Mulesoft Reports a Strong Quarter, but Is the Stock a Buy?

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Recent IPO Mulesoft (NYSE: MULE) just released its third earnings report as a public company, and the results were impressive. Mulesoft makes a software platform called Anypoint, upon which IT professionals and data scientists can construct and combine APIs (application programming interfaces). APIs are agile interfaces that reference applications, databases, or bits of code, which people can use to construct new applications.

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The prospects for the company are exciting, as this API-based architecture not only opens up new ways for businesses to use data, but could also eventually replace customized (read: expensive) integration coding services from the likes of IBM and Oracle

Here are some of the quarter's highlights:

  • Revenue grew 57% to $77.6 million, handily beating analyst estimates of $71.5 million.
  • On top of strong revenues, deferred revenue surged 63% year over year to $171 million.
  • The company acquired 47 new customers, or 4% sequential growth, to a total of 1,217 at quarter's end.
  • The dollar-based retention came in at 116%, which is in line with previous quarters. This was made all the more impressive because the company is landing larger and larger initial deal sizes (so growing off a bigger base).
  • The average annual contract grew 28% to $175,000.
  • Mulesoft closed a record seven greater-than-$1 million deals in the quarter, including two multimillion-dollar expansions with existing customers.
  • The company raised its full-year guidance to $290 million to $292 million, up from last quarter's guidance of only $279 million to $281million.
  • Mulesoft released "Crowd," an easier and more intuitive version of Anypoint on July 29.
  • The company claimed growth was broad-based. For instance CFO Matthew Langdon said of the seven greater-than-$1 million deals, "there were five different industries represented: banking, insurance, public sector, CPG [consumer packaged good], retail, and transportation. There was also a mix of customers across North America and Europe..." 

Despite the excellent results, the stock is actually now below where it was prior to the report. Why might that be, and is this a buying opportunity?

Price and profitability

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A few elements of the report may have turned some investors off. First, sales and marketing expenses, as well as research and development costs, increased as a percentage of revenue, and that's in spite of the incredibly strong revenue growth mentioned above. As I wrote in an August update on the company, Mulesoft has been aggressively hiring engineering talent in the wake of its high-profile March IPO. High-end software talent is apparently becoming quite a scarce resource in Silicon Valley, and the company is looking to bolster its resources in preparation for continued growth. 

In addition, the company stepped up its game to recruit high-performing account executives. Increased sales commissions helped sales and  marketing expense expand to 60% of revenue, up from 55% a year ago.

The aggressive spending posture is why the company continues to post operating losses, with net losses coming in at $0.13 per share this quarter, a penny worse than analyst estimates. The company also posted negative free cash flow of $5.9 million versus $11 million positive free cash flow a year ago.

Finally, the stock currently trades at a relatively expensive 11.9 times enterprise value-to-sales ratio, which is at the higher end of many recent tech IPOs, and prices in substantial growth.

For investors to consider

As I wrote at the time of Mulesoft's IPO, I was impressed with the company and its management team, but was unsure about the valuation. I actually took a small position earlier this summer when the price dipped to $20, and I continue to be impressed with the company's growth. And while the price is still well above the March IPO price of $17, the stock is currently below where it traded on its first day of trading.

Due to Mulesoft's continued strong growth and customer adoption, as well as its disruptive potential in large markets, I think Mulesoft can be part of a diversified portfolio for those with a long time horizon and the ability to handle potential volatility.

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Billy Duberstein owns shares of IBM and MuleSoft, Inc. The Motley Fool owns shares of Oracle. The Motley Fool has a disclosure policy.