Q2 2023 Fastly Inc Earnings Call
Okay.
Hello. Good afternoon, My name is Jeremy and I'll be your conference operator today.
At this time I would like to welcome everyone to the factory second quarter 2023 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 would like to withdraw your question. Please press the pound key thank you.
Now I'd like to turn the conference over to Vernon.
Bester relations at Fastly. Please go ahead.
Thank you and welcome everyone to our second quarter 2023 earnings Conference call, we have Fastly CEO , Todd Nightingale, and CFO , Ron Kisling with us today.
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 800.
7702030, 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 fastest website.
During this call we will make forward looking statements, including statements related to the expected performance of our business future financial results product sales strategy long term growth and overall future prospects. These statements are subject to known and unknown risks uncertainties and assumptions that could cause actual results to differ materially from those projected or implied.
During the call.
For further information regarding risk factors for our business. Please refer to our most recent Form 10-K and Form 10-Q filed with the SEC and our second quarter 2023 earnings release and supplement for a discussion of the factors that could cause our results to differ please.
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 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.
Before we begin our prepared comments. Please note that we will be attending two conferences in the third quarter. The Keybanc technology leadership Forum in Vail, Colorado on August 7th and the Piper Sandler growth Frontiers Conference in Nashville, Tennessee at September 13th.
With that I'll turn the call over to Todd Todd.
Thanks, Brian Hi, everyone and thanks, so much for joining US today first I will give a quick summary of our financial results and second quarter highlights and then I will provide a brief update on the progress made in our product strategy and go to market motion before I hand, the call over to Ron to discuss our second quarter financial results and guidance in detail.
We reported second quarter revenue of $122 $8 million, which grew 20% year over year and 4% quarter over quarter.
This represents a significant increase in our year over year growth rate of 15% last quarter.
I'm glad to see new enterprise customer was drawn to pass these platform and a growing momentum within our go to market teams.
Im pleased that we exceeded our guidance range as we saw upside during the quarter from some of our larger customers and expect to see that strength to carry into the rest of 2023.
I'd like to congratulate the fact like team pulling together new initiatives and our go to market strategy and delivering strong Q2.
I look forward to executing to possibly exceeding plan for the remainder of 2023.
Our customer retention and growth engine remains strong our L. T. M. N. R. R was 116% in the second quarter flat from Q1, and slightly down from 117% in the year ago quarter.
There was 123% in the second quarter up from 121% in Q1 and also from 120% in Q2 of last year.
Both of these metrics are indicative of healthy wallet share gains with existing customers. Thanks.
Thanks to our platforms expansion, we continue to cross sell more functionality more traffic to our existing customers.
Our total customer count in the second quarter was 3072, which decreased by 28 customers compared to Q1 and increased 47 year over year.
About a third of this quarter over quarter decline was due to customer consolidations.
Also worth noting that most of these customers were relatively small and they are.
We did see good momentum in enterprise customers totaling 551 in the quarter, an increase from 11 from Q1 and 52 year over year.
Our average enterprise customer spend was $818000, representing a 3% quarter over quarter increase as well as a 10% increase from Q2 of last year we.
We've seen continued wallet share expansion with customers as we've aligned our teams to be more focused on customer success and expansion.
Our portfolio expansion strategy continues to yield cross strong cross selling activity, we've seen strength in security our growth product lines, especially in Nextgen RAF technology augmenting our core network services offerings. This has been especially true as our Agila has reached feature parity and are now easier than ever.
To enable for existing fast they CDN customers and WAF, we've seen both upsell success and new logo wins are standalone sales.
We are also seeing good momentum in our incubation businesses compute and observe ability we saw success in the second quarter in selling existing customers compute at edge and observe ability muscles.
I'm excited to share some important new strategic wins in key expansion verticals for us.
We saw our first win at Abercrombie and Fitch, a well established brand with an innovative focus on omnichannel selling I'm really proud of our team here unseating an incumbent in a very competitive win and leveraging our new packaging model you can refer to June's press release here for more information.
It is also worth noting that this is one of several new logo wins in the retail vertical.
During the quarter, we closed nine new retail customers many of them enhancing our digital experience closely tied to their brick and mortar presence.
They include luxury brands like David Yurman, and dip peak major European home improvement chain, Hornbeak and specialized woodworking supplier Rockwell.
We also extended our travel and leisure presence with the addition of Bally's interactive.
We also saw great interest from high top closing nine new logos in the developer tooling and cyber security categories during the quarter, including bug crowd, a crowd sourced ml matching cyber security platform. Our media vertical continues to expand with the addition of Baum Your news serving the Nordic region as well as Tango, our live streaming social media platform.
