There were a number of notable earnings this week. I was not one of the lucky ones that had invested in Hubspot ($HUBS) or Zillow ($Z) that saw some huge share price gains this week after their earnings release.
In fact, only one company that I own was up after their earnings release:
Chegg ($CHGG) – Up 4.2% since earnings
Corsair ($CRSR) – Down 8.1% since earnings
Alteryx ($AYX) – Down 15.6% since earnings
Yeti ($YETI) – Down 7.97% since earnings
DataDog ($DDOG) – Down 2.93% after hours after earnings
Cloudflare ($NET) – Down 7.71% after hours after earnings
Now don’t get me wrong, I don’t think any of the earnings that were released this week were terrible, but some were definitely better than others. I haven’t had a chance to review today’s earnings releases in-depth yet but I did take an initial glance at their numbers and will provide some notes on my thoughts.
Chegg had a pretty solid earnings report.
- Revenue was up 63.92% YoY for Q4 which is the 6th quarter in a row of accelerating revenue.
- Their Services business continues to crush it with 64% YoY revenue growth and 57% revenue for the year.
- Services subscribers was up 74% YoY which was their biggest increase in services subscribers ever.
- Free cash flow margin was solid at 17.3% for Q4 and 16% for the year and 50% of Adj. EBITDA
- Gross margin was pretty strong at 72% though it was down from the previous year by 700 bps
- GAAP Net Income continues to inch its way to profitability finishing the year at -0.97% net income margin, I would anticipate they will be GAAP profitable next year
- Q1 guidance was $185 M (41% YoY) and FY 2021 guidance was $790 M which was an increase of $15 M from their previous guidance of $775 M. I wasn’t thrilled with their guidance, but they really lack a lot of visibility into the second half of the year. They did guide strongly for their services business with approximately 30% growth at $675 M.
Some noteworthy comments from their earnings call:
Yeah. Look, it’s a great question and unless you’re deep in this space, it’s hard to know this. But we don’t really have any competition. We have very little competition in the U.S. Nobody’s growing as fast as we are, nobody has our balance sheet and really very few people, maybe one or two are profitable at all and we’re increasing our profitability and generate a lot of free cash flow.
Yeah. So, once again, we talked about the 1 million subscribers in 2021 or at least 1 million subscribers in 2021. We’re not breaking out revenue at this point in time. But needless to say, international is important. It is growing extremely fast. And like, Dan said, we’re 190 countries at this point and many of those companies — countries, excuse me, countries have some fairly significant scale.
I didn’t do anything with my shares but was pleased with the report. In all honesty, Chegg is a good company but not really a high conviction company for me, primarily because I’m not really thrilled with their product (probably my own bias) and it looks like they’re still slowly transitioning out of the textbook industry which continues to be a drag on their overall growth.
I think Chegg will likely be able to churn out 20-30% growth for the years to come, but it’s not a stock that I would expect significant share appreciation from after their initial run-up in 2020.
2. Alteryx ($AYX)
This was a company that I got into really late in the game well after it basically 10x’d from mid-2017 through mid-2019. I still hold onto a handful of shares and options and continue to do so largely because an author who I subscribe to in his newsletter continues to be bullish on the company.
To be quite frank, I didn’t even bother reading the earnings transcript after I saw the initial numbers released:
- Revenue was up 2.9% YoY in Q4, up 18.6% for the year which was down from 64.8% the previous year
- Guidance for Q1 was $95 M which is down -1.7% YoY, however guidance for FY 2021 was $565 M which is 14.5% YoY growth for the year
- ARR guidance was $625 M which was $26.9% YoY
When I saw the Q1 guidance, I basically just exited the press release. I’m not interested in turnaround companies or companies that undergoing a big transition. I do not believe “hope” is an investing thesis.
I will admit that Alteryx does seem like it’s turning it around after a pretty rough 2020 due to the pandemic and with a new CEO and they’re moving more to a cloud offering but it’s going to take time to transition the company and their execution recently has been rather suspect. It also seems that Wall Street seems to love this company hence the continued run-up before earnings the last few quarters only to be utterly disappointed with the earnings release which results in the shares tanking the next day. Alteryx has been basically been dead money for the past 1.5 years from when I first made my initial purchase, there have been some rallies here and there but this is far from a stock where I would put a significant sum of money into and I definitely did not buy the dip.
3. Corsair ($CRSR)
Corsair had a decent report. They grew phenomenally in 2020 due to the pandemic causing people to shelter-in-place and find new things to do, so streaming, gaming, all were great tailwinds for Corsair which resulted in some solid revenue acceleration from the 15-30s to the 50-70s.
Here’s my rundown of their numbers:
- Q4 revenue growth was 70.4% for 2020 revenue was up 55% which is huge compared to 2019 where revenue only grew 17%
- HUGE margin expansion in 2020 due to a product mix shift with accelerating revenue for higher margin products. Margin for Q4 grew 600 bps!
