Among the initial public offerings I've covered recently, MuleSoft (MULE) stood out as one that has no true competitors...at the moment. That's because it has pioneered a new technology layer in enterprise information technology called the application network. An application network is a new layer above a corporation's APIs (application programming interfaces). APIs are like the "waiters" that serve data centers, software, and information spread over a corporate IT network. With an application network, developers and IT executives can manipulate and combine APIs to form new applications, all with greater speed and agility than traditional solutions.
The first quarter continued the strong revenue growth outlined in the company's S-1 filing earlier this year, at 56% year over year to $60.9 million, with the all-important recurring subscription and service revenue growing at a higher rate of 62%. Non-GAAP (generally accepted accounting principles) gross margin expanded 40 basis points to 75.3%. Non-GAAP net loss per share came in at $0.06, which was $0.05 better than expected by analysts.
The company is still in its early stages of growth. To consider MuleSoft as an investment, we need to look at the larger story, strategy, and total addressable market. For that, management highlighted a few key points on the call.
Image source: Getty Images.
It wants to be "category-defining"
"We are pioneering a new category, and we believe we are well-positioned to disrupt one of the largest areas of IT spend," said CEO Greg Schott. As such, the company is spending heavily on sales and marketing to penetrate enterprises' central IT departments and educate third-party integrators.
To capitalize on what MuleSoft believes is a $29 billion market, the company doubled its spend on research and development from last year, and increased sales and marketing by almost 50% year over year. While it's spending heavily right now, the company also noted it currently gets an 18-month payback on this marketing spend.
Customers are spending more money
MuleSoft explained its "land and expand" strategy on the call. The company usually introduces its Anypoint Platform when IT departments have a specific project or need. From there, MuleSoft says companies start to use it as the base upon which they evolve their IT departments.
To that end, the company touted its 116% dollar-based retention rate this quarter. That means that on average, if a client spent $1 with MuleSoft in Q1 last year, it spent $1.16 in Q1 this year. This number is in line with the 117% rate in 2016.
Moreover, management said that newer customers actually now have a higher initial spend than previous years, as word has gotten out about MuleSoft's capabilities. That means the dollar-based retention is even more impressive, since the retention is coming off a bigger base.
It signed high-profile new clients
In the quarter, MuleSoft increased its client base by 60 customers, increasing its customer count to 1,131 versus 892 in the year-ago quarter. The company touted many large multinational companies that signed on, including Pfizer, Fujitsu, General Dynamics, and Yum! Brands; smaller growth companies like LendingClub; and public-sector clients like the state of Idaho, and Halifax Stanfield International Airport.
The quality and diversity of its customers show that MuleSoft is making inroads in some of the world's biggest companies.
It's winning against competitors
Schott reiterated the message that the company's win rates against competitors are high, and he stressed that those competitors don't really do the same things MuleSoft does [transcript via Seeking Alpha]:
[T]he No. 1 competition for us has always been and continues to be folks writing custom point-to-point integration code, and that's where that market is so big. ... So we will see the IBMs of the world, the Oracles and TIBCOs, and in some of these larger deals for the quarter, those that are in there as legacy incumbents. ... And those legacy vendors are just not able to provide the kind of ease-of-use and velocity that they're looking for, so that's why we continue to win there.
It's making Anypoint easier to use
MuleSoft also said it was rolling out the newest version of its Anypoint Platform this year, called Crowd. Basically, the newest product is meant to be easier and more intuitive for developers and IT employees to use. As MuleSoft's flagship product is somewhat new, it is trying to make the adoption of this new tool as seamless as possible.
In sum, MuleSoft posted a strong quarter with many new customer wins. Still, only time will tell whether it can retain its leadership in this new field.
