Q1 2022 Fastly Inc Earnings Call
Good afternoon. My name is Lisa and I will be your conference operator today at this time I would like to welcome everyone to the Fastly first quarter of 2022 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 and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question. Please press star one again. Thank you I would now like to turn the conference over to Mr. Vern Etsy Investor Relations at Fastly.
Please go ahead Sir.
Thank you and welcome everyone to our first quarter 2022 earnings conference call, we have Fastly CEO , Joshua Bixby, and CFO , Ron Kisling with us today the.
The webcast of this call can be accessed through our website <unk> dot com and will be archived for one year.
Also a replay will be available by dialing 870, 702030, and referencing conference I'd number 70 543239 shortly after the conclusion of today's call.
A copy of today's earnings press release related financial tables, and Investor supplement all of which are furnished in our 8-K filing today can be found in the investor relations portion of <unk> website.
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.
The call.
Further information regarding risk factors for our business. Please refer to our most recent quarterly report 10-Q filed with the SEC and our first quarter 2022 earnings release and supplement for a discussion of the factors that could cause our results to differ.
Please refer in particular to the sections entitled Risk factors, we encourage you to read these documents.
Also note that the forward looking statements on this call are based upon information available to us as of today's date.
Or take no obligation to update any forward looking statements, except as required by law.
Also during this call we will discuss certain non-GAAP financial measures unless otherwise noted all numbers, we discuss today other than revenue will be on an adjusted non-GAAP basis.
Reconciliations to the most directly comparable GAAP financial measures are provided in the earnings release and supplement on our Investor Relations website.
These non-GAAP measures are not intended to be a substitute for our GAAP results.
Before we begin our prepared comments. Please note that we will be hosting our Investor Day next week in New York Stock Exchange.
Thursday May 12, we will also be attending re conferences in the second quarter.
The virtual Craig Hallum Institutional Investor Conference on June <unk> with Bank of America 2022, Global Technology Conference in San Francisco on June seven and the William Blair growth Stock Conference in Chicago on June eight.
We will be releasing further details regarding these events in the coming weeks.
With that I'll turn the call over to Joshua.
Joshua.
Thank you Vernon hi, everyone and thanks for joining us today.
Before we jump into the quarter I want to address another announcement, we made this afternoon.
As you may have seen I will be stepping down from my role as CEO and from the board. After a successor is appointed.
<unk> begun a search for my successor.
Do whatever I can to ensure a smooth transition.
I'm extremely proud of everything that we have accomplished including enabling the best of the web taking SaaS Republic executing our acquisition of signal Sciences and positioning ourselves for long term success.
It has been an incredible journey, but I know that there is much more to come and much more to be achieved in the next phase of the business.
As I reflect on this time and where we are in fast lease history as well as my own journey and desires and through my discussions with my fellow board members, although where we want to take faster in the future. It became clear that now was a natural time for me to step back and let someone else take the reins someone that can lead the company through the next phase of that.
Business.
We have a large enterprise customer base.
World Class experienced leadership team and a robust product roadmap. We are differentiated by delivery business is one of the fastest in the World and award winning security business at an edge cloud platform with unrivaled flexibility and Programmability.
It sounds simple to say, but in reality Fastly is where it is because of our differentiated approach. We have built a platform that is highly programmable agile secure and fast empowering developers to innovate with ease and scalability.
This in turn translates to performance a critical indicator for our customers.
As the board searches for fast. These next leader a process and as I mentioned has begun we are committed to finding a candidate that can help build upon the solid foundation.
As you may have seen from the press release, we issued this afternoon.
Will remain in my role until my successor has been brought in to ensure a smooth transition.
<unk> SaaS fleet for long term success is my number one goal throughout this process.
With that I will move on to talk about the quarter and then we'll invite Ron to provide some more color on this quarter's results.
Then we'll take some questions, which due to the limited time, we have we ask that you focus on the results and the outlook.
In the first quarter of 2022, we reported record revenue of $102 3 million, representing a 5% quarter over quarter organic growth.
Not only did this exceeded the top end of our guidance range of $97 million to $100 million.
But it was also our first quarter revenue in excess of $100 million.
I'd like to congratulate the Fastly team on this exciting milestone.
Our customer retention and growth engine remains strong.
<unk> was 115% and our <unk> was 118% in the first quarter.
Our average enterprise customer spend was $722000, representing a 3% quarter over quarter increase.
Our total customer count in the first quarter was 2880 of which 457 were enterprise customers.
We made good progress on our total customer count, adding 76 customers in Q1 up from 56 customers in Q4.
One of the key initiatives, we have undertaken in 2022 is the deployment of our new architecture for key Metro regions.
As previously discussed this will greatly increase our storage capabilities by emerging entire regions into one storage unit, thus cutting duplication.
This does require the duplication of new sites with new architecture over the year.
One of the areas, where we can gain gross margin leverage is doubling down our efforts on server efficiency with this new architecture, we have always prided ourselves on how closely we are tied to hardware and software together and we believe it is a key differentiator for us.
