FSLY - Fastly Inc. (FSLY) Presents at Morgan Stanley Technology Media & Telecom Conference (Transcript)
2023-03-08 20:23:09 ET
Fastly, Inc. (FSLY)
Morgan Stanley Technology, Media & Telecom Conference
March 08, 2023 3:55 PM ET
Company Participants
Todd Nightingale - CEO
Ron Kisling - CFO
Conference Call Participants
Sanjit Kumar Singh - Morgan Stanley
Presentation
Sanjit Kumar Singh
All right. Good afternoon, everyone. TMT, Day 3, the afternoon session. Super pleased to have the management team for Fastly, Todd Nightingale, CEO; and Ron Kisling, Chief Financial Officer. Thank you both for joining us at the conference.
Todd Nightingale
It's an honor.
Question-and-Answer Session
Q -Sanjit Kumar Singh
I think just to read some disclosures, so basically www.morganstanley.com/researchdisclosures to get the disclosures. And with that, let's kick off the conversation.
Todd, I wanted to start with just a little bit about yourself, you're roughly 6-plus months into the role. What attracted you to the Fastly opportunity? And then as you took on the role, what was your sort of assessment of the state of the business? What are the things that you thought like things are being executed very well on. And what are some of the things that you wanted to drive further improvement?
Todd Nightingale
First, I come from a networking and internet background. My entire career, I feel like I've been building the internet. And looking forward at what the internet is going to deliver to the world, it’s going to be about user experience. The user experience of websites, applications over the internet, that's what's going to matter. Most when it comes to building engineers. And for me, building networking infrastructure was so exciting, because we were bringing that outcome, the world I think, Fastly, and the edge cloud space, really going to be one of the most exciting spaces for the next 10 years and how we deliver that user outcome, that's so important.
And we really just got like 3 year tutorial through COVID, about how every organization, from schools and governments, businesses across almost every vertical, their success is going to be dependent on the user experience that digital experiences that they provide. And for me, that just sort of focused the importance on a company like Fastly delivers that. It's been six months. In an exciting six months.
And coming into Fastly, I was just really happy with the innovation velocity. And I was happy with the culture to it has been a culture that's really accepted, change and focus incredibly well. And I think that's because Fastly culture is, is so passionate about delivering the mission, making the internet a better place where every experience is fast, safe and engaging. And as we Ron and I are so closely partnered on building a successful stable business so that we can have a greater impact on the world and deliver that mission more broadly.
And the company really responded to that. And that's been amazing. I have been really touched at how people have embraced that pivot.
Sanjit Kumar Singh
To pick up on some of the themes that you just addressed. When I think of Fastly, I think of a company, that's an engineering culture that's really focused on delivering the best performance, the best outcome for customers. And that meant sometimes going against the grain, right in terms of, we're not just going to go with what has been done before. But if there's a better mousetrap, we will go out and build it. Even if there may not be maybe be like sort of an out of the box solution. I want to get a sense of whether the philosophy or the operating philosophy within Fastly is changing. And what I've thought what I thought was interesting, he just launched a 1.0 release supporting JavaScript and computed edge which took some time. And I wanted to get your perspective on whether this marks sort of an evolution in terms of the company's thinking, Do we have a more, let's say, pragmatic, in terms of something get out something there that can maybe satiate demand first, before we get things spot perfect?
Todd Nightingale
Yes. I think the JavaScript pack is pretty solid. I like it. I think it's been well accepted and ramping well talked about that. But I would say the pivot has really been around defining the scope. And using that to drive focus. Building a better mousetrap is great. And we pride ourselves on being a performance leader being an innovation leader in Edge cloud. But without a real focus on the mission on what the scope of fast leads deliverable outcomes going to be. Sometimes it's hard to make decisions about where to invest.
And so we've focused and articulated this focus of the company now for the better part of six months, we're user experience company, what we deliver is the best application experience the best web experience possible. And we do that by delivering technology through an edge cloud, that puts our infrastructure as close to the user as possible, it gives us the best opportunity to deliver that experience. And anything that helps web development teams, application development teams deliver a better digital experience over the internet, that's where we're going to invest. And when we say better, we mean fast, safe, and engaging. Making the internet a better place where all experiences are fast, safe and engaging.
