Q1 2020 Earnings Call
Good afternoon. My name is Christina and there will be your conference operator today at this time I would like to welcome everyone to the Fastly first quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise.
The speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star Oh by the number one on your telephone keypad. She would like to withdraw your question press. The pound key. Thank you I would now like to turn the conference over to Maria Lukins, Vice President of Investor Relations.
Please go ahead.
Hi, everyone. Thank you for joining our first quarter 2020 earnings call, Yes, vastly CEO, Josh Vicki Chief architect and executive Triclosan Archer burden and CFO Adrian learning with us today.
Before they start I would like you mentioned that their journey remotely today more home offices, and we apologize for any technical difficulties with me Hot.
I also want to remind everyone about the format of our call you publish the shareholder letter on our Investor Relations website and with the FCC about an hour ago, We hope everyone had a chance to read it.
The letter provides a lot of detail, we'll make some brief opening remarks and reserve the rest of the time for your question. During this call. We will make forward looking statements, including the 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 could differ materially from those projected or in my during the call. Please take a look at her filings with the FCC entered Q1 2020 shareholder letter for discussion of the factors that could cause our results 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 just.
I mean any obligation to update any forward looking statements except as required by law also during this call. He will discuss certain non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measures are providing 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 is being webcast will be archived on our website. Shortly afterwards with that I'll turn the call over to Joshua.
Thanks Maria.
Hi, everyone and welcome.
Thank you for joining us today discussed or first quarter 2020 results.
Before we dive into the results I want to take a moment to acknowledge the cobot 19 pandemic something that has and is continuing to greatly affect the entire world.
What everyone else, we're closely monitoring the situation and our thoughts are with those whose lives have been fairly affected by cobot 19.
As we collectively navigate these unprecedented times, we it fast we are intently focused on ensuring the safety of our employees and communities, while simultaneously continuing to provide scalable reliable and the most secure digital experiences for our customers.
To protect our employees and their families we shifted to a fully remote workforce on March 1st and expanded sick leave benefits. We also suspended all non essential travel.
Staying true to our Fastly values were also prioritizing the health and safety of our communities. We doubled our open source and nonprofit program to provide $50 million a free fastly services to non profit organizations around the world.
We have contributed to public health organizations fighting the virus.
Lastly, but certainly not least we're prioritizing our customers who rely on fast lead to help protect into liver news connections commerce and entertainment billions of end users around the world our customers content has never been in higher demand as more people are staying at home and we're proud to be their part.
Sure in reliably and securely deliver in it.
To ensure the health reliability of our network, we applied additional resources to increase monitoring refining capacity planning and add redundancy to our supply chain or network is designed to handle spikes in traffic and continues to perform flawlessly.
We're very confident in our underlying business model the structural changes, we anticipate coming out of this pandemic help our business in the short and long term.
We remain confident in the long term efficiency of our business model and we anticipate we will continue to see leverage as we grow.
Now turning to results.
We delivered strong first quarter results with continued top line growth generating $63 million in revenue up 38% year over year.
We continue to see strong customer adoption of our edge cloud platform and security products by both new and existing customers across multiple verticals.
Our enterprise customer count grew to 297 up from 288 last quarter with average enterprise customer spend also increasing to $642000 up from $607000 in the previous quarter.
This resulted in enterprise customers generating 88% of our trailing 12 month total revenue up from 87% last quarter.
Existing customers are continuing to rely on us more as reflected in a consistently strong dollar based net expansion rate of 133%.
We also continued to demonstrate the stickiness of our platform as reflected in our new metric net retention rate, which was 830%.
Additionally, we are seeing the results from the investments that we made in 2019 in our demand generation sales and marketing teams, which is also reflected an increase total customer count of 1837 up from 1743 last quarter.
As I touched upon in the shareholder letter fast lease platform is playing an important role as we continue to operate in these uncertain times.
As social distancing measures increased over the March period, we continue to see increased traffic across the internet and our platform, which certainly provide some additional boost to our results, but more than anything our first quarter results were driven by Fastly strong business fundamentals and the quality of our offerings, which we believe we'll continue to track.
The best of the web.
Lastly is the platform of choice for innovators, we're partnering with the most technologically advanced in creative companies, who we believe well not only weather the storm, but we'll continue to thrive in this environment.
