December 2021 Portfolio Review

Welcome to my thirteenth publicly written portfolio update (and 7th on My portfolio is up 320% as of writing on 12/31/2021 from when I started tracking my results in January of 2020. This means that, $100 invested in the ExponentialDave portfolio on January 1, 2020 would now be worth $420, which is more than a quadruple (4x). Meanwhile my benchmark, WCLD, is “only” up 99% since January of 2020, and the S&P 500 is up 47% since January 2020. For the period from January 1st, 2021 through 12/31/2021, my portfolio is up 30%, meanwhile WCLD is down 2%, and the S&P 500 is up 29%.

As we close out 2021, I want to show my sincerest gratitude to those of you following along on my journey, and I hope I have been able to help you in some way this year or last year. And of course I want to thank my friends over on Saul’s Investing Discussions and Twitter, who I continue to learn very much from.

In my November monthly report, many of you had comments and questions about my portfolio. I appreciate the engagement and hope the blog remains interactive! Keep the comments and questions coming.

Quick reminder that, if you haven’t subscribed yet but would like to, please go to my home page and enter in your email into the “Subscribe” box. Furthermore, I have been tweeting (@xponentialdave) some of my portfolio updates (just the positions – not much real analysis) as well as quick thoughts on stocks, investing, and portfolio management. Or if video is more of your thing, I’ve started a YouTube channel here.

Monthly YTD performance at the end of each month
Jan 2021: 6.5%
Feb 2021: 4.2%
Mar 2021: -9.8%
Apr 2021: -0.9%
May 2021: 3.0%
June 2021: 20%
July 2021: 23%
Aug 2021: 53%
Sep 2021: 59%
Oct 2021: 77%
Nov 2021: 43%
Dec 2021: 30%

My portfolio hit an all time high in mid October of 2021 when I was up 87% YTD. It has tumbled considerably since then, but it is still much higher than the low I hit in May of 2021, when I was down 19% YTD.

2020 Performance: 225%
Cumulative Performance Since Jan 2020: 320%

Options trading results from 2021 have added 10% to my YTD results. So, without options trading, my YTD results would be 20% as of 12/31/2021.

Current Allocation vs Allocation as of Last Portfolio Update on 11/23/2021:

* indicates 1% of the position is OTM LEAPS call options.

Conviction Levels:
First Tier: DDOG, MNDY, SNOW
Second Tier: BILL, ZS, ZI, S

Risk/Reward Categorization
Highest Risk & Highest Reward: UPST
Higher Reward, Higher Risk: SNOW, BILL, AMPL, S
Higher Reward, Lower Risk: DDOG, MNDY
Lower Reward/Lower Risk: CRWD, ZS, ZI, NET


I sold out of Affirm. It is especially important during times of market turmoil to sell lower confidence positions and buy into higher confidence positions. I have stated previously that I think Affirm’s future is like a crap shoot in the short and medium term. For that reason, when I got discounts on DDOG, SentinelOne, and Snowflake, it just made too much sense to sell out of Affirm completely. For more on why I think Affirm’s upcoming quarter is iffy, please check out my November portfolio update.

I also trimmed Upstart, for reasons I will disclose further down in this report in the Upstart section.

On the portfolio’s performance lately:
Seeing the portfolio hit YTD performance of 87% back in October was really exhilarating. It felt like I was about to pitch a perfect game. And then, in the ninth inning, I got lit up. Mostly sector wide turmoil in high growth stocks combined with company specific issues in Upstart and Lightspeed led to the destruction of a lot of my gains this year. And to be clear, most losses by far came from the rotation, not from Upstart or Lightspeed or any other specific stock.

This is when it becomes especially important to zoom out of the narrow time frame that is one year and look at the longer term. Although my portfolio’s YTD gains have shrunk, my portfolio is still up 320% from January 1, 2020. This is more important and more meaningful than letting a rough month or two sour the outlook.

Some critique I will surely face (probably from Twitter trolls lol) would be: “Dave, you only beat the S&P 500 by 1% this year – maybe you should just buy the S&P 500 next year and save yourself a lot of time?” That is a rather narrow minded way to view my results for three reasons. Firstly, did I just gain 30% this year, or did I also gain 30% and a **** ton of knowledge? Naturally, after reading about my stocks daily and writing about them monthly, I learned so much this year. Knowledge compounds, and Warren Buffett didn’t make a lot of his best investments until he was in his 70’s. I’m not saying I’m anything like Warren Buffet or that I will ever have a Buffett like careeer, but the knowledge I gained this year is worth much more than the 30% portfolio appreciation I had.

