Fastly, Inc. (FSLY) Earnings Call Transcript & Summary

Thank you, guys, for joining us and for sitting tight. I really appreciate you tuning into Needham's Virtual Tech Week. We have with us the Fastly management team. Josh, Vern, Ron, thank you for joining us today. And I wanted to just level set some of our clients who may be newer to the Fastly story.

But I guess if we could just kick it off real quick elevator pitch, but what is the value prop that Fastly is bringing to the market? And how are you serving your clients?

Absolutely. It's a pleasure to be here. Honored to be here. Thank you. The value proposition is simple. We all live and breathe on the internet, everything we do is moving there. And Fastly is in the position -- the honorable position of making that experience fast and secure and scalable all around the world. So we work with the leading brands of the world that we all use every day on our cell phones or on our desktop computers. So when you go to the New York Times, Fastly stands behind that experience. We think that content we bring it as close to end users all over the world to make it fast. We have a very large network. So no matter how much traffic that site is going to get, we make sure that it delivers and we secure that content. We make sure that bad actors don't have a chance to disrupt that service, either through large distributed denial service attacks or through more pointed and targeted attacks. We're in the business of scale, security and performance.

Terrific. Terrific. And one of the things that I did want to touch on with you guys, it's just great to see, but the returning of the traffic from these top customers that you guys cited in the most recent quarter. Can you help us think about, I guess, what drove customers to come back so quickly following the outage? And what are the strengths of the platform that are really just pulling them right back in?

Yes, it's a great question. For those who don't know, we had an outage in June, it was a significant outage. It was caused by a bug in our software. And we had one top ten customer who decided they needed to have more comfort before they brought traffic back. As you said, Mike, we're incredibly proud of the fact that all those customers are back on the platform, and I think that makes to the stickiness of the platform. And the reality is that customers are getting something they can't get from other competitors. They're getting a performance, they're getting a configurability and programmability, which is anchor of the platform, they're getting control. And so it's understandable when you have an outage that customers need to make sure that you have remediated that, our engineering infrastructure teams acted very quickly, diagnosed this issue in a minute, remediated for the most part in 49 minutes. And then over the next few weeks, put in control of the class of problem that occurred here wouldn't occur again. So incredibly proud of that, but also really honored to have, as I said earlier, the leading customers in the world on the platform, and they're here for a reason. And I think what we've shown throughout that outage and previously is a tremendous stickiness in the platform, and I think it bodes well for the future for us.

So good to see customers coming back. But if I could ask, I guess if I wanted to be devil's advocate, right? So obviously, positives would be they came back to the platform. They saw the value. They like the configurability and the controls that you guys have provided. But if I wanted to bring a point of contention. So that quick flip flop would show that maybe the service isn't as sticky where it demonstrates that it's not as sticky as previously assumed. I guess, how would you refute that point? And then the other question being when they did go from you, do you know what competitors they were going to? And then again, just what were those services that brought you back or brought them back to you?

Sure. So I think the most important thing to recognize is that 99% of those customers came back as soon as we came back up, right? So the reality is that the vast majority outside of this one outlier that we really highlighted chose as soon as we came back to come back. And that's, I think, shows the strength of that immediate stickiness if you use that term. I think the reality is when you're working at the scale that we are at, customers need redundancy, right? So they need other paths in order to ensure that these mission-critical services that we all rely on, work. And they work because the reality is the customers that we serve are developers, the technologists and they know things will play out. I mean we'd love to tell the story that it's impossible for us to fail, but that's not true for us, and it's not true as we see evidence by every service on the Internet. And so the fact that our customers have pathways in order to be resilient, is important, we encourage that we enable that. If you look at this -- in this particular example, the one customer that we called out has its own service that they can use, and they fell back on delivering the content themselves. That's unusual. Most customers don't have that. But in this particular case, they did. And that was able to take the traffic and continue to offer that service in the interim as we were getting ourselves back into a position where that trust could be rebuilt. But ultimately, I think you can look at it glass half empty, you're half full. We have over 400 enterprise customers, the fact that 99% plus came back, I think does speak to what we're doing here. But the notion that our customers aren't going to build redundancy is simply not appropriate given the scale that we are at and the importance of the content we deliver and secure.

Understood, understood. Thanks for clarifying that. And I know we're talking about these over 400 enterprise customers that you have, but the company has articulated this goal of achieving $1 billion in sales by calendar '25. And I'm curious, can you just help broad brushstrokes how fast they expect to climb to this level? And are there specific, whether it's products or go-to-market initiatives? I know you guys got a lot under the hood right now. But how should we be thinking about monitoring or milestones to think about as far as monitoring the progression towards that objective?

