Morning Markets: A dorky edition of this column focused on the Fastly S-1 filing.
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Are you tired of IPOs yet? Are you bored of S-1 filings? Then you are living in the wrong year. After a slow 2014 and 2015 and 2016 and 2017 and only a passable 2018, the technology IPO market is hot. And it looks like a host of unicorns want to jump through the public offering window while it’s still open.
Fastly is the latest example of the trend.
Before we get into the top and bottom lines, let’s remind ourselves what Fastly is. Fastly’s products helps power the Internet as you know it. The firm’s “edge cloud platform” puts applications and data closer to end-users. It also sells load-balancing services, “cloud security,” and vends a content delivery network. Fastly is therefore in the background of your Internet life, helping speed up the experience.
That’s not as holy shit as products that we’ve all used like Zoom and Pinterest, but it’s critical tech all the same. And tech shops going public is something we cover as best we can. So let’s peek at the numbers and see how healthy or not, big or not, and quickly growing or not, Fastly is.
Let’s start simply. Fastly crossed the $100 million revenue mark in 2017. It grew a little under 40 percent in 2018. The company’s net loss fell slightly in dollar terms from 2017 to 2018, descending a sharper 10 percent from 31 percent to 21 percent of revenue.
In cash terms, Fastly does not yet generate cash from its operating activities, and has regular capital expenses that provide its balance sheet with negative investing cash flow. And with just under $37 million in cash, Fastly’s IPO, if successful, will provide the firm with cash to power operating and investing deficits over the next few years.
Finally, over the two years detailed in its filing, Fastly’s gross margin improved by 100 basis points from 54 to 55 percent.
In aggregate, Fastly is a healthy business with a decent growth rate, losses that are falling in dollar and percent-of-revenue terms, operating in a fun place in the market. It has lower gross margins than many SaaS companies, but given the firm’s light losses on top of its 45 percent cost-of-revenue, investors may not mind too much.
Now let’s talk about growth.
In 2018, Fastly’s revenue grew just under 38 percent from $104.9 million to $144.6 million. Powering that growth was sales and marketing spend of $40.8 million in 2017 and $50.1 million in 2018. As you can see, Fastly spent more on sales and marketing in 2018 than it added in revenue during the year.
Is that bad? It depends on how you think about the results. Fastly sells a service to customers that they can buy more of over time. That means that spending more dollars in one year than the company added to revenue isn’t as odd as it might seem. Indeed, in its S-1 Fastly notes that:
[o]ur usage-based revenue grows as our customers’ websites and applications deliver, process, and protect more traffic, as they adopt more features of our edge platform and as they more broadly adopt our platform across their organization. A meaningful indicator of the increased activity from our existing customers is our DBNER, which was 147.3% and 132.0% for the years ended December 31, 2017 and 2018, respectively. [Bolding: Crunchbase News]
“DBNER” is short for “Dollar-Based Net Expansion Rate,” or what we loosely think of as negative churn.
In simpler language DBNER is the amount that Fastly customers spend _more_ over time. So, customers that stay with Fastly spent 132 percent more in 2018 than they did the year before. It’s a solid result. However, the company does remove companies that churn from its DBNER, so it is an adjusted metric.
But the fact that Fastly customers — the ones that stick around — do spend more with the company over time really matters. It makes its sales and marketing expense easier to understand next to its growth; the company spent a lot to acquire new customers, but as those accounts will grow over time, the spend is more efficient than it first appears.
Fastly doesn’t pass the Rule of 40 test, its growth of just under 40 percent stacked next to its roughly 20 percent net loss in 2018 put it at about half of the expected result. On the latter point Fastly’s December 31, 2018, quarter had its smallest net loss of any quarter detailed, aside from the March 31, 2017, period.
The firm also posted a 57 percent gross margin in its most recent period, leading to a net loss of just 18 percent of revenue. That’s improvement.
Fastly has a placeholder, $100 million figure in its S-1 filing for its raise. That number will change when Fastly names a price range and a share figure. As a private company Fastly raised $219 million in known funding. Its investor list includes Battery Ventures, August and ICONIQ, Sapphire and Deutsche Telecom.
It’s hard to find a valuation figure for Fastly, either from its Series E or Series F rounds ($50 million and $40 million apiece), so I can’t really tell you what to expect in terms of valuation. But I suspect that the company will target a valuation of $1 billion or more, given that a trailing revenue multiple of 7x would get it there based on its 2018 numbers alone; add in Q1 2019’s figures and the target is even more achievable.
We’ll have more as this IPO progresses. Stay tuned!
Illustration: Li-Anne Dias.