User question: Do all SaaS companies report dollar-based net customer retention rate? And do you know how this is defined?
Victor: Great question! Most of them report some form of this, though I have seen at least a dozen different names for the same metric, So when comparing two companies you do want to make sure they’re using the same calculation. I have seen this called everything from “churn”, to “ revenue or customer retention rate” to the term used by my largest holding AYX, “Dollar- Based Net Revenue Retention Rate”. I just found a handy guide online at the following posting:
https://www.key.com/kco/images/Public_SaaS_Company_Retention_Metrics_June_2017.pdf
User comment: Will read. thanks.
Victor: The basic premise is the same regardless: I want to see this number significantly over 100% to show that their existing customers are continuing to spend with them and not falling off. This is very different from new customers which may be increasing (A good sign) while this number is below 100% or decreasing (not growing and a bad sign).
5/28/19 – Zscaler Breakdown
This Friday 5/30/19 is the earnings release for Zscaler (Symbol: ZS), so I thought I would give a quick recap of where things stand as of their last release on 2/28/19.
ZS is my 4th largest position in my portfolio of 9 companies and makes up 12.5% of my invested portfolio. I’ve built my position in ZS since my first purchase almost a year ago and it is up over 100%. As always, I expect this company could still 10x itself over the next 5 years, so 100% growth does not exceed or even meet my expectations based on the results we’ve seen so far as stated below:
ZS has an interesting, innovative, and revolutionary idea in cyber security. Putting a firewall around the company hardware internally no longer provides a complete solution, now that the enterprise company is partly (or fully) 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 they are far and away the leader right now, if not the only one who can do what they do: 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 over ten years now, giving them a moat of sorts and creating a substantial barrier to entry for new competitors. As with most of the companies I own, they have a SaaS model with recurring revenues, very high profit margins, and a growing customer base and brand loyalty.
Latest Earnings Release (from 3 months ago…NOT today’s, which will be released at 1pm PDT):
Revenue was up 65% (Q/Q) 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! With growth that incredible, it is no wonder the stock is up 100% in the past year. To recap, for the past 6 quarters, their Q/Q revenue growth has been an astounding and accelerating:
48.9%
53.1%
49.1%
54.0%
58.6%
65.1%
It is important to point out that Zscaler’s quarterly revenue was only $74 million. It is still a relatively very small company, but one that is a revolution in security to huge enterprise companies that rely and trust Zscaler with their entire dataset…their entire company’s information and IP in the cloud!
As Zscaler continues to grow and add large enterprise names as references and become the trusted name in security solutions in the cloud, it becomes easier and easier to sign the next large Fortune 500 company and their growth should continue to accelerate for some time; they appear to have reached the tipping point. Their Net dollar based expansion is still a very healthy 118%., meaning they are not only retaining all their customers, but those customers are adding services.
Margins have exceeded 80% for 6 quarters in a row, calculated billings were up and incredible 74% (from $66 million to $115 million), and adjusted net income of $11.6 million, is up from a LOSS of $2.8 million.
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 on their balance sheet is $340 million, up $26 million sequentially with no debt. They were named a leader in Gartner for the 8th year in a row.
I am excited to see what they announce tomorrow. After their last earnings call on Feb 28th the stock surged up 20%; and as of today, it is up another 20% on top of that surge! Any hint of a miss or slow-down could result in a drop, but continued growth or even acceleration could see another nice bump up on Friday.
Regardless, I feel that we are in the middle of a digital transformation, which is leading to structural changes in the world of business and everyday life. New challenges and opportunities such as cloud computing, mobility and the Internet of Things require new information security solutions, especially in the corporate world. ZS is one fast growing company that likely will continue to provide that cloud security and growth for some time to come.
Tech is down overall today and it may be an opportunity to add a portion to your Zscaler position, if it’s a company you like and are looking to add. Barclays upgraded the stock today, but I usually give very little credence to analysts who are usually way behind the curve on analyzing these stocks. Legally, they should not have access to any information we do not and to upgrade or downgrade a stock the day before the company’s earnings call seems disconnected to me at best. Regardless, it has run up 50% since the last earnings call! Where has Barclay’s been? I don’t try to time the market, I just try to buy solid high growth companies for the long term and hold them. When you consider how many products now have microchips in them, the so called IoT (Internet of things), all the way down to the clothes we wear, cyber security is required at every level, and not just at the server or computer level. ZS is providing that security. Following is an article that came out today covering the topic. Enjoy!! 😬
Zscaler Reveals Enterprise IoT Ecosystem Extends Beyond Corporate Devices; 56 Million IoT Device Transactions Over 30 Days $ZS
https://seekingalpha.com/pr/17520792
https://seekingalpha.com/news/3467687-twilio-launches-750m-stock-offering?app=1
Not a bad thing long term, but will impact the stock price in the short term…more shares, dilution, perception…