Secondly, I think the S&P 500 got lucky, and I have the data to prove it 😉 The S&P 500 has averaged 10% historically, making 2021 a particularly banner year for the index, being that it ended up 29%. Additionally, in October, I was up 87% YTD, and the S&P 500 was up 24%. And then a stock market rotation away from my specific type of stock (growth stocks) happened at pretty much the perfect time to sink my results before the year end. Scanning through the S&P 500’s results back fifty years, has it ever ended the year up 225%, like I did in 2020? What about 87%, like I almost did this past year? Nope, its best year out of the last fifty saw it rise 38% in 1995.

Thirdly, the fact that my 2020 results were so outlandishly good makes it a highly suspect comparison to compare my 2021 to the S&P 500 2021 “in a tunnel” without considering what happened in 2020. If you were comparing two quarterbacks X and Y, and quarterback X has been playing for ten years and has a winning record but is pretty average over all. Quarterback Y went undefeated his rookie year and won a superbowl. But then the year after that Quarterback Y had a winning record, but it was only barely better than Quarterback X’s record. Which quarterback do you want on your team? Would you think about comparing the two quarterbacks based solely on the latest year without considering that quarterback Y was undefeated the prior year?

And lastly on this topic, I will say it would have been logical to think in January of 2021 that my portfolio maybe had overheated and was due for a contraction in 2021, but actually it expanded another 30%. So on the whole, I am disappointed that I didn’t maintain numbers anywhere near the 87% I had earlier, but I am simultaneously very proud of my results. 30% gains, if I could do this every year, would be fantastic. And I think I will continue to grow my portfolio 25%-40% every year that SaaS is having its amazing bull run. Conservatively, I think the SaaS bull market will go on for at least another 5 years, maybe 10.

YoY revenue growth rates of my companies (organic numbers used for BILL and ZI):

YTD Performance of Current Holdings as of 12/31/2021 and market cap (regardless of when I bought them):

Of all the stocks above, only five of them were stocks that I held all year: CRWD, SNOW, ZS, NET, and DDOG. Everything else was newly acquired at some point this year.


A quick word on Upstart: I have signficantly reduced my Upstart position from previously being 30% of my portfolio to now 6% of my portfolio. The bull cases people make for Upstart tend to be around the product. I get this – they could theoretically make credit scores obsolete, meanwhile giving better credit options to consumers and enabling banks to originate more loans.

The bear cases people make for Upstart tend to be around the numbers. For the four quarters before this most recent quarter, Upstart’s revenues had grown anywhere from 34% QoQ to 282% QoQ. Importantly, even 34% QoQ is significantly better than any other software company I know of. However, this most recent quarter we saw revenue growth dip down to 17.5% QoQ. This is better than some companies in my portfolio, but it’s also not as good as many SaaS companies I own.

Should revenue start coming in closer to 17% QoQ on a regular basis, suddenly it doesn’t make sense to own Upstart anymore. This is because I can get comparable revenue growth in SaaS companies with much lower risk of deceleration. Every quarter Upstart keeps growing 17%, it gets so much harder for it to repeat. This is because every quarter Upstart starts off with zero loans approved, however, Datadog Cloudflare and the rest of my cohort of SaaS companies all start off with however many customers they ended the previous quarter with. All new customers the SaaS companies acquire ultimately becomes revenue growth (minus typical churn of course, which is always very low).

Should Upstart’s QoQ revenue growth numbers rise substantially from 17% and the company issues a strong annual guide for 2022, I think there will be a huge amount of upside, and you will see build up my position again. Those are two big ifs though, and frankly not really odds that I like. For that reason, I have significantly diminished my Upstart position.

The historical volatility in Upstart’s stock could ultimately be something that boosts its stock as we get closer to its next earnings call, since it would be a prime target for both momentum traders and earnings bettors.

All in all I am bullish on Upstart, but it is now my lowest conviction position.