Artur Bergman, our founder and Chief architect will speak more to our plans at our Investor Day scheduled next week.
It is important to note that the pandemic has altered the landscape for hardware procurement and the availability of the types of data centers, we rely on it.
It is not uncommon to have lead times in excess of 80 weeks for key components to headquarters cut or canceled and to have long wait times to get into the most connected data centers in the world.
We made the decision to get ahead of these constraints by pre buying and deploying capacity in key markets. This.
This has left us with some underutilized capacity in some markets and as we have discussed previously this has had a drag on gross margin.
With no end in sight to constraints on the hardware and data center side. We feel we are prudent to take these steps and we're trying to minimize the short term impact they are having by redeploying assets where possible.
The tenet family remains United in our common mission, which is to fuel. The next modern digital experience by providing developers with a programmable secure and reliable edge cloud network that they adopt as their own.
Central to this common mission is the key role developers play in our journey and the new and expanding power of distributed edge compute and security.
As they use our trusted platform they become more interested in its features and that keeps them engaged and retained as customers as they scale.
To reinforce this effort we've acquired span out announced in late Q1, a platform that creates a frictionless environment to build and scale real time and streaming Apis.
We will be integrating the fan out technology into our compute at edge platform and launching a beta soon.
Computed edge allows us to acquire technology and rapidly releases.
Our delivery products, which are part of our network services portfolio also received strong analyst validation.
He was recognized as a leader in the first quarter by IDC market stake for the worldwide content delivery network services. We earned recognition due to our network size and scale, our comprehensive product portfolio excellent customer service and our modern network offerings.
Reinforcing these efforts in the first quarter, we announced our new computed edge partner ecosystem designed to help customers build a variety of edge computing use cases partnerships.
Partnerships include Mark key integrations with the top three cloud providers Margaret our tower, our chief marketing officer will be sharing more details at our Investor day.
We are accelerating faster lease product delivery in the first quarter. We had 11 releases in total compared to three in the fourth quarter of 2021.
We've launched our new global persistent object store for compute functions with SaaS reads and writes from both the edge or via API developers can store control and cash data to reduce origin dependency and unlock new use cases.
Also in the quarter, we deployed HCP, three and quick which are now available to our customer base.
The technology behind <unk>, three is a new low latency, reducing reliable and secure Internet transport protocol at all.
Modern web performance with low latency built in encryption and seamless developer platform integration.
We also launched the Absorbability dashboard, which will bring delivery security and application metrics into one interactive window the.
The dashboard provides per second visibility and historical reporting on the performance and activity of our customer services and applications in a single customizable dashboard.
Each of these releases also represents another touch point with our developer base and another opportunity for revenue growth Laxmi Sharma, our chief product and strategy officer will be providing you more details on our product roadmap next week at our Investor day.
All of these new features would never reach our enterprise developers without our network services business fueled by our lightning fast delivery network.
At the beginning of the year our worldwide network remains consistently faster in the U S and Europe than our largest competitor in most countries and regions as measured by independent real user data.
Our significant advantage in performance validates our unique architecture.
Performance paired with security is one of the most critical decision making metrics for our customers.
That is why you will see us winning business with highly regulated customers like a digital lending platform for fortune 100 financial institutions.
They need to configure ability at a per endpoint basis for highly regulated multi tenant customers, who demand speed, while maintaining stringent security requirements.
Size of our network matters as it opens up opportunities to us that are close to others.
In the first quarter, we signed a fortune 1000 multinational mass media and entertainment conglomerate by working closely with our partners at Google Cloud.
Ultimately chose fastly for our token authentication, while further improving their performance across Latin America.
The first quarter also brought strong analyst validation for our security product portfolio.
For the fourth consecutive year Fastly was recognized as the only vendor named by Gardner's peer insights customer choice for web application and API protection.
Lastly, as Nextgen WAF received an overall exceptional rating for web application firewall solutions among customers that have purchased implemented and used a WAF.
Last quarter, we deployed the industry's first and only unified WAF built on the compute at edge platform.
This quarter, we are thrilled to continue our momentum in security.
We announced our support for arm based environments at scale. We are the first and only WAF that enables customers to quickly secure their apps and Apis using any combination of arm and other processors is a major step forward in securing multi cloud environments.
We've also introduced <unk> inspection with API attacks, becoming the most frequent attack vectors, we wanted to provide a customized and out of the box graph <unk> inspection that will detect inspect and block attacks that can target <unk> Apis.
<unk> can now customize this tool or choose a simple out of the box option with no additional configuration on their part.
Our security business continues to shine, a publicly traded identity and access management application with a global presence adopted our next generation WAF for its ability to offer isolated environments. They wanted to provide customized security for both their platform and their customers.
The team is excited about the opportunity that lies ahead of us in 2022, we look forward to sharing with you further updates on our success at our Investor day.
To discuss the financial details of the quarter and guidance I will now turn the call over to Ron Ron.
Thank you Joshua and thanks, everyone for joining us.
