Q3 2023 Fastly Inc Earnings Call

Ladies and gentlemen, good afternoon. My name is Abby and I will be your conference operator today.

At this time I would like to welcome everyone to the Fastly third quarter 2023 earnings Conference call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time simply Breasty Starkey followed by the number one on your telephone keypad.

If you would like to withdraw your question Press Star one a second time.

Thank you.

I would now like to turn the conference over to burn SC Investor Relations at Fastly. Please go ahead.

Thank you and welcome everyone to our third quarter 2023 earnings Conference call, we have Fastly CEO, Todd Nightingale, and CFO, Ron Kisling with us today.

Cast of this call can be accessed through our website <unk> dot com and will be archived for one year also a replay will be available by dialing 870 7020.

030, and referencing conference I'd number 754, three to three nine shortly after the conclusion of today's call.

A copy of today's earnings press release related financial tables, and Investor supplement all of which are furnished in our 8-K filing today can be found in the investor relations portion of <unk> website.

During this call we will make forward looking statements, including statements related to the expected performance of our business future financial results product sales strategy long term growth and overall future prospects.

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 third quarter 2023 earnings release and supplement.

For a discussion of factors that would cause our results to differ.

Please refer in particular to the sections entitled risk factors.

We encourage you to read these documents.

Also note that the forward looking statements on this call are based 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.

If we begin our prepared comments. Please note that we will be attending three conferences in the fourth quarter. The RBC capital markets 2023, TMT Conference in New York City on November 15th.

Davidson Technology Summit in New York City on November 16th and the UBS Global Technology Conference in Scottsdale, Arizona on November 29.

With that I'll turn the call over to Todd Todd.

Thanks, Vern hi, everyone and thanks, so much for joining us today.

First I will give a quick summary of our financial results and third quarter highlights and then I will provide an update on our product strategy go to market and internal transformation before handle the call off to Ron to discuss.

Our third quarter financial results and guidance in detail.

We reported record third quarter revenue of $127 $8 million, which grew 18% year over year and 4% quarter over quarter. This.

This came in at the very high end of our guidance range driven by strong international traffic. This demonstrates continued momentum in our enterprise customer motion as we continue to benefit from vendor consolidation and seasonal strength in streaming activity.

Our customer retention efforts, a hallmark of our customer satisfaction were favorable in the third quarter. Our LTM NRI was 114% down slightly from Q2, our <unk> was 120% in the third quarter down from 123% in Q2, and also slightly down from 122% in Q3 of last year our debt.

<unk> continues to demonstrate healthy wallet share gains and our customers as we continue to cross sell more functionality and grow with our customers ongoing edge traffic requirements.

We're starting to see some effects of budget tightening by our customers. While we continue to see strength in customer expansion, especially cross product expansion across the board.

Our total customer count in the third quarter with 3102, which increased by 30 customers compared to Q2 and 63 year over year enterprise.

Enterprise customers totaled 547 in the quarter a decrease of four from Q2 and an increase of 36 year over year, we have four new customers make the enterprise 25000 dollar threshold in the quarter number dropped to reflect a sequential decline as we discussed during our Q1 earnings are newer enterprise customer count methodology will be.

Slightly more volatile.

Our average enterprise customer spend with $858000 up $40000 quarter over quarter, representing a 5% increase as well as an 11% increase year over year. These results point to continued wallet share expansion as we've aligned our customer success teams to be more focused on cross product adoption.

So as we work towards platform unification, we've begun focusing on our goal of making customer cross selling and on boarding a simple as a single click for existing customers. This will be a huge shift in the usability and the expanded ability of our platform and helped drive customer retention as well as expansion.

I am excited to share with you that on the third quarter, we acquired domain, a real time DNS API provider.

Brought on board a small team of highly respected DNS experts and paired with the general availability of certainly our certificate authority, we have the opportunity to greatly simplify onboarding to the SaaS platform with security and simplification.

In the third quarter, we landed a key new logo wins and highly competitive deals I'm personally very excited about Wendy's a true lighthouse account in a new vertical for pathway that opens up a major market opportunity.

Our success in E. Commerce grows to include more and more adjacent verticals, such as food delivery travel and leisure and consumer brands, we see significant potential to accelerate customer acquisition.

Continuing our success in security and privacy proxy implementations. We are excited about Mozilla adopted fast. These oblivious http. Relay pathway now serves three of the top four internet browsers worldwide.

Thought leadership, we published our first threat intelligence report featuring data and insights from fast food network learning exchange as well as continued post on fast the technical leadership in the constantly evolving world of Ddos exports.

Some of you are aware a couple of CDN providers are in the process of winding down their services and have sold their remaining customer contracts to our competition.

This has created a disruptive environment that faster is poised to capitalize on especially as those contracts come up for renewal digital turbine a leading digital AD providers. A great example, and there are many others already engaged with <unk> to find higher levels of service and performance at competitive rates, we are committed to helping them find their next strategic <unk>.

<unk>.

If anyone listening recently had their contracts solid please feel free to reach out.

We're seeing this e-commerce expansion internationally as well closing of top New Zealand grocer in an omnichannel retail fashion house in the U K.

Saw continued customer acquisition and the travel leisure segment and then the health care Life Sciences, we.

We anticipate continued momentum in these expansion verticals as our sales team is now armed with more reference accounts and prebuilt to use cases.

This momentum significantly tilts, the wind probability fastly and gives us a considerable edge with new customers.

As these new verticals ramp.

Diversified traffic load will provide <unk> with smoother network and compute demand, providing better infrastructure utilization leading to future margin improvements.

Our gross margin was 55, 9% for the third quarter, representing a 70 basis point decline quarter over quarter at 230 basis point increase year over year.

I am pleased with the team's efforts controlling our variable cost of revenue and continuing to get more from our infrastructure footprint.

Second quarter in a row, we saw outsized increases in international traffic, which did cause a short term margin headwind as with last quarter. These will open up opportunities for us to peer more and negotiate our bandwidth cost to lower our total cost of revenue for the future.

Our operating expenses were $84 million in the quarter coming in lower than anticipated.

Financial discipline and rigor continue to have to favorable results. Here. Note. This result also reflects heavy sales and marketing spend due to onetime events NPS I'm also pleased that we posted another positive adjusted EBITDA quarter, making this our second quarter in a row positive EBITDA should be a normal occurrence moving forward, but.

Youll excuse my enthusiasm just this one last time.

Ron will explain our outlook and guidance in more detail, but as you can tell from our Opex spend we are readying our model to leverage revenue growth and improve our cash flow for next year.

During the quarter, we continued to drive our durable innovation engine strategy and have delivered several key pieces of functionality in the market you can see these in our supplement including JD store shipping GAA, which enables more powerful edge applications through very high performance of reason right. The key data at the edge.

<unk> QL inspection expands fastest API security offering.

Certainly going GAA establishes a fastly certificate authority to provide domain validated tls certificates and improve the security and reliability of our customer sites.

And our go compiler SDK provides edge compute developers with a key capability for a highly requested language.

During the quarter, we hosted altitude.

User conference in New York City, drawing hundreds of worldwide attendees, most attendees where customers and prospects, but there were also industry and investor analysts in attendance I.

I was extremely pleased with the event was very well received some of the sessions have been viewed thousands of times online following our social media coverage.

One of the highlights was a demo of simplified service creation of our new Onboarding workflow and dashboard.

This demo was so powerful because it showcased fast these new ability to provision a global website for best in class low latency user experience worldwide all in 90 seconds.

This combination of power and simplicity is near and Dear to my heart.

This is key to rapidly increasing customer acquisition of Fastly.

Please give it a look if you have a chance it's bookmarked in our events page and in our supplemental.

There has also been great progress with our packaging motion, we initiated this motion a little less than a year ago and closed our first handful of packaging customers in the first quarter of 2023.

Since then the growth has accelerated in the third quarter. The number of customers that signed packaging deals more than doubled quarter over quarter almost half the packages sold to date have been computing related with almost a third of the customers buying a standalone compute only package.

In terms of the overall number of packages sold more than 25% of our package deals are platform wins with multiple product lines, including demonstrating the ability for packaging to help us drive our platform strategy and expand our offerings beyond CDN.

This data gives us great insight into where we can see our efforts and we plan to continue to drive our single platform cross selling motion across our customer base.

I'm very excited about this opportunity as Ron will explain in just a moment. This is having a favorable impact on our <unk> as well.

Moving onto our channel partner development, we are seeing great progress here, our 2023 deal registration is already triple that of 2022.

Youll recall that during our Investor day in late June Brett shared with you that we had 33 partners globally engaged today that number totals $55.

Our revenue contribution has grown more than 50% in 2023 year to date when compared to all of 2022, and we expect to see this trend continue into 2024.

So far I'm pleased with the progress we're making in 2023.

And this is and this is reflected in our updated projections for the year.

