FSLY - Fastly Inc. (FSLY) Presents at BofA Securities 2023 Global Technology Conference (Transcript)
2023-06-08 16:44:05 ET
Fastly, Inc. (FSLY)
BofA Securities 2023 Global Technology Conference
June 8, 2023 02:20 PM ET
Company Participants
Vernon Essi - Investor Relations
Ron Kisling - Chief Financial Officer
Presentation
Unidentified Company Representative
So there are only a few people in the room. But there are more people on the webcast. And I can say very, very few times in my career, I was happy to upgrade the stock and have such a tremendous impact immediately after. Normally I upgrade the stock, and then I explain why it's too early. So I'm happy that I was able to do it. And we just said that luck is part of the game. But I'm happy luck was on my side in this case.
So we have Vern and Ron from Fastly. We're going to talk about the CDN market. Yesterday -- and we're going to talk about CDN and their differentiation in CDN. We're going to talk about security. We're going to talk about edge cloud. Many things to talk about. Extremely interesting company. Yesterday, Madeline hosted Akamai. And if you close your eyes, and you just listen to Akamai, you think they speak about Fastly. And I'm sure that if you're going to close your eyes today, you're going to think about Akamai.
So we want to understand the difference. We want to understand the differences between the CDN companies and what they do et cetera. So that's the purpose of our call. So Vern, before we start, do you need to say anything about kind of safe harbor or something or we can skip? I call it the…
Vernon Essi
Since you ask for Safe Harbor, please refer to our most recent filings for any risk factors, we encourage you to read them.
Question-and-Answer Session
Q - Unidentified Analyst
Okay. It's perfect. Excellent. Okay. So, Ron, I want to start with the high level, can you -- and I want to start it for those who don't know the company. So otherwise, the discussion will go straight into the details. Can you talk about your big buckets of growth? What is driving revenues now? What is going to drive revenues in the future? Kind of give us an overview of the company for those that don't really know the company, and then we'll drill down.
Ron Kisling
So I'll start with, we're really focused on kind of the user experience, the end user experience. And we have an edge cloud platform. And on that edge cloud platform, we have constantly delivered content. We have a security portfolio, and we have compute. And if you look at the growth drivers today, it's really been around our performance differentiation, being able to deliver faster with lower latency, and a modern platform that is extremely efficient in terms of caching data from the central cloud, purging it, reducing costs for the providers and our customers of that central cloud. And that differentiation has really allowed us to perform well.
And the motion we see really well is when we get into a customer, even if they have multiple providers is that, that performance differentiation over time allows us to take a bigger share of the traffic as well as having a security portfolio allows us to cross-sell and add in that security product. As we look forward, some of the key efforts are really around building out that security portfolio around the key pieces of what we sort of think of as WAF security. We have the leading product around firewall. But really launching later this year a productized DDoS product and a product around bot protection, to provide that product.
And then we have launched a compute element that really allows for personalization compute at the edge as part of creating that immersive fast experience for users. And those are the upsell opportunities that allow us to continue to expand and grow within those customers.
Unidentified Analyst
Got it. Okay. Let's start with CDN because you're growing way faster than the CDN market. I know pretty well the Akamai story, the Amazon story, the Google story, they're not doing well. They're not doing well in terms of growth and profitability. How -- what is your -- first of all, what is your differentiation? How are you different in this market? And how are you going to avoid the natural commoditization of the space?
Ron Kisling
Yes. I think first and foremost, we look at the market less about a sort of a content delivery network, but more about enabling end user experiences. And the differentiation is if you're just looking at delivering content not about the experience, not about the personalization, I think that is going to become more and more commoditization. But I do think the differentiation -- and we saw early success in particularly in industries where performance mattered. E-commerce, where time to load the web cart and personalization really had a direct impact on card conversion and the value of that card.
I believe that customers across new industries are going to look at increasing their customer engagement. That means fast websites. It means immersive experience. That means personalized experiences. And that new buyer is really looking about buying that experience. Security, compute, delivery, that's all part of what they're buying. They're buying an end user experience. And what we've started to see is new industries where these are more greenfield implementations of, again, an edge cloud platform in travel and in healthcare. And so I think that is really the differentiation is. You're going to have delivery networks that are doing the basic delivery but delivering an experience at the edge, basically part of the Internet architecture with a central cloud being close to the user, delivering that experience with compute and security, that's what companies are going to value. And I think that's going to drive growth, and it's an opportunity to value and get value across that delivery...
