Zoom and CrowdStrike hang onto 2020 gains despite huge earnings expectations

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

Yesterday after the bell, Zoom and CrowdStrike reported earnings. The two technology shops, members of the SaaS cohort of public companies that has performed so well this year, had high expectations to meet.

This column noted on Monday that both companies could help set market sentiment regarding SaaS valuations at firms thought to enjoy a strong updraft from COVID-19 and its related market disruptions; working from home means that many companies needed new, better video conferencing abilities and more security tooling, the two things that Zoom and CrowdStrike provide.

If the pair failed to detail strong recent performance, their share prices, long rising, could have dramatically corrected.

But, in a huge boon to public SaaS companies — and, therefore, late-stage private SaaS valuations and early-stage SaaS investment — Zoom and CrowdStrike reported impressive financial gains. Notably in the case of Zoom, the improved results were sufficiently priced in that the company’s share price didn’t rise much after this disclosure, but defending huge gains was still a difficult feat.

CrowdStrike shares did rise after it reported its results.

On the heels of one of the sharpest rallies in SaaS history, let’s dig into how quickly the two firms grew and see what their new valuations and revenue multiples tell us about investor sentiment. If you are in a hurry, the short answer is that the risk-on move towards SaaS stocks doesn’t look like its about to abate. For those bullish on software companies, it’s a good week.

Great expectations

Let’s talk numbers first. Here’s how things shook out:

Ahead of its 2015 debut, Atlassian’s IPO deck detailed a financial rocketship

TechCrunch recently dug into Atlassian’s IPO deck, detailing how the company prepped the document and took it on the road. It’s worth your time. Read it.

It’s always interesting to dig into a company’s IPO documents and decks after they’ve debuted, as with the benefit of passed time we can learn quite a lot. This is especially true in the case of Atlassian, a company that has seen its share price multiply since its 2015 public offering; outliers are always more interesting than pedestrian results, and Atlassian’s IPO-era materials are fascinating.

In this companion post we continue our dive into the firm’s IPO deck, this time parsing the document from a financial perspective. Ron got the first-person story and the context; here we’ll dig into the company’s reported financial results, with a focus on how well-prepared to grow and profit the firm appeared at the time of its public offering.

To keep this entry from skating into long-read territory, we’ll focus on three financial elements of the firm’s deck that stood out as TechCrunch reviewed it: The company’s history of efficient growth, its customer loyalty and its intriguing cost structure. Each facet is related to the others, but our three themes will help us understand why Atlassian has managed the valuation appreciation that it has since going public.

You could see its later success at the time of its IPO, if you knew where to look.

Broad strokes

Before we dig into the specifics, let’s ground ourselves.

Atlassian’s deck detailed a quickly growing software business. In its fiscal 2013, the company generated $149 million in revenue. That figure rose to $215 million in 2014, and fiscal year 2015 saw a total of $320 million in revenue.

This revenue growth was built on the back of customer growth; Atlassian noted in its deck that between its fiscal 2010 and fiscal 2015, it grew its customer base on a 34% compounding annual growth rate. Not bad.

So, we’re examining different parts of a high-growth software business. With that, let’s get specific.

Efficient growth

Remote work helps Zoom grow 169% in one year, posting $328.2M in Q1 revenue

Today after the bell, video-chat service Zoom reported its Q1 earnings. The company disclosed that it generated $328.2 million in revenue, up 169% compared to the year-ago period. The company also reported $0.20 per-share in adjusted profit during the three-month period.

Analysts, as averaged by Yahoo Finance, expected Zoom to report $202.48 million in revenue, and a per-share profit of $0.09. After its earnings smash, shares of Zoom were up slightly Update: Zoom shares are now up 2.3% ahead of its earnings call; investors had priced in this outsized-performance, it seems.

Zoom grew 78% in its preceding quarter on an annualized basis. The company’s growth acceleration is notable.

Investors were expecting big gains. Before its earnings, shares in the popular business-to-business service were up by more than 3x during the year; Zoom has found itself in an updraft due in part to COVID-19 driving workers and others to stay home and work remotely. Zoom’s software has also seen large purchase amongst consumers hungry for a video chatting solution that was simple and that works.

