FSLY & NET, SG&A as % of Rev

[fortun8]

Hi all,
I joined MF recently, am learning from this board slowly. My weekend homework was deciding on NET vs FSLY - which one to invest in or perhaps both.
Looking at the #s, NET’s SG&A as a % of Rev for last 10 qtrs stays in the 70’s and upto 121%.
FSLYs on the other hand is consistently in the 50s.

Is SG&A/Revenue even a relevant metric?
Does that imply FSLY is more efficiently run?

In my line of work, I come across companies that are sales centric - its in their DNA. Over the long run, they falter unless they get a delivery org that matches their sales prowess.

I’d appreciate any input you can share.

[fortun8]

PS:
On LinkedIn,
FSLY has 162/533, 30% jobs in sales &
NET has 136/271, 50%

[KayakerRW]

Is SG&A/Revenue even a relevant metric?

Board members do look at S&M as a proportion of revenue as a metric to consider along with operating expenses. There is an emphasis on seeing an improvement in those numbers.

Fifth, I look for rapidly improving metrics like rapidly dropping losses as a percent of revenue, or increasing profits if there are some already, increasing gross margins, customer acquisitions, improving cash flow, dropping operating expenses as a percent of revenue, etc. If some metrics aren’t improving (S&M as a proportion of revenue, etc), because management says they are taking advantage of a greenfield opportunity to gobble up all the recurring revenue customers they can while the getting is good, I generally approve, but want to see those revenues really growing.

https://discussion.fool.com/how-i-pick-a-company-to-invest-in-33…

I don’t recall seeing the formula SG&A/Revenue discussed on this board, but I may have missed it in some deep dives of a company.

I’ve recently read a few articles looking at “the Saas Magic Number” which is used to measure sales efficiency. A number greater than 1 is a good sign.

It measures the output of a year’s worth of revenue growth for every dollar spent on sales and marketing. To think of it another way, for every dollar in S&M spend, how many dollars of ARR do you create.

((Current Quarter’s Revenue – Previous Quarter’s Revenue) X 4) / Previous Quarter’s S&M Expense

Let’s say you spent $1 on S&M in 1Q16. If your revenue then increased by 25 cents in 2Q16 (which annualizes to a $1), you would have a Magic Number of 1.0.

https://www.thesaascfo.com/calculate-saas-magic-number/

I’m not sure how much weight veteran contributors place on this metric, but it does seem to provide some insight as to whether a company’s increased spending on S&M is leading to more worthwhile growth.

All the best,

Raymond

[fortun8]

Thanks a lot, Raymond.
I was not able to pull out just S&M from Income Statement. So took SG&A as a whole. SG&A/Revenue is useful when comparing similar companies, in this case FSLY & NET.
Fact that NET has 50% more SG&A spend vs FSLY could be interpreted many ways: sales heavy org, SMB vs Enterprise selling, emphasis on Customer Success leading to better NRR, expansion plans or just inflated exec comp, etc.

To me, it looks like FSLY is a better run org.

The Magic Number article you gave is superb. Thanks again.

I did come across this excellent post by Muji, that addressed most questions I had.
https://discussion.fool.com/fastly-q120-recap-its-potential-3456…

[RafesUserName]

In my view these are both equally viable flavors of a similar solution, solid businesses with massive opportunities in the future to fuel continued growth. I own roughly equal parts of both.

Fastly has a different approach making their sales and marketing cheaper. They do this by focusing on large customers which can aggregate users for them. Shopify, Ora-TikToc-acle (hah), Amazon.com, Pinterest, Stripe, Yelp, etc. They are usage-based with a focus on more niche use-cases that benefit from from super-high-performance. They are releasing Compute@Edge (after a very wide beta program with partners like Shopify testing) which will present a platform that will be world-class using an emerging standard (WebAssembly + WebAssembly Interface (WASI - https://hacks.mozilla.org/2019/03/standardizing-wasi-a-webas…) which they are contributing to! This could really change the world.

Cloudflare markets more broadly and is aiming to own general Edge Computing. They focus more on local compliance and other important business-critical elements, stating speed is important but not the most important for most people. In other words, they are trying to stay out of a niche but perhaps still address it. Cloudflare is monthly rather than usage-based for the CDN services but their edge computing is (will be?) teared and has a usage component.

It is not clear if one will start to eat the other in the future or happily live side by side. We don’t know the future. What IS clear is that BOTH of these companies are amazing RIGHT NOW! I see no reason to pit them against each other. I look at each, independently, and am happy to invest in both. The TAM is expanding fast and can do so indefinitely! We are talking about building out a new internet paradigm to support the next generation(s) of devices, applications, communications and distributed processing.

