Fastly Q420 ... is Terrible.

Investment Analysis Clubs Saul’s Investing Discussions
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I am not impressed with $FSLY’s performance or mgmt … yet again.

Rev +40%, decelerating -4pp YoY. That isn’t the issue; they are usage based and bounce around.

But it’s their first Q of SigSci – adj out the $6M (an analyst had to wiggle out in Q&A), and they grew 30%.

Sorry, but for my rules, 30% rev growth is NOT hypergrowth.

Looking forward, guidance for Q1 was 32-36% YoY growth, but again adj out SigSci’s expected 8M, and it’s really 19-24% YoY. Terrible! Clearly no Compute@Edge contribution either.

Customer growth was +20% and enterprise custs slower at +12% (+3.5% seq). This is where I see the fracture in execution - you cannot scale if you aren’t intaking new custs at a rapid rate.

Good news here: A new CRO was hired, hopefully to correct this.

To see how striking the slow cust growth looks… let’s compare $FSLY’s “top tier” custs yet again with “SMB focused” $NET.

36 new enterprise custs in Q4 for $FSLY, +3.5% seq or +12.5% YoY to 324.

92 new enterprise custs in Q4 for $NET, +12.6% seq or +50.5% YoY to 828.

Read that again. Cloudflare’s enterprise custs grew 12.6% QoQ compared to Fastly’s 12.5% YoY.

Sure, Avg Rev per Enterprise Cust rose +28% YoY to 782K. Their entire operations are based on making their big custs bigger, vs getting new custs.

Looking at margins, CFO and FCF margins have had a significant turn negative, while the revenue growth is now decelerating.

But Gross Margin improved right? Yeah well SigSci has 85% margins in a SaaS model, throwing the usage-based sub-60% margins up a spell.

Another little thing that bugged me - they seemed flustered by the fact SigSci has SaaS sub-based finances (with deferred revs), while they are usage based in their own. They didn’t bother including SigSci in any of their called out metrics because of the diff accounting.

If you continue to hold, I wish you the best, and ultimately find them an exciting story in an amazing next-gen computing paradigm in early innings. But this is not a well executing machine currently. The new CRO has some work to do.

  • muji
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My apologies to keep harping on $FLSY but need to highlight customer growth issue.

Customers & net new adds per Q:

Q420 2084 +37
Q320 2047 +96
Q220 1951 +114
Q120 1837 +94
Q419 1743 +59
Q319 1684

So avg ~100 growth over last 3Qs now dipped to 37.

Clear issues w/ their (lack of) GTM. Or rather, the COVID-driven honeymoon where it sells itself is over.

-muji

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My personal opinion, now this is purely based on the backgrounds of the tech leaders involved as I haven’t tried to architect or code with each tech, is that FSLY is superior tech of NET. NET seems to be pumping out products so fast I wonder about the quality.

BUT

Tech cannot exist without business and vice versa, and this is a story of NET having way better business execution than FSLY so far.

I started out purely FSLY as I respect Artur Bergman and I thought the new CEO (Joshua Bixby) had a good pedigree. I then moved to 50% FSLY, 50% NET.

Looking at these latest figures, I am seriously considering moving to all NET.

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I believe your calculations are off. Fastly total new customers is only 37, and 11 of which are enterprise, so the QoW and YoY comparison is worse.

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“A Zoom video call where both of us will code using the features of FSLY and NET.”

I don’t understand this line of thinking - we’ve seen over and over again that it doesn’t matter if your product or tech is better if you don’t know how to get distribution. You can go back as recently as NTNX, or, if you want an example more relevant to pop culture, Beta vs VHS.

Are we buying the best tech or are we trying to make money?

Anyways, I have not and still do not see any need to invest in the CDN/Edge industry. Even NET’s growth is dropping sequentially, and will likely be in the 40s over the next year. The amount of bickering spent on this board between FSLY and NET seems needless when there are many other companies growing much faster, and valued less outrageously. I see no reason for NET to be treated as well as CRWD, which was the case until the recent pullback

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Aphalite,
You say… “Anyways, I have not and still do not see any need to invest in the CDN/Edge industry.”
Curious as to why you think that. If you look at the quote from the link below you can see that the Edge computing sector has a huge runway. Why would you not want to have exposure to it? NETs growth is not slowing down either.

The global edge computing market size is anticipated to reach USD 43.4 billion by 2027, exhibiting a CAGR of 37.4% over the forecast period
https://www.grandviewresearch.com/press-release/global-edge-…

Bnh
Long NET

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7 
Let me add you mentioned NETs growth is dropping sequentially. This is not true, unless you are looking only at Q3 where they had a one-time revenue boost.

Q420    Q3       Q2      Q1     Q419     Q1
10.3%   14.5%	 9.2%	 8.8%	13.5%	 9.6%

If they have their typical beat next Q seq growth will be above 10%. Looks a lot more like stable and consistent 10%+/- a few percent seq growth to me. 

Bnh
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Hi Bnh,

I think it’s comforting to be able to point to a report that says such and such industry will be this big 6 years from now, but I always have reservations about forecasts that go more than a couple of years out. Grand View Research is incentivized to sell their research reports, if they say that an industry will do fine, grow 50% this year and then at a terminal rate of 5% a year, no one will buy it. They have to make big pronouncements such as 37% CAGR or maybe the other way, shrink 10% CAGR, to get people to pay attention.

Here’s another top google result, that pegs CAGR at 34%, but pegs the total market at 28.2B by 2027 (they end in 2025, so you have to take the 15.7 and multiple by 1.34 twice): https://www.marketsandmarkets.com/Market-Reports/edge-comput…. Again, my conclusion with that kind of thing is - who the hell knows? I am not so patient to wait 6 years for the market to grow to 28B or 43B or whatever anyways, the average holding of a stock on this board is less than 2 years. We’re all trying to catch the steep part of the S curve on stocks that we own.

Additionally, I’m more interested in individual company performances, and both NET and FSLY were 40% growers before the pandemic. I think it’s bizarre that the many on the board rules out so many companies because of a “pandemic boost”, such as PTON or ETSY, but then buy into the CDN companies, ignoring what the pandemic has done for both NET and FSLY.

Am still long CRWD as my top position, but otherwise have found myself in many consumer companies lately, instead of B2B tech. I could be wrong on PTON, ETSY, TDOC, and MWK, which round out my top 5, but they look more attractive to me currently, given their growth rates and valuations.

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Ok yes, there are different reports. The common theme is the market will be big ($30-40bil+) and growing quickly. There is a reason NET has a high multiple and people are excited. It is the current leader and looks like a good bet to end up with a significant portion of it.

Bnh

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My challenge to Muji… A Zoom video call where both of us will code using the features of FSLY and NET. Let’s fix the date and time!

It’s really, really, hard to understand the sense (or nonsense) or this post. Whether the author can code faster than muji using Fastly is totally irrelevant. What matters is that Fastly’s:

Organic revenue growth dropped again, from over 60% in Q2 to 42% in Q3, and now down to 30% in Q4.

Acquisition of total net new customers dropped from 114 in Q2, to 96 in Q3, and has now plummeted to an incredibly low 37 net new paying customers in Q4. This must mean that the number of customers leaving Fastly must almost balance the number of gross new customers added.

And this 37 new paying customers was in a quarter in which Cloudflare added 10,000 new paying customers. Not a misprint. Ten thousand.

And as for enterprise customers over $100,000… Fastly added 11 and Cloudflare added 92.

Really, in looking for an investment, who cares whether the author can code faster than muji? What a silly and irrelevant challenge!

Saul

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