• Sean Rapley

August 2021 - Luke's Global Fund Performance Update

Luke's Global Fund achieved a return of 19.3% (in constant currency) return over the month of August, and a 18.9% gain to date for FY22 on a constant currency basis Our International Benchmark, the S & P 500, returned 2.9% for the month of August, and the benchmark is up 5.2% over the financial year.


Our portfolio as at August 31, 2021 is outlined in Chart 1 below:


Chart 1 - Portfolio Pie Chart


The contribution analysis of our holdings is outlined below in Chart 2, with contributions across the board, with a standout contribution form Upstart Holdings, which contributed 46.8% of the gains for August. The strong performance for the month of August can be attributed to some outstanding quarterly reports, which are discussed later in our report. The results reported confirm our belief that our holdings, which generally have recurring revenue, high gross margin, and are capital light, will continue to grow exponentially for the short to medium term, as they expand their product offerings, and assist the world's digital transformation.

Chart 2 - Contribution Analysis Bar Chart


COMPANY REPORTS & ANNOUNCEMENTS


Over the month, many of our holdings reported their 2nd quarterly results. To say the results were outstanding would be an understatement. All but one of our companies exceeded guidance, with many showing acceleration in revenue growth.


ZoomInfo


On August 2, Zoominfo, the leading market intelligence platform for sales and marketing teams, reported 2nd quarter results. ZoomInfo reported accelerating revenue growth and high profit margins ( GAAP income margin of 24%). Key highlights:


  • Revenue of $174 million, up 57% year-on-year, and 14% increase on the prior quarter. This is the highest quarterly growth rate since 4th quarter, 2019.

  • Launched integrations with Snowflake and Microsoft Dynamics 365.

  • Acquired Insent.ai and Chorus.ai, which offer services that can enhance the lead generation services of ZoomInfo. The CEO & Founder, Henry Schuck, believes the Chorus.ai acquisition is a game changer:

“The acquisition of Chorus will accelerate our vision to deliver a modern go-to-market platform that brings together best-in-class intelligence with comprehensive data management, workflow, and engagement software, empowering companies to effectively execute their revenue-generating strategies. With the largest Conversation Intelligence patent portfolio in the industry, Chorus will advance each aspect of our vision by surfacing a new category of insights, illuminating new workflows, and enabling more targeted engagement at scale”


Datadog Inc.


On August 5, Datadog reported its 2nd quarter results. With revenue growth accelerating, and operating leverage unfolding as the business scales, these were the result highlights:

  • Revenue of $234 Million, up 67% year on year. Crucially, quarter-on-quarter revenue growth accelerated to 18%, the highest Q-on-Q growth rate since Q4 2019.

  • Gross margin of 76%.

  • Operating cashflow more than doubled, with operating cashflow at 22% of revenue.

  • Net Dollar Retention Rate (NDRR) in excess of 130%.

  • R & D expenditure doubled year-on-year, with significant product additions and enhancements driving the high NDRR. New products include the Cloud Security Platform, among a long list of enhancements and additions.

Upstart Inc.


On August 10, Upstart announced its 2nd quarter results. It is fair to say that I have never seen a stronger quarterly result, with the following highlights:


  • Revenue of $194 million, up 60% on the prior quarter.

  • Gross Margin: 86%.

  • GAAP income of $37.3 million.

  • Originated loans of 287 000 vs 170 000 in the prior quarter, despite lending headwinds.

  • Loan conversion rate was 24%, up from 9% in the previous corresponding period.

  • Upstart now have 25 bank partners originating loans using the Upstart platform.

  • Guided for 10% revenue growth in Q3, however, management indicated during the earnings call they are already surpassing this level in the month of July.

