Q3 2019 Earnings Call
This time I would like to welcome everyone to the Fastly third quarter 2019 earnings Conference call.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question answer session. If you like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you like to withdraw your question press the pound Keith Thank you.
Now I'd like to turn the conference over to Maria Lukas Vice President of Investor Relations. Please go ahead.
Hi, everyone. Thank you for joining our third quarter 2019 earnings call.
We have actually CEO Archer Bergman, President, Josh So bixby and see if though adra Lars with US today before they start I want to remind everyone about the about the format of our call. We published a shareholder letter on our Investor Relations website and with the FCC about an hour ago. We hope we hope everyone had a chance to read it simpler provides a lot of details will be.
In the call with brief remarks before opening the call for your questions. During this call. We will make forward looking statements, including statements related to the expected performance of our business.
Future financial results strategy long term growth and overall future prospects. These statements are subject to known and unknown risks uncertainties and assumptions that could cause actual results to differ materially from those projected or implied during the call.
Please take a look at our filings with the FCC and our Q3 2018 shareholder letter for discussion of the factors that could cause or result to differ also note that the forward looking statements on this call are based on information available to us as of today's date.
We disclaim any obligation to update any forward looking statements except as required by law also during this call we will discuss certain non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for GAAP results. Finally this call.
It is being webcast and will be archived on our website. Shortly after the call with that I'll turn the call over the art Archer.
Thanks Maria welcome everyone. We're deeply appreciative for all of your joining us today to discuss the third quarter results.
We're making great progress, we're continuing to execute the strategy that we laid out.
In public earlier this year.
We provide a scalable cloud platform.
Allows developers to build.
<unk> secure.
Implications all around the world, we provide control real time visibility so they can grow their businesses.
Today, we're excited about our future where as we were six months ago up IPO and we're really pleased with our results for the fourth quarter.
As you can see in our shareholder letter, we had a straight quarter generating $60 million in revenue up 35% year over year.
Mr Enterprise customer count to to somebody for them to 62 in the previous quarter.
We expanded BBM yard, 235% and increased the average enterprise customer spend.
$575000 from $556000.
These results reflect a increased adoption of our edge cloud platform by both new and existing enterprise customers across the globe.
We will continue to we continue and we'll continue to identify opportunities to drive operating leverage and expect to maintain our path towards profitability over the years to calm as our network skills.
Developers.
Use continues on platform and a big recent good ideas that we deliver neutral some functionality that enables developers to build and Craig beyond that was previously possible.
We're starting to see results from last quarter's launch of our developer library, which includes ready to deploy codes on solution patterns.
It makes his Boston safer for developers to discover test customize and deploy edge cloud solutions.
The third quarter, we've launched the newest version of our how should core terraform provider.
They request the provider from our customers. So they can integrate more tied to live if their operations and deployments systems.
We also announced expansion of our real time long streaming to support.
She cosco and Elasticsearch endpoints, giving developers and customers even more options to experiment and discover.
Big data.
Finally, as you may have seen yesterday, we launched our powerful new language agnostic computer Marmon computer at the edge.
This new project.
New product in beta is a major milestone it's the next evolution of our edge computing capabilities.
Purpose is to empower developers to build far more advanced etch applications more secure more robust logic and a new level performance. It offers developers are best edge computing technology with instant global scale.
We notably out a tooling support Ross.
Second programming language. In addition to the Barneys configuration language, we chose rough due to its growing popularity with forward thinking organizations.
We also plan to add more languages in the future.
We're still only a couple of quarters and her life as a public company, but we're excited as the progress we made so far and we look forward to opportunities ahead.
Oh, sorry, we've raised our full year guidance 2019 to reflect the ongoing momentum into business.
Total revenues now expected to be between 290 498 million compared to our prior outflows of 191 to 195 non-GAAP operating loss is expected to be between 30 834 million negative compared to our previous awful over 40 or 44.
Before we move to today I want to thank our employees partners customers investors for your continued support about fleet.
During the backbone of our efforts were grateful for the vacation to past in our mission.
With that I'll turn back to the operator for the Q and a portion of people.
In order to ask a question you will need to press star one in your telephone to withdraw your question. Please press the pound key.