Companies are increasingly recognizing the importance of digital transformation not only to survive. During these uncertain times, but also for long term success.
We are seen this trend accelerate and evolve we believe we are best positions to partner and grow with these companies as they look for a trustworthy and modern platform.
For these reasons.
We are even more inspired as we continue building and investing in our offerings and network.
More of our customers are using computer to edge through the beta program. We've also been learning from them and are inspired to see the variety of innovative use cases that were enabling.
The feedback, we're receiving enables us to integrate and improve the product in order to drive further transformation at the edge.
We're on track and expect to further expand the availability of computer edge in the second half of the year.
We're also continuing to adapt our modern network to meet the new demands of computed edge.
We want to keep being as efficient if not more as you've been in the past.
When I stepped into the role of CEO in February we were just starting to comprehend the magnitude of covert 19.
It was not the challenge I expect it to face during the first few months.
What I can sincerely say that the challenges we're facing our bringing out the very best in Fastly as well as our community 'cause it's never been clear how instrumental our platform is in making internet and People's lives better.
Our first quarter results and guidance reflect that fastly is uniquely positioned to empower our customers and we'll continue to drive growth as we all whether the current storm together.
Before I hand off to a drill to walk through our financial discussion I want to touch upon a leadership transition Wolfgang mass Berg Fastly SVP of global sales and field operations will be departing from the company in November 2020 to pursue personal passions.
Well thats been a huge part of Fastly for the past four years and we're grateful for everything he has done.
As of the Middle of June I will directly oversee global sales and field operations with support from Wolfe to ensure a seamless transition.
During this transition I will evaluate what leadership mix is required for families next phase of girls.
With that I will turn it over to Israel.
Thank you Joshua and welcome everyone. We appreciate you joining during these challenging time everyone's remained healthy and safe.
Josh mentioned vastly had a strong first quarter as reflected in our robust results in 2020 guidance, which I will talk about him a little more detail shortly.
Before we moved Accuen went to briefly touch upon some of the key financial results.
We generated 53 million in revenue, representing 38% year over year growth.
We also continue to deliver a healthy gross margins, we continue to pursue leverage opportunities in the business as we scale.
GAAP gross margin was 56.7% for the quarter consistent year over year.
Non-GAAP gross margin, which excludes stock based compensation, what's 57.6% for the quarter up from 57% in your prior.
As we've said in previous quarters or gross margin can be impacted by the time in the personnel and infrastructure investments as well as a seasonal ramp of usage you request by customers on our platform.
That being said.
The current economic uncertainty, we believe we can continue to drive gross margin expansion next quarter and overtime.
We ended the quarter with 187 million in cash restricted cash and investments in marketable securities.
Please have a strong balance sheet and liquidity as we navigate the economic environment.
We also continue to make progress on our path towards profitability.
Our results and guidance reflect the efficiency of our platform and modern network design, we will continue to identify opportunities to drive operating leverage as their network skills and pursue sustainable growth.
Although macroeconomic conditions aren't flux, we have never been more confident about the demand of our platform and the continued growth of our company.
That's why we're raising guidance for the full year 2020.
Beginning first with the second quarter, we expect revenue in the range of $70 million to $72 million non-GAAP operating loss in the range of minus 2 million to breakeven.
Non-GAAP net loss per share in the range of minus two cents to breakeven.
For the full year 2020.
He said our revenue guidance range to 280 to 290 million from 255 to 265 million.
Non-GAAP operating loss range of.
And it's 20 to minus 10 million from a lots of minus 43, somebody 33 million and non-GAAP net loss per share in the range of minus 15 cents to minus eight cents from minus 43 to minus 32 cents in.
In closing, we believe we're well positioned to execute during these challenging times.
The superior edge platform and product offerings, which are starting to diversified customer base continues to innovate.
We're also strategically investing in our network computed edge and security offerings that will continue to power our future success.
I'll turn it back to the operator to take your questions.
At this time I would like to remind everyone in order to ask a question.
Please press Star then the number one on your telephone keypad <unk>.
We'll pause for just a moment to compile the acuity roster.
Your first question is from Jeff Van Rhee from Craig Hallum.
As I said.
