No. of Recommendations: 222
My portfolio at the end of June 2019

Here’s the summary of my positions at the end of June. This month you got five full weeks. There’s a lot to think about and discuss in this issue! As always, I’d welcome questions or comments on what I did or didn’t do, and will try to respond.

Please note that in my discussions of company results, I almost always use the adjusted figures that the companies give.

Please note the section just below. In it I have done my best to explain what is going on with the valuation expansion of our companies. When I included an earlier version last month I said I’d include it one more month at most. Here it is for the second time, rewritten and different, with changes suggested by some of the discussions on the board during the month. Please read it and think about it. It won’t be in my monthly summary again! Promise!




AN EXPLANATION OF THE VALUATION OF OUR STOCKS

I’m sure that some of you have wondered why our companies are valued so much higher than conventional companies. There’s been a lot of discussion and worry on the board (which is a good thing, and a lot better than if there was no worry). Here’s a more detailed explanation of their valuation expansion. It has occurred because other investors (and the market) have gradually come to realize the facts I explain below. I’ve tried to make the explanation as clear as possible, and I hope that it makes good sense to you.

The kind of companies that we are investing in now never existed before! Look, ten years ago I searched for companies growing at 15% or 20% a year. And 25% was a dream come true. Now I don’t even bother looking at a company with 20% or 25% revenue growth.

We are investing in a new model of enterprise. Our companies have very high revenue growth year after year. I’m talking about 40% to 65% per year for most of them, but some even higher. These are also very high gross margin companies (70% to 92% for the most part). Their revenue is almost all recurring, on software subscriptions and thus largely locked in, and their dollar-based net retention rates are generally greater than even 120%. This means that last year’s customers buy a lot more this year than they bought last year instead of having an attrition rate, or forbid-the-thought, being companies whose customers make one time purchases, or sell hardware, and thus don’t even have ANY revenue guaranteed next year at all. I’ve never seen companies like ours before. Have you?

Think how different this is from companies that sell “things” and have to go out and sell them again next year to the same people or different ones. And think how low capital intensive our companies are. No factories to be built to expand sales! Just lease more software.

Of course a company growing revenue 50% per year, with 95% recurring revenue, 92% gross margins, and a 130% dollar-based net retention rate is worth a much, much, higher EV/S than the old model of company, with fairly low revenue growth, low gross margins, and with little or no visibility into revenue for the next year and beyond!

And revenue which has very high gross margins is worth more per dollar of current revenue (in other words, it’s worth a higher EV/S) than lower gross margin, revenue. WHY? Let me explain it to you.

EV/S, which is traditionally used for evaluation, puts Sales (Revenue) as the denominator. But that’s silly! On $100 million of sales Alteryx, with gross margins of 90%, keeps $90 million, while a grocery chain, with gross margins of 10%, keeps $10 million on the same $100 million of sales. Revenue by itself doesn’t tell you much of anything. It’s the gross margin dollars which ought to go in the denominator, not total revenue.


Let’s consider an extreme example for clarity of understanding: I’ll take a hypothetical conventional company and compare it with an equally imaginary one of our SaaS companies:

Let’s say that our conventional company has a 23% gross margin. That means it keeps $23 out of every $100 of revenue to cover operating expenses and profit. And let’s say our SaaS company has a 92% gross margin. That means that it keeps $92 out of that same $100 of revenue. (I said it would be an extreme example, but Alteryx had a 92% gross margin last year, and a 55% rate of revenue growth).

Almost by definition, the high gross margin company is worth four times as much as the conventional company FOR EVERY MILLION DOLLARS OF REVENUE, because it keeps four times as much of every dollar of that revenue as gross profit. (It’s not the revenue that counts, its what you keep out of it. For example, a grocery chain may keep only 5% of its revenue.)

Thus, it’s totally normal for the SaaS company, with high gross margins, to have an EV/S ratio four times as high as the conventional company, even if they were growing at the same rate. The high margin company SHOULD have an EV/S ratio four times as high! (And, for example, if you were comparing it to a conventional company whose gross margins were 31%, our SaaS company should have an EV/S three times as high, etc.)

Note that that is WITHOUT even taking into account the higher rate of growth, which compounds, and without taking into account the recurring revenue.


WHY is the RATE OF GROWTH of revenue important for comparing EV/S? There’s a heck of a good reason! Next year our SaaS company growing at 50%, will have $150 of revenue instead of $100, and with its 92% gross profit margin, it will keep $138 toward covering operating expenses.

Let’s say our conventional company is growing at a nice steady respectable 10% per year. Next year, it will have just $110 of revenue, and with its 23% margins it will keep just $25 towards operating expenses. So now we have $138 versus $25… one year later!

The difference in compounding is enormous and grows each year. If we go just one additional year later, our SaaS company will have $225 in revenue and will keep $207… while the conventional company will have revenue of $121 and keep $28.

Look at that again! Both companies started two years ago with revenue of $100. Now our company is taking home $207 in gross profit , while the conventional company is taking home $28!!! Just two years later!

I won’t trouble you with the calculation for the third year, but our SaaS company growing at 50% will keep $310 in gross profit, which is ten times the $31 the conventional company will keep in gross profit. That gives you an idea of the enormous power that the combination of high growth and high gross margins (that our companies are blessed with), has.