Today, I'll discuss our financial results and business metrics and then review our forward guidance note that unless otherwise stated all financial results in my discussion on non-GAAP basis.
Total revenue for the first quarter increased 21% year over year to $102 4 million exceeding the top end of our guidance of $97 million to $100 million.
In the first quarter revenue from signal Sciences products with 12% of revenue, 59% year over year increase or 39% increase after purchase price adjustments related to deferred revenue are reflected.
Our dollar based net expansion rate for Denver was 118% down slightly from 121% in Q4, 'twenty, one and our trailing 12 months net retention rate was 115% down slightly from 118% in the prior quarter.
The majority of this decline was driven by last year's outage related to impacts from a single customer, which we have previously discussed.
As you can see from a very low churn of less than 1% our customer retention dynamics remained strong.
As of March 31, 2022, we had 2880 customers of which 457 were classified as enterprise.
Those customers with an excess of $100000 revenue over the previous 12 months.
Our total customer count grew 17% over the year ago quarter and in the first quarter. We added 76, net new customers and 12 net new enterprise customers compared to <unk> 56, and 15, new customers respectively in the prior quarter.
Accelerating our customer acquisition is one of our key goal is the sales team continues to ramp and we increase our marketing activities around lead generation and brand awareness Bret.
Brent shirt, our chief revenue officer, and Margaret <unk>, Our Chief marketing Officer will share more of our plan at our Investor day.
Enterprise customers accounted for 89% of total revenue on a trailing 12 month basis.
With your contribution in Q4 and increase their average spend 722000 from 704000 in the previous quarter, representing sequential growth of 3%.
<unk> also demonstrated our strong customer retention.
Our top 10 customers comprised 33% of our total revenues in the first quarter of 2022 in line with the contribution in Q4 2021.
Turning now to gross margin.
Our gross margin was 52, 6% in the first quarter compared to 55, 8% in the fourth quarter of 2021 as.
As we discussed on our Q4 earnings call, we anticipated our gross margin would decline a couple of hundred basis points for the full year 2022 due to the rollout of our next generation architecture. The continued investment in our network to support growth and accelerated investments to proactively address supply chain constraints.
No.
Tonight, we will continue to incur costs on the existing sites until the transition is complete.
In the first quarter, we transitioned several sites and we will transition more sites in the second quarter.
We expect the older duplicate sites to be fully decommissioned by the end of the year.
As Josh will describe we Derisked our network expansion plans by accelerating the purchase and deployment of equipment give.
Given the volatile dynamics occurring in the semiconductor industry and the supply chain at large we believe this was a prudent decision.
We continue to invest in infrastructure and capacity and expand into new markets to support growth and new customers.
In some locations. This has resulted in underutilized capacity.
In the quarter, we did not see any acceleration in price compression and we continue to expect the mix of our product offerings in security and compute to be a strong gross margin tailwind in 2023 and beyond.
We are very focused on gross margin and the opportunities to drive leverage in our network.
We look forward to providing more details on these dynamics and the changes we are making to improve the efficiency of our network investments during our Investor day.
Lastly, looking at full year 2022, we still expect gross margins to be down a couple hundred basis points with Q2 gross margin relatively flat with those in the first quarter and to improve by year end.
Our operating loss and net loss per basic and diluted share for the first quarter of 2022 were in line with our guidance.
Operating expenses were $71 6 million in the first quarter up 12% over Q1, 'twenty, one due to increased headcount across the organization.
Attracting talent has been difficult we are pleased with our success in attracting high quality talents.
With new leadership in place, we expect expense growth in 2022 will be higher in the first half and growth in operating expenses will be lower in the second half of the year.
Our operating loss for the quarter was $17 7 million and our net loss was $18 million 15 loss per basic and diluted share compared to $11 7 million and.
<unk> 10 loss per basic and diluted share in Q4 2021.
Turning to the balance sheet.
We ended the quarter with $1 billion in cash cash equivalents marketable securities investments, including those classified as long term.
Our cash capital expenditures were 6% of revenue in the first quarter.
Our capital expenditures include capitalized software this along with our foundational technology drives efficiency and leveraging our network, which is a competitive differentiator.
Spine, our transition to our next generation network architecture and acceleration of some investment due to supply chain constraints, we expect our capital expenditures in 2020 to remain at 12% to 14% of revenue.
I will now turn to discuss our outlook for the second quarter and the full year 2022.
I'd like to remind everyone again that the following statements are based on current expectations as of today and include forward looking statements.
<unk> results may differ materially.
We undertake no obligation to update these forward looking statements in the future except as required by law.
Our second quarter and full year 2020 outlook reflects our continued ability to deliver strong top line growth the improved customer acquisition and expansion within our enterprise customers driven in part by new and enhanced products.
Our revenue guidance is based on the visibility that we have today.
Given our usage based business model, we expect to gain additional visibility to our annual guidance as the year progresses.
Historically, our first and second quarter revenues are generally flat with revenues increasing in the second half of the year.
As a result for the second quarter, we expect revenue in the range of $99 million to $102 million representing.