Great. Thanks for thanks for taking my questions guys Wow, what a quarter hugely impressed of here. So a couple of questions for me maybe Josh we're just starting with the covert impacts can you talk about the the revenue strength.
In the quarter and in particular in the guide you know sort of segmented what are the relative drivers on the relative on the on the revenue upside.
Sure Hey, Jeff Thanks to the question.
You know I think that in order to understand the cobot impacts really have to step back and say Q1 was really only impacted for the first two last two weeks of March right. So in Q1, we saw a couple of weeks of this and I think that had been packs all the way through obviously the financial statements I think that we there are two phenomenon is here the first is.
Colgate, obviously as we force as people have been forced home the work from home shot from home play from home learn from home and frankly obsessed from home elements are all real and they're increasing the real thing that we saw is that school closures was actually the largest impacting archer did some great work on on pulling this out.
But as we were looking at what was actually happening we published a blog post on that so we know that there's an elevation. There I think when you look at our customer base. What you see is we are the platform for innovators I said that earlier, but do you think about you know slacking working from home you think about shopify and shopping from home or interest you know plane from home or I Watch My Kids on Khan Academy.
Learn math all of those experiences are from the most innovative companies those who have adopted adopted digital transformation. So we have one theme here, which is those digital transformers, those who are ready or have certainly seen an escalation I think we're going to see a continuation of that we definitely have.
The change in how that's happened over this period and I think a continuation there's another element here when you see this in the total customer growth and you see that our marketing efforts our work explaining what innovation can happen on a modern edge cloud, we're starting to see the impact of that and so I think you're.
Seen another phenomenon, which is at the same time is we are in coated. We also were are seen the impact of the marketing investments and new customers. Realizing they have to digitally transform quickly and you can't digitally transform quickly when you actually can't control or work with your system, where you have you know.
Average amounts of pro serve that have to go into that where as you know as a system built by developers for developers.
We're uniquely positioned to capture that inspiration and to serve the best of the web.
<unk>.
I'm very helpful and and I guess, if I could shift gears the computed edge.
You certainly called that out in your prepared remarks somebody innovation and unique innovative use cases that you've seen play out there can you put a finer point on that in terms of how many betas when it does GA, how you sort of put up some bounce around expectations on revenue and margin impact maybe just flesh out computer.
Computed edge a bit more sure we called it out on because obviously you know the core of what we have always broad is to allow developers to innovate and computer to edge as the next step in maintaining our significant advances in that market. So I'll answer a few dozen I'd love to pass it to Archer to give you some.
Examples of that but let me let me touch on a few of them, we're well on track.
We have said a in the past and continue to maintain that we're moving more aggressively through that beta and into the L.A. phase a limited availability phase this year and this will have a revenue impact next year a in a in a in a way that we'll be able to quantify and speak to I think from a margin perspective, you know this.
This is this the high margin side of the business when you can move.
Application logic from your central cloud or your data center into the edge to have it'd be more scalable more performance more secure that is the high my highest margin side of our business. So we definitely see it having an impact there I think what's really exciting about the last.
Four months five months of this is to see the innovative use cases and archers been very close to that so archer a couple examples there might might help flush that out for yet Jeff.
Hi, Jeff Thank you Sarah.
Nice to speak to all of your.
Yeah. The use cases were seeing no ranged from like a couple of this a different area.
And then one going Oh, no kind of there's really no. He can meet the seasonally it wasn't so if you want to become a year has to do <unk> digital encryption, signing and trying to protect hometown.
And ER.
Content and applications from attacks.
Uh huh.
More smarter at the edge to not letting that traffic go all the way back.
Same around off indication identity.
We're also seeing.
And did a loss protection.
Solutions that people are or exterminating with.
Well, that's when you talked about before which has to do it.
In a much more personalization and yet again.
When we when customers personal lives they drive more revenue to drive more engagement.
And it's always been is pushing forward.
Depomed you guys were issued late so then it gets smaller and it's pretty good flow are you doing some engagement and so customers are really eager to move more of that personalization and were all up it as close as easy as possible.
Very helpful. Thanks for taking my questions guys and congrats again, thanks, Jeff.
Yeah.
