Fastly’s Q2 Suffers From Network Outage

Fastly’s FSLY second-quarter revenue and adjusted EBITDA were generally in line with FactSet consensus estimates, but underlying metrics showed worrisome deterioration, and the firm reduced 2021 sales and earnings guidance significantly. We’re questioning whether Fastly can attain the hyper growth we think is required to justify recent stock levels. We’re reducing our fair value estimate to $35 from $48, and we’d recommend an outsize margin of safety before being tempted by this very high uncertainty stock.

Revenue of $85 million was roughly flat sequentially and up 14% year over year, though we estimate it was up only low single digits on an organic basis. The monstrous growth the firm achieved during the second quarter last year, at the height of COVID-19 lockdowns, offered some rationale for this expected result, but other factors are concerning, and the quarter contained a lot of noise.

For the first time, the firm consolidated last year’s Signal Sciences acquisition into its customer metrics, leaving less ability to assess how the core business is performing. Also, June’s network outage resulted in the firm issuing revenue credits and customers taking some traffic away from Fastly. One of the firm’s top 10 customers has yet to return traffic to Fastly’s platform. Uncertainty surrounding this customer’s return and delays in others ramping traffic led management to reduce its 2021 revenue outlook by $40 million, to $340 million-$350 million.

Margins were also weak, with the 58% gross margin down more than 4 percentage points year over year and 250 basis points sequentially, undoubtedly weighed down by the revenue credits. Higher investment to expand capacity also inflated costs, and the firm’s non-GAAP operating loss jumped to more than $17 million. The loss has expanded by $3 million-$5 million each quarter since the firm’s surprise operating profit in last year’s second quarter.

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