If you want to see Knox’s recent thoughts on the market, please click here. He wrote out a long explanation on the forum as to what he’s seeing and correlates this to inter-market analysis, including money flow, breadth and sector rotations.
Below, I discuss TWLO, DDOG, MGNI and ROKU. We review what was pertinent from the earnings reports. Our thesis has not changed on these 4 companies.
Also, I have a LTBH webinar planned for next Monday to go over the IDFA changes from Apple with a highlight on Magnite and also Roku. We will briefly touch base on all ad-tech stocks we own and IDFA but this is mainly a CTV ads webinar from the product perspective. I’ll send instructions on the LTBH webinar mid-week.
Last but not least, if you have not transitioned over to the new website io-fund.com, please do so soon. You will need to set a new password. The Beth.Technology password will not work on the new site. You must also use the same email address you signed up with. We are redirecting the URLs on Beth.Technology this week in anticipation of our forum launching next week. Our old site will be archived and new content will not be published starting 5/13. Thank you! J
Twilio:
We recently had our second LTBH webinar on Twilio. I thought it was important to highlight this company for the important pivot taking place. In the webinar, we stressed the first-party customer data platform and why this was an important strategic approach for a company that has PII from phone numbers in its core product and PII from emails from the SendGrid acquisition. The vehicle to maximize Twilio’s position is Segment, and the company is showing us very clearly the future for by separating R&D into three departments and placing the former CEO of Segment in charge of two of those departments.
The earnings call also communicated the importance of Segment with management stating two-thirds of their sales calls centered around this product. There was an analyst on the call who nearly verbatim discussed what we talked about on our webinar. I find management’s response encouraging as to the accuracy of our thesis (and, I guess good to know that Alex Zukin shares in this exact thesis).
Alex ZukinAlex Zukin
That makes perfect sense. And then another again kind of big picture question, if you think about the rise of IDFA, the demise of – potential demise of third party cookies, it's our thesis that we're entering the world where the notion of CDP for first-party data is going to rapidly accelerate in strategic performance.
You guys mentioned – I think George you mentioned that Segment is now in two thirds or was in two thirds of your customer conversations. I guess a couple of angles around this question. Is this something – is this future world something you contemplated when making that acquisition? Are you, you know just now reaping even greater amount of strategic benefit? Just talk to us about how you think about segments in this new world, both integrated with the rest of your solutions as part of the platform, but also on a stand-alone basis with respect to Strategic impact to all these things.
Jeff LawsonJeff Lawson
This is Jeff. I'll answer, unless George, you want to?
George HuGeorge Hu
Go ahead, Jeff. I'll chime in.
Jeff LawsonJeff Lawson
Well, I'll give my point of view and I'll let George give his point of view. You know collaboration is the answer and is harder in this virtual world.
My point of view is yes, you know we did think about the importance of first party data and how every company is having to become great digital marketers and great digital executors, and you can't necessarily rely on some of the, let's say, sloppier ways of acquiring and re-engaging your customers when you've got a lot of third party data floating around that. So we did believe – we do believe that the CDP market in and of itself as a standalone becomes ever more important to companies, not just because of the plurality of systems you have to figure out how to make sense of, but also because outside their walls it's getting more complex to actually target and reach your own customers.So it becomes even more important that once you meet a customer, so there's your marketing and they buy something or whatever it is, you do a really good job of continually engaging them, because going back out to kind of reacquire that customer is getting harder and harder and harder. And so companies have to treat their existing customers incredibly well, and those relationships are getting even more valuable. And then you add in all the value of – and then integrating that and creating that journey that's going to achieve that using Twilio's customer engagement cloud, that is the next level of benefit on top of the core CDP.
Twilio grew revenue 62% year-over-year for $590 million and guided for $596 million next quarter, or 49% year-over-year at the midpoint. This represents a 4% raise above consensus estimates of $579 million, according to FactSet.
Adjusted EPS came in at $0.05, or $0.15 ahead of estimates. Active customer accounts totaled 235,000 at the end of the Q1 compared to 190,000 in 2020, representing 24% growth YoY. Dollar-based net expansion rate came in at 133% for the quarter compared to an organic DBNER of 135% in Q1 of 2020. Gross margins were 55% for the quarter and the company recorded a -2% free cash flow margin.
The blemish on the report was Twilio’s forward EPS as the company guided for adjusted losses of $0.14 per share compared to analyst expectations of adjusted losses of 4 cents per share. We posted on the forum that this does not concern us as the company had planned investments that did not materialize in 2020 due to Covid. These investments are focused on enterprise sales, flex and new growth products, plus core systems and infrastructure. Twilio management expects these investments to generate losses in the short term, but in the long term it will allow the company to grow at elevated levels.
