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Sumo Logic (NASDAQ:SUMO) Q3 Sales Beat Estimates


Full Report / December 06, 2021
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Cloud infrastructure analytics maker Sumo Logic (SUMO) reported strong growth in the Q3 FY2022 earnings announcement, with revenue up 19.5% year on year to $62 million. The company expects that next quarter's revenue would be around $64.2 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Sumo Logic made a GAAP loss of $30.8 million, down on its loss of $23.9 million, in the same quarter last year.

Sumo Logic (SUMO) Q3 FY2022 Highlights:

  • Revenue: $62 million vs analyst estimates of $60.8 million (1.9% beat)
  • EPS (non-GAAP): -$0.12 vs analyst estimates of -$0.14
  • Revenue guidance for Q4 2022 is $64.2 million at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow was negative $13.1 million, compared to negative free cash flow of $5.59 million in previous quarter
  • Gross Margin (GAAP): 67.1%, down from 73.7% 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.

Organizations are expected to look towards modern tech platforms such as Sumo Logic to manage the growing complexity of enterprise applications and processes required to power their business.

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 moderate over the last year, growing from quarterly revenue of $51.8 million, to $62 million.

Sumo Logic Total Revenue

This quarter, Sumo Logic's quarterly revenue was once again up 19.5% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $3.17 million in Q3, compared to $4.62 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 18.9% over the next twelve months, although estimates are likely to change post earnings.

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 67.1% in Q3.

Sumo Logic Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.67 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.

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 $1.49 billion and more than $288.9 million in cash, the company has the capacity to continue to prioritise growth over profitability.

Sumo Logic topped analysts’ revenue expectations this quarter, even if just narrowly. And we were also glad to see the improvement in gross margin. Zooming out, we think this was a decent quarter, showing the company is staying on target. The company is down 3.2% on the results and currently trades at $13.26 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, and analysts believe that sort of growth is sustainable for now. Unfortunately, its customer acquisition is less efficient than many comparable companies, and its gross margins aren't as good as other tech businesses we look at.

Sumo Logic's price to sales ratio based on the next twelve months is 5.4x, 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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