Your first question comes in a line of Brad Zelnick from Credit Suisse. Your line is open.
Excellent. Thank you so much and congrats on all the success I've got two questions.
First you know when this past quarter two of your competitors highlighted record seasonal traffic growth can you talk about the trends you saw in the market in general and and as well competitively and as we look to Q4 and 2020 can you talk about the impact of a potential change in the mix of traffic on your network from upcoming OTI, t. launches and how that might impact.
The leverage we see on the gross margin line.
Sure. Thanks, Brad It's Josh we're here I think on the seasonal traffic growth I think it's important to remember that a lot of the legacy competitors are really mostly media place and and you know if you look exactly we aren't edge compute platform. We are an edge cloud and so you know we have seen sustained growth, but that's it.
Being growth and is is really in our core customer base, which is you know applications deliver differently, we obviously and we talked about this in the past time.
Video traffic, but our our media business is really highlighting on the high margin segments and not market. So things that really drives you know very different business. Then then sort of traditional Boe d. So I think you know we are seeing some of that but I think it's really augmented in some of the legacy customers who rely only on.
The Deo de segment to progress I think if you look at Q4 2020 and ongoing you know one of the secrets to our success has always been really relying on this developer friendly application.
Driven mandate and I think Archer spoke about this but are computed edge launch I think only continues to further that as we look out in the future. So I wouldn't anticipate any significant differences in that you're not traffic wheel, you're going to continue to see us drive on most of our traffic is going to be a security based application application.
Development oriented traffic.
That makes perfect sense. Thank you for that and maybe ought to something even more exciting I did want to ask a question just about computed edge and I appreciate it still in beta but it seems your differentiation in part will be the speed and low latency in executing a request, but there's also I mean, a lot a lot it needs to covers in terms of the technology, perhaps Arthur can you.
You talked about the technological differentiation and perhaps defensibility of how youve solved the challenges of concurrency and and isolation and multi language support and and then how should we think about the monetization model there in the margins associated with deploying these type of of of workloads at the edge. Thank you.
Yes. Thank you I think on the technology side, we set up a couple of requirements and we started this project a few years ago, which was really we wanted to build support many different languages, we know that tying people into paying customers are developing into one languages as not optimal.
We needed to scale to do many houses and request for second given piece of hardware.
And notably we also wanted.
Kind of a secure environment you don't first customer <unk> request, so that even if our customers code would have bugs and it. It wouldn't you know potentially leach data between two different requests in that customer.
So we started working together with Brazil, and some other companies on the Web Assembly project, which was.
Originally developed to allow multiple languages run.
Closed has made him codes speed as possible inside browsers and this is attractive to us because browsers are you know that a lot of resources and they are a area where they have to spend a lot on time and money on making shorts secure.
And so we took that.
And we have developed some open source technologies to.
Loose ends I was a compiler for web assembly.
We have done embedded that into our one networks.
And we will allow customers to upload web assembly.
And deployed using older tools logs to streaming.
All the things that make fastly grades, but now they can rights.
For complex applications in their language of choice initially, we're supporting rust, but since its web assembly underneath one is free.
We.
Our comfortable with that and have that develops we will expand it to change support other languages.
And reception from customers that we've been talking to both before and after the announcement have been being grades.
On the revenue and side.
No that forecast that we have given in the past has no.
Included the additional edge compute revenue from this but in this new version of our.
Our edge Qams, you have to compute that edge.
And we.
Our ready yet to give guidance on what that will do but it's not being baked in into the previous vendors.
Thank you so much for the color really appreciate it.
Thank you.
Your next question comes from the line of Willpower from Baird. Your line is open.
Okay, great. Thanks, Yeah, congratulations on the Oh the results I Wonder if you could you know I guess, you know Peel back the results a little bit as you looked at the upside in Q3, maybe just help us understand where the where any positive surprises might have been and just maybe a little more color on.
The key drivers there and I guess, what the same thing for the 2019 guidance, what's giving you that copper that's other trends continue into Q4.
Sure well this is Israel.
In general you can see in the.
Increasing dubner from Q2 to Q3 in general what you're seeing is even though we believe overtime.