And for those who will maintain that companies can’t maintain 50% revenue growth for three years, Zscaler was over 50% the last two years, and at 59% and 65% the first two quarters of this fiscal year. Twilio was 66%, 44% and 63% for the last three years, Alteryx has been 59%, 53% and 55%, etc, etc, etc.

If the conventional company is trading at an enterprise value of let’s say, four times its revenue, isn’t our SaaS company worth four times THAT! Or six times that, … or who knows, ten times that?

Remember that in two years the SaaS company will be taking home 7.4 times as many dollars in gross profit as the conventional company, and 7.4 times an EV/S of 4 gives you an EV/S of about 30. That’s what many people simply don’t get. You don’t even have to look at that 10x three-year example, which would justify an EV/S of 40.

You can argue that the rate of growth for the conventional company should be 13% instead of 10%, or that it should have a gross margin of 28%, or 35%, instead of 23%, and that will change the numbers slightly, but it won’t change the story at all.

And in our defense, my example used 50% revenue growth, but as of the end of May, when I made up this example, Okta was the only stock in my portfolio with revenue growth that low last quarter. All the others were above it. In fact, the percent rates of growth of revenue for my companies in the previous quarter were 50%, 51%, 56%, 55%, 59%, 65%, 71%, 81%, and 108%. Thus using 50% for our SaaS companies in the calculation was no exaggeration. In fact, it was actually being quite conservative. And five of my nine companies had gross margins over 80%, and two others were over 75%.

Now let’s consider that our company has almost all recurring revenue, and a dollar based net retention rate of 130%, which means that it is enormously more certain that our SaaS company will have increased revenue next year than that the conventional company will even have the same revenue next year. How much is that worth in increased EV/S? Is that security of our revenue worth another 30% tacked on? Or 20%, or 40%. I don’t know. But it becomes clear that, by simple arithmatic, the reason that our SaaS companies are exploding in EV/S is that the market is starting to do the same arithmatic that I just did.

To summarize
We have Factor One – A company with a higher gross margin takes home more dollars out of each $100 of revenue, and thus, by definition, is worth a higher EV/S, even without considering the higher rate of growth.

Then Factor Two, even more important. Companies with high rates of growth of revenue will compound that revenue enormously in just two or three years, and combined with the high gross margins, that will produce hugely more gross profit dollars than a conventional slower growing company that started with the same revenue.

That our companies have an even greater EV/S (EV divided by current sales), flows by definition from that, when compared to a conventional company with the same revenue!

Finally Factor Three, which is perhaps less easy to quantify, but a large percentage of recurring revenue, and a high dollar based net retention rate, gives much more security to the revenue and to its potential increase, and thus would warrant an even further increase to the EV/S in some investors’ eyes (like mine).

To summarize the summary,
The huge, even enormous, relative number of gross profit dollars that our companies have, and will have in the future, for each current dollar of revenue, because of their growth rates and high gross margins, compared to the relatively small amount of gross profit that a conventional company has, and will have, for the same current dollar of revenue, is what gives our companies the much larger EV/S ratios. Simple as that!

And don’t bother telling me our companies are not making any profit. Any company with 75%, 85% or 95% gross margins can make a profit whenever they decide to! All they need to do is slow down their enormous S&M spending, whose purpose is to grab every new customer they can grab while the grabbing is good. Personally, I’d rather they keep grabbing all those customers now, because revenue will keep flowing from them for the indefinite future.

So this is an entirely different set of facts we are dealing with. That’s how I see it anyway. And I hope that I made it clear for you.




ON MARKET TIMING

Let me remind you that I’m no good on timing the market, and I don’t try. If I did, I would have exited all my positions at the end of April 2017, when I was up 26% in four months and my portfolio had already beaten my total results of the previous two years. It was clearly time to get out and wait for the pullback that never came!

I feel the same now. The amount I’m up in six months sounds ridiculous too, but I don’t know the future, and I am surely not going to sell out of great companies because their share prices have risen.

Picking good companies makes much more sense to me than trying to pick good companies AND trying to time the market too. I have stocks in a small group of remarkable companies, in which I have high confidence for the most part. I feel that they mostly dominate their markets or their niches, they are category crushers or disruptors, they have customers that absolutely need them, they have long runways, and they will have great futures.

All enterprises, whatever industry they are in, use more and more software, want to use the cloud, AI, big data, and the rest, and they need the software that our compaies are leasing. Most of our companies provide the picks and shovels for enterprise companies switching over to the cloud, and the enterprise companies NEED what our companies have to offer.




MY RESULTS YEAR-TO-DATE

I would have been happy at the beginning of this year with a gain of 25% for the whole year, after the huge gains the last two years. Well, my portfolio closed June up 57.7% year-to-date. This is up a substantial amount from my May close of up 42.2%.


Here is the monthly progress of my portfolio results since the beginning of 2019:


End of Jan +16.5%
End of Feb +28.0%
End of Mar +36.9%
End of Apr +40.7%
End of May +42.2%
End of Jun +57.7%


Again, I have to say that I never expected a rise in my portfolio like this for a third year in a row. One of Chris’ posts (I think it was), in which he talked about how we could at least count on the price improvement roughly going with the revenue rate of increase, helped me to understand what’s going on:

In 2017 let’s say that my average company grew revenue by 55%, and my portfolio grew with the revenue, but then there was 17% valuation increase, as people started to understand what I described above, and I ended up +84%.

