Driving the digital transformation: A fireside conversation with Fastly leadership

Alex Kurtz, Managing Director, Equity Research Analyst, KeyBanc Capital Markets, January 2021

Driving the digital transformation: A fireside conversation with Fastly leadership

Executives around the globe are on a mission to make their companies more agile and more competitive in an increasingly digital world – one that has only grown more connected during the coronavirus pandemic. At the center of the digital transformation are cloud-based platforms, such as Fastly, that allow enterprises to work faster and from anywhere.

Fastly, a content delivery network that helps companies deliver online content, counts some of the world’s largest brands on its client roster. Coming out of a globally challenging 2020, the company has seized opportunity in their stronghold – helping enterprises of all sizes scale up their digital capabilities. At a recent KeyBanc Capital Markets (KBCM) Future of Technology conference, Alex Kurtz, managing director, equity research analyst for KBCM, led a fireside discussion with Fastly CEO Joshua Bixby and CFO Adriel Lares.

The key theme? “We’ve seen this seismic shift over the past few months. Executives and companies realize if they don’t iterate and try new things they will not succeed,” said Bixby. “In the old days people would cast out and buy software to plug in together, and that was good enough. That’s not good enough today,” he added. “You actually have to build differentiation. No matter what industry you’re in, you have to become a software company.”

What the moment demands from enterprises

Digital transformation has long been buzzed about, but now companies are being forced to accelerate their creation and adoption of digital platforms and processes to keep up with consumer behavior and conditions created by the pandemic. Fastly’s executives believe that key to success in this environment is empowering developers to write code and experiment. Fastly offers developers the ability to get their applications out and have them be performance-scalable and secure.

“Businesses have to experiment, our intuitions aren’t necessarily right. Companies are taking iterations – and changing and changing. Digital transformation is about that,” noted Bixby.

While the pandemic was unpredictable, it’s not a stretch to prognosticate that the pandemic has solidified systemic societal changes such as e-commerce and remote or flexible work. Companies such as Etsy, Shopify and Slack – all Fastly users – that enable those shifts will continue to do well.

Similarly, Fastly marked 62% year-over-year growth in the second quarter. Bixby credits the developer-focused nature of Fastly. He said companies are looking at the big winners in the pandemic economy and wanting to copy them. Many companies are dividing their vendors into those they absolutely must have and those they don’t.

Growth through expansion and addition

Fastly’s upward trajectory was in motion before 2020. The company had a strong response to its initial public offering in May 2019, opening 34% above its IPO price of $16 per share, after posting 38% revenue growth in 2018.

One of the keys to its revenue growth is expansion rate – growing business from existing customers year over year – while also reporting a churn rate of less than 1%.

“As the number gets larger, keeping the expansion rate high should be a hope, not an expectation, but we have actually been able to drive that number quarter over quarter and year over year,” Lares noted. “It gives you a sense of how much acceleration there was in Q2 specifically.”

He also said that most of the revenue they’re seeing this year is from existing customers, about 90% to 93%, and that customer acquisitions this year will impact revenue in 2021. Lares said Fastly is an enterprise sale. The company targets users of the monopoly incumbent and shows them the value of the Fastly edge platform and the security integration, and sells the promise of computed edge.

“That takes a bit of time,” Lares said. “When those seeds get into place, what we typically see is from year one to year two, a 3x [growth] in revenue, and by the time you get to year three, it’s growing by 40%. All of that together delivers the results we’ve seen recently.”

A developer-led approach

Fastly’s leadership credits their popularity to a focus on developers. Rather than traditional solutions that have sold to information technology (IT) departments to configure, Fastly offers developers a modern platform where they can experiment when they need a solution. The “server-less empowerment,” as Bixby put it, engenders internal champions of the Fastly product, which then helps ease the sales process. He likens it to the popularity of the Amazon Developer Services portal.

“It is hard to argue that selling into developers is not lucrative,” he said. “Amazon has showed us that developers are a force; everyone wants to be there.”

He explains the sales cycle starts with getting enterprise decision-makers to experience the difference between a developer-led world and one based in IT configuration.

Accelerating sales cycle during COVID-19

Not only has the pandemic accelerated digital transformation, it has accelerated and modernized the sales process that is bringing it about. Steak dinners and box seats for sporting events are no longer possible in the age of social distancing – and the old-school approach takes too long anyway. Bixby says in some cases, the sales cycle has been compressed into weeks because the procurement and legal departments are focused on meeting the top-down goals driven by the CEO.

“Our weaponry is a great product and people that love us. We think that’s a great thing to stake our reputation on,” said Bixby.

Lares points out the remote environment has also changed how the marketing budget and onboarding process is deployed since they can’t travel to customers or conferences. Many companies saved on the bottom-line regarding sales and marketing early in the pandemic; as remote client engagement becomes extended, money will be used on innovative content or digital experiences.

What’s ahead for Fastly and edge computing platforms

Looking forward, the Fastly team covered how various industry trends would impact their business, citing the U.S. government’s legal threat at the end of 2020 of TikTok, as one area of concern for Fastly and other content-related software providers.

When asked about the revenue contribution from computed edge, Lares said that they believe they will get to general availability by the end of 2020 and will begin to recognize revenue. He says the contribution will be minor at first, but the potential is in the reduced bandwidth cost, which will have a greater impact on incremental gross margins.

Bixby discussed the effects of working with larger customers: “Because we work with the largest websites at the largest scale, we can’t just throw software out and see if it works or breaks something. The expectation of our customers is that when we go live, it works and is bullet-proof.”

In the wrap-up, Fastly’s executives discussed the nascency of the digital transformation – particularly for business-to-business use cases. Bixby expects thousands of enterprises to go through a digital transformation in the near future. To take advantage, Fastly is determined to build loyalty and stress authenticity and performance with its existing customers.

To learn more about this article or other technology trends, connect with your KeyBanc Capital Markets Technology Investment Banker.

About the Future of Technology Series

This inaugural seven-week virtual series centered on timely and unique content across the Technology landscape. Leaders from today’s most relevant technology names gathered to take a thematic approach toward exploring market shifts, particularly in light of an increase in digital acceleration, remote work, deglobalization and changing consumer consumption habits. Attendees included 977 investors, 164 private and public companies, with 115 fireside chats and panels, and more than 700 one-on-one meetings. Please reach out to Corporate Access if you would like to be considered for attending the 2021 Emerging Technology Summit.

This article is for general information purposes only and does not consider the specific investment objectives, financial situation, and particular needs of any individual person or entity.

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