You know doesn't or could compress overtime, just give us a lot of large numbers. What we saw in the quarter was continued usage expanded usage of the age capabilities that we have amongst all of our customers.
And the fact that the trends related to enterprise customers remain positive. We added we added a few more enterprise customers.
But more importantly, you will solve reflected in terms of the average spend of enterprise customer that went up to what it is in Q3 and then that's trend just that trend seems to be continuing as we think about the end of this year and that's historically borne out and I think what you're seeing in our guidance is that we see that in terms of what we have.
And our customers today, we look at our enterprise customers as the main driver that seems to be continuing.
Okay. As you look at that dollar based net expansion rate up you're at a higher level than where you are in Q2 can it took us further in Q4 meter drops you had a pretty high levels of is right now.
You know, it's tough to speculate how that won't be in Q4, we do have new customer that are continuing to.
Ramp up with us and so we shall see how those continue to ramp up into Q4, but I think at this time.
Difficulty to speculate in terms on whether it will be done or that's going to be growing continued in Q4 are willing you customer's going to be ramping as part of that but I'm trying to give you into guidance is just that at least some combination of the two that we didn't need to be a little bit more bullish that was.
For the full year than I was previously.
Okay, great. Thank you.
Thanks.
Your next question comes from the line of Jonathan Ho from William Blair. Your line is open.
Hi, good afternoon, and congratulations on the strong result, I guess, maybe starting out with on some of the the the success that you've seen what the developer library can you talk a little bit about how that is maybe impacting I you know your ability to reach customers as well as you know use of adoption of.
If you're submission.
Sure Jonathan It's Josh with that's a great question I think it really exciting development when we talked about.
The edge compute platform, we spend a lot of time and educating you know this audience about our reasonable modules about how we could have and you know this real platform effect, where you where you have this flywheel where customers come onto the platform developers develop code that code solves the problem and then there's a way to bring on that next.
Company that maybe in the same vertical or may share some commonality such that they can get to speed.
It's a market faster develop less code themselves and we're really seen that fly will turn on the developer library Archer talking about this but giving people the ability to take these dante's advanced solutions and simple configurations, I think what you're going to see and is an acceleration of that revenue and the stickiness that the platform and anymore.
See not in the numbers were starting to see that in the numbers and I think we'll see that play out in the future. So I think what we're seeing is a real stickiness of faster time to ramp for these customers, they're getting to value quicker.
And they are there a lot of examples of that we're just seeing and significant traction I think the that really exciting part of the computed edge launch and obviously, it's still early is the acceleration of that we're going I think we're going to see more.
These things come to light as we allow people a bit more flexibility so very exciting flywheel and were seen in real effect right now.
Got it and then I can you talk a little bit about the investments that you guys have made on the go to market side and Salesforce and maybe what's been effective you know what are you seeing opportunities to invest more in a just want to get sort of an update in terms of where we stand there. Thank you.
Sure, It's Josh will again.
So we talked about this when we when we did the road show, which is this is a muscle that we are building, particularly on the on the marketing side, we have traditionally not invested a lot in this it's been much more word of mouth business that has wonderful business, but not a place that we've invested we've started to invest on the marketing side and so that's.
You know going from near zero.
Does take time get to build a teen you've got to you've got to find smart ways to invest that money. So the signs are very very positive we talked about that's in the last call and I think the signs are even more positive we're seeing.
You know, we're seeing significant attribution to our marketing efforts.
I just got a a picture of one of our Billboards in times square, which everyone is very excited about and a picture from a friend of a Billboard on the highway. So we're starting to sort of come out of our shell and tell that story and those results are showing up remember this is an enterprise sale. So this is not something what we're going to see that affect instantly but.
The money is moving in the right now the money being spent the metrics are moving into right direction and we're starting to see investment I think I'll pass it to Israel to sort of speak to the sales ramp side, but right now lots of momentum thanks, Josh and I guess.
Jonathan the only other thing to point out there's a Q3 a year over year, we did.
Clearly increase spend on sales and marketing even as a percentage. So we're making that investment but to Josh was point, it's still early days and we're still trying to figure out.
The actual defined to the go to market Ocean, we still feel good about the ramping of ours and sales reps.