We raised our annual guidance for both revenue and operating margin and will strive to find ways to outperform that guidance through strong innovation velocity strategically lowering friction of our go to market efforts and streamlining our employee experience.

Lastly partners with our customers to deliver the best possible end user experience.

This focus uniquely positions us where these market needs intersect the edge cloud.

And there is an enormous opportunity in that intersection.

Future user experience as fast safe and engaging without compromise.

Organization spend too much time building best in class digital experiences only to see the value of that effort lost by having to compromise between performance safety and personalization.

This represents a clear architectural opportunity for Fastly.

The solution has to be built on the edge and it has to leverage all of the benefits of a best in class edge cloud platform.

Fast safe and engaging without compromise this is fastly.

Thank you so much and now to discuss the financial details of the quarter and guidance I will turn the call over to Ron Bryan.

Thank you Todd and thanks to 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 based.

Total revenue for the third quarter increased 18% year over year to $127 8 million coming in at the top end of our guidance of $1 $25 million to $128 million.

Revenue from signal Sciences products was 14% of revenue or 33% year over year increase or 31% increase excluding the impact of purchase price adjustments related to deferred revenue.

Also note that we calculate gross rates off of the actual results with a percentage of revenue routed to the nearest whole percent.

In the third quarter, we saw traffic expansion at our major customers as well as strong upsell and cross sell activity.

Our trailing 12 month net retention rate was 114% down from 116% in the prior quarter at 118% in the year ago quarter, We continued to experience very low churn and our customer retention dynamics remained strong.

Turning to our Po as I discussed last quarter, our consumption based revenue model is now being augmented with predictable revenue packages for the third quarter, our RP O was $248 million.

Up 7% from $231 billion in the second quarter of 2023 and up 43% from $173 million in the third quarter of 2022.

As Todd shared we had 3102 customers at the end of Q3 of which 547 were classified as enterprise a net decrease of four compared to an increase of 11 in the second quarter.

As a reminder, we changed our calculation of enterprise customers. This year to customers with an annualized revenue run rate of $100000 or $25000 in the current quarter, which result in more quarter to quarter volatility in the previous 12 months trailing $100000 definition.

Using our prior methodology enterprise customer count increased by 10 customers in the third quarter to 530 compared to an increase of six in the prior quarter.

From higher than expected growth in traffic from customers outside the U S and E U which was partially offset by reductions in our other variable and fixed cost of revenue.

As we've discussed in 2022, we implemented new and more robust network capacity planning to better align network capacity investments with are expected traffic demands.

These steps if you have a significant reductions to our cash capex investment as a percentage of revenue, which declined from 14% in 2021 to occur at range of 6% to 8%.

As part of this capacity planning, we identified approximately $4.3 million of hardware software and related commitments, primarily acquire or committed to in 2021 that are in excess of our requirements.

We recorded an impairment charge for $4.3 million in Q3 to reserve for this excess equipment and commitments, we fluted the impacted discharge and or non-GAAP results.

Operating expenses were $84 million in the third quarter and eight per cent increase compared to Q3, 2022 and up 9% sequentially from the second quarter.

A portion of this gross with a tax benefit to $3.4 million recorded in the second quarter that did not recur in Q3, and one time marketing expenses related to events and fees. In addition to our normal investments and R&D and sales and marketing.

The benefits from our continued focus on cost disciplining financial rigour offset these investments, resulting in opex coming in slightly below our expectations.

This favor ability combined with revenue at the upper end of our guidance range and gross margin slightly ahead of expectations resulted in an operating loss of $12.6 million exceeding the high end of our operating loss guidance range of $15 million to $13 million.

Our net loss in the third quarter was $8 million or a six cent loss per basic and diluted share compared to a net loss of $16.8 million.14 loss per basic and diluted share in Q3 2022.

I'm pleased to report that our adjusted EBITDA was positive in the third quarter coming in at zero point $7 million compared to negative $9.1 million in Q3 2022.

Turning to the balance sheet, we ended the quarter with approximately $461 million in cash cash equivalents marketable securities and investments, including those classified as long term.

Our free cash flow for the third quarter with negative $19.7 million or $27 million sequential decrease from positive 7.8 money and in the second quarter.

This decrease was primarily driven by changes in working capital and lower operating margins as compared to Q2, which benefited from the aforementioned non-recurring sales and use tax refund of $3.4 million.

Our cash capital expenditures for approximately 4% of revenue in the third quarter below the low end of our outlook of 6% to 8% of revenue for 2023, we.

We expect to accelerate the purchase of certain hardware in the fourth quarter for deployment in 2024, which will drive our annual Capex for 2023 as a percentage of revenue to the high end of our 6% to 8% range. As this demonstrates we expect to continue to see quarterly fluctuations and the timing of our capital expenditure.

But for them to a line with our range on an annual basis.

As a reminder, or cash capital expenditures include capitalized internal use software.

I will now discuss our outlook for the fourth 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 fourth quarter and full year 2000 twenty-three outlook reflect our continued ability.

[noise] deliver strong top line growth via improved customer acquisition upsell and cross sell expansion in our existing customer driven in part by new and enhanced products are revenue guidance is based on the visibility that we have today.

Historically Ah revenue experience a sequential growth in the second half that accelerates into the fourth quarter.

For the fourth quarter, we expect revenue in the range of 137, two $141 million, representing 16% annual growth and 9% sequential growth at the mid point.

As we shared on a previous call. We saw some increase in price declines in the first half as a result of winning additional traffic from a major customer.

We entered the second half of 2023, we experienced increased traffic in international markets, where we saw favorable pricing as.

As a result, our pricing trajectory was more favorable and its normal course, and we expect that to continue for the remainder of 2023.

Recall that normal reductions in our bandwidth cost an ongoing network optimization combined with increasing traffic into our fixed cost base typically offset our pricing declined.

Looking more closely into these dynamics on the cost side in the second half of 2023, we saw a larger increase than previously expected and traffic from customers outside the U S and the new markets.

Within these markets are bandwidth costs today are higher than those in the U S. You market and it had a modest adverse impact on our gross margins.

While this increased traffic gives us the opportunity to renegotiate our bandwidth rate and increase pierini, reducing costs for all customers. In these regions you will have a modest near term impact on gross margins, while we complete these negotiations.

We continue to be very disciplined in our network investment cost of revenues, which contributed to our third quarter gross margins being approximately 30 basis points better than we initially expected.

For the fourth quarter, we know anticipate our gross margins will increase approximately 100 basis points relative to the third quarter, plus or minus 50 basis points.

As we mentioned previously R Q3, operating loss was moderately better than our earlier expectations as our continued cost controls offset increased seasonal spending in marketing for.

For the fourth quarter, we will see the benefit it increased revenue as we continue our cost control efforts as a result for the fourth quarter, we expect our non-GAAP operating loss decreased by approximately $3 million to $7 million to $10 million to $6 million and are non-GAAP loss to be 521 cents per.

Sure.

We reported nominally positive EBITDA in our third quarter and expect our adjusted EBITDA trade any positive and to improve materially in the fourth quarter.

For calendar year 2023, we are raising the mid point of our revenue guidance from a range of 500 to 510 million to arrange a $505 million to $509 million.

This increased represent 17% annual growth at the mid point we.

We expect our non-GAAP operating loss to improve to arrange a $44 million to $40 million, reflecting an operating margin of negative eight per cent at the mid point, which compares favorably to our prior guide of negative 9% at the mid point in our operating margin of negative 18 per cent in 2022.

We expect our non-GAAP net loss per share to improve to twenty-three to 19 cent, reflecting the improvement in our operating loss expectations compared to our prior range of a net loss per share of 27 to 21 cents.

And we expect our adjusted EBITDA for calendar year 2023 to be positive compared to negative 32.9 million in 2022.

Before we open the line for questions, we'd like to thank you for your interest and your support with athletes.

Operator.

Thank you.

As a reminder, if you would like to ask a question press star one on your telephone keypad.

If you would like to withdraw your question Press Star one a second time.

[noise] pardon me, we ask that you.

Limit yourself to one question and one follow up questions. So we can take as many as possible.

We will take our first question from Frank Laughing with Raymond James Your line is open.

Great. Thank you just following up on the guidance any change the longer term matrix you gave at the analyst day, particularly the free cash flow guide from 2024, and then to follow up on the Opex declines.

How much further can that can we see that decline in what sort of a good run rate for that going forward. Thanks [noise].

Yeah, I think if you look at the the sort of outlook, particularly with respect to cash flow that we gave back on the Investor day.

That is still intact, if we look toward 2024 on our cash flow basis, we would look to be breakeven.

Abby: Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today.

Abby: At this time, I would like to welcome everyone to be Fastly 3rd quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time.

Ish on a cash basis.

On the other side you know I'm I'm.

I'm pretty happy with the cost control across the company right now, but I'll tell you you know we got we still have some.

Significant benefits here I mean, it takes a while to unravel longterm.

Contracts and commitments were still we're still seeing that we're still reaping the benefits there and we've done a pretty good job of putting.