On August 25, Upstart announced another Credit Union, Patelco Credit Union, will join the Upstart referral Network. This is what Richard Wada, Chief Lending Officer, Patelco Credit Union said about the deal:


“Our mission is to bring the best products and services to our members as well as help improve their overall financial health and well-being. Our partnership with Upstart’s all-digital, AI lending solution allows us to drive more inclusive lending outside of our branch footprint and help even more people improve their financial wellness.”


Upstart's value proposition is compelling to banks and credit unions and to customers. Banks and credit unions get access to Upstart Inc. platform that has the highest loan conversion rate, and lowest default risk. Customers benefit form quick and easy loan applications, and more competitive interest rates (particularly for customers with low FICO scores).


Sea Ltd


Sea Ltd, reported 2nd quarter earnings on August 17. Before we outline the key highlights of the results, it is worthwhile noting that Sea Ltd has a market capitalisation of $162 Billon USD. This business is huge, yet continues to grow like a start-up. The key highlight are:

  • Total GAAP revenue up 159% year-on-year.

  • The Digital Entertainment division recorded 65% year-on-year growth in bookings.

  • E-commerce (Shopee) recorded 161 % year-on-year growth in GAAP Revenue.

  • Digital Financial services GAAP revenue was $89 million USD, up 659% year on year, with SeaMoney total payment volume up 150% year-on-year.

  • Gross Profit of $930.9 million, up 363.5% on PCP.

  • Adjusted EBITDA of -$24.1 million.

  • Shopee app was the most downloaded app on Google Play and second most downloaded app across Google Play and iOS App Stores combined for the shopping category, and Shopee continues to gain traction in Brazil, ranking first in downloads and time spent on app in the Shopping category.

Snowflake


Snowflake reported 2nd quarter earnings on August 25, 2021. Another strong quarter, with the key takeaways being:

  • Product revenue of $254.6 million, up 103% on PCP.

  • Remaining performance obligations of $1.5 Billion, up 122% on PCP. However, up just 9.2% on prior quarter.

  • Net Revenue Retention Rate of 169%. The highest rate over the previous 5 quarters.

  • 116 customers with a trailing annual product revenue of more than $1 million, up 107% on PCP.

  • Added 18 Fortune 500 customers over the quarter, which now sits at 212 of all Fortune 500 customers, and represents 34% growth on PCP.

  • Adjusted fee cashflow positive, as operational leverage and scale increase.

Over the past 12 months, Snowflake has been focusing on winning the largest customers, the Fortune 500 customers, and it is beginning to bear fruit with accelerating Fortune 500 customer wins in Q2. It typically takes 9-12 months from customer sign up to booking customer revenue, indicating a strong pipeline of growth into FY2023.


Stone Co.


On August 25, 2021, Stone Co. announced issues with high delinquencies on receivables finance, which has increased significantly at a time of regulatory change, and at a very difficult period for businesses in Brazil, which are grappling with the ongoing pandemic and a vaccine stroll out.


Stone Co. reported strong growth in Total Payment Volume and customer acquisition in their 2nd quarterly results. However, take rates plummeted due to provisions and write downs.


PORTFOLIO CHANGES FOR THE MONTH


During the month of August, we added to ZoomInfo, following their strong Q2 results. We added to our Upstart position prior to the Q2 earnings call, and again immediately following the earnings call, selling a portion of our Teladoc Health holding, to fund the purchase.


We sold out of Stone Co. immediately after their earnings release. Credit risk, economic headwinds, currency risks all influenced our decision to exit. We consider the risks are to high to hold our position, although we like the business, and management, there are too many challenges and unknowns going forward.


KEY LEARNINGS THIS MONTH:


Holding a concentrated portfolio enables one to monitor positions more closely and actively, allowing one to act quickly when opportunities, or risks arise. An example of this is our trading in Upstart Inc. over the month, which enabled us to take advantage of significant mispricing of the business, as market participants took time to absorb the remarkable development of the business this year.


If you have any opinions on the companies we hold, or would like to know more about our investments, we would love to hear your feedback.


Regards,



Sean

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