Equity Quick Look | 6/6/20

EQUITY QUICK LOOK | 6/6/20

Fastly, Inc. Priority Score: 1.5 (of 3) (FSLY) Author: Madhu C

Sector: Technology Industry: Cloud infrastructure Stock Price: $45.1 (6/05/2020)

Data as of 06/5/2020 unless specified

$304M Enterprise Value: $4.6B Market Cap: $4.7B Revenue NTM (TTM): ($217M) 15.3 YTD Return: 124% NTM (TTM) Price/Sales: RSI: 67.5 (21.5) Gross Margin Revenue Growth TTM 57% 38.2% ROIC (TTM): NM (TTM): (YoY): 200-day Moving 52-Week High: $50.5 52-Week Low: $10.6 24.1 Avg. Insider Transactions: Artur Bergman (Chairman/Co-founder) has sold 468,750 shares, Wolfgang Maasberg (EVP, Sales) has sold 353,802 shares, Joshua Bixby (CEO) has sold 140,000 shares since March 2020.

 SUMMARY OF BUSINESS Fastly, Inc. is an edge cloud platform provider. The company was founded in  2011 and is headquartered in San Francisco, California. The company went Grab-and-Go public in May 2019. FSLY derives 69% revenue from the US and rest from THESIS other countries. Vast majority of company’s revenue comes from the usage of An investment in Fastly is a play on the Fastly’s edge cloud platform. The company’s edge cloud offering is designed rate of growth in internet traffic and to allow clients such as websites and apps to run their computing processes increasing need for faster and safer digital and data closer to the location of their users in order to lower internet latency, experience. Fastly is a leading edge cloud allow for better data security and easy scalability. Edge cloud enables the provider globally. The company’s success computing of data near the end-users at Fastly’s nearest local Points of depends on its ability to continue to drive Presence (POPs) or local assess points instead of requiring data to be penetration of its services in the computed at a central cloud location in another country for example which enterprise segment and gain scale to drive otherwise would require more time and lead to subpar user experience. cash flows. Fastly has 72 POPs in 55 metropolitan areas across 26 countries providing access to a global network capacity of 88 TeraBits Per Second (Tbps). Fastly’s offerings integrates with customers’ existing infrastructure and allows for full programmability, custom configuration, and real-time data analytics.

In November 2019, the company launched beta version of Compute@Edge, a serverless compute environment allowing developers to build edge application with higher performance and security. The new solution is essentially an upgrade

over its core platform. The company had 1,837 customers and 297 enterprise customers as of March 2020. Clients include Airbnb, Shopify, Tripadvisor, Vox, The New York Times and Reddit. 51% of the customers are headquartered outside USA. 88% of the Trailing 12 months (TTM) revenue was derived from enterprise customers. The company processes over 600 billion requests per day for its customers. Contracts with Fastly’s customers are of generally one year. Customers are charged based on their usage of the platform with a minimum charge as per the contract. No customer accounted for more than 10% of total revenue in FY 2019 while one customer accounted for 10.5% of the revenue in Q1 2020. 10 largest customers accounted for 31% of TTM revenue.

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 WHAT’S HAPPENING NOW? The company has delivered strong performance in recent years with rapidly growing customer count and revenue productivity per customer. The company’s revenue is driven by increased demand for video via services such as Netflix as well as digital transformation across small and large industries. The company in its S1 last year estimated its addressable market at $18 billion which is growing at over 25% per year. Further, the company has also benefited from the surge in internet traffic post COVID-19. In fact, it recently revised its guidance for FY 2020 upwards expecting close to 42% increase in revenue vs previous guidance of 30% revenue growth. For Q2 2020, the company is now projecting a strong increase of nearly 54% on a YoY basis.

“the innovators that are on our platform are seeing consistent growth, and they are modeling when we hear them talk in their earnings calls and on their ... to us privately, they believe this exogenous shock has created huge tailwinds for their business. So Shopify, and Slack, and Spotify, and Stripe, those businesses are coming out of this much stronger.” - Joshua Bixby - Baird Global Consumer, Technology, and Service Conference on June 4th 2020 In Q1 2020, revenue went up 38.2% to $62.9M on a YoY basis due to increased traffic and higher adoption of Fastly’s platform. Dollar-based net expansion rate which measures expansion in revenue from existing accounts was at 133% and average spending per enterprise customer increased from $607,000 in Q4 2019 to $642,000 in Q1 2020. Gross profit margin stood at 57.6% in Q1 2020, up 60 bps on a YoY basis. EBITDA margin improved to -1.5% in Q1 2020 as compared to -6.3% in Q1 2019. In FY 2019, revenue at $200.5M was up 38.7% on a YoY basis as 61 new enterprise customers were added during the year, taking the total enterprise customers count to 288, up 27% from previous year. The dollar-based net expansion rate was 135.5% for FY 2019. Gross profit margin at 56.6% showed improvement of 177 bps in FY 2019 compared to FY 2018. EBITDA margin was -8.9% in FY 2019 compared to -8.1% in FY 2018 primarily because of increase in general and administrative expenses as a percentage to revenue due to additional hiring and higher costs as a public company. This was partially offset by better leverage on R&D expenses as a percentage of sales.

