Q3 2022 Fastly Inc Earnings Call
[music].
Good afternoon. My name is Christian I'll be your conference operator today.
Tom I'd like to welcome everyone to the <unk> third quarter 2022 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you'd like to withdraw your question. Please press star one again.
I'd now like to turn the conference over to burn SC Investor Relations. If Ashley. Please go ahead.
Thank you and welcome everyone to our third quarter 2022 earnings Conference call, we have Fastly CEO , John <unk>, and CFO , Ron Kisling with us today.
Cast of this call can be accessed through our website fastly 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 75432 to three nine shortly after the conclusion of today's call a.
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 the SaaS 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 particular implied during the call.
Further information regarding risk factors for our business. So as you approach. Our most recent Form 10-Q filed with the SEC and our third quarter 2022 earnings release and supplement for a discussion of the factors that could cause our results to differ so he's here for our particular to the sections and settled risk factors.
Courage you to read these documents.
Also note that the forward looking statements on this call are based on information available to US as of today's date, we undertake 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.
Let me begin our prepared comments. Please note that we are attending two conferences in the fourth quarter.
RBC capital markets Global JMP Conference in New York on November 16th and the Credit Suisse, 26th Annual Technology Conference in Arizona on November 29, with that I'll turn the call over to Tom.
Thanks, Brian and Hello, everyone and thank you so much for joining US today, let me start by thanking exactly team for such a cordial welcome and an amazing Onboarding experience and I joined 60 days ago.
Team here has been very supportive during my first few weeks in this role and I want to thank Joshua.
And in the board for their support and guidance.
The tremendous opportunity ahead.
And I'm excited to work with this incredible team.
First I will give a quick summary of our financial results and third quarter highlights and then provide a brief overview of my first impressions near term path forward.
I will then hand, the call over to Ron to discuss the third quarter financial results and guidance in detail.
We reported record third quarter revenue of $108 5 million or <unk>.
85% compared to last year, and 6% quarter over quarter I'd like to congratulate capacity team on this great growth.
This achievement. However, I believe there still remains more customer opportunities out there to grow beyond the 22% year to date revenue growth, we just posted.
Our customer retention and growth engine remains strong our last 12 months and our our 118% in the third quarter up from 117% in Q2, and our governor of 122% in the third quarter up from 120% in Q2.
To see such a passionate loyal customer base and the continued growth.
Our average enterprise customer fast what $759 four.
4% quarter over quarter increase from Q2 and continues to demonstrate.
Demonstrating the success of capacity is land and expand approach and strategic accounts.
In the third quarter, we saw continued momentum in our portfolio expansion strategy with strong cross selling activity in both compute and edge and thank Jeremy.
We saw compute at edge cross selling wins with marquee accounts like new relic and with Canada's leading content creation company.
When security with our cross selling motion with one of our largest drugstore chains in Europe , which is now using our nextgen WAF on top of content delivery from Fastly and from a major Japanese videogame company, who is now using our Nextgen WAF. In addition to our content delivery and compute at edge capabilities.
Our total customer count in the third quarter was 2925, which increased by 31 customers compared to Q2 enterprise customers totaled 482 in the quarter, an increase of 11 compared to Q2.
Pleased to report that our third quarter gross margin.
53, 6% improved 320 basis points quarter over quarter, Brian will talk in more detail about this in just a moment.
This is an area we are focused on intently and we've been able to remove duplicative costs improve our bandwidth cost our network utilization and capacity planning.
As important to me trying to efficient healthy business into that and we will continue we will be continuing to focus on margin improvement in Q4 and through FY 'twenty three.
It's also important to note we've gone to great lengths to secure our supply chain to ensure that our platform expansion can continue uninterrupted even in the presence of supply chain disruption and support existing faster customer growth and new logo acquisition.
We continue to expand product offerings in my first few weeks of an impressive speed of innovation here. In Q3. These releases include service search allow our customers to more easily.
Compliance routing, which is an alpha right now helping customers with data sovereignty requirements better manage how and where their data is process and web sockets and data, giving our customers real time low latency solutions capable of supporting the most responsive engagement applications.
We are also listed additional product releases in our Investor supplement for your reference.
My first few weeks of Fastly I talked to customers partners and key stakeholders I have immersed myself in prostate culture and organization.
