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Sep 30

Research: Datadog

I should be spending my time researching a stock I might buy or at least short. DDOG is neither. But I still find it super interesting to look at so I spent a bunch of time on it. I really didn’t look at everything. I got caught up on pricing, which I will explain, and spent a lot of time on it. I captured a few comments and such as highlights but I read way more in terms of opinion and perception of DDOGs product. These are my thoughts.

Here is the thing about DDOG. It is, by all accounts, a great product. You read the forums, it is best in class by most accounts.

But. A couple problems. First, this is not some revolutionary technology. What DDOG has is a monitoring tool. It really boils down to a GUI – a dashboard. Yes, there are all these tie-ins to data and sampling algorithms and a bunch of other functionality has been added to it as modules and blah, blah, blah. But its all basically – how can we allow IT folks to see what is going on in their network better. When you boil that down, the thing that everyone loves about DDOG is essentially a workflow and a GUI. That’s it.

Now it appears to be an extremely good workflow and GUI. No question there. But there is no magic here. Watch these videos. Go and search DDOG in youtube and watch the other customer videos. They make it pretty clear what the product does.

Meanwhile, as you will see below, DDOG is VERY expensive. IT guys are complaining about the price left and right. I point it out below. When I read the cost/host I thought it was ridiculous. I know how cheap IT guys are. They are always chintzy on spending money. There is a point where IT balks at 5-6-(7?) figure DDOG bills for monitoring. I certainly don’t think the TAM is what DDOG says it is if they are getting to a TAM by assuming every instance and host gets wired up to DDOG at current pricing. No way that happens.

The other thing about DDOG is this is niche. It appears to be a very large market because they can multiply hosts by ARR and get a massive number. But there are probably a handful or two of people in each company that actually need to look at this sort of monitoring data on a regular basis. Contrast that with a TEAM – they have a model where their TAM is the number of DEV/OPS multiplied by their sub price per user. Their users are all using the product every day. And the users are the entire DEV/OPS team. That is really different, if you ask me, than a TAM that is a far fewer number of IT admins that are actively deciding how much they want to spend to monitor their hosts.

I just don’t think this lasts. At some point a smart IT admin is going to say – hey I can cut $50k out of my budget if I move from DDOG to this or that or just bring it in house. I think you see this already. DDOG customer growth is less than half their overall growth. So much of their growth is existing customers growing their instances of DDOG – or, if you believe some of the horror stories from reddit, getting gouged on pricing from unrealized monitoring that they are billed with.

Not surprisingly, NEWR reduced pricing and added a freemium layer. I’m sure they realize that DDOG has an Achilles heel in their pricing. I wouldn’t buy NEWR on that – it seems to me to have its own problems, but I also bet it starts making more IT guys ask – is this really worth it?

Of course to some it is. It sounds like a great product. Great graphs, easy to integrate, slick to use. But I don’t buy that a great experience is worth this kind of multiple. The moat here is way smaller than investors think it is, IMO and some of these competitors, or maybe some new start-up, is going to take advantage of that and start taking share at some point.

founded in 2010
1,403 employees
cloud native, SaaS platform addressing observability – monitoring cloud technologies
offers “single pane of glass” view of IT cloud environments
they break down silos between Dev and Ops
their initial use case was infrastructure monitoring, from there expanded to APM and logging
now added network monitoring, synthetics, security monitoring

Customers

12,100 customers as of Q220
Had 8,800 customers as of Q219 – so customer growth was 37.5%
Have 1,015 large customers, up from 594 yoy
large customers are those with $100k or more – these are most of the revenue
has net retention rates above 130%
most customers adopt multiple products – 68% of customers have multiple products, up from 40% yoy

Product

an event stream to see what has been going on in your environment
so you tie in your hosts and integration by installing your agent into each
then you create dashboards to see operations of each host and integration
two types of dashboards – screenboards and timeboards
can choose what hosts or integrations you want to show on the dashboard, what metrics, etc
the graphs that you can create are quite detailed, very customizable, queryvalue maps, hostmaps. etc
they have integrations to tie in a bunch of different
functions – surface the relevant data you are collecting – transform the data with stuff like absolute value, log function, interpolation, divided by time
notifications – get alerts – two types, desktop, emails, but also can add to snap, PD, ServiceNow, Zendesk
can send notifications in a comment for any event in event stream
use monitors to send notification when some metric is triggered
collects metrics every 15s or so
I’m surprised the TAM for this is so large?

