Jamin Ball Profile picture
Sep 24, 2020 15 tweets 3 min read
A few weeks ago I shared a graphic looking at the change in YoY growth rates for SaaS businesses from Q2 to Q1. I thought another interesting analysis would be looking at the change in net new ARR added from Q2 to Q1. The data below shows the % change: Image
To calculate net new ARR in a given quarter I first take the quarterly subscription revenue (where disclosed) and multiply it by 4 to get an implied ARR metric. I do the same thing for the quarter prior. The difference between the 2 is the implied net new ARR added in a quarter
What's graphed is the % change in net new ARR added in Q2 vs Q1.

An example: Fastly added $48.3M net new ARR in Q2 and $15.8M of net new ARR in Q1. The number shown is the growth in net new ARR 205%. (shoutout to my Fastly bulls)
Normally it makes more sense to look at growth metrics YoY. But when I look at net new ARR I like to see the number increasing on an absolute basis every quarter (positive % graphed). Even at large scale I still like to see the absolute dollar increasing.
In theory companies are not reducing the size of their sales force, so if net new ARR declined on an absolute basis the same number of sales reps sold less business one quarter vs the previous quarter (not good, less efficient)
This is a large oversimplification, and there are other factors in play like expansion bookings. Public SaaS businesses don't disclose granular bookings metrics (new logo bookings vs expansion bookings, etc), so this implied net new ARR analysis is the best we can do
The companies with positive percentages added more net new ARR in Q2 vs Q1. The companies with negative percentages added less net new ARR in Q2 vs Q1. An important point to note is that companies with negative percentages are not declining
Companies can actually decelerate overall revenue growth YoY, but still accelerate net new ARR added (which is why I wanted to look at this analysis).
An example: Okta grew revenue 46% YoY in Q1 and 43% YoY in Q2. So their growth "decelerated."

However, in Q2 they added ~$68M of net new ARR, and in Q1 they added ~$61M of net new ARR.

So even while growth decelerated, net new ARR accelerated
One of the tricky aspects of SaaS businesses is that they recognize revenue ratably over the course of a contract. So looking at GAAP revenue change doesn't always tell the full picture when trying to draw short term conclusions
This is especially true if a large percentage of new business gets signed at the tail end of a quarter.

Unfortunately I don't think billings / bookings always tell the full story either since the length of contract is not factored into either
One thing to note - many SaaS businesses don't report subscription revenue separately, so they've been left off the analysis.
Similar to the YoY growth rate analysis I did, this analysis shows the clear Covid beneficiaries are Fastly, Zoom and Shopify.

However this analysis (which I think tells a more accurate picture) also highlights others as true winners as well
For reference here is the growth rate analysis I've referenced

And one final note - Datadog will be under pressure this quarter. They're one of my favorite SaaS companies, but the drop off in net new ARR in Q2 vs Q1 was significant, and a big reason the stock dropped. I'll be watching Q3 closely for them (still long term bullish)

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More from @jaminball

Mar 22
There's broadly two opinions out there on inflation:

1) Inflation is "transient-ish" and will wane the back half of this year and be back to 2% target early next year

2) De-globalization will drive sustained high inflation over the coming 3-5+ years

What do I think?
As a growth investor it's imperative to have a point of view. Inflation impacts rates, and rates impact software multiples. Ive largely been on the transient-ish side, but it's important to see the other point of view

And by transient-ish I mean inflation lasting ~12 more months
The transient-ish argument - we had a one time massive shock to the financial system with stimulus & fed pumping money into the economy. Consumer savings went way up, as did their purchasing of goods and services (first goods, and now services)
Read 20 tweets
Mar 21
Post GFC Venture Capital as an industry has massively "over earned." The data below shows pooled IRRs by vintage from Hamilton Lane. And this performance is despite the fact that private multiples have historically always been higher than public multiples
As a venture capitalist we take bets that companies will be worth more in the future, despite a "premium" multiple paid in the early days.

So yes, many private companies are "worth less" right after an investment if you applied a public multiple. But this phenomenon isn't new
What is new is the magnitude of that premium. Private companies now are worth significantly more than if they were given a public multiple. But should this really be a surprise given the IRRs of venture capital over the last decade?
Read 8 tweets
Mar 7
What should a public software company growing 100%+ at $250M+ ARR be worth (multiple)? There are very few companies to hit this. Im excluding companies that hit that growth only bc of covid. I believe that list includes Snowflake, SentinelOne, Zoom, Crowdstrike, Shopify, Workday
Expanding to 80%+ and I get a few more co's like Datadog, Monday, Elastic, UiPath, ZoomInfo, ServiceNow, Okta, Zendesk (not an exhaustive list but representative).

The big question - theres high growth software and then there's hypergrowth. What multiple should hypergrowth get?
This is especially relevant in a world where as software TAMs expand we're seeing more and more of these "hyper growers." Historically (pre 2015) there haven't been many, so how should we think about valuing them?

I expect many more companies to go public growing >80% at scale
Read 14 tweets
Feb 22
Reflecting on digital transformations vs pull forward for cloud software over the long weekend - I think we've largely seen 3 different ways cloud software was affected by Covid:

1) Fake TAM creation
2) One time pull forward
3) Durable pull forward
I don't think any business was truly unaffected. Therefore, it's important to have a perspective on which bucket each company falls into when predicting what future growth will look like. This applies to both public and private businesses
Bucket 1: Fake Tam Creation:

This describes companies who acquired users / buyers of their software who never would have otherwise been users outside of Covid. The hard part about this bucket - post Covid churn is very high. Who might stick with new behavior vs revert?
Read 24 tweets
Jan 13
Bifurcation of software multiples as seen on a scatter plot (multiple vs growth). Historically all software has traded within red circle. Now a separate group has broken out. Is it warranted? After Q4 earnings, I believe we'll see more separation of contenders from pretenders
Here's the scatter plot without the circles
Here's the same scatter plot from late October, right around the peak for the ETF WCLD (this ETF is a good proxy for cloud software). As you can see, there wasn't nearly the same amount of separation. More of a continuum. This was less than 3 months ago, before this correction
Read 4 tweets
Jan 12
Some takeaways from Morgan Stanley's Q4 CIO survey

- Software has the highest growth expectations in IT
- Strong demand in software persisting (not simply pull forward in 2021)
- Cloud computing remains CIO's top priorities
- Security software most defensible

More graphs below
"Survey data suggests 25% of application workloads are running in the public cloud today, up from 23%... in 2Q21. The multi-year trend in the migration of applications to the cloud remains intact, with CIOs expecting 44% of workloads to reside in public cloud by 2024"
Similar data but presented differently. We're in the early innings of the cloud
Read 8 tweets

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