This process yielded an enormous amount of feedback in the form of praise and constructive suggestions.
Grateful for everyone's thoughtfulness team to facilitate at all of those discussions.
Lastly has an amazing culture and a talented employee base. The team here is passionate about every customer passion about the technology, we build in most importantly, passionate about our mission to make the internet a better place where all experiences are fast engaging and safe.
Tremendous opportunity and fast I guess, a complete application experience platforms deliver cutting edge digital experiences for everyone everywhere.
Or frankly becomes a one stop shop for the edge cloud for content delivery network services security and edge compute with observer ability.
It will drive a more complete experience for our users and for our customers that drive a differentiated experience for their developers and their operations teams and I believe and staying true to that vision and by focusing on our users our developers and our customers. We can have an incredible impact on the industry. We.
We have a real opportunity to run a high velocity low friction motion at Fastly.
And I will be focused on number one simplifying our product packaging. This will enable our customers to understand quote and purchased our technology more effectively and our team can operate with less friction.
We're also focused on more deeply embedding the signal type offerings into the <unk> platform and continuing to expand our security offerings.
Three are computed edge launch from last year I had great early success and part due to our adult developer relations investment at Glimcher acquisition I plan to continue to invest here as our customers demanding even more dynamic capabilities at the edge.
For our plan to align our go to market service of our customer success teams to focus more deeply on the customers they serve.
And five our goal is to make certain that our investments are aligned with these priorities while implementing cost controls aimed to ensure that every dollar at Bradley is being used to fuel growth.
And with regards to investment I am acutely aware of our high operating expense levels and I take this very seriously we will focus on investing in our go to market and our and on our innovation engine to fuel growth, while driving efficiency in everything we do you will hear more about our long term growth and spending forecast next quarter, but let me leave you.
But your understanding that I am very committed to meaningfully reducing our operating losses in 'twenty three.
Let me close by saying I'm very excited about the opportunity of Fastly, our customers have a real passion for SaaS based solutions and our employees have a real enthusiasm for fast expansion of course, we have plenty of work ahead of us, but I believe we have significant impact on the way digital experiences are built and delivered around the world I look forward to.
Sharing more review regarding our progress are focused on fueling growth of our customer acquisition and our velocity of innovation in the coming quarters I'll now discuss the financial details of the quarter and guidance I will turn the call over to Rob Rob.
Thank you Todd and thanks, everyone for joining us today, I will discuss our business metrics and financial results and then review our forward guidance.
Note that unless otherwise stated all financial results in my discussion of our non-GAAP metrics.
Total revenue for the third quarter increased 25% year over year to $108 $5 million exceeding the top end of our guidance of $102 million to $105 million.
In the third quarter revenue from signal Sciences products was 13% of revenue of 44% year over year increase or 33% increase after purchase price adjustments related to deferred revenue are reflected.
While we are not immune to the macroeconomic trends, we are seeing healthy traffic expansion from our enterprise customers and given a relatively smaller market share we are benefiting from share gains.
Otherwise challenging environment and believe these dynamics position us for continued revenue growth.
Our trailing 12 month net retention rate was 118% up slightly from 117% in the prior quarter.
We continue to experience very low churn of less than 1% and our customer retention dynamics remained strong as Todd stated, we had 2900 25 customers at the end of Q3 of which 482 were classified as enterprises those customers with an excess of $100000 of revenue over the trailing 12 months.
Yes.
Enterprise customers accounted for 89% of total revenue on a trailing 12 month basis up slightly from the 88% contribution in Q2. However, the key highlight here is that our enterprise customer average spend grew to 759 from 730000 in the previous quarter, representing 4% expansion in.
Spend as further demonstrating our continued ability to expand our business within our largest customers at our strong customer retention.
Our strong trailing 12 month net retention rate and growth in average enterprise customer spend demonstrate our continued ability to expand within our enterprise customers due to our increased share of delivery traffic and adoption of new products and security and in our emerging compute business.
Our top 10 customers comprised 36% of our total revenues in the third quarter of 2022 slightly above the 34% contribution in the prior quarter.
Since I last spoke to our Q2 results, we made a great deal of progress within our financial organization with efforts to align closely with Cosmo leadership, we've completed the transformation of our finance leadership team and continue to enhance our cross functional efforts to streamline and improve our business visibility, including forecasting a review process to better ROI capital.
