August 2023 Portfolio Review
Total Return: +31.5% YTD (+14.1% vs S&P)
2023 Results:
2023 Monthly Allocations:
Key:
darker green: started during month
lighter green: added during month
yellow: trimmed during month
blue: bought and sold during month
red: position exits
positions >10% in bold
Past recaps:
December 2018 (the one that got things started)
December 2019 (contains links to all 2019 monthly reports)
December 2020 (contains links to all 2020 monthly reports)
December 2021 (contains links to all 2021 monthly reports)
December 2022 (contains links to all 2022 monthly reports)
Stock Comments:
Lots of earnings updates this month with one more to go (Zscaler). More good than bad overall in my opinion, which is always a pleasant way to spend earnings season.
AEHR 0.00%↑ – Other than a couple investor conference appearances, Aehr Test Systems has been mostly quiet since its July 13 report. However, we’ve gotten tidbits the demand for silicon carbide chips is as strong as ever through comments from Advanced Micro Devices (AMD) and Super Micro Computer (SMCI). While there might be questions as to how well the chipmaking supply chain will keep up, I’ve seen no doubting Aehr’s capability to help its customers test wafers at scale. That bodes well as Aehr kicks off its new fiscal year.
AXON 0.00%↑ – Axon joins our portfolio for the first time. Best known for its signature Taser product, its overall product line is geared toward “transforming public safety with technology.” As policing becomes more sophisticated, Axon has quickly expanded into cameras, sensors, and software for tracking incidents and handling digital evidence.
While the mission is admirable, I’m just as impressed with the business performance. Axon’s most recent quarter saw 31% revenue growth with strong cash flows and $1.11 earnings per share (versus $.44 last year). More importantly, its cloud revenue growth accelerated from 51% in Q1 to 62% this quarter. Cloud now represents 35%+ of total revenue at what has traditionally been 70%+ gross margin. Annual Recurring Revenue growth accelerated as well from 49% to 52%. Backing it all up, net revenue retention has crept steadily from 119% to a record 122% the last few quarters.
With an upgraded Taser on the way, Axon added $449M in future contracts this quarter for a record $5.2B overall. The fact future contracts (+57% YoY) are growing faster than revenue bodes well for continued top line strength. In an environment where accelerating metrics are increasingly hard to find, Axon’s performance is intriguing enough to put it on our board in a decent spot. I opened a small position prior to earnings and have roughly doubled it after being impressed with the report. I could easily see this becoming a larger position as I get more comfortable with the company.
BILL 0.00%↑ – In my opinion, Bill delivered another mixed report. Revenue fell a tick short of what I anticipated with a disappointing guide as well (though there were some extenuating circumstances detailed below). As with Q1, soft spots in Bill’s financial institution (FI) partner channel seem to be the culprit.
First and foremost, when management said FI customers would be lower in Q4 I thought they were referring to FI adds. Apparently, they were referring to FI customers as a whole since the number declined 2,100 from Q3. I might not have been the only one confused though as multiple analysts asked for details on this dynamic along with the Bank of America partnership most affecting it (management unsurprisingly remains confident). The hidden highlight here is Bill’s direct customers grew by 5,300 (padded slightly by 700 migrating from BofA). That is the largest raw number in five quarters and firmly above last year’s 4,900.
As for payments, core payment volume finished at $65.1B for 7.2% YoY and 6.7% QoQ growth. That seems reasonable given the “constricted macro environment.” However, the FI portion decreasing from $6.1B to $5.4B sequentially was disappointing. An area to watch.
Float revenue continues to outperform as interest rates remain high with $36.1M versus the $32M guide. Cash flows were excellent at $80M operating (27.1% margin) and $73M free cash (24.6%). The improved leverage helped produce a huge net income beat with a record at $69.4M and 23.5% net margin. After blowing out FY23’s initial $45.5M net income guide with $194M ($1.65/share), management’s initial FY24 estimate is an impressive $235M ($1.97).
