Fastly

Investment Analysis Clubs Saul’s Investing Discussions
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Fastly, Inc. (NYSE: FSLY), in fulfillment of its obligations to promptly file a resale registration statement on Form S-3 in connection with its successful acquisition of Signal Sciences on October 1, today announced preliminary revenue results for the third quarter ended September 30, 2020. On October 28, Fastly will release full third quarter 2020 financial results, along with fourth quarter and full-year 2020 guidance, which will include revenue from Signal Sciences.

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. All previously issued third quarter and full-year guidance that Fastly disclosed in its second quarter shareholder letter and related call on August 5 should not be relied upon. These preliminary results and the withdrawal of the previously-issued third quarter and full-year guidance reflect the following customer-specific factors:

– Due to the impacts of the uncertain geopolitical environment, usage of
Fastly’s platform by its previously disclosed largest customer did not meet expectations, resulting in a corresponding significant reduction in revenue from this customer.

– During the latter part of the third quarter, a few customers had lower usage than Fastly had estimated.

“The current global environment has in some ways fueled our business, but has also created areas of uncertainty. While our preliminary third quarter results reflect the challenges of a usage-based model, we believe the fundamentals of Fastly’s business remain strong, as does demand for our platform,” said Fastly CEO Joshua Bixby. “And while the timing of this required disclosure is atypical, it is part of completing the Signal Sciences transaction, which brings us a stellar team and product portfolio that further differentiates us from our competitors. I look forward to discussing our full third quarter results and the outlook for our combined businesses later this month.”

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Source: https://investors.fastly.com/news/news-details/2020/Fastly-P…

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With TikTok in limbo and perhaps cooling its jets a bit; that is a reduction of -4.8% to the low range and -6.0% to the high range…TikTok was reported to be 12% of sales, so could they have scaled back a bit on the usage?

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The letter refers to some of their other customers Besides this ‘largest’ one having lower usage than expected too.

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Understood, but it is most likely the lion’s share related to TikTok, which is a eco-political kerfluffle and not reflective of a FSLY fundamental flaw. As a long-term managed position, I will see this as a buying opportunity if the information flushes out in the direction of TikTok. The “others” at this point are unknown and could be Chinese affiliates for all we know as well. Cooler heads will prevail and I am sure there will be a market overreaction that will lead to opportunity.

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This to me is quite disappointing. My own FSLY thesis was based on accelerating growth from the previous Q, driven by their usage-based model, sales execution and the acquisition, which, as Saul pointed out the specifically stated would accelerate growth. In addition to the new CEO producing better results.

So I was fully expecting 60%+ growth, so a solid beat vs their guidance and analyst consensus of around 50% growth. In stead they are now almost certain to hit their guidance of $70-$71m because the guidance is about the past, meaning they will be down 6% qoq vs their $75m revenue in the prior quarter at the mid-point, and up 41% vs Q3 revenue of $50m in 2019. So deceleration vs my own (and I expect a lot on this board, and the market) expectation of acceleration.

The wording of this release is also uninspiring “significant reduction in revenue” from their largest customer, and also broader “a few customers had lower usage than Fastly had estimated”.

Lastly, it sounds like they were forced to make this announcement (vs probably having known that they would miss for longer), which I also don’t like.

All in all not a great message.

I decided to sell a large part of my FSLY holding based on this, taking it from a top conviction holding, to a much lower conviction holding.

Would like to hear how others are going to react.

WSM

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I’m choosing to look at it from this perspective…

In an “uncertain geopolitical environment” during a quarter in which “customers had lower usage than Fastly had estimated” FSLY revenues are still up 40% v. Q3 2019.

Is this a temporary disappointment for investors expecting a larger numbers…yes.

Is this a sign of a permanent slowdown meaning less and less usage on their platform…seems unlikely.

Maybe I’m too glass half-full.

-Ludes

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I don’t understand how the uncertain political environment affects Tik Tok usage of Fastly. Either it is banned, in which case I guess they use it not at all, or it is not banned in which case why would they not use it just as much as they always had?

Separately, DDOG, NET and I’m sure many others appear to be down on this news which seems like a potential buying opportunity, although they are only back to where they were a few days ago. :slight_smile:

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TikTok was banned in India, their largest user base, on June 30. Somehow no one paid attention to this. Earlier this week Pakistan banned TikTok as well, though it is much smaller user base.

FSLY has lost a chunk of their largest client - nothing to do with their product or performance. Happens.
They have marquee, fast growing clients. Growth story is intact. What is of concern is management’s ability to navigate these ups and downs. They should have been conservative in their guidance.
Plus usage based pricing is an issue.

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TikTok is old news, but it remains to be quantified. Today’s press release is short on details, and it’s likely little new will be available until the earnings call.

With that in mind, I looked at the AH pricing a “Prime Day” sale event and added modestly to my position.

🆁🅶🅱
post tenebras lux
For not in my bow do I trust, nor can my sword save me.

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Perspective

The after-hours price is about $89 - same price it was on… September 24… about 3 weeks ago… I think it’s ok.

I don’t understand the tech, but from what I gather, the real potential for FSLY is the expected expansion from their compute-at-edge that is starting to launch. If that thesis is correct, this momentary dip is a small bump in the road.

Saw a good quote recently - don’t get emotionally attached to your paper gains. We have been feeling pretty good about the 30%+ jump in the stock in the last few weeks. It evaporated quickly. I believe it will return - but more slowly. Still a great company. Still my 3rd largest holding - even after the drop.

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Overreaction. Totally reminds me of when Twilio tanked 25% due to Uber their biggest customer reducing usage by using other competitors. They came back with a vengeance later on that year and now they’re at $300+.