Pricing

they have a freemium model, with a low end first tier
model is on pay per host/application base – you pay for each instance that you monitor with DDOG
it seems like they charge a lot:

$23/host/month seems expensive
when I type in “datadog expensive” into google these are the two ads I get:

another site making the point:

their application performance monitoring is expensive as well: APM list pricing starts at $31/host/month and app analytics list pricing is for $1.70/million analyzed spans/month.
Competition
compete against Dynatrace, which has a cloud based service with similar functionality, and New Relic, which had an on-premise solution that they are offering now at a cheaper price
NEWR is offering a free tier that they say would cost $10,000 with competitors
but they changed tiers – reduced from 11 SKUs to 3 SKUs, results in some prices going up:

NEWR is definitely decelerating – growth rate was only 15% last quarter
DDOG has revenue retention in the 130% range
this is an interesting take:

Despite all the buzz on Datadog, New Relic still has an entrenched presence in the infrastructure/application monitoring space as one of the original vendors, and though Datadog is gaining mindshare that doesn’t mean the space isn’t still new and greenfield enough for two big players By next fiscal year, Wall Street consensus expects both companies to be at a similar scale (~$750 million in annual revenues), but Datadog is now trading at >8x New Relic’s market cap. Despite New Relic’s lower growth, both New Relic and Datadog are cash flow positive

NEWR has FCF margins of 14% – had $23.3mm of FCF in Q220
from this reddit forum I get the sense that the Dynatrace solution is maybe as good or better than DDOG but it is expensive https://www.reddit.com/r/devops/comments/ige5jr/whats_your_preferred_cloud_application_monitoring/
here are comments on how DDOG is expensive:

also Datadog has “shady pricing”:

this is another good thread on it – DDOG is an extremely good product, but its also very expensive – https://www.reddit.com/r/devops/comments/i99zim/explain_datadogs_popularity_like_im_a_5_yo_a_5_yo/

the problem is, their product is basically just a GUI with a bunch of hooks into other apps/hosts to sample data – this is not some crazy IP that can’t be replicated

Sep 27

Research: HubSpot

I primarily started looking at HubSpot to compare them to SharpSpring. I spent a bunch of time going over youtube demos of their product. Its fine, it looks clean and easy to use. It doesn’t blow me away to be honest. Its like a lot of these SaaS products. I read the WallStreet research and you’d think these companies are changing the world. Then I step through the demos and its like ehh, ok. I mean I worked in software 10 years, this stuff isn’t rocket science. But whatevs.

The bigger, more interesting thing I found is at the end of the post. I bolded it. I’ll do another post later because after noticing this with HubSpot I dug into a bunch of other SaaS names and drew the same conclusion. But just as a teaser to that, since HubSpot is where I really clued into what seems to be going on, check out the chart at the end of the post showing how HubSpot stock has moved and just how much analyst estimates have changed since the beginning of the year. Its crazy. We’re told how these software businesses are booming. Are they? Or are the stocks booming and the software businesses are doing fine, but nothing really any better than they were when the stocks were 50% lower. There are exceptions like Zoom or Shopify but most are not.

Just as a short conclusion: I’d say the HubSpot product looks better than the SharpSpring one. You watch the SharpSpring demos against the HubSpot demos and its not quite as clean, things are labeled a little clunky here and there, not as much functionality, and you can see how the workflow isn’t as slick. But on the other hand, SharpSpring is like 1/5th the price. From what I can tell its not 1/5 of the package. I can see why SharpSpring has a easier time getting the agency business. These are customers that I imagine already know what they are doing. They know marketing. They do this for a living. So they know what they want and SharpSpring delivers that functionality at a fraction of the price. Maybe if you don’t know what you are doing and you need some hand holding or want specific customization to your business then HubSpot is going to be better – I mean it really seems like a more intuitive, better package. But again, its not that much better. At least from what I can tell.