Despite appearing to have permanently turned the corner on cash flow and profits, management’s outlook sounded just OK. Being honest, I found their comments more difficult to follow than previous quarters. There were considerably more figures “excluding this” or “excluding that” to support the narrative. Maybe I was just jaded by the weak guides, but the tone toward the end seemed to imply "we have a great future but FY24 is pretty much going to be a grind." While Bill is far from the only company taking that stance, I found management more resigned to that fate than the hints of optimism last quarter.
In total I can’t think of any way to describe this quarter other than complicated. Bill has always been one of my most difficult companies to track because it has so many moving parts. That really played out this quarter, particularly with how these financial institution channels impact Bill’s present and future. Even analysts seemed to have a hard time following exactly how everything interacts. My main takeaway is Bill has enough comfort with projected cash flows and earnings to forfeit some FY24 revenue and/or profit from its FI channel to grab additional market share instead. The two main CFO quotes explaining this decision are below:
“As Rene discussed earlier, we are enhancing and expanding our solution with Bank of America to serve their large installed SMB customer base in addition to their new SMB customers. Together with BofA, we will both be accelerating our investments to address this very large market opportunity. As a part of this initiative, we are restructuring the contractual minimums to push out subscription fees planned for fiscal 2024 to future years. While this impacts our fiscal 2024 revenue and profitability, we expect it to unlock a significantly larger revenue opportunity in the future and accelerate the adoption of financial operations for SMBs…
[and]…we think the trade-off is a no-brainer, simple decision to bring forward the larger opportunity. For fiscal '24, well, I can't give specific numbers, I can say our subscription revenue estimates probably would have been in the range of 8% to 10% higher if we hadn't adjusted some of the contractual terms with BofA. But looking at this opportunity over the next couple of years, we feel really good about where this is headed.”
This initial step down in subscription revenue is a big part of the unusually low sequential Q1 guide mentioned at the top. Management also revealed it has also modeled lower second half interest rates into its initial FY guide. As you can see, there’s a lot going on here.
Trying to make sense of all these metrics (and I track more of them for Bill than anything else we own), my rough take is the core business seems OK given the macro but the FI channel has become a drag. The FI boost to recent customer counts is now being offset by lower FI payment volumes and revenue per customer. The bull case is Bill is laying a lot of groundwork through partner channels which will pay off when macro improves. The bear case is there are way less confusing places for your money while waiting it all out. I find I agree with both cases. So yeah, complicated.
While I’m not quite sure how everything currently fits, I am quite sure our allocation level was too high exiting the quarter. I trimmed quite a bit and currently – Warning! advanced options alert – have covered 1/3 of our remaining shares with September 8 $110 calls. I’m not in a hurry for the cash but do want to continue making Bill a smaller allocation.
CRWD 0.00%↑ – CrowdStrike’s PR team had an extremely busy August:
its Falcon platform received the highest security level certification from Spain’s National Cryptologic Center
CRWD was named to the Leader category in the most recent Forrester Wave External Threat Intelligence Service Providers report
the company announced a new Counter Adversary Operations service allowing customers to quickly access a dedicated team of CrowdStrike personnel and offerings to counter adversaries in real-time during any attack or breach
CRWD ranked among the highest rated companies for managed detection and response in Gartner’s 2023 Peer Insights Voice of the Customer report
it was named a Cloud Security Leader in Frost & Sullivan’s 2023 Cloud Workload Protection report with praise in several categories including workload visibility, threat hunting, and managed detection and response
it "dominated" the 2023 SC Awards winning Best Enterprise Security Solution and Best Managed Detection and Response Service
lastly, its Falcon Identity Protection won the 2023 CRN Tech Innovator award in the Identity and Access Management category
Of course, most of these accolades were just window dressing before CRWD’s August 30 earnings. Was this prelude to a strong Q2 or simply a nice PR push before another lukewarm showing? In my opinion it turned out to be a bit of both.