Investments with traffic expectations, and improved management of our balance sheet and capital structure.
As I stated last quarter. These efforts not only strengthened <unk> financial position longer term and allow us to drive increased efficiency in our business, but also improve <unk> competitive positioning it as transparency to the investor community.
I will now turn to the rest of our financial results for the third quarter.
Our gross margin was 53, 6% for the third quarter compared to 54% in the second quarter of 2020 to recall that excluding one time true up cost the gross margin for the second quarter would've been approximately 52%.
This sequential improvement in gross margin reflects our prior expectations that it would lift in the second half of 2022.
As we previously discussed this is due to the discontinuance of some duplication of expenses in the first half of 2022.
Movements in our network investment capacity planning to more closely match, our traffic patterns in demand and our focus on reducing the cost of components of our cost of revenue, including in the third quarter a reduction of our bandwidth costs.
As a result, we expect gross margin improvement of roughly 200 basis points in the fourth quarter relative to the third quarter.
We did not see any meaningful changes positive or negative to our pricing in the third quarter as compared to the prior quarter.
I appreciate your patience through this phase of our gross margin volatility as Todd stated, we will continue to be focused on gross margin improvement and efficiency through 2023 is our planned investments in our next generation network architecture.
Ongoing management of network investments in line with expected traffic continued improvement in efficiency in traffic handily and management of our cost positions us for further gross margin improvements in the medium to long term.
Operating expenses were $78 million in the third quarter up 24% over Q3, 2021 and down 1% sequentially from the second quarter. This was higher than we had previously forecasted but was offset by higher than anticipated revenue, resulting in an operating loss of $19 8 million.
Near the midpoint of our operating loss guidance range of $18 five to $21 5 million.
During the third quarter, we accelerated our sales and marketing investments to position us for strong revenue growth in 2023.
Additionally, despite our more disciplined hiring in the third quarter, our head count costs were higher than we had previously forecast as we saw a decrease in our employee attrition rate during the quarter.
As Todd indicated we are investing in our go to market efforts as part of our revenue growth initiatives. As these initiatives are put into motion, we anticipate fourth quarter sales and marketing expenses will increase sequentially, while R&D and G&A expenses will remain relatively flat.
Despite our increasing investment in our go to market efforts, there are meaningful opportunities to drive greater efficiencies in our operations, especially across G&A to give us confidence in meaningfully reducing our operating losses in 2023 and beyond.
Our net loss in the third quarter was $16 8 million.
Our 14th set loss per basic and diluted share compared to a net loss of $13 2 million and 11 loss per basic and diluted share in Q3 2021.
Turning to the balance sheet, we ended the quarter with approximately $719 million in cash cash equivalents marketable securities and investments, including those classified as long term.
Our free cash flow of negative $44 million were down sequentially from the second quarter's negative $61 million.
Primarily due to a $27 million reduction in advanced payments of capital equipment and changes in operating cash flows.
Third quarter free cash flow reflects the advanced payments for capital equipment of $2 million.
Capital expenditures of $15 million, which include cash purchases of capital equipment capitalized internal use software and payments on financial leases during the quarter.
Our cash capital expenditures were approximately 8% of revenue in the third quarter. Our cash capital expenditures include capitalized internal use software and deployment of prepaid capital equipment.
Continue to expect our cash capital expenditures for calendar year 2022 to be in the range of 10% to 12% of revenue.
I will now turn to discuss our outlook for the fourth quarter and the full year 2022 I'd.
I'd like to remind everybody again at the following statements are based on current expectations as of today and include forward looking statements actual results may differ materially and we undertake no obligation to update these forward looking statements in the future except as required by law.
Our fourth quarter and full year 2022 outlook reflects our continued ability to deliver strong top line growth via 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 we have today.
We expect revenue in the range of $112 million to $116 million, representing 17% annual growth at the midpoint.
We expect the non-GAAP operating loss of 18% to $14 million and a non-GAAP loss per share of <unk> 15 to <unk> 11.
For the calendar year 2022, we are increasing our prior revenue guidance by $7 million to a range of $4 25 to $4 29 billion, representing 21% annual growth at the midpoint, we expect non-GAAP operating loss of 82% to $78 million in.
