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Subject:  Re: Can we call it quits on FSLY v. NET? Date:  11/7/2020  3:32 PM
Author:  Ckelly7279 Number:  73292 of 78006

I think a lot of the FSLY/NET comparisons are bit of apples and oranges. They aren't "direct" competitors, and they share some clients. Earlier in the year, I thought they were, and I sold my NET position and bought FSLY. Until recently, that was a good move, but it really was a bit misinformed. I bought back into NET recently and doubled my position in NET yesterday. I sold short 80% of my FSLY position after the pre-earnings release (not early as I should have) and have since closed it. All my stocks are in a taxable account so taxes matter to me. I have not added to FSLY recently but that is because it is still my #1 holding.

Bottom line, I think both have excellent revenue growth, good (FSLY) and very good (NET) gross margins, excellent technology, good (NET) and very good (FSLY) DBNER and a big TAM.

I looked a bit more closely to solidify my conviction and here are some thoughts.

Revenues & Gross Margin:
FSLY Q3 $70.64mm +41.85% YOY
FSLY Q2 $74.63mm +61.70% YOY
FSLY Q1 $62.92mm +38.15% YOY
FSLY Q4 $58.93mm +44.46% YOY

FSLY Avg. Rev Growth: 46.54%
FSLY Avg. GM: 58.02%

NET Q3 $114.6mm +54.39% YOY
NET Q2 $99.72mm +44.94% YOY
NET Q1 $91.25mm +47.83% YOY
NET Q4 $83.90mm +51.23% YOY

NET Avg. Rev Growth: 49.60%
NET Avg. GM: 76.90%

Enterprise Customers*:
FSLY Q3: 313 +3.0% QtQ
FSLY Q2: 304 +2.4% QtQ
FSLY Q1: 297 +3.2% QtQ
FSLY Q4: 288 ?
*FSLY defines Ent Cust as >$100,000 of revenue for the TTM. So, this is clearly a lagging indicator. Landing a new customer in Q3 generating $99k of revenues would not be an enterprise customer.

NET Q3: 736 +63.2% QtQ Paying: 100,968 +24.7% QtQ
NET Q2: 451 +72.8% QtQ Paying: 80,986 +19.7% QtQ
NET Q1: 261 ? Paying: 67,643 ?
NET Q4: ?
*NET defines Ent Cust as >$100,000 of annualized revenue. So, my take is they have 736 costumers generating $25k+ of revenue. Note, NET had 100,968 paying customers in Q3, and 3.2 million total free (including me on the - Warp App) and paying customers.

Quick Takes:
Given that revenue growth of both FSLY and NET are similar, one can only conclude that FSLY is expanding its revenues with existing customers with a need/desire for its unique platform. NET, on the other hand, is growing by expanding into new enterprises more broadly, but the revenue spend per enterprise is not as great as FSLY's customers.

FSLY reports that 88% of its revenue is from Ent customers. That means the avg. spend of Ent Customers in Q3 was an average spend of $198,590/qtr and annualized spend estimate of ~$795,395/yr. NET doesn't report its revenue for Ent customers, but it's likely a lot less. At a bare minimum, they are getting $18.4mm from Ent in Q3 (736 * $25k/qtr) or 16% of Qtr revenues. At FSLY 88% revenues levels from Ent customers, NET would be getting $100.46mm from Ent or $136,497/qtr per Ent customer - only 68% of FSLY's per Ent customer revenues. If we assume NET's Ent customers give them 50% of their revenues, then NET's Ent customer spend would be around $77,555/qtr or $310,220/year.

In any case, I think the Enterprise adds are not really comparable. The business models are different. Undeniably, NET's Ent Cust growth is impressive, and I like that model better. It is broader and less dependent on fewer bigger customers. FSLY's revenue is highly dependent on fewer customers. This creates far more volatility as we saw recently with the loss of their largest customer. On the other hand, I'm not sure it makes FSLY's model bad.

I'd also note that FSLY can only sell so much in a QTR without augmenting existing POPs or building new ones. They increase this every qtr. If their existing customers are grabbing all of the available space - and paying for it - how can FSLY add new customers. I guess one would say build more capacity faster. If their new secure@edge and edge@compute products are going to drive more sales, I think that they need to be more aggressive with their CapEx and adding new customers.

To summarize what others have said, NET has an integrated and enhanced CDN platform (like AKMI) that provides zero trust security and optics (like ZS) and edge computing. It seems like a simple integrated approach. FSLY provides a the fastest enhanced CDN platform (including video streaming) that can provide private space for an Ent customer on FSLY platform (unlike NET). FSLY just added a security aspect and are rolling out Edge computing. FSLY is more developer friendly and personalized, but also likely harder to onboard than NET.

Final Thoughts:
I think there is room for both FSLY and NET. If you are going head to head and could only choose one to invest in now, then ignoring valuations I think you pick NET. I added NET and doubled my position here. It really is a strong company. Yet, I'm comfortable holding my FSLY here as well.

Going forward, it does look like FSLY will compete more with NET in the future especially with the large Enterprise Customers with a more integrated approach of CDN, security and edge, but I don't know if that head to head will be as much as it might seem. I think there is room for both.

In the recent past, Tik Tok had a huge impact positively and negatively on FSLY's numbers and stock price. While I think it was an anomaly, it does highlight that FSLY will be more erratic with its QtQ numbers and stock price. For example, they could come back in Q4 and have a large positive jolt.

Finally, leadership is a big factor, and my take at this point is NET has the edge here. From a public investor standpoint, Prince is more confident and polished than Bixby. Prince reminds me of Jensen Huang of Nvidia.


Long FSLY and NET. Note, I'm far more diversified than most here and sell much less often as well.
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