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No. of Recommendations: 212
My portfolio at the end of Feb 2020

Here’s the summary of my portfolio at the end of February. Please note that when I discuss company results, I almost always use the adjusted values that the companies give.

Last month I gave additional long term results for context, but as I indicated, this month we are back to just results for year-to-date 2020.

While January was an amazing month in which my portfolio rose over 21% in a month when the Indexes were down 3%.....

February turned out to be an even wilder month, thanks to the coronavirus scare, which became all the news, and apparently caused the general market to have its worse month, and the Dow to have its worse day, since the 2008 Great Recession.

My portfolio finished February up 22.9% year to date, tacking on an additional 1.6% this month, while the market indexes were having this epochal fall, and finishing the month averaging down 10.3% year to date.

That’s really a remarkable performance by our companies in a rapidly falling general market, and it goes against everything you’ve always been told, about how “overvalued” stocks like ours would fall much faster than the “safer” stocks in a falling market.

Let me remind you that I posted multiple times that, while old economy stocks could have severe revenue loss from the current virus pandemic (retail, travel, hotels, concerts, theatre, manufacturing (supply chain problems, shipping to customer problems, and customers closing down of the duration of the epidemic)), our “wildly overpriced” stocks would be seen as a safe refuge, as their revenue is recurring, and that Zoom especially might have a huge increase in revenue because almost all companies around the world are moving to video conferencing rather than travel and face-to-face meetings, because of the virus’ perceived danger.




MY RESULTS YEAR TO DATE

My portfolio closed this month up 22.9% (at 122.9% of where it started). And here’s a table of the monthly year-to-date progress of my portfolio for 2020.


End of Jan +21.3%
End of Feb +22.9%



Believe me, when we started 2017, I never would have dreamed that we’d have the kind of results we’ve had over the last three years. I am astonished by them and very happy with them. And we achieved them in spite of a terrible last few months of 2018, with most of the general indexes hitting “Bear Market” territory (down 20% or more from their highs), and all of them hitting “Correction Territory”, and then, again, with a Bear Market in our own stocks in the last five months of 2019, and now with a worldwide pandemic panic, and the market indexes well into “correction” territory (down more than 10% from their highs).

At the October bottom, four months ago, all the trolls were telling us that our “overpriced” stocks would “never see the highs of 2019 again,” and asking why didn’t we get smart and invest in S&P ETF’s. It was pretty scary then and even some of our regulars were saying we might have to wait two years before our stocks would regain their highs. Well, of my current six full positions, Alteryx, Coupa, Datadog, Okta, and Zoom (five out of the six), have already been at new highs, just four months later, as well as my small position in Trade Desk. My only current position that was around then and hasn’t yet hit new highs yet is Crowdstrike. Who would have believed it in October?

My only other major position at the time that didn’t reach new highs was Zscaler, which hasn’t been a major position for a number of months now, and had become a very small position before I exited totally this month (a week ago, in fact).




HOW DID THE INDEXES DO?

Here are the results year to date:

The three indexes that I’ve been tracking for years closed this month as follows.

The S&P 500 (Large Cap)
Closed down 8.6% YTD. (It started the year at 3231 and is now at 2954).

The Russell 2000 (Small and Mid Cap)
Closed down 11.5% YTD. (It started the year at 1668 and is now at 1476).

The IJS ETF (Small Cap Value)
Closed down 15.8% YTD. (It started the year at 160.8 and is now at 135.4).

These three indexes
Averaged down 12.0% YTD.


If you throw in the Dow, which started the year at 28538, is now at 25409, and is down 11.0%, … and the Nasdaq, which started the year at 8973, is now at 8567, and is down 4.5%, … you get down 10.3% for the average of the five of them YTD.

Clearly, picking stocks that will be winners, the way we do, has beaten investing in ETF’s and Indexes, and by huge amounts. We are not magicians. We just invested in great companies. Of course they are overvalued! How often have we heard that no one can beat the indexes? That stock picking is a waste of time and effort? That we will all “return to the mean”? That books have been written that prove it? Well, guess what, Folks, the books are wrong!

And if you look at the past years you will see that picking our “overvalued” stocks has done enormously better than investing in cheap, or “value” stocks.

Again, my results are without using any leverage, no margin, no options, no penny stocks, no fancy stuff, just investing long in great individual companies. And I’ve told you each month what my positions are, and what proportion of the portfolio they are, so anyone who doubts it can check for themselves. And I’m no genius. Plenty of other people on the board have done about the same, and some even a lot better .

To simply state my goals, I'm merely trying to measure my performance against that of the average return for an investor in the stock market, and combining those five indexes should give a pretty good approximation.




ON WHAT’S GOING ON WITH OUR STOCKS
At the end of last August I thought our SaaS companies would have clear sailing for the rest of the year. Well that shows how little I can time the market. I was totally wrong. Our stocks melted down, and there was a lot of talk about repricing of SaaS stocks, sector rotation, recession coming, and all the rest. It was pretty scary if it was the first time for you.

But in retrospect, what was there to be scared about? We aren’t investing in high capital expense, low margin companies, with high debt, that have to build factories or wrestle with supply chains in order to make things like automobiles, refrigerators, sneakers, and houses, all things that people can decide to just go another year or two with the old ones, or even companies that make microchips or tech appliances, where orders can totally dry up, and revenue can actually FALL.