You can refer to our investor supplement for more information.
Our gross margin was 56, 6% for the second quarter, representing a 100 basis point expansion quarter over quarter, and a 620 basis point increase year over year.
I'm incredibly pleased with this result, as our continued efforts to work rigorously on our cost of revenue and fixed cost footprint are yielding real results.
Our operating expenses were $77 million in the quarter coming in lower than anticipated by approximately $6 million.
While our rigorous cost controls drove about half of this decline and the other half was due to the timing of marketing expenses and an increase in capitalization of internal use software.
Also please recall that we took a $3 $4 million benefit in G&A to it due to a tax refund that will occur in future quarters.
<unk> will explain in more detail, but as you can see from our guidance 2023 spending is favorable and we are now looking to improve on our prior 10% operating loss target for the year.
During the quarter, our durable innovation engine continued to deliver new developments to our feature set.
There were several new technology releases, you can see in our supplement by channels in the second quarter, We released support for mutual Tls bidirectional authentication for our customers' origin. This trusted digital certificate feature will save time and resources around MTL S setup and management for our customers.
Focusing on the automation power the Fastly platform, we released dynamic back and enabling customers create new backend server definitions even more seamlessly.
Our new core cash API allows developers to extend their code on our edge compute platform with access to our powerful globally distributed cash network.
We're excited about the future launches in our Nextgen Wap solution like advanced rate limiting and site flagging at signal. This caps off a migration of our WAF security technology to our native edge platform.
Lastly, we released into limited availability, certainly which provides domain validating tls certificates theyre fully automated and are Fastly managed Tls services.
This will enable trusted identification website for our customers improving security and reliability I expect to hear a lot more about this and web site authentication capacity in the coming quarters.
Let me take a moment to discuss AI.
We've done a lot of questions on the Investor community and I'd really like to share our thoughts.
As we've indicated in the past we've been using our edge cloud to run <unk> for AI and we would expect the generative learning model to be mostly running in a central cloud.
We have engagement from customers across many industries grappling with how AI is going to affect what the risks are and what advantages they might be able to gain from this technology.
In the case of e-commerce.
We see very low latency and more personalized and more accurate recommendations coming from anyhow for media and new media, we see sentiment spam language detection and toxicity analysis for user generated content.
Others might be interested more in computer vision AI to help identify the carpenter images uploaded by their users or even provide more friendly and smoother user experiences we get speech recognition.
We feel incredibly good about our position as a platform on which to build the next generation of user experiences via AI experiences that are fast.
Safe and engage them.
Moving onto our go to market developments I'm excited to share with you that during the quarter, we introduced our new pricing and packages for plastics portfolio, including flat rate pricing and tiered packages, making easier for customers of all sizes to try buy and use vaseline platform. The reception from our customers has been incredibly favorable.
Fox.
Peter Alexander joined <unk>, as our new CMO, bringing his expertise a CMO, a checkpoint and harmonic as well as marketing leadership roles at Cisco.
Peter is a passionate creative expert and demand generation on shaping the voice technology companies.
Marshall Erwin joined fast they have our CSO, bringing this expertise from Mozilla as Betsy. So in addition to roles in the U S intelligence community.
And Karen Greenstein was promoted to general counsel, she joined <unk> in 2019 and has been serving as our interim G C.
I'm incredibly excited about the evolution of our senior leadership team.
I believe Peter Marshall and Karen will bring enormous contributions to our business and driving durable innovation, a lower friction employee experience and most importantly, a huge focus on new logo acquisition and revenue growth.
During the third quarter I'm very excited to share with you that we'll be hosting our annual user conference altitude in New York on September 26.
We will invite the investor community to join our webcast as customers share their experiences using fastest platform.
On the financial front.
We repurchased $236 million in aggregate principal amount of our convertible debt for a $196 million, which reflected a 17% discount to par.
This resulted in recording a $37 million net gain in the second quarter.
Our finance team is actively monitoring the capital markets for liquidity needs, while optimizing our cost of capital in an effort to give shareholders. The best possible return.
And last but not least we held our first ever Investor day in late June at the New York Stock Exchange I want to thank the New York Stock Exchange and all of you who joined US we greatly appreciate the level of engagement you brought both in person and virtually to this milestone required for those of you who may not have seen it I encourage you to visit our IR website now let.
Take a moment to discuss the internal transformation taking place. The fact that as I mentioned before we've put in place structural changes to our processes and realigned our departmental teams into functional groups.
We are seeing the positive outcomes. This is brought to strategic initiatives and our financial results.