If the company could sustain its valuation gains going into this earnings report was an open question that has now been answered.

Gains

Zoom’s growth in its Q1 fiscal 2021 generated some notable profit results for the firm. The firm’s net income, an unadjusted profit metric, rose from $0.2 million in the year-ago quarter to $27.0 million in its most recent three months.

And Zoom’s cash generation was astounding. Here’s how the company described its results:

Net cash provided by operating activities was $259.0 million for the quarter, compared to $22.2 million in the first quarter of fiscal year 2020. Free cash flow was $251.7 million, compared to $15.3 million in the first quarter of fiscal year 2020.

It’s difficult to recall another company that has managed such growth in cash generation in such a short period of time, driven mostly by operations and not other financial acts. Zoom’s customer numbers were similarly sharp, with the firm reporting that it had 265,400 customers with more than 10 seats (employees) at the end of the quarter, which was up 354% from the year-ago period.

Though not all news for Zoom was good. Indeed, the company’s gross margin fell sharply in the quarter, compared to its year-ago result. In is Q1 fiscal 2020, Zoom reported a gross margin of around 80%. In its most recent quarter that number slipped to around 68%. In short, the company managed to convert many free users to paying customers, but still had to carry the costs of free usage of its product, something that has exploded in recent months.

Looking ahead, Zoom expects the current quarter to be another blockbuster period. The company noted in its release that it expects “between $495.0 million and $500.0 million” in revenue for Q2 of its fiscal 2021 (the current period). Looking ahead for the full fiscal year, Zoom anticipates revenues “between $1.775 billion and $1.800 billion,” numbers that take into account “the demand for remote work solutions for businesses” and “increased churn in the second half of the fiscal year” when some customers might no longer need Zoom if they can return to their offices.

Its shares might have priced in these results, but the numbers themselves are simply massive. Just three months ago Zoom turned in revenues of just $188.3 million. That’s less than it generated in free cash flow during its next three months.

Zoom’s earnings to test hot tech valuations

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

This week will see two richly-valued SaaS business share their Q1 earnings reports: CrowdStrike and Zoom. Both are 2019 IPOs, but these relatively young public companies have enjoyed a strong run in the public markets this year.

Zoom started off 2020 worth around $69 per share; today it is worth $179.48 ahead of the start of today’s trading. CrowdStrike started the year at a little over $49 per share; today it’s worth $87.81 per share. The business-focused, but consumer-friendly video chat service Zoom and the cybersecurity-focused CrowdStrike are perfect examples of the updraft that SaaS businesses have rode this year.

With both firms reporting earnings at the same time, we’ll get notes on the work-from-home trend, and how it is impacting services that help make remote-work possible; and, CrowdStrike’s earnings will inform us on how the cybersecurity space is performing — are businesses shelling out more than expected to keep their networks and employees safe when so many are out of the office?

If Zoom and CrowdStrike report results that disappoint investors, they could do more than just deflate their own shares. Missed earnings reports from either could puncture SaaS valuations more broadly, perhaps impacting private valuations for companies that are in the market for new capital. Why?

Prominence and timing.

Earnings expectations

What the hell, SaaS valuations?

SaaS stocks are at it again, and I think I’ve got it figured it out.

More precisely I think I’ve figured out what other people think is going on. After rigorous fact-checking by both reading tweets, making VCs talk to me on the phone, and chatting with the CEO of a $27 billion cloud company this morning, it all makes sense.

Some background to start, I think.

Today, Friday the 21st of May, the day after the economy shed another 2.4 million jobs, bringing the COVID-19 jobs-lost tally to nearly 40 million, SaaS and cloud stocks reached yet another all-time high, as measured by the Bessemer cloud index.

That particular basket of stocks is the best thing we have to understand how public investors are valuing SaaS companies at any given moment. And as I’ve made you read ad nauseam, public SaaS valuations impact private SaaS valuations; the mechanism is a little slow, as Bessemer’s Mary D’Onofrio explained here, but when SaaS stocks surge or fall, startup SaaS valuations move as well.