Our companies are in the biggest wave of our time, the wave to bring all the enterprises of the world into the Cloud and AI. And they sell subscriptions to the software that enterprises use to run their businesses. This software saves their customers money, rather than costing them extra money. People may hold off on buying a new refrigerator in a recession, but no enterprise is going to pull out the software that it uses to run its business, and that is saving it money. Our companies may see their rate of revenue growth fall , but they are extremely unlikely see their revenue fall unless their customer companies go out of business. Right now everyone is in a panic about the coronavirus, but it’s hard to see how our companies will be affected the way old economy companies will be affected. We’ll just have to wait and see.




LAST FOUR MONTHS REVIEW

November. In October I had reduced Alteryx by 2% as I felt that it was too large for comfort at 22%. This month I added back more at an average price of about $96 and it’s back up to almost a 23% position at a price of $113.53.

Datadog just started the last day of September, and it grew to a 12.3% position, and my third largest, in just a month, and Coupa wasn’t even a position in September, and it had grown to be my sixth largest position at 8.7% of my portfolio in a month. Then this month I added great gobs more to Datadog before earnings at $27.80 to $34.50, and then after the big earnings rise I added a smaller amount at an average price of $40.00. It’s now become my second largest position in two months at 16.5% and a price of $40.77. It’s certainly one of my highest confidence stocks, and maybe my highest confidence one.

I kept adding to Coupa this month as well at an average price of $134, and it is now my fourth largest (after Alteryx, Datadog, and Okta), at 10.2% and a price of $153.49. You’ve probably figured out that I like Coupa a lot (but not in the same class as Datadog).

I added some Crowdstrike at an average price of $52. I added a tiny amount of Zoom at $67.50. I’ve been afraid to add much to Zoom as it was already an 8% position or so, and contrary to some of the others, it seems less sticky and a bit moat-less.

I added to Mongo early in the month at $126 to $133, but sold it back for cash later in the month at $129 to $138. As always, Mongo is one of the stocks I tend to trim when I need money. It remains my 6th largest though and a 7.7% position.

I also continued to trim Zscaler, and I eliminated my previous 7.7% position in Twilio. I sold out of the rest of my Twilio because, on top of all the other reasons for which I’d been trimming it for the last three months, I felt the CEO was trying to intentionally mislead the public. He twice referred to their “tremendous” and “incredible,” “revenue growth of 78% at scale” (in the press release and again in the conference call), which clearly implied that they were growing 78% even at such a large scale. It was, of course, entirely untrue. The 78% was due to combining the revenue of two companies and comparing it to the revenue of just one company the year before. Bragging about that was just plain false! Twilio was growing at 47% organically and Sendgrid was growing at 30%, so the combined company was growing about 42% or 43%, as close as I could figure it. I don’t invest in a company where I can’t trust the CEO. My average sale price over the last three months in reducing and then selling out was $110, which was more than a quadruple from my purchase price of $25 and change.

To summarize: Sold out of Twilio. Trimmed Zscaler. Trimmed a little Mongo. Bought a lot of Datadog and also added to Alteryx, Coupa, Crowdstrike, and a tiny bit to Zoom.


December. I had said that I would never exit Mongo again because of FUD, only if their results warranted it. Well their last results warranted it as I saw it. Their rate of revenue growth dropped sequentially from 67% to 52% (since 52 is 78% of 67, that means their rate of revenue growth fell by 22% in one quarter). From two quarters ago sequentially it fell from 78% growth to 52% growth. That means it dropped by a third, 33%, in just two quarters. Their subscription revenue rate of growth also fell by 21% sequentially. Their operating loss worsened to $14 million from $8 million a year ago. Their adjusted net loss of $15 million was more than double their loss of $7 million a year ago. Their free cash flow loss of $13 million worsened from a loss of $10 million. And those were adjusted: Their GAAP net loss was $42 million! And worsening from $22 million! Everything was worse and going in the wrong direction.

Some smart people say that they are holding with a 5 to 10 year timeline because they know that Mongo will be a category killer and it will all turn out for the best. I’m too old for a ten-year wait so that’s not the way I invest. I look at what the numbers tell me now, and it’s not a pretty picture. I exited and put my money mostly in Crowdstrike and Datadog.

Datadog, which was in 2nd place a month ago at 16.5%, is now tied for 1st place with Alteryx, at about 20.2% of my portfolio, following the sell off in Alteryx for no known reason.

Crowdstrike, which was tied for 6th, 7th and 8th at 7.6% at the end of November, is now in 3rd place at 17.4%.

I also bought a tiny think-about position in Afterpay (less than 1%) which I’m not really ready to discuss yet, or to consider as an actual “position”. I’m still deciding if I will keep it.


January. It’s been a quiet month for me. There were no earnings reports on any of my companies. I trimmed my position in Alteryx a tiny bit when it went above 22%, but it just kept going up and I probably won’t trim again unless it goes over 24% or 25%. My Afterpay position, which was less than 1% at the end of the year, has now tripled to 2.8% and I’ve decided to keep it for now, but not grow it much barring an American IPO, because of the awkwardness, hassle, and extra cost of having to buy on the Australian market as an American. I didn’t add any positions during the month, or sell out of any positions during the month.


February started for me as another fairly quiet month, but it turned into the month of the coronavirus sell-off in the general market. I did very little until the big sell off seven to ten days ago. I sold out of my remaining small position in Zscaler after their disappointing earnings. I agree that they have a better solution, and they hired a great person to try to get them back on track, but they have structural differences (pretty much having to sell an entire business instead of land and expand), which will keep them from ever growing as fast as the other companies to which I moved the money, so why would I hold on and hope. I explain why I sold in a separate section below

I added to Alteryx at an average price of $140 even though it was already my largest position, to Crowd at $60.80, and to Datadog at $44.50, and to Zoom at $101, all during the meltdown a week ago Friday. This last week I added further to Zoom at $104, $106 and $108. I also added a tiny position in a new company that I’m still deciding about, and am not ready to discuss.