So far I'm pleased with the progress we're making in 2023 and this is reflected in our updated projections for the year, we raised our annual guidance for both revenue and operating loss and will strive to find ways to outperform that guidance through strong innovation and velocity.
Strategically lowering of friction of our go to market efforts and streamlining our employee experience longer term I believe following our vision of the best end user experience will guide us to where those market needs intersect with the edge cloud.
And there is an enormous opportunity within that intersection.
As we simplify our offering and make it easier to deploy amazing web technology around the world, We will find new customers as we drive to reach a larger segment of the mid market to acquire customers at a faster rate with a motivated empowered channel and to bring the best talent from across the cloud community to Fastly.
We'll be monetizing the edge cloud and providing favorable impactful returns to our shareholders.
Our customers have a real passion for passenger solutions and our employees have a real enthusiasm for families mission to make the internet a better place where all experiences are fast paced and engaging.
Let me close by saying how excited I am about the road ahead of course, there is plenty of work to do but I believe digital experiences will drive the mission and define the success of almost every organization around the world and family will have a significant impact on the way digital experiences are built and delivered.
And now to discuss the financial details of the quarter and guidance I will turn the call over to Ron.
Tom.
Thank you Todd and thanks, everyone for joining us today, I'll 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 base.
Total revenue for the second quarter increased 20% year over year to $122 8 million exceeding the top end of our guidance of $117 million to $120 million.
Revenue from signal Sciences products was 14% of revenue.
32% year over year increase or 27% increase excluding the impact of purchase price adjustments related to deferred revenue.
Also note that we calculate growth rates after the actual results with a percentage of revenue rounded to the nearest whole percent.
As Todd shared in the second quarter, we saw traffic expansion and major customers as well as strong upsell and cross selling activity.
This led to a better than typical seasonal growth pattern in the second quarter relative to the first which is usually relatively flat sequentially.
We have a number of initiatives focused on increasing demand generation motions to simplify our pricing and packaging.
Partnership programs and marketing activities, they give us confidence in our 2023 revenue guidance or.
Our trailing 12 months net retention rate was 116% flat with the prior quarter and slightly lower than the 117% in the year ago quarter. We continued to experience very low churn and our customer retention dynamics remained strong.
As Scott shared we had 3072 customers at the end of Q2 of which 551 were classified as enterprise.
An increase of 11 compared to an increase of seven in the first quarter.
Enterprise customers accounted for 92% of total revenue on an annualized basis up from 91% in Q1.
Our enterprise customer average spend was 818000 up 3% from 795000 in the previous quarter and up 10% from 742000 compared to Q2 of last year.
Our top 10 customers comprised 37% of our total revenues in the second quarter, an increase from the 35% contribution in Q1 2023.
Let me take a moment to discuss our RP O our remaining performance obligations.
Our RPM reflects future committed revenue from current customer contracts and deferred revenue.
As we augment our primarily consumption based revenue model with predictable revenue packages, we anticipate our RP O will become more meaningful to the investor community.
Also our RPM will fluctuate on a quarter to quarter basis, due to the timing and the seasonality of customer contract renewals. So looking at the year over year change is a meaningful way to evaluate the changes in our Rps.
For the second quarter, our <unk> was $231 million down 5% from $242 million in the first quarter of 2023 and up 33% from $173 million in the second quarter of 2022.
I will now turn to the rest of our financial results for the second quarter.
Our gross margin was 56, 6% for the second quarter compared to 55, 6% in the first quarter of 2023.
As Todd discussed we are seeing the results from our continuing efforts to manage our cost of revenue and fixed cost footprint.
Operating expenses were $77 $3 million in the second quarter, a 2% decline compared to Q2, 2022 and down 3% sequentially from the first quarter.
This reflects the favorable impact of a $3 4 million sales and use tax refund we discussed on our Q1 call as well as approximately $6 million and favorability in operating expenses relative to our expectations.
About half of this was due to expense control measures with the remainder due to the timing of marketing expenses, where we see certain programs and related costs moving to the second half from the first half and an increase in the capitalization of internal use software.
This favorability combined with revenue above the high end of our guidance and better than expected gross margins resulted in an operating loss of $7 8 million.
Exceeding the high end of our operating loss guidance range of $18 million to $16 million or net loss in the second quarter was $4 6 million or.
<unk> <unk> loss per basic and diluted share compared to a net loss of $28 million.23 loss per basic and diluted share in Q2 2022.
I am pleased to report that our adjusted EBITDA positive in the second quarter coming in at $5 2 million compared to negative $16 million in Q2 2022.
