Mulesoft (NYSE: MULE) the innovator behind Application Network technology, saw its stock plummet as much as 25% in the days after its recent earnings, no doubt making investors nervous about the recent IPO's future. Looking through the results, however, the numbers were mostly positive. Moreover, I think the perceived weaknesses in the report could actually be viewed as positives for long-term investors. Here's what you need to know.
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In the quarter, Mulesoft grew revenues 57% to $69.2 million, handily beating estimates of $63.5 million. Non-GAAP losses per share of $0.10 also beat estimates of $0.13. The company increased its full-year revenue guidance from $271-$274 million to $279-$281 million and reiterated its EPS guidance of a loss of $0.38 – $0.40, which is relatively unchanged from previous guidance of a $0.37 – $0.40 loss.
The company expanded its customer base to 1,170, up 24% from a year earlier, and dollar-based retention came in strong at 116% -- which means existing customers spent 16% more this quarter than last year. The average subscription price was $164,000, a 31% increase from the prior year period.
Spending and growth concerns
With these strong results, the stock sell-off may seem confusing. Valuation is likely a concern, as the company trades at 12 times price-to-sales ratio, which is high, and the current price of $21 per share is still well above the $17 March IPO price. Despite the sell-off, the stock has performed better than other recent high-profile IPOs such as Snapchat, which trades below its March IPO price. But, at the current high valuation, Mr. Market expects perfection, and there were two small wrinkles in the report.
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First, the company's 57% growth marked a deceleration from 2016's growth of 70%. The company also noted a few deals were pushed from this quarter to later this year. Forward quarterly guidance was only $71-72 million, which would only be an increase of $2-3 million from last quarter, which may seem like slowing growth for a high-multiple company.
However, management also said the delays could be a good thing. That's because while some IT teams and CIOs had been initially evaluating Mulesoft's Anypoint Platform for a particular project, some were now considering a broader use for Anypoint, even considering turning it into the backbone for IT innovation going forward.
Mulesoft's Anypoint Platform is a unique offering that could change the way IT teams operate, so if a company wishes to use it more broadly, it would need to be vetted by more senior executives and security teams, which takes more time. Therefore, if management is to be believed, the delays in deals could be a long-term positive.
Second, the one-quarter outlook called for a loss of $0.12 per share which would be a bigger loss than the current quarter of $0.10 per share. This seems to indicate the company is heading in reverse.
However, the company is heavily investing in top-notch talent, as well as boosting its sales force. The company hired 65 new engineers in the last quarter, including two whole teams, as well as 12 engineers from another large tech company. Mulesoft was also named a #1 place to work in the Bay Area this quarter by the San Jose Mercury News. Moreover, the company noted its recent IPO has increased its profile with both companies and engineers. The tech industry is booming, and every company is competing for top talent. These accomplishments show that Mulesoft its holding its own in this important aspect of business.
New emerging uses
Finally, management also noted its pole position in high-growth industries such as omnichannel retail, healthcare, and the Internet of Things. When one analyst asked about IoT-specific applications of Mulesoft's platform, management said:
[W]e have been pulled into a number of IoT initiatives, and frankly, without really going full bore at IoT as a segment for -- certainly not from a product standpoint. And the beauty of it is, is that every IoT initiative effectively becomes an integration challenge. You have all these -- it's just more endpoints and its more connectivity, and for us, that's a good thing.
That means Mulesoft's offering is already relevant for many of the highest-growth segments today -- IoT, mobile initiatives, and others -- without it having to design specific versions of its platform. If the company is successful at getting corporations to use Anypoint as the backbone for its application designs and initiatives, the future could be very bright.
Bottom line: Mulesoft's earnings were not good enough for short-term-oriented Mr. Market, but for long-term investors, the company seems to be solidly executing on a large market opportunity.
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