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 a stock and have such a tremendous impact immediately after. Normally, I upgrade a stock and then I explain why it's too early. I'm happy that I was able to do it. We just said that, you know, luck is part of the game, but I'm happy luck was on my side in this case. We have Vern and Ron from Fastly. We're gonna talk about the CDN market. Yesterday. We're gonna talk about CDN and their differentiation in CDN. We're gonna talk about security. We're gonna 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 would think they speak about Fastly. I'm sure that if you're gonna close your eyes today, you're gonna think about Akamai. We wanna understand the difference. We wanna understand the differences between the CDN companies and what they do, et cetera.
Yeah.
That's the purpose of our call. Vern, before we start, do you need to say anything about kind of safe harbor or something? We can skip, I call it the love letter to the lawyers.
Yes, safe harbor-
Yeah.
Please refer to our most recent filings for any risk factors. We encourage you to read them.
Okay, perfect.
Excellent.
Okay. Ron, I wanna start at the high level. I wanna 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 gonna drive revenues in the future?
Mm-hmm.
Kind of give us an overview of the company for those that don't really know the company.
Yeah
We'll drill down.
I think to start with, you know, we're really focused on kind of the user experience or the end user experience, and we have an Edge Cloud platform. On that Edge Cloud platform, we have content, we deliver content, we have a security portfolio, and we have Compute. If you look at the growth drivers to date, 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, our customers, on that central cloud. That differentiation has really allowed us to perform well. What.
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 bigger share of the traffic, as well as having a security portfolio allows us to cross-sell and add in that security product. 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 WAAP 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. We have launched, you know, a Compute element that really allows for personalization, Compute at the edge, as part of creating that immersive, fast experience for users.
Those are the upsell opportunities that allow us to continue to expand and grow within those customers.
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. What is your First of all, what is your differentiation? How are you different in this market, and how are you gonna avoid the natural commoditization-
Yeah
of the space?
Yeah. 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. The differentiation is, if you're just looking at delivering content, not about the experience, not about the personalization, you know, I think that is going to become more and more commoditization. I do think the differentiation, and we saw early success in, particularly in industries where performance mattered, you know, e-commerce, where time to load the web cart and personalization really had a direct impact on cart conversion and the value of that cart. I believe that customers across new industries are going to look at increasing their customer engagement. That means fast websites, it means immersive experience, it means personalized experiences. That new buyer is really looking about buying that experience.
You know, security, Compute, delivery, that's all part of what they're buying. They're buying that end user experience. What we've started to see is, you know, new industries where these are more greenfield implementations of, again, a web app, a Edge Cloud platform, you know, in travel and in healthcare. I think that is really the differentiation, is you're gonna have delivery networks that are doing the basic delivery, but delivering a experience at the edge, basically part of the internet architecture, with a central cloud being close to the user, delivering that experience with, you know, Compute and security. That's what companies are gonna value, and I think that's gonna drive growth, and it's an opportunity to value and get value across that delivery.
Clearly, you have even technical advantages that enable you to deliver these experiences.
Mm-hmm.
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 bandwidth. How has... That was many years ago, right?
Yeah.
Years ago, before management changes, et cetera. How is it different now? What is the focus on the company, when it comes to your target contract or a target kind of deals that you go after, target customers?
Yeah. Yeah, I think there's, you know, two or three pieces to that. I mean, one, I come back to the, you know, the experience, which is sort of where we focus on the value that we bring. The other thing I would focus on is, you know, our modern architecture is very efficient from a cost perspective. You know, that may not be completely, you know, apparent based on the last couple of years, but I think a good example is, you know, our CapEx intensity. You know, back in 2021, we were 12%-14% of revenue. I think that was an overinvestment.
You know, as we built in the processes to align our investment with the capacity, we're more at 6%-8%. We can deliver content to the edge more efficiently than our competitors. We deliver content security and Compute in one platform. You know, the other architectures, which are older but very robust, you'll deliver those across three platforms. We can compete, you know, competitively on price and still generate meaningful growth margins. Having said that, I think we're approaching the market, importantly, by leveraging our performance delta, focusing on upselling and cross-selling, you know, the security piece, as well as, you know, the Compute capabilities in that market. I think the issue is we have a cost structure that allows us to compete, but deliver performance differentiated.
Got it.
Results.
Right.
Yeah, I was gonna 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. 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. For example, we're coming in a most recent upgrade, 20%+ efficient year-over-year on the exact same footprint of CPUs and hardware investment.
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. That's a good competitive advantage of ours, and we're gonna continue to scale that going forward. Interestingly enough, when we went public, that was the whole point.
