The good and the less-good from Sumo Logic’s updated IPO filing

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Sumo Logic filed an S-1/A this week, updating the world to its latest financial results ahead of its IPO pricing.

Today, just over a week after we first looked at Sumo Logic’s recent financial performance when it filed its first S-1 document, let’s explore what’s new in the document and what the numbers tell us.

For those of you in a hurry: Sumo Logic’s quarter ending July 31, 2020, has lots to like: growth, slimming operating costs, and its smallest losses in some time. But it also has some elements to it that are less inspiring, like slowing growth. How investors sort through the different signals is going to prove fascinating.

There is a lot of IPO news coming, so let’s get our head around Sumo Logic’s new results and its strengths and weaknesses before any more of it drops.

New results

The key difference between Sumo Logic’s initial S-1 and its new, S-1/A filing is the inclusion of a new quarter’s results, namely the quarter ending July 31, 2020. With this new reporting period we get to see how the company did during COVID a bit more clearly.

Here’s the results set for the quarter in simple form:

  • Revenue: $49.4 million.
  • Gross profit, margin: $35.3 million, 71%.
  • Operating loss: $11.7 million.
  • Net loss: $12.2 million.

Compared to its year-ago period, Sumo Logic grew just under 31%. That’s not an astounding growth rate, but given that during the same period the company managed to cut its operating expenses from the sequentially preceding quarter and generate higher-quality revenues with 2% better gross margins, it’s not bad either.

As you can imagine, higher revenues, lower operating costs and better gross margins is a recipe for improving profitability, which Sumo Logic managed. Its operating loss was the smallest since its October 31, 2018 quarter, and its net loss was its smallest since its January 31, 2019 quarter.

Even better, in percent-of-revenue terms (a way to scale losses against company size), Sumo Logic’s July 31, 2020 period brought with it its smallest net loss as a percent of revenue that we have data for, at 25%. The closest that Sumo Logic has managed to get to that number before was a 36% percent-of-revenue loss in the year-ago July 31, 2020 period.

Those are the good bits, mostly.

On the other hand, growth is slowing and Sumo Logic’s free cash flow is getting worse.

In its July 31, 2020 quarter, the firm saw 31% growth. In its April 30, 2020 quarter, Sumo Logic grew over 45% on a year-over-year basis. The company’s recent frugality in its most recent quarter, tempering sales and marketing spend, looks less impressive when coupled to such a deceleration in growth.

Of course, the company may reaccelerate in coming quarters. But so far it has done the opposite, and while burning more cash to boot. Sumo Logic’s free cash flow was -$17.4 million in the July 31, 2020 quarter, its second-worst result on record, and far more expensive than its sequentially preceding free cash flow deficit ($11.6 million), or its year-ago gap ($11.9 million).

You can read Sumo Logic’s S-1, then, a few different ways. You can easily find a bullish thread to tug on or a bearish pattern to trace. Your call.

The company was worth $1 billion about 15 months ago. What is it worth now? Its roughly $200 million run rate and a 15x multiple would put its worth at around $3 billion, though for some reason that feels high. More when we get an initial price range in a few days.

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