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Sumo Logic IPO | S-1 Breakdown

By 

Alex Clayton

Sep 8, 2020

Company Overview

Sumo Logic, a leading player in the fast-growing log management space, filed for a $100M IPO, which is a placeholder amount. They have also subsequently filed an amended S-1/A with new July-31st ending numbers (Q2). Morgan Stanley is leading the offering and the company plans to trade under the symbol “SUMO” on the Nasdaq. Sumo is part of the wave of SaaS companies filing including JFrog*, Snowflake*, Unity, Palantir, and Asana. Given where we're at in the market cycle -- public SaaS companies at new all-time highs, record low interest rates, and a looming Presidential election, it's prudent for any SaaS company of scale and predictability to get public now -- the IPO window for SaaS companies has never been more open. For context, the average SaaS IPO is up 7.2x on average, and most of those businesses have been public only a few years (as of 4-Sep-2020).

Sumo Logic's mission is to "empower organizations to close the intelligence gap" and is looking to create a new category around log management use-cases. They call themselves a pioneer in "Continuous Intelligence, a new category of software, which enables organizations of all sizes to address the challenges and opportunities presented by digital transformation, modern applications, and cloud computing". The product has use cases across all lines of business spanning developers, IT, and security teams. Sumo Logic states that with the amount of data being generated inside an enterprise -- as well with increasing gaps of knowledge about this data -- there needs to be a solution to bring that machine data together inside of one platform. The company's vision is to "democratize machine data" and in July of 2020 scanned 18.6 billion events per second through their platform. Sumo Logic started in 2010 with a SIEM (security information and event management) for the cloud and has since broadened the product to include many other machine data analytics use-cases and also mentions how they enable their end customers to adopt DevSecOps, which is the philosophy of integrating security practices within the DevOps process. The company did $155.1M of revenue in FY-20, up 50% YoY and in the last quarter, they did $49.4M of revenue, up 31% YoY. Sumo Logic had 2,130 customers as of last quarter and 125,000+ users (ending Jul-2020). The company is based in Redwood City, CA, and has 710 full-time-employees (FTEs) across 13 countries. Sumo Logic was founded in March of 2010 and has raised $340.2M of equity financings over the life of the company (more in the ownership section below).

Product

Sumo Logic's platform offers insights to their end customers and uses proprietary machine learning technology. Customers can gain insights without knowing what questions they need to ask and the company serves both technical and non-technical users and has a wide range of use-cases across IT, security, product, customer success, and insights for executives. The company offers out of the box and customizable dashboards across a variety of use-cases and is used across four main areas:

  • Operational Intelligence: Enables users to rapidly understand the root cause of poor performance in their application stack and troubleshoot quickly.
  • Security Intelligence: The platform can detect real-time threats and incidents and provide indicators of compromise that enable analysts to accelerate investigations across environments.
  • Business Intelligence: Extracts valuable business, service, and other critical KPIs from existing data to predict and analyze customer behavior, engagement, and actions.
  • Global Intelligence: Given the solution ingests vasts amounts of data, Sumo Logic provides benchmarking that leverages machine learning to uncover global KPIs and key risk indicators, or KRIs, allowing customers to measure themselves against the broader Sumo Logic global community.

Sumo describes their platform as being used across a few main tenants which include data collection and management, visualization and exploration, alerts and notifications, and search and analytics. As mentioned, the use-cases are broad and typically customers utilize Sumo Logic’s platform for operational intelligence to address observability requirements, security intelligence for cloud SIEM, and business intelligence. Over time, the company expands into other use-cases such as fraud detection, preventive maintenance, inventory management, and IoT initiatives -- Customers typically adopt Sumo Logic with an initial use case or a single project. This product expansion also correlates well with their net expansion characteristics which are in the metrics section of this post. Additionally, the product ingests data generated by applications, infrastructure, and microservices from cloud and on-premise environments and supports ~175 out-of-the-box applications and integrations. Below are a couple of product screenshots from the S-1.

Source: S-1
Source: S-1

Summary Metrics and GTM (Go-to-Market)

Sumo Logic sells to mostly mid-market and larger customers and their GTM consists of self-serve free trials through their website, an inside and field sales team, and a partner channel. The company's self-serve free trial generates a significant portion of their paying customers and in FY'2020 ~1/3 of new customers started with a free trial. The company charges customers subscriptions which are multi-tiered packages for access to the platform and pricing is based on factors such as the volume of data to be ingested, duration of data retention, and breadth of access to platform features and functionalities. Sumo Logic disclosed that ~99% of their revenue is subscription in nature therefore they ended Q2'21 / Jul-2020 at $195.7M of implied ending ARR (quarterly subscription revenue multiplied by 4).  An output of their pricing page from the website is below and is here on their website. Sumo Logic does not mention sales cycle length other than that it varies customer to customer. Clearly the company has seen negative results due to COVID. Revenue growth in the most recent quarter has slowed to 31% YoY compared to 45% YoY in Q1'21. Moreover, their total number of customers has decreased slightly from 2,137 at the end of Jan-2020 to 2,130 ending Jul-2020. Although, large customers are still growing and there is more on customer segmentation later in this post. Below are more stats on the business and industry from the S-1:

