I’ll leave the rest to the numbers guys but what stood out to me is last quarter revenue growth was 47% and this quarter revenue growth is 97% so wow the growth is back! This company looks like it will belong in the future fang group with Zoom and DataDog! Shop!!
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Total revenue in the second quarter was $714.3 million, a 97% increase from the comparable quarter in 2019.
Subscription Solutions revenue was $196.4 million, up 28% year over year, primarily due to more merchants joining the platform.
Merchant Solutions revenue growth accelerated for the third consecutive quarter, up 148%, to $517.9 million, driven primarily by the growth of GMV.
It may be time to buy more Fastly.
Bear
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Merchant Solutions revenue growth accelerated for the third consecutive quarter, up 148%, to $517.9 million, driven primarily by the growth of GMV.
That 518m is 61% higher than the 322m they had in the Christmas/holiday quarter. Incredible.
There is so much more online shopping going on that it’s not much more than the typical Q2, but it’s much more than the typical Q4. That’s more than I personally could have hoped for. And Fastly is powering it.
Bear
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Bear,
Could you please elaborate why Fastly is a natural winner? Is Shopify’s success really so predicated on Fastly’s tools?
I’m long on SHOP and FSLY already, and understand (with my rudimentary grasp of the underlying tech) that FSLY speeds things up.
No need to go into deep explanation as I can re-read the FSLY write ups, was just unsure if I was missing something obvious
thank you!
Perfstud07
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SHOP’s usage is FSLY’s revenue, if my memory correct
Cheers
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From the Fastly website (Shopify use case)
https://www.fastly.com/customers/shopify#:~:text=Shopify%20n….
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Could you please elaborate why Fastly is a natural winner? Is Shopify’s success really so predicated on Fastly’s tools?
…No need to go into deep explanation as I can re-read the FSLY write ups, was just unsure if I was missing something obvious
Others have already started to address this, but I think you’re right: go back and read FSLY write ups on this board! You can even use the search tool Greg built! https://discussion.fool.com/ot-search-34542654.aspx
But I will highlight one post on Fastly that directly mentions SHOP: https://discussion.fool.com/on-fastly-vs-cdn-debate-to-me-its-fo…
Bear
PS - How about SHOP’s EPS, btw? Even the lower-margin merchant solutions revenue was a powerful driver of profits, at this scale.
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Could you please elaborate why Fastly is a natural winner? Is Shopify’s success really so predicated on Fastly’s tools?
Not Bear. I wouldn’t call it “a natural winner.” CDN is, for all practical purposes, a commodity product and in commodities the better technology wins. It is the case of the better mousetrap.
I just read the Fastly Shopify page (thanks JPutter for the link). When an enterprise the size of Shopify gives such glowing feedback one can sure that it is the better technology, it confirms that going back to the drawing board to create a new and better CDN architecture was a brilliant move. This makes Fastly a technology disruptor. Incumbents have the millstone of incumbency when facing off against Fastly. A lower price will not take business from Fastly because CDN has now become mission critical for high volume internet players.
Shopify’s bulk allows it to buy best of breed and all Shopify stores get to benefit from best of breed that they could not possibly have as independents. It’s a fantastic network effect for Shopify and it trickles down to Shopify. Shopify has 350,000 customers who are indirectly Fastly users. Even Amazon uses Fastly. Talk about large numbers.
Denny Schlesinger
long FSLY, no SHOP
CDN Fastly Wins Content Delivery Business For Amazon.com and IMDB Websites
Dan Rayburn | Wednesday May 6, 2020 | 03:59 PM | 3 Comments
I’ve been tracing a lot of content over the past 60 days to see what changes have taken place with the surge in certain types of content consumption, specifically across OTT video, Xbox and PlayStation software downloads and commerce sites. Over the past few weeks I’ve seen a change where images that use to be coming from Amazon’s CDN CloudFront, are now coming from Fastly for both the Amazon.com homepage and their IMDb website. This isn’t any sort of test or trial as it’s been consistent like this for a few weeks.
https://www.streamingmediablog.com/2020/05/fastly-amazon-hom…
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@captainccs & re Fastly:
It is simpler than that, and mentioned up thread as Rickliu put it, “SHOP’s usage is FSLY’s revenue”. The point is Fastly is usage-based. Shopify growth = more usage. I don’t know how much impact this one customer has on Fastly’s top-line, but it can’t hurt!
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That seems overly simplistic? Fastly benefits from Shopify’s need for CDN, and we are not certain whether SHOP usage of CDN is linear to the revenue. Is it specific to add-in services that only some clients partake of, or is it embedded in the offering to every shopify storefront?
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. I don’t know how much impact this one customer has on Fastly’s top-line, but it can’t hurt!
It certainly doesn’t hurt. Importantly it also implies increasing usage across the board. Or so I would surmise. Points to a possible blowout.