Yes. So I think first and foremost, as we've said, we plan to continue to invest in our network, invest in products and our people. The first task is to moving any friction in terms of getting developers on our platform. We've got a number of initiatives to try to accelerate that, get people to run trials, giving them credits. But we want to give developers the freedom to innovate and create great things on the edge that they can't do with any other customer. And so with our developer-first, security-first go-to-market shifting the way our customers start to think about us. So leaning in and innovating so that our customers are able to get a full suite of products they need through fastly. And so first and foremost, it's going to be adding enterprise customers, it's going to be leveraging the growth we see in security and bringing developer awareness and adoption of computed edge applications onto our delivery network.

And I guess from a -- coming back to that go-to-market, right, with your new Chief Revenue Officer. Can you just walk us through the playbook that he is currently instilling the help product success? Or what he's doing to accelerate maybe customer acquisition?

Yes. I mean, since he's joined, he's done a number of things. I mean he's building an enterprise sales organization aligned with the compensation structure to support growing enterprise business. And we're starting to see some results. In Q3, we added 22 new enterprise customers. That's the highest number of organically added enterprise customers since we went public. He's increasing the focus within the sales organization, that efficiency in the sales organization by moving from what was previously more of a vertically aligned sales team to a regionally organized sales team that is much more efficient in terms of bringing on customers. Specifically, as we look at the SMB market, building out a partner network as a more efficient means to sort of build customers there. So as we add customers, we're adding enterprise customers as well as an efficient way of going after the SMB market. And then lastly, he brings a great deal of experience and discipline to the sales team with just a maniacal focus on building pipeline.

And maybe just to come back to the comments from building that sales organization, sales structure, right? So one of the things that we've been hearing is it's a tight market, right? There's a lot to fight off for as far as the right talent and then not only finding the recruiting, but they're retaining. Curious what Fastly has seen on that hiring progress. Are you guys facing headwinds on that front? What is wage inflation like how is turnover?

Yes. So I think there's 2 sides to that. I think, one, everybody, I think, is seeing increased attrition coming out of COVID, a lot of people are assessing their job and making changes and moving around. And so it's no difference here. I mean as Fastly has historically had very low attrition rates and we have seen that trend up. However, as we're engaging in our recruiting efforts, we're seeing extremely strong pipelines of candidates for those open positions who want to work for fastly. And so it means a little extra work on the recruiting side, but we are still able to attract talent. And as you see that attrition at other companies, that opens up people to acquire new talent into Fastly.

That's great, that's great. Thank you for explaining that. We've heard from another -- I guess, a number of different companies that they are [indiscernible] So the fact that you guys are able to attract that, it's really -- almost like success begets success.

It does, and ...

To some of these larger companies, which are higher growth, where the market is moving to. Thank you for that. If I'm thinking about the developers because that's really one of the things that strikes us about your model, right? Fastly, I mean, the success that you've had in attracting developers to the platform, can you give us a sense of how many developers are currently coding on the platform today? Or how many new coders is Fastly attracting each quarter because that is really one of the more powerful messages to the story more broadly.

Yes. We feel that way. I mean we believe developers are the new decision makers. We are seeing those decision-makers act and they're acting in a certain way. They want products that give them control flexibility, programmability. So if you look at our history, we started with developers. We started the notion that if we serve that community well, we would have success. And I think 10 years later, that recipe has paid off, and we want to continue to invest. We have to -- we really have the core original platform that's based in DCO, and then we have the new Compute platform. What we've set is some goals around the new Compute platform, one of them being to get to 100,000 enterprise developers by 2023 on that platform. We're really focusing our energy on the developers that are joining that platform. Now until recently, that was a process that we were gaining, and we were working with customers directly. So there are a few thousand on the new platform. As we've unlocked this which with a couple of key initiatives, we have, as I say, a goal to get that to 100,000. There a couple of initiatives that are important. One is a free trial because we know that inspiration strikes this community at the moment that it strikes and that doesn't mean that our doors are open and there someone ready to turns up and off. So the first element of this is every great cloud modern product gives that serendipitous moments a place to grow and expand. And that's the case with the launch of the free trial. We want to make sure that, that process where we get built-in on a late night by somebody having inspiration exists. Then what we also need is, we need organizations to have the flexibility in order to try this out. And so we have a -- we have a credit program, which we've just launched with these people a few months and up to $1 million in credit so they can actually use the platform and get this new way of building the web to take some of the risk out of building that. Because what we're talking about here is a new way to build. When developers have always traditionally thought about, I can work on the web server, I can work on a database server. I can work on the application server but the network has not really been a place where they can take their code. And when you look at what Compute does, it allows people to take the code in the language of their choosing and have that run right next to their users in a safe environment. And so we think of our platforms, is the developer where developers know that, that code is going to be run in an environment that they control and they can have certainty around. So it's definitely going from a few thousand to 100,000 is important for us. And we know that, that's historically what's led to our success on our existing business. And so we anticipate the same thing on the Compute side. But we're still in the early days of that.