On a non-GAAP loss per share of <unk> 57 to 63.
Reflecting the impact from increased revenue outlook and as I discussed above we now anticipate operating expenses will increase in Q4 relative to the third quarter and our second half operating expenses will be higher than the first half due to our investments in sales and marketing.
Before we open the line for questions, we would like to thank you for your interest and your support and vastly.
Operator.
Thank you.
Reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from James Fish with Piper Sandler Your line is open.
Hey, guys nice nice bounce back on the topline there and Todd welcome to Fastly looking forward to working with you again.
I wanted to start on.
The sales cycles that you're seeing particularly for new perspective customers and obviously you have some sales and marketing spending going on but what are you guys seeing with sales cycles on those new prospective customers versus the willingness to consolidate more traffic and security functionality with your existing installed base.
That's a great question.
So you're going to appreciate it appreciate being here.
I think that the.
As far as the length of the sales cycle. Those we haven't seen any very significant change.
And the last.
Last couple of quarters, but we have seen some very.
Relatively quick.
Sales cycles in some large strategic deals, especially when we're talking about expansion deals.
Our customers that might be in our content deliveries out of the house and are moving to security are moving to expand to edge compute and so those cycles have definitely.
Our definitely far shorter than the initial logo acquisition and thats been helping us quite a bit as we see expansion in those areas as far as new customer logo.
Sure.
Sales cycle changes haven't seen any yet.
But I think it's a good thing for us to look out for.
And then just to follow up on gross margins couple.
Couple of things, obviously, some of the co location companies out there raising prices just given energy costs increases, particularly in the EMEA region. I guess, how is that impacting your gross margins for the next year or so or what are you guys seeing on that end and at what point should we be through kind of the duplicative sites.
<unk> wins that you guys are I'll say self grading.
Yes.
We've seen some of the.
Changes on the power side, especially in Europe , So we're seeing what youre, saying.
But we have very close relationships with those providers and I think we're going to able to manage that.
As our scale continues to increase our ability to find good pricing.
Comes along with that so we've actually done a good job, bringing down our bandwidth costs and I think that trajectory will will continue specifically and just for bandwidth, but when we look across all of the cost of revenue.
We're pretty we're leaning in pretty hard right now and really driving our margins up we saw great results there.
This quarter I believe that Theres, a real opportunity to continue that trajectory.
And I think that is core to our success as well so youre going to continue to see a ton of focus in this area, we have opportunity with peering, we have opportunity with higher utilization of our infrastructure higher utilization of our network to drive to drive our margins up even if.
We do find a little bit of incremental cost around energy usage anything you'd add there. The only thing I would add and I think just to Todd's point, we're seeing good improvement in cost, particularly around bandwidth.
Managing our capex.
Hello, <unk> depreciation and bandwidth and depreciation are kind of the biggest drivers of our cost of revenue with colo being a little bit smaller so that kids to help against some of the increases we're seeing from co location providers.
Thanks Opex Ron.
Sure.
The next question is from Frank Louthan with Raymond James Your line is open.
Frank Louthan with Raymond James Your line is open.
Sorry about that I think the telecom guy can work the mute button, but eight Todd good to meet you stand currently on there.
Talk to us a little bit give us a bit more details about the tech upgrade and the gross margin.
Here can you just remind us the 200 basis points of pressure was that the GAAP or non-GAAP and any chance that leads into <unk>.
Into next year, and then walk us through what you've seen on pricing. It's good revenue trends how are how is pricing.
Going in the market currently.
Yes, so I'll start on the 200 basis points in pricing.
Yes, the 200 basis points that we saw in Q2 was sort of one time events. The the duplication associated with our architecture migration was largely completed in the first half as we planned so that's really driving some of the Q3 improvement.
And then I think as you look to Q4, you get a little benefit from.
The revenue accretion you see in Q4 as well as as we indicated we saw some improvements in our bandwidth pricing that we'll actually see that benefit for the full quarter in Q4. So that's why.
Really the drivers behind the couple hundred basis point improvement, we'll see going into Q4, and then I think on pricing, we really haven't seen any meaningful changes in the quarter positive or negative.
Compared to the prior quarter.
As we look forward.
There's real opportunity for us to sort of continue this trajectory of margin improvement.