To raise money for these purchases, in addition to selling out of Zscaler, I sold back half of my small Afterpay positions, feeling that as a company focussed on clothing retail, while 2019 results, just announced, seemed great, their sales may be substantially below expectations during this next six month period (January through June of 2020), because of disruptions due to the virus. Fortunately I did it before their earnings release, after which they fell 10% on Friday. I also sold some Okta for cash to buy more Zoom, feeling that Zoom was a remarkable opportunity at present.




HOW THE INDIVIDUAL STOCKS HAVE DONE
Here’s how my current positions have done this year. I’ve arranged them in order of percentage gain. As always I’ve used the start of the year price for stocks I’ve been in all year, and my initial buy price for stocks I’ve added during the year. Please remember that these starting prices are from the beginning of 2020, and not from when I originally bought them if I bought them in earlier years (for example, I bought Alteryx originally at $27.72, over two years ago, but it’s listed below at an entry price of $100.07 because that is the price at which it started 2020.

Zoom from 68.04 to 105.00 up 54.3%
Alteryx from 100.07 to 139.62 up 39.5%
Crowd from 49.87 to 59.64 up 19.6%
DataDog from 37.78 to 45.15 up 19.5%
Okta from 115.37 to 128.06 up 11.0%
TradeDesk from 259.78 to 287.25 up 10.6%
Afterpay from 20.50 to 21.59 up 5.3%
Coupa from 146.25 to 149.75 up 2.4%


As an aside, Zoom was up only 12.4% at the end of January.

For another aside, you’ll notice that every one of them is still up YTD while the indexes are all down.


Exited positions this year showing my gain or loss from the beginning of this year, or from when I first bought if it was during the year, and my average exit price. Please remember that these are from the beginning of 2020, and not from when I originally bought them if I bought them in earlier years.


Zscaler from 46.50 to 54.00 up 16.1%






POSITION SIZES.
I’m still trying to keep my portfolio concentrated and streamlined. I’m at eight positions now (plus the tiny new try-out position that I mentioned above, in the monthly summary) which is quite concentrated for me, and definitely more concentrated than I would ideally want to be. However, when I look at new opportunities I don’t see any that excite me enough to want to take substantial funds out of my favorites to invest in these new ideas. My top three positions (Alteryx, Datadog, and Crowdstrike), make up about 60.8% of my portfolio, and my top six make up 94.7%. The last two and the little tryout are relatively bit players. By the way, keeping my number of stocks down really makes me focus my mind and decide which are really the best and highest confidence positions.

Here are my positions in order of position size, and bunched by size groups. You’ll notice however that not only are they the same stocks but they are also in the same order as a month ago, except that Zscaler, which was one of my three small positions a month ago, is now gone, Zoom, with its considerable run-up, has passed Coupa, and Trade Desk has passed Afterpay (which I reduced a tiny amount).
.

Alteryx 23.6%
Datadog 20.0%
Crowdstrike 17.2%

Zoom 13.7%
Okta 10.3%
Coupa 9.9%

Trade Desk 2.8%
New try-out 1.4%
Afterpay 1.3%





STOCK REVIEWS
Alteryx and Datadog both announced December quarter results in February. They were beyond excellent.

Datadog is a relatively new position that I built from 0% to 20% of my portfolio in the three months from the end of Sept to the end of December. It got as low as $28 in the meltdown and it is now about $45, and is in 2nd place at 20% of my portfolio. I bought in at an average price of $31.50, so I now have about a 43% gain. Buying in that rapidly is really extraordinary for me, so let me tell you a bit about Datadog: It is a SaaS software company that leases subscriptions to software that monitors infrastructure, analyzes application performance and provides log management. Recently it has added new products that provide what it calls experience monitoring (what the experience of your customers is), and a network performance management product.

What makes it unique is that its competitors have single products that work in silos, while Datadog integrates them all and its “three pillars of observability can be observed on a single pane of glass.” As Bert says, “DataDog built a product that is self-serve in nature and can be installed in minutes. And having a platform that offers all the monitoring, and the analysis of logs, in a single platform is more unique than you imagine.” And that ability users have to look at their entire IT operation holistically and on a single pane of glass is a great differentiator.
Here are the results of their December quarter:

Revenue grew 85% to $114 million. (Note that it’s ALL subscription revenue). The scuttlebutt was that their growth would be down to 30% or 40% this year.😀

GAAP Gross margins were 77% from 74% a year ago.

Adj operating income was $7 million,

Adj operating margin was positive 6%, improved from NEGATIVE 7% a year ago

Operating cash flow was $24 million, up from $4 million sequentially,

Free cash flow was $1 million, up from $(3.7) million sequentially (due to real estate capex expenses).

Customers over $100,000 at 858 up 89% from 453 a year-ago

Customers over $1 million at 50 up 72% from 29 a year-ago

They are currently “In Process” on the FedRAMP Marketplace, initiating the certification process.

Announced Security Monitoring, currently available in beta, to break down the silos between security, dev, and ops. Our vision is to offer security teams the same visibility into their infrastructure, network, and applications that developers and operations teams have.

Announced the general availability of Network Performance Monitoring (NPM). Our Simple Network Management Protocol (SNMP) integration, a component of NPM, is available in beta and extends visibility to physical network devices.