If it doesn't fall out of that scope, we're not going to build it even if our infrastructure is like well positioned, we're going to focus on this one outcome, because that's one buyer and we can leverage one go to market team efficiently. And it's one infrastructure, we can leverage one infrastructure efficiently. And that outcome is something that I think the company is really building a momentum around focusing upon.
And the edge compute, releases and there have been quite a few actually, in six months have been I think about realizing that as computers, this is an area where we've always sort of prided ourselves on having the most dynamic edge cloud. And by letting our customers now deploy their own bespoke workloads right at the edge, they can deliver a better user experience when it matters most. And that's why we're focusing so much on that right now. I think it's a super exciting space. I've heard some other people talking about it. And I think the biggest change culture is focusing on this one.
Sanjit Kumar Singh
How about that the evolution and focus can maybe map to the evolution in sort of your go to market and the markets you're sort of pursuing? So traditionally, historically Fastly has been focused at the blue chip customers large enterprise? And I want to get your perspective whether there's the opportunity to move and address some of the longer tail. And what kind of muscle would you have to build to execute on that and so that's sort of market bracket positioning?
Todd Nightingale
Actually, I got, we got a bunch of questions about that before my very first earnings call, and I'd only been in the seat like, six weeks.
Sanjit Kumar Singh
We're tough bunch. Sorry about that.
Todd Nightingale
Maybe eight weeks. And I still believe what I say there. I think there's Fastly has an enormous et of lighthouse customers right now. It's a gift, like huge strategic accounts, that are in so many ways, demonstrating the ways that edge cloud can be used to drive better user experience, better security, better application, reliability and better performance. But there is a real opportunity for us to start penetrating the rest of the market beyond the lighthouse accounts, especially in places like media and journalism, hacks, healthcare, travel, et cetera. And I think we do have that opportunity, but it takes a different muscle.
A big step forward in building that muscle, is the packaging efforts that we're going through right now. One thing we hear from midmarket quite a bit is, it feels a little risky to buy to architect factoring into their infrastructure, our pure utility billing model, where they're going to have to kind of project how much time they're going to have. So by delivering packages that are all in from a functionality, perspective, and we're doing that per module network services, security and compute. And by giving them a reliable package and reliability, reliable discounting, they have a very predictable way to onboard get started.
And that both packages are going to launch in Q2, we're already seeing some early successes on that. And I think that's the first step in building that muscle around the mid-market. And the secondary effects there, which I think will help us progress mid-market penetration as well, which is this type of package with an all-in functionality reliable building a SaaS like feel. It allows us to unlock the channel with much greater velocity. And that's important to the channel to help us read systems integration channel, especially with MSP to get it helps the reach of the market.
Sanjit Kumar Singh
Maybe like bring it back down to some of the financials in row brought into the conversation. The big theme, I think, for the past few quarters is the improvement and trajectory in gross margins after you know about a year of gross margin debt degradation. You've seen the gross margins come up to the high 50s. In terms of the mission statement to get back to 60%, what is it going to take to get there? And ultimately, what do you see as sort of the longer-term trajectory for gross margins going forward?
Ron Kisling
The biggest motion on gross margin driven improvement and the provision for really sort of mandate [indiscernible] our biggest costs program bandwidth and our server deployment. And what we've done really over the last year was a lot more robust, planning around the better mind our capacity with that traffic. In addition, you marry that a lot of engineering efforts is driven increase efficiency on our server allows us to run a lot more traffic, the same hardware that we get saved here.
That along with our family and contractor price pricing. Well, it's increasingly not appearing. On the bad side of old news are costs and revenue and all growth more recent. Those efforts are ongoing. I think a good example you're going to hear spoken about our capital city refers to we're year with a CapEx target cost 14%. And we added 2022 at 10%. To manage that, their output for '23 is 5% to 8%. So that gives you an idea of the progress we've made around efficiency and finish points. So we looked at what's possible, I think, a couple of data points, one, you can look back at the song in 2020, where we saw gross margins. I think this current mix is huge again. We looked at '23, I think, a year we recommend. I think they're further off beyond that, kind of in that low 60s that we saw back in 2012. Beyond that the medium-term as we continue to see your reflection of our portfolio security, because your bigger percentage is our overall revenue base. Those are those margins drive further growth. What [indiscernible].