Another record today after several preceding records this week seems odd, given the world. Sure, the stock market is largely recovered from its March-era, COVID-19-driven lows, but successive new records are more gauche than merely working to get back to flat, as other public equity cohorts have generally managed (not all, mind).

That we’re at a record is more than my idea, or Bessemer’s — Meritech Capital wrote earlier this week that “we are now sitting at the all-time peak of public SaaS valuations in the midst of a global pandemic.” But don’t think that these valuations predicated on companies promising more growth. As the same Meritech report states: “Generally speaking, the outlooks of these businesses haven’t changed that much since February, except for Q1 earnings where, in almost all cases, management waved a yellow caution flag to investors and withdrew or lowered guidance.”

Wild, right?

There are some warning signs that growth is going to slow, as Redpoint’s Jamin Ball noted on Twitter:

But who cares! Not the markets. It’s time for some new fucking records, y’all.

Let’s talk about why this is all happening.

The Hybrid Theory Of COVID-19 Era SaaS Valuations

This is my third post in what I suppose is now a series on this stuff (more here and here), so we’re largely building on prior foundations while adding a little.

Here’s the argument in a multi-bullet nutshell:

  • Investors want to buy into growth, and while many companies are struggling to grow at all, digital whatnot is still performing reasonably well, so capital is flowing from other equities into the shares of digital companies, many of which are SaaS companies. This trend is accelerated by:
  • ZIRP, or the era of free money. After a hot second of rising rates (quickly brow-beaten by POTUS and then whacked by an economy in free fall), money once again costs nothing and thus yields are hot garbage. This has led investors to look for any place to stuff their lucre that might provide some sort of return. So, capital is moving away from safer stuff (boo, safety!) and is instead flowing where some return might be found. Like SaaS.
  • The above two (rather related) points are made a little bit more reasonable by the fact that the digital transformation that CEOs and CTOs and every webinar you’ve ever been invited to is now going at warp speed. Like, no shit, it’s a real thing, not just something that Levie tweets about when his engagement numbers dip. That acceleration is making investors very excited about what might come later. So SaaS stocks go up.

This morning I spent 30 minutes yammering with Splunk’s CEO Doug Merritt. It went pretty well. After digging through his company’s earnings report (SaaS transformation continues, some revenue recognition headwinds, lots of cash, good ARR growth, and the company spends heavily spreading stock around to all its workers, which I dig) I asked him about whether the digital transformation stuff that he mentioned in Splunk’s earnings letter is actually making stuff move to the cloud faster, and thus boosting SaaS stocks.

He assented.

So, what’s powering the SaaS rally, stretching valuations to comical levels — recall that we’re always valuing SaaS and cloud companies on revenue, and not profit multiples, so they’re always graded on a comfortable curve — is two parts greed (capital rotation into SaaS stocks from other equities, and ZIRP limiting return to only a few asset buckets) and one part common sense (if SaaS companies are riding the digital transformation trend, an acceleration thereof could raise their long-term growth prospects).

Got it?

Anyway I’m on vacation for the next week as soon as this hits the internet. Have fun, everyone, and let me know what happens to SaaS stocks. Pretty sure my partner will end me if I keep up to speed on the stock market when I’m supposed to be napping. Hugs.

API startups are so hot right now

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

A cluster of related companies recently caught our eye by raising capital in rapid-fire fashion. TechCrunch covered a few of them, and I read coverage of others. Looking back through my notes and the media cycles that they generated, it feels safe to say that API -based startups are hot right now.

What’s fun about this trend is that the startups we’re considering are all relatively early-stage, so they aren’t limping unicorns staring down a closed IPO window. Instead, we’re taking a peek at startups that mostly haven’t raised material external capital — yet. They have lots of room to grow.

And the group is somewhat easy to understand. Sure, I don’t fully grok their underlying tech — that’s a bit of the point with API startups; they take something complex and offer it in an easy-to-consume fashion — but I do get how they make money. Not only are their business models fairly easy to understand, there are public companies that monetized in similar ways for us to use as a framework as the startups themselves scale.