General

$12.5b market cap – stock is at $284 right now
$1.13b of cash
$467mm of debt

trades at 14x P/S
grew 25% yoy in Q220
ranked #1 company to work for on Glassdoor
their annual event that SharpSpring mentions is called Inbound – 26k registrants in 2019

Customers

leader in smaller businesses
focus has been small business (organizations less than 2,000 people)
could cause elevated churn though
have 25k customers that are 2-20 employees – this segment grew 150% yoy
enterprise with 200-2000+ employees has 8k customers
25k customers that have multi-products
total of about 68k customers
because they are targeting small busines, their TAM is 100s of millions of businesses)

Competition

they have avoided competition by focusing on smaller end of midmarket
they don’t even mention SHSP as competition:

Product

began as an app, becoming a platform
Marketing Hub is oldest product
Marketing Hub puts all of the marketing activities/campaigns in one spot, accessible to sales and marketing depts
CRM – contacts tab
- contacts page, list contacts, filter contacts
conversations
- support emails
- chat logs
- creating email/conversation templates
marketing
this is a good video explaining the product https://www.youtube.com/watch?v=sxOibuTUGjQ
- ads – can connect google/facebook ads, track engagement
- email – create marketing emails, set up, automate and schedule marketing emails, analyze success of email campaigns based on open rates, click rates
- social – link all social media accounts in one spot, schedule SM posts, monitor activity
- website – create static websites in your domain (home page, contact), landing pages for inbound marketing – to download content, fill forms, blog pages – has things like templates for landing pages, web pages, its actually a little web page creation tool, geared to creating CTA pages
sales – this is in large part their CRM platform
- deals – set up a deal flow, appts, proposals stored, who decision makers are
- tasks – lists of sales tasks assigned to you
- documents – hub for finding documents, also shows stats around document usage/views
- meetings – set up your sales meetings, connect to Google or Office 365 calendar
here is what the deals page looks like:

service:
- tickets are listed
- service hub dropdowns
automated:
- workflows – automated workflows for your organization, example I watched of an email nurturing sequence, sending sequence of emails of a contact that has shown interest via some form they filled out – fill out triggers of the automation, the emails you want sent out, timing of those emails, etc
- sequences – stuff like send an email, call two days later, sequence of followup events
- this was a good video describing: https://www.youtube.com/watch?v=sIEnM0YyM5M&t=444s
reports:
- see traffic analytics
- performance of ad campaigns
CRM
- I’m not sure if HubSpot integrates with other CRMs or if you have to use their CRM
- tracks contact management
- deal and task management
- interactions with social and email to track leads
- good video demo: https://www.youtube.com/watch?v=zv2QXavTvH0
pricing:

the CRM software is free
was originally a tool for SMB – a simple platform to track marketing campaigns
originally built around inbound marketing – also called content marketing

offer a free CRM product, cheap starter for marketing, sales, service hub:

between the three hubs:
- Marketing hub – $530mm of ARR, growing low-mid 20%s yoy
- Sales Hub – $100mm ARR, growing 100% yoy
- Service Hub – $14mm ARR, up 5x from ~$2m a year ago

Growth

a few years ago they changed go-to-market by embracing free CRM
their growth has been primary a function of customer count
ARPC has been declining
ARPC metric is a bit deceptive – enterprise spend per customer is increasing, starter products are bringing down overall spend per customer
- Marketing Hub growing at 5% yoy if you exclude the starter product
- Sales Hub growing at 31% yoy
international revenue has expanded faster – 60% CAGR over last 5 years
fcf margins are ~10% and growing:

more evidence that their growth is based on sub adds. Their retention rates are not that high, hovering around 100%

revenue in the US is slowing a little – was 26% in Q319
core marketing ARR is in low-mid 20s
these were the Wells Fargo numbers heading into Q419:

whats interesting is that the FY20 average estimates are essentially the same as that, actually a little less on EPS:

Q2 Results

had set a low bar
revenue was up 25% to $204mm – this compares to 31% yoy growth in Q120 and 33% yoy growth in Q219
positive surprise on customer acquisitions
they had lowered the price of their Starter Suite by 2/3 in Q120 which drove growth in customers
total customers grew 34% – 7,896 new adds vs 4-5k new adds last quarters
the promotion could lower revenue growth over next 12 months – it is extended to Q320
billings was up 20% yoy
there was 400% increase in suites install base – due to free user upgrades and new businesses moving online
avg sub revenue per customer was down 5% yoy though
guidance of 23% revenue increase – up from 19% before – $210.5mm at midpoint
here’s the funny thing about Hubspot, while the stock has shot up to new highs, its not really based on any increase in estimates, estimates went down and then came back up again and are basically still below where they were:

So really take a look at this chart. This chart is not just showing 2020. Its showing 2021 and 2022 estimates as well. So we are looking at changes to analyst revenue forecasts for next year and the year after. And, um, they have hardly changed. This is the big “pull forward” in software adoption? Really? Because it looks pretty damn flat to me. The stock is up a ton. But the forecasts – not so much.
their poor cash flow in Q220 is kind of weird – everything yoy on the income statement looks comparable to Q219 but for some reason they burned through $23mm of cash before working capital.
the only thing I see on the cash flow statement is this repayment of convertible:

I wonder if that shouldn’t really be subtracted as an operating activity?
Its really strange to me that Q220 cash flow was as bad as it was given results are basically similar yoy (and they are growing of course)

what strikes me as well is that in the last 5 years their top line has grown 6x but really their EBITDA loss has only shrunk like by like $25mm. And if you want to argue that its because of the sub-growth – that MS argument that growth is masking true profitability, then why don’t we see EBITDA improvement accelerating as their growth rate goes from 57% down to 32%

Sep 14

Research: SharpSpring

Marketing Automation

marketing automation is really about driving leads and sales and revenue for our customers
enables them to drive more leads and sales at a time when converting every lead possible into a sale
help along the entire sales funnel
With regard to the value of marketing automation, marketing automation is really about driving leads and sales and revenue for our customers.
Even in a pandemic situation, SharpSpring enables them to drive more leads and sales at a time when converting every lead possible into a sale matters more than ever.
enables them to optimize their entire marketing and sales process, enabling them to understand what’s working and what isn’t and eliminate the things that aren’t working and double down on the things that do.
the TAM, the total addressable market, is massive when it comes to marketing automation
estimated to grow by folks like Gartner and the rest to $14 billion by the end of 2014 — or excuse me, ’24

Legacy Alternative

just beginning to see the adoption as people get frustrated with managing all of these point solutions that were never designed to work together, that don’t include the automation or any of the tracking
at the beginning of the industry’s — or the world’s adoption of marketing automation
A CRM system, a landing page builder, a forum builder, a social media management platform, an analytics package, an e-mail package, all of these things don’t work together well and create a very brittle marketing technology stack.
Marketing automation solves that by incorporating all those technologies into an integrated solution that is wrapped around a core technology

Product

we had a very weak product
We launched in 2014
we launched with a hugely disruptive price point
offer our services for as little as 1/10 the cost of a comparable solution
core technology is an integrated database
and a core tracking technology that today will track literally billions of clicks from our agency — or excuse me, from our customers, every one of our customers’ websites, every visitor to every one of our customers’ websites and every click on an e-mail or landing page or website runs through our rules engine
rules engine is the core technology of a marketing automation platform
Form builders, landing page builders, e-mail marketing, social media management, chat bots and the list goes on – wrapped around this core tracking technology
the rules engine that makes all of marketing automation possible is really the stuff of computer science textbooks
pulling off a marketing automation solution is incredibly hard. It’s really 20 products at this point rolled into 1
any click could tick off an automated event such as increasing a person’s lead score, a lead score, sending an e-mail or Drift campaign to that lead, notifying a salesperson that a lead has changed status and is now worth working on
top-rated platform by every major software review site that’s out there, G2 Crowd, Software Advice, Capterra
Nearly all of our revenues are SaaS business.
7:1 LTV to CAC ratio
lifetime value, we believe, is — for an agency partner is north of $50,000
During the COVID time period, we’ve been acquiring customers for south of 10,000 rather than 7,400 as represented here
are acquiring customers that we think are actually now worth just north of $50,000

Customers

SharpSpring competes is in the SMB and mid market
85% of our revenues flow through digital marketing agencies
have about 2,000 agencies that we think of as our customer, but they act a lot like resellers
agencies serve essentially as augmenting an internal marketing department or is a completely outsourced digital marketing department for the SMBs that hire them
these agencies typically have between 5 and 50 employees and have many clients – between 10 and 100 clients
No single client represents more than 1% of revenues and the vast majority of clients represent less than 0.1% of revenues.
have thousands of clients
their low price point – have not found ourselves on the menu when companies look to cut back in an effort to save costs.