Turning to the balance sheet.
We ended the quarter was approximately $475 million in cash cash equivalents marketable securities and investments, including those classified as long term.
Cause of our outlook of capital expenditures of 6% to 8% of revenue for 2000 twenty-three.
We expect quarterly cast capital expenditures to decline in the second half of 2023 and to be in line with our outlook for the full year.
As a reminder, or cash capital expenditures include capitalized internal use software.
I will now turn to discuss our outlook for the third quarter and full year 2023.
I'd like to remind everyone again that the following statements are based on current expectations as of today and include forward looking statements.
Actual results may differ materially.
We undertake no obligation to update these forward looking statements in the future except as required by law.
Our third quarter and full year 2000 twenty-three outlook reflects our continued ability to deliver strong top line growth. The improved customer acquisition ended up selling cross sell expansion in our existing customers driven in part by new and enhanced products.
Ah revenue guidance is based on the visibility that we have today.
We continue to expect expense growth for the year to lag year over year revenue growth and expect a meaningful improvement in our operating losses 2023 over 2022.
As we stated last quarter, we are investing it or go to market efforts as part of our revenue growth initiatives to continue our expansion in our existing customers and to accelerate our new customer acquisition.
We will continue our investments and product and R&D, and we see meaningful opportunities to drive greater efficiencies in our operations, especially across G&A and expect to see meaningful leveraged our G&A costs in 2023 and for these costs to decrease as a percent of revenue.
Historically third quarter revenue experiences sequential growth that accelerates into the fourth quarter.
For the third quarter, we expect revenue in the range of $125 million to $128 million, representing 17% annual growth and 3% sequential growth at the midpoint.
As we've discussed we are managing our capacity or higher traffic and revenue expected in the second half of 2023.
While we continue to be very disciplined in our network investment cost of revenues.
G B did to our second quarter gross margins being approximately 100 basis points better than we initially expected we have onboard a newer traffic patterns that have a modest adverse impact to our variable bandwidth costs.
As a result in the third quarter, we anticipate our gross margins will decline approximately 100 basis points relative to the second quarter.
Or minus 100 basis points.
And we expect to see gross margin accretion in the fourth quarter of at least 150 basis points above Q2 levels.
As we shared on our first quarter call. We saw some increase in price declines in the second quarter.
<unk>, winning additional delivery traffic from a major customer.
We expect our pricing trajectory to return to its normal trajectory in the second half of 2023.
Normal reductions in our bandwidth costs, an ongoing network optimization combined with increasing traffic into our fixed cost base in the second half are expected to offset any pricing changes.
As we mentioned previously.
Q2 operating loss was approximately 6 million better than our earlier projections. What's happened this improvement due to the timing of marketing expenses and an increase in capitalization of internal use software.
R Q2 operating loss also reflected the expected benefits are three $4 million from a sales and use tax refund.
For the third quarter, we will continue our cost control efforts. However, we will see a reversal in both the marketing expense benefit and the non-recurring sales and use tax benefits experienced in the second quarter.
As a result for.
For the third quarter, we expect our non-GAAP operating loss increased by $5 million to $7 million to a loss of $15 million to $13 million in a non-GAAP loss of nine cents to seven cents per share.
Given these results and are working capital expectations. We also expect our free cash flow to be negative for the third quarter.
For calendar year 2023 year, we are raising our revenue guidance a range of $495 million to $505 million to arrange a $500 million to $510 million.
This increase represents 17% annual growth at the midpoint.
We expect our non-GAAP operating loss to improve to arrange a $49 million to $43 million, reflecting an operating margin of negative 9% at the midpoint compared to an operating margin of negative 18% in 2022.
We expect our non-GAAP net loss per share to remain at 27 to 21 cents for basic and diluted share, reflecting the improvement in our operating loss expectations offset by lower interest income in the second half, resulting from the hundred and $96 million spent on our convertible that report.
And the second quarter.
Before we open the line for questions, we would like to thank you for your interest and your support and Fastly.
Operator.
Awesome. Thank you so much and just as a reminder, if you would like to ask a question. Please press star followed by the number one.
Alrighty, we do have a couple of people already lined up our first question comes from the line of James James. Please go ahead.
Hi, guys. Congrats on the quarter a couple a couple of questions for you guys. You know just first.
If I look at your net retouching rates, but it's nice to see the trial in 12 months stabilized, but you're about to come off some some high numbers kind of next quarter I guess, what's given the confidence that we can see the number move higher how should we think about retention rates in the back half a year, especially given you could shed some customers. What you did sound like you you wanted some increased traffic.