This morning let’s look at FalconX and Treasury Prime and Spruce and Daily.co and Skyflow and Evervault, all API-focused startups to one degree or another, to see what’s up.

What’s an API-based startup?

Simply: a high-growth company that delivers its main service via an application programming interface, or API.

APIs help services communicate with other apps, allowing them to execute tasks or request information quickly and easily. These services are sometimes highly valuable because they can offer something complex and difficult, easily and simply.

Clubhouse proves that time is a flat circle

Hello and welcome back to Equity, TechCrunch’s venture capital-focused podcast, where we unpack the numbers behind the headlines.

First, a big thanks to everyone who took part in the Equity survey, we really appreciated your notes and thoughts. The crew is chewing over what you said, and we’ll roll up the best feedback into show tweaks in the future.

Today, though, we’ve got Danny and Natasha and Chris and Alex back again for our regular news dive. This week we had to leave the Vroom IPO filing, Danny’s group project on The Future of Work and a handwashing startup (?) from Natasha to get to the very biggest stories:

  • Brex’s $150 million raise: Natasha covered the latest huge round from corporate charge-card behemoth Brex. The party’s over in Silicon Valley for a little while, so Brex is turning down your favorite startup’s credit limit while it stacks cash for the downturn.
  • Spruce raises a $29 million Series B: Led by Scale Venture Partners, Spruce is taking on the world of real estate transactions with digital tooling and an API. As Danny notes, it’s a huge market and one that could find a boost from the pandemic.
  • MasterClass raises $100 million: Somewhere between education and entertainment, MasterClass has found its niche. The startup’s $180 yearly subscription product appears to be performing well, given that the company just stacked nine-figures into its checking account. What’s it worth? The company would only tell Natasha that it was more than $800 million.
  • Clubhouse does, well, you know. Clubhouse happened. So we talked about it.
  • SoftBank dropped its earnings lately, which gave Danny time to break out his pocket calculator and figure out how much money it spent daily, and Alex time to parse the comedy that its slideshow entailed. Here’s our favorites from the mix. (Source materials are here.)

And at the end, we got Danny to explain what the flying frack is going on over at Luckin. It’s somewhere between tragedy and farce, we reckon. That’s it for today, more Tuesday after the holiday!

Equity drops every Friday at 6:00 am PT, so subscribe to us on Apple PodcastsOvercastSpotify and all the casts.

Skyflow raises $7.5M to build its privacy API business

Skyflow, a Mountain View-based privacy API company, announced this morning that it has closed a $7.5 million round of capital it describes as a seed investment. Foundation Capital’s Ashu Garg led the round, with the company touting smaller checks from Jeff Immelt (former GE CEO) and Jonathan Bush (former AthenaHealth CEO).

For Skyflow, founded in 2019, the capital raise and its constituent announcement mark an exit from quasi-stealth mode.

TechCrunch knew a little about Skyflow before it announced its seed round because one if its co-founders, Anshu Sharma is a former Salesforce executive and former venture partner at Storm Ventures, a venture capital firm that focuses on enterprise SaaS businesses. That he left the venture world to eventually found something new caught our eye.

Sharma co-founded the company with Prakash Khot, another former Salesforce denizen.

So what is Skyflow? In a sense it’s the nexus between two trends, namely the growing importance of data security (privacy, in other words), and API -based companies. Skyflow’s product is an API that allows its customers — businesses, not individuals — to store sensitive user information, like Social Security numbers, securely.

Chatting with Sharma in advance of the funding, the CEO told TechCrunch that many providers of cybersecurity solutions today sell products that raise a company’s walls a little higher against certain threats. Once breached, however, the data stored inside is loose. Skyflow wants to make sure that its customers cannot lose your personal information.

Sharma likened Skyflow to other API companies that work to take complex services — Twilio’s telephony API, Stripe’s payments API, and so forth — and provide a simple endpoint for companies to hook into, giving them access to something hard with ease.

