this, speculation has emerged that Twilio will acquire Segment for $3.2B. Segment offers a Customer Data Platform, which consists of software tools and APIs to enable online businesses to collect, clean, combine and distribute their customer data. The primary use case is to instrument web sites and mobile apps to create a single view of all customer activity and then pipe that to a data warehouse, marketing tools and/or a CRM system. This acquisition would be a very strategic move in my opinion. Combining these customer data collection capabilities with Twilio’s own communication tools and extensive contact data set would create a powerful platform to address the full lifecycle of customer engagement. I speculated a bit on a potential acquisition like this in my review of Twilio’s Q2 results.

Twilio’s communications tools are single-shot currently, as they rely on other systems to measure the impact of an SMS or email. With Segment, Twilio could close the loop and offer enhanced services to drive the effectiveness of an omni-channel customer engagement campaign. They could also build a rich customer dataset to help marketing teams better target their audiences. More to come on this, assuming the acquisition actually happens. We may need to wait until Twilio’s Q3 earnings report on Oct 26th to get the official announcement.

On October 5th, Alteryx announced a CEO transition. Included in this was a raise to expected Q3 revenue guidance. Founder and CEO Dean Stoecker has been replaced as CEO by board member Mark Anderson. Stoecker will continue as Executive Chairman and Chairman of the Board. Anderson’s most significant previous role was as President of Palo Alto Networks, leading all go-to-market efforts there. He also served briefly as Anaplan’s chief growth officer, but left under questionable circumstances after about 6 months.

In the same press release, Alteryx raised their Q3 revenue target to $126M – $128M, for annual growth of 22 – 24%. This is up from their prior range of $110M – $115M, for growth of 7 – 11%. The raise here is significant, particularly considering the headwinds that Alteryx had been experiencing. In Q2’s report, Alteryx had provided initial guidance below analysts consensus for $119M (15% growth), so it is nice to see the actuals now anticipated to be above the prior expectations.

I am not sure what to make of the CEO transition. On one hand, Stoecker has led the company for 23 years and arguably is ready to hand off the reigns. On the other hand, the change seems rather sudden (announced as effective the same day) and Anderson has a checkered past. His reason cited for leaving Anaplan in February was to allow more time with his family. Yet, 10 months later he is ready for a CEO role.

On the revenue target increase, that is refreshing. I am happy that Alteryx seems to be recovering from the COVID-19 impact on deal closure and new business. Revenue growth in the mid-20 range isn’t that exciting on the surface, but does represent a step up from 15% growth in Q2. This could mark a transition back towards higher revenue rates in the 30-40% range going into 2021.

As I discussed in my review of Alteryx’s Q2 results, I think there are other factors to monitor relative to the AYX bull case. While I am generally optimistic on the opportunity, I do have concerns about Alteryx’s product development pipeline and want to see a clear trajectory towards a multi-tenant, cloud-centric delivery model (not just placing packaged software on a self-managed cloud server instance). Also, the emerging ecosystem of tooling around cloud-based data platforms, like Snowflake, present an alternative to Alteryx’s product set for customers. I would like to see how Alteryx is adapting to participate in this domain. Over the next couple of quarters, I will be monitoring their product development releases closely to see evidence of thoughtful positioning around these trends.

News Items from Week of Sept 14 – 27 (NET, TWLO, SMAR)

In recognition of their 10 year anniversary, Cloudflare (NET) will be hosting a Birthday Week from September 28 – Oct 2. This will include a number of product announcements and a long list of speakers to be engaged in interviews on Cloudflare TV. Product announcements are usually posted to the Cloudflare Blog and promoted on their Twitter account. The speaker list is also very impressive, including many “business and industry leaders” like the CEO’s of Slack, Zoom, Upwork, Stripe, Rent the Runway, Box, DocuSign, OpenTable and PagerDuty. It’s not clear if all of these are current customers of Cloudflare. Regardless, the visibility is great.

As part of this, the tech lead for the Workers product, Kenton Varda, tweeted on Friday that there would be two large features released next week for Workers. One of which, he described as “my favorite Workers feature” that has been 1.5 years in the making. He also described it as “wonky” and that not everyone will get it. This leads us to a lot of speculation about what these features may be. Based on other guesses from Twitter posts and my own research, here are some possibilities:

Edge database. Would allow user data to be stored in the POP closest to the user. Cloudflare has something similar in their KV (key-value) store, but a full-featured database would be an improvement. Developers might also be able to interact with it using the standard interfaces per language they are used to and query it via SQL.
More support for calling APIs at the edge. Kenton has talked about this before – Workers might now offer easier out-of-the-box wiring for API configuration. Enabling APIs (which power mobile apps) to move to the edge is a big use case for edge compute by itself. Coupled with an edge database, this migration would be even easier. Having APIs terminate at the edge would substantially speed up mobile app performance and responsiveness.
Additional security features. When they launched Workers Unbound as part of Serverless Week, Cloudflare implied that they were continuing to add more security layers.
Open sourcing some infrastructure code. Kenton was asked about this at a conference previously and hinted that they might bundle some of their supporting infrastructure for Workers into an open source package. This might be along the lines of what Fastly has done with Lucet and WASI.

I opened a 7% position in NET following my coverage of Serverless Week and their Q2 results as part of my analysis of Fastly. Depending on what is announced next week, I may increase my allocation further. NET stock has treaded water over the past month, following their Q2 earnings announcement. I am hoping these announcements may provide a another catalyst for the stock. Between my allocations to FSLY and NET, I expect to further capitalize on the industry momentum towards adoption of programmable networks and edge compute.

Along the same lines, Twilio will be hosting their annual Signal event on Sept 30 – Oct 1. They have an exciting speaker list, including Barack Obama, Trevor Noah and leaders at a number of customer companies. The event is also packed with informative sessions focused on helping developers and other users at customer companies maximize their benefit from Twilio products. I have always appreciated the builder focus of the Signal event, with most sessions structured with an interactive, hands-on and informative approach, as opposed to being filled with marketing content.

Signal is also the time when Twilio usually makes new product announcements, which is the most relevant aspect for investors. We should be on the look-out for press releases that highlight these. The Signal Sessions list has placeholders in the the Product Release category for several new product announcements. These include announcements for Flex, a new product associated with messaging, a new product associated with Building with Data and announcements for IoT. The new product offerings could yield incremental revenue streams, which may drive further growth opportunities in 2021.

As investors will also recall from my prior coverage of Twilio’s Q2 earnings, they raised $1.25B in early August just after the earnings release. This brings Twilio’s total cash and equivalents to $1.9B. The additional raise on August 5th was noteworthy as Twilio really didn’t need the cash, fueling speculation that these funds could be applied to another acquisition. Twilio leadership even hinted at this in the Investor Presentation published with the capital raise, which included a slide I hadn’t seen before highlighting their disciplined approach to M&A.
Twilio previously acquired Electric Imp on July 9th to bolster their capabilities in IoT. The Electric Imp platform provides a fully integrated solution for managing IoT devices and securely routing their data to a customer’s cloud application. Further acquisitions could be in the IoT space, as I think Twilio sees a big opportunity there. Alternately, they could expand into an adjacent category, like consumer marketing to supplement their core capabilities in email distribution with the SendGrid acquisition.

In recent marketing materials, Twilio highlights being a “Customer Engagement Platform” and refers to enabling customer journeys. I think this change in messaging is subtle, but could be telling. This would imply that Twilio is thinking about the full lifecycle of communication with customers – not just facilitating single, isolated interactions through SMS, voice, video, email, etc., but trying to connect these interactions into an end-to-end customer journey. The move into contact center with Flex aligns with this positioning, as that facilitates not just voice communications, but also supports engagement across other touch points, like chat, SMS and email. Enhanced customer engagement would imply Twilio intends to add new products to facilitate marketing or customer relationship management.

