Good day to my fellow compounders!
In this week’s 3-Bullet Sunday, I’m trying a different approach.
Rather than 3 most interesting & insightful articles, I’ll share my takes on 3 companies because…
It’s the earnings season!
And if you like this format, hit reply and let me know.
Oh… and I’m heading over to Omaha in a few days for the first time and I’ll be sharing everything I’ve learned.
Stay tuned!
And if you see me, say hi 🙂
Alright, time to dive into this week’s newsletter.
I. Alphabet (Google) Q1 2023
Most investors let out a big sigh of relief, with its advertising revenue staying pretty much flat with a 3% growth.
Many were worried they would be a decline given the pessimism and slowdown in the global economy.
YouTube did have a slowdown though. But management wasn’t exactly forthcoming at explaining what’s the issue:
My guess is they have a monetization problem. They’re certainly showing a ton of ads, but it ain’t converting for marketers.
In other words, it’s ads targeting isn’t as good and marketers aren’t seeing results as compared to advertising on Meta or Amazon.
Here’s what my friend Jason has to share about YouTube ads:
II. Meta Platforms Q1 2023
Mark Zuckerberg is certainly becoming better with earnings call.
Saying everything investors want to hear.
He talked about the company’s AI capabilities (and equally acute, talked less about the Metaverse).
When we look at the financials, capital expenditures (CAPEX) have increased by 29%.
Management explains that CAPEX is broken down into 3 broad buckets:
“The first, we’ve talked about before, non-AI compute needs. We do have ongoing general compute and storage needs to support the existing business, but this is an area where we’ve become much more efficient in terms of capital intensity and are very much focused on continuing to do so over time. The second area is in our core AI investments, which is really most of our AI investment today, and that’s supporting the building of the discovery engine, ranking unconnected organic content, ranking ads, and we’re focused on measuring the return of those investments and making sure that we feel good about the ROI of our spend there, and that really will drive our future plans in terms of that core AI spend. And then the third bucket is really around CapEx investments now to support gen AI. And this is an emerging opportunity for us. We’re still in the beginning stages of understanding the various applications and possible use cases. “
And Meta is certainly not dead yet, growing to over 3b users.
III. Cloudflare Q1 2023
This is probably the company’s worst quarter since IPO-ing 3.5 years ago.
Cloudflare guided for better earnings than expected, but worse revenue growth.
Going from a 37% growth forecast to a 31% forecast.
Management put the blame on 3 items (my thoughts in brackets):
- Longer sales cycles (hmmmm…ok)
- SVB banking crisis (huh?)
- 100+ ineffective sales people (say wot m8)
Management seems to be diverting attention from the crux of the problem.
Devoting quite a bit of the earnings call to calling out the 100+ salespeople who didn’t hit their KPIs:
“Digging in with Marc, we’ve identified more than 100 people on our sales team who have consistently missed expectations. Simply put, a significant percentage of our sales force has been repeatedly underperforming based on measurable performance targets and critical KPIs. That’s obviously a problem. But it’s one in this environment with a particularly available and actionable solution. We are now in the process of quickly rotating out those members of our team who have been underperforming and bringing in new with salespeople who have a proven track record of success, grit and a strong cultural fit. To give you some sense, these 100-plus people contributed approximately 4% of annualized new business sold over the last year. So we’re optimistic we can make this team upgrade without significantly impacting sales capacity. While team upgrades are always hard, this is a uniquely good time for us to do this. A year ago, the tech labor market was extremely tight. Today, there is an abundance of talent eager to work at Cloudflare. In Q1, we received more than 0.25 million applicants, approximately 40% of which were for sales positions. That’s more applications than we received in all of 2021. In addition to the volume, the caliber of the applicants we’re receiving is higher than we’ve seen at any point in our history, especially for go-to-market positions. While other companies are laying off, we’re going to be bringing on great people with proven track records to raise the capability of our enterprise go-to-market team.”
Feels like management isn’t owning up to the slowing growth in sales, and suggesting that a better labor market now would fix this problem.
Not digging this.
The funny thing is, they explained that they have 250,000 applicants in Q1, of which 100,000 (40% of total applicants) were for sales…
Why end up with 100+ less than par salespeople?
Is the problem the salespeople? Is the problem really that customers are holding tightly to their purse strings? Or are they having challenges with selling to enterprises because of the product?
Regardless, the slither of good is that the company is becoming more profitable as it grows and the co-founders Michelle Zatlyn and Matthew Prince have built an impressive company.
I don’t own this company yet and I’m still monitoring it to see how things develop.
That’s all I have for you today.
If you are enjoying this post, the best compliment you could pay me would be to share it with one person who you think would benefit from it.
See you again soon.
Cheers,
Thomas
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