We are deeply focused on this one is just around really diligent capacity planning.
We've seen some stabilization in the supply chain, maybe not complete but enough.
And we are focusing deeply on doing very rigorous capacity planning. So that we are deploying our equipment as efficiently as we possibly can and that goes beyond just how much we deploy but where we deploy it with deploying our equipment into the right regions as we predict load.
The second is network efficiency.
We have a real opportunity as that scales to push more of our bandwidth costs, appearing with such a radically less expensive for us.
And that gives us an opportunity to define serious efficiency SASSA continues to scale that.
That opportunity continues to be available to us.
And last is really the efficiency of the system one of the first things I did.
When I sort of arrive at Fastly is to work closely with our infra team to understand all of the work that's going on just to build the most efficient infrastructure possible capable of.
Really maintaining a trajectory of margin improvement.
For the next few quarters and that's that's what we plan to do and that's our focus right now.
Where how high a priority is it to get to EBITDA positive and in what timeframe do you think you can do that.
I'll tell you that.
I believe we have a.
Real opportunity to post.
A far more profitable are far better operating losses next year than this year.
And it's something that is incredibly top of mind for me and our whole leadership team in fact, the discussion of deploying every single dollar spent is vastly to fuel growth.
Radically more efficient with our spend more judicious and even scrappy what that spend is incredibly top of mind for us because it is not lost on me that we have to improve profitability here and specifically our cash burn.
As far as the exact timing of borrowings that turnaround we're going to try to give you as much information as Mccann and.
And our next in our next call when we will be.
We won't be discussing the entire FY 'twenty three plan and guidance and I think that would be the right time for us to give you a further outlook there.
Alright, great. Thank you very much.
Thanks.
The next question is from James Breen with William Blair. Your line is open.
Thanks for taking the question just on the capacity side.
Where are you right now given the growth that Youre seeing do you think there is staying in the Capex range is reasonable.
Given some of the new products and some of the growth seen within your existing customer base and then gross margins of.
Peru, how much of that is just from.
Increased revenue on <unk>.
Fixed cost basis in terms of where the network is.
Going forward you continue to expect yes, I guess, what do you think the gross margin potential as you sort of reach and scale.
Yeah.
Yes, so on the capacity side I think.
Earlier this year, we kind of brought down our expected capex.
From 12 to 14 to 10% to 12% of revenue.
I think there is opportunities as we get into next year to continue to see.
Opportunities to improve around the capex side, as we use capex a more efficiently.
We continue to make sure we're aligning with traffic expectations.
Despite what we see is.
Really good growth and expansion within our existing customers.
I think look as far as the especially the capital expense goes.
Fly chain stabilization is going to help us control capex and specifically.
The demand planning improvements and I think thats thats really key or getting we have been getting a better handle on.
Being able to predict demand and that would help us be more efficient in how we deploy capital that's going to be key to this.
Again, I believe that the trajectory here that we're on is something that is incredibly important we are deeply focused on this our demand planning efficiency of ours.
Every single cost revenue dollars, not just the capex side, but the but the entire cost of revenue line.
Being more efficient with our bandwidth is going to be incredibly important to us.
I want to lose track of that Capex depreciation.
Big deal the bandwidth cost is enormous and so.
Our efforts around more efficient use of that bandwidth better peak management better peering.
Peering utilization is going to be driving this or we're going to be really building that muscle more and more over the next few quarters, we're going to continue this trajectory.
Don't want to speak to how high I think it can go.
In this earnings call might just be a little early for me Im still unpacking the business, but we will we will get into a much more deeply.
We give FY 'twenty three guidance in the next call.
And just as a follow up.
<unk> was $1 22 years or so.
Just below where your total growth rate is on the revenue side.
Whats the opportunity outside of your existing customer base.
If you think about that from a go to market perspective. Thanks.
Yeah, that's great I mean of course, we look at the existing customer base with organic growth.
Technology already.
Delivering and portfolio growth.
Especially with the early success, we're seeing on compute at edge and with security and.
Sigma Science acquisition, but as far as.
New logo acquisition goes we've seen some real.
We've seen some real progress in the high Tech space and we're looking at additional verticals, where we can really make a concerted.
Vastly wide.
Go to market surge in Turkey in terms of driving new enterprise logos and new verticals.