Revenue

revenue model, there’s really 4 parts to it
First and foremost, we want to land new customers – means landing new agencies
that leads to our expansion potential within each agency
core mission is to expand within the agency, to get the agency to move from 1 client to 2, 3, 4 on up to 5, 10, 15. Our largest agency has over 100 clients
fourth is pricing power
are, far and away, the low-cost leader in the space
ability to increase our prices significantly over time without fear that agencies would — or excuse me, clients would move in a different direction
are literally 1/10 the cost of most of these solutions, but for a product that is every bit the equivalent of what they offer
in order for competition to come down to compete with us, they would cannibalize themselves
first 3 categories are what it’s all about for us, expanding the number of clients within each agency and giving them more products and providing value that way
Beyond that, we can cross-sell and we can up-sell
one of the things that people don’t understand about our business, we have high logo attrition
see the heaviest attrition taking place in year 1 and are focusing on executing within that year time frame to become a more sticky platform
can sign up on a monthly agreement and pay a very small onboarding fee to get started with SharpSpring
no clear way for us to tell which agency is going to take off and add 15 or 20 of their clients to the platform and which agency is going to fizzle out after 6 months in a trip
reported a 99% year-over-year net revenue retention number prior to COVID
this last quarter, we reported roughly 92% revenue retention
backdrop of 3% logo attrition on a monthly basis, so very high comparatively logo attrition
only ever lose low-value agencies
those characteristics, including the higher logo attrition, is built into our lifetime value calculation, which is north of $50,000

Recent Financials

latest guidance, which is around $30 million of revenue
We are continuing to grow healthily despite the pandemic conditions and have really never been more stable as a business than we are today.
I need to — this slide does not gel with our latest guidance, which is around $30 million of revenue.
We’ve also increased our cash position and are at around $15 million of cash on the balance sheet as of this point and made significant strides this last quarter towards both cash and EBITDA breakeven.

Competition

competition is same as its been for years
we compete with exactly the same companies that were on my business plan from 2011 before I started our company: HubSpot, Marketo, Salesforce, Act-On and Pardot
Adobe just purchased Marketo last year, I believe, for $4.5 billion
compete and win every day versus HubSpot, Act-On, Pardot, which is now part of Salesforce
compete with Marketo on occasion
we aren’t up at the enterprise space, which is mainly where Marketo exists
smaller companies better served by companies like Mailchimp and Constant Contact
they are leader in agencies – HubSpot has long since stopped reporting on their agency count – last number we’ve ever heard from them at 3,000 agencies
other companies were the first movers in the space. They certainly have much, much higher price points and that serves them well
competition has built up cost structures around those price points, have field representatives
HubSpot does an inbound conference every year that, I believe, costs them something like $20 million
if you go to any one of these software review sites, which are effectively the analyst for SMBS, right? SMBs don’t really go to Gartner. But they do go to Capterra, which is a Gartner site and look for reviews. And our ratings there and the number of ratings and the brand awareness is really started to pick up a little bit and we’re included in more bake offs, and we’re attracting a little bit larger agency, which is sort of exciting for us

Perfect Audience

acquired in Q4 of 2020
acquired substantially all the assets and assumed certain liabilities of the Perfect Audience business unit from Marin Software Incorporated, a Delaware corporation for cash consideration of $4.6 million
Perfect Audience platform employs a usage-based revenue model
Perfect Audience platform acquired in November of 2019 generated an additional $0.62 million of new revenue for the three months ended March 31, 2020
retargeting and digital ad platform and we can bring those types of products to customers – basically an advertising platform
allows a business to put all of their ads in one platform and yet advertise across dozens of digital ad networks including Google’s digital ad network, Facebook; Instagram; Smaato; OpenX; Rubicon, which is now, I believe, Xander — no, excuse me, the Rubicon Project, different company; Yahoo; AppNexus
Perfect Audience experiences a much quicker cash turn than our core SharpSpring business. Processing higher volume, lower fee transactions
estimate that the lifetime value of a Perfect Audience customer could be around $1,500
believe we’re acquiring customers for about $475
payback period on those dollars is just a couple of months, which allows us to recycle those invested dollars at very high velocity
been steadily building this product into SharpSpring and believe it will offer us some real cross-selling and upselling potential
Sharpspring integration focus has really been about making significant changes in the customer acquisition process and working to increase lifetime value by helping customers better spend our budget through look-alike audiences
use it to drive quality leads into the top of the funnel
June was the single highest revenue month since the acquisition