Announced the general availability of Real User Monitoring (RUM). An extension of our user experience monitoring suite, RUM provides real-time visibility into the experience of individual users, in order to quickly spot and correct otherwise costly website performance issues.

All new products are available in the same tightly integrated platform.

Launched the Datadog Partner Network, a new program expanding Datadog’s support for channel partners.

Continued product innovations, including enhanced APM functionality, deeper visibility into containers and serverless environments, and enhanced machine learning capabilities.

Conference Call (greatly edited, paraphrased, and summarized)

This quarter was a great finish to a milestone year for us. Revenue was $114 million, up 85% We ended the year with 858 customers with ARR of $100,000 or more, up 89% yoy.

About 60% of our customers are now using two or more of our products, up from 25% a year ago. Penetration is relatively even across enterprise, mid-market and SMB segments. Additionally, about 25% of our customers are using all three pillars of observability, which is up from 5% a year ago. This is especially impressive considering that our third pillar, Logs, has been available for less than two years.

Our net retention rate continued over 130% We also continue to be capital-efficient with free cash flow of $11 million.

For the full-year, we generated revenue of $363 million, up 83%, and free cash flow was positive $0.8 million for the year.

We added about 1,000 new customers in Q4, which is a record and almost twice the number we added a year ago.

We accelerated our pace of innovation with multiple exciting developments in Q4. We are pleased with the initial uptake of NPM and RUM, which demonstrates our opportunity to create future revenue drivers for our business.

We also announced security monitoring, as a first step to apply the power of our platform beyond observability use cases. We envision a future where silos continue to break down beyond dev and ops and extended security teams.

As it becomes clear that securing applications in the cloud world needs to involve all three. We believe that by harnessing the massive amounts of data we already collect we can improve our customer’s IT security.

Finally, one of the greatest surprises to us this year has been the success of initial land deals. In 2019, approximately 65% of our new logo deals had two or more products, up from only about 25% in 2018. This demonstrates the pent-up demand for our integrated platform and our ability to add value from the very start of a customer relationship.

To summarize, we believe we have a very significant opportunity to further expand our product portfolio. Investing in innovation is a core part of our business strategy.

Now, let's move onto marketing. We have been expanding coverage in both commercial and enterprise channels to capture the opportunity across company sizes. While continuing rapid growth in North America, we are also expanding in new and existing territories internationally.

Additionally, we have been building a government-focused team. And finally, we are investing in the partner channel, with the launch of the Datadog Partner Network.

As of the end of the quarter, we had about 10,500 customers, up from 7,700 a year ago. We added about 1,000 customers in Q4, a record for us.

We ended Q4 with 858 customers with an ARR of $100,000 or more, up 89% from a year ago, up more than 130 in Q4. Given that more than 70% of our ARR is generated from customers over $100,000, we expect this cohort of customers to be a large driver of our future growth. We also ended the year with 50 customers with ARR of $1 million or more, which is up from 29 a year ago, and only 12 two years ago.

As a conclusion, we are in the early stages of what we think is a tremendous market opportunity, which we believe we are well positioned to capture. We have been performing at a very high level and our focus is on doubling down on what has made us successful today.

So in 2020, we plan to continue to invest in hiring great engineers and delivering innovation to our existing and new customers. We also remain committed to investing in our go-to-market, expanding our sales capacity globally across all geographies, as well as investing in new opportunities such as a partner channel in public sector.

CFO - I'm happy to report that the average ARR of our enterprise customers at the end of 2019 was about $230,000, an increase from $160,000 at the end of 2018. And average ARR of our mid-market customers at the end of 2019 was about $170,000, an increase from $110,000 at the end of 2018. We believe there remains ample room for continued penetration of each of these segments.

Lastly, international growth outpaced total growth. And many of these international teams are still ramping.

Gross profit in the quarter was $88.4 million, representing a gross margin of 78%. This compares to a gross margin of 76% last quarter and 75% in the year ago period.

Net income in the quarter was $10 million, or 3 cents per share, on 327 million weighted average diluted shares outstanding. Profitability outperformance was driven primarily by the revenue outperformance.

We have a highly efficient business model and have experienced a high return on our investments in S&M and in R&D. While we have operated around breakeven to slightly profitable and outperformed on profitability in Q4, we see ample opportunities to continue to invest in the large market opportunity ahead of us.

Turning to the balance sheet and cash flow, we ended the quarter with $778 million in cash
Op Cash Flow was a positive $17.4 million in the quarter and a positive $24.2 million for the full year.

After taking into consideration capital expenditures and capitalized software, free cash flow was positive $10.9 million in the quarter and approximately breakeven or around $800,000 for the full-year.

We are very pleased. We have growth at scale that few can match and have demonstrated efficiency in our model. We are making continued investments for growth for the foreseeable future. We believe we are at the very early stages of a multi-billion dollar market opportunity and we feel very good about our ability to build a large and successful company over time.



Alteryx is at 23.6% of my portfolio, and in 1st place. It and has quintupled since I originally bought it a few years ago. It announced December quarter results in February, and they were enormous, with revenue growth accelerating both year over year and sequentially to 75%, the highest I’ve ever seen them. That was up sequentially from 51% in March, 59% in June, and 65% in September! That’s just incredible!

Their revenue percentage growth looks like this:
 
2016: 57 67
2017: 61 50 55 55
2018: 50 54 59 57
2019: 51 59 65 75


As you can see, it looks solid as a rock.