Unidentified Analyst
However, in the past -- so clearly, you have even technical advantages that enable you to deliver these experiences. But in the past, I have seen you also participating in deals that were not very profitable for the company, meaning competing on price per bit, competing on bandwidths. What -- how has -- and that was many years, right? Years ago, before management changes, et cetera. How is it different now? What is the focus of the company when it comes to your target contract or a target kind of deals that you go after a target customers?
Ron Kisling
Yes. I think there's two or three pieces to that. I mean why I come back to the experience, which is sort of where we focus on the value that we bring. But the other thing I would focus on is our modern architecture is very efficient from a cost perspective. That may not be completely apparent based on the last couple of years. But I think a good example is our CapEx intensity, back in 2021, we were like 12% to 14% of revenue. I think that was an overinvestment. As we built in the processes to align our investment with the capacity, we're more at a 6% to 8%. And so we can deliver content to the edge more efficiently than our competitors.
We deliver content security and compute in one platform. The other architectures, which are older but very robust, you deliver those across three platforms. So we can compete competitively on price and still generate meaningful gross margins. Having said that, I think we're approaching the market, importantly, by leveraging our performance delta, focusing on upselling and cross-selling the security piece, as well as the compute capabilities in that market. So I think the issue is we have a cost structure that allows us to compete but deliver performance differentiated results.
Vernon Essi
I was going to add to that, too. I think just to give a quick background on the platform itself. I mean it's entirely built on a compute framework in Varnish, and it allows a high degree of programmability and allows us to basically do adjustments to the network in software. And so if you look at what Ron was referring to in terms of efficiency, we could do an entire upgrade to the network with software, with new routing and new features that would actually improve traffic, and we can measure that performance over time.
So for example, we're coming-in in a most recent upgrade 20%-plus efficient year-over-year on the exact same footprint of CPUs and hardware investment. And that's very powerful when you're going into some of these contracts and markets with our competition. We can come in at a lower price than they would accept and still have a very handsome gross margin on a relative basis. So that's a good competitive advantage of ours, and we're going to continue to scale that going forward.
And interestingly enough, we went public, that was the whole point of Fastly. And unfortunately, as Ron said, it's sort of -- was out a lockstep a little bit with that investment. And it's been hard on Wall Street for people to see that in the gross margin. But as you know, we'll tell, it's starting to turn a corner and pull out. So it's recovering on that.
Unidentified Analyst
You compete with big companies, you compete with Amazon, with Google. They have tremendous capacity. How do you compete with them? What are the things that you can do in order to avoid the head-on competition? I spoke with the Chief Architect of CDN of Amazon. And when you talk to him, you forget it’s Amazon because it tells me exactly what you're telling me that they're not making money on regular CDN, that they need to find unique services in order to make the money, and they are basically "struggling" not struggling, but "struggling" to find how to differentiate on top of a commoditizing CDN market. So how do you do it on your end to compete with such big giants that have the same -- basically the same problem?
Ron Kisling
I think also -- while you may say we compete, we also sort of partner with some of those same cloud solutions in terms of delivering solutions that optimize delivery of central cloud with the edge cloud. And I sort of come back to the point. I think their focus really is -- if they're looking at it simply as a delivery mechanism at the edge, I think it is going to be hard for them to make a profit. I think our technology in terms of delivering -- and I can come back to this edge cloud platform, but it really is not just delivering content. It's delivering a solution with security and personalization, all on one platform. And by the end of the year with one sort of the management console and you're delivering a solution. And this modern architecture, I think, is going to be kind of the future, if you look at the -- if you will, the architect of the Internet, which is you're going to have the heavy workloads, you're going to have the content all of the central cloud. How do you cache that efficiently, automatically purge and bring in the right traffic and run smaller workloads at the edge to create that experience? And if you're selling that solution versus just delivering straight delivery, that's where the value is. I think somewhere here, if you look at the central cloud, they've moved from pure storage to workloads and a centralized solution. I think the same thing applies here.
Unidentified Analyst
Got it. Security, how is this synergistic -- and I'm asking it without knowing -- I want to understand kind of for people, how is it synergistic to the company? Is it a completely standalone business you're going after? You sell it separately from the other services? Or is it something you sell together basically?
Ron Kisling
Yes. I mean I think we sell it both. I think if you look at our web application firewall, it is the leader in the market. Over 90% of the deployments are run in blocking mode. We have customers that are not running our delivery that are running web application firewall. But I think broadly, the way we look at it is it's really about having the solution and running it on our platform for our customers so they can deploy an experience with the security in place that they need. There's differentiated security that is efficient for them internally to manage as well as this complete solution versus them having to bring in multiple vendors and create a solution.
Number of things that we're doing as we look to bring together the platform unification as well as some of the pricing and packages is to make it much easier for customers to adopt the whole platform.