Since FY 2017, revenue has gone up at a 3-year CAGR of 38.2% and GAAP GPM has improved by 240 bps from 53.6% in FY 2017 to 56% on a TTM basis. As the company scales up, the company’s gross margins should inch closer to Akamai’s mid 60s gross margin. The company has been rapidly increasing its presence globally. Revenue from countries excluding U.S. as a percentage of total sales has increased from 21% in FY 2017 to 29% in FY 2019 and 35% in Q1 2020. There is still plenty of headroom for growth in international markets and we expect international segment to grow faster than overall company revenues. The company has a negative net debt position (cash>debt) and has resources to invest in the business. Currently, the company has a strong liquidity position of $116.6M in form of cash, cash equivalents and marketable securities as well as $70M under the revolver to meet any business investment needs. In FY19, FCF was -$50.8M and CFO was -$31.3M.  MANAGEMENT Artur Bergman founded Fastly in 2011 and served as company’s CEO since then until February 2020. Currently, he serves as the company’s Chief Architect and Chairperson. Prior to Fastly, he served as CTO of Wikia, Inc. and Engineering Manager of SixApart and Fotango, Ltd. Joshua Bixby became the company’s CEO in February 2020, prior to which he served as Fastly’s President since 2017. He joined the company as a part-time advisor in 2013 and later became SVP, Marketing in 2016. Before Fastly, he was Vice President of Acceleration at Radware Ltd. briefly. He co-founded Strangeloop Networks, IronPoint Technology, Inc. and founded Stanley Park Ventures. Joshua holds a BA degree in Management and Economics from the University of Toronto.

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Adriel Lares is the company’s CFO since May 2016. Prior to joining, he served as an advisor and CFO at Lookout, Inc. and held several executive positions at 3PAR Inc. including business unit manager and CFO. Adriel holds a BA degree in Economics from Stanford University.

 COMPETITIVE ENVIRONMENT The company operates in a competitive industry with rapidly changing technology. It faces competition from data centers, central and hybrid clouds, legacy CDNs and new age CDN providers. Akamai, Cloudflare and Amazon’s Cloudfront are the closest peers. Akamai is the market leader for CDN with nearly 60% market share and has globally spread servers, huge scale of operation however Fastly has been growing at a faster pace as a result of its improved product offering for the cloud ecosystem that has software at its core. Essentially, Fastly was built for the new age tech ecosystem ground up while legacy players such as Akamai were built for the traditional non-cloud IT world and that is the reason Fastly also attracts customers that have a higher growth profile. “we're faster than our largest competitor. They have 270,000 servers. We have just 2,500. And so that takes a tremendous amount of software in order to do that at that scale, and be that efficient. And we've built software through the entire stack. We don't have large Juniper or Cisco routers. We've got Arista routers, we write the code. All of these concepts where we have written software to solve our problems in order to gain this incredible efficiency, this incredible scale.” - Joshua Bixby - Baird Global Consumer, Technology, and Service Conference on June 4th 2020

Fastly Cloudflare Akamai Revenue 2019 ($ M) 200 287 2,894 Revenue FY17-19 CAGR 38.2% 45.8% 7.8% Content delivery solutions, Content delivery Content delivery, media Cloud security solutions, solutions, cloud delivery, security Primary offerings Image optimization Video & security, Data & solutions, image live streaming, Load analytics, Domain optimization, Video on Balancing registration demand Source: Individual company websites and financials The company also competes with Amazon’s CloudFront in the CDN space. However, customers don’t want to depend on one cloud provider and especially large enterprises want a multi cloud set up and that’s where Fastly as a third party tool stands out. “And then I think the cloud giants is another category, which is we consider them partners and customers. They are customers. And I think the other side of this, if you actually look at what customers are asking us, they don't want to be home to one cloud. They want a neutral third party tool that allows them to load balance between clouds. Centralized logging, for example, centralized access, centralized web application firewalls, and these other tools. So we are hearing this.” - Joshua Bixby - Baird Global Consumer, Technology, and Service Conference on June 4th 2020  CONCLUSION/RECOMMENDATION Fastly has delivered strong top-line performance in recent years and has several years of growth ahead in a large addressable market. The company is experiencing above market growth as a result of its focus on cloud coupled with superior software driven architecture. The COVID-19 outbreak has further propelled the company’s growth profile as internet traffic surges. While the company is not FCF positive at the moment, we expect the expanded scale in the future to drive EBITDA and FCF margin expansion. Overall, we rate the stock 1.5 out of 3.

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◼ Performance Data FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 RETURN ON INVESTED CAPITAL (%) - - - NM NM NM GROSS MARGIN (%) - - - 54% 55% 57% EBIT (MILLIONS USD) - - - -31 -25 -34 YoY Earnings Growth (%) - - - - 19% -37% REVENUE (MILLIONS USD) - - - 105 145 200 YoY Revenue Growth (%) - - - - 38% 39% ◼ Valuation Data

FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 SHARE PRICE (USD) - - - - - 20.1 SHARES OUTSTANDING (MILLIONS) - - - - - 95.9 MARKET CAP (MILLIONS USD) - - - - - 1,880 PRICE/SALES RATIO - - - - - 6.84

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