Your next question comes from the line of Jonathan Ho from William Blair. Your line is open hi, Good Oh. Good afternoon, Let me Echo my congratulations as well one thing that I wanted to understand a little bit better is that historically, you've had some revenue tied to live streaming events and with some of the challenges around code.
And can you maybe quantify for us on what those impacts look like and.
Yeah, well, we'll start there.
Thank you Jonathan Thank you for the congratulations obviously, it's a with mixed emotions. Because this is a difficult time for everyone. You know I think it what we have been very clear I think in past earnings calls and you know the business very well is that we don't rely.
On being an event driven business switching we've said in the past we don't go build capacity just for events. We you know we have always maintained a really healthy balance here I think one of the phenomenon that we're seeing.
In this you know work from home play from home <unk> shop from home World.
It although there aren't the same you know live events, especially on the sporting side that we would have seen we are continuing to see live linear. So other live linear examples continued to be important for customers and and so you know because we haven't relied on those I think the impact to us compared to others in the space.
It's obviously very different but we all are because we are the platform for innovators and we served the most valuable content. The most valuable content is the or is really the content that's being consumed the most as people are sheltering. So we have seen over.
Overall, a growth in that area of the business notwithstanding the lack of traditional live events I think that just speaks to the the exposure that we have more than anything.
Got it and then just relative to pricing can you talk about whether you've seen any sort of benefit or pick up on you know just given that you have a in a capacity put into place.
The weighted to co bid or otherwise and in terms of your ability to maybe you expect better pricing in this environment.
Sure I mean it. This is this is a early obviously an early days I think we're seeing a really interesting phenomenon than the and I alluded to it earlier, which is.
As organizations try to grapple with this new reality, they realize that digital transformation and we all know that that's a.
Codeword euphemism sort of story art, but what it really mean, just go faster and and and adapt and innovate. We're seeing this trend where organizations who are perhaps on the legacy provider realized that the speed at which they want to go can't be enabled by an army of proserv people can't be enabled by technology can configure yourself.
For integrated into your development environment or that isn't ready for the enterprise and so actually one of the things that we're seeing I think and again. It's early days is the special attributes that we uniquely bringing to the market around our ability to do you know application logic in computer at the edge our ability to have everything.
Be transparent be a product that feels an acts like your own something you can build directly into your enterprise you know see I see the environments all of those things allow us to be uniquely position and we've seen some examples over the last six weeks you know some protracted negotiations that have gone on that have just.
That up dramatically price is not the underlying issue.
And neither or some of the terms because organizations that want to be the platform of a you know at to innovate ultimately really look at the market and don't don't feel lot of a credible choices. So I you know it's early to say, but I think it's.
Our unique value proposition is showing up pretty strongly in terms of abating any any price pressure that might might have you know might exist in the market for at least from our perspective.
Thank you.
Your next question comes from Brad Zelnick from Credit Suisse. Your line is open.
Great. Thanks, so much and congrats on the strong momentum and being there to power. So many of the digital experiences we've become only more dependent on during the last couple of months, Josh maybe for you just as we try to understand you know the demand and Capex dynamic.
Our next that we're seeing here in the numbers in and that you've spoken to where you would all constrained from a capacity perspective in Q1 is the pandemic. It in any region and can you talk about where the average utilization of the network was in March maybe compared to prior months or even a year ago and and how is utilization.
Been since then.
Sure Let me, let me answer at the high level in that Archer has been very deeply involved in some of this ah So I'd love to get his perspective on this as well I think you know what you see in the Capex numbers. Obviously is is that a you know we recognize very early that there was something a miss in the numbers one of the one of the amazing things about being.
Yeah. The platform for innovators is that you get a bit of in early warning sign of what innovative companies will do and we saw them at well before we closed our business in March we saw them started adapting and so we adapted so what you're seeing in that Capex number is us being proactive and pulling some of the capex that normally would've been in Q2 up into Q1 in order to.
In order to deal with any particular capacity need you know we've talked in the past about [noise].
Being such a high growth business that we always have to have room on the network and thankfully we have that I think archers, probably in a good position to give you some more insight into the specifics, but ultimately you know we sought early and and we were very well prepared archer any anything else to add to that.
Normally we have had significant growth in usage we've had.
Couple places, but of rone hundred and we kind of wanting to better we've had capacity nearby.