While Q2 revenue fell a bit short of my expectations (the 0.6% beat was CRWD’s smallest ever), the $778M Q3 guide was bang on.
CRWD technically raised the $3.0367B FY guide by $6.2M to $3.0429B. But at just 0.2%, does that even count?
Net new ARR disappointed slightly at $198.5M, but CEO George Kurtz threw us a bone by stating he believes “our second half performance will yield double-digit net new ARR growth.” I’d give that a glass half full.
Remaining Performance Obligation (RPO) was a highlight. CRWD added $285M in new contracts, a Q2 record by a landslide and welcome development.
Customers using 5+, 6+, and 7+ modules all ticked up a percentage point to 63%, 41%, and 24%.
The CFO stated net retention rate was “effectively at our [120%] benchmark.” I take that to mean under the same pressure as most NRR’s but at least still hanging in there.
Profits were strong with CRWD posting its second consecutive GAAP profit. It also set records in all four non-GAAP profit metrics: $156M operating income, 21.3% operating margin, $180M net income, and 24.6% net margin.
Putting it all together, I’d call this report “just good enough” mostly because of the RPO bounce back and Q3 guide. However, in recent quarters CRWD has shown more and more signs of a maturing company rather than one with room for continued leverage and growth. Having now posted its first 20%+ operating margin, CrowdStrike has already reached most of its long-term performance targets. While that’s commendable for a company that has only been public since June 2019, the question becomes exactly where it can go from here. The security space has always been extremely competitive, and CRWD has now grown from the frisky up-and-comer to one of the big boys slugging it out over gains on the margins. The good news is CrowdStrike still packs a legitimate punch. The bad news is the fight seems to get just a little bit tougher with each passing round.
Having literally owned CRWD from its first day of IPO, I can honestly say I know it as well as any firm I have ever owned. While I admire what CEO George Kurtz & Gang have done, the bigger question is always what these firms can do for our family’s portfolio going forward. With CRWD already attaining most of its target metrics, I now consider it more of a portfolio stabilizer than driver. That means a smaller allocation. I’ve trimmed some already with plans to cut it further. I currently have a 6-8% target in mind until something better comes along, but we’ll see.
CELH 0.00%↑ – Celsius Holdings also gets a starter spot this month. Makers of the Celsius energy drink, CELH has shown big time growth the last few quarters spurred mainly by its recent distribution deal with Pepsi. Signed last August, the deal included $550 in cash and access to Pepsi’s distribution channels in exchange for convertible preferred stock worth roughly 8.5% of Celsius Holdings. After seeing a step down in growth from 137% to 98% and 71% as it closed out its old distribution channels and ramped up with Pepsi, CELH has since seen a reacceleration to 95% and 112% growth. Its most recent report saw $326M in revenue with $59M in operating cash flow (18% margin), $41M in GAAP net income (12.5%), $78M in adjusted EBITDA (24%), and $0.52 EPS. That’s an attractive combination.
The question is just how long CELH can maintain this type of performance. Several signs suggest it could be quite a while. First, CELH has mostly leveraged Pepsi’s North American distribution only to this point (114% YoY growth and 95.4% of current revenue). With non-North America at just $15M (4.6% of total), there is a tremendous amount of international runway to tap into. Second, CELH has consistently gained market share versus key competitors Monster and Red Bull. Celsius’s separator has been positioning itself as the healthiest energy drink alternative (some might call it the “least unhealthy”, but you catch my drift). Third, consumption patterns in this space generate a lot of repeat business. Management likened it to “coffee drinkers” who now make energy drinks a consistent part of their day. That bodes well as a revenue baseline while the company continues to build out its marketing and distribution efforts. I find the combination of Celsius’s crazy-fast growth with Pepsi’s recently added marketing muscle interesting enough to give it a portfolio spot and see where it leads.