Additional Research:
Datadog:
Datadog allows us exposure to the market that AWS, Azure and Google Cloud participates in but with a pureplay. If the tech giants are communicating that cloud infrastructure-as-a-service is one of the most critical markets in the future, then who are we to argue with this by not investing in the leader across cloud monitoring products?
The company capitalizes on the trend that vendor-specific is becoming unpopular due to issues that vendor lock-in creates. On the flip side, the company competes with open-source options, such as OpenTelemetry.
Here is what the company stated as to why customers choose Datadog in light of many competitors: “We lean into open-source format and libraries to instrument obligations for a very long time. And we support a large number of them. The way we see the problem is not like what matters is not with technology we use to get from here to there. What matters is to solve the end-to-end problem for our customers. And to make it as easy as possible for them to just plug us in and everything just work everything to show that we don’t get our mess, a gigantic mess with all these different technologies and applications and clouds, everything else. We turn that into something that the understanding is well ordered, without any effort.”What matters is to solve the end-to-end problem for our customers. And to make it as easy as possible for them to just plug us in and everything just work everything to show that we don’t get our mess, a gigantic mess with all these different technologies and applications and clouds, everything else. We turn that into something that the understanding is well ordered, without any effort.”
Datadog deserves an updated LTBH report as the product has evolved since we last covered the company with the acquisition of Sqreen. Keep an eye out for this after we get through cloud earnings.
I had said on a Motley Fool podcast in February that we faced a unique environment for cloud stocks this year with a tight pack of cloud stocks guiding between 20-30% and then another tight pack guiding between 30-40% on forward growth. Only Snowflake and Kingsoft Cloud were guiding higher than 50%. We provided a chart here. This is unusual as cloud guidance usually tells us our leaders in advance. Tougher comps from last year require cloud companies to show endurance and prove that any growth last year was not a pull forward from the one-time event of Covid.
You can view my explanation of cloud valuations going into 2021 here at minute 2:15 – YouTube linkYouTube link
What we want to see are cloud companies breaking through the ceiling of 40% growth. That is exactly what Datadog did this quarter and also provided >40% guidance for next quarter and full-year guidance, as well.
Notably, the tone on the earnings call was that their guidance is conservative in light of many unknowns. I can’t guarantee this but I’m hoping to see Datadog come in above guidance in the future, per comments like this: “Now, some notes on our guidance, while usage growth was strong in Q1, when providing guidance as usual, we use more conservative assumptions.”, we use more conservative assumptions.”
The company grew revenue 51% YoY to $198.5M, representing a 6% beat above consensus estimates. Management attributed the revenue beat in Q1 to stronger than expected usage growth from existing customers. On the bottom line, EPS came in at $0.06, topping consensus estimates by $0.03. The company logged a record EBITDA total of $24M in the quarter and free cash flow of $44M (22% FCF Margin).
Customers with $100K+ ARR totaled 1,437 at the end of Q1, representing growth of 50% YoY. These customers generate over 75% of Datadog’s ARR.
Additionally, Datadog announced that 75% of its customers are using two or more products at the end of Q1. This is up from 63% in Q1 of 2020.
For Q2, Datadog guided for $212M of revenue, or 51% year-over-year at the midpoint, beating the consensus estimate by 8%. The company is expecting $0.03 of EPS and $10M of operating income in Q2.
For the FY21, DDOG raised revenue guidance to $885M, or 47% year-over-year at the midpoint, and 6% above consensus estimates. The company is expecting EPS of $0.15 and operating income of $50M for the full year.
I touch on Datadog here around minute 53:00 – click here for YouTube link
Additional Research:
Datadog Premium Research
H1 2021 Cloud Software Update
Magnite:
We laid out our thoughts here on Magnite and our conviction and thesis remains the same. We go over why Magnite’s Q1 report came in weaker than expected and why we aren’t concerned as management has provided enough statements Q2’s guidance being stronger than expected. We take short-term misses as long as guidance remains strong and the story is intact.
Per my post on the forum, I do believe some of the weakness we saw in ad-tech today is due to IDFA changes from the April 30th iOS update. There was a report from Flurry, as reported by Mashable, over the weekend that stated “only 4 percent of iOS users in the United States let apps track them.” Here’s the full post from Flurry. I believe this partly caused the weakness today in TTD, MGNI, Unity plus other ad-tech companies as there is a lot of confusion in regards to IDFA.
On one hand, we have companies like Unity saying it’ll impact low single digits for their revenue, and on the other hand we see sensational comments from mobile analysts that this is an Apocalypse and “Book of Revelation” stuff
I’ve been covering the IDFA specifically since October of 2019 after attending Advertising Week and I followed up again in 2020 with free version here. I also covered Facebook’s tracking behaviors in-depth for public investors around Q1 2018, when I criticized the company for not talking about Audience Network in their earnings calls (the IDFA threatens Facebook’s Audience Network the most).