One of your larger customers in wrong can can you help us understand the gross number of new at this quarter is just trying to under and quality underneath as it looked like new business was quite quite good here.
Yeah.
I can start.
When we look at I remember attention right. There is some organic growth in terms of usage on the platform that has a strong seasonal effect, but I think our biggest leopard here and the reason, we're seeing confidence from our teams and that retention rate is really about the cross sell.
We've made a lot of progress with platform unification and simple finding ourselves motion more and more of our largest deals are our platform wins, even on the new logo, sorry, meaning multi portfolio.
And our cross-sell motion is just getting really I think is gaining a lot of momentum and so that's I think really why we see confidence there on the networks actually already.
And looking at total customers one as you saw our enterprise customers actually accelerated Elizabeth Brown, plus six plus 11, when you look at the aggregate number of customers. If you exclude customers at the low and we actually did see a net add if you take customers under a thousand a R. R.
You would have seen.
Some increase in the total customer number quarter on quarter basis. So you like the medium and high and we're seeing good customer quality and ads.
Got it.
Talking to me for Ya <unk>, mainly have a line for kind of new use cases today, but not the analysts say, we we all talked about big security opportunity, both as a spear for new logos and for expansion on the existing base.
I guess, what's what's gonna be the differentiation and an ability to replace your competitors at a lot of these overlapping in major customer accounts and Additionally, do you feel a need the potentially change sales incentives to align more security cross so rather than a new logo with at all.
We are primarily focusing self defense is around new logo growth of course total revenue growth, but but new logo growth, especially when you look at <unk> special incentives.
The security Cross so I think in a lot of ways is it's a natural extension of of the sales motion relationships customers with whom we have a great relationship.
And really the best in class offerings, especially an extra and laugh.
The I think the last piece to that puzzle is really completing the platform unification play.
This time, so feature parody on our edge Waff are on Fastly platform, an extra and last solution with the traditional <unk> solution, which is a big big step and make your Mac cross-sell smoother.
The platform unification for management claim, which we hope to have in the market by the end of the year will really I think complete that story I'm not.
I'm not really anticipating that we're gonna need special sales incentives around the cross so I would expect new customer acquisition primarily.
[noise] alright, thank you.
My question comes from the line of spring clothes and Frank. Please go ahead.
[noise] Frank How're, you there you might be amused.
Sorry about that okay, hey, thanks, a lot can you walk us through the status of the chat channel program. When does that began in and where are you, saying that there and then maybe a little more details on on your <unk>. Your cross sell efforts here with with with signals lives in delivery, Yeah, where are you on being able to <unk>.
Pull that out with with customers and what's the response been thanks.
Yeah. The channel program was launched I think two quarters ago, and we've had I think I'm pretty good uptake, we're seeing a significant.
Increase in dual registration, which for me is kind of the leading indicators here in terms of a healthy channel launch and do registration also drives new mobile acquisition, which obviously is a huge focus bars across the board we've seen some really creative partnerships as well.
Traditional systems integrators, especially on the security side incredibly strong, but folks who've actually embedded fastly technology onto their platforms and I've been able to.
Resell it that way like a 10, that's been incredibly successful so far too so.
Right now, we're feeling pretty bullish about where the channel channel program wise.
There's one interesting piece, which is the channel that we.
Sort of had been incubating for the last year before the Big Channel launch started with the signal science business.
Because of that the single science business.
Had historically been primarily north American based.
Channel has a little bit more maturity in the in North America, we're working hard to build out a comparable channel M U, but certainly it lags and we we see that we're investing there to make sure that we've got good channel coverage and at least both of those primary markets.
Yeah.
[laughter].
Right.
<unk> you know with that on on the channel side can you give us what what sort of percentage of your sales came from channel and the quarter or where do you expect that to end up by year end.
Yeah. So you have a.
<unk> channel launch the particularly the security side coming from signal Sciences has been you know a heavily channel that business.
That business you know in the aggregate.
Was.
13% in the corner 14 per cent of revenue in the quarter. The big piece of that is channel that the channel sounds delivery, which was launched two months ago is you know we're starting to see some early traction.
But in terms of a percentage, it's still a fairly nominal percentage at this point, we should start to see that ramp more in the second half and more of the business outside of signal sciences be sold through the channel partners.
Right.
<unk> just try to highlight more of this the the channel deals and and get the.
Clearance to share more of that in the future, but it was nice to see I I thought of it matter a handful of our biggest deals some of the top five bills in the corner of went through the channel.
And we're source there in that <unk> actually makes a big difference.