Q2 20 CC

276 new customer wins we secured during the period represent approximately $2.2 million in annual recurring revenue
approximately 2,000 agency customers and over 500 direct customers and over 8,500 total businesses
CAC up due to COVID: cost to acquire customer was approximately $10,900, which was a sequential increase from $9,800 recorded during the first quarter of 2020
this quarter’s CAC calculation artificially reflected pre-COVID-19 sales and marketing spend as a numerator and COVID-19 adjusted new deal closing as a denominator
our marketing spend is down considerably in Q2, but we’re still expecting to see similar sales levels going forward, which should lead to significantly lower CAC next quarter and beyond
Q2 2020 net revenue retention was 91.6%. On a monthly basis, second quarter 2020 average net revenue retention was 97.6%
firmly believe that we will see a point in our relatively near future where we hit a 100% revenue retention
reduced expenses due to COVID: deliberately reduced our expense budget based by nearly 20%, which is expected to create significant cost savings for the remainder of 2020, and should also allow us to meet our target cash usage for the year of approximately $4.8 million
put some austerity measures for lack of a better term in place as the pandemic hit
Most of the changes that we put in place, we believe, to be permanent changes
did do a salary reduction
asked people to take a 10% reduction in salary
During the first half of the year, we spent approximately $3.5 million of our $4.8 million 2020 full year projection
expects total revenues between $29.5 million and $30.5 million, which would represent an increase of approximately 32% compared to the prior year – some of this growth is from Perfect Audience though
range of total revenue is driven in large part by our Perfect Audience revenue through the second half of the year
recorded a 38% increase in the number of paid advertisers compared to the first quarter of 2020
actually sold, I want to say the number is 2 or 3 more agency partners than we did last year
80% of the businesses that we sold in Q2 were agencies and then that, of course, is where the 10 packs came from.
seen agency client expansion slow down
not seeing agency clients leave agencies very much at all
many other players in the space are experiencing major drops in the advertising revenue
as the economic conditions improve, we’ll see greater acceleration of the business
as the low-cost provider in the space, we are also insulated from companies seeking to lower cost by switching to more cost-effective solutions.
introduced a new pricing option for larger agencies that allows new customers to buy more licenses upfront at a nominal discount in exchange for an annual commitment
saw strong interest in this new option from larger agencies and sold a total of 10 bundled, $1,500, 10 pack licenses, one of which was actually a 40 pack.
in addition to signing up at a much higher initial MRR point from, typically what is a $600 sign up starting out at $1,500, in addition to that, they are on an annual contract. So these are customers that are not only paying us more MRR, but are more stable customers and more committed to putting a lot of clients on the platform
these larger clients that takes a 10 pack and you’re getting the $1,500 kind of as it is
would then be charging for expansion licenses I believe it’s $275 million for an additional license after the 10 pack
these are larger customers that believe that their 10 pack is just the start
new agency customers were actually up year-over-year for the second quarter.
larger deals resulted in a 10% increase in ARR from $2 million in Q2 of 2019, to $2.2 million in Q2 of 2020
Chip House would be joining SharpSpring as our new Chief Marketing Officer
credentials at high-growth SaaS operations
was the first marketing executive at Exact target and early SaaS pioneer
also led marketing efforts for e-commerce provider, Digital River

Springboard

our new engagement platform, which we’re calling SpringBoard
products have become so powerful that most customers only use 20% or 25% of the entire tool set
proactively building an in-app engagement tool called SpringBoard that is designed to provide a customized plan to a user, enabling an agency or their client to know precisely what to do? Why to do it? And when to do it?
SpringBoard’s unique value proposition is that it doesn’t just teach a user how to use the platform, but acts as a business’ own strategy consultant advising you on how to extract the most value from the platform.
customized stats to show a promise land
concrete tailored guidance on how to get there
gamified the process to track progress and unlock certification and merchandise rewards

Longer-term Financials:

Recent Financials

Sep 10

Research: Alcanna

~$180mm market cap
have a fair bit of net debt – $9.1mm of cash and, debt of $75mm
largest retailer of alcohol in Canada
top 3 in NA
operates 226 stores in AB, BC

these are their brands:

brands are: Wine & Beyond, Liquor Depot, Brown Jug
they are mostly on the discount side
operate in big box stores and from what I see next to groceries a lot of the time
operate Nova Cannabis business (retail cannabis)
here are cannabis stores:

was 25% owned by Aurora Cannabis – I think they may have sold their stake though
on June 24, Aurora sold 9.2mm shares at $3
that was all of Aurora’s shares according to the MD&A

