Fastly at Morgan Stanley

Morgan Stanley hosts companies periodically, to enable them to present their business case to MS analysts, who ask questions. This just happened earlier today with Joshua Bixby (CEO) and Adriel Lares (CFO) of Fastly. Transcript here: https://seekingalpha.com/article/4410549-fastly-inc-fsly-ceo…

Some high points:
• On Edge Computing: And the beauty of doing it close to users, of course, is it improves the performance, it improves increase the scale, it also improves the security. So, this is about rethinking how the applications are built, and where that work is at start of that. It’s a very exciting time…And the idea of this is actually transcending well beyond the Internet and the traditional way we thought about the Internet, this is about edges all over the world that have the capacity to deliver, secure and scale every bite that goes across the Internet, which is more and more content every day for all of us.

• Developers are important, since the most disruptive companies lead with new technologies. And ultimately, this entire concept of digital transformation is actually just, give developers tools, developers are scientists, they’re going to do tests to see what works best, let’s give them this incredibly rich environment. In order to test modern application designs, you need the content at the edge, you need the compute at the edge, you need the security at the edge, and you need the control.

• e-commerce depends on speed. Edge Computing enables deep personalization for their customers without sacrificing speed. But, not just e-commerce: personalization goes beyond e-commerce of course, if you look at ads, video ads, that’s another market that’s ripe for modernization in the sense of knowing who you are and getting an ad to you.

• Compliance is another application for Edge Computing, so that customers in one country don’t have their data sent to other countries.

• CFO Lares: 2021 is going to be the year for us, for Secure@Edge, Signal Sciences is clearly the big accelerant to that. And in particular, when you think about security and you also think about compute, as Joshua mentioned earlier, it makes most sense to do it at the edge and from a cost standpoint, historically cost of revenue for us, bandwidth was about 30% of that cost. So, interestingly, both for Secure@Edge and Compute@Edge, there is not much meaningful bandwidth impact. That’s why that gross margin is more likely to be a lot higher, in particular Signal Sciences has 80% north of gross margins in that regard, and you can imagine Compute@Edge is also going to have a similar like incremental added gross margin as well.

• Real revenue from Compute@Edge is 2022 and beyond. 2021 revenue bump is from Secure@Edge (Signal Sciences). I suspect this is disappointing to many here.

• Usage-based versus Subscription-based. Lares talks about giving customers a choice: And so I think we want to be a company that offers them a choice. And so there will be some situations where it makes more sense to be a more subscription based. And in other situations, such as compute and delivery, it’s more likely to continue to remain usage based. But, later states that in 2021 Signal Sciences will still be subscription-based.

ª Bixby gave a customer example: I did a demo with a top 10 e-commerce customer last week. And they reluctantly took a demo to look at security. And now we’re in. They had agreed to a POC running one – a week later. So, what you see in this product is two things that are really unique. One is that it’s all integrated into one – usability matters, it’s all integrated. So in many of these solutions, who have a POP solution or a WAF solution and everything is separated.

• Bixby again talked about targeting “high value” content: You see those who have made their living in content that is perhaps not as valuable. I mean you see that impact on gross margin, you see that impact on the business. As you said, we are exceptionally disciplined about this. We could grow our top-line revenue, but we’ve always said – more than we have, but we’ve always said, we’re going to grow our top-line revenue in conjunction with gross margin leverage. That’s important to us, and it’s been important from the day we started. Because, to your point, there is content that is lower value. In other words, Fastly isn’t trying to be the CDN or Edge Compute server for everyone. It’s for companies that need the best performance and are willing to pay for it - high margins for Fastly.

• When asked about traffic that becomes a commodity, Bixby responded that they work closely with their customers to help them get more value from their content, whether it’s avoiding bots scraping their websites for data or adding deeper personalization to the content they provide.

FSLY may no longer be an investment that fits the style of investing discussed on Saul’s board, but in my view it most definitely is an investment that fits Motley Fool’s way of investing in long term winners. It may take a couple/few years to play out, so the question is whether you’re willing to invest now and wait, or try to time when the hockey-stick inflection point will happen, or whether it’s just too technical and complicated and so you just move on to easier to predict and understand companies.

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