Hi Jason, I read your post and realised that I also didn’t know why FSLYs gross margin was so much lower than NETs.
That seems like something important to know! Note that Cost of Revenue doesn’t include R&D, but the costs that keep the service running for their customers.
From the 10-Q:
FSLY
"Cost of revenue consists primarily of fees paid for bandwidth, peering, and colocation. Cost of revenue also includes personnel costs, such as salaries, benefits, bonuses, and stock-based compensation for our customer support and infrastructure employees, and non-personnel costs, such as amortization of
capitalized internal-use software development costs and depreciation of our network equipment. Our arrangements with network service providers require us to pay fees based on bandwidth use, in some cases subject to minimum commitments, which may be underutilized.
NET
“Cost of revenue consists primarily of expenses that are directly related to providing our service to our paying customers. These expenses include expenses related to operating in co-location facilities, network and bandwidth costs, depreciation of our equipment located in co-location facilities, certificate authority services costs for paying customers, related overhead costs, the amortization of our capitalized internal-use software, and the amortization of acquired developed technologies. Cost of revenue also includes employee-related costs, including salaries, bonuses, benefits, and stock-based compensation for employees whose primary responsibilities relate to supporting our paying customers and delivering paid customer support. Other costs included in cost of revenue include credit card fees related to processing customer transactions and allocated overhead costs.”
So not super-clear why the difference, although you might figure that FSLY is spending more due to increased usage and building out server infrastructure.
Heres the GAAP smackdown as at last quarter:
| TICKER | FSLY | NET |
|:-----------------------|:--------|:--------|
| CLOSE | $86.5 | $35.5 |
| REVENUE | $62.9M | $91.3M |
| REVENUE TTM | $218M | $249M |
| REV. TTM 𝝳 (YOY) | 38.20% | 48.91% |
| EV | $8.24B | $10.7B |
| EV/S | 37.8 | 42.9 |
| GROSS MARGIN | 56.70% | 77.20% |
| GM $ TTM | $122M | $194M |
| EV/GM $ | 67.5 | 55.1 |
| GM $ 𝝳 (YOY)% | 38.98% | 50.71% |
| RPS | $2.28 | $841m |
| FCF | -$18.8M | -$30.6M |
| CASH | $92.6M | $118M |
| SHORT-TERM INVESTMENTS | $94.1M | $479M |
| DEBT | $31.3M | $50.8M |
| DEFERRED REV | $0.00 | $38.1M |
| EBIT MARGIN | -9.80% | -24.60% |
| STOCK BASED COMP | $6.33M | $12.9M |
| DILUTED SHARES | 95.4M | 296M |
| SHARESWADIL_GROWTH | 277.23% | 248.01% |
So I have FSLY at 57% gross margin, and NET at 77%. So 2000 basis points difference. FSLY is still cheaper by EV by 24%.
From the last conference call a bunch of analysts talked about gross margin, an example response:
“Yeah, it’s Adriel here. With respect to what we’re reflecting in operating leverage for the rest of the year, I’ll start first on the gross margin side. So for Q2, I do think we’re going to get some incremental gross margin improvement in Q2 relative to Q1. A big reason there is we only had a couple of weeks’ worth of sort of that revenue and I think just given what we’re seeing at the – sort of what we saw in March, I think we should see a good outcome in Q2 relative to gross margin.”
Not sure that added much!
cheers
Greg