Fastly and Pivotal Software, a Lesson

[SaulR80683]

Fastly and Pivotal Software, a Lesson

Do any of you remember Pivotal Software, that we were interested in (and invested in briefly) a few years ago? They were a division of Dell and VMware, and were spun off with a lot of hoopla. The story, as I remember was that the subscription business was growing rapidly, but was hidden. They had a lot of huge customers (like Ford, that had been handed to them by Dell when they were a division). We had a lot of hope for them at first. But then it became clear that they couldn’t add many new customers.

We made excuses for them at first, but then got out. VMware took them back in house last December at a fraction of the price that we got out at.

What reminds me of them is Fastly’s inability to add new enterprise customers. Last quarter they added roughly 2 new enterprise customers per month net, while Cloudflare was adding 27 enterprise customers per month!!! We made excuses for Fastly too.

I think that a lot of discussion of Fastly is getting lost in the details and missing the big picture. Fastly wasn’t growing 62% last quarter. They were hardly growing at all. They grew their number of customers by 2% sequentially! What happened was that their existing customers had a one-time usage blip, which even Fastly said wouldn’t be repeated. But we didn’t listen. This quarter revenue will be DOWN sequentially! But people are still saying “Oh, but it’s up from two quarters ago.” Big deal.

Nobody can grow 60% a year if they are growing enterprise customers 2% per quarter sequentially! Especially when enterprise customers are their business… providing 88% of their total revenue!!!

Best,

Saul

[Epictetus]

Hey Saul, I hope your shoulder is feeling better!

I was looking through your past comments on FSLY in light of the dramatic change in mood on this board about the company’s prospects and found this post from just 2 months ago:

Why I added to Fastly in the premarket without understanding anything about the tech involved.

1. I got alerts about the acquisition from my broker and from Seeking Alpha in my email when I signed in.

2. I read comments on the board.

3. I learned that the acquired company was highest rated by Gardner in whatever it does. It got a 5.0 out of 5.0, while Cloudflare got 4.4 (not bad, but not the same).

4. I learned that this company was fastest growing in whatever it does.

5. Fastly was going to use it as a key part of its new security offering.

6. And then the key words: the acquisition would be ACCRETIVE to revenue growth rate and margins.

What more could I ask for? I looked in the premarket and the price was basically still unchanged because some poor fool had left an overnight order to sell a huge 25,000 shares at $89.85 which apparently was holding the price down. I bought a reasonable amount at that same price, sold a little ZM and CRWD (which were both about 24.5% positions) to cover. Next time I looked, when I returned from a doctor’s appt, Fastly was up 10%. I wish I had been able to add more.

Down in the thread it is mentioned that the acquisition will bring in more than 40 new enterprise customers going forward. I assume these new customers are not included in the current numbers, but that would be a forward increase of enterprise customers from 2 last Q to more than 40 more in Q3 or Q4.

I don’t think Pivotal is a fair comparison, in this case.

Seems like maybe the Q4 report will make FSLY once again a darling of this board…no?

[SaulR80683]

Seems like maybe the Q4 report will make FSLY once again a darling of this board…no?

Could happen, but I’m more interested in what IS happening, and in organic growth!

Saul

[fortun8]

Epictetus,
Lets assume the 40 customers are net new to FSLY, i.e: no overlap.
Yes, you have logo adds. Core of the business is still CDN/EDGE, they still have to cross sell to SS customers, it will be a bit easier.

The acquisition has its own challenges. They will optimize sales, marketing, finance, hr, etc and layoff a bunch of people. Over time they have to integrate the products.
If your business is already facing headwinds, led by unproven management, integrating the new acquisition smoothly is difficult.

New CEO may prove himself to be adept. Time will tell.

-F8

[gmcnatt]

If there are any growth investors out there who are as able as Saul (or Bear, Stocknovice, GauchoChris or the many others on this board) to read companies and the market, act on them, and express their opinion in real-time knowing they could be wrong, then please point me in their direction. The only thing I can do is humbly come here and hope to learn over time. The more I watch, the less I realize I know, and the more I realize I have to learn … not copy, but learn.

[LifeOfDreamer]

I am way behind in lurking on posts here, but when reading Saul’s earlier post on exiting FSLY, I thought to myself that the reasoning and how the company’s recent growth was misleading, reminded me of Pivotal.

So just wanted to chime in on this thread and say that I agree. Although I think FSLY probably has more upside and a better future than Pivotal, it doesn’t mean I want to invest in it.

I had some quick gains in early Summer in FSLY that I exited a couple months back, based solely on fact that they preannounced a big increase in forecast, and I figured the stock would run for a bit. If I had known their client growth was going to be so anemic, I probably wouldn’t have even risked the short-term trade.

It seems that software can only be complicated when it is deemed essential, like SAP, and then you have dedicated resources that support it at the client.

Or software can provide some sort of measurable business boost, even if only slight, if it is exceedingly easy to use and implement.

Some live somewhere in-between, like an Elastic (ESTC).

It is a tough sell to a new client when the benefits of the software can only be realized with either heavy reliance on services, the cost of staff aug services, or cost of additional client headcount. That is ok if you are whale hunting, but not if you want to catch a lot of fish.

Dreamer