By QoQ revenue growth, only Snowflake just barely beats SentinelOne. Still Snowflake is not SaaS, so SentinelOne is technically the fastest growing SaaS stock I own, and also the fastest growing SaaS stock that I know of. The company has only been public for part of the year, and so we only have two quarters in the books as a public company. S1 is guiding for 9% QoQ growth, which is exactly what they guided to last time.

Notably, non-GAAP gross margins are rising, from 62% last quarter to 67% this quarter. They were as low as 54% in Q4 2021. The full story though is that they used to be sitting at 64% in Q2 2020.

SentinelOne is highly unprofitable, much more so than any other company I own. Therefore it is especially important that the company continues to show strides towards profitability. We see this happening with their non-GAAP operating loss margin, which was -98% in Q2 2021 but came in at -69% in the latest quarter. We also see non GAAP operating expenses as a percent of revenue moving in the right direction, from 161% in Q2 2021 to 136% in Q3 of 2021.

Overall customer count rose 79% YoY to 6000 customers, and enterprise customers spending > $100k annually rose 140% YoY and 20% QoQ. This is stellar enterprise growth, however, it is technically decelerating, since the previous three quarter saw QoQ growth between 26%-27%.

Net retention rate (comparable to but slightly different than DBNER) hit a record high of 130%, up from 129% last quarter and 115% last year.

Key quotes from latest earnings call:
We received the highest overall rating in the 2021 Gartner Voice of the Customer Report for endpoint protection platforms where 97% of reviewers would recommend the SentinelOne Singularity XDR platform.

Automation is a top priority for SentinelOne. Machine speed automation can help counter instantaneous cyberattacks and enable under-resourced IT teams.

We’re offering complete remote control and orchestration across endpoints. It’s a scalable way for security providers to not only detect and respond with existing endpoints, but also manage and control the entire deployed footprint. It’s like having a security analyst on every single endpoint at all times.

Revenue from international markets grew 159% year-over-year. International markets now represent 33% of our total revenue, up from 29% a year ago

It’s telling that we’re getting so much attention by our competitors, which speaks to the traction we’re having in the market. We’re winning more and more customers, and our growth rates speak for themselves. What enterprises need is automated security, not repackaged legacy AV and crowd-powered protection.

Our non-GAAP gross margin in Q3 was 67%. This was up 9% year-over-year and up 5% quarter-over-quarter. The biggest benefits are coming from our increasing scale and business expansion, including modest benefits from module and platform upsell.

Analyst: I would assume, somewhat weaker fiscal first quarter. So can you talk a little bit about how the seasonality might be impacting your thoughts on growth and whether we should be factoring that into our assessment of the next couple of quarters?

Nick Warner: Sure. Good question. Q4 is our strongest quarter. I think that has been the case historically. I think if you look at broader buying trends in the security industry, Q4 is the most active quarter. We expect to have very strong Q4 in terms of where our pipeline is at, where deals in the flow are sitting right now. And so I think your assessment is accurate.
ExponentialDave: Funny to compare this to George Kurtz prepping analyts for Crowdstrike’s upcoming quarter. George goes more out of his way to be conservative and even reminds all of us of the law of large numbers. Of course, Crowdstrike really is dealing with significantly larger revenue amounts than SentinelOne, but as growth stock investors we are indifferent to the absolute dollar amounts and are much more interested in percent growth.

On technical differentiation:we have unique capabilities like true multi-tenancy. And that’s incredibly important if you think about the way a managed service platform works with hundreds or thousands of customers under one central tenant. So SentinelOne is really leading that set of capabilities in the space. We also have unique capabilities like RSO, or remote script orchestration, which really lends itself to having an automated way for folks at the managed service provider level to take meaningful real-time action on each and every machine.

Analyst: how fast through the displacement of antivirus are we as of December 2021? Is there still a lot of McAfee, Symantec and then these companies left? Or is that kind of process now largely complete?

Tomer Weingarten: I think it’s safe to assume that it’s far from complete. I mean, one data point to point towards that is the fact that pretty much every deal that we closed this quarter and in past quarters, always had an incumbent vendor in the mix. So they’re obviously still there, they’re obviously still are the vast majority of what we deal with when we go into environments.

And I think that even if we take a very conservative view at the overall TAM, ,I think it’s safe to assume that about over 50% of it is still in the hands of the incumbents.