Representing 18% annual growth at the midpoint.
We expect a non-GAAP operating loss of $21 five to $18 5 million.
The non-GAAP loss per share of <unk> 18 to <unk> 15 per share.
For the full year 2022, we are increasing our prior guidance by $5 million to a range of $405 million to $415 million.
We expect our non-GAAP operating loss of <unk>.
70% to $60 million and a non-GAAP net loss of 62 to <unk> 50 per share unchanged from our prior guidance.
Before we open the line for questions, we would like to thank you for your interest and your support and vastly and look forward to seeing you at our Investor day.
Operator.
And once again, everyone. It is star one if you would like to ask a question today.
We will take our first question from Frank Louthan Raymond James.
Great. Thank you, maybe just walk us through a couple of the puts and takes in the gross margins and how we should expect that to progress to only be.
A couple of hundred basis points for the year and then secondly, you had a competitor stated recently that the rate of growth in traffic growth has slowed.
That theyre seeing are you seeing anything like that what sort of sort of the traffic trends that you are saying hey.
Hey, Frank It's Joshua here, let me take the traffic question I'll hand, it over to Ron for the gross margin side.
<unk>.
We are seeing across the prints that are happening on the street, we have definitely seen change in growth rates for some industries, it's going up for summit is going down and I think that.
Thankfully for US we are exposed to both sides of it in general the industries that we're hearing our competitors talk about slowing down or industries, we don't have a lot of exposure to so.
On the on the streaming side as you know we've talked about this many times, we don't take the commodity stream business in the areas of streaming that we do work in those are the high growth areas. The high value areas and we don't have a lot of exposure.
We are rarely going to sort of the number one or number two provider. There are some exceptions, but in general we have a tremendous amount of room to grow in that because we've been we've been.
Dave about who we work with them, we don't work across the board so.
General I wouldn't see Fastly as a good proxy for some of the overall trends in the industry because of how selective we have been in some of those industries, but unquestionably in industries. For example, like travel we're absolutely seeing an uptick so I would say we are seeing both sides of the coin, but we have much less exposure I think to the generally commoditized.
Side of the business, which is what a lot of the other vendors are speaking to runway you take the gross margin questions. Yeah. So I think let me start with kind of how we see the year then I'll talk about the dynamics driving it so I think as.
As we said we expect for the full year. So it would be on a couple of hundred basis points that plays out over the course of the year with Q2 being relatively flat with those in the first quarter and then we see improvement in gross margin in the second half towards the end of the year.
The biggest driver to the change in dynamics really as that rollout of the next generation architecture.
As we talked about in the past as part of this rollout we continue to incur costs on the existing sites. So in the first quarter. We transitioned several sites will transition a few more in the second quarter and then as you get into the second half we expect the older duplicate sites to be fully decommissioned by the end of the year. So that's going to drive some reduction.
Our cost of revenues in that second half.
The other driver if you just look at historically kind of how our revenue plays out we typically see an acceleration in revenue in the second half that drives an increase in utilization and so we typically see an increase in network utilization and that also drives.
An improvement in gross margin. So those are the two biggest drivers I think the other.
Drivers that we've seen is we haven't seen as Joshua said any.
The acceleration of price compression.
Our mix.
Product didn't really change materially from quarter to quarter, and then we continue to see strength in our security product, which is a.
A positive tailwind to our gross margin.
Thanks, Greg Thank you very much.
Next we'll take a question from Sanjay <unk> Morgan Stanley .
Thank you for taking the questions I wanted to revisit the gross margin topic once more.
If I could I guess in some sense I'm trying to understand maybe just the magnitude of the sequential decline in the sense that if I look at sort of a second derivative growth on the network capacity it seems like that.
Slowing or starting to improve on the network capacity side on the expansion rate side in the June quarter, net revenue retention improved decently versus versus the prior quarter. The sequential revenue growth improved versus last year year over year growth improved versus last quarter.
It would seem to me that like there'll be more sort of utilization or more of absorption of some of the.
Some of the.
Sort of steel capacity I'm, just trying to understand like the magnitude on the gross margins this quarter versus versus prior.
Yes, sure. So let me let me let me take the first sorry, Ron Let me, let me take the first section I'll hand that off to Ron I think in general.
As you pointed out the growth in the customer base is good the gross and the network expansion is good but we're also growing the network Mr. Ron can kind of speak to those those two things racing ahead as I talked about in my comments the general sense.
We have in the industry is that we're in a lucky position to have the access that we have we think thats going to come into good really good use in the latter half of the year, but I think youre just sort of seen two things race ahead, and once <unk> had a little bit higher faster than the other if.
We saw a difference in the pricing environment or a difference in the mix that would be different but thats really the main the main driver, but Ron why don't you expand on that.
Yes, the only thing I would expand on that yeah. Thanks. Joshua is in addition to what we saw around the new architecture is we thought we did accelerate some of the purchase and some deployment of equipment given kind of the bulk of the dynamics, we saw in the supply chain at large and so some of that deploy.
