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Sumo Logic (NASDAQ:SUMO) Q2 Sales Beat Estimates, Provides Encouraging Quarterly Guidance


Full Report / September 09, 2021
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Cloud infrastructure analytics maker Sumo Logic (SUMO) reported Q2 FY2022 results topping analyst expectations, with revenue up 19% year on year to $58.8 million. Sumo Logic made a GAAP loss of $32 million, down on its loss of $12.2 million, in the same quarter last year.

Sumo Logic (SUMO) Q2 FY2022 Highlights:

  • Revenue: $58.8 million vs analyst estimates of $56.6 million (3.82% beat)
  • EPS (non-GAAP): -$0.11 vs analyst estimates of -$0.14
  • Revenue guidance for Q3 2022 is $60.8 million at the midpoint, above analyst estimates of $60.1 million
  • The company lifted revenue guidance for the full year, from $234.5 million to $237.8 million at the midpoint, a 1.4% increase
  • Free cash flow was negative $5.59 million, compared to negative free cash flow of -$2.97 million in previous quarter
  • Gross Margin (GAAP): 66.3%, down from 71.6% previous quarter

Founded in 2010, Sumo Logic 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 solid over the last year, growing from quarterly revenue of $49.4 million, to $58.8 million.

Sumo Logic Total Revenue

This quarter, Sumo Logic's quarterly revenue was once again up 19% year on year. We can see that the company increased revenue by $4.62 million quarter on quarter. That's a solid improvement on the $67 thousand increase in Q1 2022, so shareholders should appreciate the acceleration of growth.

Analysts covering the company are expecting the revenues to grow 18.3% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

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, licences, technical support and other necessary running expenses was at 66.3% in Q2.

Sumo Logic Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.66 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 dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

Key Takeaways from Sumo Logic's Q2 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 $2.14 billion and more than $96.5 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, it was less good to see the pretty significant deterioration in gross margin. Zooming out, we think this was still a decent quarter, showing the company is staying on target. The company is up 3.08% on the results and currently trades at $20.74 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 cash burn means its business isn't yet sustainable.

Sumo Logic's price to sales ratio based on the next twelve months is 8.4, 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, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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