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Hello~~ First post here (non-technical person). Bit intimidated but piggybacking off of Analog’s perspective above, presuming that the longterm investment thesis is still intact (and it seems like it is based on the overall feedback), the same stampeding that drove the price down today is mostly the same crowd that recently drove the surge upwards to ATHs.

So they just took back what they momentarily gave us. Would that be a correct way to view this?

Additionally, isn’t Q3 historically weaker per CFO from Q2 transcripts? Did I read it wrong?

https://www.fool.com/earnings/call-transcripts/2020/08/06/fa…

Will Power – Robert W. Baird and Company – Analyst

OK. Great. Thanks. Yes, I guess maybe just following up on that a bit, Adriel.

I wonder if you could just talk about more broadly the factors that are informing Q3 guidance. I mean when I look historically, normally you have a pretty good pick up sequentially from Q2 to Q3. And guidance assumes something that’s flatter to maybe down slightly at the midpoint. And so just trying to figure out how much of that’s conservatism versus maybe any change in trend? And I guess along those lines, it would be great to kind of get your sense for kind of what you have been seeing the traffic trends as you move from May, June into July?

Adriel Lares – Chief Financial Officer

Will, yes. So in general, we do see — we begin to see some pickup from sort of Q2 to Q3. I think the thing to keep in mind, clearly, is Q2 this year relative to previous years. Seasonally, Q2 versus Q1 is actually relatively flat.

Clearly, that’s not what we experienced this year. So I think you have a bit of a comparison challenge when you think about Q2 to Q3. So the fact that we’re still at the midpoint here, getting some pretty strong year over year growth rates, I think, is worth noting. So from our standpoint, we have built in last quarter the idea that folks would be coming — getting back to sort of a normal life from a shelter-in-place to be able from before.

And we’re beginning to see that sort of as a mixed bag. It’s mostly coming true. But that’s — what’s a little bit uncertain here is kind of how the rest of the world, in some respects, the rest of the United States is going to sort of play that out. So in some respects, the sort of the normal seasonality is sort of being sort of thought up in sort of Q4.

But with respect to Q3, it’s somewhat respective, ameliorated a bit by the comparison to sort of a very, very strong Q2.

Thank you,
Eddie

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*Small correction “expected to be weaker” vs “historically”

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good insight here. When FSLY pre-announces lower revenue like they did today, we must ask ourselves: What is going on and has their story fundamentally changed?

What is going on?

  1. TikTok didn’t buy as much as they thought, simple as that. But why didn’t TikTok buy as much as FSLY thought they would? There was a lot of uncertainty around TikTok (some of it politically based), which may have contributed to its lower than expected usage of FSLY. The release also mentions “a few other customers” but my guess is that TikTok was likely the primary contributor.

  2. FSLY was due for a slow down. FSLY ran up quite a bit over the last few weeks. There was even thought that a larger company (Google?) was acquiring shares in advance of a potential acquisition. Another part of the story is that FSLY was a darling of the “Robin Hooders”, traders looking for a short gain. News like this sends them running.

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Whilst TikTok maybe the primary culprit, it can’t be all and The release also mentions “a few other customers” clearly highlights something more at play than just TikTok which needs consideration.

I had been still expecting a beat even with the TikTok factor but there is clearly something going on here.

Ant

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I have a large position in FSLY and am not concerned about the TikTok usage issue.

What is slightly more concerning is the usage drop from other customers. I was assuming the guidance was conservative and their business with other customers would make up for any TikTok fluctuations… It appears that was wrong and the guidance was either somewhat optimistic or they are having issues with something. I was going to trim some in AH, but I think I will wait for the report in 2 weeks before I make any decisions.

Bnh91

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What is slightly more concerning is the usage drop from other customers. I was assuming the guidance was conservative and their business with other customers would make up for any TikTok fluctuations… It appears that was wrong and the guidance was either somewhat optimistic or they are having issues with something. I was going to trim some in AH, but I think I will wait for the report in 2 weeks before I make any decisions.

Indeed. They were quite vague about the loss of revenue from other businesses. With the recent increase in price, any loss form TikTok seemed to have been priced in. However, decelerating growth does warrant a haircut on their market cap, just not sure it should have been 30%. The price reduction
assumes the guidance to be at $70 million with forward guidance being slashed considerably as well.

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I feel it is super hard to make any valid judgments at right now because they have given us so little information. We need to know what’s the basic cause of the deceleration. Actually I don’t think their fundamental story has changed, just like AYX, but they may experience some headwind. How long and the scope of the headwind is the critical information we need to make a decision. Whatever, I will wait for the conference call.

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Fastly’s customer base is concentrated and their billing is primarily usage based. To me this is as simple as usage not increasing as much as they expected based on the April-June quarter. I would not be surprised as pandemic related stay at home trend was somewhat lifted over the past quarter. Unlike other companies where their expansion rate is due primarily to adding users or services, at least some of FSLY’s growth was simply attributed to increased demand that could easily have decreased or leveled off. And while other companies followed by the board are experiencing growth because of business usage, which is going to be much slower to revert to pre-pandemic practices (if at all), FSLY was relying on people staying at home and shopping online or watching videos.

Contrasted with NET, which is more of a subscription model, and should have more reliable revenue expectations.

For me, FSLY is attractive as a combination of a relatively fast growing company (which should be boosted by the Signal Sciences acquisition) and also a play on the future of edge computing. While I’d love for their growth to continue in the 60%+ range, anything over 40% would be enough to keep me in as long as their long term prospects remain bright.

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