Fastly to Acquire Web Application Security Company Signal Sciences for $775 Million

This morning, Fastly announced an agreement to acquire web application security company Signal Sciences for approximately $775 million in cash and stock. Signal Sciences has raised about $62M to date and had $28 million in revenue in 2019. Based on their projected 2020 run rate, Fastly is paying in the range of 19x revenue with $200 million in cash and approximately $575 million worth of stock. The deal is expected to close sometime this year after all the required regulatory approvals.

While 19x revenue may seem like a high-multiple for Fastly to pay, this seems to be the norm of what cloud security companies are going for in today’s market. Shape was recently acquired by F5 for $1 billion, on approximately $70 million in annual recurring revenue. Other recent cloud security based acquisitions by FireEye and Palo Alto Networks also valued those deals with similar multiples.

Fastly already offers some cloud based security solutions, but adding Signal Sciences to the mix will help to expand their product feature set with additional products and functionality, especially around WAF, ATO and API protection and rate limiting. Fastly is also banking on the impact that security can have on the growth of their edge compute business and the similar approach to the market Signal Sciences has with Fastly in terms of targeting developers and the importance of APIs. Fastly disclosed that Signal Sciences has 60+ enterprise customers, defined as $100k in Trailing Twelve Months (TTM) revenue, of which 70% are new accounts for Fastly and that their product line has gross margins of 85%+. This is in line with the numbers I recently gave out on Akamai’s security product line, where I estimated they have 80-85% gross margins for their cloud security services.

With Akamai having just hit a major cloud security revenue milestone for the company, and for the industry, announcing they have achieved a $1 billion run rate on an annualized basis, it’s no surprise to see Fastly take steps to buildout their cloud security product line even further. Adding in all the different cloud security services available today and the total addressable market (TAM) is in the multi-billions, if not larger. And with high-margins for vendors and developers releasing more complex apps with lots of intelligence and logic, these cloud security solutions will become even more essential for customers doing business on the web, which is basically every company. The demand for these services is going to continue to grow at a very healthy rate overall, for many years to come, which means there is a lot of room for growth for vendors that specialize in this market.

Updated 1:17pm ET: TechCrunch is saying that this deal places Fastly as a, “new competitor in the cybersecurity market“, but that’s not accurate. Fastly has already been selling cybersecurity services in the market.

Note: I’m working on a more detailed article around how this news might impact some of the competitive landscape when it comes to these services.