Right, right. I mean it might be too early, but I did want to ask. So with, let's say, these free trials, the free credits that you're currently giving to the developers as part of these initiatives, are you seeing that resonate in the market? And is it -- are you at least starting to see some of the conversion? Or is it too early to tell at this point? It might just be more happen stance versus a solid database that you can refer to where it's ...

Yes. I mean these programs were launched at the end of the quarter. It's early. The signs are really positive. And I think what Ron talked about, which is the focus of Brett and his organization on pipeline. What we know is this is making a meaningful impact on pipeline. And we know pipeline has historically been a very good indicator for us as it is for most companies and what that future might look like. So when we come to an organization and talk about some of the challenges they have let's say, personalization for an e-commerce company, and we can tell them that a lot of that can happen at -- right next to the users opposed to far away in a data center that might cross a country or an ocean we really see the power of that manifesting in interest. And interest is obviously the first element of the upper funnel. So I would say it's very clear that the security offerings and the Compute offerings are generating that interest that we are in the enterprise business, so we have a 69-month sales cycle. So it's going to take time to have that work through the system. But it was very encouraging to see the net new customer adds, and as Ron alluded to, the enterprise customer adds in the last quarter. And I think that speaks to some of the momentum that we're building here.

And if I'm just shifting gears here and thinking about the beachheads essentially the fastest building, right? There's delivery, Compute, now security. And all these have like real use cases, market-driven approach, which feeds right into the product-led motion with the developers. They all seem to be inherently tied to each other. Can you talk to the success that Fastly is seeing in driving each of these beachheads? And then how the customers, how the developers are responding, what might seem to be nearer-term versus more medium-term as we look to the results that you guys are driving towards?

Yes. I really like how you position that because the reality is they're almost inseparable at this point. the idea that you would get to you talk to a company and say, "Hey, when you deliver my critical API, but don't protect it". Like those days are gone. And the reality is that delivery, security and now Compute are all intermingling to create that story. I think if you look at the beachheads, they're significant. If you look at the security business, we just got placed in the sort of the largest movement in the Magic Quadrant for our WAF and that thanks to the incredible work of the teams on the Signal Sciences, a company that we acquired almost a year ago. So we have best technology. And again, coming back to the ethos of control and flexibility and programmability. And this modern approach to DevOps really plays well in that. If you look at the Compute side, Forrester just came out with their recent wave and highlighted specifically for us security of that particular platform. And I think, as I said, these are intermingled. So when you come and you look at a security platform or you look at a Compute platform, at the scales, we're operating and with the criticality that we operate. The first question you're asking is your -- is my content sitting there intermixed with other content to I might vulnerable to side channel attacks. That might vulnerable to memory challenges that can occur in a shared environment. The answer on our platform is no, the answer on the competitive platforms are yes. And so that's an example of where you see Compute, but actually the security requirements to Compute get elevated. And then on the delivery side, I mean, we still maintain a very significant lead when it comes to performance and scale on the delivery platform. And that's why when you go out and look at the sites that you would experience yourself, you will see that the most modern ones run up fastly. And so it's absolutely a mingling of all 3. And ultimately, the conversation is about all 3 and how they play together rather than how they -- you separate this out and play a part.

Great. Great. And you actually -- you touched on one of the next questions. It's more of a market data point here, but coming back to the Forrester. The report specifically called out Fastly with some of the highest ratings in security versus peers. And I'm curious, this acknowledgment, does that go out? How much does that help you from a marketing and branding perspective . And then what's your reaction to it as far as pipeline, again, funnel conversion?