I want to achieve near the end of the year.
To give you a sense of where we are at the end of the year. When we report Q4, but overall, we're pleased with where we are in that ramp and.
Nodes gets about.
For that labor hopefully sometime next year.
Great. Thank you.
Your next question comes from the line of Walter for curve from Citi. Your line is open.
Hi, Thanks, Israel for you on the gross margin side I think this quarter I think surprised that at least versus our model and the positive side and a reversal from what you saw in Q2 could you help us understand what the swing factors were and then I think just as I look at and you're not guiding to it specifically, but as I look at consensus for Q4, it looks like the streets looking for.
200 basis points are sort of sequential increase in gross margin just curious if I, if that's realistic and what the drivers are on together.
So I'll answer in reverse order so last year, we saw a similar increase in gross margin Q3 Q4.
To the tune of what you just mentioned.
I see no reason why we would be no different than that to share everything seems to be going that direction and then specifically with respect to Q3 in terms of the gross margin progress, we're making I think in general they're still areas within our investments into support labor allocations install investments need to make.
We will reach critical mass there.
Hopefully here and then your future, but from a sort of incremental bandwidth side and some other areas that we feel on a variable side, we are making good progress there and I think you're beginning to see the beginning to that in Q3.
But we hope to as I've mentioned before in past calls contribute leveraging gross margin on a year over year basis, and we expect to do that in 2019 over 2018.
But from a high level, that's kind of house.
Great and then just relative to the industry, maybe for Joshua on a on pricing I know you're a that you know from an industry perspective, you're embedding some.
Compression in pricing as time goes on I'm wondering what you saw in Q3 and how that compares to what it's been historically.
Yes, I mean, we certainly haven't seen any difference in pricing, but but again I think it really depends on the market. Your end right. So because we're not in the low end of the commodity space, which we see can we which we here it's come pricing quite quite quickly that's not the space. We're in so when you think about price compression, obviously, it's a direct function of how much value I discussed.
First and I think when you look at you know the Gardner and you look at the growth in our large customers whats. That's what that is speaking to is a significant value. We provide so I I feel like that price compression question is really a in many ways. It come modification question and being the only real leader in the edge compute space.
That gives us a huge leg up in and we made significant sort of bounds leaps I would say, even farther and not with the launch of computed edge. So we're not only in the lead we're increasing the lead and not that dramatically affects the pricing continue.
Okay, great. Thank you.
Thank you.
Your next question comes on line of Michael Turits from Raymond James Your line is open.
Hey, guys and congrats on the results couple of questions first I would imagine granted you are not in the Kamada fight end of it but.
<unk>.
I understand here my expectation would be it's still that you're getting he may get some benefit in fourq you from the two prominent a new big TT launches.
How much is being built into that for that and even more important how much variability is there in other words. It I think there's a general sense that.
We don't know how fast those will roll out we don't know how much will go to one one provider or another so does that introduce more variability and this particular quarter.
So let me talk Michael dystrophy here on the Oh Gee launches, we as we said all along we are not events based business, we don't build out for events in the typical way that you'd see how people sort of throw a lot of Capex and then wait a long time for it to get used so from our perspective it doesn't really introduced.
Area ability, we've got a plan. It's it's a it's lasted in work for us for the last eight years and we continue to.
Worked to work that plant I think you'll see over the year.
They drill can speak more to this that we have a pretty good certainty of what our capex numbers are going to be in we you know there quarter to quarter as we talked about last quarter and this quarter. There was some variability, but you know we all we work at the high margin side of that and we don't see that introducing tremendous variability into the business a little or no you want to add earlier.
Michael is just in general a second half the year and specifically in Q4, you sort of see an acceleration in revenue across all of our business not just what you think you referred to as RTT, but you also have you know our e-commerce customers with shopping season. So remember those Jim tactics I think what we're trying to endeavor to get better out every year, it's clearly.
From a forecast and standpoint, so the range you see there is.
Probably a bit wider than you would see when we're at called the 500 million dollar run rate or several hundred million dollars north where we are today.
But I think it's there's nothing I think more unusual today than what we saw last year.