Their adjusted gross margins were 90%, 91%, 92%, and 93% for the last four quarters!

Their dollar based net retention rate has been 130% or more for the last thirteen quarters!.

For a few other figures:
Adj op income was $51 million up 93% from $26 million a year ago.

Adj net income was $44 million up over 100% from $21 million.

Adj net income margin was 28% !!!, up from 24% a year ago.

Adj EPS was 64 cents, up 100% from 32 cents

Total Shares were up just 5%

Cash was $975 million.

Op cash flow was $21 million up from $14.4 million a year ago.

What they do is to enable non-techies and techies to quickly and easily analyze data. Their clients therefore love them. Management feels they have no competition. From one of their earlier conference calls: “We are in a space where there's little to no competition and a much larger TAM.”

We’ve had some discussion on the board about whether Alteryx is really a SaaS company, since it’s not on the cloud, and whether or not it really matters as its revenue is recurring and its net expansion rate is 132%.

Their long term goals are:

Gross margin 90-92%
Operating Margin 35-40%
FCF Margin 30-35%

They recently announced a new collaboration to work on Smart Cities.

The stock finished 2018 up 135% yoy, and they were up 68% in 2019 on top of that, in spite of the big sell-off. They hit a low during the sell-off of about $87, and they have now bounced about 60% off that low, to about $139. I feel very justified in calling Alteryx a Category Crusher, with very high confidence level. I’d give it six confidence stars out of six. It seems to control its space and is growing like mad.



Crowdstrike is in 3rd place at 17.2%. It has been as high as $96, and hit a low of $46 and is now about $60, so while it is up 33% from that low, it is still down 36% from its high in spite of the enormous results that you are about to read about.

Crowd was a recent IPO and there were a couple of extended threads on it in November and December so I’ll just give you my brief summary of their last earnings report. It was one of the best earnings reports that I have ever seen from any company, ever!

Total revenue was $125 million, up 88% from $66 million a year ago.
Subscription revenue was $114 million, up 98% from $58 million a year ago.

Subscription revenue was 91% of total revenue, up from 87% a year ago. That means that low margin Service revenue, which only grew at 25%, was left behind and fell from 13% of total revenue to only 9%. It’s really a breakeven service and had a margin of about minus 1%.

Annual Recurring Revenue (ARR) was $502 million up 97%, and $78 million of that was new ARR added in the quarter.

Adj Subscription Gross Margin was 76%, up 5 points (!!!) from 71% a year ago.

Adj operating loss was $16.5 million, improved from $28.6 million a year ago.

Adj net loss was $13.4 million, improved from $28.8 million.

Adj EPS was a loss of 7 cents, improved from what would have been a loss of 15 cents if they had the same number of shares a year ago (it was pre-IPO).

Operating Cash Flow was $39 million, improved from a loss of $3.6 million a year ago.

Free cash flow was $7 million, improved from a loss of $13 million a year ago.

Cash increased to $834 million

Added a record 772 net new subscription customers for a total of 4,561 subscription customers, up 112% yoy.

Subscription customers that have adopted four or more cloud modules increased to over 50%, and those with five or more cloud modules increased to 30%.

Expanded cloud-native Falcon Platform with the announcement of a new Firewall Management module that delivers simple, centralized host firewall management to help customers transition from legacy endpoint suites to CrowdStrike’s next-generation solution.

Introduced Falcon for Amazon Web Services to simplify cloud workload protection and provide enhanced visibility.

They added a bunch more products which you can look up for yourself.

Received highest score for “Lean Forward” Organizations (Type A Use Cases) in Gartner’s Critical Capabilities for Endpoint Protection Platforms. Named by Forrester as a Leader in Endpoint Security in The Forrester Wave: Endpoint Security Suites. Named Best New Endpoint Solution by SE Labs in annual report.

They also had huge, accelerating customer growth? I’m not kidding about huge. January fiscal year-end customers in 2016 thru 2019 were

165
450
1242
2516


Just look at that stack for a minute. And after the last three quarters they are already almost up 100% with over 4500 customers And they say that they are focusing on larger customers, and those customers are asking for longer contracts. Longer contracts mean more dollars that they have signed up but can’t recognize yet. Also, they have a land and expand sales plan so those new customers will increase their spend in the future.

Adjusted net profit margin was -173%, -114%, and -56% the last three fiscal years. Last quarter it was -21%, and this quarter it was about -10% !!!!!! That gives an idea where it is going.

Dollar based net retention rate was “over 120%” for the umpteenth consecutive quarter.

Okay, so what did I do? I more than doubled my Crowd position during December, and added a little bit in January, and some in February. It seems to me to be high confidence, and a clear Category Leader and disruptor. But please don’t just follow me. Decide for yourself. I make mistakes I can assure you.



Okta in 5th place, is a 10% position, and is at a five star confidence level. It was up 81% in 2019, and is over a quadruple since I bought it over two years ago. What Okta does is control individual sign-on to all the apps you use using a native cloud SaaS platform. It’s called identity and access management. It is loved by the people who use it, because they no longer need a million passwords for each program they sign on to. Last quarter the rate of revenue growth “fell” from 49% to 45% sequentially. That’s the bad news. The good news is that they do a lot more than smart sign-in, more than I can understand for sure, and it seems likely their revenue growth will take off again. It’s also very sticky and unlikely to be replaced. At the bottom of this meltdown it got as low as $99 and it’s now at $128. Here are results from the most recent quarter they announced.

Total revenue was $153 million, up 45% yoy.

Subscription revenue was $144.5 million, up 48%.

