Fastly S-1 Analysis — Accelerating the Edge
Around this time last year we saw the first DevOps company IPO, Pivotal. Now developers’ voices are being heard at the edge with Fastly’s $100M S-1 filing, with the amount as a placeholder. Fastly offers an edge cloud platform that enables developers to build, secure, and deliver digital experiences. The solution helps business serve dynamic, time-sensitive content quickly at an average of 150 milliseconds or less. Fastly not only helps business in mobile, gaming, and live-streaming but also new segments like IoT and AR/VR. In CY18 Fastly had 1.6K customers generating $144.6M in revenue. Founded in March 2011, Fastly has ~450 employees and is headquartered in San Francisco, CA.
Fastly’s products support the growing trend of moving compute power and logic as close to the end user as possible. The business defines its service as an “edge cloud,” a new category of IaaS that represents the convergence of CDN, ADC, WAF, Bot Detection, and DDoS solutions. It leverages serverless computing to run servers and dynamically manage the allocation of machine resources.
Its edge cloud platform consists of three key components: 1) a programmable edge, 2) a software-defined modern network, and 3) a philosophy of customer empowerment. The programmable edge sits between Fastly’s customers and their end users. Developers can write and deploy their code to push application logic to the edge. Fastly also offers reusable modules to developers. Developers can apply agile development practices like CI/CD. Fastly offers real-time visibility and control by streaming log data from the network edge, which helps developer make configuration changes, roll back deploys, and change code. There is also a serverless development environment.
Second, Fastly developed its software-defined modern network from the ground up. Fastly’s proprietary software runs on custom-designed servers built with commodity components and network hardware. The custom network stack includes built-in routing and load balancing, which Fastly claims improves performance, efficiency, and flexibility. Its 45 terabit edge network is located in 60 uniquely designed points-of-presence (POPs) across 21 countries as of March 31, 2019. This compares to Akamai’s ~2K pops across 139 countries and Cloudflare’s 175 POPS across ~80 countries. Fastly argues that it runs smaller clusters of more powerful servers using high-end CPUs, RAM, and SSDs for superior performance and 25 Gigabit Ethernet for robust bandwidth. Finally, its SDN is one network and can scale to defend against DDoS attacks.
The third leg is customer empowerment. Its free trial allows developers to sign up and start experimenting in a self-service manager. It also has rich documentation, a developer community, and a partner ecosystem.
Fastly argued legacy CDN’s are inferior because they are black box solutions with too many small servers that are capex intensive, exhibit latency, and haven’t integrated acquisitions into the core network. It underscored the heavy professional services business model was outdated.
Fastly addresses multiple markets including delivery, streaming, cloud security, and application delivery control. In aggregate Fastly’s Total Addressable Market (TAM) represents $18B in 2019 and is expect to grow to $35.8B in 2022, a 25.6% CAGR.
There are numerous competitors across CDNs, cloud providers, and data center providers. Direct CDN competitors include Akamai, Limelight, EdgeCast (part of Verizon Digital Media), Level3, Imperva, Cloudflare, InStart, StackPath, and Section.io. Cloud providers offer compute functionality at the edge like Amazon’s CloudFront, AWS Lambda, and Google Cloud Platform. Traditional load balancing, WAF, and DDoS competitors include F5, Citrix, A10 Networks, Cisco, Imperva, Radware, and Arbor Networks.
Fastly is growing well achieving $144.5M in CY18 compared to $105M in CY17, 38% YoY growth. In CY18 platform services represented 95% of revenue while the other 5% was other products, support, and professional services.
The U.S. represents the highest portion of revenue at 77% in CY18. In CY18 revenue expanded faster outside the U.S. than within. Total customer count grew 10% YoY and customer growth outside the U.S. outpaced domestic growth, at 18% and 4%, respectively.
Importantly, Fastly has significant customer concentration with its 10 largest customers generating 32% of CY18 revenue. The number of “enterprise customers,” those who spend over $100K annually, increased from 170 in CY17 to 227 in CY18, up 33% YoY. The 227 enterprise customers represented 84% of total revenue in CY18. The average revenue across all enterprise customers was $530K in CY18.
Fastly primarily generates revenue from usage-based fees for its platform. Some products and services have flat fees. Larger customers often enter into contracts that contain minimum billing commitments and reflect discounted pricing.
We thought it was interesting that Fastly emphasized a large part of its growth depends on the success of its partner relationships like Datadog, Looker, Heroku, Magento, Drupal, and Wordpress.
One thing that stood out to us was the business’ sound dollar-based net expansion rate of 132% for CY18. Note, Fastly’s metric does not include churn. The company stated its retention rate was 98.9% in CY18, suggesting a 1.1% churn rate. Our recent research found that the top quartile of SaaS businesses observe net dollar retention of 120%+. Fastly’s ~130% dollar-based net expansion rate is good but below fellow developer-centric, recently IPOed PagerDuty’s 139%.
Moving on to gross margin, which equals revenue minus the cost of goods sold that includes things like hosting costs and customer support. Fastly achieved an 55% gross margin in CY18 below Akamai’s 65% in CY18.
Of each operating expense item, Fastly spends the most on S&M at 35%. Fastly has a sales efficiency coefficient of 0.60. As a reminder, the sales efficiency coefficient measures gross profit increase over a period divided by sales & marketing investment. The company has an incredibly strong magic number of 1.2. A magic number of over 1.0 the business paid back its customer acquisition costs in a one-year timeframe.
In terms of net income margin, Fastly was -21% in CY18, an improvement from -31% for the equivalent period a year earlier.
In July 2018, Fastly achieved a $935M valuation when it closed a $40M Series F financing led by Deutsche Telekom Capital partners. Fastly has raised $219M in funding from investors including Battery, August, ICONIQ, Amplify, and O’Reilly AlphaTech.
Fastly’s IPO registration touches on a few trends: 1) hyper-connected end-users are increasingly impatient, 2) advanced mobile applications like IoT, AR/VR, and live streaming, and 3) developers are the new decision-makers. With good revenue and customer growth, and strong net dollar retention, it will be exciting to watch as Fastly goes public.