Okay. Thanks, and then you hard to see though and securities part of your offering but my sense is always been that there's there's certainly a roadmap there and a lot more opportunity for development and things that you can do have you can share with us about about that roadmap at this point.
Yeah, I mean, I think we've been pretty clear that security and delivery is core to our business in there and they're really equal players. If you look at our customers. They are buying security from us it's sort of the given now. It's you don't go to one of these ecommerce platform or high Tech companies and just just offer part of the solution you don't see your offering comps.
Your offering delivery your offerings security I think that the web security market is changing rapidly.
And it's a huge area of investment. So you saw the announcement, which were quite excited about around.
You know significant new talent, joining the team I think what you will see in the road map is continued investment and significant investment in that area. In 2020. This is a there's a large growth area for us.
Our customers are demanding more and more we are investing.
More R&D into this every year because than the demands are pretty significant if you think back to this story arc of disintegration of the datacenter in all of these sort of antique software appliances that sit in data centers that are all going away. The reality is a large portion to those were six.
Gary on where security appliances, and and when you think about the real value.
That we provide it's actually building out.
The ability for those functions to one modernize and to go up to the network one of the areas. It's extremely exciting about to competed edge launch and Watson in particular is the ability to allow developers our customers to innovate on the security.
Side, and so I think you're going to see a couple areas of innovation and if sped up innovation because of the ability that we're bringing with the computing.
Computed edge, so I would I.
I would anticipate more announcements on that over the coming year and a significant R&D investment.
In terms of moving dollars not net new dollars into that area.
Great Joshua.
Thank you very much.
Thank you.
Your next question comes on line of Tim Horne from Oppenheimer. Your line is open.
Okay. Thanks Archer.
Maybe just help us understand why computed edge is so important and why the so revolutionary and maybe just talk about some of the new use cases that you're discussing with your with your customers and you know I guess.
No longer term, how large of a market can this really be thank you.
Thank you I think.
The revolutionary aspect of view, if you look back at.
How the server last container market actually bold.
There is a.
It was all do function.
And the cloud there's a lot of overhead.
I mean, you know large Javascript interpreters.
You have to either start up or keep running that you sell a memory.
Some of course beer.
And I've got my work when you are operating in large data centers in the middle of nowhere, but when you wanted to place it adds you're in a more constrained environment and so the fact that the overhead of web assembly not only in execution time, but also in to spin up time or the number we we mentioned or press.
Leaves us well around 35 million microseconds, even I.
Did I Miss they sometimes micro seconds to spin up a container put out requests.
This is really critical same with memory efficiency and so it really.
You know takes his idea.
Right code.
Right. It in the language that you are using in house, but you have tooling for.
But be able to deploy it in a very safe secure efficient manner as close to the user as possible.
And kind of handled AD load globally, and I think that's where oh, they really amazing engineering work we have done.
Shines true is that kind of the efficiency of doing does not just doing it because that's been possible in the past with large servers and personalization, but it is really doing it at scale on a in a very.
Type environment.
On the use cases, and we were been hearing from customers for a long time around things like graft your outlook.
For example, like the ability to assemble apiay requests I'd to edge.
Render a page.
Think of a page of made out of a bunch of different models. Some of those modules are shared by will use or some or not so is this you can.
That's a different modules from origin, something that might be cash and you can't have assembled a page and stream it out to the customer as soon as things arrive solve it personalized some of it now and so you really think at a much better.
I feel like good response time on pages, when they'd be eichholz offload more can offload more and the cash because you can personalize.
And so we're hearing a lot of that barrels a hearing a more advanced use cases, when I go tea and mapping.
Customers really want to explore.
New things to do in this environment that they haven't been able to do before.
Thank you.
Your next question comes from a line of James Fish from Piper Jaffray. Your line is open.
Hey, guys congrats on the corner and thus far jumping around here. So I apologize if someone asked but archer maybe maybe for you. If you could start how did the opening up of the web to somebody this quarter go for coming that you add or did you see any demand as a result of that openness.
Share, but in fact numbers, but we're very happy with the demand.
Oh, well I've ever.
But open or the public beta that we're opening up a that demand is coming both from existing customers.
As well as.