Yes. Yes. So I mean the reaction, I think, from our perspective, if this was one of the requirements we built in from the start. Fastly always starts with this enterprise mindset. We are dealing with the most sophisticated, the largest scale in the world, the way we start from that place. That's not the starting place of every other company. And actually, this is a large market. There's a universe where all companies can benefit from this move in the edge and not every company needs the ability to run 100,000 requests a second in certain locations like we are uniquely catering to the largest in the world. So I think the fact that there's an acknowledgment that from a security perspective, our Compute environment is just leaps and balance above the competitive set is really promising. As you said, it leads to interest when we are talking to those that are security minded, those who worry about fraud, those who worry about being a target of a government actor or a state-sponsored denial service for example, they really care about securities [ clause ]. . And if you look at Fastly, what we've become over the last year is really a security-centric business. We are thinking about everything we do through that lens because of how important it is to our customers. And so ultimately, what you see here is that is leading to pipeline. We know that pipeline leads to growth. And when we set out the $1 billion target, that's part of our discussion. In the quarter, it was really to orient all of us around the fact that we know, we feel and we have demonstrated this for the first few years of being a public company. There's tremendous growth here. This year, in particular, was an aberration, but we really wanted to remind everyone it set the same kind of targets that we have inside the house to outside the house. This is a fast-growing opportunity. The tailwinds that are behind us in terms of the adoption of the Internet. The where data center technology is going and the fact that every security appliance is moving into the cloud. The fact that we have 5G, we've got machine learning. We now have this whole metaverse world. All of these things are all tailwinds to a business that delivers the content that we all live and use and play with all the time. It's a great space to be in.

Well said. And I did want to just come back to because one of the things, again, on security the bogey for this -- the revenue growth, a 10x move in revenue contribution versus today by the time we hit calendar '25 similarly, are there milestones we should be looking for? I guess, how can we track success? And what products specifically should we be watching for Fastly to drive that kind of success?

Yes. So on the security front, I think our enthusiasm only grows. I mean the problems that are being brought to us that are being solved either by our own security products or using Compute to build security products, it's a very exciting time. So I would start by just sort of talking about the general level of enthusiasm. I think when we look at that 10x, we already have a very fast-growing security business. We talked about that growth quarter-over-quarter. We also don't yet have every part of that security portfolio complete. So we see a big pipeline, we see the momentum, and we also see what the opportunity is going to be when we have every piece of that. We have very strong offerings and a number of the areas of the business. But there are a number that we have committed to and are still building towards. So for example, when we acquired Signal Sciences, we talked about having their product available at our edge and our scale. And that's a process that is well underway. We're well on target, but that's not something that will be fully commercially available and distributed to our customers until Q2. So when you look at some of those milestones, what you know is that when that portfolio is complete, that's when it's easier to even grow faster than we already are. When you also look at the pieces of the portfolio. So we're talking about the sort of TLS certificate side of the business. We've got the denial of service protection side. We have the WAF side. We have the bot side, all of those areas continue to evolve and ultimately in the grand scheme of things, they're all quite small businesses today. And we are seeing, as we have in the delivery side of the business, these inflection point. Once you get to the largest customers, and they start using them, there's an incredible cascading effect down market where everyone looks up and see who the top cost that e-commerce customers who the publishers are using educational institutions. And that sets the primitive or the template on how everyone then acts over the next 5 years. And when you look at how those types of customers, the brands we all admire in these sectors are what they're building, they're building a tightly integrated delivery, Compute and security platform and their delivery and they're building that out fastly. And so I think our enthusiasm stems from seeing the momentum we have, which is very [indiscernible] at growth, seeing the pipeline and then seeing sort of how we see this all coming together at the most impressive brands and then understanding how that cascade effect helped Fastly grow over for 10 years. All of that is giving us tremendous enthusiasm.

With all those markets that you're moving to in the security space, right? And that again, that portfolio is continuing to build and then that will almost help accelerate growth in the sense that you'll have a more complete holistic offering. But you are touching on a number of well-established markets, right, much bigger than where you are today. I have to imagine the entry from new products into some of these new markets, does bring on new competitors in that sense. So can you kind of walk us through the competitive set that you guys are squaring off against? And I'm curious based on where you guys are in this integration that you're providing how do win rates look? Are they stable? Are they improving? What is the dynamic on as well?

So win rates continue to improve. I think we continue to hone our offering and win rates continue to improve. I think on the competitive side, you really have 2 places here. You've got those who are already invested in the cloud and those were invested in appliances in the security market really just bifurcates in that. For those that are invested in the cloud, particularly on the web and API side, they are often and today at the enterprise using Akamai and the Kona offering along with the Prolexic offering, both of those product offerings from our customers' perspective, [indiscernible] a lot of sort of legacy characteristics, right? They're not something that a developer comes and control. They're not something that developer uses when they hit inspiration. There's a lot of the sort of traditional legacy aspects to them that our customers are very eager to get off. So you've got one path, which is Fastly continues to spend time working with those who are caught in a legacy cycle. And that's one legacy. The other legacy, of course, is appliances. And so if you look at what that market brings up the appliance tenders, the F5s and the radars and you could go on and on with all these lists of security devices that were all stuck in front of -- in data centers, there's a layer upon layer of appliance. And as the world modernizes, there's no place for that. This is all done in software, and it's all done in the cloud. And so the idea that I'm going to have a different cloud to do my denial service protection than my WAF and a different cloud to do my botting and that's it to the customers want out they're buying today. They want one place where all of this is together and they have the ability to reap the benefits of emergent effects. When you put your WAF and your bot product together, it's not 1 plus 1 equals 2. It's 1 plus 1 equals 3. And that's the case across all of these. So ultimately, there are 2 legacy siloeds. One is a legacy cloud and the other is the legacy appliance that's -- and really, the business is coming from both of those sides today.