- Operating cash flow was $168.9 M which was a huge increase from last year which enabled them to pay off a lot of debt
- Speaking of debt, Corsair was able to trim LT debt by $200+ M in 2020, largely from proceeds from the IPO but also strong operating cash flow. Total net debt ended the year at $197.4.
- Their TTM EPS grew pretty materially, where in Q4, their EPS went from $0.08 to $0.43 and they finished the year with $1.14 EPS. After yesterday’s close, they have a 37.2 TTM P/E ratio which isn’t absurd given the prospects of the company
- SG&A grew 72.5% in Q4 and here’s the rate of SG&A growth in the past 4 quarters (earliest first): 41.1%, 48.9%, 64.2%, 72.5%. This is NOT good. They blame the SG&A growth due to needing to innovate at a larger scale and public company costs. While I guess that makes sense on the surface, but wouldn’t that mean higher increases in their product development expenses?
- Guidance was incredibly conservative based on their current growth trajectory, with FY 2021 revenues coming in at $1.95 (14.6%) which much of that will be front-loaded. Adjusted EBITDA guidance was also a little wimpy coming in at $230 M on the high end. To be clear, they finished 2020 with $213 M in adjusted EBITDA, so they are assuming only 8% growth
I reviewed the earnings call and management is incredibly excited about their product lines and emphasized that there are supply issues that are causing issues with meeting demand.
Rod Hall — Goldman Sachs — Analyst
Yeah. Good morning, guys. Thanks for the question. I — I wanted to come back to the supply question but more related to peripherals.
The peripheral segment was below what we expected and I think, you know, it looks to me like probably supply constraint was the main driver there. I’m just curious how much supply — how much you think it affected the peripherals business in the — the fourth quarter. And then also curious how that rolls into Q1 and you said you were restocking, you know, in Q4. Do you catch up on some of that demand in Q1 or, you know, what’s — what’s the flow of supply versus demand in Q4 and Q1? Thanks.
Andy Paul — Chief Executive Officer
Yeah. So, I think that the first part of the question is — is a tricky one to answer because everyone was supply constrained. So — but there’s no question that the market grew in gaming peripherals faster than our growth for most of the year. Now, you — you will notice that Q4, we actually grew over 100%.
So, that’s when we started to — to catch up with the market and the weeks on hand in the channel has definitely started to increase. I mean, some parts of last year, we — we were down to zero to one week. So, it’s gone now out to a few weeks, still less than we’d like to see but starting to get on top of that. So, hopefully, that gives you some color.
And in terms of the margin question year over year, we do expect margins to improve year over year. You know, it’s going to be sort of a tale of two halves during the year. First half of the year, there is more supply constraints and freight costs are higher, but we expect that promotional activities will remain relatively low. We sort of have a scenario where things return — return a little bit more to normal in the back half of the year and we’re going to see a little bit more promotional activity but freight expenses should come down.
So, between that, we think that we will be able to improve even with the constrained business environment in the first half to bring margins up year over year. We’ll also get some benefit because we do expect for — for, obviously, that keep growing faster than — than our components and systems business and those enjoy higher margins.
As noted, I think Corsair had a decent report because while they noted tremendous growth in 2020 which is backwards looking, their forward looking view was rather muted. Some of it was due to supply constraints and other was simply due to lack of visibility into what the “New normal” will look like in the months to come.
What’s most concerning for me is that Corsair seems to have an issue with SG&A expense management. Corsair is valued based on their P/E ratio and their expected earnings, and the fact that they guided conservatively and that SG&A expenses do not show any signs of slowing down (it’s growing faster than revenue for the most part), this will cause huge pressure on EPS growth. Due to this, I decided to trim half of my position which was made up of options and shares to free up some cash for other companies that I found more appealing.
Don’t get me wrong, I think long-term Corsair will most likely have a good future (which is why I’m keeping half of my position) but there’s simply a lot of unknowns about how much demand they will generate post-vaccine and how they will manage their expenses going forward combined with the fact that they are a lower margin business just makes this investment thesis not as attractive anymore.
4. Yeti ($YETI)
When Yeti announced yesterday morning, they actually were up pre-market but then subsequently tanked during normal trading hours. I think the overall report was strong and I suspect the shares will rebound in the coming days.
Quick run through of the numbers:
- Revenue was $375.8 M for Q4, up 26.3% and for the full year they crested $1 B in Net Sales, up nearly 20% at 19.5%
- Their direct to consumer business continues to be a huge growth driver of the business and finished at $217.8 M, up 46.2%
- Drinkware and Coolers both had strong growth rates at 42% and 31% respectively
- SG&A was down 4.7% for Q4 and only had moderate growth for the year which enabled them to grow EPS by 200% YoY
- They paid down debt to $135 M which is down over $170 M from last year’s $300 M balance
- Guidance was between 15-17% (52-week year vs. 53-week year) which was in line with what they’ve been growing at historically
- SG&A guidance indicated that it would grow faster than net sales so there would be some deleveraging there which seems to have impacted their EPS growth guidance. I expect more insight will be provided later on.