And I think with the product packaging improvements that we that we mentioned, we actually have an opportunity to to reach some of the mid market, especially the high end of the mid market with a simpler motion a lower friction motion to onboard new accounts and so as we start to.
In our packaging.
In order I think we're going to be able to see some improvement in how well we penetrate not just large enterprise accounts, but at the high end of the mid market as well.
Great. Thanks.
Yes.
The next question is from Sandeep Singh with Morgan Stanley . Your line is open.
Hi, It's Matt Wilson on for Sanjay. Thanks for taking my question, maybe just back to that last one can you talk about the opportunity in mid market through the better packaging. How large is this opportunity when connect kind of start to show up in the financials.
Sure.
I think the better packaging.
Really it's not just the benefit in the mid market gives us opportunity to lower our.
The lower the friction really increase the velocity of our sales motion of the way, we do our billing and invoicing the way with the way customers and how easy it is for customers to really understand what they bought and use as much of that as possible really becoming platform users.
And so I think from a packaging point of view, we have the opportunity to impact.
Core existing enterprise motion for sure I will say, though as far as mid market goes it is absolutely a requirement that we have simpler packaging.
That can be bought holistically, so that you can deploy.
Our content delivery technology with a single SKU and that SKU can be transacted quickly and easily and also and this is I think really.
Maybe the most important part of that packaging when it comes to the market. It unlocks the opportunity for us to bring content delivery through our channel.
We've had some early success in the security side of our business.
Bringing that through the channel, especially from what <unk> learned from the <unk> acquisition and by building really simple straightforward.
<unk> for content delivery with the opportunity to bring back the channels, while I'm pretty excited about that as far as sizing it.
Thank you for your question, that's something we'll probably have to take to the next call as well.
Alright, great. Thank you.
Thank you.
The next question is from will power with Baird. Your line is open.
Great. Thank you.
Yeah, No I appreciate all the color on.
And focus on prudent improving the cost structure I guess, Todd one of the questions.
It might be as you think about the cost reduction opportunities and improving cash flow how do you balance that.
Against also trying to improve revenue growth. It sounds like you have some initiatives there so I guess whats kind of the confidence level.
Prioritization there.
Between those two areas.
Yes.
<unk> is an amazing question because its incredibly top of mind for Ron myself, our entire senior staff right now is <unk>.
Ensuring that every dollar we spend is fueling growth.
And ensuring that as we get a lot more serious about controlling expenses now we're doing it in the most judicious way, we don't want to throw the baby out with the Bath water and.
<unk>.
Maybe there's a parallel to be drawn here.
We've worked hard at removing duplicative expenses in our infrastructure and our cost of revenue and we have some of that thing.
In the on the Opex line. So we're pushing really hard to ensure that we're that we're first and foremost.
Taking an opportunity to cut expenses everywhere, there is low hanging fruit where it won't.
Be a trade off between.
Growth in Opex.
I think at that point, we will then have the opportunity to really figure out how much we want to balance.
Our kind of spend and growth line, but there's a huge amount of opportunity here for us to sort of get our house in order and make sure that every single dollar is being used as efficiently as possible that we're stepping away from vendors and contracts that.
Arent really driving and fueling growth and so I think.
Realistically there is the opportunity here for us to do better without.
Having to make the tradeoffs between spend in growth that's what we're really focused on right now.
I've been here about 60 days, so we're still impacting all the details I want to make sure I make these decisions.
As carefully as I, possibly can but.
The opportunity is there and we're going to get that done as fast as we possibly can and really trying to set ourselves up for.
<unk> much.
Yeah.
How much better profitability number for next year.
And be careful and very judicious about doing that without sacrificing growth number.
But I think we will get it.
A really good place to discuss that a detailed the next earnings call.
Okay, Great no I appreciate that.
Color and good luck with those initiatives, maybe if I can just do it.
A quick follow up for Ron here.
Upside to revenue in the quarter guidance, a bit higher or is there anything in particular as you look across product lines whether signals.
Signal sciences or something in media.
Providing upside maybe relative to where prior expectations might have been and then and then I guess tied to that.
Any additional color on any macro headwinds you might be seeing either longer sales cycles.
Anything else to call out.
Yes, I mean, I think on the first part of the question I would come back to.
What Todd said.