Remaining Performance Obligations (RPO): Total RPO was just over $1.0 billion, up 68%.

Current RPO (revenue expected to be recognized over the next 12 months), was $516 million, up 52%.

Calculated Billings: were $176 million, up 42%.

Adj operating loss was $8.1 million, or 5% of revenue, compared to $6.5 million, or 6% of revenue last year.

Adj net loss was $8.1 million, compared to $3.9 million a year ago.
Adj EPS was minus 7 cents, compared to minus 4 cents a year ago.

Operating Cash Flow was positive $10.6 million, or 7% of revenue, improved from negative $6.4 million, or 6% of revenue, a year ago.

Free cash flow was $9.2 million, or 6% of revenue, up from $1.4 million, or 1% of total revenue, a year ago.

Cash was $1.37 billion.

Adj Gross Margin was 78%, up from 76%.

This wasn’t a blow-out quarter by any means, but certainly a very good quarter. Okta is a Disruptor and Category Leader, a Cloud-based New Market Stock, and is becoming a Catgory Crusher as well.



Coupa was a new stock in October and is now in 6th place at 10% of my portfolio. Its low in the meltdown was $120, and it’s now back up to $150, and has been making new all time highs.

I had lost sight of Coupa until October when a portfolio summary by another poster on our board alerted me. When I sold a try-out position last March, the percentage revenue increases for the past two years had looked like this:


2017: 44% 41% 43% 34%
2018: 41% 37% 38% 42%
2019: 39%

It looked very unexciting. But since then the three quarters that have been reported have given a different picture:

2017: 44% 41% 43% 34%
2018: 41% 37% 38% 42%
2019: 39% 44% 54% 51%


Thus we had growth of 44%, up from 37% yoy… Which was followed by growth of 54%, up from 38% yoy, and finally by 51%, up from 42%. It was very impressive.

This was a different picture than the one I had been looking at, and I took a position. Let me tell you a little about the most recent quarter:

Revenue growth was up 51%, second only to last quarter's 54%. The next closest looking back three years was 44%.

Subscription Revenue was up 49%, and was 88% of revenue.

Calculated billings were up 54%.


Now we get to the GOOD part:
Operating Income was 11.6 million. By comparison the previous 7 quarters were 0.9, 0.3, 4.0, 5.8, 2.4, 2.2, and 4.8. Making $11.6 looks like they are breaking out.

Adjusted Net Income was 14.2 million. By comparison the previous 7 quarters were 1.4, (0.1), 3.3, 5.5, 3.4, 2.1, and 5.3. Making $14.2 also looks like they are breaking out.

EPS was 20 cents. The previous high ever was 8 cents.


And even BETTER stuff:
Operating Cash Flow and Free Cash Flow were $26 million and $22 million. A year ago they were $4 million and less than $3 million.

Looks great to me. Maybe not on the scale of Crowdstrike or Datadog, but really humming along.

For a little background on the company, here’s a little paraphrased excerpt from the introduction to Bert’s multi-page write-up in January. Bolding is mine.

Coupa is a leader in the e-procurement space. It has continued to exceed its targets for growth, earnings, and free cash flow. It has built a substantial competitive moat that may not be fully appreciated. It has grown its TAM prodigiously by expanding into ancillary spaces that enhance the value of e-procurement. At this point, it seems destined to become the absolute leader in its spaceand to achieve the kind of profitability that leaders often deliver in the enterprise software world.


And finally, Coupa gives a wonderful example of how GAAP accounting tries to get you to believe the impossible:

Coupa had $22 million in Free Cash Flow. Free Cash Flow is real money that they have in the bank, any way you look at it.

GAAP wants you to believe that they had a net loss of more than $26 million!

If GAAP had any reality, and if they had a "real" NET LOSS of $26 million, then where did that $22 million of free cash flow, that they have already put in the bank, come from???? The adjusted net income of positive $14 million sure makes a lot more sense with that $22 million of positive free cash flow than that $26 million GAAP net loss, now doesn't it?

That's what I mean when I say that GAAP is make-believe, and useless for understanding how the company actually did. It may make some accountants happy, but even the CFOs and CEOs of our reporting companies almost always say they use the adjusted results internally for planning and for evaluating how their companies are doing.



Zoom has moved up to 4th place at about 14% of my portfolio (up from 9% a month ago). It had a low of $62 in the sell-off and is now at $105. There were a couple of long write-ups on Zoom around the time of their IPO last year that you might want to look at, as well as my numerous posts about Zoom this month. Here are the results of their most recent quarter, announced in December.

“Our third quarter was another strong performance. We had revenue growth of 85% with increased adj profitability, and free cash flow of $55 million. We had 67% growth in customers with over 10 employees, and 97% growth in TTM $100K customers.
We hosted our customer event with more than 2,600 registered guests, up 80% yoy. At it, we were proud to announce expansions to our platform including our new Zoom Rooms Appliance Program, expanded Zoom Phone service and capabilities, and the growth of our App Marketplace. Our customers tell us that Zoom ‘just works,’ and with these new innovations we empower teams to do even more with video communications.

I’m excited that the U.S. Postal Service is starting to deploy Zoom Meetings more broadly across the organization after an extensive proof-of-concept. This is our first major agency win since we received FedRAMP approval in May.

Gartner named Zoom a leader for the fourth consecutive time in their Magic Quadrant for Meeting Solutions. We are grateful that Gartner has placed Zoom top for completeness of vision and ability to execute once again.