Cloud still remains our fastest-growing module. About 10% of endpoints are covered by cloud and servers. It has been our fastest-growing module for some time

Analyst: do you see any significant change in pricing or aggressiveness of other players? Are the – there are some concerns that the pricing environment is deteriorating on the basic product or the initial footprint. And I’m wondering if this is something you’re actually seeing in the market or that’s more just a high-level concern?

Nick Warner: We’re not seeing that. And in fact, year-over-year, our prices – our land prices are rising. And that’s a function of product enhancements, the innovation that we show, our customers as well as our module attach rate. And really SentinelOne competes and wins because of the differentiation of our data and AI-driven technology.

In this space, with enterprise buyers, no customer selects a security vendor based solely on pricing. That just doesn’t happen. And so I think what we’re really seeing is a combination of a few factors. One, folks are relying on and going to the best technology that provides an automated and easy-to-deploy solution. The second thing is we have a number of highly interesting modules that customers are consuming. And the third is the surfaces that we’re protecting are increasing.

And again, if you put a layer on top of it, a consumption usage-based module that we will start introducing as well and we’re already introducing with our data retention modules
ExponentialDave: In the long term this could be very meaningful if they start adding more usage based modules, but I’m not counting on SentinelOne becoming as usage based as say Snowflake any time soon.

And Tomer, is there – initially, when you went public, some distributors or resellers were saying that your price level is lower than that of CrowdStrike. Is this still the case? Are you winning also on price? Or did the – because of what you just said, we can’t compare pricing levels?

Tomer Weingarten: Yes, I think it was never the case. I don’t know if it’s no longer the case. Again, the way that we price is – or the fair system that we found to monetize our platform, I think it’s very competitive. I think in certain cases, you’ll see it’s more expensive than the competition. In some cases, you’ll see the competition actually coming in and discounting deeply to try and win against us… Look at our margin. I mean that would not have been possible without a very healthy price point for our offering.

Crowdstrike has been in a pretty even and slow deceleration for the past 3 years. This most recent quarter, we saw growth come in at 13% QoQ, which is not bad, but it’s much lower than in previous years. The 2021 average quarter over quarter growth is 13%, in 2020 it was 15%, and in 2019 it was 17%. That all amounts to what is a super obvious and linear deceleration. That doesn’t mean necessarily it will continue, but there is a good chance. Conversely, an acceleration is unlikely, unless something drastically changes with the business. If we continue to see them slide towards 50% YoY growth, which seems likely, I will need to be asking myself why I own them, when their competitor SentinelOne is growing so much faster.

Guidance is for 8.5% growth next quarter, which is on the high end of what they’ve provided lately. The problem is, their revenue beats have pretty consistently been around 4.5%, so I don’t see a whole lot of upside beyond that going into Q4 2021.

Customer growth dipped from its usual 15%-16% QoQ growth down to 12%, and CRWD does not provide us with enterprise customer growth numbers. Module adoption continues to strengthen with 68% of customers having more than 4 modules, up from 61% in teh comparable quarter last year, and 32% of customers having 6 or more modules, up from 22% in the comparable quarter.

I don’t generally focus on tax ramifications, but I have kept some of my Crowdstrike simply to keep my tax bill from rising anymore than it already has. Now that the year is over, look for me to further reduce my CRWD position and add to SentinelOne and Snowflake.

Key quotes from latest earnings call:
This quarter, our win rates increased across the board, and we saw a record number of wins against both legacy and next-gen vendors with SMB, mid-market and large enterprise customers.

Let me share a recent example with one of the largest nonprofit hospital systems in the U.S. which had initially chosen the recently public next-gen vendor [SentinelOne] based on price and promised features that were never delivered. Just a few months into their multiyear contract with the other vendor , this organization realized the product fail to scale, cause major performance issues, prohibited critical processes from functioning properly and drove significant friction within the organization and its subsidiaries. That is when they turned to CrowdStrike, purchased multiple modules in a multimillion dollar ARR deal and realized immediate improvement, gaining up to 30% performance increase on their servers alone and greater efficacy without intrusive false positive.
ExponentialDave: I have been asked by people if statements like the one above make me reluctant to be an investor of SentinelOne. My answer is an emphatic no. I see this as a bit of a sales pitch from George Kurtz, so it’s natural for him to tout a success like this one. I would also bet that SentinelOne could put together a similar pitch regarding a Crowdstrike replacement if they wanted.

