Fastly

Well, I was expecting raised guidance from Fastly, not lowered guidance. This reinforces the point to me that as investors, maybe sometimes we just don’t have all the information we need to read between the lines.

This is where management comes in.

In an interview in August, Bixby asserted that the TikTok risk had been ‘baked in’ to guidance - albeit he did so in an evasive kind of way (that was my gut feel at the time):
https://discussion.fool.com/quick-fastly-ceo-video-appearance-34…
Management also reassured us that it was baked into guidance in the Q2 earnings call.

Now Fastly have just announced “usage of Fastly’s platform by its previously disclosed largest customer (TikTok) did not meet expectations, resulting in a corresponding significant reduction in revenue from this customer”.

So taking management at their word either 1. Fastly did NOT bake in TikTok to their Q3 guidance but just their FY guidance or 2. They were not prudent enough doing so.

TikTok was the most downloaded non-gaming app in the world in August (https://www.businessofapps.com/news/tiktok-most-downloaded-n…) - so how did usage not meet expectations? Well as fortun8 has suggested, TikTok was banned in India in the quarter (its largest user base), so perhaps this was an oversight.
However, US TikTok is half of TikTok revenues. It’s hard to see how this usage also decreased dramatically quarter on quarter.

The other part of the release:

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

I don’t like this line at all. The glaring omission, is WHY did these ‘few’ customers have lower usage. But what I really don’t like about it, is the ‘latter part of the third quarter’. What happened in September compared to July that so affected usage? Did the schools reopening have much impact (presumably now students are back to learning they don’t have as much time to go on TikTok)? Are these the same customers in the travel and hospitality industries that were impacted in Q2? The statement is open ended. The implication of course is that because it’s in the latter part of the quarter, usage is running of a lower base going into Q4. Is there a deceleration or just a temporary impact?

It feels like a repeat from Q2, when there were heightened expectations ahead of earnings due to an explosion of traffic in some of Fastly’s largest customers. However, that usage upside did not materialise, and the share price plummeted. Then it seemed apparent that the usage upside for Fastly was capped somewhat and doesn’t correlate to revenue 1:1.

My first impression after Q2 earnings was that with a slowing of Enterprise customers and usage (which drove the spike of revenue in Q2) assumed to be running at run rate going forwards, what was going to continue to accelerate Fastly’s revenue before Compute Edge becomes realisable? (https://discussion.fool.com/what-really-jumps-out-at-me-reading-…)

I thought we had the answer since then, primarily in the form of Signal Sciences, assumed usage upside and TikTok impact aside. I understood that it would be ‘immediately accretive to revenue’ as per their initial press release, and the acquisition was finalised in quarter. I can only assume that a full year’s worth of revenue will be shown in their Q4/FY report and updated in their FY guidance (if the latest guidance did include Signal Sciences revenue, that really would be worrying).

Has the story changed? Yes and no. It has changed in terms of Fastly has gone from quarter on quarter acceleration to deceleration, on the face of it suggesting its Q2 spike might have been a one off. But if we take a step back, what has really changed between Q2 and Q3? 1. The acquisition of Signal Sciences, which I believe is a long term benefit for the company (regardless of how it’s recognised this FY). 2. Partnership with Google Cloud, opening up new possibilities for Fastly to grow. 3. We are one quarter closer to Compute Edge becoming realisable.

Therefore it seems to me, if you did not sell after the Q2 sell off following earnings, why would you sell off now? The TikTok risk was a known factor, but perhaps should have been navigated better by management. Questions need to be asked of them, but at the same time I remind myself - Fastly has always been consistently lower growth and lower margin than my other holdings and its Q2 acceleration was dependent on usage. My long term thesis revolves around the opportunity for Fastly, an $8bn company today, in the future becoming a much bigger company in a budding industry. This hasn’t changed from a 5% earnings miss primarily due to TikTok. While I’m less certain of usage upside going forwards, Fastly’s mid to long term prospects still seem favourable to me.

From all this, I would like management to be more transparent where possible, so that I don’t need to go trying to predict my own (wayward) guidance :slight_smile:

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