DDOG 0.00%↑ – Datadog began the month with its annual Dash customer conference Aug 3-4. Unsurprisingly, six different releases hit my inbox as DDOG joined the AI party with a flurry of AI-driven upgrades. While the company was kind enough to recap all the excitement here, that all paled in comparison to what we’d see in its August 8 report.
I’m sorry to say I thought it was…well…a dog of a quarter. Not only was management forced to restate its full year guide down, but customer adds and net retention rate both took a turn for the worse. It was a bad enough quarter I no longer consider DDOG a slam dunk as one of the 8-10 best companies I can own. However, I’ve yet to close our small position as I have some capital gains implications to think through (I know some investors complain about that, but I always consider gains an excellent problem to have). I’ve decided to hold for now and wait until all our earnings info is in. The bottom line is I feel our almost 4-year run with Datadog as a premium position is drawing to a close.
IOT 0.00%↑ – This was Samsara’s first report as a member of our portfolio. I thought the headline numbers were solid with secondary metrics that really stood out:
An $11.3M beat on the quarter with a $26M FY raise to $900M.
A record $74M in net new Annual Recurring Revenue for 33% YoY growth, the fastest in six quarters.
A record 74.7% gross margin.
Expenses as a percentage of revenue at a record-low 77.3%, suggesting leverage is kicking in.
Yet another record with 140 net new $100K+ customers for 1,515 total and 53% YoY growth.
$7.7M operating cash and $4.7M in free cash, marking IOT’s first quarter with both in the black. In addition, the CFO states the company expects to “remain adjusted free cash flow positive for the full year and going forward.”
A strong beat of the -9.0% operating margin guide at -2.7% on a $5.9M operating loss. In addition, IOT squeaked out its first ever positive net income at $3.9M. With a -2.0% operating margin guide for Q3, its first positive operating income shouldn’t be far behind.
Overall, I really liked the quarter. The top line was within range of what I expected with operating, cash flow, and profitability metrics all showing upside surprise. Management sounded quite comfortable with both the performance and outlook on the call. The fact Samsara is scaling so well in this macro environment is testament to not only its products but business model as a whole. This company has a lot of good things going on, and I’m happy to have it in our portfolio.
TMDX 0.00%↑ – We had all kinds of TransMedics news this month. First, it bought Summit Aviation. Summit gives TMDX the initial personnel, licenses, and aircraft equipment to build its own nationwide organ transportation network. Part of the agreement I like is Summit founder Ben Walton joining TMDX as VP of Aviation Services. I know founders sometimes have issues playing second fiddle, but I’m glad TMDX is keeping his institutional knowledge around at least for the short term as the company begins this very important initiative.
Next, TransMedics expanded its technology base by purchasing intellectual property from Bridge to Life Ltd. The technologies include a warm perfusion technique for heart and lung transplants along with a cold perfusion technology for heart transplants. TMDX “intends to further develop these technologies as the company seeks to expand its product offerings and indications for organ transplantation.”
Lastly, TMDX released its August 3 earnings. I had no issue with the numbers, and the initial market reaction suggests it didn’t either. However, the tide turned once management started talking about the Summit acquisition on the call. With the purchase not even official yet, management could not give much insight into initial setup costs, timelines, and financial performance metrics. That apparently was not what analysts or investors wanted to hear, and the stock slid steadily.
We received a bit more clarity when TransMedics presented at the Canaccord investor conference August 9. I felt the CEO got into defense/lecture mode a couple times, but the info was solid. Nothing I heard either changes the difficulty of the transportation challenge or my conviction about the opportunity. The Summit and Bridge to Life acquisitions totaled $45M with Summit being the lower cost, so it does appear TMDX has more than enough cash to build out the initial stages of its aviation plan with no real fear of another capital raise. My Canaccord notes are below.
CEO’s opening:
Improved adoption rates in all organ categories
Highlighted business model change to end-to-end handling model (NOP). Called it “path to standard of care in this country.”
Talked about all stakeholders from insurers to hospitals to patients being aligned in improving systems. Also mentioned government bill currently being approved allowing TMDX and other voices to help revamp current national organ system (supporting article here).