On the cloud front, our footprint continues to grow even faster than our overall server endpoint growth with over 25% of the servers we protect now in the public cloud.

During the quarter, we extended Falcon Horizon to support Google Cloud environments now supporting the three largest clouds

We also continued to perform at a high level well in excess of the SaaS industry’s Rule of 40 benchmark, achieving a Rule of 77 and when calculated on a free cash flow basis, a Rule of 96 at scale with over $1.5 billion in ARR.

we signed a large deal with CISA in the quarter, which will make the U.S. federal government one of our top customers.

The geographic mix of third quarter revenue consisted of approximately 73% from the U.S.; 13% from Europe, Middle East and Africa; 10% from the Asia Pacific region; and approximately 4% from other markets.

operating margin improved five percentage points over Q3 of last year to exceed 13%.

free cash flow grew to a new record of $123.5 million or 32% of revenue.

we continue to expect seasonality in net new ARR to be less pronounced relative to prior years as we move from Q3 into Q4, given our steady climb at a much higher scale in recent quarters and outstanding performance throughout this fiscal year.
ExponentialDave: This is their way of telling us not to expect a strong Q4 like we usually see.

let me start with that Q4 is off to a great start. We’ve got the record pipeline, record momentum, and we already landed a notable financial large financial — global financial institution, so off to a great start in Q4. But again, we’re coming off of a record Q3 at $170 million net new ARR super proud of that record and obviously really strong throughout this year. So when you — when we look at comps, obviously, my comments are more to the fact that when we guide and we’re guiding to revenue, we don’t guide to running the tables. We guide to what we know, not to what we don’t know. And so that comment just wanted to put everything into perspective for us. The numbers are getting bigger and bigger, and that’s great for us. But as you know, when you think about the law of large numbers, then you’re going to have — and you don’t guide to running the tables, that’s why I put that comment in there.
ExponentialDave : Just for reference, this is what I was mentioning in the SentinelOne section about George conservatively prepping analysts for tougher comps.

On partnerships: I’m sure I can’t single everyone out, but I think Zscaler is a good example. You look at that partnership, you look at what we’re doing, what they’re doing on the network side, the integrations that we’re able to share data, what we’re doing with — from an XDR perspective, and it makes sense. We’re pulling them into deals. They’re pulling us into deals, and we’re meeting in the field and adding value to the customers and obviously gaining a lot of traction with those customers. And that’s just one example. We’re doing that across the board in our technology alliance partnerships.

if you look at our overall customer count, it’s fantastic, but it’s still small in the grand scheme of customers that are out there. And there’s still a lot of legacy technologies that are out there that are and will be displaced.

Snowflake had an exceptionally strong quarter. Product revenues rose 23% QoQ to $313m, an acceleration from the 19% increase QoQ we saw in Q2 of 2021. Guidance is for the usual 12% QoQ increase in Q4 2021 (the last 3 quarters of guidance have all been for 12%).

Million dollar customers continues to be a bright spot for Snowflake. They now have 148 of them, a 28% increase QoQ. Overall customer growth came in at 9% QoQ, which has been pretty standard for the past 3 quarters now.

And of course DBNER continued with its mild acceleration to 173%, which is considerably higher than any company I follow. It has consistently been extraordinarily high for every quarter that I have data for, going all the way back to Q3 of 2019.

The RPO was the big issue after Q2 of 2021 for many people. My response was to trim but not sell out entirely of Snowflake. The thinking is that, since RPO denotes contracted revenue that has not been “used” yet, it means that Snowflake’s pipeline of future revenue growth was not growing as fast as it did in 2020. Just to be clear, RPO growth came in at 18% QoQ, an acceleration from the 7% QoQ growth we saw in both Q1 and Q2 of 2021. Although 18% is an acceleration, it is still markedly lower than it was in 2020, where it grew at 34% QoQ on average. So it still could be the case that lower RPO growth is a sign that future revenue growth won’t be as strong. However, with yet another quarter of strong revenue growth in the books and normal guidance, it seems increasingly unlikely that Snowflake’s revenues will slow any time soon. For this reason, I re-upped my allocation to Snowflake after its last quarter.

Product non-GAAP gross margins have hit a high of 75%, up from 74% last quarter and 58% a couple of years ago.