[intjudo]

Hi, this is my first post here; I have a techie background and I’m new to stock investing. I’m long FSLY and NET.

IMO FSLY and NET each have a fundamental flaw built into their business.

I think NET has a fundamental flaw in its architecture, and FSLY has a fundamental flaw in its branding.

To illustrate NET’s architectural flaw, I’d like to ask you to imagine a paper plate with 100 DOTS on it, and lines connecting each DOT to ALL of the others…this is NET. Now imagine a paper plate with 5 DOTS on it, all connected by lines, and call this FSLY. Now imagine an icon labeled “END-USER” and place the icon randomly on NET. Place the same icon, in the same relative spot, on FSLY. This is a real oversimplification, but it illustrates two of my arguments: 1)It’s statistically likely that END-USER is closer to a DOT on NET than on FSLY 2)There are MUCH FEWER lines connecting DOTS on FSLY. FSLY correctly determined, during their Design Phase, that FEWER dots results in FASTER overall performance because of the greatly-reduced number of LINES connecting DOTS (e.g. the network communications required to keep data in DOTS in synch). The increased number of DOTS actually SLOW THINGS DOWN, not speed them up like NET thought they would. So: although FSLY does (roughly) the same stuff NET does, FSLY does it…MUCH FASTER.

FSLY’s fundamental marketing flaw is that they emphasized speed in their Company Name; thus, the market will forever be (incorrectly) imagining that FSLY’s architecture is faster, but can’t do as much as NET…this is incorrect, but FSLY will forever fight a losing battle trying to counteract that perception.

Despite these flaws, I think they both have a bright future ahead. However, personally I’ll be watching for any Competitor that emerges without either of these flaws.

[RafesUserName]

Hi Intjudo, at the risk of falling in to a rabbit hole, I’d like to disagree with a couple of points.

First you are right on the tech assessment but only for some use cases, right? Like when you actually have to leave the nearest datacenter for some reason. Consensus (all nodes in sync, or at least to agree on some data point) across the network may not be needed for many use cases. I suspect it is far more common for a device to interact with the nearest datacenter than to traverse them in the way you suggest. I just don’t think it is so black & white. These are programmable networks so I imagine even if you did need consensus for part of an application it could be designed in a way that smooths any difference in the network capabilities. Every programming decision comes with pros and cons. This is just conjecture though and none of this affects my investment conviction.

Since branding is aesthetic and personal in how it is interpreted, this is just one person’s opinion countering another’s, BUT… I can’t imagine having a computing and network related brand associated with speed being a bad thing! I would never assume they can’t do things just because they are really fast. Quite the opposite. I would immediately assume that any other feature advertised would be implemented thoughtfully because of the engineering prowess needed to be fast. Regardless, I don’t know if branding is such a strong driver that it would materially affect these quality businesses. I mean “Cloudflare” doesn’t have “fast” in the name, but it still communicates speed quite well in my opinion. I visualize something shooting through the clouds so fast it is on fire. “Fastly” actually sounds more generic to me because so many tech companies seem to be named for something obvious with “ly” thrown on these days.

[intjudo]

“Consensus (all nodes in sync, or at least to agree on some data point) across the network may not be needed for many use cases.”
The only assertion I’m making about their architecture is that it makes a small sacrifice (physical proximity) for the huge benefit (much fewer network communications). Think of it this way: would you rather walk to twelve close-by stores and buy one item in each, or walk to ONE store and buy all twelve items there? You’d probably save time buying at the ONE store, even if it were a little farther away. It’s not a perfect analogy, but it’s close enough.

“I can’t imagine having a computing and network related brand associated with speed being a bad thing!”
Neither can I…UNLESS (in the minds of prospective Customers) the association with speed implies a weakness in other areas…that it MIGHT, is pure speculation on my part. In the IT world, Performance is one of many important characteristics; others include Availability/Reliability, Security, Maintainability etc. Branding yourself with only ONE of these factors potentially implies that you aren’t sufficiently concerned about the others.

If I had to choose one from a techie perspective, I’d choose FSLY. I don’t know which is better from an Investment standpoint, so I’m long on both.

[intjudo]

I just changed my mind; I think FSLY will outperform NET in the long run. They just have too much of a fundamental architecture advantage vs. NET. So I just sold all of my NET shares (I kept one for tracking purposes) and used the proceeds to buy more FSLY.