Fastly Earnings: Continued Progress on Cost Controls as Revenue Uptrend Stays on Track

Fastly FSLY reported a good first quarter that contained no big surprises but showed the company continuing to better control its costs. The ability to improve margins without sacrificing revenue growth is crucial for Fastly as it works to achieve profitability, and we have growing confidence that the firm is on track. With no change to the company’s full-year outlook after a first quarter that very slightly exceeded guidance, we are making very few adjustments to our model and are maintaining our $20 fair value estimate.

Revenue growth slowed to 15% year over year after exceeding 20% each quarter in 2022, but we believe there’s room for growth to reaccelerate. We’ve looked at edge computing opportunities as the biggest area that could bring more activity to Fastly, but this quarter, the firm made encouraging strides with its privacy and security offerings, which is another area where we believe there is a lot of runway for Fastly. The biggest headline grabber was management’s disclosure that Google chose Fastly as its sole partner to enhance privacy for users of its Chrome browser. More vaguely, management said it is seeing good velocity in the security portfolio and that customers that renew are looking to add security features. We expect these added features to drive higher spending from existing customers to keep sales growing at a high clip.

Fastly’s area of needed improvement has been cost controls, and all signs there look good. In the quarter, the reported gross margin expanded by 400 basis points year over year to 51.3%, and the reported net loss improved to $44 million from $64 million. Management attributed much of the improvement to better cost controls and cost management. We expect margins to improve further in the second half of the year, when there is seasonally more network traffic, as Fastly’s fixed costs to enable network capacity will lend themselves to greater operating leverage.