Key quotes from the latest conference call:
we recorded our first positive non-GAAP operating income in the company’s history.

the 10 largest consumers in Q3 include four Fortune 500 companies
ExponentialDave: This reinforces the point that a lot of their biggest spenders are not Fortune 500. In this example alone, 60% of their top 10 largest consumers are not fortune 500.

We continued our international expansion with product revenue from EMEA and Asia-Pacific outstripping the company’s year-on-year growth, up 174% and 219% respectively

During the quarter, we announced two industry data clouds. The Financial Services Data Cloud brings together Snowflake platform partner solutions and industry data to help financial services organizations mobilize their data. Customers can launch products, build FinTech platforms, and accelerate their compliance on top of Snowflake. Industry leading customers Allianz, Blackrock, Capital One, New York Stock Exchange, Refinitiv, Square, State Street, and the Western Union are all part of the Financial Services Data Cloud.
ExponentialDave: A key part of the thesis for Snowflake is that data begets more data, which means a few things. Here, I’m specifically referencing the fact that getting companies like Blackrock and the New York Stock Exchange onto Snowflake will ultimately lead even more companies to follow suit.

We launched our Powered By Snowflake program in June to help companies build and promote applications into Data Cloud. Powered By Snowflake is designed to accelerate the delivery of cloud applications on Snowflake.

Snowflakes Data Marketplace grew 41% this quarter now with more than 900 data sets from over 200 providers. We also saw more than 130% annual increase in so-called stable edges. Stable edges are ongoing Snowflake data networking relationships between providers and consumers.
ExponentialDave: The growth of these edges is one reason why data begets more data. More companies will be incentivized to create their own edges, which will create more use cases for other companies.

ZoomInfo is another feature dataset. It provides company and contact data with no additional integration or ETL required.

Net revenue retention expansion is driven by rapid growth among our largest customers and the addition of six customers to the measurement cohort that have gained greater than $1 million of revenue in the past year. In Q3, five of our top 10 customers grew at or above the company’s product revenue growth rate of 110% year-on-year.

Of the $1.8 billion in RPO, we expect approximately 55% to be recognized as revenue in the next 12 months.

On the growth of the partner ecosystem: First, our relationships with our cloud service providers in the field continued to strengthen. This fiscal year-to-date, we have co-sold over a $0.5 billion in total contract value with our cloud service providers. Second, we are seeing significant growth from our Powered By Snowflake program, with a number of registered Power by partners growing 137% quarter-on-quarter and the products revenue from those partners growing 173% year-on-year. Lastly, we are seeing growing engagement within the Data Cloud ecosystem and we will continue to evaluate strategic opportunities to invest through Snowflake ventures.

Our forecast calls for our top customers to continue growing from Q3 to Q4, but not at the same record rate we saw from Q2 to Q3.

So, yes, we are in the very early stages, but as you see from the metrics that we report on, there is a very, very steady aggressive growth happening quarter-on-quarter. But we sort of haven’t reached that tipping point yet where sort of the floodgates are open and things are just expanding at a meteoric rate. But we’re anticipating that that will happen at some point. It’s very non-linear in the way the adoptions is going to develop.

What I would say is it was really driven by some of our largest mature customers with some things that was unique to their business that kind of surprised us on the upside. I don’t think you’re going to see that same repeat of a beat. At least I’m not expecting that. I’m sure you guys would love it, but I just don’t see that happening this quarter. As we said before, a 5% to 7% beat is a big beat for us with our model. So, it was exceptional performance last quarter. I’m actually disappointed we outperform that much to be honest with you.
ExponentialDave: Fin-Twit had a field day with that last part, where Snowflake’s Michael Scarpelli jokes that he’s disappointed that they beat revenue by as much as they did.

The other thing that I would say is that we shouldn’t sort of view things in the historical way that all the money is going to come from Fortune 500 companies, this is absolutely not the case. I mean you’ll be stumped if you look at the number of customers that we — who are not Fortune 500, and how high their revenue contribution is.

Well, if you recall at the end of last quarter, a lot of people picked on our RPO and I said, don’t worry, it’s timing and Q3 was going to have a big quarter of RPO, which we pretty much hit our targets internally as to where we thought it would be. There is timing on as an example, our first $100 million deal we did in 2020, clearly, that customer is not renewing every year because it’s in RPO. We will do some big deals this quarter too, we expect Q4 is going to be a big RPO addition. But at the end of the day, it’s about [more than] RPO and [in] isolation, it’s revenue and it’s more current RPO that is more meaningful.