Vern Essi: Thank you, and I would now like to turn the conference over to Vern Essi investor relations at Fastly. Please go ahead. Thank you, and welcome everyone to our third 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 fastly.com. It will be archived for one year. Also a replay will be available by dialing 800 770 2030 and referencing conference ID number 754 3239 shortly after the conclusion of today's call.

<unk> business model.

Rubrics in place to control a head count that control the operator miles for our teams so that going forward. We we don't expect opex to grow nearly as fast as the top line and I think that's going to be the key for us.

Alright, great alright, thank you.

And we will take our next question from Jonathan how with William Blair. Your line is open.

Hi, Good morning, Good afternoon, just wanted to get a little bit more color on what you're seeing in terms of the spending environment and some of the budget tightening that's the first question.

Vern Essi: A copy of today's earnings press release related financial tables and investor supplement, all of which are furnished in our AK filing today can be found in investor relations portion of fastly's 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.

[noise] Yeah, it's Super interesting, we're seeing we see a bunch of tightening and some of our accounts that leaves too that can lead to vendor consolidation. They don't Wanna managers, many vendors that that tends to be good news for us because you don't have the performance leader and almost all of those deals are they tend to want.

Fast it'd be part of their solution, even if they stick with a multi vendor play.

Vern Essi: For further information regarding risk factors for our business, please refer to our most recent form 10K and form 10Q file with the SEC and our third quarter 2023 earnings release and supplement for discussion of factors that would cause a result to differ. Please refer in particular to the sections entitled risk factors. We encourage you to read these documents. Also note that the forward looking statements on those call are based on information available to us as of today's date.

There are some cases, where we've seen deals taking a little longer to close as more approvals are needed I think that might be the nature of the current economic environment that we're in and.

We haven't seen those deals dissolved we've seen them take off slightly longer than usual, but we're tracking that very carefully.

I might have a little bit more interesting information next quarter on it but we haven't we haven't really been too worried about it so far but we're noticing something.

Vern Essi: We undertake no obligation to update any forward looking statements except it's required by law. Also during this call, we will discuss certain non-gap financial measures, unless otherwise noted all numbers we discussed today, other than revenue, will be on an adjusted non-gap basis. Reconciliation to the most directly comparable gap financial measures are provided in the earnings release and supplement on our investor relations website. These non-gap measures are not intended to be a substitute for our gap results. Before we begin our prepared comments, please note that we will be attending three conferences in the fourth quarter.

Got it and just as a follow up how should we think about you know where your growing in terms of the international markets is there a way for you to maybe help us understand what markets is or you know or is there a specific vertical that you're seeing traction internationally and how <unk>. How long is it sort of takes for some of these contact me to grocery.

<unk>. Thank you.

Vern Essi: The RBC capital markets 2023 TIMT conference in New York City on November 15th, the DA Davidson Technology Summit in New York City on November 16th, and the UBS Global Technology Conference in Scottsdale, Arizona on November 29th.

Sure we see we've been pushing on our international go to market for sure and that drives a local business with local traffic and those are expanding region for us, but what is interesting and what is causing Ah.

Todd Nightingale: With that, I'll turn the call over to Todd. Todd. Thanks, Vern. Hi, everyone. Thanks so much for joining us today.

Some of our model to shut the tiny bit is got large multinationals, who are successfully penetrating new regions themselves and they're using fastly to partner to deliver that to deliver that content. We see it in in media largely and I think it's really.

Todd Nightingale: First, I will give a quick summary of our financial results and third quarter highlight. And then I will provide an update on our product strategy, go to market and internal transformation before a handler call off to Ron to discuss our third quarter financial results and guidance indeed, detail. We reported record third quarter revenue of $127.8 million, which grew 18% year-over-year and 4% quarter-over-quarter. This came in at the very high end of our guidance range driven by strong international traffic.

Good news is helping us grow into those markets and modernize our infrastructure and our.

Or I should say mature our infrastructure and that's what leads to those contract negotiations because with more traffic, we're able to negotiate in Pierre more effectively in those regions that improve the margin for all of our traffic in that region not just the multinationals, but the local traffic as well it can take as little as a quarter.

Todd Nightingale: This demonstrates continued momentum in our enterprise customer motion as we continue to benefit from vendor consolidation and seasonal strength and streaming activity. Our customer retention efforts, a hallmark of our customer satisfaction, were favorable in the third quarter. Our LTM NRR was 114% down slightly from Q2. Our Devner was 120% in the third quarter down from 123% in Q2 and also slightly down from 122% in Q3 last year. Our Devner continues to demonstrate healthy wallet share gains in our customers as we continue to cross down more functionality and grow with our customers ongoing edge traffic requirements.

But more likely probably six months it doesn't take a full year generally speaking because those contracts have a much tighter turn on the renegotiation.

[noise] Yeah, we'll take our next question from James Fish with Piper Sandler Your line is open.

Hey, guys next quarter here talk maybe for you channel partner Gill registration up three times a day you just talk about what those channel partners are leading with between delivery that tends to be more self server social security understanding you gave some of those metrics bear.

Todd Nightingale: We're starting to see some effects of budget tightening by our customers, but we continue to see strength in customer expansion, especially cross product expansion across the board. Our total customer count of third quarter was 3,102, which increased by 30 customers compared to Q2 and 63 year-over-year. Enterprise customers totaled 547 in the quarter, a decrease of 4 from Q2 and an increase of 36 year-over-year. We have four new customers make the enterprise $25,000 threshold in the quarter, number dropped to reflect a sequential decline.

And really the crux is kind of what kind of economics, you're seeing versus the traditional fastly Ah model and then I've got a follow up for Iran.

Yeah, No no worries you know our partner community is largely you know historically been around the security business and we're starting to see that branch out from just security.

To them being able to operate across the portfolio, which is awesome and that's been a big help, especially new partners that we're bringing on board, they're capable of operating and in some cases have all my front or expertise and that's why for me the jump of partners in the program up to 55 really matters I think that.

Todd Nightingale: As we discuss during our Q1 earnings, our newer enterprise customer count methodology will be slightly more volatile. Our average enterprise customer spends with $858,000, up $40,000 quarter of the quarter, representing a 5% increase as well as an 11% increase year-over-year. These results point to continued wallet share expansion as we've aligned our customer success teams to be more focused on cross product adoption. Also, as we work towards platform unification, we've begun focusing on our goal of making customer cross selling and onboarding as simple as a single click for existing customers.

That is a broadening of the expertise of our partner community and I think it will also help customers who engage with those partners onboard faster, which is an important metric to our business.

And and the other thing is just <unk> on the geographic site. We've got are are you know traditional partner program before the revamp was really heavily focused in the U S for seeing it start to ramp up outside of the U S and that's helping quite a bit.

Todd Nightingale: This will be a huge shift in the usability and the expandability of our platform and health drive customer retention as well as expansion.

Todd Nightingale: I'm excited to share with you that on the third quarter, we acquired Domainer, a real-time DNS API provider. We brought on board a small team of highly respected DNS experts and paired with the general availability of certainly our certificate authority. We have the opportunity to greatly simplify onboarding to the vastly platform with security and simplification.

And I and I should say the partnership with the cloud providers helps move a little faster in some cases, it's easier for a partner strong board because they're already operating through a cloud marketplace and that is a nice synergy for them and available for us as well it lowers our operating costs.

Got it and not surprised to see the top 10 up just you you guys on the relationships with with those top 10 customers and it's a bit of a double edged sword, especially if you think about the history of the space. So I guess, how are you guys trying to mitigate some of that risk around those top 10 customers are you looking to sign those customers for longer contracts and and also.

Todd Nightingale: In the third quarter, we landed a key new logo wind and highly competitive deals. I'm personally very excited about Wendy's, a true lighthouse account and a new vertical for faculty that opens up a major market opportunity. As our success in e-commerce grows to include more and more adjacent verticals such as food delivery, travel and leisure and consumer brands, we see significant potential to accelerate customer acquisition. Continuing our success in security and privacy proxy implementations, we are excited about Mozilla, adopted fastest oblivious HTTP relay.

Wrong and he puts and takes on 24 to think about understanding you're not gonna guide here for it specifically, but especially as we start to think about how this packaging can kind of impact growth rates moving forward. Thanks.

Yeah, I'll I'll tell you I I'm proud of the growth in the top 10 accounts and and we take that very seriously.

Todd Nightingale: Fasting now serves three of the top four internet browsers worldwide. On fault leadership, we published our first threat intelligence report featuring data and insights from Fastly's network learning exchange, as well as continued posts on Fastly's technical leadership in the constantly evolving world of DDoSX, in the process of winding down their services and have sold their remaining customer contracts to a competition. This has created this ruptive environment that Fastly is poised to capitalize on, especially as those contracts come up for renewal.

But the largest and most sophisticated users of this tech they trust athletes and their leaning into the apply for more and more strategically which is a good thing.