And I know that you also have a pretty -- a wide range of customers you could tap into. But I know one of the things that we get, and I'm hoping you can shed a little bit of light on this. But if I think about enterprise, right, they have the resources in hand not willing to compromise on security because maybe they have more budget that they can allocate towards the best-of-breed product out there. Maybe mid market does not have those type of resources so they're probably -- not willing to compromise but maybe go to best-of-suite approach. And I'm just curious is that a fair characterization? or you seeing -- are you seeing that in the market and have the big changes like that? I'd just be curious about those two dynamics as well.

Yes. We certainly see elements of that but I do think, as I said the emerging qualities of web and API security are taking these point solutions and bringing it together no matter what, whether you're large or medium. So I think the answer is we're seeing a centralization back to core platform. [indiscernible] you all of these well and tighten together no matter which segment of the market is. The demand is different, the needs are different and of course the budgets are different but it just does'nt make sense in a modern architecture to have multiple WAS or WAF that's separated from your bot. So I think in traditionally yes, we are seeing that change a little bit in the market or I would say this approach of getting one platform that brings all of the intelligence together and then act that we're seeing across all levels, small, medium and large, hope that makes sense.

Yes, it does. It really does. And again, just coming to that security that 10x back that we're looking for, I have to imagine that the Single Sciences acquisition, plays role into that, right? We're already talking about the Q2. But can you just walk us through how that's accelerated your overall goals? And how that acquisition is performing versus your initial expectations?

Yes. So I think as we've talked about it, it's really integral to our overall security portfolio. I think the integration is going exceptionally well. As a matter of fact, we really don't see it as a separate business, but part of the overall Fastly business. The sales team earlier this year, his team were combined in one, all the sales reps carry the full portfolio of products from both companies. And we -- over time, I think we see it becoming more and more incorporated into our overall revenue stream. I think in terms of performance, I think it's done better than sort of the initial sort of pre-acquisition projections. I mean it's done really well in the most recent quarter, it was about 11% of revenue and grew roughly 12.5% on a quarter-on-quarter basis. So we're really happy with how smoothly it's integrated and the response we're seeing from our customers and the success we're having in selling their solution.

Terrific, terrific. And I know, I guess, moving away from security a little bit, but turning to Compute, right? It's this younger -- it feels like a more nascent initiative currently. And I'm curious, what is Fastly doing to get more applications at the edge Compute network. What are you guys doing to drive, I guess, growth in usage on that front?

Yes. So thankfully, we have a lot of experience on this, right? We started 10 years ago with the notion that we would provide an edge for people to code on. And what we realized is it doesn't just happen. You have to set out primitives, you got to design things that people can jump off from. So you have these have very different classes of mindset. You have people that just want the platform, want the APIs. They're going to go in their home, they're going to do their own thing, and that exists. But for a lot of people, they actually want to work on top of others work, the work that others do. So if you look at our developer hub, if you look at the recipes that we create, if you look at all of these integrations, we rather give fully integrated modules or we give code samples or we give snippets that somebody could insert it's all about building that up. And there's actually a flywheel effect here because the more that we can do that, the more we can allow our customers to do that, then the next time when a new customer comes on, they can get the benefit of all of that. So the first customer that built -- the first newspaper to build a paywall on Fastly, that was a big lift. The second one was able to leverage some of that insight. The third, fourth, fifth and now multiples of that, they just can click a button. And that flywheel starts to really differentiate any platform on the Compute side once you start getting that knowledge built in and institutionalized. So it's about having the platform available. It's then about all of the work that you can make easier for the next person. If you could turn that into a flywheel, which we've been able to do on our VCL platform, you get this incredible impact the net new customer who comes on the platform, and that's exactly what we're doing right now.

Great. And I'm seeing we are out of time, sorry to our listeners for tuning in a bit early. There was a little bit of a scheduling issue. But with that, Josh, Ron, Bern, thank you very much for joining us today, and thank you to all our listeners for tuning into the webcast as well.

Great. Thank you.

Thank you.

Thank you, guys.