This positive news will hopefully overshadow a recent development on the competitive front. On September 22, Microsoft announced the launch of Azure Communication Services, which is viewed as a competitive offering to Twilio. Like Twilio, Microsoft’s new service provides programmable APIs for developers to use to enable video and voice calling and real-time chat. Coming in October will be SMS and phone number provisioning. These are being positioned as an extension of the same communications services that make Microsoft Teams so useful, but now available separately for developers to consume to build new digital experiences. Also, they highlight integrations with other Microsoft services, like AI for chat context and language translation.

On the surface, this announcement is concerning as it represents another entrant into the CPaaS space. Microsoft, in particular, could leverage their existing customer relationships and offer these products in a bundled fashion with core infrastructure. They might peel away some Twilio customers or land new ones on their service who might have considered Twilio.

However, I am largely ambivalent about this move by Microsoft. On the plus side, it validates the market that Twilio operates in, as Microsoft wouldn’t pursue this if they didn’t see a growth opportunity. Also, this would only be relevant for Azure customers. AWS, GCP or other cloud vendor customers wouldn’t utilize this capability on a stand-alone basis.

Most importantly, though, I believe that CTO/CIO’s at large enterprises value working with an independent provider of software services where possible to avoid lock-in with any particular cloud vendor. As I discussed in a prior post, independent software providers have the advantage of allowing customers to pursue a multi-cloud strategy and leverage best-of-breed solutions from neutral providers where possible. Programmable communications is one of the easier services to integrate from a third-party, with no real advantage from locating the service origin in proximity to compute or data. As I argue in the blog post, the independent software providers have the advantages of network effects, focus, talent and product development velocity. While Microsoft has incredible resources behind them, these are dispersed across a large organization. Independents, like Twilio, have the advantage of focusing on a subset of customer problems every day. Over the long term, this will yield more complete products and better customer service.

Finally, Airtable announced a $185M funding round on September 14th. Embedded in the press release, Airtable highlighted their new Airtable Apps feature, which allows developers to leverage a Javascript framework to build custom apps on top of the core Airtable platform to address their own unique customer requirements for workflow and interaction. This goes beyond their existing Blocks feature. Blocks represents small app-like widgets that can be embedded into the Airtable UI. Examples are maps, charts, video chat windows, pivot tables, translations, etc. Some blocks were provided by Airtable themselves and third-party partners have also developed a number of them.

With Apps, customers can take this functionality a step further and build their own collaborative work management solutions on top of Airtable. These Apps can also be shared inside the Airtable Marketplace for other developers to view.
I highlight this announcement from Airtable because it demonstrates a recent move by Collaborative Work Management (CWM) vendors to add programmability to their platforms. Monday.com provides a similar capability through their Apps framework. These companies compete with Smartsheet, which I cover, but closed my position following their Q1 results. Smartsheet has talked about adding programmability features to their platform to empower “citizen developers” in the past, but doesn’t seem to have made product releases in this direction yet. This will be something for SMAR investors to monitor going forward. Arguably, even Airtable admits that this kind of customization may appeal to only a subset of customers. But, it could be the type of capability that a customer values knowing is available if needed. We will see. I plan to continue to monitor the space and may re-enter Smartsheet, or one of their competitors, once the landscape for CWM offerings becomes more clear.

News Items from Week of Sept 7 – 13 (TWLO, FSLY)

On September 9th, Twilio announced that Deloitte Digital had joined their Partner Build program as a premier Global Systems Integrator (GSI). As a SI partner, Deloitte Digital will build a Twilio practice to offer their Global 2000 clients fully built solutions that leverage Twilio Flex for contact centers, as well as communications APIs like video, voice and messaging. They will also collaborate on delivering pre-packaged solutions for health care, through Deloitte’s ConvergeHEALTH Connect product.

This new partnership is important for Twilio as it represents one of the largest additions to date to the Build program, which was first announced in 2018. Newer packaged solutions, like Flex, can require customization for large enterprises to adopt. Having a global SI available to perform this work, makes the integration easier. Also, when a large consulting firm like Deloitte builds a practice around a particular vendor’s technology, they are automatically motivated to sell that solution to their clients. The net result should drive more customer wins for Twilio. Analysts have been asking about the status of Twilio’s SI partnerships on past earnings calls. This announcement provides at least one major relationship to reference.

In other news, Fastly announced a more formal partnership with the Google Cloud Platform (GCP). As part of it, Fastly will be available as a private listing on the Google Cloud Marketplace. This allows GCP customers to purchase Fastly services directly through the Marketplace using committed Google Cloud spend. Fastly is the first edge cloud content delivery solution to be offered on the Marketplace. This should result in easier on-boarding of new customers from the Google Cloud to Fastly, as the sign-up process is automated and billing is unified with the customer’s existing Google Cloud spend.

Bloomberg reported this week that Chipotle expects digital sales to reach $2.4B this year, which is more than double the $1B in 2019. The CEO now anticipates orders placed online and through the Chipotle mobile app to represent 40-50% of all sales going forward. These orders are primarily for carryout and offer patrons the convenience to skip the line and have their food waiting for them when they arrive. Even as in-person dining has returned, the CEO expects digital business “is going to stay around.”

The reason this is important for investors is that each of these restaurant chains is opting to build their own solution to enable these digital experiences. We have become familiar with the explosive growth of e-commerce enablers like Shopify, Amazon and Wix, and can discern the implications for software service providers that enable these businesses, like Fastly, Cloudflare, Twilio, Datadog, Elastic and others. However, when independent restaurant chains and other traditional enterprises move more business online, their in-house development teams (or consultants) will need to consume the same set of software services for categories like observability, data storage, communications and content delivery. In my prior post on the Signal Sciences acquisition by Fastly, I even highlighted the implications for application security, as Chik-fil-A is one of Signal Sciences’ larger customers.

While I think the market was expecting a more immediate demand surge for some of these software providers as a consequence of the COVID-19 situation, I would argue that many of these digital transformation software projects will take some time to implement. As such, we should see this increased demand spread out over the next year or two for digital transformation efforts that require code to be written. Nonetheless, similar to immediate beneficiaries like Zoom and Peloton capitalizing on changing consumer behaviors, software service providers should see a long tail of incremental revenue from the same effects. This provides a nice set-up for several companies going into 2021, as enterprise spend shifts to these larger, but longer term, digital investments.

News Items from Week of Aug 31 – Sept 6 (DOCU, MDB)

Docusign reported Q2 FY2021 earnings on September 3rd. Overall, I was very happy with the results. While the stock dropped over 10% the next day, this was part of a broader sell-off in software names and follows a 20% run-up earlier in the week. Docusign exceeded every expected performance metric in Q2. Revenue accelerated from 39% year/year growth in Q1 to 45% in Q2. Billings shot up even higher, delivering 61% growth, following 59% in Q1. The high billings rate sets up what will likely be continued revenue acceleration for the second half of the year. Q3 revenue guidance came in at 44% growth, beating estimates by 10%, and full year revenue growth is now projected at 42%. With similar beat and raise activity for Q3/Q4, it is reasonable to expect revenue growth to exceed 50% year/year.

Other measures continue to improve as well. Q2 Operating margin hit 10% for Q2, leading to a Non-GAAP EPS of $0.17, beating estimates by $0.10. FCF skyrocketed to $100M ($12M year ago) for a FCF margin of 29%. DBNER reached its highest mark in over a year at 120%. Docusign added more total customers in the first half of this year than all of last year, and saw a similar burst in direct customer growth (those large enough to warrant sales engagement). Finally, international revenue growth was strong at 59% year/year and makes up almost 20% of revenue now.

The primary concern with DOCU shared by analysts and investors revolves around valuation. Even with the post-earning drop, the EV/S ratio is 34 and the enterprise value is nearly $40B. Docusign raised full year revenue guidance by about $70M to $1.386B. Assuming they similarly outperform the next two quarters, DOCU could deliver $1.5B in revenue by end of year. This would put forward EV/S at nearly 27, which appears low for a 50% grower with positive margins. While I wouldn’t expect 50% revenue growth again next year, it could hit 40%, given all the customer additions, DBNER and upsell opportunities from e-signature to full CLM products. I am comfortable that Docusign will continue growing steadily for several years.