The only way that I look to come back that is through enterprise customer acquisition, especially large strategic customers.

I have we we love engaging with those large customers I've no interest in doing anything but growing those accounts as fast as we can and adding more and more technology to those partnerships, but it's a longterm mitigation, but it has to come through customer acquisition, especially differentiated vertical customer acquisition and that's why we're so focused.

Todd Nightingale: Digital turbine, a leading digital ad provider is a great example, and there are many others already engaged with Fastly to find higher levels of service and performance at competitive rates. We are committed to helping them develop their services. We can find our next strategic partner. If anyone listening recently had their contracts sold, please feel free to reach out. We're seeing this e-commerce expansion internationally as well, closing a top New Zealand grocer and an Omni Channel retail fashion house in the UK.

That's why we mentioned some of the expansion vertical, especially e-commerce expansion vehicles that were focused on.

I think looking to 24, and we haven't really shared our 20th for guidance.

We talked a little bit about.

Cash flow expectations are Investor day, Yeah, we will share that historically done on our queue for a call in February I think what I would say is I think we're excited about the progress to date, we continue believe you're on our ability to outperform the market continuing into 2024.

Todd Nightingale: We saw continued customer acquisition in the travel leisure segment and in the healthcare life sciences. We anticipate continuing momentum in these expansion verticals as our sales team is now armed with more reference accounts and pre-built use cases. This momentum significantly tilts the wind probability to fastly and gives us a considerable edge with new customers. As these new verticals ramp, a diversified traffic load will provide fastly with smoother network and compute demand, providing better infrastructure utilization, leading to future margin improvements.

Gosh.

We will take our next question from Richy <unk> with RBC capital market. Your line is open.

Hey, This is Richard Paul <unk> jewelry that thanks for taking my question sorry, Yeah first one just any sense for how much of that top 10 account expansion was on the traffic side versus you know across the broader portfolio, maybe getting more security products.

Todd Nightingale: Our gross margin was 55.9% for the third quarter representing a 70 basis point decline quarter over quarter, but a 230 basis point increase year over year. I am pleased with the team's efforts controlling our variable cost of revenue and continuing to get more from our infrastructure footprint. The second quarter in the row, we saw outside increases in international traffic, which did cause a short term margin headwind. As with last quarter, these will open up opportunities for us to peer more and negotiate bandwidth costs to lower our total cost of revenue for the future.

And they're just any color around kind of the the breakdown of that.

[noise]. It is a good question, we don't disclose it although we do track it.

<unk> you know the pecan in international traffic that came from a large multinational that's largely traffic expansion, but there are new use cases being added with those folks all the time.

Todd Nightingale: Our operating expenses were $84 million in the quarter coming in lower than anticipated financial discipline and rigor continued to have behavioral results here. Note this result also reflects heavy sales and marketing spend due to one time events and fees. I'm also pleased that we posted another positive adjusted EBITDA quarter, making this our second quarter in a row. Positive EBITDA should be a normal occurrence moving forward, but you'll excuse my enthusiasm just this one last time.

Cause it's hard for us to disclose details on that I mean, maybe it will look and see if there's something that that we can share in the longer term anything it either I mean, the only thing I would add.

I think as you look at that that grow them a vendor consolidation that we saw at one of our largest customers clearly was a contributor in that concentration is Todd said earlier I think as we look forward to.

The benefits from some of the sales and marketing the packaging and the channels that accelerates new customer acquisition, yeah that should be a counter motion.

To the expansion, we're we're going to continue to see particularly our largest customers that you see in that top 10 number.

Todd Nightingale: Ron will explain our outlook and guidance in more detail, but as you can tell from our object spend, we are readying our model to leverage revenue growth and improve our cash flow for next year. During the quarter, we continued to drive our durable innovation engine strategy and had delivered several key pieces of functionality in the market. You can see these in our supplement, including KD store shipping GA, which enables more powerful edge applications through very high performance of reason, right, the key data at the edge.

Thank you that's very helpful. And then just a quick follow up on the security portfolio I think if I recall correctly. The <unk> management solution was still in beta as of last quarter Sunny update there and just kind of have the progress of the expansion of the security portfolio Sky. Thanks.

Yeah. That's great are bought product is we have like a very large number of folks on the beta it's going limited availability. This quarter, we I I hope to actually be able to close on <unk> this quarter.

Todd Nightingale: Graph QL inspection expands fastest API security offering. Certainly, going GA establishes a fastly certificate authority to provide domain validated TLS certificates and improve the security and reliability of our customer sites. And our go compiler SDK provides edge compute developers with a key capability for a highly requested language.

And then G. I in the first half hour got amazing success, I I've been I've been really happy with how many customers have leaned in to the beta and and are helping us really co develop that solution and.

Todd Nightingale: So in the quarter, we hosted altitude, our user conference in New York City, drawing hundreds of worldwide. Wendy's. Most attendees were customers in prospects, but there were also industry and investor analysts in attendance. I was extremely pleased with the event. It was very well received. Some of the sessions have been viewed thousands of times online following our social media coverage. One of the highlights was a demo of simplified service creation our new onboarding workflow and dashboard.

I've got one more feature to to check off and and and it'll become available to customers and to our sales team to start closing deal. So I'm Super excited about that we're also looking at a couple of other important areas on the security side Productization the potential privatization I should say deeper deed off analytics <unk>.

Asian and services as well as a deeper feature set an API security, it's become really clear to us that the buyer in this space, but it's looking for strategic partner M. C. D. N security I, just compute et cetera, they're looking for a sweet a security sweep that includes spot.

Todd Nightingale: This demo was so powerful because it showcased fast these new ability to provision a global website for best in class low latency user experience worldwide. All in 90 seconds. This combination of power and simplicity is near and dear to my heart. And I believe it's key to rapidly increasing customer acquisition of fastly. Please give it a look if you have a chance. It's bookmarked in our events page and in our supplement.

<unk> <unk> Wack, I named Guy Security, and we plan I'm I'm pushing hard on all of those components.

Some very helpful time, thank you.

Todd Nightingale: There's also been great progress with our packaging motion. We initiated this motion a little less than a year ago and close our first handful of packaging customers in the first quarter of 2023. Since then, the growth has accelerated in a third quarter of the number of customers that signed packaging deals more than double to quarter over quarter. Almost half the packages sold to date have been computing related with almost a third of the customers buying a standalone compute only package in terms of the overall number of packages is full more than 25% of our package deals our platform wins with multiple product lines included demonstrating the ability for packaging to help us drive our platform strategy and expand our offerings beyond CDN. This data gives us great insight into where we can see our efforts and we plan to continue to drive a single platform cross-selling motion across our customer base.

Right.

And we will take our next question from Willpower with Bird Your line is open.

[noise], Okay, great. Thanks, Yeah, I guess, a couple of <unk> starting on competition. I mean, you kind of noted and I guess, we're seeing you know a couple of smaller players you know so.

Showing off contracts and I guess, you actually need a business I just wanted more broadly kind of what you're seeing from a pricing environment at least in the U S. It sounds like you know international pricing is helping.

You know probably overall, but just put any any kind of color is to kind of have a competitive environment looking today.

Yeah, I think you know from a pricing perspective.

As we said you know the the international mix, we do have a slightly favorable pricing relative to kind of the major markets in the U S and E U and that really provided if you will some strength kind of in the quarter to quarter pricing.

Todd Nightingale: I'm very excited about this opportunity as Ron will explain just a moment. This is having a favorable impact on our RPO as well. Moving on to our channel partner development. We are seeing great progress here. Our 2023 deal registration is already triple bat of 2022. You'll recall that during our investor day in light June Brett shared with you that we had 33 partners globally engaged today that number totals 50. Our revenue contribution has grown more than 50% in 2023 year to date when compared to all of 2022 and we expect to see this trend continue into 2024. So far, I'm pleased that the progress we're making in 2023.

Generally in the U S. You know the trend has been <unk>.

Generally in line with our our longterm trend we did have some deceleration in the first half from some of the vendor consolidation and I would say go outside of that international or if you look at it by market. It's generally been returned to more of those longterm trend, we haven't seen any acceleration.

And we still see a good pricing environment I think this point across the industry.

Okay, and then I guess wrong, just sounds gross margin B O comments. It sounds like you know some headwind just getting international traffic in queue for but how would you kind of frame of how to think about gross margin progression next year. I mean, I you know I know you've generally been expecting it to rise but.

Todd Nightingale: This is reflected in our updated projections for the year. We raised our annual guidance for both revenue and operating margin and will strive to find ways to outperform that guidance through strong innovation velocity strategically lowering the friction of our go to market efforts and streamlining our employee experience. Fastly partners with our customers to deliver the best possible end user experience. This focus uniquely positioned us where these market needs intersect the edge cloud.

You know how quickly do you get kind of international kind of behind your back and maybe an attorney gets where you were.

Yeah, I I think if you look at kind of that timeline I may I think.

