News of the Week (May 27 -31)

Salesforce; Cava; SentinelOne; Zscaler; Okta; UiPath; Dell; MongoDB; Meta; Amazon; Nu; PayPal; Draftkings & Flutter; Lululemon; Market Headlines; Portfolio & Transactions

1. Salesforce (CRM) — Earnings Review

Salesforce 101:

Salesforce is the 3rd largest enterprise software firm on the planet. It provides a broad suite of products to help clients optimize customer interactions, sales and marketing. The overarching niche is called Customer Resource Management (CRM). Salesforce offers a variety of cloud services to its customers. There’s a sales cloud, which perfects consumer touch-points. There’s a commerce and marketing cloud to build online storefronts and augment promotional activity. There’s a service cloud to handle customer issues and inquiries. There’s also a platform cloud, which includes Slack.

Most recently, it debuted its data cloud. This is an aggregated analysts service to ingest, organize & glean insight from 1st party data. It conjoins siloed data and “unlocks” previously disparate sources for client value creation. It’s similar to what Snowflake does, but more for managing customer relationships. MuleSoft and Tableau are both key pieces of this data cloud. MuleSoft integrates apps and data to enable management of these products within Salesforce. Tableau is a data visualization tool to create automated progress reports and suggestions to leverage findings. Finally, it offers industry-specific clouds for sectors like healthcare. These are customized to meet specific regulatory and operational needs. All of these clouds and products make up the firm’s subscription & support revenue, which represents 93% of its total business. Professional services make up the rest.

Separately, Salesforce offers a product called Einstein One. This is a full set of AI tools, including outcome prediction, chat bots, image recognition, sentiment analytics and more. It’s considered a general-purpose AI platform infused into all Salesforce products. Most recently, through an OpenAI partnership, it debuted Einstein GPT. Einstein existed before the GenAI wave, but is now getting an upgrade thanks to it. Einstein GPT allows Salesforce clients to plug into language models (including OpenAI, Anthropic and Cohere) to make workflows more productive, intuitive, conversational and automated. It features a low code tool set to reduce the barrier for non-experts to build applications; it also boasts expert-level tools to build more complex apps. That’s Salesforce in a nutshell.  Now, the quarterly results.

The next three sections consist of detailed Salesforce, Cava and SentinelOne Earnings Reviews. Upgrade below to read:

4. Earnings Round-up – Zscaler (ZS); Okta (OKTA); UiPath (PATH); Dell (DELL); MongoDB (MDB)

Plus/Max subs can expect a full review of Zscaler’s report & MongoDB’s report at some point early next week along with coverage of Uber, Airbnb and Mastercard investor conferences. I simply ran out of hours in the day to thoughtfully review these two prints. Zscaler looked excellent; MongoDB’s guide was underwhelming. Stay tuned for a lot more detail in the near future. 

a. Zscaler (ZS)

Results:

  • Beat revenue estimates by 3.2% & beat guidance by 3.4%. Its 46.3% 3-year revenue compounded annual growth rate (CAGR) compares to 49.5% Q/Q & 51.6% 2 quarters ago.

  • Beat EBIT estimates by 22% & beat guidance by 23%.

  • Beat $0.65 EPS estimates & beat identical guidance by $0.23 each.

  • Beat FCF estimate by 58%.

Fourth Quarter Guidance & Valuation:

  • Slightly beat Q4 revenue estimates.

  • Beat Q4 EBIT estimates by 1.4%.

  • Beat $0.67 EPS estimates by $0.02.

Zscaler trades for 56x this fiscal year’s earnings with earnings expected to grow by 70% Y/Y this year and 8% Y/Y next year.

Balance Sheet:

  • $2.25B in cash & equivalents.

  • $1.14B in senior notes. 

  • No traditional debt.

  • Diluted share count rose 6% Y/Y; basic share count rose by 3.4% Y/Y.

b. Okta (OKTA)

Results:

  • Beat revenue estimates by 2.1% & beat guidance by 2.2%. Its 35.0% 3-year revenue CAGR compares to 37.1% Q/Q & 40.6% 2 quarters ago.

  • Beat cRPO growth guide by 1.7%.

  • Beat FCF guide by 42%.

  • Beat EBIT estimate by 21.3% & beat guide by 22.0%.