That seems overly simplistic? Fastly benefits from Shopify’s need for CDN, and we are not certain whether SHOP usage of CDN is linear to the revenue.
Ok - well we know the answer to that - and it appears linear. Shopify disclosed in a tweet that they were running at BFCM levels on a daily basis during the pandemic which was approaching double the traffic - so in touch with the 97% revenue growth.
https://twitter.com/jmwind/status/1250816681024331777?lang=e…
I don’t know how much impact this one customer has on Fastly’s top-line, but it can’t hurt!
This might be the more pertinent question to resolve. I don’t know whether Shopify traffic is a 10% customer concentration, 20% or much lower. So I suspect this is the area to resolve if you believe this is a proxy for Fastly.
We know that ebay just hit 20%+ growth in Q2 - up from single digit growth rates. But that is a long way from Shopify’s experience. How much Shopify counts for Fastly and how representative it is is the real question.
Ant
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That seems overly simplistic? Fastly benefits from Shopify’s need for CDN, and we are not certain whether SHOP usage of CDN is linear to the revenue. Is it specific to add-in services that only some clients partake of, or is it embedded in the offering to every shopify storefront?
Every single store uses it because Shopify uses it to deliver store content (I assume the same features that Amazon.com and imdb.com now take advantage of) and handle key aspects their traffic. One case study points this out:
"GoldieBlox, a Shopify customer that creates and sells engineering toys designed for girls, won a coveted ad spot during the 2014 Super Bowl. Their ad aired in the third quarter of the game, and, in seconds, GoldieBlox experienced an 18,000% increase in traffic — the kind of spike that can crash a small company site. Thanks to Fastly’s shielding feature, Shopify and the GoldieBlox online store handled the spike while maintaining a quick, responsive, and reliable experience …
One of the many benefits Shopify takes advantage of allows them to let you as a merchant tweak your store in their editor, hit “save”, and see the results in your online store pretty much immediately (your browser cache, on your computer, is slower to update than their entire network). If you were using AWS’s Cloudfront to do this you would be waiting 10+ minutes for the CDN’s cache update.
While not exactly what my example above is talking about, this statement from Shopify says it all:
“We really like the fact that we can […] fully control the experience on Fastly. If we need to deploy a hot-fix or revert a change, we have the power and control to fix it ourselves. That’s huge for us. With our former provider, we always had to engage our assigned customer support engineer to have changes made.”
More detail in this link mentioned up-thread: https://www.fastly.com/customers/shopify
I have to drop this quote in too: Considering this comes from Shopify I take this as a massive compliment for Fastly:
“Customer support experience and company philosophy as a whole are huge for us. We look for companies with similar values and culture that can become partners rather than just vendors. Fastly’s company philosophy and culture really resonated with our team. Their sales team understands our growth and trajectory, and they provide a rock-solid, fast platform with great support.”
This is the best kind of “sticky”.
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More on Shopify using Fastly’s CDN, from Shopify itself (https://www.shopify.com/enterprise/site-performance-page-spe… ):
Shopify offers a world-class CDN powered by Fastly at no extra cost. Shopify stores will come up almost instantaneously anywhere in the world, including the U.S., U.K., South America, southern Africa, the Australia and New Zealand (APAC) region, and Asia.
and why Shopify customers with built-in Fastly are so happy:
“Getting our license, hosting, and CDN from Shopify Plus saved us about $100,000 per year right off the bat,” says Red Dress Boutique owner, Diana Harbour.
But, I think the future is Fastly’s upcoming Edge Computing offering, Compute@Edge, and Shopify is a Beta customer/tester: https://www.fastly.com/blog/how-fastly-and-developer-communi…
Shopify is building a developer SDK powered by AssemblyScript and Lucet, allowing merchants to create synchronous plugins for Shopify’s commerce platform
Fastly has stated that edge computing will be a “high margin business” for them.
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FROM FSLY’S most recent 10-Q risk section.
“Our future success is dependent on establishing and maintaining successful relationships with a diverse set of customers. We currently receive a substantial portion of our revenues from a limited number of customers. For trailing 12 months ended March 31, 2020, our top ten customers accounted for approximately 31% of our revenue. It is likely that we will continue to be dependent upon a limited number of customers for a significant portion of our revenues for the foreseeable future and, in some cases, the portion of our revenues attributable to individual customers may increase in the future. The loss of one or more key customers or a reduction in usage by any major customers would reduce our revenues. If we fail to maintain existing customers or develop relationships with new customers, our business would be harmed.”
Gotta think SHOP, SPOT, and AMZN are 3 of those top ten customers (and/or grew to become one) and so even though this is a “risk” it also works the other way as a strength when their customers dominate and usage goes up.