And the same thing happened in 2018. We can estimate that revenue grew 55% and valuation increasd 12%, giving me +74%.

In 2019, as we can see from the IPO’s of Zoom and Crowdstrike, the general public finally caught on to what we’ve been riding for the last two years. A weighted average revenue growth rate for the companies in my portfolio would probably be about 60%. If my portfolio grows with the revenue increase and tacks on some of valuation increase that comes with the general public desire to have a bit of these companies, it may help to explain this crazy rise for a third year in a row. What can I say? Just that investing in great companies pays off.



HOW DID I GET THERE?

Well, it was rather tumultuous. It was a sequence of rises and falls. Here are the pairs of highs and lows (I only use end of day closes).


HIGH LOW DROP
Mar 21 +42.7% Apr 19 +29.9% 12.8 points

May 03 +44.3% May 13 +31.7% 12.6 points

May 16 +48.3% Jun 03 +34.4% 13.9 points

Jun 20 +68.4% Jun 26 +54.1% 14.3 points


As you can see, each high was higher than the high before, and each low was also higher than the low before. Each of the lows was a drop of between 12 and 15 points, which I have to admit is unpleasant and a bit scary, but you can see how silly it would have been for me to get scared out at one of those bottoms. As you remember, I’m now at +57.7%.

It would also have been a mistake to try to time the market and sell out at that first high in March, even though the portfolio was up a ridiculous 43% in less than three months. After all, I would have missed the chance to sell out in May at +48%, or in June at +68%, which would have been 25 points higher, or even now, at my current rise of +58%.




HOW DID THE MARKET INDEXES DO?

Let’s look at results year-to-date. The three indexes that I’ve been tracking against for ages closed year-to-date as follows.

The S&P 500 (Large Cap)
Closed up 17.4% year-to-date. (It started the year at 2507 and is now at 2942).

The Russell 2000 (Small and Mid Cap)
Closed up 16.2% year-to-date. (It started the year at 1349 and is now at 1567).

The IJS ETF (Small Cap Value)
Closed up 12.7% year-to-date. (It started the year at 131.9 and is now at 148.6).

These three indexes
Averaged up 15.4% year-to-date.

If you throw in the Dow, which is up 14.0% and the Nasdaq, which is up 20.7% you get up 16.2% for the five of them year to date.


Since the beginning of last year (2018), when the average of the indexes was down 8.5%, the five indexes are up 6.3%. (0.915 x 1.162 = 1.063).Now compare that result with my portfolio’s gain of 170.3% in those 17 months (1.714 x 1.577 = 2.703). Read that again! Up 6.3% for the indexes, up 170.3% for my portfolio. Tell me what about those results makes investing in the averages seem “conservative” to you?

And, if you want a real shocker, my results from the beginning of 2017 are just about a quintuple, 498% of what I started with, or +398%! (1.842 x 1.714 x 1.577) = 4.979. Clearly, picking stocks that will be winners, the way we do, has beaten investing in ETF’s and Indexes, and by huge amounts. Let’s put it in table form:


Since Jan 1, 2019

Market indexes + 16.2%
My portfolio + 57.7%


Since Jan 1, 2018

Market indexes + 6.3%
My portfolio + 170.3%


Since Jan 1, 2017

Market indexes + 21.6%
My portfolio + 398.9%



And that’s without using any leverage, no margin, no options, no fancy stuff, just investing long in great individual companies. And I’ve told you each month what my positions are, and how big 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 the same, or a little more, or a little less, but about the same. So if you didn’t read my explanation above of what’s going on with our stocks, maybe you should go back and read it carefully.

For more on why I compare against those indexes, please see my summary at the end of 2018. To simply state my goals, I'm simply trying to measure my performance against that of the average return for an investor in the stock market, and combining those five indexes gives a pretty good approximation.




LAST FOUR MONTHS REVIEW

In March, Nutanix announced that their sales were falling off a cliff and I exited, and I am not looking back. On this one I will say “Never again!”.

Guardant Health announced that their Nile Study was a success, and I bought back in at about $70.70, inspite of a 70% or so rise from when I had sold. It kept rising to $100 and then fell back, finishing March at $76.70, up 8.5% from my $70.70 purchase.

Mongo again! I exited when I mistakenly thought that they had backed down on their new software licensing rules, but bought back almost immediately after they blew out their quarterly report, even though it had run up after earnings. You are probably tired of hearing about my wavering on Mongo, and I am too. I can’t think of anything that will make me sell Mongo again except actual poor operational results, which I don’t think will happen.

I told the board that I considered my little try-out SaaS positions like Docusign, Coupa, Zuora, EverBridge, with 30-40% growth and 110-120% retention rates, as weak relatives to our dominant SaaS positions, and asked for suggestions for a new position that would be better. I got a huge outpouring of good advice and finally sold all of the little try-outs and I started a position in SmartSheets, which fit much better, with revenue growth of 58%, and a retention rate of 134%.



In April, I finally exited Guardant again and put the money into Mongo, Zscaler, Okta, and The Trade Desk. I didn’t add to Twilio as it was already too big. All my bouncing around on Guardant didn’t actually amount to much as I gained 10% the first time and lost 2% the second time, on smallish positions.