Internally a signal to our sales team that you can find success the channel and that that helps us continue that momentum there.
Uh-huh.
Okay, great. Thank you very much thanks.
Thanks.
Alright. Our next question comes from the line of <unk>. Please go ahead.
Thank you for taking the questions that congrats on the on the quartering beginning that 20 per cent gross threshold I want to get a sense of time from your perspective as you guys were to expand into new industries and you guys caught out tech How's the composition of traffic on the network changing and and does that have any sort of impact or.
Mixed effect on sort of your mortgage if you expect that you still saw this current quarter, what you sort of <unk>.
You know what that is a really great question, because we have some of that conversation apparently so the mix shift by vertical it matters actually a lot when it comes to time of day loading.
Our infrastructure tends to be highest highest under highest load in the evenings when people are.
Streaming entertainment, most commonly and so things like text that tend to have a more balanced workload tends to be a good margin tailwind to us and you can imagine other types of articles that have fast that shape will.
Type of time of day mix is a in the margin Tetouan for us for sure. There's also the case that tech.
Hospitality people with large personalization requirements e-commerce retail.
Tend to be pretty interested in the computer platform and and that again is a mix that will will tend to be a tailwind to our margin. So those things have been helpful and I I think we're going to start to see more of that in fact, you know in the coming 24 months.
That's super helpful and there's sort of a broader question sort of picking up some on some of the theme from the from the Investor day, the sort of you know one <unk> kind of unifying you know go to market product engineering sort of customer advocacy.
What do you think we're in any sort of launch the channel program, which you talked about a couple of minutes ago, but what what's more coming down the pipe over the next three to four quarters that we should be attained attention too.
When we think about one fast I just the biggest.
Peace, that's coming is the the full platform unification.
And what that means is all of the product offerings can be managed from a single management suite no swivel chair management, regardless of which type Mexican last appointment you're using if you're if you have an ex wife and you add content delivery. If you expand to compute if you deploy observability there's one.
One platform, meaning one management plan, one a P I and importantly, one set of infrastructure.
And what that means is a benefit for the user experience.
Because they don't have that swivel chair, it's easier for them to operate and expand from one portfolio to the next it makes our sales teams job in Atlanta, and expand easier for sure and of course <unk>.
<unk> a real simple stay on the operation, we don't have to run multiple different types of infrastructure. We don't have a completely different infrastructure for cute. We have one set of infrastructure. We're all of our services run one management plan one API.
And I think there's benefit them ops and sales and certainly in the customer experience.
Understood. Thank you very much.
Oh, you asked for any I'm, saying, we're in the fourth [laughter].
Alright. Our next question comes from the line of Jonathan Jonathan. Please go ahead.
Hi, there [noise] good afternoon, and congrats on the strong results.
Can you give us a little bit more color on started the AI opportunity that you described and maybe you know what some of the specific use cases or what the potential for revenue is and how soon should we you know sort of expect us to become you know or or will it even become instead of a meaningful driver.
Yeah, I mean, I think it's <unk>.
Excuse the good question when it will become a meaningful driver.
You should now we're not planning for it to be a meaningful driver for the remainder of this year, but the use cases are incredibly interesting we see.
Hey, I and especially in France based algorithms that are being used for deep personalization content recommendation.
Product recommendation et cetera.
Sophistication of that algorithm truly matters directly to the R O y a.
One of our customer, especially in e-commerce and media et cetera.
And I think those folks are experimenting with it right now but this is it is it very interesting intersection for US, we're personalization matters and user experience matters and and where there is a strong.
Ability for those two things matter of fact, I feel like that's all we're gonna see AI at the edge and this is a great example of the kind of Multicloud strategy that that.
We talked about it an investor day.
We know these models are going to be trained in central piled on AWS M. G. C. P and then deployed to the edge.
In order to make those real time decisions.
And I think that's good I think that's the way developers want to operate and that puts the central cloud and the edge in a place where they can both Sean.
Excellent and then just in terms of the new traffic pattern set you describe that potentially impact gross.
Gross margins is there any additional details that you can provide and do you expect this to be a <unk> continue to turn it over time.
I do expect it to be a trend I think any vertical.
We are obviously focusing on political differentiation, our customer base, a new logo acquisition and and you know.
Nine media and on publishing vehicles that differentiation.
It matters it does matter because of the time of day.
It also it it doesn't matter because of the type of workloads, but they have you know computing security workloads tend to be a tailwind to our to our gross margin.
You know we will have to give it some thought I don't have any other data point that I could disclose right now there, but I definitely do expect it to be a tailwind.