  • Sumo Logic's dollar-based net retention rate has fluctuated between approximately 120% and 130% for each of the past ten quarters.
  • As of last quarter, the implied average ACV (implied ending ARR / total customers) was $91.9K. The company recognizes subscription revenue ratably over the term of the subscription, which is usually 1 year but can be 3+ years.
  • The company does see some seasonality, and most new contracts are entered in the 4th quarter of each year, which isn't surprising for a SaaS company.
  • No customer represented 10% or more of revenue in fiscal 2018, 2019, or 2020, or for the six months ended July 31, 2019, or 2020. They mention the customer that's almost 10% of revenue is in the digital entertainment industry.
  • Sumo Logic generates almost all of their revenue from the growth in existing customers, which isn't surprising as total revenue has grown while customers have been slightly negative during the first 6 months of the year. 95% of the increase in revenue for the first 6 months of the year was attributable to existing customers, with less than 5% attributable to new customers. While the amount of expansion revenue is impressive, the lack of new customers has clearly contributed to the slowing of revenue growth in Q2'21, likely coming in below their pre-COVID plan. Adding new logos to maintain and / or re-accelerate growth in subsequent quarters will be a big question that investors have for the company.
  • The company is very good at up-selling current customers. For example, as of last quarter customers who generated $1M+ in ARR have experienced a 10x in aggregate in ARR since their initial contract term. This could be driven by a few large customers (they do disclose they have a customer that could be close to 10% of total revenue), but that statistic is very strong.
  • 16% of revenue was generated outside the U.S. in each of the last 3 years.
  • Sales commissions are deferred and amortized on a straight-line basis over a period of benefit, which they determined to be 5 years.
  • Sumo Logic does have a strong community of users and they're generally happy: They have 125,000+ users and have conducted 22,000+ Sumo Logic certifications. Moreover, the company has maintained a 94% average CSAT (customer satisfaction score) score over the past 8 quarters.
  • As of last quarter, the company owns 19 issued U.S. patents, 17 U.S. patent applications, and 12 non-U.S. patent applications.
  • Sumo Logic has an outstanding loan balance of $24.3M.
  • The company has certifications in for CSA-Star, FedRAMP In Process, HIPAA, ISO 27001, PCI/DSS Provider Level 1, and SOC 2 Type 2.
  • Sumo Logic reveals some interesting stats about the data that is both generated by their customers and analyzed: Their platform scans an average of 873 petabytes of data per day and an average of 18.6 billion events per second. In July 2020, they scanned 27.1 exabytes of data and 49.9 quadrillion events. In the same month, an average event comprised 542 bytes of data, and in the same period, their platform scanned an average of 1.6 quadrillion events per day.
  • They also quote some interesting research from IDC: By 2024, there will be over 140 ZB of data generated, of which nearly 25% will be real-time, public cloud spending will grow from $233 billion in 2019 to over $513 billion in 2023, and the number of connected devices, including predominantly IoT devices, is expected to reach 55.9 billion by 2025.

Here is an output of their price page:

Source: Sumo Logic pricing page

Representative Customers

Sumo Logic ended last quarter with 2,130 total customers and representative customers include 23andMe, Alaska Airlines, Brown University, JetBlue, Land O’Lakes, LendingTree, Major League Baseball, Netflix, PagerDuty, Petco, Pitney Bowes, Qualtrics, Salesforce.com, Twilio, ULTA Beauty, and Xero. A screenshot of other representative customers from the S-1 is below:

Source: S-1

COVID Impacts

Sumo Logic does add a risk factor and has disclosure around the impact of COVID-19, which has been generally negative for the company. They believe the pandemic has caused delays in some renewal decisions, has reduced the effectiveness of their sales and marketing efforts, has reduced the duration of some subscriptions, and caused some customers to ask for concessions in payment terms. Moreover, they mention that "our ability to add new customers may be negatively impacted by current economic uncertainty in light of the COVID-19 pandemic." This isn't surprising as the company has lost customers from the start of the year to the end of Q2.

