While I agree with a lot of this there are a few points i’ve seen brought up several times in various threads as I catch up on things.
First I want to say my conviction hasn’t changed. However I am not putting on blinders and this next quarterly report will get triple the attention it might have.
1. Was a TikTok Loss Baked in?
I came away from the call thinking that it was not. Many felt it was. I just went back for a look:
The transcript: https://investors.fastly.com/files/doc_financials/2020/q2/2Q…
"…ByteDance, the operator of TikTok was our largest customer in the quarter. Any ban of the TikTok app by the U.S. would create uncertainty around our ability to support this customer. While we believe we are in a position to backfill the majority of this traffic in case they are no longer able to operate in the U.S., the loss of this customer’s traffic would have an impact on our business."
…then later…
Brad Reback
Stifel, Nicolaus & Co., Inc.
Great. And then Adriel, just following up on this line of thought. As you look at the back half guidance have you assumed status quo with TikTok or have you made any changes in the assumptions? Thanks.
Adriel G. Lares
Chief Financial Officer, Fastly, Inc.
Hey Brad. Yes, nothing at this time. I mean, we’re sort of assuming a little bit of status quo at this moment and again, as Josh has sort of mentioned, as you get to sort of the latter half of the year also will give us a lot more time to react. So that’s sort of built into that.
They did NOT say they baked it in. They are alluding to a previous comment where they said they think they can back-fill the loss of traffic later in the year since there is more time to find new traffic to fill a potential gap. In other words, they did not account for a short-term loss of traffic from TikToc. Again I thought this was clear when I heard it, but looking back at the transcript it does seem a little hard to weed through. I don’t love the way this is said as it isn’t clear what he means to me: “So, we have looked at this risk. We obviously wanted to make sure everyone heard about it. As I stated in the prepared remarks, we are very confident because of our strategy on how we’ve looked at this side of traffic that there is a meaningful amount of traffic that we could pull on to the network and in case something didn’t move in the right direction at short notice. But that’s not what we’re seeing today.”
2. Usage and DBNER
"Prior Belief: FSLY has fantastically happy customers as evinced by their 130%+ NER (Net expansion rate).
Update: The press release said “During the latter part of the third quarter, a few customers had lower usage than Fastly had estimated.” So maybe the NER has dropped. Uh oh."
Less spend is probably not a choice when it is traffic-usage-based. It is just less traffic, like the AirBnB example. I don’t think of end-user-usage-based expansion in the same light as a company choosing to use more products or more of a product. The former is based on the comodization of user behavior while the second is a business choice and measure of how much customers value the product(s) or service(s). In other words, reduced traffic-usage does NOT mean they don’t like Fastly.
3. Enterprise Customers Grew Less Than 2/Month
I don’t think this is accurate. Going back to the transcript:
“We grew our total customer count to 1,951 from 1,837 in the previous quarter, the largest quarterly increase since going public. Our enterprise customer count grew to 304, up from 297 last quarter. We are pleased with the number of new enterprise customers as well as customers who grew into the enterprise category. However, this strong growth was offset by some customers falling out of the category in COVID impacted industries.”
In other words, the growth in this segment looks low because there was churn. They didn’t lose customers they just had to reclassify them as they dropped below the threshold. I wish they would have provided more detail here, or didn’t report it this way. It is confusing. I don’t see any more discussion on this point in the transcript. We do not actually know how many new “enterprise” customers were added …only that total customers increased ~6%, which isn’t too exciting. However, we also know they are selective about the kind of customer they partner with (not sell to, but partner with), so I’m not sure what the most healthy way to think through this is.
This is the only other information we get about general customer growth. To me this is just talk about how early things are and how much room they have to grow.
From the Q&A later:
"Brad Zelnick
Analyst, Credit Suisse Securities (USA) LLC
It’s nice to see the record customer adds in the quarter. What can you tell us about the size and wallet of the customers you’re adding today? And as well, how would you characterize what you’re seeing in the funnel in terms of propensity to spend?
Joshua Bixby
Chief Executive Officer & Director, Fastly, Inc.
Yes. So, I mean, I think you know, Brad, pretty well our strategy on the SMB market, which is to go to market with our partners. I think in the last few months we’ve really seen the strength and the wisdom of that approach, where instead of going and figuring out how we can monetize tens, hundreds, millions of individual domains by building a sales machine that does that. We have gone to the largest aggregators and the most sophisticated aggregators, the Shopifys and the Wixs and the Adobes and others. That’s a strong play for us and it’s something that we want to continue to do.
So, if you look at the customers that we have in that category, of new customers, they tend to be obviously the larger enterprise customers who really will benefit from a direct relationship with us. Most of the smaller customers we would work with our partners on, which we have done historically.
So, you’re talking about large wallet sizes. I mean, to put our 300 enterprise customers into perspective, some of our largest competitors in the space have 6,000, 7,000 of these. So this is—we are in the early days of this market from our perspective and I think that only—that universe of 6,000 to 7,000 enterprise customers is very much limited by the lack of programmability and innovation in the traditional sector.
So, if you sort of cast your eyes wider to some of these other companies that have 30,000 or 100,000 enterprise customers, that’s certainly where we’re looking at. So we are humbled about where we are at in the journey. It is early but we’re really stepping into it and seeing that acceleration and pretty excited about it right now."
This stuff is better:
“Our average enterprise customer spend increased to $716,000 from $642,000 in the previous quarter. Our existing customers are relying on us more and more as reflected in our increased net retention rate of 138%, up from 130% last quarter, and dollar based net expansion rate of 137%, up from 133% last quarter.”
These numbers are all better than NET aren’t they? (I own both but running out of time right now to look it up).
4. So How Much Really Changed?
Here is the actual press release for quick reference: https://investors.fastly.com/news/news-details/2020/Fastly-P…
This is not a very long press release. It really only says, “Fastly now expects third quarter 2020 total revenue of $70.0 to $71.0 million, compared to its previous guidance of $73.5 to $75.5 million.”
What is that…a ~5% correction? So call it a few percent for TikTok and a couple for some other customers. Is this really such a big deal? I feel like they told us this might happen. They like to be transparent or even over-communicate. I’m still processing things but if this board wasn’t flush with threads on Fastly I’m not sure I would have thought much of it. Maybe this is a mistake and a learning opportunity. I hope not.
