Cloud infrastructure analytics maker Sumo Logic (SUMO) reported Q3 FY2023 results that beat analyst expectations, with revenue up 27.3% year on year to $78.9 million. Guidance for next quarter's revenue was $77.5 million at the midpoint, 2.76% above the average of analyst estimates. Sumo Logic made a GAAP loss of $26.2 million, improving on its loss of $30.8 million, in the same quarter last year.
Sumo Logic (SUMO) Q3 FY2023 Highlights:
- Revenue: $78.9 million vs analyst estimates of $74.1 million (6.4% beat)
- EPS (non-GAAP): -$0.04 vs analyst estimates of -$0.15
- Revenue guidance for Q4 2023 is $77.5 million at the midpoint, above analyst estimates of $75.4 million
- Free cash flow was negative $9.1 million, compared to negative free cash flow of $12.4 million in previous quarter
- Gross Margin (GAAP): 68.1%, up from 67.2% same quarter last year
Founded in 2010 by Christian Beegden who went from driving a cab in Germany to landing an internship at Amazon, Sumo Logic (NASDAQ:SUMO) is software as a service data analytics platform that helps companies get insight into what is happening in their servers and applications.
Sumo plugs into their cloud customers’ services and gathers logs about how they are being used, analyses the data and then makes them accessible through collaborative dashboards. It helps their customers reduce downtime by alerting them about performance issues of their applications and mitigates security risks by flagging suspicious traffic and visitor behaviour.
When the founders were starting Sumo Logic, the first investment from the famous VC firm Greylock came so fast they didn’t even have a name for the company yet, and so they chose the name of one of their dogs “Sumo” as a placeholder. As is often the case, it stuck.
Software is eating the world, increasing organizations’ reliance on digital-only solutions. As more workloads and applications move to the cloud, the reliability of the underlying cloud infrastructure becomes ever more critical, and ever more complex. To solve the challenge, companies and their engineering teams have turned to a range of cloud monitoring tools that provide them with visibility to troubleshoot the issues in real time.
The data analytics space is competitive, and it includes companies such as Datadog (NASDAQ:DDOG), Splunk (NASDAQ:SPLK), and Elastic (ESTC).
Sales Growth
As you can see below, Sumo Logic's revenue growth has been strong over the last two years, growing from quarterly revenue of $51.8 million in Q3 FY2021, to $78.9 million.

This quarter, Sumo Logic's quarterly revenue was once again up a very solid 27.3% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $4.84 million in Q3, compared to $6.25 million in Q2 2023. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Guidance for the next quarter indicates Sumo Logic is expecting revenue to grow 15.5% year on year to $77.5 million, slowing down from the 23.8% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 14.9% over the next twelve months.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Sumo Logic's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 68.1% in Q3.

That means that for every $1 in revenue the company had $0.68 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Sumo Logic burned through $9.1 million in Q3.

Sumo Logic has burned through $34.7 million in cash over the last twelve months, a negative 12% free cash flow margin. This low FCF margin is a result of Sumo Logic's need to still heavily invest in the business.
Key Takeaways from Sumo Logic's Q3 Results
Since it has still been burning cash over the last twelve months it is worth keeping an eye on Sumo Logic’s balance sheet, but we note that with a market capitalization of $922.2 million and more than $322.1 million in cash, the company has the capacity to continue to prioritise growth over profitability.
We were very impressed by the strong improvements in Sumo Logic’s gross margin this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. Zooming out, we think this was a great quarter and shareholders will likely feel excited about the results. The company is up 11.8% on the results and currently trades at $8.05 per share.
Is Now The Time?
Sumo Logic may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We cheer for everyone who is making the lives of others easier through technology, but in case of Sumo Logic we will be cheering from the sidelines. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. Unfortunately, its customer acquisition is less efficient than many comparable companies, and its gross margins show its business model is much less lucrative than the best software businesses.
Sumo Logic's price to sales ratio based on the next twelve months is 2.6x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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