Sanjit Kumar Singh
Makes total sense. And maybe to stick on the topic of financials and sort of particularly the outlook, which was quite solid, I think, sort of targeting mid-teens growth. Can you give us the underlying assumptions behind the outlook with respect to some of the macro headwinds that all software companies are seeing? And then particularly does imply some acceleration, I think in the back half, and will give you the confidence to see that better growth in the second half?
Ron Kisling
Yes, so I think we started the year providing full year approaches similar to last year, which is our profit visibility, we have over the years, continued to evolve that process. Really good visibility to our customers [indiscernible] we reflected that continue [indiscernible] for full year. I think if you look to where areas that we might be where we are outperformance with risk around the efficacy around that case [indiscernible] in the last second quarter. Those we really expected a large increase. So we see a very different case that we see the channel was a very successful selling in 2023. That opportunity to drive incremental revenue in terms of the forecast or guidance he laid out.
I think when you look at the macro economy, central tendency can come back to kind of what is their growth driver over the past couple years. And that's what we did last year again, rather than overall growth in internet traffic. Well, that's better aligned. And so we found it helpful to continue with continuing to drive market share growth, expansion within our existing customers, both in terms of cross sell, and upsell across our product portfolio, as well as gaining additional share of traffic based on that user experience.
So I think those are some of the dynamics, if you look at the economy. I think, if you start seeing some big headwinds, what's the posture to sort of leverage you can see sales cycle. At the same time, as customers are looking for opportunities to reduce costs, and be more efficient, are in user experience combined with your various ease of management would allow them to deliver their opportunity at lower costs. So that could actually be an opportunity for.
Sanjit Kumar Singh
Okay potential tail when there. And then zooming out in terms of the sort of longer-term view in terms of the targets previously in goes probably a different environment at that time. But you guys talked about getting to a billion dollars in revenue in 2025 10X in the security revenue over that period. Do you feel like those targets are still relevant? Or is that something we should reassess for later and sort of pushed for the routes?
Todd Nightingale
I think the billion dollar target certainly is relevant to us. And largely, because scale does matter. Our business we can run more efficiently our gross margins can improve. They're greater scale drive leverage. And so scaling is important. I certainly am targeting a billion dollar, actually tis a revenue one day, I think 2025 sounds ambitious. So I pulled that I don't hold that part of the 2025 target. But I certainly see that as a vision.
I do believe that and this has been true. Ever since we've made the single size acquisition. We're going to see security, driving growth, outpacing drastic growth and drive growth. In fact, we think of our network service content delivery business, if our core business, our security, business of the growth business, and then edge compute and now observability as our incubation. And so certainly we're going to see outsized growth coming from the security space. So getting to 10X from the original acquisition date. I certainly believe we will hit that just again in the timeline.
Sanjit Kumar Singh
So let's just pick up from your comments here on security. Can you frame out for us how many customers are taking Fastly security products a day, and what can happen on the single sciences front to drive greater adoption within the base?
Todd Nightingale
Sure. We don't disclose individual customer clarify products [indiscernible]. But I'll say this, with the purchases single science, I think that really codified security as a separate and really growth driving product. That was a seminal moment for us. And now, we're really building that as a separate product line with a value proposition that doesn't just apply to the application and web developers. But it applies to the [indiscernible] and security and compliance teams as well, which has been a win for us.
We see not just the motion of sort of upselling technology to existing cost to customers. But we have seen quite a bit of massive customer acquisition from the security space. And then given the opportunity to cross sell into some of the more content delivery as of Q2. One thing that I think, though is interesting is there's a ton of portfolio completion opportunity on the security side. We see enormous opportunity on API security, where we've always had a lot of investments, but there's tons and tons of interest right now. And really, especially anti box protection.
There's still a lot of room on DDoS as well. And so there's a lot of components that I think can be brought to bear that we have in development right now. They're going to help bolster the security portfolio beyond the next gen WAF. In fact, we really look at that security portfolio holistically, not separately as sort of what goes to signal sciences [indiscernible].
