Fastly, My reply to AThinkingFool

Investment Analysis Clubs Saul’s Investing Discussions
1

Thanks, AthinkingFool, for a very thoughtful analysis. And let me again make clear that if things change for Fastly, I’d be glad to get back in, even at a higher price than the one I exited at.
Some thoughts of my own:

Point 1 – You wrote that Therefore 20 ‘Enterprise’ customers in the travel or hospitality industries could have dropped out of this bracket in Q2.
But Runner Guy points out that:

Fastly defines an enterprise customers as Enterprise customers (defined as spending $100,000 or more in a twelve-month period) while

Cloudflare defines an enterprise customers as customers with Annualized Revenue greater than $100,000… To measure Annualized Revenue, we take the sum of revenue for each customer in the quarter and multiply that amount by four.

Do you realize that this turns our excuse for Fastly’s lack of growth of customers upside down. In the that Covid quarter it would have been Cloudflare that would lose total Enterprise customer count, not Fastly.

Here’s what I mean: Say Fastly had an established $50,000 per quarter travel company, spending $200,000 per year. Then in the June quarter, because their travel business collapsed, they only spent $10,000 with Fastly instead of $50,000! However, they still had $160,000 over the last year and still count as a $100,000 customer. Even if they were a $40,000 a quarter customer, and dropped to $8,000 in that quarter, they’d be at $128,000 and still count. They’d have to be just at the border to actually drop out of their count. The chance of more than one or two travel, etc, companies dropping out seems very remote, and certainly nowhere near twenty.

But if they were a Cloudflare customer, Cloudflare multiplies the quarter revenue by four to get their annualized revenue, so if they gave their $50,000 per quarter travel customer a reduced $10,000 rate, they logically might not count them.

Point 2 – You state if you are to compare their relative DBNER’s, Cloudfare had 115% (down from 122% YoY) last quarter while Fastly had 137% (up from 133% QoQ

That makes perfect sense. Cloudflare’s DBNER was down because because their customers were reluctant to take on new modules in the middle of the Covid panic. Fastly’s was up because of the one time usage blip.

Point 3 - You state So how much new business did Fastly generate? In Q2 a record number of new customers were added with total customers growing from 1,837 to 1,951 quarter on quarter.

That’s just a 6% sequential gain. And it’s almost all companies that just contribute peanuts. There was only a 2% gain in the companies that count.

For comparison with another of our high confidence companies, Crowdstrike grew total customers by 15.5% sequentially and by 91% over a year ago. And Cloudflare added over 7000 paying customers in the quarter, to Fastly’s 114. … I’m sorry, Fastly is simply not blasting along like a true winner. They are just making excuses.

Best,

Saul

79 Likes
2

Point 3 - You state So how much new business did Fastly generate? In Q2 a record number of new customers were added with total customers growing from 1,837 to 1,951 quarter on quarter.

That’s just a 6% sequential gain. And it’s almost all companies that just contribute peanuts. There was only a 2% gain in the companies that count.

To be more clear, I should have stated that only 7 out of that 114 new customers were customers that mattered, enterprise customers that contribute 88% of revenue.

Saul

4 Likes
3

Hi Saul,

Thanks for the clarifications.

Without going into too much detail again (for the sake of everyone’s sanity):

The 20 Enterprise customers I quoted there was an indicative number, pulled from thin air, simply to demonstrate that Fastly did have some negative impact on its Enterprise customer numbers from churn in those sectors.

The DBNER comparison was just meant to be a high level illustration of the two types of their business models. The fact that 1. Cloudfare goes after volume of customers and 2. Fastly goes after bigger customers and growing their spend. This shows in a consistently higher and accelerative DBNER in Fastly.

I know 6% doesn’t seem much, but there has been trend of acceleration in total customers each quarter. While 2% matter, due to the size of businesses Fastly targets, there will be a pipeline for this 4% to grow into Enterprise. These bigger customers have a slower sales cycle, and longer lead time to full usage. So the acceleration is key here for me.

I get the comparison to Cloudfare customers, but how much revenue are all those extra Cloudfare customers generating? I can also say from experience, it is significantly easier to sign SME’s. In my business, we signed about 50 SME’s in H1, but only about 2 Corporate sector. In H1 there was no revenue contribution from these corporate customers, but this time next year those 2 corporate customers will generate 5x the revenue of those 50 SME’s, conservatively. There is more long term value there, and they are less prone to churn. I just see Fastly and Cloudfare as having different business models.

I get that Fastly is not a Crowdstrike, or a Datadog or Zoom. But it never has been, and I knew that when I invested. I am taking a slightly different approach with Fastly than I normally would. For me there are enough positive trends in the business and enough prospective tailwinds, with a big enough opportunity, for it to maintain a high enough growth rate to grow into its valuation.

I agree with all your points, and understand completely why you and many others have sold. I commented the other day, that perhaps I would have taken a different decision if my circumstances were different. But I have enough conviction, risk appetite and a long term perspective to have a little bit of patience with this one.

Hope your shoulder is healing up :slight_smile:

ATF

44 Likes