Jaimin Ball
I asked Claude to summarise a June 19, 2024 newsletter from Jaimin Ball (Altimeter Capital) looking at Q1 2024 public cloud software earnings.
- Weak Overall Performance: Q1 2024 was generally a weak quarter for software earnings. Most companies faced pressures as buyers expressed caution in purchasing decisions, often weighing whether vendors would help them transition to AI or be disrupted by it.
- Hyperscaler Resilience: Major cloud providers (Azure, AWS, GCP) continued to benefit from AI-driven demand. Their revenue growth showed signs of recovery after the previous period of cloud cost optimizations.
- Declining Growth Rates: The median quarterly year-over-year growth rate for SaaS companies continued to decline, although there was a slight uptick in Q1. This suggests that while growth is slowing, it may be starting to stabilize.
- Improving Profitability: The median Free Cash Flow (FCF) margin continued to rise as companies exited the zero interest rate period and focused on efficient growth. This indicates a shift towards profitability in the SaaS sector.
- Pressure on Customer Metrics: Key customer-related metrics showed signs of strain:
- Net Dollar Retention rates have been declining in recent quarters, indicating challenges in expanding revenue from existing customers.
- The median Gross Margin Adjusted CAC (Customer Acquisition Cost) Payback period has been increasing, suggesting it’s becoming more expensive and time-consuming to acquire new customers.
Here are a few additional pointers from Jaimin Ball’s recent newsletters.
July 12, 2024: “You have no choice but to invest in AI given your competitors are. Failure to do so implicitly means you’re giving up on the race and ceding ground and market share to you competitors. This is the Red Queen Effect. I do believe, however, that those who “win the race” in their respective markets will see orders of magnitude returns on their early CapEx. Industrial revolutions don’t last a couple years. They last decades.”
July 5, 2024: Key operating metrics from the listed cloud companies:
- Median NTM growth rate: 12%
- Median LTM growth rate: 17%
- Median Gross Margin: 75%
- Median Operating Margin (10%)
- Median FCF Margin: 14%
- Median Net Retention: 110%
- Median CAC Payback: 53 months
- Median S&M % Revenue: 40%
- Median R&D % Revenue: 25%
- Median G&A % Revenue: 15%
June 28, 2024: “The challenge is private markets are FULL of companies who were growing 50-100% at ~$100m of ARR, who are now growing <20% at $200-$300m ARR. And there are many reasons for this. Some [are]: TAMs were captured sooner and companies didn’t scale into their next product line, large incumbents bundled them, execution challenges popped up. Scaling to $500m of revenue is HARD! If the public markets valued a company at 15x revenue who was growing 50-100% at $100m of revenue, who then saw growth decelerate to 20% at $250m, the multiple compression would eat away all of the returns. A company growing 20% at $250m of revenue very well may trade at 5x revenue. And that would leave every public market investor who invested at $100m of revenue underwater.”
June 21, 2024: “The market today is simply saying “we don’t want to make assumptions about your profitability or growth at scale. We’ll pay the high multiple once the company is established.” The fact that 80% of the 20 highest revenue multiple companies have >$1B in revenue (and 100% of the top 10 are >$1B in revenue) shows this. IF you’re able to hit platform scale, and IF you can show FCF leverage, then and only then will you be rewarded with a premium multiple. For everyone else, they find themselves in a “prove it” stage.”
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