The the medium to long term gross margin dynamics are still intact cause I think the 80 per cent gross margin.

Todd Nightingale: And there is an enormous opportunity in that intersection. The future user experience is fast, faith and engaging without compromise. Organizations spend too much time building best in class digital experiences only to see the value of that effort lost by having to compromise between performance, faithy and personalization. This represents a clear architectural opportunity for fastly. The solution has to be built on the edge and it has to leverage all the benefits of a best in class edge cloud platform. Fast, Safe, and Engaging Without Compromise. This is Fastly.

That we had mentioned at the Investor day in that medium to long term or attack incremental incremental gross margins are are are intact. I think if you look at.

Gross Martin incremental gross margins that we've seen.

Last four quarters had been about 60% compared to the teens and early 2020.

I think as we go through that contract negotiations, that's probably a couple of quarters work I think we generally.

In 2024 address most of those headwinds and get back to that medium to long term market targets that we've laid out or previously.

Okay. Thank you [noise].

Todd Nightingale: Thank you so much.

And we will take our next question from Tim Harangue with Oppenheimer. Your line is open.

Ron Kisling: And now to discuss the financial details of the quarter and guidance I'll turn the call over to Ron. Thank you, Todd, and thanks everyone for joining us today. I'll discuss our business metric and financial results and then review our forward guidance.

Thanks, guys can you talk a little bit about the products what customers are using it for and why are they using you and any color when that kind of starts to move the revenue needle.

Ron Kisling: Note that unless otherwise stated all financial results in my discussion are non-gap based. Total revenue for the third quarter increased 18% year-over-year to 127.8 million coming in at the top end of our guidance of 125 to 128 million dollars. Revenue from Signal Sciences Products was 14% of revenue, a 33% year-over-year increase, or a 31% increase excluding the impact of purchase price adjustments related to deferred revenue. Also, note that we calculate gross rates off of the actual results with the percentage of revenue routed to the nearest whole percent.

Yeah, we missed the first part of that could you could you repeat the question. Yeah. I apologize can you talk about which compute products to your customers are using you know what are they using it for you know and why are these guys and when when do you got it might move the needle.

Yeah. Great question, you know the customer we track our computer business on customer acquisition people tend to calm.

To fastly, because we are really delivering freedom to developers, especially with the technology called <unk> that allows them to compile their own language.

And run around the fast the platform you saw there was a release I think within the supplement of our go S. D. K and I think that that gives you a real sense of supporting languages that developers are about our top of mind for developers and give them the freedom to to go and build a service components at the edge.

Ron Kisling: In the third quarter we saw traffic expansion in our major customers as well as strong upsell and cross sell activity. Our trailing 12 month net retention rate was 114% down from 116% in the prior quarter and 118% in the year-over-go quarter. We continued to experience very low-turn and our customer retention dynamics remained strong. Turning to RPO, as I discussed last quarter, our consumption-based revenue model is now being augmented with predictable revenue packages.

The second thing is people come in the property to deliver use cases that are already proven out and that's a big deal, especially around personalization shopping cart management content recommendation et cetera, that's been really.

Pushed there and from a vertical point of view, there's a very strong focus from high Tech companies, who are they trying to be the most sophisticated they tend to get be able to get a lot out of it very quickly, especially with pretty mature documentation and develop our enablement from Fastly and park, thanks to neglect acquisition and I think.

Ron Kisling: For the third quarter, our RPO was 248 million dollars, up 7% from 231 million in the second quarter of 2023, and up 43% from 173 million in the third quarter of 2022. As Pod shared, we had 3,102 customers at the end of Tuesday of which 547 were classified as enterprise, a net decrease of 4 compared to an increase of 11 in the second quarter. As a reminder, we changed our calculation of enterprise customers this year to customers with an annualized revenue run rate of $100,000 or $25,000 in the current quarter, which results in more quarter to quarter volatility than the previous 12 month trailing $100,000 definition.

That's what brings folks to the vast the program, it's really an organic develop our first motion.

I plan on tracking this business largely in customer acquisition through next year as it still truly an incubation, but I think we're going to start to see it at the.

Some material way hit the revenue line and.

I hope by the tail end of 24 and 25, but we'll see.

Great and can you just give us some kind of revenue breakdown now if possible like an immediate delivery your application delivery or you know any other color would be would be great.

Ron Kisling: Using our prior methodology, enterprise customer count increased by 10 customers in the third quarter to 530 compared to an increase of 6 in the prior quarter. Enterprise customers accounted for 92% of total revenue on an annualized basis in both Q3 and Q2, and enterprise customer average spend was 858,000, up 5% from 818,000 in the previous quarter, and up 11% from 771,000 in Q3 of last year. Our top 10 customers comprise 40% of our total revenues in the third quarter of 2023, an increase from the 37% contribution in Q2 2023, reflecting in part the impact of vendor consolidation and expansion of our traffic at some of our largest customers, which also drove one customer to account for 12% of revenue in the third quarter. Carter.

Yeah.

We haven't provided that Ah breakdown between media and other delivery across the vertical.

And our revenue breakdown, sorry about that okay. Thanks.

[noise] Oh, we'll take our next question from Rudy Kissinger with D. A Davidson your line is open.

Okay, great. Thanks for taking my questions guys I guess, just with those smaller CDN players exiting the <unk> the business in the quarter did you pick up any material business from the smaller pleasure said exit.

[noise], we do pick up we we've seen a few already moved over and we've got Ah quite a few additionally already in the in the pipeline those folks have contracts and so what really I think I think the real pattern here is that as their contracts come do they tend to stick their.

[noise] head up and and make a new vendor selection. That's that's really good news for us.

Ron Kisling: I'll now turn to the rest of our financial results for the third quarter. Our gross margin was 55.9% compared to 56.6% in the second quarter of 2023, slightly above our expectation of a 100 basis point sequential decline. We saw increased bandwidth costs from higher than expected growth and traffic from customers outside the US and EU, which was partially offset by reduction in our other variable and fixed costs. As we've discussed, in 2022, we implemented new and more robust network capacity planning to better align network capacity investment with our expected traffic demands.

We saw with digital turbine those guys.

Get a group they were able to move quickly I'm, hoping that we're going to see more of that really two four and in Q1 on the new customer acquisition.

[noise] got it and then.

Just general traffic growth trends across the board any anything to call out any material changes or just house general traffic trend traffic growth trend.

Ron Kisling: These steps have driven significant reductions to our cash cat-back investment as a percentage of revenue, which declined from 14% in 2021 to a current range of 6% to 8%. As part of this capacity planning, we identified approximately $4.3 million of hardware, software, and related commitments primarily acquired or committed to in 2021 that are in excess of our requirements. We recorded an impairment charge for $4.3 million in Q3 to reserve for this excess equipment and commitments.

[noise] <unk> pretty I've been sort of interesting there's been a lot of interesting events, we're starting to see the seasonal sporting event trends, we even saw some peaks from content drops some of the streaming platforms I think it's clearly.

Close to what we were expecting with the addition of.

Some of the international.

So i'ma dishes, some additional volume on the international fun Yeah.

Yeah, I think it's the normal occasional uptick we start to see Z exit Q3 broke continuing to see this year [noise].

Got a great. Thanks for taking my questions and congrats on the numbers.

Thanks again.

Okay, we'll take our next question from <unk> City. Your line is open.

Ron Kisling: We excluded the impact of this charge in our non-gap results. Operating expenses were $84 million in the third quarter, an 8% increase compared to Q3 2022, and up 9% sequentially from the second quarter. A portion of this gross was a tax benefit of $3.4 million recorded in the second quarter that did not recur in Q3, and one time marketing expenses related to events and fees in addition to our normal investments in R&D and sales and marketing.

Alright. Good afternoon. Thank you for taking my questions Uhm <unk> for you first thing you know over the course of the here you all have been very intentional about managing your installed base or pruning the less economical or lower L. T V Tech customers in your base and you know that it's been pretty odd.

I'm curious if you can comment on if you're certain through the halfway point or towards the end of that process that we can start seeing said that robust gross in in that in that track and then just a quick follow up on some of the contract negotiations that you are are foreshadowing for next year.

Ron Kisling: The benefits from our continued focus on cost-discipline and financial rigor offset these investments, resulting in optics coming in slightly below our expectations. This favorability combined with revenue at the upper end of our guidance range and gross margins slightly ahead of expectations resulted in an operating loss of $12.6 million exceeding the high end of our operating loss guidance range of $15 to $13 million. Our net loss in the third quarter was $8 million, or a 6-cent loss per basic and deluded share compared to a net loss of $16.8 million and a 14-cent loss per basic and deluded share in Q3 2022.

So just to clarify when you say pruning customers and the L. T V's basically what do you mean.

Just in terms of you know managing the installed base for higher quality customers just wanted to get a sense of you know how far down the path argue that you know your current installed base is.