As we continue to differentiate the customer base.
Thank you.
Okay.
Alright. Our next question comes from the line of Madeline Brooks Madeline. Please go ahead.
Hey, guys. Congrats on this trunk order just to follow up.
For me I guess perfect environment, you know from my perspective, it looks like that most of the rain, that's really coming from the cheapest quarter. So how are you feeling about the environment clean the back half of it here and then just no ketchup on AI after that.
Sure.
As far as the environment goes I think we are actually pretty bullish.
We we've seen some of our.
Other folks in the market to be a little bit concerned about the.
<unk>.
Growth in their in their user base.
And I think maybe there's some of that down market, but we have very little exposure to it maybe some in service right or a banking again, we don't have a lot of exposure there I'd like more.
We don't have any.
You know look I think that's as far as the Guy Who's goes and I think you make a good call out like we wanted to be very clear that we are being responsible about the guy and so we have very high confidence and hitting those numbers.
I was proud of the fact that the team was able to get real clarity in and pull up to the annual guide here I hope to do it again.
<unk>. Thanks for the clarification and then on a I.
I understand I'm training and models of decor, and then the only thing I've been seeing on the edge pretty fast for a second P C and printing and killing some mortgage on the S. C. That's something that will require more capex and you're already planning for when it does become an opportunity or do you feel confident that the cabinet for Ya have spent so far I sufficient for.
That story about the ads.
No. We we have absolutely deployed for this thing and you see it in the future releases over the last few quarters, we watched big store as well as the <unk> <unk>.
Value pair store, which is which can absolutely be used in order to deliver outcomes using in for an inference based model and you're gonna see more storage features from us as we go forward, but this has been in the plan and edge storage as part of a.
Computer platform.
Is absolutely part of what we have already built out for we're not expecting.
A significant change to our bill Clinton because of that.
Great. Thank you so much.
Sure.
Alright. Our next question comes from the line of Willpower will please go ahead.
Hi, <unk> on for well thanks for taking the question just got pricing and packaging I think you mentioned that you started to introduce it this quarter.
Where would you say you are in that journey right now and when do you expect to finish the transition and when do you expect the bulk of the benefits to kind of kick in there any color it'd be great. Thanks.
Yeah.
You know I think it's going to be.
It's gonna be a relatively long transmission in part because we're not trying to force. It we have lots of customers that want to run a true utility motion.
And especially you know customers and media entertainment, that's the motion. They Wanna run, we we have no intention of making any changes there.
But there's a huge chunk of the enterprise market that wants it all in one package and especially they want reliable billing.
And that's something that I think it's good for us and that it it makes our revenue a little bit more reliable gives us a strong sir monthly renewing.
Or monthly commit and.
Revenue, we're seeing the improvement and things like the <unk>, which ran out into the disclosure this time around and in part I think so that you can track the progress here.
I would say.
Our sales motion I hope to be kind of transition maybe in another 12 months.
But I think the customer base will will shift towards this maybe over the next few years.
Until we hit kind of a steady state.
It was nice to see that again some of the big deals that we called out and maimed or using we're using packages and that new packaging system was a reason why some of them made the change from Oh deeply entrenched incumbent flat rate packaging no overages.
All in one feature set.
That was my system.
Awesome Yeah. Thanks for the call are there and then just personally on the competitive environment. What are you seeing in the <unk> the business there any any changes on the competitive environment. Thanks.
You know we have seen some.
[noise] consolidation in the market and and some interest but largely the two big trends we see is.
There are large large customers customers with a multi C D and that are looking at vendor consolidation and it tends to be good for us when we see that.
Because they tend to choose the performance leader as as one of their downs.
Bounds selected vendors.
And I think what we're seeing is that C D and more and more is being bought as part of an edge cloud solution and so having the complete platform is an enormous tool.
And we see.
Some of our large competitors targeting that same kind of emotion and I think that's good I think it's good for the industry that fish is becoming much more of a platform play instead of a point solution.
Great. Thanks, a lot.
Sure.
Alright. Our next question comes from the line of Rudy Kasinger Rudy. Please go ahead.
Yeah. He got <unk> I just have two quick ones for you Theresa and then you guys. Instead of the analysts say that revenue per server and keeps you was roughly.
I'm sorry can you see one was roughly 12% below the peak and I was just curious if you guys saw any further improvement and two two.
Oh, that's a great question, we don't track revenue per server every quarter [noise].
I guess, what I can tell you is we did not have to deploy any significant additional hardware in this quarter and the revenue went up so.
I feel like.
Okay have a good chance that the revenue per server increased but to be honest.