Right
... of Fastly. Unfortunately, as Ron said, it sort of was out of lockstep a little bit with that investment, and it's been hard on Wall Street for people to see that in the gross margin.
Right.
As you know, Edgio is starting to turn a corner.
Yeah
... and pull out, so it's recovering on that.
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 he 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're basically, quote, unquote, "struggling." Not struggling, but quote, unquote, "struggling to find how to differentiate on top of a commoditizing CDN market." How do you do it on your end to compete with such big giants that have the same, basically the same problem?
I think there, you know, I also Well, you basically, we compete. We also sort of partner with some of those same.
Right
... you know, cloud solutions in terms of delivering solutions that, you know, optimize delivery of central cloud with the Edge Cloud. I sort of come back to the point, I think their focus really is, and if they're looking at it simply as a delivery mechanism at the edge, I think it is gonna be hard for them to make a profit. I think our technology in terms of delivering, you know, and I come back to this Edge Cloud platform, but it really is not just delivering content, it's delivering a solution...
Yeah
with security and personalization, all on 1 platform, and by the end of the year, with 1, you know, sort of management console, and you're delivering a solution. 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, you know, all at the central cloud. How do you know, cache that efficiently, you know, automatically purge and bring in the right traffic, and run, you know, smaller workloads at the edge to create that experience? If you're selling that solution versus just delivering straight delivery, that's where the value is.
I think somewhere, if you look at the central clouds, they've moved from pure storage to, you know, workloads and a centralized solution. I think the same thing applies here.
Got it. Security. How is this synergistic? I'm asking you for that knowledge, not because-
Right.
I wanna 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?
Yeah. I mean, I think we sell it both.
Yeah.
I think, if you look at our web application firewall, you know, 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, you know, our web application firewall. I think broadly, with the way we look at it is, it's really about having the solution and running it, you know, on our platform for our customers, so they can deploy an experience with the security in place that they need. You know, that it's differentiated security, that is efficient for them internally to manage, as well as just this complete solution versus them having to bring in multiple vendors and create.
Yeah
... a solution. A 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.
Vern, what makes you better in doing security than the other CDN or even F5? I just hosted F5, they're not doing CDN, but they're in the same position, kind of in front of data centers. The question is, what makes Fastly better in delivering security than others?
When we talk about security, firewall only, I mean, the solutions Ron said is very robust and very portable. We do see it even being implemented in other delivery, competition scenarios. Still people are sticking with it, and we do, you know, unseat cloud vendors that have their own security-
Yeah
in the WAF space. I think as Ron 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 a really good tech stack there. Hasn't been commercialized. We also have some partnerships we've done in Bot Management and some products we've worked on, but we're gonna be more focused on that on a go-forward basis.
Right.
Those are sort of the three core components to that WAF solution.
Right. I 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. The 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. Everyone that has the same architecture is trying to do the same thing. My question is: what makes you better in doing it versus anyone else? Meaning, 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?
Well, I think, well, certainly on the WAF, there's an IP stack behind that, right?
Yeah.
Obviously, there's a lot of development that's taken place. I think, again, going back to, I know we sound like we're saying the same thing over again...
Yeah
The delivery itself, I mean, if you look at our network relative to some of the other people you've brought up.
Yeah
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.
Yeah
we always benchmark much, much better than our competition. You have to have that, I think, in order to run a really robust security framework. I mean, in the end, it's going to be investment and know-how.
Yeah.
I mean, DDoS, to Cloudflare's credit, that's their origin. They have a very robust solution there. Akamai is gonna enter that from the Bot Management side. They've invested a lot of money there. I mean, with all respect, we have our own secret ways, our own, not secret, but rather our own.
Secret sauce.
secret sauce. Our sort of legacy approaches to the market, if you want to call it that.
Got it.
to try to grow it out. That's probably why, from the outside, you're hearing the same sort of stories from...
Yeah
the other vendors.
I mean, what I would add is, at the end of the day, I think the differentiation is gonna be a competitive product.
Yeah
In terms of security, execution, cost of ownership, ease of use. I think, the latter two, particularly with our platform, I think, you know, are extremely compelling.
Yep.
We have a leading firewall. I think, you know, our technology on DDoS is exceptionally good. We've had customers, while it's not productized, who have actually implemented it in some of their most challenging areas where they have DDoS, I think that's gonna be very successful, very competitive.
Yeah.
We need to launch, you know, a new bot product later this year. I think each of those is gonna be based on the, you know, competitive differentiation-.
Right
in terms of gaining in the market. I think, you know, 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.
Got it.
... those are the differentiations, particularly, you know, in customers where we are deploying.
Got it. Last question on products, then we'll talk about numbers. Edge Cloud. Same question, what makes you better? You know what? Let's start from even before that.
