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Sumo Logic (NASDAQ:SUMO) Beats Q1 Sales Targets, Stock Soars


Full Report / May 26, 2022
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Cloud infrastructure analytics maker Sumo Logic (SUMO) reported Q1 FY2023 results beating Wall St's expectations, with revenue up 25.1% year on year to $67.8 million. Guidance for the full year was in line with analyst expectations with revenues guided to $290.5 million at the midpoint. Sumo Logic made a GAAP loss of $34.7 million, down on its loss of $26.9 million, in the same quarter last year.

Sumo Logic (SUMO) Q1 FY2023 Highlights:

  • Revenue: $67.8 million (2.67% beat)
  • EPS (non-GAAP): -$0.13 vs analyst estimates of -$0.17
  • Revenue guidance for Q2 2023 is $71.5 million at the midpoint, above analyst estimates of $70.4 million
  • The company reconfirmed revenue guidance for the full year, at $290.5 million at the midpoint
  • Free cash flow was negative $1.99 million, compared to negative free cash flow of $11.1 million in previous quarter
  • Gross Margin (GAAP): 64.4%, down from 71.6% 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 year, growing from quarterly revenue of $54.2 million, to $67.8 million.

Sumo Logic Total Revenue

This quarter, Sumo Logic's quarterly revenue was once again up a very solid 25.1% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $806 thousand in Q1, compared to $5.03 million in Q4 2022. 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 21.5% year on year to $71.5 million, improving on the 19% 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 19.2% 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 64.4% in Q1.

Sumo Logic Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.64 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has been going down over the last year, which is probably the opposite direction shareholders would like to see it go.

Cash Is King

If you follow 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 $1.99 million in Q1.

Sumo Logic Free Cash Flow

Sumo Logic has burned through $31.9 million in cash over the last twelve months, a negative 12.4% 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 Q1 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 $860.2 million and more than $308.1 million in cash, the company has the capacity to continue to prioritise growth over profitability.

It was good to see Sumo Logic outperform Wall St’s revenue expectations this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, there was a deterioration in gross margin. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 6.49% on the results and currently trades at $8.2 per share.

Is Now The Time?

When considering Sumo Logic, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. 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. 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 2.9x, 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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