Sumo Logic’s S-1 Analysis — Some Logic 📊
Cloud data analytics and log analysis company Sumo Logic recently filed its S-1 with $100M as a placeholder for the offering. The first cybersecurity company to file in 2020, Sumo Logic brands itself a Continuous Intelligence Platform, which enables organizations to automate the collection, ingestion, and analysis of application, infrastructure, security, and IoT data to derive actionable insights within seconds. Currently Sumo Logic has 2.1K customers generating $170M in revenue over the last twelve months. Founded in 2010, Sumo Logic has 710 employees and is headquartered in Redwood City, California.
Sumo Logic’s S-1 emphasizes that we live in the intelligence economy and organizations succeed and fail based on how they understand and respond to changes in their business. Sumo Logic’s goal is to democratize machine data, making insights from data available to all.
The Continuous Intelligence Platform is a multi-tenant, cloud-native SaaS platform that integrates and analyzes structured, semi-structured, and unstructured machine data, both historically and in real time, to provide actionable intelligence around what happened, why it happened, and how to resolve business, technology, or cybersecurity issues. Sumo Logic offers advanced analytics based on proprietary machine learning technology to identify and predict anomalies in real time. It runs on AWS and is powered by 175 out-of-the box applications and integrations and supports self-service installation. There are four main solution areas: operational intelligence, security intelligence, business intelligence, and global intelligence (benchmarking technology usage across businesses). The company claims benefits of their approach include real-time data ingestion, predictive/proactive insights, multi-tenant cloud architecture, and accessibility to everyone in an organization.
What really stood out in the S-1 is that Sumo Logic’s technology can be used by many parts of the organization: development, IT operations, security, product, customer success, and executives. Sumo Logic’s dashboards can be used out-of-the-box or customized for a range of use cases including monitoring workloads, alerting users to performance issues, investigating anomalies, detecting threats, responding to security incidents, and predicting customer churn. Sumo Logic also tied itself to the DevSecOps movement, the philosophy of integrating security practices within the DevOps process, and involves ongoing, flexible collaboration among developers, release engineers, and security teams.
Sumo Logic touches on many categories of spend. Sumo Logic believes it can address $55.1B, which they derived from combining IDC categories including 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. They also built their own Total Addressable Market (TAM) model that suggested a $49.3B market, which they calculated by multiplying the average ARR per customer type for each product by the number of businesses that are over $1.5B in annual revenue, $500M-$1.5B, and $100M-$500M with +250 employees.
There are numerous competitors across analytics, enterprise and open source search, SIEM, and monitoring. Primary competitors include Splunk and Elastic. Other competitors include Datadog, cloud infrastructure providers such as Amazon Web Services (AWS), Microsoft Azure, GCP, and various private companies.
Sumo Logic is growing OK. It achieved $155M in FY20 compared to $104M in FY19, 50% YoY growth. For the three months ended April 30, 2019 and 2020, Sumo Logic’s revenue increased from $32M to $47M, expanding 45% YoY.
Customers continue to increase. As of April 30, 2020, Sumo Logic had 2,131 customers, down from 2,137 as of January 31, 2020, but up from 1,900 as of January 31, 2019. Approximately 329 customers as of April 30, 2020 had annual run-rate revenue (ARR) of $100K or more, increasing from approximately 323, 234, and 187 customers as of Jan 31, 2020, 2019 and 2018, respectively. Further, as of April 30, 2020, they had 27 customers with ARR of +$1M, up from 25, 17 and seven customers as of January 31, 2020, 2019 and 2018, respectively. No single customer represented more than 10% of revenue.
Revenue is derived from both U.S. and international customers. International customers represented 16–17% of revenue the past three years. Other than the United States, no other individual country accounted for 10% or more of total revenue for these years.
Sumo Logic’s dollar-based net retention rate fluctuated between 120–135% for each of the past nine quarters. The dollar-based net retention rate (NRR) is total current period ARR divided by the total prior period ARR for the customer cohort. Our recent research found that the SaaS businesses achieving +124% net dollar retention are in the top quartile. Interestingly, customers with ARR +$1M have experienced a ten-fold increase in aggregate in their ARR since their initial subscription. Comparing the revenue and customer growth rates, existing customers significantly contributed to revenue growth. Roughly 90% of the increase in revenue from FY19 to FY20 stemmed from existing customers.
Moving on to gross margin, which equals revenue minus the cost of goods sold that includes things like hosting costs and customer support. Sumo Logic achieved a 71% gross margin in FY20, in line with Elastic at 71% but below Splunk at 80%. Our research suggests for publicly traded SaaS companies the median gross margin is 73% so Sumo Logic is slightly below.
Of each operating expense item, Sumo Logic spent the most on S&M at 69% in FY20, above Elastic at 51% and Splunk at 55%. Its GTM motion includes self-service adoption through its website, an inside sales team, a field sales team, and a partner channel. One-third of new customers in FY20 were free trial users who converted into paying customers. The company has a weak magic number of 0.38. A magic number below 1 suggests there is S&M inefficiency.
In terms of net income margin, Sumo Logic achieved -60% in FY20, worsening from -46% for the equivalent period a year earlier.
Sumo Logic raised +$340M in total funding from backers including Battery Ventures, Sapphire Ventures, Accel and Sequoia Capital. It last raised a $110M Series G round in May 2019 at over a billion dollar valuation.
Sumo Logic’s IPO registration touches on a few trends. First observability, including log management, continues to be hot with the recent Datadog and Dynatrace IPOs as well as Splunk’s acquisition of SignalFx in 2019. Second, businesses are moving to real-time data collection and analytics. Finally, using a single product, in this case SIEM, as a Trojan horse for a larger platform play is compelling. After a decade of being private, it will be exciting to watch as Sumo Logic goes public.