Comparing his company’s product to privacy-focused solutions like Apple Pay, the CEO said in a release that “Skyflow has taken a similar approach to all the sensitive data so companies can run their workflows, analytics and machine learning to serve the customer, but do so without exposing the data as a result of a potential theft or breach.”

It’s an interesting idea. If the technology works as promised, Skyflow could help a host of companies that either can’t afford, or simply can’t be bothered, to properly protect your data that they have collected.

If you are not still furious with Equifax, a company that decided that it was a fine idea to collect your personal information so it could grade you and then lost “hundreds of millions of customer records,” Skyflow might not excite you. But if the law is willing to let firms leak your data with little punishment, tooling to help companies be a bit less awful concerning data security is welcome.

Skyflow is not the only API-based company that has raised recently. Daily.co picked up funds recently for its video-chatting API, FalconX raised money for its crypto pricing and trading API, and CNBC reported today that another privacy-focused API company called Evervault has also taken on capital.

Skyflow’s model, however, may differ a little from how other API-built companies have priced themselves. Given that the data it will store for customers isn’t accessed as often, say, as a customer might ping Twilio’s API, Skyflow won’t charge usage rates for its product. After discussing the topic with Sharma, our impression is that Skyflow — once it formally launches its service commercially– will look something like a SaaS business.

The cloud isn’t coming, it’s here. And companies are awful at cybersecurity. Skyflow is betting it’s engineering-heavy team can make that better, while making money. Let’s see.

Beware mega-unicorn paper valuations

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

There’s a famous old post going around Twitter this week by entrepreneur and developer David Heinemeier Hansson (@DHH). DHH is a critic of certain elements of the startup world, especially wild valuations. This entry from him is, in my view, a classic of the genre.

The post in question is titled “Facebook is not worth $33,000,000,000,” and was written back in 2010.

You can already imagine who might find the post irksome — namely folks who are in the business of putting capital into high-growth companies. This sort of snark, though not precisely recent, is a good example of how posts like the Facebook entry are read on Twitter.

If you take a moment to actually read DHH’s blog, however, you’ll find that the first part of his argument is that selling a minute slice of a company at a high price, thus “revaluing” the company at a new, stratospheric valuation, is a little silly. DHH didn’t like that by selling a few percentage points of itself, Facebook’s worth was pegged at $33 billion. We’ve seen some similarly-small-dollar, high-valuation rounds recently that could be scooted into the same bucket.

It’s a somewhat fair point.

But what struck me this morning while re-reading the DHH piece was that his second two points are useful rubrics for framing the modern, post-unicorn era. DHH wrote that profits matter, companies are ultimately valued on them, and that companies that don’t scale financial results as they add customers (or users) aren’t great.

Why VCs say they’re open for business, even if they’re pausing new deals

This week Alexia Bonatsos of Dream Machine and Niko Bonatsos of General Catalyst swung by Extra Crunch Live to discuss where they are investing today and what the future might look like.

As expected, these seed and early-stage venture capitalists had a lot to say about their current investing cadence and what interests them in the world of edtech, Clubhouse and more. A big thanks to everyone who came out and submitted some great questions.

Going back through the chat today, a few sections jumped out. For this recap, I’ve gathered answers from the transcript regarding today’s fundraising climate, the future of AI and the possible impact of the downturn on VC-backed founder diversity.

And for everyone who couldn’t join us live, I’ve included the full video replay below. (You can get access here, if you need it.)

Today’s fundraising climate

Alexia:

It’s kind of a Rashomon; depending on whose perspective you’re getting the story, is just completely different.

Let’s see, are [VCs] being as active as they were in 2018? I’m gonna say no. I mean, look at your data, your data says no. But does that mean people [have] shut down the shop and are all in Montana? Also no, right?

We know that these kinds of “crisistunities” — and I’m not diminishing the crisis at all, it is very sad and very scary, and it’s something that I’m very privileged to be able to be experiencing from inside my apartment and not from outside within an emergency room or a food bank or any other place that it’s actually at the front lines, right?