Unidentified Analyst
Vern, what makes you better in doing security than the other CDN or even F5? I just hosted F5 and they're not doing CDN, but they're in the same position kind of in front of data centers. And the question is, what makes Fastly better in delivering security than others?
Vernon Essi
When you talk about security, the firewall-only, I mean, the solution as Ron said, is very robust and very portable. So we do see it even being implemented in other delivery competition scenarios. And still people are sticking with it, and we do unsee cloud vendors that have their own security in the WAF space.
I think as Rob was saying, I mean, the strategy around our security in WAF or the web application area is to build this out with a robust DDoS solution. We have really good tech stack there, hasn't been commercialized. And then we also have some partnerships we've done in bot management and some products we've worked on, but we're going to be more focused on that on a go-forward basis. And those are sort of the three core components to that WAF solution.
Unidentified Analyst
Right. I'll tell you why I'm asking this question is because when you hear the other CDN companies and you ask them, what are you doing security? You'll get the same buzzwords. Same buzzwords because at the end of the day, you have high-end data centers for you. You have high-end data centers. They don't have high end, but they have data centers. They have traffic going through them. So they're trying to basically block the threats from the traffic. So everyone that has the same architecture is trying to do the same thing. So my question is what makes you better in doing it versus anyone else? Meaning what are -- do you have technology advantages? Do you have any product advantages that companies would like to do WAF with you or to do bot protection with you or DDoS protection with you versus Akamai versus F5 or others, right?
Vernon Essi
Well, I think -- well, certainly on the WAF, there's an IP stack behind that, right? So obviously, there's a lot of development that's taken place. But I think again, going back to -- I know we sound like we're saying same since our earning but the delivery itself, I mean, if you look at our network relative to some of the other people we've brought up, our ability to deliver a dynamic object very rapidly, we have like the lowest latency on doing that sort of thing in terms of error rates. We always benchmark much, much better than our competition. And you have to have that, I think, in order to run a really robust security framework.
But I mean in the end, it's going to be investment in know-how. I mean DDoS to Cloudflare's credit, that's their origin. They have a very robust solution there. Akamai is going to enter that from the bot management side. They've invested a lot of money there. So I mean with all respect, we have our own secret ways for -- or our own, not secret, but rather our own secret sauce, but our sort of legacy approaches to the market, if you want to call it that, to try to grow it out. So that's probably why from the outside, you're hearing the same sort of stories from the other vendors.
Ron Kisling
I mean what I would add is I think the differentiation is going to be a competitive product in terms of security execution, cost of ownership, ease of use. And I think -- the latter two, particularly with our platform, I think, are extremely compelling. We have a leading firewall. I think our technology on DDoS is exceptionally good. We've had customers most not productized, who have actually implemented in some of their most challenging areas where they have DDoS. And I think that's going to be very successful, very competitive.
We need launch a new bot product later this year. But I think each of those is going to be based on the competitive differentiation in terms of gaining in the market. And I think at least on the two where we have the technology developments today, we're very competitive on their functionality in terms of ease of use, cost of ownership with the product. I think that draws the differentiation, particularly in customers where we are deployed.
Unidentified Analyst
Got it. Last question on products, then we'll talk about numbers. Edge cloud. What -- same question, what makes you better? Well, you know what, let's start from even before that because it's kind of a new space. What is the opportunity here? Discuss the opportunity. What is the demand? What is the problem you're trying to solve with your edge cloud solution?
Vernon Essi
So the problem or the solution or opportunity really is the customers' end users experience on the web and creating a very fast, immersive, personalized experience. The compute capability can be applied to things like gaming. It's particularly good around travel and e-commerce, but it really is providing that fast experience at the edge for the user directly. And that is the differentiation. And that is a compelling need, and I think we're seeing more and more companies who recognize engaging with their customers is important, not just if they're selling. I think you're starting to see it in healthcare.
I know that motion started a long time ago. In my previous company, a lot of the health care companies were saying, how do we not just become kind of that back office. We want to engage with our customers. We want to drive their behavior. We went through who we are. You got to have a web presence that's personalized and fast to do that. And so I think you're going to see more and more industries adopt that, and we're going to deliver that and then only gets delivered through an edge platform.
Unidentified Analyst
Right. And how do you compete with -- again same question, how do you compete with the edge cloud services of the big cloud companies? What is your edge?
Ron Kisling
I think I'll come back to the technology. And I think we have very unique technologies. I really look at the platform and it's really the modern architecture coming in where you have a single platform that you deliver all of these things from. It is very hardware efficient, we run 6% to 8% or if you look at some of the metrics, we run with 4% of the hardware intensity that some of the other players run with. And so this modern architecture allows us to deliver lots of things.