In terms of.
Seeing fairly short sales cycles in terms of customers quickly adopting.
Either additional delivery or even more importantly, additional products around security or compute where we're starting to actually see.
Some traction in those areas and so I think that expansion is one area that we saw in the quarter driving some of the.
Sort of increased growth, particularly around the timing trajectory with customers sort of took on that additional business.
I think in terms of the macro headwinds.
I think to date.
Come back to.
What's been driving the business thus far is.
Expansion with our existing customers, where we've actually seen.
Maybe the less friction in.
And expanding in existing customers.
And again, given our relative market share.
Market share gains has sort of.
Helped us against any sort of macro headwinds that we see I mean, ultimately I think the service that we do is pretty key to customers and if you look at kind of the dynamics of whether it's M&A or shopping.
I think <unk> seen opportunity for that traffic to continue to grow.
Okay. Thank you.
And the next question is from Fatima <unk> with Citigroup. Your line is open.
Hey, guys. This is mark entre for team thanks for taking our questions.
Congrats on the first few months in the role.
And that's great to see topline races on 2022.
Just on the operating margin points coming down a point.
On the sales and marketing investments is there any specific areas. There that's really driving the lion's share of the investments or just a function of the opportunity ahead that you could call out.
And then maybe Kevin just to get a sense of how much incremental investments may be needed.
Just going beyond 2022, just given your initiatives. Thanks.
Sure I can speak to that.
Sales and marketing side.
We've tried to focus any incremental investment on quota carriers and thats been sort of.
Religion here is focusing on recovering as much as many of the accounts as possible with the strongest possible teams.
And so really quota carrying carriers in the account executive nasty, Rollouts, where we've where we focus any incremental spend.
As far as looking at the projections beyond FY 'twenty two.
It will be a little bit early for me to take.
For me to make the call and I recognize that this is the question keeps coming up.
We are deeply like.
Concerned about it, especially the operating loss side of the house and its absolutely the area, where my whole team right now is engaged in our planning for next year.
And I do want to be just as judicious as I, possibly can to put that.
To put that.
Our strategic plan and budget planning together before we talk about it publicly.
Got it. Thanks. Thanks, so much maybe just a follow up on that just go into 2023 no notes there is probably a meaningful reduction opportunities to reduce operating losses in the areas of low hanging fruits outside of the gross margin level, maybe in the next time.
I'm, sorry, low hanging fruit in regards of.
Just on the operating.
Operating expense structure outside of the gross margin side.
I think that there is actually some some low hanging fruit and duplicative systems to be honest.
And we've seen this in a couple of areas of course, we start with cost of revenue that's going to help us drive up the margins out of the house.
We see it we see it on the Opex side too we have an opportunity to clean that up.
And drive some real savings there I think there's also an opportunity for us to find.
<unk> efficiencies.
In our in our systems and how quickly our teams can operate.
With less out with black outside.
Contractor support simplifying our motion moving our sales our depot sales motion over to a package system is going to help us run a simpler motion a leaner motion with fewer fewer resources.
That's going to be important in driving our profitability for next year. It's also going to be important as we look to scale over the next three to five years.
And things are interesting and that you're stepping in.
Yeah.
Well I think the.
Cost control is an opportunity for sure it's top of mind for us.
Improving the margins I think it's a huge opportunity we have.
The ability to deploy technology and resources to improve the margins, which is great too but.
As far as the opportunity goes.
It really is around driving growth for us we have the opportunity to drive organic growth.
Within the.
Technology already deploy and portfolio expansion.
We Havent logo acquisition, along a line of expanding from one vertical to the next but also driving beyond the enterprise accounts that.
And we've got a real I think a real opportunity to look at driving growth in a very significant way even beyond those mentioned geographic expansion as well and so for us trying to balance like there's a huge opportunity in managing these different dimensions of growth and trying to really focus.
Ourselves on the areas and the opportunities for growth, where we have the best investment leverage.
Thanks for taking my questions.
Great.
Okay.
The next question is from Tom Blakey with Keybanc capital markets. Your line is open.
Hey, guys. Thanks for taking my question.
<unk>.
Some interesting comments about expanding on existing customers I was wondering if you could maybe.
Qualify some of those statements in terms of penetration rates.
Any of the customers generally or.