Sanjit Kumar Singh
And that sort of my follow-up question in terms of going out to market and being confident in the portfolio of capabilities in your security portfolio. What's sort of the status check across those dimensions, obviously, next gen WAF you're there DDoS. I'm going to sort of maybe just walk us through API anti bot protection DDoS. Where's it today? Where's it going to be 6 months, 12 months down the road?
Todd Nightingale
I think next year in WAF, we feel comfortable that we have a technology advantage across the market there. And it's a lot of the reason people take a look at Fastly security, which is great. I mean, that's, I think why that acquisition was so important. It's also incredibly, it's really, incredibly complimentary to folks who are using Fastly on the content side. There's one real exception there from a roadmap completion point of view. And that is unifying the platform, unifying the management pane.
It is still not a single pane of glass, that really could lower the friction of a land and expand motion where if you're already a content delivery customer Fastly with a click of a button, you can enable nationwide, that doesn't exist today, too. It's still two separate management planes. And so the work to do full platform unification is underway has been for a few months, I hope that we'll be shipping that late this year. And that I think, will accelerate the land and expand motion in a big way.
But other than that on Next-Gen WAF from a functionality point of view, I'd say it's 10. From a DDoS point of view, I'd probably give us an 8 out of 10, Fastly has been delivering best in class DDoS, basically, since inception, it's table stakes to do what we do on the content side. But we haven't done a great job productizing it separately for customers who aren't on our platform, or who want better telemetry and more sophisticated analytics around DDoS protection. And so we are working on productizing DDoS. And you just saw, we just launched a managed service around DDoS and application security to help bolster that and complete that portfolio on that side.
For BOT protection, we mostly deliver that through partnership today. We have a ton of R&D going in there, I'd say it's still very early days for us. So we're we have ways to go. And on the API side, we've had a, there's a lot of deployment around API protection, especially on the DDoS side. But there's a lot more to do. And that space is evolving very, very quickly. Web application protection. We hear about that from customers. There's a lot of different solutions with different types of tech in the market right now. And I believe that we're investing there as well, because we believe that will be increasingly important.
Sanjit Kumar Singh
Sort of round out the conversation on product and product strategy. Why don't you talk a little bit about the Fanout and glitch acquisitions. What did those bring to the table? Like what does it what capabilities it brings to bear? How do you see that sort of impacting the business over the next few years?
Todd Nightingale
I think fan out was a pretty straightforward Aqua hire and technology tuck him to help bolster of the API technology across the board. So that was pretty straightforward. Glitch, on the other hand, is super, super interesting which is a developer community that's really driven around education and developer awareness. And it's doing two really big things right now. It's driving our edge compute roadmap. We pride ourselves on being developer led, and really letting the developer community at large drive that roadmap it's what informed the JavaScript, prioritizing JavaScript and language support what's helped inform prioritizing, distributed edge storage technology. It's been remarkable. And maybe that makes us more pragmatic to your first question. So like, I take that point.
But that's been incredibly valuable. I think that was the core value proposition upon which the acquisition was made. But the second thing now is we're starting to see developer conversions, and leveraging the glitch community to start creating early customer acquisition for the edge computing space, especially. And it's early days on that front. But I see that as a potential headwind moving forward for sure.
Especially on customer acquisition, I mean, we need developer customer acquisition, to start to build that expertise of developers preferring the fastest platform. And as they move from job to job as they tackle more and more user experience problems, they've turned to faster to solve those.
Sanjit Kumar Singh
Let's bring back the conversation to the edge opportunity, which in some of your early responses to my questions. We continue to seem to have an optimistic view about the edge cloud? Can you frame us sort of give us an update and how you're looking at the edge cloud opportunity from the Fastly perspective? And how should we start thinking about the timeline? Because I think across CloudFlare Fastly, we've been talking about it for quite some time, it's been taken a minute to materialize. So what sort of the updated view on the timeline?
Todd Nightingale
When you say edge cloud, you mean edge compute?
Sanjit Kumar Singh
Edge compute, yes.