Total revenue was $167 million, up 85%

Deferred Revenue was $202 million, up 89%

Total RPO (Remaining Performance Obligation) was $517 million, up 102% from $256 million.

Adj gross margins were 83% up from 82% a year ago, and from 82% sequentially.

Adj operating income was $21 million, up from $2 million yoy.

Adj operating margin was 13%, up from 2% a year ago.


Adj net income was $25 million up from $2 million a year ago
Adj EPS was 9 cents up from 1 cent the year before.

Cash was $811 million.

Operating Cash Flow was $62 million, up from $18 million a year ago.

Free cash flow was $55 million, up from $10 million a year ago.

(There was apparently some one-time accounting thing that added a little to Cash Flow that I didn’t understand, so it may not be so high next time.)

Customers with more than 10 employees was 74,100, up 67%.

TTM $100K customers were 546, up 97%.

TTM net expansion rate was over 130% for the 6th consecutive quarter.

Net Promoter Score – over 70

This would obviously have qualified as a blow-out quarter. I’m also impressed that Zoom is so profitable at such an early stage. Yes, I know that there is a lot of argument about whether or not they have a moat, but I expect that they will have enormous growth this year, because enterprises all over the world will be looking to cut down on all travel to meetings, and using video conferencing instead, and because Zoom is simply better at video conferencing than anyone else. Given that videoconferencing instead of travel and hotels will save enterprises gobs of money, as well as avoiding risk, I just don’t see them hesitating to pay a little more for the best.



The Trade Desk is in 7th place at 2.8% of my portfolio. I see their results a lot differently than everyone else apparently does. Bear with me and read what I have written

After the SEPTEMBER quarter I wrote the following in my notes:

“I reread the last earnings report, and read the transcript of the conference call, and looked at the investor presentation.

I have to admit that Jeff Green, the CEO, is a great salesman for his stock, and makes it sound like there’s no way the company can go wrong, and indeed, with an election year coming and lots more political ads, I can see where he could be right.

However, what the f… happened this quarter???
How can a company growing CTV spend at 145%, and audio spend at “a stunning” 162%, and with mobile spend up 58%, and data spend up 63%, and cross-device spend up 132%, have revenue up just 38%??? It just doesn't make sense! What isn’t he telling us? What is shrinking?

The Sept quarter sequential revenue rose just $4 million, from $160 to $164 million!!! That’s about 2.5%. That’s the smallest sequential growth from June to Sept, by far, in the last four years. Last year the percentage was double that, the year before it was more than triple that, the year before that it was 5 times this year’s sequential growth.

And don’t give me any nonsense about the law of big numbers. It was by far the smallest sequential gain in dollars too, by far. Even in 2016 when they were only coming off a base of $47 million in June, they managed to grow by $6 million sequentially to $53 million, and this year, coming off a base of $160 million, they only grew $4 million??? With all those bragging segments with over 100% growth?

How can 2.5% sequential growth happen in a company growing all these segments by 162%, 145%, 132%, 63%, and 58%? I don’t get it!

And why did EPS grow only 10 cents yoy, when a year ago it grew 30 cents yoy??? Does that make any sense? And, oh yes, this June quarter it grew 35 cents, and in the Mar quarter (usually smallest) it grew 15 cents, and last December it grew 55 cents. And only 10 cents this quarter???

And he gave no explanation for what went wrong. Just everything is beyond wonderful!”


Well now, after the DECEMBER quarter I can ask the same thing:

What the f… happened this quarter???
How can a company growing CTV spend at 137%, and audio spend at 185%, and with mobile video spend up over 50%, and mobile in-app spend data spend up 67%, etc, etc have revenue up just 35%??? It just doesn't make sense! … Look, revenue was up 56% in the year ago quarter. They dropped from 56% to 35% growth in just one year. That’s losing almost 40% of their growth in one year. We had people worried because Datadog lost 14% of their growth rate in a year.

Let’s look at dollars of growth! A year ago, December quarter over December quarter, they grew revenue by about $58.0 million. This year, December quarter over December quarter, coming off a much larger base, they could only grow revenue by $55.5 million. Their dollar growth actually went DOWN!!! And with all those bragging segments with over 100% yoy growth?

And why did EPS grow only 40 cents yoy this quarter, when a year ago it grew 55 cents yoy in the same quarter, off a much smaller base??? Does that make any sense?

And they gave no explanation for what went wrong. Just everything is beyond wonderful! I have a lot of misgivings. I’d rate it 3.5 confidence stars now, because of my mistrust of a complicated advertising milieu, a rapidly dropping growth rate, and its tie-in to the general economy, in spite of feeling that this is a unique, innovative, and creative company.



AfterPay is now at 1.3% and is in 8th place. I wrote separate reports on it here, and here:
https://boards.fool.com/afterpay-my-notes-34399404.aspx?sort...
https://boards.fool.com/misconceptions-about-afterpay-343997...

Here is the thread about it’s current results, which came out on Thursday. It sold off almost 10% after earnings. Fortunately had I cut my position by more than half the week before for reasons I’ve discussed in the Four Month Summary above.

https://boards.fool.com/apt-afterpay-results-h12020-34421213...

As I mentioned, I cut my position down in size because of concern about clothing retail being greatly affected by interruptions due to the pandemic.




