The U.S. Federal Reserve raised the price of money once again yesterday. Investors expected the move, but shares dove after the Fed declined to tell investors that it intends to slow the pace at which it raises interest rates in the future, as some had hoped.
While shares of many U.S. companies fell in the wake of the news, tech stocks took a particular whacking.
Then a few tech companies reported earnings. You have to feel for them to some degree — reporting earnings during a down cycle for your sector right after market conditions just became more difficult is not the stuff of CEO dreams. The opposite, really.
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But the earnings news was not all bad. Despite a weak advertising market imperiling the Snaps and Metas of the world, and in contrast to slowing cloud growth more generally, there were a few green shoots amid yesterday’s earnings reports that are worth our time.
Why? Because when we see public market investors react warmly to smaller-cap tech companies’ results, we can get a vibe for how unicorns might be valued if and when they do go public. Robinhood, the consumer trading platform, is up around 9% this morning after its own earnings report, worth around $10 billion. And later this afternoon, Coinbase will report results.
But both companies are decacorns or more, not really the substance that most unicorns — private companies worth $1 billion or more — are today. So what we really need is a company that is worth a billion dollars or two, preferably operating in the software market, and reporting numbers solid enough to enjoy an initial bump to its value in the wake of its earnings report.
Thankfully, Amplitude managed the feat, and we caught up with its CEO after the numbers came out for a quick chat. Let’s talk about what counts as good enough today, in software earnings terms.
What’s good?
In the third quarter, Amplitude, which sells digital product analytics software, generated revenues of $61.6 million, up 35% compared to its year-ago result. The company’s revenue and costs led to a net loss of $22.5 million, down from a year-ago net loss of $36.6 million. With certain costs including share-based compensation stripped out, Amplitude’s loss for the quarter was $3.2 million, up slightly from $2.1 million in the year-ago quarter.
For the SaaS heads out there, customer count was up 35% at Amplitude year over year; its 12-month trailing dollar-based net retention metric came in at 123%, up slightly from the year-ago period; and the company’s remaining performance obligations (RPO) and current RPO (cRPO) both grew more rapidly than revenue.
Guidance of $62.5 million to $64.5 million in Q4 2022 revenue bracketed street expectations, and Amplitude raised its full-year guidance in light of its Q3 results during its earnings call. That was the numerical package the company turned in, but there’s more to the story. (Our lesson this morning is that it takes a top- and bottom-line beat in the trailing period, better full-year guidance and more to engender a good market reaction.)
Here’s how Hoang Vuong, Amplitude’s CFO, described his company’s position in its market in Q3 2022 and beyond:
We mentioned the potential headwinds in the economy during our last earnings call, and we saw the following specific impact in Q3. Expansion bookings were lighter than expected as some of our customer business load and budget scrutiny remain elevated. We saw higher churn from small businesses who were unable to pay and partial churn increase as customer[s] rightsized due to budget or utilization. If we look past the near-term headwinds, our growth vectors have not changed.
Spenser Skates, the company’s CEO, added that Amplitude is “earlier than [it] thought in our markets,” hinting at more durable growth rates in the long term.
In summary, the company beat trailing expectations, targeted slightly better full-year results, projected growth in line with expectations and told investors that despite some near-term chop, its perspective on its market has not changed in growth terms and may actually be a bit bigger than it anticipated.
The reward for the above package of results and notes? An initial gain of around 10% in early-morning trading, more or less erasing yesterday’s losses. The company has since given back most of its gains, up a more modest 2% as we wrap edits on this post.
The CEO’s take
I have two notes from my chat with Amplitude’s CEO that are worth our time: First, that Skates and company are in a part of the market that they view as more durable than some others. Secondly, that the company is seeing more strength from enterprise customers than smaller players when it comes to its own growth. There are small lessons in there for startups operating today, so let’s unpack them.
First, the tailwinds-headwinds point. Per Skates, software tools that are part of the sales and marketing stack are having a harder go of it today than software services that are focused on the data and product side of digital operations. This segments the unicorn market for our purposes somewhat neatly — any unicorn building data products is probably seeing more enticing growth than sales and marketing services.
This could mean that well-known unicorns like Gong — which sells sales team software and services — are facing a more uphill battle to growth than other companies in discrete niches. (Not to pick on Gong, mind, it just comes to mind when we think about well-funded sales software startups.)
We can mix our first point with our second. If we are seeing segmentation in terms of which buckets of software are a better fit for the current macro moment — investing in product may be harder to slow, while cutting market and sales spend is likely easier, in the near term — we can also infer from Amplitude’s results that enterprise-facing software companies in the product and data world are likely seeing better results than those that sell more to smaller companies.
Amplitude’s CFO discussed the matter, as we noted above, citing “higher churn from small businesses who were unable to pay and partial churn increase as customer[s] rightsized due to budget or utilization.” Big companies are less likely to run short of operating cash, meaning that they are less likely to churn whole-cloth; net retention could slow, but that’s a slightly different point.
The Amplitude earnings report, then, tells us three things:
- The bar for what counts as a “good” earnings report is very, very high today.
- Not all software products are performing equally in today’s economy, meaning that we are likely seeing a divergence in unicorn performance that will dictate who goes public and when.
- And, finally, the general drift upmarket that we see from software companies may not be simply a good idea in the present economy but a requirement — and one with an earlier due date than expected.
Amplitude is worth $1.67 billion today per Google Finance. Or, about 6.8x its Q3 annualized run rate. Unicorns, handicap your own valuation accordingly.