Here’s why I did what I did! I kept Elastic at a 1% position because of its ‘pure open source’ model, which made me uneasy for a long term holding, as well as the issues of dilution and of the lock-up expiring, and just preferred to have the money in Mongo which is growing as fast and seems safer. I just don’t understand all the issues involved with being open source. I see that Amazon couldn’t use Mongo’s code and had to copy it (re-invent the wheel), but it could use Elastic’s basic code. I just sleep better with money in Okta, Zscaler, Trade Desk, and Alteryx, which don’t have the same kind of issues. I reduced Guardant, and finally sold out of it, because of all the posts on the board pointing out that Guardant isn’t the sure thing, and huge TAM, that it had originally seemed to me to be.



In May, there were a lot fewer changes. Basically, I sold my 1% position in Elastic and took a small position in Zoom. That’s very odd from me who was writing in April about how overpiced Zoom was, but then I started taking into account the high margins and higher growth rate (see my opening section at the beginning of this post for more on that), and I decided to take a smallish position. As far as Elastic, I just can’t own them all, and in spite of muji’s and others’ enthusiasm, I couldn’t get my confidence level up to where it needed to be. The rest of my portfolio is pretty much unchanged.



In June, believe it or not, I made almost no changes in my portfolio. I took a token one quarter of one percent position in Crowdstrike at $60.80, But on Thursday, when Verizon announced its partnership with Zoom for all of Verizon’s business customers, I sold the tiny position in Crowd and moved it into Zoom. That was it for the month, pretty much.




HOW THE INDIVIDUAL STOCKS HAVE DONE

Here’s how my current positions have done year-to-date
. I’ve arranged them in order of percentage gain. 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 2019, and not from when I originally bought them if I bought them in earlier years.

Trade Desk from 116.1 to 227.8 up 96.2%
Zscaler from 39.21 to 76.64 up 95.5%
Okta from 63.80 to 123.51 up 93.6%
Alteryx from 59.47 to 109.12 up 83.5%
Twilio from 89.30 to 136.35 up 52.7%
Square from 56.09 to 72.53 up 29.3%
SmartSheets from 39.21 to 48.40 up 23.4%
MongoDB from 131.47 to 152.09 up 15.7% 3rd time
Zoom from 77.63 to 88.79 up 14.4% new in May



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 2019, and not from when I originally bought them if I bought them in earlier years. You’ll note that almost all of these were tiny little try-out positions that I ended up deciding against, and don’t represent actual churn of the body of my portfolio


Docusign from 43.75 to 56.80 up 23.4%
Zuora from 19.80 to 24.00 up 21.2%
Elastic from 71.48 to 83.80 up 17.2%
Guardant from 37.59 to 41.50 up 10.4% 1st time
Anaplan from 28.75 to 31.05 up 8.0%
CrowdStrike from 60.80 to 64.81 up 6.6%
Mongo from 95.0 to 99.9 up 5.2% 1st time
Coupa from 91.95 to 93.13 up 3.0%
Abiomed from 325.0 to 334.0 up 2.8%
EverBridge from 73.58 to 73.95 up 0.5%
Vericel from 17.40 to 17.38 down 0.1%
Guardant from 70.70 to 69.50 down 1.7% 2nd time
Mongo from 83.74 to 76.20 down 9.0% 2nd time
Nutanix from 41.59 to 36.00 down 13.4%





MY HERO COMPANIES

Square, Alteryx, Twilio, Okta and Zscaler have all been in my portfolio for more than a year now, although I did reduce my position in Square at the end of 2018 and built it partially back in February. The Trade Desk has now hit eight months from when I bought it last October.

Twilio is a quintuple in under a year and a half, at 5.3 times what I paid for it in January a year ago ($25.70). It is up 431%.

Okta is 4.1 times what I paid for it ($29.95), also a year and a half ago, a quadruple. It is up 312%.

Square is also 4.1 times what I paid for it (a quadruple), up 314% since I first bought it in March 2017 at $17.50, two years ago and three months ago.

Alteryx is up 294%. That means it’s 3.9 times what I paid for it in December 2017, a year and a half ago, at $27.72, or just short of a quadruple.

Zscaler is up 114%, a double, since I bought it a year ago, in June 2018, at $35.84.

And finally Trade Desk is up 88% in eight months, from when I bought it at $121.0 last October


This is how you make money in the stock market, buying exceptional companies and holding them as long as the story doesn’t change.


You know, some people see me take tiny try out positions and sell them, or change my mind about exiting, and they announce that “Saul just has great intuition or luck in trading in and out of the market.” They feel I’m not really a buy-and-hold investor. They don’t get it. As you see just above, the great majority of my portfolio is invested in companies that I bought and held on to, and let them quaduple or quintuple.


And another great point from this is:

Do you think I care, or even remember, if I bought Twilio at $25.90, $25.70, or $25.50, now that it’s a quintuple and its price is $136.35? Think about that for a moment! The decision that matters as far as making money in the market is “Do I want a position in this company?” and not “Can I buy it 25 cents cheaper?” If you have a stock that you want to buy because you believe it will triple or quadruple, and then you put in a buy order for it 25 cents or 50 cents below the market, and hope that it will FALL to your price, you are out of your mind! But that’s just my opinion.