That being able to handle that traffic with auto problem, we did publish the loan payoff.
Yes, I mentioned earlier couple of weeks ago that don't have some of the countries in there that shows load.
But.
Our our general.
It would be on how we want to grow their network and that kind of spare capacity do you want to have because of a rapid growth seven we serve us well, we'll miss it because weve used up some of that.
From a spare capacity.
That was that's why I mean, there that's why we probably for China.
Sure.
And we have not been constrained on capacity to our customers.
Well to do either.
What it did purchase and the passing of your purchasing and asking for like.
One thing Brad I think the Guy you are well familiar with of course is the sort of the efficiency of the network and that certainly has has been a strong part you know our software defined modern network is it's very different obviously than our competitors networks or if a competitor that the entire subset of the competitive network and our ability to do.
The same with you know.
Orders of magnitude less server certainly played into this as well and I think you know that efficiency just continued the gap in that efficiency just continues to build for us.
It's perfect sense to me, maybe if I can just follow up with a quick one for ATRIO Israel Your guidance implies a nice leverage in the business and appreciate your comments on gross margin leverage but more broadly how are you thinking about the path to profitability and your current capital position here has anything changed just given what's going on in the world.
Thanks, Brad and meet generally we still we feel good about our path to profitability sort of pre coded I think we feel just as good about it if not maybe a little bit more confident about it just based on the fact that you are seeing a stronger demand which is reflected.
In or sort of annual topline revenue guidance and filled from from a that's where we are from a cash position were from the profitability position I would say that nothing nothing's changed other than them, India, Phil the incrementally more confident if everything were seeing.
Awesome. Thank you so much guys.
Thanks, Brett.
Your next question comes from the line of will power from Baird. Your line is open.
Hey, guys. This is actually Charlie really got per well thanks for taking my question.
And congrats on a really strong adults.
I'm wondering if you could talk about your exposure since some of the more impacted customer verticals like oil and gas hospitality travel consumer discretionary reserve rough way, maybe to think about what percentage of your customers are in those verticals.
No we don't break that out Charlie overall, it's it's a very small percentage I mean, when you think about oil.
Oil and gas.
Then the hospitality and travel business together, you're looking at small single digits.
Great. Thanks.
I'm also wondering if you could unpack maybe your assumptions in Q2 answer the rest of the year.
In terms of maybe contract repricings or customer non payments or you know things related to.
Some of the customer segments, feeling pressure I know small percentage, but are you baking in some assumptions for bad debt or or contract repricings and things like that.
Sure. Let me go attached at a high level metal handed off to Adrian I think it at a high level you know the fact that we are a platform for innovators in the innovators are seeing success in this market because they digitally transformed and built their businesses for exactly. These moments I think that you know, it's very different profile than you'd see.
And others, but you know like everyone. There is some exposure and April has some some more would have some more insight into that.
Yeah, I think stress right and thanks for answering the question.
Yes at least at this time, we're not seen anything yet into Josh was point.
The majority of the customers that we have on our platform are those innovators are those sort of larger enterprise customers, which makes up the bulk of our revenue.
And so far they seem to be in good shape.
There was a slight uptick India, so, but there wasn't anything.
Certainly from a long term bases at least we can see right now it is something that we continue to monitor.
On sort of a weekly basis databases, but.
But as time went out for anything concerning from from sort of the Q2 perspective.
Okay.
Thanks for taking my question Congrats again on at least from though thanks, Charlie Thank you for best of will.
Well there next.
Your next question comes from the line of Rishi Jaluria.
Hey, Davidson your line is open.
Hey, guys. Thanks. Thanks, so much for taking my questions I'm glad I want to stay mass sets out there.
Two questions I wanted to ask a lot one financial one a little bit more softball.
So on the on the financial side.
The margins.
Nicely, especially with the spike in traffic.
Especially looking at guidance.
I'm going to change you can see and maybe even think about positive next year.
Oh, sorry next quarter.
Just as we think about you know.
Full year, all with your operating margin guidance, how should we be thinking about.
Cash conversion.
In this environment or are there any call smiles on are talking about.
Changing minimum traffic and that man so.
Talking about extending payment terms or anything like that.
Sure age or why don't you grab them.
Sure.