Mm-hmm
it's kind of a new space. What is the opportunity here? Discuss the opportunity. What, what is the demand? What is the problem you are trying to solve with your Edge Cloud solution?
The problem, or the solution or opportunity, really is the customer's end user's experience on the web.
Yeah.
Creating a very fast, you know, immersive, personalized experience. You know, the Compute capability can be applied to things like gaming. It's particularly good around, you know, travel and e-commerce, but it really is providing that fast experience at the edge for the user directly. That is the differentiation, and that is a compelling need, and I think you'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. You know, I know that motion started a long time ago. I know, even my previous company, a lot of the healthcare 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 want them to know who we are.
You've got to have a web presence that's personalized and fast to do that. I think you're gonna see more and more industries adopt that, and we're gonna have to deliver that, and it only gets delivered through an edge platform.
Right. 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?
I think, I'll come back to the technology, and I think.
Yeah
... we have very unique technologies. I really look at the platform as it's really the modern architecture coming in, where you have a single platform that you deliver all of these things from.
Yeah.
It is, you know, very hardware efficient. You know, we run, again, with that 68%, or if you look at some of the metrics, you know, we run with, you know, 4% of the hardware intensity that some of the other players run with. This modern architecture allows us to deliver lots of things. Today, it's content, security, and Compute. It may at some include observability and other things at the edge. This modern architecture, there's the ability to ultimately expand in terms of what we're delivering, you know, close to the internet points of presence to deliver extremely fast performance, and you can't do that in the central cloud.
Yeah.
The differentiation is this architecture, and we run it all off of one platform.
Yeah.
Which not only allows us to run it very efficiently and cost effectively, it has meaningful impact in terms of cost of ownership, efficiency, and ease of use for our customers.
Got it.
Yeah, I think to answer your competitive question, especially against 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.
Mm-hmm.
I think what we've done very well is introduce a portfolio of products and modules that go into, say, delivery, for an example, that allow customers to use most of those features across a broader selection of use cases. I think it's really a question of where you're gonna focus your resources. I think for central cloud, they're more worried about making sure that the central cloud's 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 gonna be a tough learning curve from that perspective.
Got it. Over time, it develops into this broader platform. There's the core architecture to build out, there are the security components to build out-
Right.
There's the Compute components, there's the observability. You know, there's a lot there.
Got it.
that needs to be built out, that we have in place today, that we can continue to build off and leverage.
Yeah.
Is it planned to be. I understand today is small.
Yeah.
Is it planned to be its own product that is first to market? Do you intend to go to existing CDN customers or security customers and say, "Hey, we also have an Edge Cloud?" Where is it, is it an add-on to existing customers, or is it gonna be a standalone product that you can sell on its own?
Yeah. Are you talking about the platform?
Yeah. You're selling Compute, or are you selling the-?
Compute.
Oh, so, so, uh, I mean-
Yeah. I think, you know, well, on the Compute, I think the we see it as part of the platform.
Yeah.
It runs on our platform, it works well with our delivery. I think, again, some of the same benefits around the technology. I see it being part of customers who sort of adopt.
Yeah
our overall platform, where it runs. I think what we're really starting to see this year is, you know, customers really start to begin to use it, experiment with it.
Mm-hmm.
Our launch of simplified packaging, where there's a fixed price, so the customers know what they're gonna pay, has really enabled customers to do a lot more experimentation. The risk that you have an unintended bill from this experimentation, they can roll things out, they can see how it works. We're seeing, and we're really measuring it today in terms of the number of customers that are signing up and using Compute.
Yeah.
I think that revenue starts to grow in the future. You know, 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.
Yeah.
Yeah.
We have had instances, though, where we've I mean, there is a, of course, we're under NDA, but we've had a major global retailer that's using Compute only with us right now.
Compute first.
without delivery.
Yeah.
Yeah.
We have another customer who has actually spoken at our user conference, who's using our Compute only as well.
Got it. Okay, great. what kind of investment now wearing your CFO hat, what kind of investment do you need to do in order to enable all this? The company is going into many directions. Talk to me maybe about both the tailwind and the headwind. Meaning, what are the things that you're gonna restructure and save cost on, given that the company's in-
Yeah
... in making changes, and what are the things that you need to invest in order...
Yeah.
Yeah.
I think.
Bring things up.
Yeah, This is just sort of the, the good news and the bad news.
Yeah.
I think historically, without some of the financial rigor, you know, we had a lot of duplicate SaaS systems. I think we built a lot of inefficiency into some of our cost structure. As we're cleaning that up, that's actually, one, giving us, you know, leverage in our OpEx. It's also giving us, you know, headroom to make an investment. A good example, you know, in the sales organization going into the year, you know, we looked at that organization. We were able to eliminate a level of management in that organization.