Or any one specific and then go ahead.
Those opportunities there or is there a room for it.
Some of the room for expansion from taking share from existing CDN and security vendors as well and I have a follow up after that thank you.
Sure Yeah, I think when it comes to logo acquisition I mean, we are largely looking at picking up share no doubt about it and in some cases that means.
Actually transitioning customers over from another CDM provider or bringing their first CDM.
CDM provider in both cases, it's really focused on picking up share and picking up market share in the CDN space is an enormous enormous part of our focus.
No doubt about it but I do think it's important to remember.
Edge cloud and that's about.
Edge cloud platform as our offering.
Which is why there's just been I think an enormous opportunity for us to do portfolio expansion with existing accounts.
Expansion from content delivery to security, especially in the lab space.
<unk> has been I think an incredibly powerful force right now.
Especially because the industry is focused on WAF right now and web application firewall is becoming more and more of the facto standard requirement.
Our application developers for web site developers.
Great and growing market. So we are focused on that expansion.
And that's really that security portfolio, we really think of as our growth.
As the growth portion of part of our portfolio.
When we look at it look at edge compute.
Think about a lot in terms of incubation I've been incubation business I mean, something that was really a pleasant surprise when I got here is to see how mature that business has gotten in such a short time.
We've had very significant deals and edge compute.
And customers, who were content delivery customers, who are actually going to be spending more on edge compute next year. Then on content I think that's the motion that we can replicate and and it's an important one because.
After golfers, especially are looking at how dynamic.
How real time their applications can be pushing that compute to the edge is a huge opportunity to a better outcome for them.
So we're super bullish on that opportunity and that's something we are deeply focused on.
Very interesting thanks, Todd and then a follow up on.
Did you talk about improving the supply chain in order to get equipment little faster I was trying to square that comment along the lines of capacity utilization you could try to connect like that comment with my current gross margins today.
Under the impression that maybe there was enough.
Possibly on the network, but it could be wrong that'd be helpful. Thank you.
Yeah. So this is Ron on the commitments, what we did I think going into really the pandemic. When we realize there can be supply chain is we basically made commitments with the number of our suppliers.
To lock in a certain supply of equipment.
And that supply the equipment, we're taking delivery on that as we need to deploy it in line with those traffic patterns.
From a cost perspective, we did talk about last quarter that we did make some payments associated with these prepayments, but we haven't taken delivery of the equipment. So from a gross margin perspective, we don't actually start taking depreciation until we take title and deploy this and we're going to deploy this scale in line with our build plans that are.
And you know very tightly with what that demand is so when we see the demand the equipments available and that's when we really start taking title to the equipment and reflecting the cost of that in our gross margins.
So with our cash commitment it.
Positioned us really well to be able to meet the increasing demand.
And still allows us to deploy inline with expected traffic patterns.
Ron just maybe if I could just back on is there any type of capacity utilization rate overall, you can share with us relative to the gross margin structure of the company. Today is this like is this a geo location issue or.
You keep saying deploy more equipment with demand.
And just maybe I am not trying to pin your opinion down on a number but.
No I mean, it's a good question I think the challenge is that you know that the that utilization varies a lot geographically as well as you know when you are in the quarter Theres a little bit of.
Seasonality of our business, which is you have to build capacity for the demand as you see in Q4. So that traffic has to beat that capacity has to be there for that expected traffic. So you build a little bit of that and then it has we've talked in the past the other driver which does affect utilization is.
When we do expand particularly into a new region.
That initial deployment, maybe running at below are.
Normal or desired utilization.
As we would deploy that to cover a certain opportunity.
And as we add traffic in that area, we bring up that utilization. So the impact on utilization is really a combination of whats traffic levels, we're seeing.
And where we're expanding the footprint of our global market a global platform.
Thank you Brian .
Yeah.
We have no further questions at this time I'll turn it over to Todd Nightingale for any closing remarks.
Thanks, so much thanks, everyone.
We're going to call arent, taking opportunity just to thank all of our customers our employees our partners and our investors.
In fact, we remain as committed as ever to making the internet better place are all experiences are fast engaging.
<unk>.
Moving forward, we remain focused on execution, I'm, bringing lasting growth to our business and.
And delivering value to all shareholders. Thank you all thanks, so much for the time today.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
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