In May I read a Roundtable Discussion put out by the sponsors of our board, and I came across this sad paragraph by one of the participants:

If we get a sell-off I would definitely consider buying in. It's a stock I've always wanted to get into! Unfortunately, though, this approach has been killing me because the stock is up 60% in the last three months. So I keep waiting for the sell-off, but the sell-off was actually right then, three months ago, when I should have bought it.

I don’t have to say anything else. The guy wanted to get into a company. But he wanted to buy it a few percent lower so that he could congratulate himself that he got a bargain, and think, “Wasn’t I smart?” So he missed a 60% rise in three months. How many times would he have to succeed at scalping a few percent in order to make up for a 60% gain that he missed?

If you want to be in a company because you think it’s a great company and that its stock will go up, at least take a starter position that you can add to. Don’t wait around for the sell-off that may never come.




POSITION SIZES.

I’m still trying to keep my portfolio concentrated and streamlined. I’m at nine positions which is quite concentrated. My top three positions make up 54% of my portfolio, and the top six of the nine make up 90%. 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. Note that the Twilio, Zscaler, and Alteryx positions are larger than I usually like, but they are high conviction Category Crushers. Note also that if you compare with a month ago, the top three are the same companies, and they are separated by just 0.3%, so their order can change from day to day. The next three are the same as a month ago too, but in different order, and the last three are also the same three companies.
 No huge changes.

Alteryx 18.2%
Twilio 18.1%
Zscaler 17.9%
Okta 12.7%
Mongo 12.6%
The Trade Desk 10.8%
Zoom 4.2%
Square 3.0%
Smartsheets 2.4%





STOCK REVIEWS

I didn’t change any significant positions this month but we did have a number of earnings reports. As I said above, my largest positions are Twilio, Zscaler, and Alteryx. As you can see, they are now all about the same size because Zscaler and Alteryx have grown faster than Twilio recently, and caught up. They are all small companies but in my opinion they each dominate the market they are in with little credible competition (except do-it-yourself). I’d have to call the three of them Category Crushers, and juggernauts.



Alteryx has grown into my largest position by growing faster than the others, and is now at 18.2% of my portfolio. What they do is to enable non-techies to quickly and easily analyze data. Their clients therefore love them. They changed accountants near the end of 2018 because their current accountant, Price Waterhouse, was reselling so much Alteryx solutions to their other clients, that they could no longer consider it non-material, and wanted to avoid any appearance of conflict of interest. Thus their choice showed that they were happier having Alteryx as a valued technology partner than keeping it as just one more accounting client.

When Alteryx announced December quarter results, they prepared us for their forthcoming change from ASC 605 to the new standard 606. First I’ll give you the 605 results for comparability to previous quarters. their revenue percentage growth looks like this:


2016: 57 67
2017: 61 50 55 55
2018: 50 54 59 57


That looks solid as a rock to me. However the change to the new accounting system confused everything.

Going on to March results, the percentage revenue growth under the new system was 51%.

Their adjusted gross margin was 90%!

Their dollar based net retention rate was 134.

Their number of customers, which is 4973, is 315% the number of customers that they had three years ago, and up about 35% yoy.

The number of shares is growing fairly slowly, which is remarkable for one of these super fast growing companies.

They feel 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.”

The stock finished 2018 year up 135% for the year. I still feel very justified in calling Alteryx a Category Crusher, with very high confidence level. I’d give it six confidence stars out of six.



Twilio is a 18.1% position and in second place. It provides communication services and it seems to have no viable competition in what it does besides “do-it-yourself”. In April Twilio announced enormous results for the March quarter and proved it is still a Category Crusher, a Juggernaut, a One-of-a-Kind company, and a pure phenomenon of nature. Its base revenue growth accelerated from 46% a year ago to 88% this quarter!!!! The last six quarters' growth rates have been:

40%
46%
54%
68%
77%
88% !!!!

Yes I know that they made excuses for the great growth and said it was partly due to one big customer, and partly due to the acquisition. But these companies always try to damp down expectations like that, so they can beat expectations. Next quarter they will have a different excuse for their enormous growth and for their low guidance.

Now look at dollar based net retention rate: 118% a year ago. That was great. But now it's 146%. That's greater! The last six quarters have been:
118%
132%
137%
145%
147%
146%

They hit adjusted profit in the June quarter last year unexpectedly, and have stayed profitable since.

They had 154,000 Active Customer Accounts about triple the 54,000 they had a year ago. This was driven partly by customer acquisition and partly by their SendGrid acquisition. It doesn’t take much imagination to think about the cross-selling that can come both ways from that!!!

They continue to have euphoric conference calls:

And the average revenue per customer continues to grow at a 25% to 30% rate.

… I think that that means there's a runway for us for many, many years to be replacing old legacy technology… I think there is going to be no shortage of opportunity for us to do that for years to come.

…It's still day one of this journey.


There was a lot of obsessing on our board and elsewhere about “weak” guidance. For the life of me I don’t understand why anyone even looks at the guidance figures for these companies. Have you ever seen even one of our SaaS companies that doesn’t simply destroy their guidance at least 95% of the time? Why waste your time unless reduced guidance is due to an actual problem with the business (ie Nutanix). Follow the actual results!