As the lead technology analyst at the I/O Fund, I made sure my readers were up to speed on the IDFA, such as the July 2020 Update and also here when I first covered Magnite.
With that said, I don’t think information is easily accessible to public investors on this topic, and meanwhile, iOS 14.5 rolled out at the end of April. Therefore, seeing the reaction to Magnite and The Trade Desk today, Citi’s downgrade, and Flurry’s report, I think it makes sense to have our next LTBH webinar on the IDFA this Monday with a primary focus on Magnite and Roku but we will touch on other ad-tech stocks we own too (Unity, Snap, Pinterest, etcetera).
The summary of my thoughts can be found in the links above if you want the information before Monday. Similar to the tide of all boats, I believe we will see the supply side come out better than the demand side – but that’s my personal opinion and the way that we’ve structured I/O Fund with our positions. I’ll present the information from a product perspective and you can make your own conclusions when we review this on Monday.
Although I don’t think it will be Apocalypse, I do believe it will affect the ad industry enough that we should do the next LTBH webinar on this topic. We will dive deeper into Magnite and Roku, as well.
Magnite’s Earnings:
I had said that Magnite is not the “shiniest company to analyze if you’re a financial analyst” and this earnings report validated that statement. There have been two acquisitions and a major rebranding, so what we really have is really three companies reporting earnings: Telaria, Rubicon and SpotX.
Magnite reported revenue growth of 67%, up 18% on a pro-forma basis. CTV revenue was up 32% on a pro-forma basis or $12 million. Compare this to last quarter’s report which was 69% revenue growth, up 20% on a pro-forma basis, with CTV revenue up 53% on a pro-forma basis, or $15.4 million. Therefore, Q1 was meaningfully weaker than Q4 on CTV (more on this below).
The company was profitable on an adjusted basis at $0.03 EPS compared to a loss of $0.06 EPS in the year-ago quarter.
SpotX results showed considerable strength on CTV with overall revenue excluding traffic acquisition costs of $31.2 million. CTV revenue was at $19.7 million, up 70% year-over-year.
Management is guiding for revenue of $94 million with CTV revenue of $32 million, at the midpoint. This represents 90% growth if the company had closed the acquisition on SpotX on April 1st rather than April 30th. The company raised its long-term revenue targets from 20% to 25% and had raised long-term adjusted EBITDA targets to 30% to 35% in the last quarter.
This comment here provides color for the weaker-than-expected CTV revenue:
Yes, so I think, March was a bit of a disappointment for us at Magnite. I think if you look at the combined company going forward, you're just going to have a greater line of CTV products that each kind of address a different sliver of the marketplace. We talked a bit about the SpotX managed service business, which was able to extract linear dollars into CTV capability that we did not build out at Magnite, but saw as something incredibly attractive in its products, along with a few other products. But as we said, severe acceleration in Q2 for Magnite's business, and if you look at the two combined, you're 90% plus growth range for Q2. So, so all is well there.which was able to extract linear dollars into CTV capability that we did not build out at Magnite, but saw as something incredibly attractive in its products, along with a few other products. But as we said, severe acceleration in Q2 for Magnite's business, and if you look at the two combined, you're 90% plus growth range for Q2. So, so all is well there.
Another analyst also asked about March, which management provided this answer:
Suffice to say, Magnite is growing in terms of — its back to where we always thought it would be and then some. So, I think that this isn't a case of — in q2, particularly SpotX coming in and saving the show, if you will, I think both are growing exceptionally well. And any kind of slowdown that we witness in Magnite in March has been more than made up for, but David, do you have any more color to bring to that?its back to where we always thought it would be and then some. So, I think that this isn't a case of — in q2, particularly SpotX coming in and saving the show, if you will, I think both are growing exceptionally well. And any kind of slowdown that we witness in Magnite in March has been more than made up for, but David, do you have any more color to bring to that?
And there was yet another question about the weaker guidance in March. Management stressed how early in the cycle the Connected TV market is and how some inventory is still being sold direct versus programmatic.
So, I think that there's in any kind of nascent marketplace and CTV is certainly nascent … I would say that Q2 is behaving what in excess of what we would have thought going into it, and that Q1 was strong going in, and then had a weaker March. And, again, probably a handful of reasons there, but nothing systemic or anything that takes the bloom off the rose in terms of our position in CTV or the attractiveness of that marketplace.
As I said, we are comfortable with short-term misses as long as the story is intact and guidance remains strong. There was also more to the earnings call in terms of IDFA, which we will unpack during the upcoming webinar on Monday.
Roku:
I’ve written a library of research about this company from very early-on. If you want more information as to how we arrived here, I encourage you to read my analysis as it dates back to a time when the market doubted Roku and we withstood two 60% drawdowns.