MongoDB also reported earnings on September 2nd. I thought the results were reasonable, but not as strong. Performance of some software companies has been harder to judge recently, as many are experiencing headwinds from the COVID-19 environment. This is driven by reductions in enterprise spend for some categories, general SMB impact and longer sales cycles. Fast growers on the software infrastructure side, like Datadog, Elastic, Okta and Alteryx experienced this effect and anticipate revenue growth slowdowns through the year. The same effect applies to MongoDB. While we see usage expand for some customers with a direct COVID-19 benefit, like gaming and e-commerce, we also see some constrained spend in impacted industries and for SMBs.

Nonetheless, MongoDB Q2 revenue grew by 39%, beating estimates by 11%. However, this does represent a deceleration from Q1’s revenue growth of 46%. Full year revenue growth was raised by 6% to 31%. Q3 revenue growth was raised to 26% and implied Q4 growth is 17% year/year. With quarterly beats and raises of 5-10%, these growth rates should get into the 30% range, but the revenue growth linearity is concerning without taking the COVID-19 impact into account.

Going into 2021 will be where the opportunity likely lies for investors for many of these names. For MongoDB, if revenue growth reaccelerates coming out of the COVID-19 situation, then multiples could expand again. MDB’s current EV/S ratio is 25. Total enterprise value is about $12.6B. FY2021 revenue was just raised by nearly $30M to $554M on the high end. With two more quarters of outperformance, full year revenue could hit $600M, lowering forward EV/S to 21. If revenue growth picks back up to the 30-40% range next year, MDB could see further upside.

I plan to publish detailed earnings analysis on both DOCU and MDB in the coming weeks. In the meantime, I am maintaining my oversized allocation to DOCU. For MDB, I had trimmed coming into the earnings report, given the sizable run-up prior and concerns for short term impact. I now have a 4% allocation, which I may increase later in the year, if performance overachieves these targets. I think the long-term investment thesis for MDB is intact.

News Items from Week of Aug 24 – 30 (FSLY, TWLO, SMAR, NET)

On August 27, Fastly (FSLY) announced their intent to acquire Signal Sciences. The goal is to combine the security capabilities of both companies into a new product offering called Secure@Edge. This significantly buttresses Fastly’s existing security product line, providing an accretive blending of existing products with new ones provided by Signal Sciences into a comprehensive solution designed to protect application and API availability and delivery. New capabilities to Fastly include bot mitigation, rate limiting and API protection, which were previously offered through partnerships. For bot mitigation in particular, sell-side analysts have pressed Fastly leadership in past earnings calls about why they don’t offer the capability themselves. Well, now we have an answer.

While many investors rightfully question the rationale behind acquisitions, I think this one is both pragmatic and strategic on several levels. First, it is immediately additive to revenue following the close. Signal Sciences brings $28M of ARR, growing at an annual rate higher than Fastly’s 62% from Q2. In 2019, the Signal Sciences’ CEO reported that revenue had doubled from the prior year in various interviews, so their current revenue growth rate could be somewhere between 62-100%. Due to the nature of their product, Signal Sciences also delivers much higher gross margin at 85%. On the analyst call following the announcement, Fastly’s CFO stated that he expects this to accelerate Fastly’s gross margin improvement trajectory.

Another notable outcome from the acquisition will be in customer expansion and cross-sell opportunities. Signal Sciences brings 265 total customers, of which 60 are at the enterprise level (defined as spending more than $100k in the prior 12 months). Of these, 70% (about 42) are new to Fastly. At end of Q2, Fastly reported 304 enterprise customers, with an average spend of $716k. Signal Sciences’ 42 new enterprise customers would increase Fastly’s count by 14% and could add about $30M in incremental revenue over time, if they could all be cross-sold Fastly products at the average enterprise customer spend. Most impressive, though, is the list of customers from Signal Sciences, which reflects the same caliber of innovators that Fastly attracts. Examples include Under Armor, Datadog, Duo, One Medical, O’Reilly, Doordash, Onelogin, Airtable, Chef, Postmates, Remitly, Procore, Twilio and Wework.

Fastly is paying $775M for the acquisition, consisting of $575M in stock and $200M in cash. Using the ARR value of $28M, this implies about a 28 P/S ratio, which is below the current ratio for FSLY. This provides evidence they aren’t over-paying. The deal still needs to go through approvals, but is expected to close in 2020. Fastly leadership committed to providing updated forward guidance that includes the contribution from Signal Sciences in the Q3 earnings report.

Given these developments, I have become even more bullish on Fastly’s potential going into 2021. I had been expecting them to deliver at least $300M in revenue for 2020 (likely $310-320M), representing growth of at least 50%. For 2021, I felt that 40-50% growth was achievable over 2020, based on continued momentum and the introduction of Compute@Edge, yielding revenue approaching $450M. With the addition of Signal Sciences and the new Secure@Edge product line, we could see an additional $30-50M in revenue for 2021, based on Signal Sciences’ existing ARR of $28M as of June 30th, continued high growth and future cross-sell opportunities. This could bring total revenue for 2021 of $500M. Investors can apply their own multiple to this target, but I am optimistic the market cap for the combined company could surpass $15B at some point in 2021 (roughly an increase of 50% from now).

I have increased the allocation of FSLY in my personal portfolio to over 30%, and may add more. Of all the stocks I cover, I am most confident in Fastly’s ability to increase in value over the next 12-18 months.

I am working through a full analysis of the acquisition and will be posting that to the blog in the next few days. Then, I will loop back on Q2 recaps, with Datadog (DDOG), Alteryx (AYX), Elastic (ESTC) and Okta (OKTA) on deck.

In addition to analyzing the Fastly / Signal Sciences acquisition announcement, there were a few other interesting news items regarding covered software stack companies in the past week:

Twilio announced on August 27th that their products had been selected by 28 cities, states and universities to power communications for contact tracing programs. Examples included the Illinois Department of Innovation & Technology, the Public Health Department of Philadelphia and the Department of Information Technology and Telecommunications for New York City. These represent the most populous regions in the U.S., with coverage of over 156M people.

These engagements lead with Twilio Flex to power the contact center, and supplement follow-on communications to citizens through programmable SMS, voice, email and WhatsApp channels. These deals have two benefits for Twilio. First, they demonstrate how Flex can drive incremental usage across all communications channels. Second, many of these engagements are within one department of an organization. As the benefits of Twilio’s cloud-based, programmable content center and communications capabilities become evident within the early adopters, there is presumably an expansion opportunity into other departments of those large government entities. These could all drive incremental revenue for Twilio.

Smartsheet announced on August 24th that they have agreed to acquire Brandfolder, a provider of digital asset management (DAM) solutions. Brandfolder’s platform allows customers to create, distribute and analyze digital content assets. Brandfolder has an extensive customer list, claiming over 5,000 individual brands ranging from start-ups to Fortune 500 companies. Brandfolder’s digital content management solutions will be combined with Smartsheet’s workflow management to provide enhanced capabilities for organizations to manage and track the end-to-end lifecycle around content creation and distribution.

Smartsheet (SMAR) will pay $155M in a combination of stock and cash for Brandfolder. The deal is expected to close quickly in September. Smartsheet will report on the anticipated financial impact from the acquisition in their upcoming Q2 earnings results on September 2nd. Smartsheet already offers Accelerators targeted at marketing and creative teams. This new capability should enhance and deepen those capabilities, appealing more broadly to organizations where content creation and management are critical workflows.

Cloudflare (NET) moved their wrangler dev tool to GA on August 26th. As part of Serverless Week, Cloudflare introduced wrangler dev as a development and deployment management environment for Cloudflare Workers. Because Cloudflare’s Workers are serverless and run in conjunction with other network services, provisioning a localized development environment that mirrors production is a challenge. It isn’t realistic to reproduce all aspects of the Workers production environment on a developer’s local machine. The answer from Cloudflare is to provide the developer with an environment that appears local and private to them, but actually runs on Cloudflare’s edge network. This accomplishes the best of both worlds – it removes risk of discrepancies between production and the development environment, but still provides the developer with the speed and convenience of an isolated instance. This tool should further drive adoption of Cloudflare’s Workers product.