Hi value high penetration opportunity versus you know some of the customers that you might've pardon ladies with over the course of the year I just wanted to get a sense of where you are in that process, mostly should've gotten argued that you're pre name.

Ron Kisling: I'm pleased to report that our adjusted EBITDA was positive in the third quarter coming in at $0.7 million compared to negative $9.1 million in Q3 2022. Turning to the balance sheet, we ended the quarter with approximately $461 million in cash, cash equivalents, marketable securities and investments, including those classified as long term. Our free cash flow for the third quarter was negative $19.7 million, a $27 million sequential decrease from positive $7.8 million in the second quarter.

Got it.

Clarify that we we haven't <unk> any customers.

Intentionally and get a largely the way that our business runs and the way our infrastructure.

<unk> and is able to organically serve customers I think.

It's pretty hard I mean, it's very rare that we would find a customer that would be not a great fit when we occasionally have a I need a current customer the only time I can think of that happening are on terms of use.

Ron Kisling: This decrease was primarily driven by changes in working capital and lower operating margins compared to Q2 which benefited from the aforementioned non-recurring sales and use tax refund of $3.4 million. Lars. Our cash capital expenditures were approximately 4% of revenue in the third quarter below the low end of our outlook of 6 to 8% of revenue for 2023. We expect to accelerate the purchase of certain hardware in the fourth quarter for deployment in 2024, which will drive our annual CAPEX for 2023 as a percentage of revenue to the high end of our 6 to 8% range.

And community guidelines.

Infrastructure.

Allows for us to have very efficient.

Delivering especially very efficient delivery incremental traffic and so we don't.

We haven't done any pruning I, absolutely don't intend to.

I I do believe we have an opportunity to increase the margin by changing the traffic a signature of our total customer base.

But the only way that we are the only thing we're pursuing to do that is focusing on differentiating the vertical that we serve so that the traffic load will be more balanced across type of day as well as the type of traffic load and working hard to drive our customer acquisition motion into regions, where we've got.

Ron Kisling: As this demonstrates, we expect to continue to see quarterly fluctuations in the timing of our capital expenditures, but for them to align with our range on an annual basis. As a reminder, our cash capital expenditures include capitalized internal use software.

Where we have good infrastructure to be able to serve and so as far as improving the traffic mix on the platform. We certainly do that we certainly have shifted our focus but it's all all of that focuses on our customer acquisition side and not on that on that.

Ron Kisling: I will now discuss our outlook for the fourth quarter and full year 2023. I'd like to remind everyone again that the following statements are based on current expectations as it's 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 fourth quarter and full year 2023 outlook reflect our continued ability to deliver strong cop line growth via improved customer acquisition, upsell, and cross sell expansion in our existing customers, driven in part by new and enhanced products.

I understand I appreciate that and I appreciate your in the planning phases 2024, right now, but Kennedy contract negotiations that you're you know again for shadowing for 2024 that you're gonna be interesting can you give us a little bit of a flavor S. Too you know how big these back.

30 of contracts is going to be you know any high level thoughts on you know if these contracts maybe concentrated with that sounds like your largest customers in any seasonality commentary at high level, you can share with us that would be really great. That's what we think about the next.

Ron Kisling: Our revenue guidance is based on the visibility that we have today. Historically, our revenue experience is sequential growth in the second half that accelerates into the fourth quarter. For the fourth quarter, we expect revenue in the range of 137 to $141 million, representing 16% annual growth and 9% sequential growth at the previous call. We saw some increase in price declines in the first half as a result of winning additional traffic from a major customer.

Yeah, I mean, I think she'll starting with the seasonality I think you know what we're certainly seeing this year is a fairly consistent seasonal patterns. You know as we work through Q3, we started to see an increase in traffic you know, we expect us to continue to see that accelerating queue for that I think it's reflected in our guidance I think as you looked.

2024 from seasonality I think again, we expect that the typical seasonal patterns to continue you wanted typically is flat to down you know a few percentage points, we would expect that to continue into 2024.

Ron Kisling: As we entered the second half of 2023, we experienced increased traffic in international markets where we saw favorable pricing. As a result, our pricing trajectory was more favorable than its normal course, and we expect that to continue for the remainder of 2023. And recall that normal reductions in our bandwidth costs and ongoing network optimization combined with increasing traffic into our fixed cost base typically offset our pricing declines. Looking more closely into these dynamics on the cost side, in the second half of 2023, we saw a larger increase than previously expected in traffic from customers outside the US and EU markets.

I think as you look to kind of customer acquisition I think again, there's really two motions that we have that are driving that there is the expansion in the cross selling opportunity in our largest customers and we continue to be really successful at that particularly when we see bender consolidation and where there's multiple vendors we.

<unk>.

Because of our performance you'll gain share and are able to cross sell additional products into those customers and then our new customer acquisition engine with a lot of the work we're doing across packages.

Ron Kisling: Within these markets, our bandwidth costs today are higher than those in the US and EU markets, and it has had a modest adverse impact on our growth margins. While this increased traffic gives us the opportunity to renegotiate our bandwidth rates and increase peering, reducing costs for all customers in these regions, we will have a modest near-term impact on growth margins while we complete these negotiations. We continue to be very disciplined in our network investment and cost of revenues, which contributed to our third quarter growth margins being approximately 30 basis points better than we initially expected.

As well as the channel, we really expect that to sort of drive an acceleration of new customers. In 2024, So I think you're gonna see both of those motions driving the performance of 2024.

Both the expansion motion, which we've consistently done well in the the new activities really driving Ah acceleration of new customer.

Okay. What are we will take our next question from Tom Blinky with Keybanc capital markets. Your line is open.

Hey, guys. Thanks for being here I just perfect setup there in terms of the channel you discuss some highlights in your press release. This morning, or this afternoon any color Todd you want to provide for us. So we can talk to you know check the sustainability here what are the biggest changes that you've implemented.

Ron Kisling: For the fourth quarter, we now anticipate our growth margins will increase approximately 100 basis points relative to the third quarter, plus or minus 50 basis As we mentioned previously, our Q3 operating loss was moderately better than our earlier expectations as our continued cost controls offset increased seasonal spending and marketing. For the fourth quarter, we will see the benefit of increased revenue as we continue our cost control efforts. As a result, for the fourth quarter, we expect our non-gap operating loss to decrease by approximately $3 to $7 million to $10 to $6 million.

You know in terms of this dynamic growth, you're you're seeing of late I have a follow up for.

[noise], Yeah I think.

It is still early I hope to have hundreds of partners driving business for fast and more importantly, delivering services that allow our customers to move more quickly to adopt athlete technology more rapidly.

Ron Kisling: And our non-gap loss to be $5 to $1 cents per share. We reported nominally positive EBITDA in our third quarter and expect our adjusted EBITDA training positive and to improve materially in the fourth quarter. For calendar year 2023, we are raising the midpoint of our revenue guidance from a range of $500 to $510 million to a range of $505 to $509 million. This increase represents 17% annual growth at the midpoint. We expect our non-gap operating loss to improve to a range of $44 to $40 million, reflecting an operating margin of negative 8% at the midpoint, which compares favorably to our prior guide of negative 9% at the midpoint and our operating margin of negative 18% in 2022.

Say from a <unk> point of view I, just think it's an underserved space. There's a lot of systems integrators with high software specialty are working very closely.

Closely with teams that are building out digital experiences and they haven't had the ability to partner closely with a edge cloud provider, especially performance leader in seed yet.

And so we've had good reception to this new partner program will be looking and reviewing it for next year to see ways to make it a better but so far for me the trends are what I want to see this is moving in the right direction, but I would say for sure partner acquisition it'd be over in philosophy or.

<unk> <unk>.

Ron Kisling: We expect our non-gap net loss per share to improve to $23 to $19, reflecting the improvement in our operating loss expectations compared to our prior range of a net loss per share of $27 to $21. And we expect our adjusted EBITDA for calendar year 2023 to be positive compared to negative $32.9 million in 2022.

Trending in the right direction, but for sure. We're we're planning to ramp him hard in 2024.

Does that include just follow up before I ask for all the questions does that conclude like enterprise caliber customers <unk> why is this.

You know kind of growth unique to fastly and what are the incentives sorry.

Sorry, just just a lot of growth here in a big opportunity and typically you know see me and doesn't know.

Ron Kisling: Before we open the line for questions, we'd like to thank you for your interest and your support and finally, operator. Thank you.

Benefit from the channel.

[noise] yeah.

I really think that's Ah artifact of just the way the first few entrance into this into this product in space and operated I think looking at the market now there's so much software spend that's already going through the cloud marketplaces systems integrators know how to operate bat and operationalize deals.

Abby: As a reminder, if you would like to ask a question, press star one on your telephone keypad. If you would like to withdraw your question, press star one a second time. Pardon me, we ask that you limit yourself to one question and one follow-up question so we can take as many as possible.

Big and small through those systems and direct to vendors and we offer both options.

