Strictly Business: Mid-March Update

News and notes from the last two weeks.

I anxiously await an article about the first company with exactly $250,000 spread among 742 banks… 🙄

I hope everyone’s month has gone well otherwise.

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BILL 0.00%↑ – Bill has had an interesting March. Its only scheduled action to start the month was three investor presentations between March 6 and March 14. The middle of that stretch saw some positive news as Bill partnered with BMO bank on a new service. BMO Bill Connect is “a bill pay and invoicing platform that helps customers pay and get paid in a simpler, faster and more secure way.” While I’ve recently written about the riskier quality of smaller customers from banking partners, we can’t fault Bill for continuing to increase its customer pipeline. After all, it’s not as if these aren’t legitimate partner banks or many of these smaller clients won’t eventually become excellent customers over time.

Unfortunately, that positive news was overwhelmed by Bill getting caught up in the Silicon Valley Bank fiasco. Bill issued an almost immediate statement acknowledging it had roughly $300M of its $2.6B in corporate cash along with ~$370M of its current $3.3B in customer float with SVB. Despite acting quickly and ultimately seeing little to no disruption from the incident, a spooked market dinged the stock.

Bill has since underscored its stability by expanding services to any existing customers affected by the SVB collapse. These “New Offerings to Enable Business Continuity” include a secure place for customer funds, pre-approval for Divvy credit lines to help with expenses, and reimbursing all pay-by-card fees for the next 30 days on any SVB debit card transactions run through Bill. This seems like a strong move and very much the right thing to do by its customers.

The Silicon Valley Bank failure is a terrible event, particularly for firms that had most or even all their cash with the bank. Fortunately, it appears Bill has come through with limited impact. There’s no telling where the broad market settles after this latest fear du jour, but we can at least turn our attention back to underlying business performance when examining Bill’s future.

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CRWD 0.00%↑ – I found CrowdStrike's quarter a nice way to end earnings season for our holdings. I view it as a strong bounce back from a disappointing Q3 and an optimistic springboard for the upcoming fiscal year. Way more details at the link…

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DDOG 0.00%↑ – Like Bill, Datadog had some damage control thrust upon it this month. Things started harmlessly enough with a March 7 appearance at the Morgan Stanley Technology, Media and Telecom Conference. On March 8, however, users awoke to an extended service outage that took almost 48 hours to resolve. While outages are always a risk with infrastructure firms, the timing couldn’t have been much worse so soon after Q4’s increased user scrutiny and surprisingly weak FY24 guide. I find myself relieved I trimmed DDOG to more of a something-to-prove allocation after earnings.

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ENPH 0.00%↑ – Enphase’s updates were expanded deployments in Illinois and Utah. We rarely get sales specifics in these releases, but ENPH has certainly established a steady cadence of expansions in recent months. Given some of our other portfolio news the last two weeks, it’s nice to have at least one name that feels business as usual.

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NET 0.00%↑ – It had been an unusually long stretch without formal news from Cloudflare. The only real non-techie update on its blog during that time was an expansion of its network in Indonesia  However, its more regular rhythm picked up this week with the start of Security Week 2023. In the kick off NET promised “[over] the next six days you’ll read more than 30 announcements” making it easier for customers to keep systems more secure.

The first business update was a deeper Zero Trust integration with Atlassian, Microsoft, and Sumo Logic. Next was Cloudflare’s entry into the Fraud Detection market “to help businesses quickly identify and stop online fraud…before it impacts their brand or their bottom line.”

Notable in the flurry of secondary announcements was an update aimed directly at competitor and portfolio mate Zscaler. NET’s Descaler Program (well played, NET, well played) is a new “frictionless path to migrate existing Zscaler customers to Cloudflare One.” At this point, I’m comfortable with the recent numbers of both firms. Besides, it’s not as if this is NET’s first attempt at calling itself superior to ZS. However, I certainly don’t like Zscaler CEO Jay Chaudhry’s chances in a marketing and messaging battle with Cloudflare’s Matthew Prince. We’ll see how this plays out as the year progresses.

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SNOW 0.00%↑ – Snowflake reported earnings March 1. In my opinion, this was one of our portfolio’s more disappointing reports this season. In a rare unforced error, management floated an unnecessary FY24 pre-guide of 47% after Q3 only to eat crow by having to lower it all the way to 40% after Q4. I’d call this a surprising gaffe for a usually rock-solid management team.

SNOW has the unfortunate challenge of hitting law-of-large-numbers scale in the teeth of a tightening economy. Snowflake has always gotten a premium for its impressive numbers, unassailable management team, and what seemed to be an avalanche of data migrating to the cloud. I leave this report thinking every single one of these advantages has basically evaporated. Will they ever return? Darned if I know. I only know much if not all that premium might be on the verge of evaporating as well. My belief there’s more sideways or downside risk than upside the next few quarters has me on the sidelines until we gain more clarity.

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TMDX 0.00%↑ – TransMedics’ only news was an appearance at a Cowen healthcare conference on March 6. Though I didn’t see much new information, there’s a good recap here.

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TTD 0.00%↑ – Nothing new with The Trade Desk other than I hope they are selling a lot of ads. Moving right along…

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ZS 0.00%↑ – Zscaler posted what I thought was a solid quarter March 1. It issued a firm beat and raise with a record operating profit. Yes, billings were lighter than expected, but management noted it has extended some customer payments so less falls into the first year of the contract and more into the second. I consider this a smart use of its cash flows and something which should hopefully lend some stability while waiting for macro effects to play out. Regardless, I’m OK with the way ZS is navigating this downturn so far.

The company followed earnings by hiring Karl Soderlund as Senior VP, Worldwide Partners and Alliances. Interestingly, Soderlund joins Zscaler from competitor Palo Alto Networks after senior roles at Aruba Networks, Avaya, HP, Cisco Systems, and Fortinet. Sounds like an interesting add.

As I type this, I’m slightly amused by the relative relief I feel over Zscaler’s apparent boring steadiness. Sign of the times, I guess…

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March 15 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

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As usual, thanks for reading and good luck the rest of March.