News Items from Week of Aug 17 – 23 (DOCU, ESTC, DDOG)

Docusign will report Q2 earnings on September 3rd. In advance of that, RBC Capital raised their price target from $210 to $230 and maintained an Outperform rating. Analyst Alex Zukin referred to proprietary data that his firm collects, which indicates that Docusign usage activity remains near all-time highs. He anticipates “significant upside” in revenue and billings in this quarter’s report. He also states that Docusign’s growth will be “highly durable”, given the company’s leadership in the digital signature and agreement workflow space and the large greenfield opportunity around converting offline document management workflows to digital.

I agree with this long-term perspective. While I can’t say for sure that DocuSign will blow out Q2 earnings, the secular trends are favorable. Additionally, they are coming off a surge in billings growth of 59% from Q1, along with a nice beat and raise on revenue. Q2 revenue growth is currently estimated at 35%, which could accelerate past Q1’s 39% growth with a similar sized beat for Q2. We will see in a couple of weeks, but the long term trend is favorable. DocuSign is the largest provider of e-signature services by far and estimates their TAM at $50B. In some ways, the thesis for DocuSign mirrors that of Twilio.

On August 19th, Elastic released software version 7.9. Keeping with their rapid product development cadence, this follows the release of v7.8 in mid-June. As investors know, Elastic point releases include major feature improvements. Version 7.9 was no exception. Here are some highlights:

Free one-click install malware prevention for Windows and MacOS, as well as advanced detections and deep visibility into vulnerabilities for all major operating systems including Windows, MacOS and Linux. These are being offered through the free distribution tier in order to help protect the remote workforce. The offering also includes access to more than 200 pre-built adversary behavior pattern finders mapped directly to the MITRE ATT&CK framework.
Moved Workplace Search into the free distribution tier for Elastic Cloud and self-managed environments. This lowers the barrier to entry for organizations to get started. Elastic offers additional capabilities and support under the Platinum subscription. v7.9 also added a connector for ingestion of Gmail content into Workplace Search.
Launched a new Elastic Agent and Ingest Manager to simplify the collection of data from hosts in a centralized way, including logs, metrics, APM and endpoint security. Elastic Agent provides a single software agent for system operators to deploy. Ingest Manager similarly controls ingestion of all types of data from a single location.
A number of other smaller enhancements detailed in the press release.

The new consolidated agent will help observability and security customers simplify the management of their environments. This represents a significant step forward. The free malware prevention and vulnerability monitoring for enterprise customer devices is very interesting, as that would undercut competitive offerings. In these cases, Elastic expects to generate revenue through subscription up-sells and migration of workloads to the Elastic Cloud.

Elastic reports Q1 earnings on August 26th. We will get further insight into how the Elastic product set is translating into customer usage. I am generally bullish on the long-term prospects for ESTC, but acknowledge that it may take some time for the thesis to play out. In advance of earnings, a couple of analysts issued updated reports and raised price targets. Citi upgraded ESTC from neutral to buy and raised its price target from $90 to $126. Jeffries raised their price target from $105 to $110 and maintained a buy rating. Finally, RBC Capital Markets raised their price target from $95 to $111 and maintained an outperform rating.

On August 19th, Datadog achieved “in process” status on the FedRAMP marketplace for moderate-impact SaaS applications. This follows Datadog’s earlier FedRAMP authorization for low-impact SaaS workloads in June. These authorizations allow U.S. federal government departments and agencies to use Datadog’s cloud platform. Each impact level broadens Datadog’s reach with these agencies.

News Items from Week of Aug 10 – 16 (DDOG, ESTC, ZM)

Datadog announced several new product offerings at their annual Dash conference on August 11. These included:

Incident Management. This new product streamlines on-call response workflows for DevOps teams by unifying alerting data, documentation, and collaboration in a centralized view. Incident response benefits from being viewed alongside the actual observability data associated with the service issue in Datadog’s interface. To facilitate on-call communications, this also includes integration with their mobile app and a dedicated issue response Slack channel. The feature makes it easy to declare an incident as well, right from the Datadog interface. This product is being launched as a beta.
Marketplace. This extends the existing Datadog Partner Network to provide a central marketplace where partners can list and sell their custom integrations built on top of the Datadog platform. Datadog users can view these offerings within the Integrations tab of the Datadog app. If they find an integration of interest, they can instantly activate it from the Datadog app. Datadog handles all billing, so the process for the user is seamless. Benefits for Datadog include increased usage of the platform and presumably some cut of the partner’s revenue.
Continuous Profiler. This product measures the performance of code in production. Specifically, it captures resource utilization (CPU, memory, etc.) at a very granular level, down to the line of code. This provides very useful feedback for developers. First, if a service issue exists, the developer can use this tool to determine if a particular function or behavior within the code is causing the issue by consuming too many resources. Second, DevOps can use this tool to monitor cloud resource utilization in general, as a means to identify expensive operations and forward those observations to developers for optimization. Continuous profiler is being launched as a full product with pricing. This would represent an incremental revenue stream for Datadog.
Compliance Monitoring. This new service monitors production environments for misconfigurations that could cause service or compliance issues. Cloud resources, like security groups, load balancers and storage buckets, all have configurations that require extensive customization for the specific architecture of the user’s environment. These resources can be misconfigured, or worse, left in default settings that introduce vulnerability risks for the environment. These risks can manifest as security incidents or put an environment out of compliance with standards like PCI (credit card processing). Datadog’s compliance monitoring service continuously examines production environments for these issues and notifies DevOps personnel when one is introduced. The service is being rolled out as a beta program.
Error Tracking. This feature is being tucked into the Real User Monitoring product. It monitors for JavaScript errors within browsers and groups those into logical issues for investigation by developers. The feature intelligently analyzes each error to indicate when it started, which code is associated with it and most importantly, what may be causing it. Since error tracking leverages the existing integration with RUM, customers don’t need to install an additional agent or SDK to utilize the capability.

Overall, I think these represent thoughtful extensions to Datadog’s product suite. Continuous Profiler was launched as a new stand-alone product with a separate revenue stream. As beta offerings, both Incident Management and Compliance Monitoring should eventually be transitioned into paid products as well. The Marketplace is a standard offering that other SaaS vendors have adopted with success and it is great to see Datadog leveraging this potential as well. I think all of these product additions will help further bolster Datadog’s growth in the future and continue to expand its reach. They are also indicative of Datadog’s continued rapid product development cadence.

One separate consideration around these announcements is for investors in PagerDuty (PD). Datadog’s new Incident Management product appears to have overlap with aspects of PagerDuty’s Incident Response offering. While Datadog’s Incident Management product description includes reference to integration with other on-call notification services like PagerDuty and OpsGenie, that service only refers to PagerDuty’s core on-call management and notifications product. As PagerDuty investors may know, the company started in on-call management, and layered additional workflow and visibility products around this over time to grow the company. Incident Response has been a large source of incremental revenue for PagerDuty beyond basic on-call management. Datadog’s move into this space is a logical extension for them, as most of the incidents for a customer organization would be associated with an event surfaced by one of Datadog’s observability tools. Given that Datadog already has the context for the incident in its interface, including incident management in the same toolset provides greater efficiency for the DevOps team that responds. While PagerDuty has faced competition before from other vectors, like Atlassian’s OpsGenie and ServiceNow, I would posit that Datadog’s move into this space is much more threatening, as it is based on the foundation of observability, rather than tools for workflow and ticketing management. This news doesn’t seem to have phased PD stock, as it is up slightly this past week. However, if I were a PD investor, I would watch this competitive encroachment carefully.