Frank Lawson: We will take our first question from Frank Lawson with Raymond James. Your line is open. Great. Thank you. Just following up on the guidance, any change to the longer term metrics you gave at the analyst day, particularly the free cash flow guide from 2024 and then to follow-up on the op-x declines. Yeah, how much further can we see that decline and what sort of a good run rate for that going forward?

For me, there's one other twists, which is the ability that flexibility in that channel program matters.

These are channel partners can operate in the traditional.

Channel sales motion, but also in an agency model that flexibility matters and the way that we've operationalized bad I think is is important. We're also engaging with partners who are really on the technology consulting side for the first time and those engagement. Although it's early days I think I have a lot of potential upside.

Frank Lawson: Thanks. Yeah, I think if you look at the sort of outlook, particularly with respect to cash flow that we gave back on the investor day, that is still intact if we look toward 2024 on our cash flow basis. We would look to be a break even ish on a cash basis. On the op-x side, I'm pretty happy with the cost control across the company right now, but I'll tell you we still have some significant benefits here.

As well and those are like technology consultants, largely uhm, but.

I guess my my point of view and I think this will play out in the next 12 months is that this has just been under certain part of the market and buy focusing here, we have an opportunity to gain.

Gain the attention of the channels.

Very very helpful. And then you know running the 50 per cent channel revenue growth you just all the all the requisite questions. There over what period of time, what percentage of revenue here, even if it's a range where you kind of expect that to to head in the coming year or two that'd be helpful. Thanks, guys.

Frank Lawson: I mean, it takes while to unravel long-term, you know, fast contracts and commitments, we're still, we're still thinking that we're still reaping the benefits there. And we've done, I think, a pretty good job of putting, you know, business model. Rubrics in place to control the headcount and control the operating miles for our teams so that going forward, we don't expect OpEx to grow nearly as fast as the top line. And I think that's going to be the key for us.

The 50 per cent channel gross.

Well you you're talking about revenue channels you just.

And your right period of time is that.

It's it's program to date year over year.

Frank Lawson: All right, great, all right, thank you.

Okay, and where and where are we.

If a percentage of revenue where do you expect that to go you know Todd kind of smoke positively. There is that's obviously going to increase just to give us something like level set here will be helped yet.

Jonathan Ho: And we will take our next question from Jonathan Ho with William Blair. Your line is open. Hi, good afternoon. Just wanted to get a little bit more color on what you're seeing in terms of the spending environment and some of the budget tightening as the first question. Yeah, it's super interesting. We're seeing we see budget tightening in some of our accounts that leads to that can lead to vendor consolidation. They don't want to manage as many vendors that tends to be good news for us because, you know, as a performance leader in almost all of those deals, they tend to want a fast as we part of their solution, even if they stick with a multi vendor play.

So I think what I would say you know we haven't given the specific the specific percentage of revenue, but we do expect it.

To continue to grow as a percentage of revenue I think in terms of really gaining traction and being <unk>.

<unk>, we see that really gaining traction in 2024 I'll do a lot of the work signed up some deal Reg happened. This year, we expect to see that grow as a contributor drove all revenue in 2024.

Great. Thank you.

And we will take our final question from Madeline Brooks with Bank of America. Your line is open.

Jonathan Ho: There are some cases where we've seen deals taking a little longer to close as more approvals are needed. I think that might be the nature of the current economic environment that we're in. And we haven't seen those deals dissolved. We've seen them take us slightly longer than usual, but we're tracking that very carefully. Kind of I might have a little bit more interesting information next quarter on it, but we haven't we haven't really been too worried about it so far, but we're noticing something.

He team. Thank you so much for taking the questions that quick one for me here yeah. It looks like the <unk> I don't want a positive signals that the packaging lotion. So just wanted to marry that quickly to the budget comments in in a landscape you guys are skiing with the slight weakness in two months now in a positive for something ask something therapy. Paul said you know why.

Do you think of paying Fastly now versus other companies earlier and can you call any specific area of interest and pack anymore uhm versus last thanks, so much.

Sure.

Jonathan Ho: Got it. And just as a follow up, you know, how should we think about where you're growing in terms of the international markets, is there a way for you to maybe help us understand, you know, what markets are, you know, is there specific vertical that you're seeing traction internationally. And, you know, how long does it sort of take for some of these contracting negotiations to take. Thank you. Sure. We see we've been pushing on our international go to market for sure.

On the computer side I.

I feel like the momentum is really good for US right now I feel like you do need a critical amount of features and functionality for developers can really.

The outcome of a daycare about running their services are higher cost dramatically improving performance and user experience being able to build sustainable solutions and pull the appropriate workload from their core into an edge surplus environment that will have the kind of performance that kind of user experience improvement that they want and I think we're.

Jonathan Ho: And that drives, you know, local business with local traffic in those expanding regions for us. But what is interesting and what is causing some of our model to shift a tiny bit is we've got large multinationals who are successfully penetrating new regions themselves, and they're using faculty to partner to deliver that to deliver that content. And we see it in media largely. And I think it's really good news. It's helping us grow into those markets and modernize our infrastructure and our, or I should say mature our infrastructure.

Jonathan Ho: And that's what leads to those contract negotiations because with more traffic, we're able to negotiate and peer more effectively in those regions, and that improves the margin for all of our traffic in that region, not just the multinationals, but the local traffic as well. It can take us a little bit quarter, but more likely probably six months. It doesn't take a full year, generally speaking, because those contracts have a much tighter turn on the real negotiation.

Getting we're starting to hit our stride, which is great I think we have opportunity here on the product side as well or not to ultimate source, but I think we can simplify are offering and make it even easier for our customers to onboard and understand all the components. There so I I I'm not I'm.

Not to say that we've arrived we're gonna be on the sturdy for quite a while.

The second question was around the belt tightening comment in the in the opening is that correct.

Yeah, Yeah, that's correct.

Yeah, I guess, we we may have briefly mentioned it already I I think you know what we're seeing as our customers budgets.

I'm still a little pinch to them that certainly drive is vendor consolidation that tends to be good thing for US is the performance later, we tend to fare well in those engagements, we do see a little bit of a soulless and the deals as vendor changes when customers are leaving some of our competitors are coming to frankly.

James Fish: And we will take our next question from James Fish with Piper Sandler. Your line is open. Hey guys, nice quarter here.

Changes in contracts or just getting more scrutiny requiring more sign off some that can delay some deals. So we've seen a few deals that have.

James Fish: Todd, maybe for you, Channel Partner Deal Registration up three times here today, you just talked about what those channel partners are leading with between delivery that tends to be more self-serve versus security understanding you gave some of those metrics there, and really the crux is kind of what kind of economics you're seeing versus the traditional, fastly model, and then I've got to follow up for Ron. Yeah, no worries. You know, our partner community is largely, you know, it historically been around the security business, and we're starting to see that branch out from just security to them being able to operate across the portfolio, which is awesome.

Taking a little longer to close and we'd like but we'll see I think I mentioned this earlier like I think we might have more of a complete perspective of that next quarter.

Alright, I'm, sorry to quickly clarify that <unk>. So is it fair to say anything else have you won't get it that clearly for each have remained stable throughout this winter.

Yeah, well, we we track a few we we track very carefully he deals in the quarter and we saw a few of them slip a few weeks nothing material I mean, some of these are six months engagements that we saw them slip a few weeks and that.

Yeah. That's slip is largely due to additional approvals that are needed I'd say, it's anecdotal, but will be traveling a closely so I might have a better day before your next year next quarter.

James Fish: And that's been a big help, especially new partners that were bringing on board. They're capable of operating, and in some cases have a much broader expertise. And that's why for me, the jump of partners in the program up to 55 really matters. I think that is a broadening of the expertise of our partner community. And I think we'll also help customers who engage with those partners on board faster, which is an important metric to our business.

Got it thank you so much <unk>.

Great.

And that concludes our question and answer session I will now turn the call back to Mister Todd Nightingale for closing remarks.

[noise] Oh. Thank you so much and you wanted to take a minute to think our employees or customers partners and investors I'm.

James Fish: And the other thing is just the juke on the geographic side. We've got our traditional partner program before the revamp was really heavily focused in the US. We're seeing it start to ramp up outside of the US, and that's helping quite a bit. And I should say the partnership with the cloud providers helps move a little faster. In some cases, it's easier for partners to run on board because they're already operating to a cloud marketplace, and that is a nice synergy for them, and it's valuable for us as well.

Moving forward, we will continue to remain focused on execution lasting grown into our business and delivering value to our shareholders I.

I'd like to close by saying, how <unk>, how excited I am about the road ahead.

Of course, there's plenty of work to do but I believed digital experiences will drive a mission to find the success of almost every organization everywhere and fastly lots of significant impact on the way digital experience or built in.

And delivered around the world.

Our customers have a real passion for fast I solutions and employees have a real enthusiasm for our mission to make the internet a better place where all experiences are fast.