I’ll give Twilio six confidence stars. To be honest, probably seven stars on a one to six scale. Do I like it? I’ll let you figure it out.

I wrote a long two-part deep dive on Twilio about a couple of months ago, in case you missed it.



Zscaler is in third place at 17.9% of my portfolio. I’ve continued to build my position. It has an interesting, innovative, and revolutionary idea in Internet security. They feel that putting a hardware firewall around a company doesn’t work anymore, now that the enterprise company is partly in the cloud and people can sign in from anywhere, and sign on to other outside programs from within the enterprise. Zscaler provides native cloud-based security, and as far as I can tell they are far and way the leader in this, if not the only player. They have 100-plus data centers all around the world, which would be difficult for most potential competitors to replicate. Zscaler has been operating them for ten years.

Here’s what their last earnings looked like:

Revenue was up 65% to $74 million. This was an acceleration from 53% growth a year ago, and an acceleration from 59% sequentially, from 54% the quarter before that, and from 49% the quarter before that. Now go back and read that again!

Why is Zscaler’s revenue growth accelerating like that instead of slowing down by the law of large numbers. Well their quarterly revenue was only $74 million. It’s a small company. And they aren’t selling something trivial. It’s the security of the customer’s entire company. For a big enterprise to trust Zscaler with the family jewels of its security requires an act of faith.

Therefore, as Zscaler became a listed company, grew larger, and also signed up more and more large enterprises as customers, they could show more revenue, and more large company references, and thus other large enterprises feel better and better about trusting them. So it snowballs, and with each signing it becomes easier and easier to sign the next large customer, and they seem to have passed that inflection point, and are taking off.

Calculated billings were up an astounding 74% from $66 million to $115 million. Read that over carefully too.

Adj net income of $11.6 million, up from a LOSS of $2.8 million.

Adj operating income was 13% of revenue or $10 million, improved from a LOSS of 6% of revenue or $2.7 million, a year ago.

Adj EPS was 9 cents, improved from a LOSS of 3 cents

Free cash flow was $12 million, or 16% of revenue, up from a LOSS of $4.6 million, or 10% of revenue

Cash $340 million, up $26 million sequentially, and No Debt.

Named a leader in Gartner for the 8th year in a row.

Zscaler Private Access (ZPA) is the first zero trust architecture to achieve AWS Security Competency status, and it achieved FedRamp authorization. This sets the stage to further expand its growth within the Federal market.

You’ve probably figured out by now why I’ve built Zscaler into my second largest position. In my opinion Zscaler is a Disruptor, a Category Crusher, and a juggernaut like Twilio and Alteryx. The traditional security providers can’t compete with Zscaler because their businesses are built around high-priced hardware and firewalls, and they don’t have the data centers all over the world that Zscaler has. I’ve been building my position steadily, and I now give it a full six out of six confidence rating. It sells at a high valuation, as you might expect. Here’s a little plug from a recent post by Tinker which helps explain my high confidence”

…Cyber-security is such a core necessity of our modern world that a company like Zscaler - a “mere provider of security services”, but in a different manner - is enabling an entirely different network framework that is far more efficient and useful than what exists….

There seems to be no more core and essential technology today, or one that is more important… than SECURITY…. You cannot run a business today of any scale without serious security – period! Heck you cannot even run a home website showing off baby pictures without keeping the wolves at bay. Your iPhone, Android phone, Alexa unit, etc., can all be attacked. And those are the lowest value units on the totem pole. Your entire business can be destroyed, demolished, without security.

But security that encumbers you is almost as bad. That is what makes OKTA and Zscaler so successful. They not only secure, they simplify and unemcumber you.


Actually I think Twilio, Zscaler, and Alteryx as juggernauts. They are each a one-of-a-kind company. Each seems to control its space and is growing like mad.



Okta is in fourth and has grown into a 12.7% position, and is at a five star confidence level. 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. I almost backed it down from 5 stars to 4.5 stars because the rate of revenue growth “fell” from 58% to 50% sequentially. That’s the bad news. The good news is that it has become evident from the conference call, and their recent acquisitions, 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. I added considerably in early April and was rewarded as the share price rose 24% from $82 to $102 in the month. It’s now over $123. This is a Disruptor and Category Leader, and a Cloud-based New Market Stock.



MongoDB. As I wrote in my four month summary, I’ve been in and out a couple of times, being scared out by Amazon, Red Hat and a lot of other FUD, each time having to buy back at a significantly higher price than the one I had sold at. Such is life! You can’t go back in time and buy it two weeks ago. A shame, isn’t it? You are probably tired of hearing about my wavering on Mongo, and I am too. I can’t think of anything that will make me sell again except bad operational results, which I don’t think will happen. It’s now in 5th place at 12.6% of my portfolio.

Mongo has pretty much invented its solution and category, although it does have competition. It’s the leader in NoSQL data storage and last quarter its revenue growth accelerated to 85% from 50% the year before. (That’s under ASC 605, but from now on it will be reporting under 606, which will confuse comparisons for a while). It has chosen to put almost all its money into growing, and thus is still running an adjusted loss, which was 28% of revenue for 2018, down from a loss of 49% of revenue in 2017. (Under ASC 606 it was only 19.5% for 2018).

Mongo has come out with Atlas which gives it a fully managed cloud solution, and Atlas is growing at about 300%, although off a small base.