Yeah.
We were able to deploy that back to, you know, direct account executives in the team.
Mm-hmm.
No incremental cost, but just some of the efficiency. 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. The engineering work that we're doing today is very focused around a number of initiatives, which is the security products we spoke about, it's platform unification, and it's building out Compute. That focus, you know, it's also eliminating a lot of the inefficient development. All of the engineering is really focused. The product management team is really leading direction there.
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. It's about good discipline. We will continue to invest in your go-to-market motion to drive growth. But we will also continue to invest in driving efficiency in our processes, eliminating duplicate SaaS systems to reduce our overall OpEx. 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.
Got it. We have a question from the audience.
Thanks for taking the question. One of the things that, you know, 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 that you talk, and you went to great lengths to sort of explain some of that. I also feel, on the other hand, that's part of the story that's the least understood or appreciated by investors. One way to sort of bridge that gap, perhaps, can be, have you guys thought about some added disclosure on a regular basis or sizing? Be like, "Here's the CDN business, you know, here's sort of non-CDN business. Here are some KPIs. This is how fast it's growing?
This is why early." Just sort of frame it, and ability to sort of, you know, update that on, you know, somewhat frequent basis, I think will sort of bring to light a lot of the things that you're so painfully trying to share.
Yeah. I think that's a great question. It's one of the things that I think, even when Vernon and I joined, we joined about the same time, it was one of the things we thought was missing, is we had not done a very good job of articulating the space we play in and what that opportunity is. I think those are some really good ideas. The other thing is we are doing an Investor Day. It's the first one since I've been here, in about two weeks, on June 22nd. The goal of that is really to do a much better job of articulating clearly, you know, what's the space we're in, how do we differentiate, and what are the opportunities in this space to grow?
I think, you know, to your point, you know, 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 that we can do better.
Yeah, we will help you size up those markets. The KPIs, I can't promise you that, but we'll help you understand that much better.
Good. Thank you.
You touched on margin. Oh, sorry, yes. I didn't see.
You touched on free cash flow. Will you be updating us on some sort of timeline for that? That's been a considerable overhang on your stock, and if you can remove that, I think it would invite additional investors into the name.
The short answer is, yes, we will.
Okay, thank you.
Give us, kind of what are your targets? You spoke about it, profitability. Elaborate on profitability, if you don't mind. Elaborate on ways to get there, you mentioned a few things, and number, and maybe timing and targets.
Yeah.
What are your targets?
Yeah. I think, you know, I'll save some of the specifics for, you know, 2 weeks from now. Broadly speaking, you know, getting to, you know, 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 mechanisms we need to get there, and the way we get there is, you know, multiple fold. One is, you know, continuing to focus on revenue growth, driving continued improvement in gross margins. We've talked about, you know, exiting this year, you know, excuse me, within striking distance of 60.
As we get into 2024, we see those moving into the 60s. We believe kind of with the current, you know, product portfolio and general mix, you know, the mid-to-low 60s are where our growth margins should reside. That is a significant tailwind to, you know, cash flow positive and operating profit. We're gonna continue to drive leverage in our operating expenses. You know, this year we're moving from basically an 18% operating margin loss to about 10%, the midpoint of our guidance. We're gonna continue to make progress on that. We're going to, you know, invest in go-to-market and engineering. We're gonna do it efficiently with some of the savings we have across all of our processes to drive leverage and OpEx. That's gonna be another driver to it.
You look at cash, continuing to manage our network investment, and just the architecture allows us to invest at that 6%-8% of revenue, and we see that as really a sustainable level of investment, which is down substantially from the 10%-14% that the company did in 2021.
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?
Yeah, I think, you know, we've really been taking a really good look at kind of our balance sheet and opportunity to really manage that well. We've seen, you know, 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. You know, we've brought that down at half. I think we'll continue to look at where the bond is trading and for opportunities to reduce that.
You know, the debt has a maturity date that's, you know, just about 3 years out, so we have a pretty good window to continue to sort of manage that, take advantage of, you know, trading at a discount, in terms of managing that debt on the balance sheet.
Great.
I was gonna say, too, it's a constant process. We're always examining our cap structure, and that was a very unique situation. We could take advantage of the price relative yield to maturity on our existing cash. You know, we always examine that.
You have anything to say in for me, for a second?
Thanks.
We're doing Investor Day on, you know, June 22nd, a lot of the questions we haven't answered, we'll be answering there. Thank you.
Perfect. Thank you so much.
Thank you.
Thank you.
Thank you.
Thank you.