I think in some respects a similar just sort of in the last question you see you haven't seen anything as of late even from sort of the payment terms collection standpoint, but as well as on the contractual terms we have.
Even if you folks and you could probably get those verticals that have asked for some additional payment terms and some of them have asked for some slight changes, but nothing of any sort of magnitude, especially given just let it represents today of our revenue.
That's been a sort of reflected in our current guidance.
Got it and just how should we be thinking about.
Cash conversion relative to where you've got its a non-GAAP operating income.
And whenever you sort of get ends from cash flow sort of ultimately down to the bottom line.
Oh, yes, ultimately trying to think about our cash and I think you know we you've already got into the Capex, but just trying to think of.
I'd say African past side of thing.
Yeah, the biggest driver from sort of the frequent version free cash flow perspective is really going to be driven by the.
Non-GAAP operating or sort of EBITDA like metrics until the extension that we feel like we're getting better there, which you can see in the guidance, we are reflecting more leverage and better leverage that will.
Ultimately drive itself down to free cash flow I think the other thing we're going to continue to monitor is and additional pointed out earlier. If there are any sort of near term impacts with respect to tropic surges. If there is a resurfacing ur cobot matching impacts later in the year that when you do a comfortable we made sort of think about.
On the Capex standpoint, but at least at this point I'm thinking about the leverage coming directly from sort of the operation side of it I don't necessarily see anything major negative with respect to a working capital at this point working capital seems to be in line with what we're expecting.
And then the only other thing could be on Capex side, but at least from what I can tell them, what I can see I still feel comfortable with the 13% to 14% sort of a capex percentage revenue guidance range and I think hopefully that gives you. Some so I'm not I'm perspective on that.
Reshape I'd also add to that that you know we're in the early any of it gigantic market and I think you know our bed on computer to edge and our continued investment in security speaks to that so I think that you know the other side of this is obviously, we're going to continue to invest where in the early innings of this and so there's a there's a balance between those two that you know it.
Bill and I and spend a lot of time talking about but you know there's definitely an emphasis on the investment side as well.
Okay, great that that's helpful.
And then just philosophically clearly you're getting a a benefit from something I stay at home work at work from home all that.
Yeah, and then I think thats bearish on the reflecting the Q2 guidance.
Given that now some places are starting to talk about opening offices are starting to reopen punch the economy in California, which is the first state to do onshore walk down as it is starting to talk about that obviously warm the weather more people going outside how do you think about how you kind of long lasting these benefits.
From social distancing or I mean is there a some of these changes in behavior. It reversible I should it kind of go back to more on a more normalized growth rates I'm pleased to see prequel that just what's the way that you're thinking about this as you all forecast investment business. Thanks sure Yeah. It's a it's a great question, obviously, it say a deferred.
Got to predict a couple one month and a half into this I think you know from a from a from our perspective one of the things that you see when you look at RGB any are the new staff that we brought out around that retention. What you see is that when customers try us they see they haven't they see new world right that this is a platform that is so different faster.
More secure more scalable it just it is a platform from which you can't go back and so I think one of the things that we see in these disruptive times is people taking risks and innovating as we've talked about so when you look at the world that we predict and we certainly hope that we get back to normal world as quickly as we.
Possibly can we do think that there is gonna be some lasting impacts but your seem to phenomenon here. One is that's going to take time, but the other and I think more important phenomenon that you're seeing here is actually the phenomenon of acceleration of digital transformation. So what you're actually seeing as customers that normally maybe would have stayed with the incumbent stayed in a you know.
Pre modern world and antique world actually you're taking the opportunity that change presents to really bring out.
The the.
To really in NAFTA. This form of digital transformation, which is really only possible on our platform and so I do think Oh.
Oh, we are going to see some lasting trends I mean I did my first grocery store order to my House 20 years ago, and you know I didn't do anything for 19 years, and now doing grocery groceries to home and I don't think I'm never going to go back I I'd really like that this happens for me. During this time I think we're going to see patterns like that stay.
But overall I think what we are predicting.
When you look at our story arc for the year and beyond this is just a fundamental transformation and how people look at the roll the edge plays and more importantly, a modern etch.
That's helpful. Thank you so much.
Thank you.
Your next question comes from the line of games fish from Piper Sandler Your line is open.