They announced April earnings in June. Here are some highlights:

Atlas Revenue was 35% of Total Revenue, up over 340%
Continued strong growth to over 14,200 customers.

We delivered excellent quarterly results driven by strength across all products and geographies. Our success is being driven by growing customer interest in a modern, general purpose database for use on premise and in hybrid and multi-cloud environments to help users innovate more quickly and efficiently.
The continued success of Atlas, our fully managed global, multi-cloud database service, reflects the powerful combination of the move to the cloud and customers' desire for sophisticated managed database offerings. These trends are reshaping the market and we believe will provide a significant growth opportunity for Mongo for the foreseeable future.


Revenue: Total revenue was $89 million, up 78%.
Atlas Revenue was 35% of Total Revenue, and was up over 340%
• Subscription revenue was $84 million, up 82%
• Services revenue was $5 million, up 33%.
• Adj gross profit was $63 million, giving an adj gross margin of 70%.
• Adj op loss was $13 million, improved from a loss of $19 million a year ago.
• Adj net loss was $12 million or 22 cents per share, improved from $19 million or 37 cents a year ago.
• Cash is $477 million
• Op cash flow was positive $3.2 million
• Free cash flow of $2.8 million, improved from minus $8.4 million a year ago.

• A new business partnership with Google Cloud Platform (GCP) that will provide deeper product integration and unified billing for joint customers. MongoDB Atlas will be integrated directly within the GCP Console and we have expanded our go to market relationship. Offering Atlas as a first class service on GCP means customers will get a seamless experience as Atlas will be tightly coupled with core GCP services such as identity and access management, logging and monitoring, as well as open source projects like Kubernetes and Tensorflow.

• Acquired Realm, the company behind the Realm mobile database and synchronization platform, to expand MongoDB's mobile product offerings and deepen its relationship with developer communities focused on mobile and serverless development. There are more than 100,000 active developers using Realm.

• Named a Leader by Forrester Research in two recent reports. gave MongoDB the highest scores possible in the Data Security, Performance, Scalability, High Availability, Global Distribution and Ability to Execute criteria, as well as High Availability, Disaster Recovery, Multimodel Support, Automation, User Access and Roadmap criteria.

I’ll call Mongo a Disrupter, a Category Leader, and a Big Data New Market Stock, and I’ll give it four confidence stars for now.



The Trade Desk announced stupendous results at the end of February, and rose $47, or more than 31%, in one day. Revenue was up 56%, with growth accelerating from 42% a year ago. Earnings were up just over 100% (!) Then, in May, they announced results that beat estimates, and all the analysts raised target prices, most by $25 to $30, but the market didn’t like it, because revenues were “only” up by 41%. Management was very upbeat and raised estimates for the year. EPS was up 44% yoy. The stock sold off rather massively but is on its way back.

It is an 10.8% position and is in 6th place in my portfolio. I’d still rate it five confidence stars now, getting over my mistrust in them over them being an advertising company, which is a field that I have zero confidence in, because I feel that this is a very unique innovative and creative company. The Trade Desk seems to be a Leader in a Rapidly Growing niche Market within the larger field of advertising, which up to now is controlled by the behemoths.

For more on why I didn’t panic about Trade Desk’s decreased growth rate this quarter I’d suggest reading my post #55674 about why I sold Shopify but kept Trade Desk.



In 7th place at 4.2% of my portfolio is Zoom, which in April I said was multiples too high. What happened? Well, the Oomph scale that some kind spirit brought to the board, made me think about the figures that you’ll find in the opening section of this post entitled AN EXPLANATION OF THE VALUATION OF OUR STOCKS. And that’s what changed my mind.

There were a couple of long write-ups on Zoom last month, around the time of the IPO, but here are some financials from before their IPO, which influenced me to get in:


Fiscal Q1 Q2 Q3 Q4 YR

Revenues
2017: xx xx xx xx 61
2018 27 33 41 51 151
2019 60 75 90 106 331

% Increase
2018 149%
2019 122 127 120 108 119%

Revenue Growth per fiscal year declined from 149% to 119%, which is normal with increasing size.


GAAP Gross Margins %
2017: 80%
2018 79 79 81 79 80%
2019 81 83 81 82 82%

Adj Gross Margins %
2018 81 82 82 80 81%
2019 82 84 84 86 84%

Gross margins look great, and RISING!


Op Cash Flow (millions of dollars)
2017: 9.3
2018: 19.4
2019: 51.3

Free Cash Flow (millions of dollars)
2018: xx
2019: 30
Note that those cash flow numbers are positive numbers!
I don’t think that any of our SaaS companies have cash flow
numbers like that


Cust with ARR over $100,000
2017 54
2018 143
2019 344

% Increase !!!!!!!!
2018 165%
2019 141%

These figures don’t need any explanation and show how well the business is doing.


Customers with over 10 employees (in thousands)
2017: 10.9
2018 25.8
2019 50.8

% Increase
2018 137%
2019 97%


Dollar based net retention rate
2019 138 139 140
2020

High and rising!