Deployment that we did actually increase capacity ahead of demand and so we did see in some location. Some underutilized capacity as a result of accelerating some of the deployment in response to the supply chain. So that's probably the additional.
Factor on top of the other drivers that we spoke about earlier.
Understood and then on the comment on.
On pricing and sort of being in line with historical trends or no sort of incremental sort of.
Pricing headwind, if I were to think about quantifying that pricing impact in some sense you have the customer base expanding sort of 15%.
Customer base overall is growing 17% sort of implies kind of low 30% growth, you're posting about 2021% growth, which implies kind of a high single digit low double digit sort of pricing headwind does that sort of the right way to think about.
What youre seeing on the pricing side.
Yes, I mean from a pricing dynamic perspective, we're in a number of different markets and I think it's important to sort of carve those out when you look at the security the security enterprise compute side of our business I mean, you're really that's not a price compressing market in a meaningful way I think.
Where price compression has traditionally status on the streaming side for the most part and in that market. It's interesting thing things are changing or the large companies that we work with are also buying hardware there they buy data centers they understand the inflationary costs inherent in all of those.
<unk> in the environment and their own I was in a recent conversation with large customers said you know normally would come back and ask for.
A little bit of discount for some more.
If we brought you more capacity this year, but we understand the pressures you are under we understand that and we think we're going to hold off till next year. So.
I would say in general the math is in line, but overall, we're actually seeing with the kinds of partners. We work with and I think that's important because the kinds of partners. We work with are the ones whose.
Revenues are also going up who is viewership is going up who has a high value content. The organisations, who really care about quality. These are very strong partnerships and they want to see us be successful I mean, they really value. What we do so I think the dynamics are similar to what you've described but overall I'm seeing the environment change even though.
Last few weeks, where people are really understanding the pressure.
That everyone's under trying to get these these components out into the field and the inflationary costs around them as I said I think we've been very prudent in getting ahead of this and then I think a lot of the calls that you are on and others are on are hearing about.
Chip shortages, we're not we're not saying that at all I would say, we're sort of in the opposite category, but we're confident we'll get utilization.
Super helpful. Joshua and best of luck on your next endeavor.
Thank you very much.
Next up we'll take a question from James Fish Piper Sandler.
Hey, guys. Thanks for the questions here I wanted to inquire about the non top 10 enterprise customers really good strength with top 10, but it looks like the non top 10, only grew like 3% year on year and I get it was a tough compare but what's going on with that lower and kind of customer base that arent growing as.
Fasten underneath your guide wrong, it looks like it implies a relatively flat net retention rate compared to what we saw in Q1. Despite easier compares coming you know just being conservative and prudent given some of the macro stuff going on or how should we think about that.
Retention for the rest of the year.
Sure Ron why don't you take the top 10 in the guide question.
Okay, Yes, so I think.
Yes.
You point out the overall customers, we saw about a three or three 4%, 3% increase in customer count, Yes, we did see an increase over the previous quarter with relatively low I think when we look at overall customer acquisition I think accelerating that overall number.
Both across the enterprise and sort of that below enterprise carrier is a key priority and theres a number of things.
What we're doing around increasing market activities and lead Gen and brand awareness. So.
At the Investor Day, Brett sure, our Chief revenue Officer, and Margaret will share a little bit of the specific plans, we're doing around customer acquisition.
To accelerate that as we move into sort of the second half.
I think on the second point with regard to guidance I think what you look at either LTM at RR Depner.
Those are 12 months.
Metrics.
And it continues to reflect some impact from the outage. We saw June 'twenty. One. So we'll continue to see some impact of that reduced traffic until that outage impact is no longer within the metric I think for a number of those customers most of them came back.
Within a week or two we have talked about one large customer who took a couple of quarters to really come back to kind of their pre outage levels and we've seen good increase.
And that but that will continue to be somewhat of a drag on the LTM metrics.
Until that outage impact drops out of the calculation.
Okay, and then have you we've seen the Hyperscale is trying to promote their own CDN services more recently to get really workloads into their own public cloud and now Akamai acquired one node for public cloud capabilities.
How are you guys thinking about the need to have your own cloud environment.
Post as well as delivery mechanism versus just partnering with the hyperscale or like you did with that Fortune 1000 media conglomerate. Thanks Scott.
Yes, Thanks, Jim.
Continue to see the world through the same lens as we've seen it for a long time, which is which is we think the hyper scalar and the edge cloud coexist together our customers are multi cloud they want to be multi cloud and one of the things that they are asking us.
Is to allow them to load balance between clouds have one security.
Perimeter approach to all of the clouds.
And so.
So doing.
What we have seen is a lot of cooperation. So we are absolutely seeing that for certain types of workloads the.
Hyperscale are sort of looking at putting some edge caching capabilities and we think thats great. Our customers are looking for other things from us from security to compute as well as caching and right now. It's this if this multi cloud personalized edge world that is really driving the decision, making so we see this.
Cooperative Unlike some of the other competitors, who I think are seeing.