And also supporting the solo or small group near case on leisure and so when we look at it, we like that trend a lot, but it’s a trend that we’ve been watching for years. And we’ve seen over the last five years, we believe has contributed to engagement with YETI as people get outside more and realize the health and wellness benefits of it.
Growth was led by the markets where we’ve historically been the least penetrated. But even in our longest standing what we’ve referred to in the past, our heritage markets continued to grow strongly through 2020. So we liked the both the penetration we’re continuing to get in our most established markets and the reach with newer consumers or consumers that are newer to the brand. And we’ve talked about penetration in the coastal communities and we’re really seeing the effect of that with opportunities still in front of us.
Yeti is a newer position of mine where I got in around $68-70/share. I don’t expect it to ever be a huge position, but I like the brand and I think they have solid growth drivers, reasonable margins and good SG&A management which has resulted in some good EPS growth.
I love their products and many people I know also love their products. I am not surprised that they’ve been able to grow their share price so quickly in the past few years since I think they have a great brand and solid management team.
As stated above, I don’t think I’ll ever make this a large position since SG&A management is fairly unpredictable compared to revenue growth, or at least it seems there are more inputs to it which makes it more volatile. Also, I only have recently started to invest in companies where their P/E ratio actually impacted their valuation, so this is new territory for me and it definitely takes me a lot longer (like 3x) to analyze this type of company vs. a software/technology company.
5. Cloudflare ($NET)
Cloudflare had a good report but their after hours earnings reaction was pretty poor, with shares falling 6%+. I think that ultimately this was more of a valuation issue than a performance issue. Honestly, there’s a ton to like in this report:
- Revenue grew 50% for the quarter and 50% for the year which is an acceleration from the last 2 years where they grew 42.8% and 49%
- Large customers with > $100k ARR was up 57.4% and had 12.5% sequential growth, a slight slowdown, but still very strong.
- Their paying customers growth was up tremendously! 32% YoY for Q4 and 10% sequentially, this is by far the biggest increase in paying customers since their S-1 was released.
- Their Dollar based net revenue retention went up 300 basis points to 119 for the quarter which is very strong and good.
- FCF margin was -18.7% which continues to be a point of frustration for me since they haven’t increased this figure much this year despite the huge growth and for a company so highly valued, so you would hope that this figure improves a little.
I skimmed their earnings report and I will say that it was a pretty upbeat call and it’s very clear that management and the company is firing on all cylinders.
They think international is a big growth driver and are investing heavily there. They are also winning a lot more deals and expanding a lot which can explain their improving DBNRR.
Despite all this fantastic growth and having a product that their customers love, I decided to trim my position. Primarily because I do not believe that a company that is being valued at a 58-60 TTM EV/S has a ton of upside in terms of short-term share price appreciation. Plus, I’m not a huge fan of some of the trends in their financials (which I’m sure they will fix with time, but I think there are just better companies out there that have better operating metrics).
My cost basis for Cloudflare is around $25, so I didn’t trim too much because of the tax consequences (I got in late summer 2020), so I intend to hold on until then and see if their valuation multiple has shrunk or not, but I plan on writing covered calls due to my skepticism that they will be able to grow their share price much faster. Cloudflare should be long-term holding by all means and I definitely intend to hold the bulk of my position until at least 2023 (options) but as someone seeking significant positive alpha, I’m not sure if Cloudflare in the short-term is going to do too much.
6. DataDog ($DDOG)
DataDog had a solid earnings report despite the after hours & pre-market negativity. They have dropped after hours for the past few reports, largely due to concerns about revenue deceleration and valuation but they always end up ticking back up.
DataDog like Cloudflare has a huge EV/S multiple but unlike Cloudflare, DataDog has financials that I really like to see: High revenue growth, growing free cash flow margin, and improving operating margins
Few highlights from their earnings report:
- Revenue grew 56% YoY to finish the year at 66.3% and revenue grew sequentially from 10.5% to 14.8% in the most recent quarter. In Q2 or Q3, DataDog had mentioned that it would take some time to “get back to normal” and it seems that they are executing well and their revenue trajectory looks strong
- Customers with > $100k ARR continues to grow quickly with YoY growth at 46% for Q4 and sequentially high revenue customers increased by 13.2% which is the third quarter of accelerated growth
- FCF margins dropped to 9% but for the year, DataDog has maintained positive free cash flow margin vs. last year.
- Non-GAAP operating margins continue to improve with 2020 operating margins finishing at 11% vs. -1% last year. They are seeing some tremendous operating leverage which is fantastic given this is a high margin business.
- Guidance was conservative with FY 2021 revenue expected to come in at $835 M but given their history of beating expectations, I think $900+ M is very doable which would be a 50% growth rate and I think DataDog has a slight possibility of being GAAP profitable this year.
I actually haven’t had a chance to review their earnings report yet, but at a high level, there’s a lot to like and I anticipate shares will rebound. Their EV/S multiple continues to be unattractive but given their growth rate and improving FCF margin, I think this valuation is better justified than Cloudflare’s.