That’s all pretty amazing, but then they added April quarter results this month, with more insanely good figures:

• Total revenue was $122 million, up 103%.
• Adj Operating Income was $8.2 million, up from a loss of $0.8 million a year ago.
• Adj Operating Margin was 6.7%, up from a small negative.
• Adj net income was $8.9 million up from a loss of $0.5 million.
• Adj EPS was 3 cents, up from a loss of 0 cents
• Cash was $737 million and included $544 million in proceeds from the IPO.
• Op Cash Flow was $22.2 million up from $2.8 million a year ago.
• Free cash flow was $15.3 million, up from minus $1.1 million.
Customer Metrics
• 58,500 customers with over 10 employees, up 86%
• 405 customers contributing more than $100,000 up 120%
• Net dollar expansion rate in customers with over 10 employees over 130% for the 4th consecutive quarter.


Then, just last Thursday Verizon announced a partnership with Zoom, available to ALL their business customers – Wow!
Verizon Business Group has joined forces with Zoom to offer its global customers a new, unified communications solution that aims to improve organizational collaboration. Zoom’s video-first unified communications platform is now available to all Verizon business customers as a cloud service.


What impressed me especially was that it was Verizon that announced it and was bragging about the offering to all of its customers, not Zoom.

Yes, I know! I don’t really see what Zoom’s moat is either, except that it is obviously doing what it is doing better than anyone else is doing it. Because of this and its high valuation it’s not a high confidence position, so I’m keeping my position small, but I keep nibbling away, adding little bits.



Square, in 8th place, is now 3.0%. The main reason it seems to slip in percentage of my portfolio recently is that everything else is moving up in share price and Square’s stock price has hardly moved in months.

It announced March quarter results in April. It has been annoucing incredibly good results. Its total revenue has grown year-over-year by 39%, 41%, 45%, 47%, 51%, 60%, 68%, 64%, and 59% in its last eight quarters.

How is that happening? It’s because its Subscription and Service Revenue which is its high margin revenue, the good stuff, is growing at over 100%, and is now over 45% of revenue. Quarterly it’s grown year-over-year by 104%, 97%, 86%, 98%, 98%, and then, the last four quarters, by 131%, 155%, 151%, and 126% (!).

Adjusted EBITDA was $62 million, up about 72% from $36 million the year before, and was 12.7% of adjusted revenue.

They’ve were adjusted profitable in 2016, 2017, and 2018, and EPS grew from 4 cents to 27 cents to 47 cents. We also learned that Square’s Cash App passed PayPal’s Venmo in total downloads (which was a big surprise for most of us.

Square also released Square Payroll App in September, and Square Payroll and Square Terminal in October, and Square Reader SDK, and Square Installment somewhere in there, and now Square Card andSquare Payments, and Square Payroll, and Square for Retail, and Square Online Stores (competing with Shopify) so Square is still rolling along for now! I can’t keep track of all of them so I may have missed some. Somewhere in there they added Square Appointments for service businesses, and last week it was Square Invoices.

As far as Sarah Friar leaving, I’ll miss seeing her but Square will undoubtedly get along without her.

So why in the world did I cut my position so markedly? Read my reasons in my Dec monthly summary.

I didn’t feel that I needed to sell out of all my Square, and I added some back since December as I’ve regained confidence with the hiring of a new CFO and with some of their announcements of creative new products, but I felt that it shouldn’t be in the top half of my portfolio. I’ll call it a Rapidly Growing Company in a Rapidly Expanding Market, and I’ll rate them four confidence stars out of six. I don’t have a clue why it has been stuck in place, except that some other people may have had some of the same worries I had.



SmartSheets is in 9th place at 2.4% of my portfolio. I had said when I asked for help, that my three little SaaS companies (DOCU, ZUO,COUP), with 30% to 40% growth and net retention rates of 110% to 120%, were good companies but they seemed like weaker versions of my full position companies. Well, you guys found Smartsheets for me, and it was what I had been looking for. I established a position and I am currently considering it as a long-term hold.

Here are the results of its Apr quarter, announced in June.
• Total revenue was $56 million, up 55%.
• Subscription revenue was $50 million, up 57%.
• Prof services revenue was $5.9 million, up 38%.
• Adj operating loss was $14.1 million, or 25% of revenue, compared to $11.0 million, or 30% of revenue, a year ago.
• Adj net loss was $13 million, compared to $11 million a year ago.
• Adj EPS was -12 cents, flat with a year ago.
• Operating cash flow was negative $9.2 million, compared to negative $8.2 million a year ago
• Free cash flow was negative $13.1 million, compared to negative $9.7 million a year ago.
• Cash was $209 million
Business Highlights
• Ended the quarter with 80,280 domain-based customers
• Customers with ACV of $5,000 or more up to 6,779, up 56%.
• Customers with ACV of $50,000 or more up to 518, up 117%.
• Customers with ACV of $100,000 up to 189, up 139%.
• Average ACV per domain-based customer was $2,675, up 48%.
• Dollar-based net retention rate was 134%
My take – They are growing very well but are not yet moving towards profitability. Losses are the same or more as a year ago.

It's kind of odd but I don't see any real weak spots to worry about. I could mention revenue growth rate, but it's hard to worry about a subscription revenue growth rate of 57% for the last quarter and 60% for the last fiscal year. And as far as not moving yet towards a profit, they are still a very small company (TTM revenue not quite $200 million!), and trying to grow as fast as they can. I’d give them four stars of confidence for now.




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.

I hope this has been helpful.

Saul
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