Today, it's content security and compute. It may at someday include observability and other things at the edge. And so this modern architecture, there's ability to ultimately expand in terms of what we're delivering close to the Internet points of presence to deliver extremely fast performance, and you can do it in the central cloud.
And so the differentiation is this architecture and we run it all off of one platform, which not only allows us it very efficiently and cost effectively, it has a meaningful impact in terms of cost of ownership, efficiency and ease of use for our customers.
Vernon Essi
Yes. And I think to answer your competitive question, especially, again, central cloud, I mean if you look at some of those solutions that they've built for themselves on the edge, I won't go to one in particular, but a lot of us have used it, and it's incredibly robust, but it's also very focused in one specific use case. I think what we've done very well is introduce a portfolio of products and modules that go into+, say, delivery, for example, that allow customers to use most of those features across a broader selection of use cases.
And so I think it's really a question of where you're going to focus your resources, I think, for central cloud. They're more worried about making sure that central cloud is running well. I think they haven't invested as much as they probably would like on the edge, and it's just for them, they would have to relearn some of the things they've done historically. And it's just going to be a tough learning curve from that perspective.
Ron Kisling
And over time, it develops into this broader platform. So there's the core architecture to build out. There are security components to build out. There's compute components. There's the observability. And so there's a lot there that got to be built out that we have in place today that we can continue to build off and leverage.
Unidentified Analyst
Is it planned to be -- I understand today is small, but is it planned to be its own product that is first to market? Or do you intend to go to existing CDN customers or security customers and say, "Hey, we also have an edge cloud." So -- where is it in the -- is it an add-on to existing customers? Or is it going to be a standalone product that you can sell on its own?
Ron Kisling
About the platform? You are talking about compute or you are talking about…?
Unidentified Analyst
Compute.
Ron Kisling
So I mean -- yes, so I think while the compute, I think the -- we see it as part of the platform. It runs on our platform, worked well with our delivery. The -- I think, again, some of the same benefits around the technology. I see it being part of customers who sort of adopt our overall platform where it runs. And I think we're -- what we're really starting to see this year is customers really start to begin to use it, experiment with it. Our launch of simplified packaging, where there's a fixed price so that customers know what they're going to pay, has really enabled customers to do a lot more experimentation because the risk that they -- you have an unintended build from this experimentation. They can roll things out, they can see how it works. And so we're seeing -- and we're really measuring it today in terms of the number of customers that are signing up and using compute. And I think that revenue starts to grow in the future. It's not meaningful today, but we're seeing really good traction in terms of the number of customers that are experimenting and using, including some large customers who are using it as well.
We have had instances though, where we've -- I mean there is a -- we're under [NDA], but we've had a major global retailer that's using compute only with us...
Vernon Essi
Without delivery. So we have another customer who has actually...
Unidentified Analyst
Okay. Great. What kind of investment now going -- wearing now -- wearing your CFO, what kind of investment do you need to do in order to enable all this? The company is going into many directions. So talk to me maybe about both the tailwind and the headwind, meaning what are the things that you're going to restructure and save cost on giving the companies and making changes? And what are the things that you need to invest in order to…?
Ron Kisling
I think things are -- is sort of the good news and the bad news. I think historically, without some of the financial rigor, we have a lot of duplicate SaaS systems. I think we've built a lot of inefficiency into some of our cost structure. And so as we're cleaning that up, that's actually, one, giving us leverage in our OpEx, it's also giving us headroom to make an investment. A good example in the sales organization going into the year, we looked at that organization. We were able to bring out -- eliminated a level of management in that organization, and we were able to deploy that back to direct account executives and the team. So no incremental cost, but just some of the efficiency. And so as we drive these efficiencies across the organization, that gives us headroom to invest as well as leverage.
The other, I think, key thing that we have today, and I think this is one of the things that Todd has really brought to the organization, is focus and alignment. And so the engineering work that we're doing today is very focused around a number of initiatives, which is the security product we spoke about. It's a platform unification and it's building out compute. And so that focus -- it's also eliminating a lot of the inefficient development. All the engineering is really focused. The product management team is really leading direction there. And so we're getting a lot more efficient engineering motion, which allows us to invest more in the areas that we want to invest in and at the same time drive leverage in the business. So it's about good discipline.
We will continue to invest in our go-to-market motion to drive growth. But we will also continue to invest in driving efficiency in our processes, eliminating duplicate SaaS system to reduce our overall OpEx. And we expect to continue to see leverage in our OpEx relative to our revenue growth as well as gross margin accretion and drive the business toward profitability and cash flow breakeven.