Q4 2020 is shaping up to be very strong for e-commerce and could deliver another record. This has been underscored by commentary on various earnings and analyst calls coming out of Q2 earnings. This catalyst has primarily been associated with those companies that are benefitting from a usage model with revenue tied to e-commerce spend and COVID-19 favored categories. Examples of expressed optimism on earnings calls came through from Shopify, Twilio, Fastly and even AdTech plays like The Trade Desk. As mentioned in a past newsletter, Goldman Sachs now predicts the U.S. e-commerce growth rate to nearly double in 2020 over estimates at the start of the year.

I expect this change to be long-lasting as well. Anecdotally, we can agree that the biggest barrier to technology adoption for the general population is simply taking the first step. People are habit-driven and shopping in person has been the norm, until they can’t anymore. Then, the convenience of online experiences is realized. Once people find that it is easier to shop online, order food delivery, communicate (Zoom), etc., they tend to not revert. I think we will see this behavior change persist after COVID-19 clears.

Additionally, physical shopping may no longer even be a choice. I came across an interesting article last week describing how several investment funds have emerged that are purchasing the remaining assets of bankrupt bricks-and-mortar retailers and re-launching their operations online only. Examples of purchases by one of these funds, Retail Ecommerce Ventures (REV) are Dressbarn, Pier 1 Imports and Modell’s Sporting Goods. In the case of Dressbarn, they have already re-organized the company. They shed the physical stores and reduced headcount from 9,000 employees to 30. The entire operation was moved online, leveraging the Shopify Plus platform. Under the new model, Dressbarn increased revenue by 165% from Q1 to Q2, with an annual run rate of about $65M. Prior to COVID-19, Pier 1 Imports had annual sales of over $1B and Modell’s Sporting Goods had sales of $538M in 2019. If REV continues their practice of moving all operations online, we will see this spend shift to e-commerce channels expand. I suspect this will be the case, as I personally know the CEO of REV through my time with him at Zoosk (LOV). And REV is just one fund doing this.

Implications for investors could be large. The obvious candidate is Shopify, but as I wrote two weeks ago, many software stack companies provide the software infrastructure that enables these e-commerce operations. Just for Shopify, these include Fastly, Cloudflare, Twilio and Elastic. Obviously, other providers of software infrastructure and services would similarly benefit over the long term, like Datadog, MongoDB, Okta, Docusign, Crowdstrike, etc. This trend in e-commerce is being mirrored in other categories as well, like restaurants (food delivery), health care (tele-medicine) and education (remote learning). I realize investors were hoping for more immediate upside in some of the Q2 earnings reports, but if we zoom out a bit, it’s clear that the COVID-19 triggered acceleration in digital transformation should provide tailwinds for a long time. Investors will benefit by allocating their portfolios towards these names and watching growth accumulate over many years.

News Items from Week of July 27 – Aug 2 (MDB, DDOG, ESTC, ZM)

Amazon Kinesis Data Firehose announced support for data streaming to MongoDB Atlas and Datadog on July 29. Kinesis Data Firehose is an AWS service that allows for the collection of large volumes of real-time data from many devices and transfer of that data stream into a permanent data store, like a database, data warehouse or analytics system. From the Kinesis home page “It can capture, transform, and deliver streaming data to Amazon S3, Amazon Redshift, Amazon Elasticsearch Service, generic HTTP endpoints, and service providers like Datadog, New Relic, MongoDB, and Splunk.“

What is interesting about these announcements is the third-party services that Amazon has selected. First, the fact that they are promoting a pipe directly to MongoDB and not DocumentDB or DynamoDB (AWS’s own NoSQL solutions) is telling. I imagine this is reflective of customer demand and a signal that AWS is conceding this territory to MongoDB. Along the same lines, they haven’t given up on their own Elasticsearch product. Finally, it acknowledges leadership in log analysis and observability with Datadog, New Relic and Splunk. At a high-level, I think it reflects the beginnings of an opening up of AWS services to cooperate more productively with independent providers that have overlapping offerings. With AWS growing 29% year/year in Q2, versus 47% for Azure and 43% for GCP (granted, from a larger base), this may be a realization that AWS needs to cooperate with independents in order to maintain their hegemony.

Elastic announced that they achieved FedRAMP Moderate Authorization on July 29. Specifically, the Elastic Cloud is now able to service users from federal agencies and related industries that handle controlled information. Achieving this authorization streamlines the procurement process for federal customers in the U.S. by standardizing security requirements and allows them to select cloud solutions without additional reviews. The result for ESTC should be the ability to grow their business with federal agencies, and other government organizations (like states, counties and cities) that similarly look for this security standard. This solution for Elastic Cloud is hosted on AWS GovCloud.

Shopify reported exceptionally strong numbers for Q2. Following the results, Goldman Sachs commented “in response to COVID, e-commerce penetration went from 16% of retail spending in the U.S. in Q1 to 40% in May. Goldman Sachs’ internet team now estimates U.S. e-commerce revenue will grow 29% this year, up from 15% previously. This will provide a “sustained tailwind” to Shopify’s gross merchandise volume growth and by extension its merchant solutions revenue. Shopify should be able to sustain hyper-growth for longer than the market expects.”

While I do not cover Shopify, I think it is instructive to consider the software stack companies that provide services to them. These include Fastly for CDN, Cloudflare for DNS/Domain Hosting, Twilio for Contact Center and Elastic for Site Search (there may be other examples). Shopify is one of the most advanced, engineering-driven e-commerce platforms. Therefore, it is telling when they reach outside of the organization for a solution. As Cloudflare put it, “Shopify’s engineering-driven culture has no shortage of performance and security whizzes who optimize every network packet they can, but sometimes it doesn’t make sense to do everything in-house.” Investors could probably generate significant alpha simply by investing in Shopify’s vendors (maybe an idea for an ETF).

In a post on their Engineering Blog, Airbnb described the rapid launch of their Online Experiences platform. If you aren’t familiar with Airbnb Experiences, it allows hosts in travel destinations around the world to offer customized local experiences for guests. These could be tours, classes, food tastings, etc. It has grown to over 50,000 unique experiences in 1,000 cities worldwide. With the COVID-19 situation, Airbnb decided to pivot the product to offer online experiences. These include local cooking classes, walking tours and inspirational segments.

What was interesting about this new offering from Airbnb is that they grounded the experiences in video interaction. To power that, they chose the Zoom API offering. Each experience has a unique Zoom meeting that guests can join after paying the Airbnb fee. Airbnb engineers use Zoom APIs to create Zoom accounts for hosts as part of the on-boarding flow and then to schedule and facilitate participation in each session for guests. While I don’t cover ZM at this point, I commented in a prior post about how I think there is a big opportunity for the company if they expand their focus to enabling an ecosystem of developers to build new products on top of the Zoom platform through APIs. For whatever reason, Zoom hasn’t given this much focus in the past. Perhaps, this deal with Airbnb represents a new growth vector for ZM.

News Items from Week of July 20-26 (NET, FSLY, TWLO, MDB)

The Cloudflare CEO made a significant set of announcements in a blog post on Sunday about enhancements to Cloudflare Workers, their serverless product. This represented the kick-off of “serverless week” at Cloudflare, which will provide details about their vision, tooling and new capabilities for Workers. While the blog post was a bit philosophical, there were a few specifics:

Faster Cold Start Times. The current cold start time for Workers is around 3-5ms, which is standard for the V8 Engine used as the runtime. With this announcement, the CEO claims “zero nanosecond” code starts, which he states is the fastest of any serverless platform.
Lower Cost. Cloudflare will offer unconstrained Worker processing for less cost than comparable serverless solutions from the cloud vendors.
More Language Support. Workers currently supports several languages for development – JavaScript, C, C++, Rust and Go. This week, they are adding Python, Scala and Kotlin.
Data Localization. Workers can be run locally in over 100 countries, which means that any data collected can be kept within that country if required.

The CEO promised more details in individual release announcements this coming week. There will also be some customer examples highlighting use cases with Workers. I plan to dig into these announcements and draw some conclusions about Cloudflare’s position in the serverless environment, following these enhancements. Investors will naturally wonder how this relates to Fastly and their Compute@Edge platform.