Themselves as competitors to the hyper scaler, we don't see that and we think so far that has that has played well we have very cooperative relationships and great partnerships in that regard.
Thanks Scott.
Thanks, Jim.
Next up we'll hear a question from James Breen William Blair.
Thanks for taking the question can you just talk a little bit about <unk>.
Capital spending you need to get you where you want to go on in terms of top line growth.
It was fairly low this quarter.
From a capex perspective capitalized software was up a little bit how should we think about that going forward and as a percentage of revenue.
Ron when you take that one.
Yes.
So you are as you pointed out our capex, our cash capex in the quarter was a little bit on the low side.
I think broadly for the year, we expect to be in line kind of our historical guidance of somewhere between 12%, 14% I think despite the transition to the architecture and some of the acceleration of investment.
You'll be within that historical 12% to 14% of revenue for Capex for the year. So that would imply some some increase over what we saw in Q1 in terms of Capex investments.
Great. Thanks.
Thanks, Jim.
Once again, everyone. It is star one if you have a question next is willpower Baird.
Hey, guys. This is Charlie Ehrlich on for will thanks for taking the question.
Just first I wanted to ask about the fan out acquisition and maybe just get a little bit more detail on what that gives you and the path forward on that.
Sure. This is an exciting one for us our customers have been asking for this for a long time, it's something that is required.
<unk> for our customers a lot of work unlocking this real time App development.
And all of all of what is built into it so think about a live chat support or.
Gaming examples of this this is what our customers do all the time and in most cases, they've got to do it themselves and so with the acquisition it really positions us to support these use cases.
Can migrate away from really complex existing in house web sockets stacks.
And they don't have to engineer it themselves. So this has been this has been long long time coming.
On the top of the priority list and something that we thought.
When we saw what fan out was doing and how they were being viewed in the market. It just was a natural unnatural acquisition for us and very exciting.
Great and if I can just squeeze one more in are you guys thinking about profitability timing in the future balancing you know a lot of the.
Growth initiatives, you want to invest in but also keeping an eye on profitability. It's cort. So how should we think about just the timing around that.
Sure I mean, we're certainly going to talk more about that at our Investor day, but Ron I don't know what you want to share before that.
Ronny there.
Sorry about that yes.
I think we are.
Certainly starting to spend more time thinking about it and I think there is an opportunity to drive growth, we've talked about growth and increased investment business to grow both security and edge computing platform those are accretive to gross margin.
And we believe that drives long term margin.
As we see that growth play out and the accretion we're seeing gross margins in terms of the long term model of getting to profitability. We plan to share kind of our view on what that long term model looks like at our Investor day.
Yes, sorry, what I can tell you is it a high priority for US we believe.
There is a tremendous amount of leverage as we talked about just briefly on the gross margin side in the call.
In the script and we believe that across the business. So it is a priority and that's something that you'll hear a lot more from us about at Investor day.
Great. Thanks, Scott.
Our next question is from Philip Rigby RBC capital market.
Hey, Thanks for taking the question just one for me following up on the idea of traffic traffic growth in streaming can you just remind us sort of what those are.
A higher quality streaming businesses, you're in but you have a higher mix to like is that all.
Yes.
Cassidy and increases.
Is there potential to sort of go into the lower quality more.
Or monetize for any business to kind of maintain utilization you talked before about.
How important video is kind of back that utilization over time any color there would be really helpful. Sure. Thanks, Phil. It's a great question I think it's a misunderstood part of part of our story, which is how important video is we feel to the long term success of our business.
To answer the first and the second part of the question, we have no intention of going into the Commoditized side of this market in any meaningful way.
Our interested just to sort of segue off the last last comment in building a profitable business.
It's extremely difficult if not impossible I think to build a profitable business off the lowest end of this market. So that won't be interesting to us I think coming to the first part of the question.
For us, it's always been who cares about quality, who is able to monetize.
Their content and traditionally that sort of started as you recall with live events right.
Live events, you're streaming important.
Tiger Woods is walking down the 18th Green in the Masters or the Super Bowl is on those events are so high profile. The advertising revenue is significant in those you care deeply about quality, we saw transition over the last three years is that video on demand has actually had similar characteristics. So when game of.
<unk> is on an launches all at the same day or or some other.
Show of that magnitude and that gets that much attention when something isn't high quality. It actually has the same reaction within the consumer environment as it would if it was live Twitter blows up everyone starts talking about it people get egg on their face and those huge shows the ones that really matter.
Netflix or Disney show or whatever the case may be are the drivers for new sign ups. So we've seen that.
So the dynamics have really shifted where we have those whose quality deeply matters, who can monetize those users and those who don't and you're not going to see a shift away from those who don't but as I say our exposure to those who do remains very limited and therefore, there is a lot of upside a lot more traffic that we can.
Get in the high value area of this and why this is so important is because video is critical our goal has always been and I talked about it earlier efficiency. When we are deeply efficient we're using all parts of our network all parts of our servers and also it allows us to change the dynamics on the bandwidth side to the eyeball users.