Working toward launching products outside the US.
Views technology as a moat and believes owning own logistics network only increases that moat. Called it “game, set, match” for TMDX.
Mentioned kidneys as additional offering though no timeline given. (me: I don’t put much stock into this right now since we have plenty of other info to follow.)
Question & Answer:
Q: On disappointing heart revenues.
A: Grew number of clinics, repeat customers, overall heart transplants, and overall revenue. What couldn’t be mentioned on call was total number of heart calls much higher in Q2, but number of actual hearts donated fell short of expected as 53 DCD calls were serviced but didn’t turn into harvestable organs. (Me: DCD is “a donor who has suffered devastating and irreversible brain injury and may be near death but does not meet formal brain death criteria.” I feel a bit morbid writing that but want to remember there is a waiting recipient on the other end.)
If the patient doesn’t die during the time TMDX is called, it becomes a “dry run.” TMDX doesn’t want to avoid these DCD calls because the goal is to provide as many organs as possible to transplant candidates. This quarter’s smaller increase in heart revenue was simply a side effect of the DCD ebbs and flows with regard to dry runs. Management has “no fundamental concerns” with its heart growth or opportunity.
TMDX already knows it will double growth in 2023. Putting systems in place to make sure that growth continues in 2024 and 2025. Demand is there. Needs logistics and capacity to meet it.
Q: Does bottleneck include any shortfall in staff or any pushback from aviation providers knowing you will buy network?
A: No staffing issues or pushback. Strictly flight availability. Lost 12 lungs, 10-15 hearts, and 10-15 livers due to lack of flights. Said that represents $100K in revenue per case. (Me: So $3.2M to $4.2M in inaccessible revenue this Q. I guess the question becomes whether TMDX has tapped out the system until it gets its planes on line.)
Q: $70M in extra spend listed in 10K. Parse out at all? What are metrics for Summit? How many more planes?
$45M total for the Summit and Bridge To Life acquisitions. Summit was lower cost of the two. More details in Q3 with complete Summit metrics by Q4. (Analyst made it very clear Summit is mucking things up and pushed for modeling call if available sooner.)
Q: Any national partnering opportunities rather than buying planes?
No. No such thing as a national transplant courier. All regional mom-and-pops booked through brokers. The CEO said some brokers suggested acquiring them, but brokering isn’t the issue. Planes are. Compared it to mini-Amazon situation. Moving organs from San Francisco to Boston wasn’t possible before. Now it is. Estimate 25-30% gross margins on each flight with the benefit of increased volume tapping into higher-margin products especially 90% margin disposables.
Q: Will Summit be loss leader? Breakeven? How many more planes?
Plan to have 15 planes total by mid-2024. Now have four. Two from Summit and two more purchased in early Q3. Expects aviation to be accretive as a standalone but main impetus is to grow cases and increase other areas of business. (Me: This is the big unknown. We’re probably looking at $20-$25M for planes in Q3 with another $110-$130M more over the length of the buildout. We know they have the cash, but we have little info yet on outlays or margins. The four dedicated planes should help regain some of those missed organs starting in Q3. The risk is growth lags in the second half because TMDX has maxed out the rest of the transportation network. I guess we’ll see how the market reacts to this new info.)
The market being the market, the uncertainty over this new venture seems to have spooked a lot of shareholders. The bear narrative is the Summit buy is a high capital, low margin pivot which will weaken the overall business. The bull narrative is TransMedics has proactively addressed its most obvious bottleneck on the way to continuing hypergrowth well into next year. Management’s next states its case September 11 at the Morgan Stanley 21st Annual Global Healthcare Conference.
I’ve spent a lot of time on TMDX this month including multiple conversations with people I trust who have reduced their positions or sold out. I find I’m comfortable holding what we have but won’t be adding any further (full disclosure: I also have the psychological comfort of a position with a significant number of shares added in the high-$40’s which I know some others don’t). Size your bets accordingly, I guess.