Market Opportunity

Per usual for an S-1, Sumo Logic paints a massive market size. Given the use-cases around their product and the broad swath of types of companies they can serve, the market is no doubt very large. The company measures their market size in a couple of different ways 1) the company aggregated IDC (International Data Corporation) projected revenue across categories that include: "advanced and predictive analytics software; AI software platforms; content analytics and search software; end-user query, reporting, and analysis software; software change and configuration management; security analytics, intelligence, response, and orchestration; and IT operations management (ITOM) software, across on-premise and cloud environments", which they believe to be $55.1B. 2) the company has identified a global list of companies and ascribe a range of ARR (annual recurring revenue) figures against similar ARR ranges in their own customer base, and this number comes out to $49.3B.

Competition

Given the large market for solutions in the general data space and Sumo Logic's extensive product offering, they cross over with multiple end markets. The company mentions competitors that provide tools for analytics, enterprise and open source search, SIEM, and monitoring are all in their purview. Moreover, they mention primary competitors to be Splunk and Elastic, Datadog* in infrastructure monitoring, and basic cloud monitoring tools offered by cloud infrastructure providers such as AWS, Azure, and GCP.

Investors and Ownership

Sumo Logic disclosed they raised $340.2M in equity financings and Pitchbook is close at $345.5M. Investors include Battery Ventures, Sapphire Ventures, DFJ Growth, IVP, Tiger, Wing, Sequoia, Accel, Sutter Hill, Greylock, and others. 5%+ pre-offering institutional investor shareholders include Greylock (22.6%), Sapphire Ventures (7.1%), Accel (6.8%), IVP / Institutional Venture Partners (5.6%), and DFJ Growth (5.1%). Ramin Sayar, the CEO, holds a 4.7% pre-offering stake. The last round was a $110M Series G in May of 2019 that was led by Battery Ventures at a $1.19B post-money valuation (Pitchbook) at a $11.02 price per share. After that round in July of 2019, the company did a tender offer and sold ~$20M worth of shares at a $12.12 price per share. An output of the cap table ownership and per series prices is below.

Source: S-1

Price per Share Disclosure

Source: S-1

Acquisitions‍

Sumo Logic has acquired a couple of companies over the past couple of years. The most recent was Jask Labs, which was acquired in the fall of 2019. Jask generated $2.9M of revenue from January 1st --> October 25th, 2019 with a $(22.5)M net loss. More detail is below:

Source: S-1

Financials and Other Metrics Outputs

Sumo Logic is almost at $200M of implied ARR and grew 31% YoY last quarter, although LTM (last-twelve-months) growth is higher at 42%. COVID-19 has clearly been a headwind for the company as it relates to new logos. Non-GAAP gross margins are almost at 75% and while the company has lost money in each of the last 8 quarters, their non-GAAP operating margin is rising and was (11)% last quarter. Sumo Logic also mentions the following in their S-1: "we believe our long-term value as a company will be greater if we focus on growth over short-term results" and they are no doubt investing in the future. Their implied months to pay back, which is the inverse of a CAC ratio (implied net new ARR multiplied by gross margin/sales and marketing spend of the prior quarter), was at a 35-month median over the past 8 quarters and has risen significantly over the past 2 quarters as the company's revenue growth has slowed down. Sumo Logic has raised $340.2M, has $98.1M of cash on their balance sheet, $24.3M of debt, and spent $11.2M in cash on acquiring Jask, implying they have burned almost $270M to get to $196M of implied ending ARR, a 0.7 ratio of implied ending ARR / implied net burn to IPO quarter. Outputs of other metrics are below:

Historical P&L & Metrics ($000's)

Source: S-1

Quarterly Revenue ($M)

Source: S-1

Ending ARR ($M)

Sumo Logic added $8.8M of implied net new ARR over the past quarter and $46.1M over the past year.

Source: S-1

Quarterly non-GAAP Gross Margin and Operating Expenses as a % of Revenue

Source: S-1

GAAP and Non-GAAP Operating and Free Cash Flow Margins

Source: S-1

U.S. vs International Revenue Mix Percentage

Source: S-1

Average ACV and Customer Segment Analysis

Sumo Logic discloses some good data around customers at different spend levels, although they do not release what portion of total revenue each segment produces. Moreover, while total customers are slightly negative year-to-date, larger customers are growing at faster rates, which is a positive for the company. The first chart below shows total customers, customers >$100K in ARR, and the implied average ACV across total customers, which is growing slightly. Note we do not know the average ACV for each segment since they don't release that detail.

Source: S-1

This second chart looks at the YoY growth rates of each segment of customers. Note that larger customers ($1M+ in ARR) are growing the fastest, which is a very positive sign for the company. Customers with $100K+ in ACV are growing faster than the total as well. With negative YTD total customers, the larger customers are the only way they're growing on the new revenue side. Note that the Jul-2020 growth rates are calculated using an average of the beginning and end of FY'19 and FY'20. This bifurcation in the customer base seems plausible as their smallest customers are getting hit with COVID headwinds but larger enterprises are able to weather the storm.