On that note, Roku is the perfect example of how long it takes for a trend to play out. While many investors are conditioned for instant gratification following last year, we know that tech trends are a 3-5 year exit or longer. In the meantime, our job is to make sure a company is consistently reporting along the thesis we’ve laid out.
Here’s what I want to emphasize: the 3-5 year investment period for Roku begins this year. If someone were to learn about Roku for the first time today, I’d say they’re right on time. In fact, there is less risk now as Roku is a mature and consistent performer. As an analyst, I’m on cruise control with this stock as it’s been performing as we laid out nearly three years ago.
Rarely, do we get a full-stack opportunity that is centered in the middle of a future trend. It’s my belief that Apple’s IDFA deprecation will positively impact Roku – and I hope a few others we have picked out too.
That’s what my library of research answered through the past few years. We will touch on this in the upcoming webinar, as well. The simple answer is Roku delivers the targeting capabilities of mobile with the completion rates of Pay TV. This was outlined in May of 2018.
“For example, according to Nielsen in March, ratings, linear TV ratings for adults 18 to 24 was down 22%. Q1 TV ad spending was down 11% and according to Media Radar. Meanwhile, we doubled, monetized video ad impressions on the platform, ad spending by major agency holding companies with Roku more than doubled. We saw strength really up and down the ad business.”linear TV ratings for adults 18 to 24 was down 22%. Q1 TV ad spending was down 11% and according to Media Radar. Meanwhile, we doubled, monetized video ad impressions on the platform, ad spending by major agency holding companies with Roku more than doubled. We saw strength really up and down the ad business.”
Since my coverage began, Roku has become an even bigger force in the Connected TV ad space. OneView is Roku’s move into the demand side while The Roku Channel provides original content to optimize ad formats.
This sums up some of Roku’s strength competitively speaking:
I will say that the use of OneView to buy media on Roku, whether that's media we're selling, for example, a video ad that runs in The Roku Channel or an ad bought from a publisher on Roku through one year. That segment is growing even faster because, of course, we have data and identity and optimization capabilities to help them do that better than were they to buy through a third-party DSP.we have data and identity and optimization capabilities to help them do that better than were they to buy through a third-party DSP.
And also here …
“The second part of your question was about volume and CPMs. Our product remains a premium product. If anything, we've added, better data, better targeting, better measurement, newer ad products over time. And I think that, that bodes well for continuing to be able to command premium CPMs, but I will also call out to the earlier question from Ralph that streaming is increasingly also a performance media.”we've added, better data, better targeting, better measurement, newer ad products over time. And I think that, that bodes well for continuing to be able to command premium CPMs, but I will also call out to the earlier question from Ralph that streaming is increasingly also a performance media.”
Roku also recently acquired Nielsen’s advanced video advertising business and is expected to close in Q2 2021. The automatic content recognition and dynamic ad insertion will help Roku show different ads to different households based on Nielsen data.
We’ve written quite a bit on Roku and I hesitate to spend more time on the company when we have other stocks we are forming a thesis on and/or need a reiteration of our conviction. However, that should not be confused for lack of conviction by any means as Roku has received my highest conviction for some time and continues to.
Here’s a clip we created of me explaining Roku in October of last year – view on YouTube here.
Roku and The Trade Desk: 2019 Analysis
Roku Update & What’s Next in June
Disney+ Killing it on the App Store – Roku Downstream
Check-in: ROKU, TTD, BABA, UBER, TLRA, and upcoming 5G – Nov 6th
Checking in on Tech Trends and My Current Convictions – January 2020
The Crucial Difference Between Roku and Netflix
Q4 Earnings Analysis for Shopify, Roku, Fiverr And Palantir
On Earnings …
Roku delivered excellent Q1 results on May 6th led by strong growth in advertising and the expansion of content distribution partnerships. Total revenue grew 79% YoY to $574.2M, representing a 17% beat above consensus estimates.
The growth was led by platform revenue, which increased 101% YoY to $466.5M. Gross profit rose 132% YoY to $326.8M while operating income came in at $75.8M after negative operating income $55.2M in the year-ago quarter.
Roku also announced positive EBITDA of $125.9M in Q1 from a loss of $16.3M in the year-ago quarter. Roku added 2.4M active accounts in Q1 to reach 53.6M in total, representing 35% growth YoY.
Streaming Hours increased 49% YoY to 18.3 billion, while average revenue per user (ARPU) grew 32% YoY to $32.14.
For Q2, Roku management is guiding for $615M of revenue at the midpoint (73% YoY growth), representing a 13% raise above consensus estimates. The company is also guiding for total gross profit to rise 104% YoY to $300M and EBITDA of $65M after recording negative EBITDA of $3M in Q2 ’20.