Hey, guys nice nice quarter hope you're doing it sounds like you're doing pretty well despite the difficult time.
I hope the same for your families and friends just a two related questions. First. So you guys are kind of the newer vendor on the block here or how much of an impact related to covert 19, do you think impacted actually your enterprise sales process, including more so on the security related sales.
Yes, Josh we're here you know.
Obviously early to tell in an enterprise sales cycle as I as I alluded to earlier, we are seeing an acceleration.
Of the sales cycle in certain instances, where customers are realizing they need to innovate.
But and that and that and that goes not just for this sort of delivery content delivery side. It's also on the security side.
So we're seeing we're seeing patterns in both it's early days, so I would I would say.
I'm optimistic.
But you know well, we'll check back with you in a quarter to tell you what what a court what a whole quarter looks like of of covert related sales.
Got it and then keeping on security discussion peers have made moves too on the bought management space and you guys partner in this space with a with a private vendor I guess why do you view it strength through partner here as opposed to on the space when web traffic more than half of it is coming from box today.
Yes. This is it's a really good question in a very important market I think you know if you look at our approach to almost all of the markets. We're in it stems from this developer oriented mentality, which is we think people should have choice.
And you know if you look at some of our investments for example in image optimization or other areas. We do have a home grown solution that we also you know are the backbone and the platform for the most innovative image Io companies in the world and so I think what you will see on the bought side is a similar strategy, which is we certainly partner with a few.
Vendors and overtime to your point as this becomes a male continues to be an important element. We are always considering whether that's something that we should also bring out ourselves I think the point that you raises that it's very important and weve continued to to partner and and invest in that area as well. So you will you know that's that's.
It's a very important area to our customers.
Got it well, thanks, guys and Uh huh.
Good good luck.
Thanks, James <unk> best to you and your family's well.
Thanks.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Next question comes from Jason Graco from Citigroup. Your line is open.
Hi, Thanks for taking my question. This is the opposite end for Walter we heard lots of do as positive commentary from your regarding optical edge platform and so looking out to your revised full year guidance just setting aside what has already been accomplished in Q1. When you look at the remainder of the or the garden seems to imply over $20 million of upside.
So close to 80% operating margin.
So the question People's questions here wanted to what extent is this positive operating leverage uplift to what extent can we ascribe to larger demand for your higher volumes software services and when we tried to translate to that operating leverage into gross margin how much of that she gets parts of gross margin and what factors, we considered or.
Things like more favorable mix efficiency than maybe pricing and I do have a follow up.
Sure I'll take that from a high level in the past that to Israel I think in many ways. All the above we continue to see demand for the higher value products that we offer.
And that.
It's really difficult to separate these from a customer perspective, when a you know when one of the biggest.
Sort of vendors that we've run across for example, one of the world's largest ecommerce platforms that we mentioned in the in the a in the latter comes to us you're not having a conversation that doesn't include security I mean, that's just not a conversation you can have it's not a reasonable conversation to have so I think you know at the outset, we are seeing.
In that customers don't think of delivery in security separately or delivery scaling security separately. This is all one thing. So I think I would start from from that premise and then hand handed off to Israel to sort of talk through some of the other nuances of it.
Yes, it could say drill here with respect to reflecting in operating leverage for the rest of the year.
I'll start first on the gross margin side. So for Q2 I do think we're going to get some incremental gross margin improvement from Q2 relative to Q1 Big reason there as we only had a couple of weeks worth of sort of that revenue and I think just given what we're seeing at the sort of move on March I think we should see a good.
Outcome in Q2 relative to on gross margin now as you get beyond that I think that's where we're taking sort of high level revenue. We're trying to figure out also where we think gross margin will be we talked in the past why we don't guide gross margin generally just because it sort of the ins and outs.
Of request for some bandwidth for usage et cetera, et cetera, but at least on them on them as you go down to the bottom bottom bottom line.
The other thing we're trying to figure out is how how well we'll be able to spend it just how do we make sure that the folks we do bring onboard and recruit a make them effective whether we'll actually be able to do that during this time as we've gone to work from home situation, we've had to sort of rethink a lot of our processes and be thoughtful about that and I think I'm, reflecting a bit.