We serve the content that they need and when I think about the future content being served.
In different ways.
It is going to matter, who has the majority of the content because those are going to be there's going to be the suppliers that are invited into satellite. So it's going to be the suppliers that are invited into cruise ships. Those are going to be the suppliers that are at these critical junctions where content is being consumed. So we see it is critical we think it's strategic to our story, but no plans right now and I don't think ever to go into the <unk>.
Modest part of this business.
Got it thanks, so much thanks al.
Our next question is from D. A Davidson Rudy Kessinger.
Hi, guys the NEMA Entre Rudy.
I just had a question on an update you guys said last quarter that you had 40 sign ups for the through the credit program on computed edge.
I was just wondering where you guys are at on this quarter and how many you guys have converted to paying customers at this point.
My name is Joshua here.
One of the things that we're going to be sharing is a comprehensive view of this at Investor Day I can tell you that we've had growth we had conversion, but we're going to we're going to share that and sort of when we have a little bit more time to work through those the nuances of that I have been very happy with those programs, including how many enterprise developers around the platform. So a little wait and see on that because that's what gives.
All the context, all at the same time, but we've seen progress and compute.
Computed edge remains I think the most exciting.
If not one of the most exciting opportunities that we have here for really significant growth.
Got it that's it for me thanks, guys. Thank you.
And now we'll hear from Tech team member Ronnie.
Good afternoon. Thanks for taking my questions, Josh was nice working with you and best of luck.
I'm curious.
The question is just around your security will that happen.
At a high level, but I'm curious about.
How that business is trending if you could sort of quantify for us on a year over year and quarter on quarter momentum.
Within that specific side of the house in your portfolio and then I have an extension Joshua talked about security and continue being pricing accretive right. You have a lot more pricing power at these are very important challenges youre, helping solve customers. So im curious if you can help reconcile that with.
Average enterprise customer spend only up 3%. So hoping you can sort of bridge that gap for me vis vis the pricing power on the securities items, maybe writer.
Wallet share goes on some of your larger enterprise customers. Thank you.
So let me take a couple of those I'm going to hand, a few of those off to Ron I think in general if we zoom way out we have discussed or the contribution of the legacy <unk> side.
Product line, but we have not yet.
Sort of collected together and publish what our entire security portfolio is because it extends well beyond that before we bought signals Sciences fast we had a WAF we have a ddos business. We have a we have a tls business. We have an emerging bought business. So Ron Ron will speak to the and already did on the <unk> side business, but that's not the entirety I think in <unk>.
General I give you color on the entirety of that portfolio, which is and continues to.
Drive tremendous growth and as we've talked about in the past we do have.
No.
A great margin profile on that business as well as the compute business. So Ron why don't you why don't you sort of give some of the stats on it and then I think coming back to the wallet share and growth question. You can also address that if you could.
Yes.
Just give you a couple of stats on Q4.
Revenue from signal appliances was <unk>.
11, 9% in the quarter was 11, 9% up from $10 nine.
Reflecting about a 15% growth rate as I mentioned on the call on a year over year basis signals Sciences revenues increased about 59% if you take into account the.
Purchase price adjustment it was about a 38% growth on a year over year basis. So we're seeing really strong growth there and as Joshua points out.
The signal Sciences is only a portion of our security business does.
It does not include some of the Fastly products, such as Ddos Tls and I think over time as we add more security products and launch more products, we expect to see more growth.
In security in the overall portfolio I think this goes back to.
If you go back earlier, we talked about.
Substantial growth in terms of our long term goals of sort of <unk> growth.
Security and so we see it as an important part every conversation around delivery include security.
And as we build that portfolio out we see opportunities to grow that and then I think in terms of margin opportunity.
The gross margins on the security business are substantially higher.
And then on the delivery side, they don't use bandwidth and then secondly, predominantly most of the signal science products today are sold on a SaaS basis. So there are also a little bit less volatile theyre not.
Traffic or volume based sale. So that's the other sort of differentiation in terms of the security business versus.
The delivery side of that.
Product.
Fair enough if I may ask you a follow up on the delivery side of the house.
I think you sort of characterize the quality of.
Traffic on the network is not being commodity right. So I'm, hoping if we could take a step back if you can help us.
The competition of the state in terms of your traffic and traffic volumes on the network, whether that's across very premium high end.
Video streaming God gaming software downloads, social media anything to help us think about that pie of traffic on your platform to give us maybe more crisper understand against them.
Why it isn't necessarily monetize trends that.
Some of your peers, maybe you are seeing.
Sure I mean I think.
We.
We have spoken in the past about that being an equal balance between.
Video and non video in it and it changes it remains it remains about the same as Ron said nothing changed quarter to quarter.
And the mix has remained relatively stable over the last.
18 to 24 months. So I think we have one of our goals is to keep that stable, we think that that's really important.
And as I say not go down into the Commoditized side of it so I would say a lot of stability, we see growth.
And all of it is important for us to make money and to get a great margin.