We think, on average, when we laid out our model, at our Analyst Day last year, that we think we can get to our customers paying us over a million dollars a year, on average, that will be $5.5 million, right now that 148 customers on average is $3.5 million.

Well, our over achievement is partially driven by these large customers. We did see generally across the Board, most of our customers have been exceeding their targets. Yes, there are some that are down that happen every quarter, but there’s a lot more that were above their forecasts. So, it’s hard to say Brent, but yes, I do think we still would have — if I pulled out a couple of those big customers with their growth, we still would have been over 100% growth.

Analyst: But we’ve seen in examples of where customers get sticker shock over time and it becomes kind of bad marketing and difficult for companies to deal with. How do you guys avoid that? How do you sort of ensure that that your customers are seeing value from the solution, but don’t get that sticker shock that the consumption model could bring up?

Frank Slootman: So, business units can decide where they want to run this workload, how often they want to run it, how they want to provision it. So, they’re really in charge. It’s not sort of a runaway utility model, people can selectively decide which workloads they want to run and what is the business case for it and that’s the way it’s supposed to work…

…That really mitigates the sticker shock, people can make investment decisions as they go along…

…what’s really happening in the beginning, people have sticker shock, yes, because that goes from x to 2x to 10x, or whatever it is, that we’re really resetting what is normal and what is appropriate spent for this class of computing

Yes, I’ll also add to is we really stress with customers to take training on how best practices around how to use Snowpark [ph], how to optimize your queries, and we go into our largest customers. And I’ll tell you last quarter, one of our top 10 customers, we saw a big decrease in their consumption, more than what we were forecasting. Why? Because our RSAs went in there and helped optimize that customer.
But you want to what, when we do that, that customer then moves more workloads and we’re seeing this quarter already, they’re tracking ahead of our forecast, because they’re using in a more optimized way and the customer sees the value they’re getting out of Snowflake.

So, I was wondering what do you think is the best forward-looking predictor of revenue? I know, last quarter, there was a focus on RPO, which can move around. So, how much weight do you think we should put on things like RPO or customer ads versus just the pace of net new product revenue in a given quarter?

Michael Scarpelli: I would say the first thing is the guidance we give. The second thing is historical revenue growth patterns coupled with the current portion of RPO to build your models.


From a QoQ revenue growth perspective, Zscaler just had its best quarter ever since Q2 of 2019, with growth of 17% QoQ. This annualizes to 87% YoY revenue growth. That said, guidance was a bit weaker than usual, so it seems especially unwise to try to say that 17% QoQ growth is the new normal. Guidance is for 5% QoQ growth on the high end, and they beat this amount by 7% on average in the last four quarters. With this in mind, I think we can expect next quarter’s sequential growth to come in around 10%-13% QoQ.

Net expansion rate was not formally given for this quarter, but it was mentioned that it was higher than the 128% they reported last quarter. This is not the first time Zscaler has been cagey about this number – I suspect they are unsure of their ability to keep it as high as it is.

Zscaler’s most impressive metric is their YoY increase in million dollar customers, which was 87%, taking them to 224. This is more million dollar customers than any other company I track that provides info on million dollar customers, including Snowflake, Datadog, and Amplitude. It’s worth noting though, that on a QoQ basis, growth was 11%. This points toward deceleration in the amount of million dollar customers should trends hold. Meanwhile, enterprise customer growth (those spending > $100k) rose 9% sequentially or 53% YoY.

Key quotes on latest conference call:
This year, our cloud has blocked more than 20 billion threats hidden in encrypted traffic

Two factors that drove performance: One, we saw continued strength in new and upsell bookings of over $1 million in annual value. We drove 87% year-over-year growth in customers exceeding $1 million in ARR, ending with over 220 of these customers.

Two, the expansion down-market to Enterprise segment, organizations with 2,000 to 6,000 employees, is scaling and it remains our fastest-growing segment.

ExponentialDave: Expansion down market is also what Crowdstrike is doing, and their revenues have been declining. Expansion upmarket is what is doing, meanwhile revenue growth has been accelerating. I’m not saying necessarily that expansion downmarket leads to deceleration, but it is something to consider.

