Fast Earnings: Why Investors Need to See Customer Growth and Retention | The variegated fool

Quickly‘s (NYSE: FSLY) edge cloud platform allows companies 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 improving safety for Fastly’s customers.

Like many young people technical companies, Fastly is currently unprofitable and faces intense competition from larger, more established rivals. In addition, the stock has increased by 350% in the last 12 months, driven by the rapid push towards digitization and edge computing. In short, Wall Street expects amazing results. But instead of getting too caught up in quarterly guidance, investors should focus their attention where it matters most. Here are two measurements you should see when Fastly announces earnings on Wednesday, February 17th.

Person pressing digital cloud computing icon.

Image source: Getty Images

Customer growth

Strong customer growth is crucial for Fastly’s future success. As a unprofitable company, the company must scale its operations if it hopes to achieve profitability. So far, the company is moving in the right direction. Over the past three years, Fastly has reported relatively strong growth in total customers and corporate customers (those who spend more than $ 100,000 each year), but it would be nice to see these growth rates accelerate.

Metric

2017

2018

2019

CAGR

Customers

1,439 th most common

1,582

1,743

10%

Corporate customers

170

227

288

30%

Source: Fast SEC filing. CAGR: compound annual growth rate.

Customer retention

Annual withholding of revenue provides insight into the customer basket (how many customers quickly lost during the year). The company reported a retention rate of 98.9% for 2018 and 99.3% for 2019, indicating that Fastly held almost all of its customers during that period. It’s encouraging.

But in 2020 ran in quickly problems with TikTok, its largest customer. And there are still quite a few uncertainty about TikTok, owned by the Chinese ByteDance, being allowed to operate in the United States. Therefore, investors should be aware of this measurement. If retention starts to pull down in the coming quarters, it would be one red flag.

Quick also reports a metric known as dollar-based net expansion, which excludes the effects of churn but includes increases in customer consumption. This percentage helps investors measure whether the average customer spends more or less each year with the company. Eg. Fastly’s expansion rate was 132% in 2018 and 136% in 2019, which means that the average customer spent 32% and 36% more respectively in these years. If Fastly can sustain the 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).

Put the pieces together

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

Turnover

2017

2018

2019

CAGR

Quickly

$ 105 million

$ 145 million

$ 201 million

38%

Akamai

$ 2.49 billion

$ 2.71 billion

$ 2.89 billion

8%

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

The high end of Fastlight’s guidance in the fourth quarter requires revenue of $ 82 million (middle), which will result in full – year revenue of $ 290 million, representing a 44% growth over the previous year. If the company can deliver this estimate, the growth acceleration will indicate that Fastly’s edge cloud platform is gaining traction. If growth continues to surpass larger, market-leading rivals like Akamai, it means the company is eating market share.

One last word

In the vast majority of circumstances, no single quarter can create or break a company. And high-growth stocks with expensive valuations that quickly show great volatility around earnings. Therefore, investors should pay attention to measurable results and not irregular movements in the stock price. Put another way, do not sell just because the stock price is falling, and do not buy just because the stock price is popping up. Focus on the measurements that matter in the long run.

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