Because it all has different impacts in less sort of line of our business. So it's hard to break it out and just sort of say well the pricing is this or that in some ways because if you think about.
<unk>.
Really high value Streamer, who then gets us into an eyeball network that we otherwise would have had to pay for some of that math is.
Is very valuable to our business and something that we are constantly looking at so I think in general not a significant change in the quarter or over the course of the last couple of years.
Thanks for taking me.
And as a reminder, everyone. It is star one if you have any question today next step is Tom Blakey Keybanc capital market.
Hey, good evening gentlemen.
I have a couple of questions starting with Ron on the gross margin side. It seems like things are pretty identifiable in terms of duplicative costs.
Have you ever done.
On the calculations around to say what as we go into 2023 with those costs Olivia from a basis point perspective, what type of release that that would be in terms of gross margin and similarly with regard to utilization impossible to.
Probably track the level of demand for like every 10 points of utilization in terms of increase what kind of basis point.
Expansion that could have on gross margin to give us like some sort of flavor for the longer term and speaking in that term, but longer term what about this new improved network. What's it going to look like is it going to be more in line with peers of yours.
Significantly higher gross margins or should we expect something.
Some other number.
Yeah.
So a couple of data points I think as we look to 2023 the headwinds from the new architect transition sort of fall away and we expect to continue to drive toward higher utilization across our network.
And there's a number of other things that we're doing internally in terms of our traffic forecasting and investment process to provide a drive even tighter alignment.
Those investments in traffic expectations, we'll talk more about on Investor day, which should also drive better utilization and higher gross margins. So we havent quantified kind of the gross margin for 2023 other than to say that we expect to see further accretion in improvement in gross margins in 2023.
Efficiencies in our cost of revenue.
From the <unk>.
<unk> of the transition of the architecture.
Driving better utilization across our network.
And also the as we see the higher growth in the security products.
<unk> become a bigger mix of the products and those are also contributors. So we've got a lot of tailwind going into 2023 that will drive gross margin accretion over what we've seen this year.
And that should should play out as you know accretion off of kind of what that exit rate as we get to the end of the year, but we haven't explicitly quantified yet.
That's fair and just maybe one more try then is it it sounds like if I'm hearing you correctly around its more.
Going into 'twenty, three 'twenty four 'twenty five its more utilization in terms of what the expansion on the gross margin will be.
Towards back to those 60 plus percent range versus <unk>.
Versus some sort of identifiable duplicative cost overhang being meaning that the way the way I would look at that is I think we did have a headwind in 'twenty two from this transition that sort of falls away and then as you get into 'twenty three 'twenty four 'twenty five it's really going to be driven by.
Utilization and efficiency on the network as we build more efficiency.
Leveraging.
The new architectures and driving efficiency, there and product mix.
Sort of the fundamentals of the business that will be driving ongoing accretion in gross margin.
Great that's helpful and will see going into 'twenty three what that looks like my second question is around security, obviously and.
And related kind of longer term strategic vision on adding functionality, that's less bandwidth intensive and more kind of SaaS like on your platform, especially given the questionnaire is about we.
We will see about the profitability going forward. So it kind of all on one question about capital structure and cash.
<unk> usage and what the long term strategic vision.
Fastly is in terms of long term growth on these non delivery related businesses will that be more organic or inorganic and your kind of intermediate term vision for the company. Thank you and that's it.
Yes, Thanks, Tom I think we said this in the past I think we view.
We view our trajectory on an organic view at this point I think we feel like security will continue to grow and we haven't even scratched the surface of that market. If you look at the scale that we're at.
There are a few places in the portfolio that we're beefing up particularly on the box side, but we.
In terms of in terms of sort of large scale.
Inorganic growth that's not how we feel we are going to hit the long term goals that we've set out so right now we have teams working on.
We're diligently working on the bond portfolio and continuing to improve that and the rest of the portfolio is strong its world class and it's something that we go up every day against our competitors and win with as you can see the growth in that market and the trajectory is strong. So right now we're really confident in the portfolio and we are confident in the team.
There may be small things here and there, but that would be more on the talent side than it would be on the revenue side.
And that would be excellent to see from an organic basis, Joshua and I agree you've anniversaried since starting here with solid growth. So.
<unk> and look forward to keeping in touch with your next endeavors. Thank you yeah. It's been it's been a great success.
That does conclude our question and answer session. At this time I would like to hand things back to Mr. Joshua Bixby for any additional or closing remarks.
Thank you before we sign off I want to thank our employees our customers our partners and our investors, we remain as committed to ever as ever to fueling and security and digital experiences and moving forward, we remain focused on execution, bringing lasting growth to our business and delivering value to our shareholders I will remain in my role.
Until my successor has been brought in to ensure that we have a smooth transition and.
And I want to assure you.
That positioning Fastly for long term success is my number one goal throughout this process.
We look forward to connecting with many of you at our Investor Day on May 12.
Yes.
Okay.
That does conclude.
Today's conference. Thank you all for your participation you may now disconnect.
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