Speaking of Fastly, their CTO was featured this past week on the Google Cloud Platform (GCP) Podcast. This is a weekly show that covers the latest news with GCP and brings in subject matter experts to discuss a particular topic in depth. The CTO discussed Fastly’s edge compute platform and how it was built. He also explored the parts of an application that could be hosted on the edge and the benefits for developers.

The key take-away for me in this was the fact that GCP even hosted Fastly. This reflects a trend that I discussed in this week’s blog post. Because multi-cloud deployments are leveling the playing field for independent software providers, the cloud vendors have recently become more conciliatory towards them. GCP is the most welcoming, but even Azure has an accommodating Partner program. Both GCP and Azure also provide unified billing for customers, when they utilize a service from an independent.

Twilio received more price upgrades this week. On July 20th, Morgan Stanley analyst Meta Marshall set a $240 price target and reiterated an overweight rating. This price target is up from $160 previously. The analyst said that Twilio “is better positioned than competition to benefit from enabling customized digital communications. In addition, Marshall believes the second half of 2020 will be strong for the company.” On July 21st, RBC also raised their price target to $300 and maintained an Outperform rating.

MongoDB published a blog post about Forbes’ recent migration to GCP with MongoDB as their back-end data store. They cited a few wins for Forbes as a result, including a 58% improvement in build speed and release cycle improvements of 2x to 10x (depending on the service). The migration also drove a 25% reduction in total cost of ownership. While MongoDB was the focus, a diagram of Forbes’ new architecture revealed Fastly as the entry point into the cloud infrastructure for customer requests. This highlights Fastly’s enviable position among many marquee customers, allowing them to continue building out new services for edge computing and offering them to existing customers.

News Items from Week of July 13-19 (TWLO, NET, MDB)

Twilio (TWLO) conducted a study of over 2,500 enterprise decision makers globally to gauge the effect of COVID-19 on their company’s digital transformation and communication roadmap. The study highlighted common themes that we have heard previously about the impact of shelter in place and work from home on businesses. However, this survey provided actual data about these trends. The headline is understood – that decade-long digital transformation plans were compressed into days or weeks as a result of COVID-19. Businesses had to figure out how to interact with their customers without the benefit of physical proximity. Here are some highlights from the survey:

When asked if COVID-19 sped up their company’s digital transformation, 68% responded “a great deal” and another 29% responded “yes, somewhat”. The average amount of acceleration was 6 years.
Almost all companies (95%) are seeking new ways to engage customers as a result of COVID-19. 92% say transforming digital communications is extremely or very critical to that.
79% of respondents say that COVID-19 increased the budget for digital transformation.
92% say their organization is very or somewhat likely to expand digital communications channels.
54% said COVID-19 propelled focus on omni-channel communications and 53% added new channels during the pandemic.
1 in 3 companies started using live chat and IVR channels for the first time as a result of COVID-19.

All of these results signal an acceleration of engagement with Twilio this quarter and through the year. Along with this, two sell-side analyst firms raised their price targets for TWLO during the week. Wells Fargo raised their price target from $225 to $250 on July 16 and maintained their Overweight rating. The analyst states that “Twilio is running away with the Communications Platform as a Service market.” The next day, Cowen raised their price target from $230 to $260 and maintained an Outperform rating. The firm notes TWLO’s “significant acceleration” related to the pandemic, which has served as a “major catalyst” driving “a plethora of new use-case/vertical adoption.” Cowen calls the communication APIs provider “one of the more open-ended growth stories we have come across in a long time.”

I watched a recent video about Cloudflare’s (NET) partnership with Tanium. This was announced in late May, but seems to be getting more focus. The solution combines Cloudflare Access, which is Cloudflare’s VPN replacement, with Tanium’s endpoint security solution. Cloudflare Access leverages Cloudflare’s global network to provide a security layer and identity check in front of enterprise applications. The Tanium platform deploys an agent onto corporate devices that constantly evaluates and monitors the health of the endpoint. With the combined solution, enterprises can secure employee access to applications through two layers of protection – at the device level with Tanium and at the network level with Cloudflare Access.

What is interesting about this partnership is how it positions Cloudflare/Tanium against the partnership between Crowdstrike, Okta, Netskope and Proofpoint announced in June. That partnership also promises enterprises with Zero Trust access to connect employees to IT tools and apps. From that announcement, “Organizations can move beyond legacy VPNs for remote network access with this modern, secure application-specific solution. Netskope and Proofpoint replace VPNs and enable Zero Trust network access (ZTNA), Okta enables modern identity and access management, and CrowdStrike embeds strong endpoint security to secure applications and network resources.”

The realization for me is that the Cloudflare/Tanium offering is essentially competing with the Crowdstrike/Okta/Netskope/Proofpoint partnership for remote access business from enterprises. Investors may want to take this into account as they consider investments in NET and CRWD. I’m not implying the two names are mutually exclusive, but at least in this segment of business, they would be. Related to OKTA, the Cloudflare/Tanium solution uses third-party identity providers for authentication, so in some sense, Okta may be in the safest position here. It will be interesting to see how the competitive landscape evolves.

MongoDB’s (MDB) SVP of Partnerships presented at the Alibaba Cloud Summit in early July. The sessions were just recently made available on YouTube. MongoDB’s presentation was part of the Cloud Native Intelligent Database session and was entitled “Accelerating MongoDB’s Growth in China with Alibaba Cloud”. As investors will recall, MongoDB and Alibaba announced a partnership in October 2019 to offer an authorized version of MongoDB as a service on the Alibaba Cloud, under the product label ApsaraDB. While MongoDB is not selling directly to Alibaba’s customers, they do benefit commercially from usage. The presentation talked about MongoDB product uses and the partnership with Alibaba Cloud. Embedded within the presentation was mention of a customer win with China Eastern Airlines, a major Chinese airline. From the slide, “MongoDB Connector for Apache Spark enables new fare calculation engine, supporting 180M fares and 1.6B queries per day. Migrated off Oracle.” MongoDB leadership hasn’t provided customer examples with Alibaba Cloud on prior earnings calls. I think this presentation and customer mention give investors some indication of traction for the partnership as a future revenue driver.

News Items from Week of July 6-12 (DOCU, TWLO, PING, OKTA, FSLY)

DocuSign announced the acquisition of Liveoak Technologies on July 7th. The deal was an all stock transaction worth about $38M. While the two companies already had a partnership, this acquisition will provide the foundation for a new product offering in DocuSign’s Agreement Cloud, called DocuSign Notary. The process of remote online notarization (RON) is rapidly gaining legal acceptance by states, as a consequence of social distancing requirements coming out of COVID-19. Currently 37 states allow some form of online notarization, although many are through temporary executive orders (which legislatures may make permanent). While there are other smaller, independent RON providers, we would expect DocuSign to grab the majority of this business given that they already have deep relationships with players in most high-value transactions, like real estate agents. DocuSign Notary is planned for early-access availability later in the summer. Given the momentum behind RON, I think we can expect this to become a meaningful revenue stream going into 2021. Both JMP and Wedbush raised their price targets by around 50% following this announcement (not directly attributed, but likely considered).

In addition, DocuSign announced the 2020, Release 2 of the Agreement Cloud on July 9th. This introduced the following new functionality:

Added DocuSign Intelligent Insights to the native Agreement Cloud platform. This was based on the Seal Software acquisition. The product will deliver more AI and analytics capabilities to the agreement process. Users will be able to locate contract clauses and terms using powerful AI models. Insight Accelerators are add-on modules that use pre-built AI models to target specific use cases, like Brexit, data privacy and LIBOR. They are also offering a Catastrophic Event Accelerator that can help locate Force Majeure clauses.
DocuSign Gen for Salesforce will enable more complex quote generation. Enhancements include multi-year subscriptions and automatic formatting of currency based on the user’s locale.
DocuSign CLM adds Workflow Templates which allows users to configure common agreement workflows and activities, like approval dependencies and contract red-lining.
Improvements to ID Verification, which enables users to automatically verify a signer’s government issued ID. Senders can manually verify the user’s identity, if the automated process fails. Also, signers can be allowed to verify their identity only once when signing multiple documents.

