Peter Offringa of Software Stack Investing has offered his take on Fastly’s acquisition of Signal Sciences:
I think this acquisition significantly improves the investment thesis for Fastly. By adding new product revenue streams, enterprise customers for cross-sell and enhanced capabilities for Compute@Edge, Fastly’s future is looking even brighter as we transition into 2021. They are well-positioned to further disrupt legacy offerings in content delivery, application security and distributed computing. With a seasoned team of thought leaders, we could see even more product innovation down the road, as they rethink the foundational underpinnings of modern application delivery infrastructure.
He has increased his holding to over 30% of his portfolio.
Gap in the market
Frustrated by the limitations of existing security solutions to protect web applications, the Signal Sciences co-founders decided that they could build a better offering…Sound familiar? This is the same impetus that drove Artur Bergman to found Fastly out of frustration with existing CDN solutions.
Like Eric Yuan did with Zoom, Fastly & Signal Sciences identified needs in the market and addressed them with a superior offering.
Awards and TAM
Signal Sciences’ technologies have also been recognized with industry awards:
InfoWorld – 2018 Technology of the Year
Computing – DevOps Excellence Awards 2020 for Best DevOps Security Tool
451 Research – 451 Firestarter Award, October 2019
According to an LA TechWatch article in early 2019, the application security market was estimated at $7B and is the fastest growing segment of information security.
The plan is to integrate the application security capabilities from both companies together into a single new product offering called Secure@Edge. This will complement the Compute@Edge platform, but also be a key component within it. Secure@Edge will be built on top of the Compute@Edge platform, using the same development tooling as any other edge compute application.
Common DNA: Management and Customers
A big part of my bullishness around the Fastly investment thesis centers on the talent base they are building. As investors, I think we sometimes overlook the power of assembling a strong team of highly motivated engineering talent that includes the leading minds in their fields. We tend to focus on the tangible metrics in front of us, like financials or customer growth, as talent is harder to assess and speaks more to future potential for a company’s growth than current performance. We celebrate strong founders/CEOs of software companies, and when they have the technical chops to deliver the first prototype of their product, even better (Yuan, Lawson, McKinnon, Banon). Yet, there is an equally important organizational layer to build in the technology team that drives innovation and leadership long into the future. In this regard, Fastly has been assembling a brain trust of leading thinkers in networking, content delivery, programming languages and now security.
Like Fastly, Signal Sciences targets and attracts innovative, internet-first companies as customers. This is a consequence of the disruptive nature of their product and reflects the benefits in operational efficiency that progressive players would seek as early adopters. A sampling of brand names listed on their web site includes Under Armor, Datadog, Duo, One Medical, O’Reilly, DoorDash, Onelogin, Airtable, Chef, Postmates, Remitly, Procore, Twilio and WeWork.
This example highlights the large cross-sell and customer expansion opportunity available to the combined company. Signal Sciences brings 265 total customers, of which 60 are at the enterprise level (defined as spending more than $100k in the prior 12 months). Of these, 70% (about 42) are new to Fastly. At the end of Q2, Fastly reported 304 enterprise customers, with an average spend of $716k. Signal Sciences’ 42 new enterprise customers would increase Fastly’s count by 14% and could add about $30M in incremental revenue over time, if they could all be cross-sold up to the average Fastly enterprise customer spend.
Given these developments, I have become even more bullish on Fastly’s potential going into 2021. Coming out of Q2, I was anticipating them to deliver at least $300M in revenue for 2020, representing growth exceeding 50% year/year. For 2021, I felt that 40-50% growth was achievable over 2020, based on continued momentum in content delivery uptake and the introduction of Compute@Edge, yielding revenue approaching $450M. With the addition of Signal Sciences and the new Secure@Edge product line, we could see an additional $30-50M in revenue for 2021, based on Signal Sciences’ existing ARR of $28M as of June 30th, continued high growth of their product sales and future cross-sell opportunities. This could bring total revenue for 2021 of $500M. Investors can apply their own multiple to this target, but I am optimistic the market cap for the combined company could surpass $15-20B by end of 2021.