Unidentified Analyst
Got it. We have a question from the audience.
Unidentified Analyst
One of the things that investors, I think, myself included, find very exciting about the Fastly story is that it's not just a CDN. It's all this differentiated stuff they talk and you went to great lengths, so explain some of that. But I also feel on the other hand, that's part of the story that's the least understood or appreciated by investors. And one way to sort of bridge that gap perhaps could be -- have you guys thought about some added disclosure on a regular basis or sizing? Like here's the CDN business, here's sort of non-CDN business. You have some KPIs is how fast it's growing while early, just sort of frame it and ability to sort of update that on somewhat frequent basis, I think, will sort of bring to light a lot of the things that you're so painfully trying to share?
Ron Kisling
Yes. That's a great question. And it's one of the things that I think -- even Vernon, we're going about the same time that was -- one of the things that we thought was missing is we had not done a very good job of articulating the space, we plan and what that opportunity is. I think those are some really good ideas. The other things we are doing at Investor Day, it's the first one since I've been here in about two weeks on June 22. The goal of that is really to do a much better job of articulating clearly what's the space we're in, how do we differentiate, what are the opportunities in this space to grow. And I think to your point, leveraging a lot of that information on an ongoing basis and continually to sort of tell that story now that we sort of have the words, I think it is something we need to...
Vernon Essi
We will help you size up those markets. The KPIs, you -- can't promise you that. But we'll help you understand that much better.
Unidentified Analyst
You touched on margins -- oh, sorry, sorry. Yes. I didn't see it.
Unidentified Analyst
You touched on free cash flow. Will you be updating us on some sort of time line for that because that's been a considerable overhang on your stock? And if you can remove that, I think it would invite additional investors into…?
Ron Kisling
The short answer is, yes, we will.
Unidentified Analyst
Give us kind of what are your targets? You spoke about it, profitability. Elaborate on profitability, if you don't mind, elaborate on ways together? You mentioned a few things number and maybe timing and targets. What are your targets?
Ron Kisling
Yes. So I think I'll save some of the specifics two weeks from now. But broadly speaking, getting to operating breakeven, getting to positive cash flow and starting to actually generate cash are our key objectives that we have. We feel very confident in the path and the mechanism we need to get there. And the way we get there is multiple fold. One is continuing to focus on revenue growth, driving continued improvement in gross margins. We've talked about exiting this year with a striking distance of 60 as we get into 2024. We see those moving into the 60s, and we believe kind of with the current product portfolio and general mix, the mid- to low 60s are where our gross margins should reside. And so that is a significant tailwind to cash flow positive and operating profit.
We're going to continue to drive leverage in the operating expenses. This year, we're moving from basically an 18% operating margin loss to about 10% at the midpoint of our guidance. We're going to continue to make progress on that. We're going to invest in go-to-market and engineering, but we're going to do it efficiently with some of the savings we have across all of our processes to drive leverage in OpEx. So that's going to be another driver to it.
And then if you look at cash, continuing to manage our network investment and just the architecture allows us to invest at that 6% to 8% of revenue, and we see that as really a sustainable level of investment which is down substantially from the 10% to 14% that the company did in 2021.
Unidentified Analyst
Got it. Maybe last question as time permits is about the convertible bond. A few weeks ago, you announced that you repurchased some of it. Can you give us your overview on converts?
Ron Kisling
Yes, I think we've really been taking a really good look at kind of our balance sheet and opportunities to really manage that well. And we've seen a year ago and even today, given where it was trading an opportunity to buy back at a discount. To date, we've bought back about $470 million of debt or about half of the debt for about $370 million. And so I think that's had -- we brought that down in half. And I think we'll continue to look at where the bond is trading and for opportunities to reduce that. The debt has a maturity date -- that's just about three years out. So we have a pretty good window to continue to sort of manage that, take advantage of trading at a discount in terms of managing that debt on the balance sheet.
Vernon Essi
I was going to say too, it's a constant process. So we're always examining our cap structure, and that was a very unique situation we could take advantage of the price relative to yield to maturity on our existing cash. So we always examine that.
Unidentified Analyst
Got it. Do you have anything to say in for me -- for a second?
Ron Kisling
We're doing an Investor Day on June 22 and a lot of the questions we haven't answered, we'll be answering there. So thank you.
Unidentified Analyst
Thank you so much.
Ron Kisling
Thank you.
Vernon Essi
Thank you.
Unidentified Analyst
Thank you.
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Fastly, Inc. (FSLY) Presents at BofA Securities 2023 Global Technology Conference (Transcript)