FSLY Conf Call

I’m sure others will post a much more detailed, substantive FSLY conf call report, but I’ll give you my quick non-techie take of the CC from memory. I didn’t take notes, and I was multi-tasking at times.

First, I didn’t see more evidence of blow-ups that had me really worried based on their early press release (and which caused me to short 80% of my position). Essentially, the earnings miss was a decision by tik-tok to move all of their traffic/business out of the US, plus, issues with a few other customers. First, the tik-tok problem was a concern that the US would prohibit US companies from providing any services to tik-tok. In response to that uncertainty, tik-tok moved their traffic off the FSLY platform. I think it was implied that this traffic went in-house at tik-tok. An analyst asked why couldn’t others just pick up and go in house, and I think the gist of the response is that they could but companies would have cost, performance and security issues doing so. tik-tok didn’t have a choice because of US actions. FSLY is maintaining capacity if tik-tok decides to bring traffic back, but at this point there is no certainty. FSLY will use those resources elsewhere as overflow capacity for the time being. If it is clear that tik-tok will not come back, FSLY will reallocate those resources on a more permanent basis. Second, addressing the other reduction in revenues, they noted that a few other customers had a reduction from prior estimates. I believe they stressed that this was new customers coming on to the platform not existing ones. They suggested that all of those issues have already been resolved. Less talk than I would have expected on this, but analysts seemed to accept it was not a major issue going forward.

Nothing smelled like a Shopify reduction of revenues which has been much discussed on this board. Based on this call, I would surmise that much of their enterprise work is BAU and growing nicely, including Shopify. Also, I didn’t here any questions about the Mozilla folks.

On a forward looking basis, two things that the shareholder letter peaked my interest were summarized as follows:

Compute@Edge is now in the market running production traffic and opening
up new use cases and market segments for us. Our acquisition of Signal
Sciences is complete and integration of their powerful security products into
our platform is underway. With these two key pillars in place flanking our
successful delivery business, we are able to supply enterprise builders of
all kinds, from developers up through CIOs and CISOs, with the speed and
confidence they need to continue expanding and differentiating.

As enterprises complete the shift to the cost-saving measures provided
by the central cloud, their next frontier is to move logic, compute power,
and security to the edge in order to more effectively meet their customers
in the digital-first way that consumers have come to expect and rely on.
We believe we are exceptionally well-positioned in the current enterprise
technology environment, delivering multiple powerful solutions, tuned for the
evolving DevOps workflow at the edge, opening up much broader enterprise
customer opportunities.

Much of the analysts questions focused on the Signal Sciences add. In sum, it will be positive, additive etc, but I didn’t get any real numbers or clarity out of it. I was surprised that I didn’t hear more questions on the move from beta to actual production traffic on compute@edge or how many enterprise customers would be moving to it. I would think secure@edge and compute@edge are far stickier businesses that the CDN commodity type revenue.

They talked about revenue growth and retention rates. My big picture take on this is that FSLY is not a 60% grower and the last quarter was a spike. I think FSLY’s price got a bit over extended. It’s a 40% grower with a usage based model (for now?) with a great product, but not great stickyness (for now?). With that said, developers seem to love it and sometimes they are driving the decisions. If the price settles down here, I think FSLY will move back up over time, but it isn’t going to spike back up. I covered my short at $68.3 in after hours, and I’m comfortable holding long again. (Keep in mind if you short against the box, current law requires you to keep your long position for at least 60 days to avoid the deemed sale rule under Section 1259.)