Divisions inside our customers that were in customers as well as like brand new customers that are really interested in the technology. So the initial I mean, we announced yesterday, but initial responses.
Really HM.
It's really exciting and some of these customers really are very advanced technically and so we feel.
It's always exciting when you have customers really can use the technology provide them also help guide ousted lumps most important in the short terms delivered to them and make them.
Helpful.
Got it and then Adrian maybe or Josh could you guys give us a senses to what has evolved in terms of kinda talks with a major OTI t. providers in terms of common share what kind of a new services and if you guys think you need to continue to add more more capacity to the network I just trying to get a sense of how much capacity.
The network your even using today and that's it for me. Thanks.
Thanks, Jim I'll take that one the Patriot.
General we've talked in the past that we run the network utilization because of how fast for growing.
Somewhere between sort of 30, 35% I think it's something that we continue to sort of trying to keep keep batches from a safety standpoint, and then that drives.
How we manage our capex purchases and in general bandwidth purchases for capacity.
So we're constantly having these.
Conversations with our current and prospective customers in terms of what we think we.
May win in terms of new business and new usage.
The ongoing this is a week week to week month to month.
So look forward and so when I try to build into art and our guidance. When we give out is effectively that which is hey, here's what we think.
What we see out there from a current our current business as well as our respective businesses beginning to ramp or excuse me that we believe will ramp up and then as it relates to on an annual basis.
When we think of sort of Capex you see on the cash flow statement as a percentage of revenue.
Actually long term really been gets around 10% revenue.
This year, we think will be similar it's where we were last year as we begin to.
Ramp our capex, because purchases, but that but that feels about right and sort of that's all incorporated into that got it. So I know, it's double long winded answer questions give just a bit as into how we think about these things.
Got it makes sense. Thank you.
Thanks.
Your next question comes from a line of Jefferies entry from Craig Hallum Capital. Your line is open.
Hey, guys. This is really on for Jeff couple from me one the Devon are up nicely. This quarter second straight quarter. I was curious you guys gave this cohort analysis in the that's one I was curious to know if you look at the 2018 customers now in the second year is that sort of the cohort.
<unk>.
With that you guys were seeing almost $3 near two for every dollar near one for in your Threed for every dollar in your one is that still trend in sort of in line or what's changed there.
I think shorter answer is yes, it's still trending.
Sort of as you've seen historically I think what you saw NDS one with the 2008 to court in general they were growing actually a little faster.
So I think that's what you see.
Impacting our current Dubner are those 2018 customers continuing to fall to try to previous codes.
Got it and then secondly, I think you guys touched on this that you're on track for year end sales higher gold I think you commented last quarter that you're looking to you and your 60, a quota bearing reps on is that still to go and can you share where you guys are at now.
That's still our goal, we're sort of running fast and furious trying to keep up with a goal and we'll share where we are in our next quarter in terms of where we end up.
Okay got it great. Thanks.
Thank you.
Your next question comes from a line of Jeff capping from Stifel. Your line is open.
Hey, guys. Thanks for taking the questions just a quick one on on the enterprise customer growth or just the absolute number of net adds was down a little this quarter relative to the last is just curious you have any additional color on that it's just a reflection of I think we'll seasonality and just trying to figure out how to think rather growth of enterprise.
That was going forward on a quarterly basis.
Yeah, I mean, I think like a lot of these metrics just given the size I think you have to look at them over a LTM basis, rather than sort of a quarter to quarter basis, We're really happy with the continued trend of customers growing in fact, we're seeing actually the acceleration of customers ramping to that enterprise class faster than historically I wouldn't read in the same.
I wouldn't read too much into that I think you have to look at this really over a longer period of time.
Seasonality.
Plays into it to some extent, but I I think overall, it's a healthy growth in you'll continue to see healthy growth, but there will be some variability.
Got it thanks.
But from thinks the question.
And there are no further questions at this time mystery Drillers I turn the call back over to you for some closing remarks.
Thanks, everybody for joining us on our Q3 call we shall see hopefully many of you on the Investor Relations Circuit and I believe next week, we will be.
At the Needham Conference.
In New York, So we hope to see somebody else thanks very much.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.