WHY I SOLD OUT OF ZSCALER
Zscaler was my second largest position at 19% of my portfolio at the end of September. I reduced it greatly In October, and a little in November, a little more in December, and a tiny bit more in January. I sold out after earnings in February. Here’s my story:

Zscaler hit its peak at about $89 in July. It was then tied for my largest position at about 18%. Over the next few weeks it drifted down with the market to about $82, but then, near the end of August, it suffered a large decline attributed to a negative article. When it continued to fall from there I didn’t understand what was going on. I knew that they had guided conservatively but all these companies do that so that they can beat. I knew that they were encountering longer sales times with larger enterprises, but I also knew that they had hired a superstar to take over sales and marketing motion. I added a considerable amount at an average price of about $49 or so.

But then I reconsidered, and over the past months I greatly reduced my position. Well why?

First of all, I do feel that the old firewall paradigm, as represented by Palo Alto, is obsolete. The CEO of Palo Alto, the number one in security, making a huge point of crowing about how his company beat out Zscaler, a little company one-tenth the size of Palo Alto, in a few sales, shows how scared they are. Think about it! Why would a really dominant company even mention, or care about, beating out a little company a tenth their size, unless they fear that that little company has a better product?

But now that the legacy security companies are aware of the threat to their very existence, they will fight tooth and nail, with lies, and false and distorted claims, and whatever they can, to hold on to the bulk of their business for as long as they can. Zscaler may take over a large part of the security world, but it definitely won’t do it overnight. It will be a long struggle.

Second, Zscaler was clearly worried about their lengthening sales cycles, and slowing growth rates, as the early adopters have been worked through and they have to sell to the C-level executives of larger enterprises who may know nothing about security but will worry about changing their security system, may have IT departments worried about losing all their beloved hardware (and maybe their jobs, some of which will become unnecessary), and who have the CEO’s of their legacy security companies, who they have known for years,whispering in their ears. Clearly Zscaler made the right move in hiring someone really competent in order to deal with this situation, but you don’t overhaul a sales process overnight. There may be even more slow quarters to come.

Third, Zscaler is not an easy try, land and expand company like most of our other SaaS companies. One has to sell a whole company, or at least an entire division, to get in the door.

Fourth, Zscaler’s revenue growth and billings and other metrics have fallen off a cliff with the quarter results announced on Feb 20.

So here I am, with Zscaler, with a tailwind of inevitability, sure, but which is asking huge enterprises to revamp their entire security systems, and which has a lot of temporary obstacles in its path which may cause growth rates to diminish in the near term, such as desperate large competitors, customer IT departments that don’t want to lose their jobs, and enterprise CEO’s who don’t really understand security… while I have other companies, growing like mad, and without these execution problems, so it made sense for me to reduce the size of my Zscaler position from huge to smallish, and then to get out after quarter results, to use the cash to buy into companies like Alteryx, Crowdstrike, Coupa, Datadog and Zoom. It was a question of evaluating what was going on and acting on it.




THE OUTLOOK FOR THIS YEAR
Here’s what I wrote a month ago. I’ll repeat it. Last quarter the average growth rate for my top six stocks, which make up 95% of my portfolio, was 71%. (If you don’t believe me, calculate it yourself). Even if they slow down more than I expect, it’s hard to see my portfolio as a whole with a return of less than 25%. So I’ll say I expect a return of 25% on up. People are now predicting US companies as a whole will have zero growth in profits this year. I would guess that that may make make our companies very desireable to any mutual fund or hedge fund portfolio manager who wants to show good results for the year.




FINISHING UP
I feel that most of my portfolio is made up of a bunch of great companies. But that’s just my opinion, and I can’t say often enough that I’m not a techie and I don’t really understand what most of them actually do at all ! I just know what great results look like. I figure that if their customers clearly like them and keep buying their products in hugely increasing amounts, they must have something going for them and, as I’ve often said, I follow the money, the results. And I listen to smart people about the prospects of these companies.

When I take a regular position in a stock, it’s always with the idea of holding it indefinitely, or as long as circumstances
seem appropriate, and never with a price goal or with the idea of trying to make a few points and selling. I do, of course, eventually exit. Sometimes it’s after months, and sometimes after years, but I’m talking about what my intention is when I buy.

I do sometimes take a tiny position in a company to put it on my radar and get me to learn more about it. I’m not trying to trade it and make money on it, I’m just trying to decide if I want to keep it long term. If I do try out a stock in a small position and later decide that it’s not what I want, I sell it without hesitation, and I really don’t care whether I gain a dollar or lose one. I just sell out to put the money somewhere better. If I decide to keep it, I add to my position and build it into a regular position.

You should never try to just follow what I’m doing without making up your own mind about a stock. In these monthly summaries I’m giving you a static picture of where I am currently, but I may change my mind about a position during the month. In fact, I not infrequently do, and I make changes in the position. I usually don’t announce these changes until the end of the month, and if I’m busy or have some personal emergency I might not announce them even then. And besides, I sometimes make mistakes, even big ones! Don’t just follow me blindly! I’m an old guy and won’t be around forever. The key is to learn how to do this for yourself.




THE KNOWLEDGEBASE
Since I began in 1989, my entire portfolio has grown enormously.
If you are new to the board and want to find out how I did it, and how you can try to do it yourself, I’d suggest you read the Knowledgebase, which is a compilation of words of wisdom, and definitely worth reading (a couple of times) if you haven't yet.
A link to the Knowledgebase is at the top of the Announcements panel that is on the right side of every page on this board.

For some additions to the Knowledgebase, bringing it up to date, I’d advise reading several other posts linked to on the panel, especially:

How I Pick a Company to Invest In,
Why My Investing Criteria Have Changed,
Why It Really is Different.
Illogical Investing Fallacies

I hope this has been helpful.

Saul
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