Sale of Alaska business

sold for $27.2mm
using proceeds to reduce debt

Q220 results

SSS were up 13.4% yoy
gross margins were up to 22.7% from 22.1% yoy
frequency of visits was down but avg basket size up substantially
cannabis retail sales inline with expectations
total cannabis sales up 64% – from $8.8mm to $14.4mm
GMs in cannabis were $4.9mm – that is 34%
plan to open 2-4 new Nova stores in AB
opening 6-7 stores in Ont

Q2 CC

our results since May and right through till sitting here today have not changed
Anecdotally, we’ve heard that even people who do go to restaurants are not staying. They’re eating fast, staying — in and out, stay for an hour, and — which the restaurants are encouraging to try to get some business in their limited-capacity footprints now. Not ordering the second bottle of wine. Not having the predinner drinks or the cocktails or the after dinner, and — all of which, I think, is playing into our belief — our strong belief that this is not just a onetime blip, it’s a trend and societal and consumer behavior trend that will be in place for the foreseeable future.
Our company has shifted, quite dramatically, its focus, and we’re essentially, for the most part, a discount liquor company now
our Ace banner has 102 stores, whatever it is, and Liquor Depot is 79 now. So — and Wine and Beyond, which is our large-format store, which does have luxury products but it’s not a luxury store, its margins are more or less the same as Ace
on cannabis margins: That’s pretty much standard for the industry, as I understand, reading some other people. And we just — we obviously go comparison shop our other retailers. Most people are — started getting around 34%, 35% margin right now.
more on cannabis: Our stores have been extremely stable on a sales-per-week basis because we’re in good locations. But ones who are in terrible locations, which is the vast majority of them, are just having more and more stores sharing tinier and tinier pieces of their part of the pie. And the only competitive response people in that situation can do over time, if you look at any retail 101, is drop prices
we don’t anticipate margins staying in the competitive environment at this level for too much longer in Alberta – sounds like AB cannabis retail market is saturated but so is wholesale so prices just overall will come down
But it’s 35%. 35% is just not sustainable for a long time in any retail. It’s just there’s too much — you do very well at 35% in a retail environment
on liquor side they can’t keep inventory: The other place that we’ve increased inventories is just we have some stores that are just doing gangbuster numbers, and we needed to put more inventory in there to support those increased sales. And then the third place, as you pointed out, is there’s been some great deals on some LTOs from the vendors, and so we’ve stocked up to keep our margins healthy and remain competitive in the marketplace.
step up in inventory buying in Q220 was deliberate: We made a deliberate — we sat down with our operating team, and they asked, and they had a well-thought-out plan for — wanted as much as — at the high point, as much as $10 million to $12 million extra dollars to invest in inventory because of the LTOs they saw coming and the conversations they’ve been having with vendors as to what might be possible. So it was a very deliberate thing we did. And you’ll see the benefits of that on the income statement over the next quarters because it’s purchased now, but the pricing is — it will have the impact on — positive impact on margins going forward. So yes, it was strategic. It was carefully done
more on store sales: some of the stores, especially the Wine and Beyonds, we just literally couldn’t keep — the shelves are running out every single weekend. Those stores are doing Christmas-like numbers week after week after week, and we just couldn’t literally keep it on the shelf.
in strong position for lease renewals: like 10%, give or take, whatever, of leases every year come due. So yes, no, absolutely. I think we can say with almost certainty there’s not going to be any rent increases, for sure. And it’s situational, case by case. If you’ve got some of our great Liquor Depots in — which have restrictive covenants in a grocery-anchored mall, which do very well, and we wouldn’t have the same leverage you might think we’d have with the landlord because we — if you say no, they get somebody else.
more on leases: other situations, we do have tremendous leverage. Obviously, one of the very few retailers right now who is not only able to pay the rents but very comfortably able to pay the rents. So we’re a very desired tenant. Always have been, but even more so now
if we’re patient, to get some extremely attractive real estate for very extremely attractive rents to build Wine and Beyonds, especially, in places where so far we’ve had trouble, namely Calgary and British Columbia

Insiders

been buying a lot of shares
bought around 100k shares in Aug/Sept at around current price
Before that, in June-July had bought about 175k shares at a little over $3

Financials

Long term:

Short term:

business really accelerated last quarter – no surprise
FCF last quarter was negative b/c they built inventory – before WC FCF was $13mm
I kinda like this one – seems to me that cases in BC and AB are going up not down, BC just shut down their bars and clubs, AB maybe not but who is going out right now – tailwinds for a few more quarters at least and this stock isn’t pricing in that like other pandemic stocks