Fastly Earnings: Why Investors Should Watch Customer Growth and Retention

Fastly‘s (NYSE:FSLY) edge cloud platform allows enterprises to deliver content and process data at the network edge (close to where the data is generated). This creates a fast, reliable experience for end users while reducing costs and enhancing security for Fastly’s customers.

Like many young tech companies, Fastly is currently unprofitable and faces intense competition from larger, more established rivals. Moreover, the stock is up 350% in the last 12 months, driven by the rapid push toward digitization and edge computing. Put simply, Wall Street will be expecting stellar results. But rather than get too caught up in quarterly guidance, investors should focus their attention where it matters most. Here are two metrics to watch when Fastly announces earnings on Wednesday, Feb. 17.

Person pressing digital cloud computing icon.

Image source: Getty Images

Customer growth

Strong customer growth is essential to Fastly’s future success. As an unprofitable enterprise, the company needs to scale its operations if it hopes to achieve profitability. So far, the company is moving in the right direction. Over the last three years, Fastly has reported reasonably strong growth in total customers and enterprise customers (those spending over $100,000 each year), but it would be nice to see those growth rates accelerate.

Source: Fastly SEC filings. CAGR: compound annual growth rate.

Customer retention

Annual revenue retention provides insight into customer churn (how many customers Fastly lost during the year). The company reported a retention rate of 98.9% for 2018 and 99.3% for 2019, indicating that the Fastly kept virtually all of its customers in that period. That’s encouraging.

But in 2020, Fastly ran into trouble with TikTok, its largest customer. And there is still a fair amount of uncertainty as to whether TikTok, which is owned by China-based ByteDance, will be allowed to operate in the United States. That’s why investors should pay attention to this metric. If retention starts trending downward in the coming quarters, it would be a red flag.

Fastly also reports a metric known as dollar-based net expansion rate, which excludes the effects of churn but includes increases in customer spend. This percentage helps investors gauge whether the average customer is spending more or less each year with the company. For instance, Fastly’s expansion rate was 132% in 2018 and 136% in 2019, which means the average customer spent 32% and 36% more in those years, respectively. If Fastly can maintain that upward trend, it would be a bullish signal to investors as the company grows its top line on two fronts (with new customers and existing ones).

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Putting the pieces together

Fastly’s revenue is entirely dependent on the company’s ability to add new customers and keep existing customers on its platform. For that reason, this metric tends to follow trends in customer growth, retention rates, and expansion rates. Since 2017, Fastly has grown revenue at over 38% per year, easily outpacing its larger, more established competitor Akamai.

Revenue

2017

2018

2019

CAGR

Fastly

$105 million

$145 million

$201 million

38%

Akamai

$2.49 billion

$2.71 billion

$2.89 billion

8%

Source: Akamai, Fastly. CAGR: compound annual growth rate.

The high end of Fastly’s fourth-quarter guidance calls for $82 million in revenue (at the midpoint), which would put full-year revenue at $290 million, representing 44% growth over the previous year. If the company can deliver on this estimate, the growth acceleration would indicate Fastly’s edge cloud platform is gaining traction. Moreover, if its growth continues to outpace larger, market-leading rivals like Akamai, it means the company is gobbling up market share. 

A final word

In the vast majority of circumstances, no single quarter can make or break a company. And high-growth stocks with pricey valuations like Fastly often show great volatility around earnings. That’s why investors should pay attention to measurable outcomes, not erratic movements in the share price. Put another way, don’t sell just because the stock price plummets, and don’t buy just because the stock price pops. Focus on the metrics that matter over the long term.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


View more information: https://www.fool.com/investing/2021/02/15/fastly-earnings-why-investors-should-watch-custome/

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