Todd Nightingale
Like I think about edge compute as a component to the solution. So the outcome that matters here is user experience. We provide ourselves on having the most dynamic edge cloud possible. And we've been delivering that through content delivery, with extremely flexible, extremely dynamic content delivery that allows for all kinds of advanced features at the edge. But eventually, in order to really realize that dream, in order to make it usable across a massive expansive set of use cases, you sort of have to unlock the ability to run bespoke customer written workloads right at the edge.
And that allows you to move from dynamic content delivery to true edge compute. The way I see that and I think this differs from some of our competition. This is not about trying to compete directly with central cloud, like AI services like AWS, or GCP. It's a complementary architecture. The reality is core infrastructure, the service, core compute, workloads are running in AWS, running GCP or Azure. There's very little reason for people to migrate those off most of them. But there are a set of workloads that by deploying them at the edge, you can radically change that user experience, latency sensitive, jitter sensitive workloads can change the user experience by pushing just a small portion of workloads and storage to the edge.
And that's where it matters and that's where we see customer interest. And when it comes to like personalization, especially recommendation engines, and e-commerce and media. When we look at the high tech, like observability and DevOps, the ability to do ultra-low latency, response times for IoT or any kind of monitoring. Putting those workloads at the edge can deliver a completely different user experience. And maybe the best example of this would be would be in gaming.
The user experience for gaming is so latency sensitive that gamers talk about what their latency is. Bragging if they have the right like cable modem. You can radically change the latency in gaming by pushing the operational game workloads to the edge. And it's that kind of user experience. I think so many industries are moving towards having a more responsive more engaging user experience will have the opportunity to change your business model. Change how frequently you convert shopping carts, how frequently people stay engaged on a media stream, etc. How quickly you do ad personalization, ad placement, etc. And that isn't going to, that's not about competing with AWS, that's about building a multi cloud architecture that delivers the best-in-class user experience.
Sanjit Kumar Singh
It makes a ton of sense. Look at auto audiences today any questions for the factory teams, you just raise your hand? We'll get you a microphone. All right, no questions.
Todd Nightingale
[indiscernible] it's because your questions are so great.
Sanjit Kumar Singh
I got ChadGPT director before me. So let's maybe I want to bring the conversation back to where we started. Going back to your personal background, that being a longtime executive at Cisco. And when I started, my career was in Wall Street, I was working on Cisco, and I've seen all kinds of competitive threats to Cisco, they've really been like a tested company that's sustained over decades. What in your Cisco experience, you think really suits you well, in terms of taking Fastly to the next era?
Todd Nightingale
Maybe there's three things that I guess I've like, found incredibly useful. One being this sort of durable, durable innovation model. Cisco has a core business, and has for decades now, but they're always, Cisco is always reaching for that next generation of technology, they maintain innovation at scale. And you see, I think, Chuck is like a case study and innovation scale. And even at the Fastly scale, I think it's so important to think about durable innovation, it's why we're really focusing on this concept of a core business growth business, and always reaching for incubation businesses that will become the next growth engine, three years, five years from now, it's why we're taught we have completely different targets in our incubation space for compute and observability they were on customer acquisition, and growth engine and the core engine that's about revenue growth and revenue upside. That's been incredibly useful.
The second one would be scalable go-to-market. Now Fastly is at a moment in time where we really need to build to scale. We need to be building Fastly right now to operate at $1 billion, $2 billion space. And that means shedding some of the growing pains and building an operating model that is built to be repeatable and scalable and efficient. And at least in my experience, showing no one does that better. I mean, Cisco's built to scale in so many ways. And then the last would be the technology. I mean, at the end of the day, fast is operating. We operate a global network our business is dependent on best-in-class networking technology. And it's I guess it's just nice that, nice for me that I know something in my whole life, building out internet technology and now getting to be a little bit on the other side of that, to really be deploying it and operationalizing that. It is awesome been amazing experience.
Sanjit Kumar Singh
With that. Thank you so much, Todd and Ron for giving us the update on Fastly. Really enjoyed the conversation.
Todd Nightingale
Thank you.
Ron Kisling
Thank you.
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Fastly, Inc. (FSLY) Presents at Morgan Stanley Technology, Media & Telecom Conference (Transcript)