Only the revenue I think sort of it's almost like the normalized gross margin pattern. We've seen historically and then also accounting for what do we think we're going to build spend and spent probably wasn't.
Thank you and how do you approach hiring for sales and technical rolls into current environment do you find yourself hiring opportunistically or expecting to do so.
Yes, Josh we're here you know it hiring has obviously the environment's changed we can't meet people face to face.
We you know we have many of our groups as you would expect to or who are home and who are taking care of kids are taking care of elderly elderly focus and the rest and their community. So I think the answer is we remain open for hiring we are continuing to hire we are being more thoughtful about the.
Load that that brings to the business and hiring has actually got more difficult a in this environment, but when you're growing like we're growing obviously, that's a you know that's something that we are continuing to invest in.
Thanks, so much.
Thanks, that's it.
Your next question comes from Brad Reback from Stifel. Your line is open.
Great. Thanks very much.
If we think about the from a high level that 25 million dollar guide up for the year, how much would you attribute to covert covert related workloads like you talked about.
Work from home school from home versus where the organic business was running a pre cobot. Thanks.
It really only pick up.
Yeah, Hey, Brad Israel here so it's.
Difficult to distinguish especially given that we're sort of only two weeks into it a lot of our.
If you've noticed our ranges are kind of stuck to where they were before us we applied effectively.
The same.
Methodology that we'd had before and I think as we get more data, we'll get a better sense of how much of this is you know I'm just sort of longer term impacts the covenants as touched off or catalyze how much of this and sort of relatively nearer term.
But I think there's also just the seasonal aspect of normally in the second half of our year, we tend to accelerate a we tend to have.
Folks tend to shop as result of holidays, and especially when we have the fact that you have more of these commerce native ecommerce companies on our platform I think that that benefits as well so.
Again, I think we'll have a little bit more sense of that I think once we get past Q2.
In terms of maybe what the mix and then what at least what we're seeing and then you may see some of the Broncos would be the maybe we'll publish on or maybe talk about an earnings call, but at least at this point, that's kind of a little bit difficult to sort of disentangle. The too I mean, a lot of the what we're seeing here is just based on sort of current traffic pattern.
To extrapolate as best we could and also if you could be back directly from customers in terms of what they're saying.
Great. Thanks very much.
Thanks, Brad Thanks Ren.
Your next question comes from Michael Turits from Raymond James Your line is open.
Hey, this is actually rubber magic on for Michael today, Congrats on the strong results. This quarter I just wanted to follow up on the previous questions. Your full year revenue guide imply for full year, Dod imply strong incremental margins on the 25 million dollar revenue raised I think part of that a lot of that is underutilized Pos server capacity going into <unk>.
Quarter, and you'll have to add a slug of server cost at some point on an income statement perspective, just how should I think about that dynamic and how many more incremental margins look like on a need further revenue upside here. This year are going into 2021.
[noise] trade or what else can swim.
Thanks.
I know, it's not a the other thing I'm sort of sort of add to that it's not just servers you have colo you've got a number of other things that we're going to have to sort of think about as we see what demand were seeing out there as well and overall, we have the companys committed just given our very efficient footprint from server standpoint to continue to drive level.
Now all that being said, we also want to make sure that we can deliver.
The flexibility that our customers are asking us so I think.
It's a bit of Oh thats why gross margin is more challenging the sort of a forecast than anything else, but I think what you're seeing mostly is on the operating margin side again and that really is more from an operating expense side.
In terms of again, the the thoughtfulness and the challenge with actually hired in this environment ramping people.
And our ability to spend both on the sell side and from a marketing standpoint, we do believe we're going to get to a more normal situation that we see before which and we're intending to do that because historically, we've gotten a good return on that investment. So I think not as would be incorporated into that non-GAAP operating.
On a guide for the for the entirety of your.
Appreciate it.
Thank you thanks art.
There are no further questions at this time, Mr. Bixby I turn the call back over to you I.
I want to thank our employees and their families along with our customers partners and investors without whom we could not have achieved a strong quarter and success over the years.
We look forward to connecting with many of you in the near future and hope to virtually see most of you at the upcoming Craig Hallum BAML impaired conferences, we are confident about our future and can't wait to share more with you in the quarters to come.
Thank you.
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