On a big customer win: “ZPA will eliminate their attack surface, hiding their thousands of private applications behind our Zero Trust Exchange, hence they can’t be discovered, exploited or DDoS’d. We are consolidating at least three vendor point products, materially reducing complexity and operating cost. Our integration with CrowdStrike and Microsoft was also an important consideration for them.

Our Zero Trust Exchange is the largest in-line cloud security platform in the world, processing over 200 billion transactions per day, which doubled in the last 18 months, and is preventing more than 7 billion security and policy violations per day. This massive amount of traffic provides us 300 trillion signals per day to feed our machine learning and AI engines, resulting in superior threat protection and better detection of user and application traffic anomalies.

We are seeing increasing average revenue per customer, and we estimate a 6x growth opportunity on upsell with our current customers.

ZPA [Zscaler Private Access] product revenue was 16% of total revenue.

Americas represented 51% of revenue, EMEA was 35% and APJ was 14%. Our investments in APJ are bearing fruit with greater than 100% revenue growth in that region.

Remaining performance obligations, or RPO, were $1.71 billion as of October 31, up 97% from one year ago. The current RPO is 50% of the total RPO.

Our strong customer retention and ability to upsell the broader platform have resulted in a high dollar-based net retention rate, which was above 125% in the quarter and higher than the 128% we reported last quarter. As we have discussed before, this metric will vary quarter-to-quarter and is not a metric we manage our business towards. We focus on growing our net new business without incentivizing differently between new or upsell.

Operating expenses as a percentage of revenue increased by approximately 3 percentage points from 67% a year ago to 70% in the quarter, primarily due to increased hiring

We have decent penetration on the high end, Fortune 500 companies, 35%, Global 2000 were 25%. That means there is a big market still for us to deploy and these, especially high end customers look for a proxy-based architecture and zero trust architecture.
ExponentialDave: Because Zscaler largely charges on a per seat basis (as opposed to Snowflake which charges based on consumption), and the companies with the most potential seats tend to be Fortune 500 and Global 2k, it is especially important that Zscaler still has room to grow in these areas.

As always, thanks for reading this far!

11 thoughts on “December 2021 Portfolio Review

  1. Excellent write up Dave. I very much look forward to these each month as well as the other content that you provide. Great job!

  2. Great write up. Just a small side note, The S&P 500 has returned around 10-11% a year (including dividends). It has returned about 7% a year if you account for inflation.

  3. Great job Dave. I always look forward to your write ups.

    Do you have an excel or Google sheet template you use to track all your companies? I’m struggling to put one together to track the numbers.

  4. Thanks Dave. Fantastic write up and well done on the great performance. Could you please clarify what would you consider to be a “strong annual guide for 2022” for UPST? Thanks

    • Ronnie, really great question. I didn’t include this in the report because it’s sort of hard to nail down what a strong annual guide is. It’s sort of like “I know it when I see it”, and also everything is relative. As in, I think Upstart has to provide “relatively” better guidance than SaaS or SaaS adjacent companies in order to be a viable investment for me. It’s hard to come up with a pretty black and white example, but hypothetically if Snowflake or SentinelOne is guiding for 70% or 80% annual growth, but Upstart guides us to 50% annual growth, that to me is an obviously bad guide. On the other hand, in March of 2021 Upstart guided their 2021 growth to 114% annual growth, which was fantastic guidance. If we get anything like that, expect me to grab up a large Upstart position again. Of course, I’m not expecting a 114% guide, for a lot of reasons I spoke about in my last couple of reports.

      • Awesome thanks for the great answer – it’s clear to me now. With a lot of this stuff I have my own thoughts/calculations, but I tend to have little trust my own thoughts until another investor that I trust (like you or others on Sauls board) have the same view – that’s where your blog serves me well, it helps me to check if you agree with my own thoughts. Thanks again for the great work that you do! and happy new year!

  5. Excellent job Dave. I really enjoy your monthly reports. Thanks so much for sharing your insights.
    Happy New Year.

  6. Hey Dave,

    Thank you for sharing your success and thoughts. I am wandering how you get companies’ news and updates? Are you subscribed to their Investor Relations newsletters, Seeking Alpha or maybe something non-standard…?

    Thank you in advance,

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