Twilio had a couple of significant announcements last week as well. First, Twilio Programmable Video is powering the Dialer Video product from Doximity. This provides a secure and reliable video call between physicians and patients through a smartphone app. Over 100,000 U.S. physicians are using the Doximity app for telemedicine visits. Tucked into the press release, Twilio highlighted significant growth in use of their programmable video product. They noted a 540% year/year increase in weekly minutes and a 100% increase in overall use of their platform by healthcare customers.

Additionally, Twilio announced the acquisition of Electric Imp on July 9th. Electric Imp provides a platform that makes it easier for businesses to securely connect IoT devices to software in their data centers and third-party services. Electric Imp abstracts away the maintenance of IoT networks, by managing software updates and security. The move should help expand Twilio’s offerings in the IoT space, which they have highlighted in the past as a large future growth opportunity. Though not directly related, the next day KeyBanc raised their price target for Twilio to $270.

Ping Identity pre-released some Q2 earnings metrics on July 6th. They updated revenue guidance to a range of $55.6-56.5M, compared to consensus estimates calling for $51.5M. Additionally, at end of Q2, ARR is projected at $234.5-235M, FCF should reach $2.0-2.5M and they estimate DBNER of 110-111%. These improvements are being driven by a larger number of deals executed in the quarter and shift to more SaaS product demand. Given that Okta offers a similar suite of Workforce and Customer Identity products, this should bode well for their current quarter performance as well. Along these lines, RBC initiated coverage on OKTA with an outperform rating and a $230 price target.

After a huge price run over the past month, Fastly received several analyst downgrades this past week. Piper Sandler lowered from overweight to neutral, Citi from neutral to sell, Craig-Hallum from buy to hold and BofA from neutral to underperform. However, in these cases, analysts raised their price targets substantially. Some examples were from $31 to $89, $36 to $100 and $50 to $90. What I find interesting is how close the new price targets are to the current FSLY price, yet two of the ratings are a sell equivalent. It seems to me that the analysts are hedging. Also, the magnitude of the price target increases is substantial, approaching 3x in some cases. The slope of the line for price target changes would imply more upside in the future.

Adding to my prior post on Fastly’s edge compute solution, I found another video of interest for investors. It was from a presentation at Fastly’s Altitude user conference in Dec 2019, entitled “From content to logic and beyond: The future of Fastly’s edge“. The speaker was Fastly’s Chief Architect. He covered the history of Compute@Edge, design decisions the team made and potential use cases. The audience was Fastly’s customers and this coincided with the beginning of the private beta program. I thought there were a few interesting take-aways for investors.

First, he pointed out that Fastly’s edge compute solution is really a better way to perform serverless processing. Serverless is the fastest growing segment of public cloud spending. He covered how Fastly addressed the design of their serverless solution and its foundation on WebAssembly, which differs from the approach used by the cloud vendors. He pulled out an interesting quote from the founder and CTO of Docker, arguably the most popular container technology. “If WASM+WASI existed in 2008, we wouldn’t have needed to create Docker. That’s how important it is. WebAssembly on the server is the future of computing.” Twitter, March 2019. This underscores the cutting-edge nature of the technology underpinnings for Fastly’s serverless edge compute solution.
Second, the speaker covered a number of potential use cases for Compute@Edge. He mentioned that these were based on the outcome of a survey conducted with existing Fastly customers, asking what they would want to run at the edge. Here were some examples:

API response stitching. All modern mobile and web apps communicate with the application back-end through APIs. Responses of different API types, cacheable and non-cacheable, can be coalesced into a single response, lowering load on the back-end servers (and compute cost).
Dynamic manifest manipulation for OTT video delivery. This enables the list of video files to be changed on the fly. As an example, it could allow the fastest CDN selection for every user request on demand. Improves live video event delivery.
Server-side ad insertion for OTT video and header bidding for web content. These are common AdTech use cases. Moving these decisions to the edge would dramatically improve response times.

Near the end of the presentation, he mentioned that the Beta program was currently over-subscribed. My take-away is that if edge compute use cases were based on survey input from existing customers, those customers represent an impressive set of progressive internet players and the Beta program was over-subscribed, then we could see some interesting uses announced as Fastly pulls back the curtain on the Compute@Edge program over the coming months.

News Items from Week of June 29 – July 5 (MDB, ESTC, TWLO, DOCU, OKTA)

MongoDB announced the appointment of Mark Porter as their new CTO on June 29th. This is a replacement for co-founder and long-time CTO Eliot Horowitz, whose departure was announced as part of the Q4 earnings release in March. Porter was previously the CTO, Core Technology and Transport, at Grab, a popular mobile platform in Southeast Asia that provides ride-hailing, food delivery and financial services. Prior to his role at Grab, Porter led database development for AWS. His teams worked on RDS, Aurora, PostgreSQL and various migration services. Earlier in his career, he was a VP of Engineering at Oracle and a member of their database kernel group. If anyone would be aware of competitive threats to MongoDB, it would be this individual. Also, I think it is a testament to MongoDB’s potential that Porter would join the company full time. If he thought MongoDB were not a threat to Oracle or could be easily displaced by AWS, he would not have taken this role.

Elastic announced the creation of an open source repo on GitHub for security rules. This serves a few purposes. First, the Elastic Security Intelligence team has already developed over 50 rules that customers can import to seed their security monitoring practice using the Elastic Stack. By open sourcing these existing rules, customers gain visibility into the code behind them. Second, and more importantly, the community of security analysts can add their own rules based on their experience. This should drive broader coverage of common security exploits and provide more value for customers that lack internal expertise to create a full set of monitoring rules themselves. The contribution process is straightforward – the security analyst need only create a rule, run some validation tests and then submit a pull request for the Elastic security development team to review. Elastic SIEM product customers can easily review and selectively import these rules through the Elastic admin UI.

Two covered companies received significant price target upgrades this past week. First, KeyBanc raised Twilio’s price target from $206 to $248 on July 2. They see Twilio as a key enabler of digital acceleration over the next few years and highlight Twilio’s move up the stack into Contact Center as a Service. Second, RBC raised DocuSign’s price target from $170 to $210 and maintained their outperform rating. The analyst feels that DocuSign has the “greatest engagement durability” among his covered work-from-home companies and that DocuSign is set to win a large share of the eSignature market.

On the other hand, BTIG downgraded Okta from Buy to Neutral. The analyst claims that his channel checks indicate that deals for Okta’s Customer Identity solutions have temporarily slowed. This would lower Okta’s year/year billings growth from 40% plus to somewhere in the 30% range. His concern is that this will affect OKTA’s valuation, which is already high. I think this is a fair concern, as Customer Identity revenue is dependent on new product development projects at customer enterprises. With macro uncertainty, it is likely that these projects are being delayed. On the other hand, I am confident that demand for Okta’s Customer Identity solutions will be higher in the future as enterprises double-down on enabling technologies for their digital transformation initiatives.

News Items from Week of June 22-28 (OKTA, TWLO, ZEN)

Okta, Crowdstrike, Netskope and Proofpoint announced a new partnership to safeguard enterprise organizations by delivering an integrated, Zero Trust security strategy that is designed to protect remote work environments. The business terms aren’t specified, but the announcement did clarify that each partner is bringing a segment of the total solution and that will be co-marketed. Crowdstrike provides more detailed information about the partnership on their site. They identify these areas of expertise contributed by each partner for the consolidated solution:

CrowdStrike protects enterprise endpoints
Netskope provides web and cloud security and data protection
Okta brings strong identity management and simplifies the user experience
Proofpoint guards against people-oriented attacks

What I think is most notable about this partnership is the companies that were not included. Zscaler and Cloudflare for Teams come to mind. It will be interesting to watch this partnership evolve to see how meaningful it is as a competitive factor and revenue contributor.