FSLY might shock us all with 75% rev growth this Q
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It is simpler than that, and mentioned up thread as Rickliu put it, “SHOP’s usage is FSLY’s revenue”. The point is Fastly is usage-based. Shopify growth = more usage. I don’t know how much impact this one customer has on Fastly’s top-line, but it can’t hurt!
There are two ways to look at it:
-
How much can we squeeze out of our customers, and
-
How can we best serve our customers.
The first is short term and dangerous. I prefer the second.
Denny Schlesinger
1 Like
It is simpler than that, and mentioned up thread as Rickliu put it, “SHOP’s usage is FSLY’s revenue”. The point is Fastly is usage-based. Shopify growth = more usage. I don’t know how much impact this one customer has on Fastly’s top-line, but it can’t hurt!
There are two ways to look at it:
-
How much can we squeeze out of our customers, or
-
How can we best serve our customers.
The first is short term and dangerous. I prefer the second.
Denny Schlesinger
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great insight XMFALieberman on customer concentration. I’ll expand just a bit and add my 2 cents (about what my insight is worth!) for people new to the board.
Saul mentions that we should be aware of, and perhaps concerned if a company’s (e.g. FSLY) customer concentration becomes too narrowly focused, say in the range of or greater than 30% to 40%, because that company becomes too beholden to its customer’s businesses, for example if those customers suffer lost business for any reason.
But XMFALieberman notes that if a company has a material portion of their revenue tied to a narrow list of customers and those customers are doing well (e.g. AMZN, SHOP), then the company may do well, even disproportionately well.
It might be sacrilegious to consider adding anything to Saul’s list of criterion but it might be worth while to consider the following addendum to Saul’s seventh criterion as you evaluate a company…
from Saul’s seventh criterion of how to evaluate a company…“…They also don’t have huge customer concentrations (top three companies making up 30%-40% of revenue)…” Having huge customer concentrations could be bad unless those companies dominate their respective markets, are themselves rule breakers, with dominant market share and strong fundamentals. Then it might permissible, or even desirable, but the investor is advised to watch this closely, as even well run, rule breaker companies are subject to market downturns…
An example: At one time, McDonald’s (yes, the fast food restaurant) was considered a fast growing, even a "hhhypergrowth"™, company. They were seeing significant customer growth in the 60s and later.
aside: If you were lucky enough to purchase 100 shares of McDonald’s when it was at $22.50 on its IPO date April 21, 1965, you would have spent about $2,250, which is about $18,000 in today’s dollars, so not a trivial amount. Given McDonald’s closing stock price of $191.48 on July 17, 2020, that investment would be worth about $13M million today. Additionally, you would have owned over 74,360 shares of McDonald’s common stock after its stock splits. Since its IPO, McDonald’s has split its stock 12 times as of July 2020.
Anyway, early in McDonald’s history, they chose a company to supply their buns, Fresh Start Bakeries. At the time, Fresh Start Bakeries had a reasonable business with a diversified group of customers. But as McDonald’s grew, McDonald’s soon became Fresh Start Bakeries largest customer, then for a time, their only customer. They’ve since diversified and today are one of the largest global suppliers of baked goods to the foodservice and retail markets, but McDonald’s continues to be one of Fresh Starts Bakeries’ largest (and most important) customers.
My point: sometimes, having a narrow set of customer can actually leverage a company’s growth, if (and dare I say only if), that narrow list of customers dominates their particular market segments, are well run, and have strong business fundamentals. I obviously consider AMZN to be the “McDonald’s” and FSLY to be the bun supplier 
. To put in in portfolio management terms, better to have a narrow concentration of the best run, strongest fundamental companies, than to invest is all of them, and dilute your performance. Sure, volatility will be high, but over the long run, this has shown to provide the best returns.
I hope you find this interesting
Thanks,
Gary
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Having huge customer concentrations could be bad unless those companies dominate their respective markets, are themselves rule breakers, with dominant market share and strong fundamentals. Then it might permissible, or even desirable, but the investor is advised to watch this closely, as even well run, rule breaker companies are subject to market downturns…
Hi Gary,
The risk with huge customer concentration is not that your customer may stop growing as fast as he was, or even suffer a downturn, although those certainly are possibilities (but secondary concerns).
The bigger risks are first, that your customer could switch to another provider suddenly or gradually (leaving you with a big hole in your revenue), and second, that your customer realizes that you are so dependent on him that he can get away with insisting you cut your prices to him by 50% or 75% (again leaving you with a big hole in your revenue).
But that’s talking about customers that individually make up 10% or more of your revenue. If, for instance, a single customer made up 25% of your revenue, it would be disastrous and would put your company in considerable danger. If you have a number of customers making up 3% or so each of your revenue, that’s no risk at all.
Saul
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Thanks Saul for the clarification. This is where your other criterion of having switching costs and “stickiness” comes into play. If it’s difficult for a customer to switch to a competitor, all the better, but if the company has a superior product, you remove the need/desire to switch.