TTD 0.00%↑ – In my opinion, The Trade Desk churned out yet another of its boringly consistent quarters August 9. The headline numbers were strong at $464M in revenue, $180M in adjusted EBITDA and a $485M Q3 guide. That not only means YoY revenue growth acceleration from 21% to 23% this quarter but implies a chance for 25%+ next quarter. As a shareholder, I’m quite happy with that.
Secondarily, TTD continues to grab market share by growing much faster than the overall ad market. Here is CEO Jeff Green’s take:
“…just like the last few quarters, we continue to significantly outperform the digital advertising industry…Our relative outperformance over the last few quarters means we have gained more market share than in any other period in our company's history…we're giving our clients certainty and reliability that they can't get elsewhere…Our recent outperformance is not a temporary blip, I believe it is the start of a reassessment of the value of the Internet, particularly from an advertiser's perspective, and I could not be more excited about the growth opportunity that is in front of us in the years ahead as a result.”
During his introduction Green identified Warner Bros. Discovery as the latest large digital media partner to integrate TTD’s “UID2” customer identification system across all its streaming properties. He also highlighted a new partnership with European ad firm RTL Group expanding the international ad inventory available to TTD’s customers. The deal starts in Germany, Spain, France, and Austria with other European markets to follow. With non-US revenue just 12% of total, TTD has plenty of room for international growth.
The connected TV segment remains TTD’s biggest grower with continued momentum in dollars shifting over from traditional TV. While advertisers are still hyperaware of macro concerns, they are becoming increasingly comfortable in the ability of targeted ads to provide specific conversion rates and ROI on the dollars they do spend. That should play strongly in TTD’s favor as ad budgets inevitably return to full strength. My personal feeling is The Trade Desk has lined itself up for a stretch of accelerating revenue growth into a series of weaker comps. That keeps me enthusiastic, and I exit the quarter seeing no reason its thesis isn’t 100% intact.
One piece of follow up news to at least pay attention to was the announcement CTO and co-founder Dave Pickles is leaving the company. While shareholders rarely get the full details on these types of moves, the accompanying quotes are appropriately complementary with two remaining executives singled out for the increased roles they have taken on in this area. So, it sounds like things are covered. If Green departed, I’d be concerned. As it is, I don’t see any immediate threat to the business momentum TTD has built the last few quarters.
ZS 0.00%↑ – The only news I saw from Zscaler was a company-issued report on the state of VPN security The conclusions included:
88% of companies report being concerned that VPNs jeopardize their ability to maintain a secure environment
90% of organizations are apprehensive that attackers will target them through third-party-owned VPNs
User satisfaction is also low, with 72% of users expressing frustration due to slow and unreliable VPN connections
Company-funded studies almost always favor the company’s position, so take the above with a grain or three of salt. However, it’s nice to see such strong percentages identifying with pain points Zscaler specifically aims to solve. If nothing else, I’m sure this survey provides useful information for improving and tweaking Zscaler’s products. We’ll find out how much immediate impact this is having when it reports September 5.
My current watch list…
…in rough order includes monday.com (MNDY), MongoDB (MDB), Super Micro Computer (SMCI), and Snowflake (SNOW).
And there you have it.
Despite the slightly negative month, I’m content with how things played out. After a ridiculously good run from May-July, the market took a lot of profit off the table during the first half of August. However, it appears a good portion of that money has crept back in after a string of mostly stable to slightly optimistic earnings releases. I still have some work to do realigning our allocations to match conviction coming out of these reports, but seeing more and more businesses regaining their footing is a welcome development after most of the last two years.
Thanks for reading, and I hope everyone has a great September.
I learn a lot from each of your monthly portfolio reports. Interesting commentary on TMDX. Buying and operating an airline is not for the faint of heart. They have their work cut out for them.
Also, I think you are now convincing me to take a closer look at CELH. I will run the numbers through my process to see if I am interested.
Cheers!