Twilio announced the general availability of Messaging Insights on June 22. This feature provides real-time analytics on delivery across all messaging channels – SMS, MMS, WhatsApp, etc. This allows customers to monitor message delivery and user engagement and optimize campaign effectiveness by tweaking content and frequency. Also, if messages aren’t getting delivered, Insights provides reports and tools to troubleshoot to find the root cause. It is packaged with four default reports to provide visibility into the most critical aspects of message delivery and user engagement. This feature should help Twilio customers build their confidence in messaging channels and optimize their campaigns, which should increase revenue for TWLO as more messages get delivered.

Zendesk was named a best idea in the small to mid-cap range by Cowen on June 23. As part of this, they raised their ZEN price target from $87 to $100. Analyst Derrick Wood anticipates a re-acceleration of billings growth as the year progresses. This could help ZEN close the valuation gap it currently has with peers.

News Items from Week of June 15-21 (FSLY, AYX, DDOG, ESTC)

Fastly made a couple of announcements on June 17th. The headline was that their network achieved 100 Tbps of edge capacity. This is up 35% since December. In their S-1 filing, they mention having 45 Tbps of capacity as of March 31, 2019. So, a 120% increase in about a year. More significant in my opinion, was the acquisition of Tesuto, which was tucked into the press release. Tesuto is a virtual network emulation platform, which allows users to clone any network and test planned network configuration changes in a controlled sandbox. This will be applied to Fastly’s platform to facilitate automated testing and deployment of network configuration changes, which enables users to avoid unnecessary downtime. This capability highlights Fastly’s ongoing investment in cutting-edge technologies to facilitate fast and secure edge compute, going far beyond simple CDN use cases. Fastly engineers are working closely with standards organizations like Mozilla and the Bytecode Alliance to define and extend technologies like Wasm, WASI, witx and others. Suffice it to say, Fastly is quietly building an ecosystem of tooling for edge compute and establishing standards for the developer community. Tesuto adds another piece of necessary tooling for a configurable compute environment on the edge. As validation of Fastly’s approach, investors should watch this video from a Shopify engineer discussing their adoption of Lucet (Fastly’s WebAssembly runtime) to allow partners and merchants to create their own custom application logic that runs synchronously on the Shopify platform.

Alteryx announced two new product offerings on June 16th. These were the Analytics Hub and the Intelligence Suite. The Analytics Hub represents the first product launch following the general announcement of the Alteryx APA Platform in May. The Analytics Hub greatly expands the user base for Alteryx products, by introducing new user roles that go beyond just data analysts with a Designer license. These users interact with the hub through a browser interface built on a modern Javascript-driven user interface. The open architecture also includes API interfaces to control all functionality. Data processing jobs run on 1-10 worker nodes which make use of the new multi-threaded processing engine (AMP) that allows large jobs to be broken up and run in parallel. All of these architectural constructs would support a cloud-based delivery model, if that becomes a future Alteryx product direction. The Intelligence Suite represents an add-on module for Designer. It enables assisted modeling to allow less technical users to create machine-learning predictive models through a wizard, without requiring code. The suite also includes sophisticated text mining capabilities to pull context from images, documents or customer sentiment. Both of these new products have separate pricing, which should drive incremental revenue. The Analytics Hub in particular seems to support a new user licensing model that would extend far into the enterprise organization, touching any knowledge worker with the need to view the output of an analytics job.

Datadog continued their rapid fire advancements in two separate announcements. First, they added support for the Amazon Elastic File System (Amazon EFS) on AWS Lambda. Integration with EFS gives DevOps personnel increased depth of insight into monitoring workloads on Amazon’s serverless solution. Second, they achieved FedRAMP authorization for low-impact SaaS. This allows U.S. federal government departments and agencies to use Datadog’s cloud platform. Obviously, the net benefit to Datadog is a new sales opportunity.

Not to be outdone, Elastic released version 7.8 of the Elastic Stack on June 18th. This follows the 7.7 release on May 13. Elastic point releases include major features that span both the core platform and each solution category. To add this much additional functionality in a little over a month is indicative of Elastic’s rapid product development pace. I won’t try to detail every feature in 7.8. Major highlights on the platform side include consolidated and hierarchical side navigation, cascading dashboards with drill-down capability, a REST API for cloud cluster configuration, 8 more cloud region/provider locations, AWS GovCloud in beta and FedRAMP moderate in-process certification. On the solutions side, they added enhanced security controls for Workplace Search, more granular visibility into app search data ingestion, expanded monitoring for Google Cloud operations, TLS/SSL certificate tracking, health status indicators powered by machine learning to service maps (which were just added in 7.7), better case management tools and Jira integration for security, additional rules for detecting security threats on Linux systems and new security data ingestion modules for Fortinet, Check Point and Crowdstrike Falcon EDR.

SSI Newsletter – 2020

Newsletter Sign Up Page

Newsletter Content Archive – 2020

News Items from Week of Nov 23 – Dec 13 (DOCU, MDB, NET)

News Items from Week of Nov 9 – 22 (AYX, DOCU, ESTC)

News Items from Week of Oct 26 – Nov 8 (FSLY, NET, TTD)

News Items from Week of Oct 12 – 25 (FSLY, NET, TWLO)

News Items from Week of Sept 28 – Oct 11 (NET, TWLO, AYX)

News Items from Week of Sept 14 – 27 (NET, TWLO, SMAR)

News Items from Week of Sept 7 – 13 (TWLO, FSLY)

News Items from Week of Aug 31 – Sept 6 (DOCU, MDB)

News Items from Week of Aug 24 – 30 (FSLY, TWLO, SMAR, NET)

News Items from Week of Aug 17 – 23 (DOCU, ESTC, DDOG)

News Items from Week of Aug 10 – 16 (DDOG, ESTC, ZM)

News Items from Week of July 27 – Aug 2 (MDB, DDOG, ESTC, ZM)

News Items from Week of July 20-26 (NET, FSLY, TWLO, MDB)

News Items from Week of July 13-19 (TWLO, NET, MDB)

News Items from Week of July 6-12 (DOCU, TWLO, PING, OKTA, FSLY)

News Items from Week of June 29 – July 5 (MDB, ESTC, TWLO, DOCU, OKTA)

News Items from Week of June 22-28 (OKTA, TWLO, ZEN)

News Items from Week of June 15-21 (FSLY, AYX, DDOG, ESTC)

Recent Posts

SSI Newsletter – 2020

Newsletter Sign Up Page

Newsletter Content Archive – 2020

News Items from Week of Nov 23 – Dec 13 (DOCU, MDB, NET)

News Items from Week of Nov 9 – 22 (AYX, DOCU, ESTC)

News Items from Week of Oct 26 – Nov 8 (FSLY, NET, TTD)

News Items from Week of Oct 12 – 25 (FSLY, NET, TWLO)

News Items from Week of Sept 28 – Oct 11 (NET, TWLO, AYX)

News Items from Week of Sept 14 – 27 (NET, TWLO, SMAR)

News Items from Week of Sept 7 – 13 (TWLO, FSLY)

News Items from Week of Aug 31 – Sept 6 (DOCU, MDB)

News Items from Week of Aug 24 – 30 (FSLY, TWLO, SMAR, NET)

News Items from Week of Aug 17 – 23 (DOCU, ESTC, DDOG)

News Items from Week of Aug 10 – 16 (DDOG, ESTC, ZM)

News Items from Week of July 27 – Aug 2 (MDB, DDOG, ESTC, ZM)

News Items from Week of July 20-26 (NET, FSLY, TWLO, MDB)

News Items from Week of July 13-19 (TWLO, NET, MDB)

News Items from Week of July 6-12 (DOCU, TWLO, PING, OKTA, FSLY)

News Items from Week of June 29 – July 5 (MDB, ESTC, TWLO, DOCU, OKTA)

News Items from Week of June 22-28 (OKTA, TWLO, ZEN)

News Items from Week of June 15-21 (FSLY, AYX, DDOG, ESTC)

Tags

Recent Posts