  • Beat $0.55 EPS estimate & beat identical guidance by $0.10 each.

Annual Guidance & Valuation:

  • Raised revenue guide by 1.4%, which beat by 1.1%.

  • Raised EBIT guide by 7.6%, which beat by 6.9%.

  • Raised FCF guide by 6.3%, which beat by 6.0%.

  • Raised $2.27 EPS guide by $0.10, which beat by $0.11.

Trades for 39x forward earnings. Earnings are expected to grow by 50% Y/Y this year & 19% Y/Y next year.

Balance Sheet:

  • $2.3B in cash & equivalents.

  • $1.2B in convertible notes; no debt.

  • Share count +3.8% Y/Y.

c. UiPath (PATH)

Results:

  • Beat revenue estimate by 0.6% & beat guide by 0.8%.

  • Slightly missed ARR guidance.

  • Missed EBIT estimate & missed same guide by 8.4% each.

  • Beat 85.5% GPM estimate by 50 bps.

  • The company’s old founder/CEO is stepping back in to replace the current CEO.

  • 118% dollar-based net revenue retention vs. 119% Q/Q & 122% Y/Y.

Annual Guidance:

  • Lowered annual revenue guide by 5.3%, which missed by 5.3%.

  • Lowered annual ARR guide by 3.8%.

  • Cut annual $245 million EBIT guide in half, which sharply missed estimates.

Trades for ~40x EPS with -32% Y/Y EPS growth expected & 25% Y/Y EPS growth next year expected.

Balance Sheet:

  • ~$2B in cash & equivalents.

  • No debt.

  • Share count rose by 2.1% Y/Y.

d. Dell (DELL)

Results:

  • Beat revenue estimates by 2.5% & beat guide by 2.5%.

  • Beat $1.29 EPS estimate by $0.03 & beat lower guidance by $0.17.

  • Slightly missed EBIT estimates; missed 22.8% GPM estimate by 120 bps.

Annual Guidance & Valuation:

  • Raised $93 billion annual revenue guide by 2.7%, which beat estimates by 1.1%.

  • Raised $7.50 annual EPS guide by $0.15, which missed by $0.19. There was some concern from analysts about rapid AI server growth not leading to any EBIT growth at all. The Dell team called deals for these servers “competitive.”

Balance Sheet:

  • $5.8B in cash; $4.7B in short term financing receivables.

  • $1.3B in long term investments.

  • $25.5B in total debt. 

  • Stock comp fell Y/Y to less than 1% of revenue.

e. MongoDB (MDB)

Results:

  • Beat revenue estimate by 2.4% & beat guide by 2.9%. 25.7% 2-year revenue CAGR vs. 38.1% Q/Q and 46% 2 quarters ago.

  • Beat $25M EBIT estimate by $8M & Beat guide by $9M.

  • Beat $0.37 EPS estimate & beat same guide by $0.14 each.

  • Beat FCF estimate by 74%.

Annual Guidance & Valuation:

  • Lowered annual revenue guide by 1.3%, which missed by 2.6%.

  • Lowered annual EBIT guide by 9.3%, which missed by 11.7%.

  • Lowered $2.38 EPS guide by $0.16, which missed by $0.21.

  • Next Q missed across the board.

Balance Sheet:

  • $2.1B in cash & equivalents.

  • $1.14B in senior notes.

  • Diluted share count rose by 4% Y/Y.

The next sections include news & insight on Meta, Amazon Prime, PayPal Ads and Nu product expansion.

9. DraftKings (DKNG) and Flutter (FanDuel; FLUT) – Illinois

The Illinois state government passed a new progressive sports gambling tax as part of its budget. The bill changes the flat 15% tax rate to a progressive tax rate of up to 40%. Vendors will pay 20% on revenue up to $30 million, 25% from $30-$50 million, 30% from $50-$100 million, 35% from $100-$200 million and 40% thereafter.

That is not ideal for large players like DraftKings and Flutter, which are the dominant market share holders in that state and all others. While high tax rates in states like New York are tough to navigate, that rate is flat, which benefits the big boys over everyone else. Inefficiency makes a tough industry even tougher to compete in and leads to weaker players fading away. Illinois legislation penalizes the big boys for their success. So what does this mean for these larger players and potential legislation across other states?

11. Market Headlines, Sell-Side Notes & Macro