Not a figure we track every single quarter. It was disclosed during investor day, because the trend was was interesting and certainly in hindsight I think painting the picture, but it's really the cost of revenue that we are tracking most carefully if I can optimize.
Cost of revenue by adding a few servers and reducing other types of costs will take that trade off all day long I don't want my ox team <unk>.
Chasing down.
A goal around cough revenue per server instead of just.
Optimizing for gross margin overall.
Got it yeah that makes sense and then just a second one just any early feedback you've gotten from the <unk> mitigation data and then when will bought and Ddos products <unk>. That's it for me.
Thank you.
Oh, that's a great question my security team will be so excited.
We've got a great response, and you bought mitigation and we have a bunch of beta deployments out in the in customer.
Customers hands right now it's been going great and we're really excited about that play on the deed outside obviously, we've had lots of ddos.
Technology available from Fastly for years and years, but getting more ddos visibility is gonna win the most interesting part of that has been an enormous amount of customer interest in the full managed security service, which includes the Ddos mitigation there and that's been that's been a nice tailwind and yeah.
To be honest I think a really attractive service with pumping some of our competitors have had in the past it gives a direct access to our.
Security operations team really in depth threatened litigation.
And those two the security M. S S and the abomination were incredibly coughing and and and I think we're seeing a really healthy pipeline growth right now.
Alright, Thank you and just as a reminder, if you would like to ask a question. Please press star followed by the number one.
Alright. Our next question comes from the line of Richie took Maria Richie. Please go ahead.
Hey, this is <unk>. Thanks for taking my question first one is just on the pricing and packaging you mentioned it's good.
Good for send that there's a new industry wins and use cases. Thank you call that retail in high Tech in particular is there anything else. Besides the pricing impacting that you've done over the past couple of quarters to help you know be more suitable for those types of abuse cases.
Just anything that that you can expand on it a little bit.
Sure I mean, we've pushed really hard on automation you saw in the supplement there's details on dynamic back and which helps automate Fastly management and we pushed on the security side of the house of mutual Tls, There's a bunch of work that we're doing to make it.
Platform itself more powerful.
And to be honest easier to use an automated and I think there's a lot more work we have here on just simplifying our customer experience, making vaseline not just the most powerful as cloud platform, but the easiest to use in the easiest to develop for them and we're working hard at that.
B.
Ah strength of of the platform has been I think really steadily increasing we're very excited about certainly you were very excited about some of the security efficacy improvements we've seen but.
If there was one thing that I could say that we've that we're really pushing on hard where we've already seen benefits and and we hope to see a lot more it's real platform you to vacation.
Because.
While the media vertical I think is very focused on direct content delivery.
Most other enterprise vertical is really need a complete edge sweet they want a single platform a single strategic vendor and they want that to be as easy onboard as possible. So we've seen improvements in our account linking and you I.
The holiday season, but as we get.
The full platform unification story, I think that's really going to help us.
Knock down a lot of new logos and some of these expansion verticals.
Thank you that's very helpful. And then just to follow up on on some of that yeah security products that are rolling out how should we think about just in terms of like monetization for some of those products and how does that kind of flow into the model as we think about maybe just.
Generally speaking, but then also as it applies to the pricing and packaging changes.
Sure. So the security the web applications security solution, we kind of.
Try to sell that is.
One unified package, especially in our new modern packaging solutions Ddos anti bot mitigation next door and laugh that as one consistent package.
Think that'll be our primary emotion more and more we obviously seldom Ala carte, but.
You're gonna see I think we're gonna see more and more that there that are sold as a package web application security.
The.
T L. As in the certificate solution, you, usually get sold kind of in conjunction with the.
With a C D N and certainly is really gonna make that a lot easier, especially for a platform. What we call a platform to you last spoke with you about the port a lot of U R. LS and I have a lot of different web presence is at.
Certainly is going to help us make that radically simpler for them.
But I do think that will be sold separately, so there's a little bit of a different emotion there.
Yeah.
Yeah, I guess, that's sort of how we see it largely the core security solution being sold as a package.
And.
You know things like Tls.
Certificate management et cetera, being sold all occur.
Got it thank you.
Sure.
Alright, and that looks like all of our questions I would now like to turn it back over to Todd and the team.
Thanks, so much before we close the call.
Our employees, our customers our partners or investors.
We remain as committed as ever to make me in a better place where all experiences are fast paced and engaging.
Moving forward, we remain focused on execution.
I'm, bringing lasting growth to our business and delivering value to all our shareholders. Thank you so much for your time.
That concludes today's call have a pleasant day.
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