Source: S-1

Here is the last look at customer segmentation. The below chart shows the percentage of each bucket of customers as a percentage of the total. The $1M+ and $100K+ customers are smaller relative to the total but they are growing more quickly.

Source: S-1

Cohorts and Contribution Margin

Sumo Logic discloses a cohort graphic and some details around a customer cohort's contribution analysis. On average, each cohort grew at a compound annual growth rate of 35%+. As you can see from the graphic below, they're expanding over time. Sumo Logic doesn't release specific net dollar retention rates but mentions they have been between 120-130% over the past 10 quarters.

Source: S-1

The company also releases a contribution analysis for the 2018 cohort of customers, which they believe to be a good representation of their base. As you can see, customers become very profitable over time. Not surprisingly, this is the beauty of the SaaS model -- pay to acquire the customer upfront, they pay you more over time and eventually can generate significant cash flow. The company released the following about the 2018 cohort.

  • At the end of fiscal 2018, the 2018 Cohort accounted for $10.1 million in ARR and $19.8 million in associated costs, representing a contribution of $(9.7) million, or a contribution margin of (97)%. At the end of fiscal 2019, the 2018 Cohort accounted for $14.6 million in ARR and $7.6 million in associated costs, representing a contribution of $7.0 million, or a contribution margin of 48%. At the end of fiscal 2020, the 2018 Cohort accounted for $18.3 million in ARR and $8.2 million in associated costs, representing a contribution of $10.1 million, or a contribution margin of 55%.
Source: S-1

Sales Efficiency and Payback Periods

Sumo Logic doesn't release customer counts at every quarter, but the below output plots their implied months to payback using the inverse of a CAC ratio (net new ARR multiplied by non-GAAP gross margin/non-GAAP sales and marketing spend of the prior quarter). The magic number is defined as net new ARR/non-GAAP sales and marketing spend of the prior quarter. Sumo Logic's efficiency has declined over the past two quarters as new logos have stalled. They don't disclosure churn. The median months-to-pay-back over the disclosure period is 35 months.

Source: S-1

Cash Flows ($M)

Source: S-1

Quarterly P&L (000's)

Source: S-1

Valuation ($M)

Sumo Logic will trade like other high-growth SaaS companies: on a multiple of forward revenue and will likely want to point to Datadog* as the closest comparable. Datadog* is currently trading at almost 40x NTM revenue (as of 4-Sep-2020). The output below uses NTM (next-twelve-months) revenue based on an illustrative range of growth rates and comparable EV (enterprise value) / NTM revenue multiples from other public, high-growth SaaS businesses. It also includes an implied ARR multiple range. As mentioned in other posts, companies do not release projections or guidance in S-1's. As I mentioned earlier, there has not been a better time for a SaaS company to IPO, and Sumo Logic will likely trade in the range of other, high-growth SaaS companies.

Source: Multiple ranges from https://www.meritechcapital.com/public-comparables/enterprise. Enterprise value ranges are illustrative.

The below is a deeper dive on valuation given the company has filed an amended S-1 with a price range. This output is called an AVP (analysis at various prices) and plots the market cap, enterprise values, and associated multiples based on an illustrative trading range of prices per share. Moreover, on the right side of a the output there are the current multiples of other public SaaS companies. As we've seen in over the past few months, SaaS IPOs generally risen dramatically on the first day of trading and I suspect Sumo Logic to follow suit.

Source: S-1 and public company data as of 4-Sep-2020.

Final Thoughts

Sumo Logic is playing in a massive market and competitors like Splunk, Elastic and to a certain extent Datadog* have all performed very well in the public markets. Sumo Logic isn't at the same level of efficiency and growth of a Datadog* (or even Elastic) at IPO quarter, but they're the largest stand-alone (and cloud-first) player in the logging and SIEM markets. Clearly, the company has been heavily impacted by COVID given logos are negative year-to-date, but once they get a customer onboard they expand their spend dramatically and the larger-spend customers are growing the fastest. If the company can tell a story around how they can reignite new customer logo growth (which might be just the end of COVID), they should trade quite well as a public company. The market opportunity is no-doubt massive and Sumo Logic has significant room to grow. Given the frenzy of investors looking for more SaaS exposure, Sumo Logic should do quite well even with the recent slowness in new logos, the huge amount of SaaS companies raising money right now, and the sell-off in the past week.

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Special thanks to my partners Aimee He and Anthony DeCamillo for their help on this post.

Disclosures:

*Meritech is an investor in Datadog and Snowflake.

*I invested in JFrog at Spark Capital.

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