James Fish: It lowers our operating costs. Got it. And it's not surprising to see the top 10 up just you guys own the relationships with with those top 10 customers. And it's a bit of a double edged sword, especially as you think about the history of the space.

And engaging.

Thank you so much for the time today.

Ladies and gentlemen, this concludes today's call and we thank you for your participation you may now disconnect.

Todd Nightingale: So I guess how are you guys trying to mitigate some of that risk around those top 10 customers? Are you looking to sign those customers for longer contracts and also run any puts and takes on 24 to think about understanding you're not going to guide here for specifically, but especially as we start to think about how this packaging can kind of impact growth rates moving forward. Thanks. I'll tell you, I'm proud of the growth in the top 10 accounts.

Please wait the conference will be in shortly [music].

Todd Nightingale: And we take that very seriously if that's the largest, the most sophisticated users of this tech they trust fastly. And they're leaning into the platform more and more strategically, which is a good thing. The only way that I look to combat that is through enterprise customer acquisition, especially large strategic customers. I have, we love engaging with those large customers. I have no interest in doing anything, but growing those accounts as fast as we can and adding more and more technology to those partnerships. But it's a long-term mitigation that has to come through customer acquisition, especially differentiated vertical customer acquisition.

Todd Nightingale: And that's why we're so focused on that, why we mentioned some of the expansion verticals, especially e-commerce expansion verticals that we're focused on. I think looking into 24, and we haven't really shared our 24 guidance. You know, it's not a little bit about some of the cash flow expectations are investor day. You know, we will share that as we historically done on our Q4 call in February. I think what I would say is I think we're excited about the progress to date. We continue to believe your vulnerability to help perform the market continuing into 2024. Thank you.

Rishi Jaluria: We will take our next question from Rishi Jaluria with RBC Capital Market. Your line is open. Hey, this is Richard Polonon for Rishi Jaluria. Thanks for taking my question. So I guess first one, just any sense for how much of that top 10 account extension was on the traffic side versus, you know, a cross fell of the broader port portfolio, maybe getting more security products in there. Just any color around kind of the breakdown of that.

Todd Nightingale: It is a good question. We don't disclose it, although we do track it. The, you know, the peak in international traffic that came from the large multinationals that's largely traffic expansion, but there are new use cases being added with those folks all the time. It's a part for us to disclose details on that.

Ron Kisling: Maybe we'll look and see if there's something that we can share in the longer term. Anything you'd add there. I mean, you know, the idea. I think as you look at that, that growth of a bitter consolidation that we saw at, you know, one of our largest customers, clearly wasn't a contributor in that concentration. I think, you know, it's hot center earlier. I think as we look forward to the benefits from some of the sales and marketing, the packaging and the channel if that accelerates, you know, new customer acquisition. That should be a counter motion to the expansion. We are going to continue to see particularly our largest customers that you see in that top 10 number.

Rishi Jaluria: Thank you.

Todd Nightingale: That's very helpful and then just a quick follow up on the security portfolio. I think if I recall correctly, the bot management solution was still in in beta as a last quarter. So any update there and just kind of how the progress of the expansion of security portfolio is gone.

Todd Nightingale: Thanks. Yeah, that's great. Our bot product is. We have like a very large number of folks on the beta is going limited availability this quarter. I hope to actually be able to close some deals on this quarter. And then GA in the first half. I was out of amazing success. I've been, I've been really happy with how many customers have leaned in to the beta and are helping us really co develop that solution. And got one more feature to check off and and it'll become available to customers and to our sales team to start closing deals. I'm super excited about that.

Todd Nightingale: We're also looking at a couple of other important areas on security side. A productization of the potential productization, I should say a deeper DDoF analytics visualization and services as well as deeper feature set in API security. It's become really clear to us that the buyer in this space that's looking for strategic edge partner and CDN security edge compute, et cetera. They're looking for a suite, a security suite that includes bot, DDoF, next gen WAF and API security. And we plan on pushing hard on all of those components. Awesome. Very helpful.

Todd Nightingale: Thank you.

Will Power: We'll take our next question from Will power with beard. Your line is open. Okay, great. Thanks. Yeah, I guess a couple. Maybe you're starting on, you know, competition. I mean, you kind of noted, and I guess we've seen, you know, a couple of smaller players, you know, selling off contracts. And I guess, you know, exiting the business. I just wonder more broadly, kind of what you're seeing from a pricing environment, at least in the US.

Will Power: It sounds like, you know, international pricing is helping, you know, probably overall, but just any kind of, you know, color as to kind of have the competitive environments looking today. Yeah, I think you're from a pricing perspective, you know, as we said, you know, the international mix, you know, we do have slightly favorable pricing relative to kind of the major markets in the US and EU. And that really provided, if you will, some strengths, kind of in the quarter to quarter pricing.

Will Power: I say generally in the US, you know, the trend has been generally in line with our long term trend, you know, we did have some deceleration in the first half from the vendor consolidation. And I would say, you know, outside of that international, or if you look at it by market, it's generally been returned to more of those long term trends. We haven't seen any acceleration. And we still see, you know, a good pricing environment.

Will Power: I think this point across the industry. Okay, and then I guess, Ron, just on the on the gross margin, you know, comments, it sounds like, you know, some headwinds just given international traffic in Q4, but how would you kind of frame up how to think about gross margin progression next year? I mean, I, you know, I know you've generally been expecting it to rise, but, you know, how quickly do you get kind of international kind of behind you and back kind of maybe on the targets where you were?

Will Power: Yeah, I think if you look at kind of that timeline, I think, you know, the meeting's a long term gross margin dynamic or still intact. I think that 80% gross margin that we had mentioned at the investor day, in that medium to long term or intact incremental incremental gross margins are intact. I think if you look at, you know, that gross margin incremental gross margins that we've seen. You know, a lot for quarters have been above 60% compared to the teens kind of an early 2020. I think as we go through that contract negotiations, that's probably a couple of quarters work. I think we generally in 2024, address most of those headwinds and get back to that medium to long term.

Will Power: We'll take our next question from Kim Haram with Oppenheimer.

Kim Haram: Your line is open. Thanks, guys. Can you talk a little bit about the few products? What, you know, customers are using it for and why they're using you? And any color when that kind of starts to move the revenue needle? Thanks. We missed the first part of that. Could you repeat the question? Yeah, I apologize. Can you talk about which compute products your customers are using? You know, what are they using it for? You know, and why are they using it guys? And when do you get my moving?

Todd Nightingale: Yeah, great question. And, you know, the customer, we track our compute business on customer acquisition. People tend to come to faculty because we are really delivering freedom to developers, especially with the technology called last and then allows them to compile their own language on and run it on the faculty platform. You saw there's a release. I think it's in the supplement of our go SDK. And I think that that gives you a real sense of supporting languages that developers are that are top of mind for developers that give them the freedom to go and build serverless components at the edge.

Todd Nightingale: The second thing is people come to faculty to deliver use cases that are already proven out. And that's a big deal, especially around personalization, shopping cart management, content recommendation, etc. That's been really a big push there. And from a vertical point of view, there's a very strong focus from high tech companies who are they tend to be the most sophisticated. They tend to get be able to get a lot out of it very quickly, especially with pretty mature documentation and developer enablement from faculty in part, thanks to the glitch acquisition. And I think that's what brings folks to the faculty program. It's really an organic developer first motion.

Todd Nightingale: Um, I plan on tracking this business largely in customer acquisition through next year as it's still truly an incubation but I think we're going to start to see it hit the in some material way hit the revenue line and I hope by the tail end of 24 and 25 but we'll see. Great and can you just give us some kind of revenue breakdown now if possible like on media delivery or application delivery or you know any other color would be would be great. Yeah, you know we haven't provided that breakdown between you know media and other delivery across the verticals you know our revenue breakdown sorry about that. Okay, thanks.

Rudy Kessinger: We will take our next question from Rudy Kessinger with DA Davidson your line is open. Hey great thanks for taking my questions guys I guess just with the smaller CDM players exiting the business in the quarter do you pick up any material business from the smaller players that exit. We do pick up we've seen a few already move over and we've got quite a few additionally already in the in the pipeline those folks have contract and so what really I think I think the real pattern here is that as their contracts come do they tend to stick their head up and make a new vendor selection that's really good news for us.

Rudy Kessinger: We thought with digital turbine those guys pretty expensive group they were able to move quickly I'm hoping they'll see more of that really Q4 and and Q1 on the new customer acquisition time. Got it and then just general traffic growth trends across the board any anything they call out any material changes is just how is general traffic trend traffic growth trending. Yeah, traffic trends pretty had been sort of interesting there've been a lot of interesting events we're starting to see the seasonal sporting event trends.

Rudy Kessinger: We even thought peaks from content drops some of the streaming platforms think it's fairly close to what we were expecting with the addition of some of the international some additional volume on the international fund. Yeah, and we're I think it's a normal seasonal uptake we start to see is the exit Q3 we're continuing to see this year.

Rudy Kessinger: I got a great thanks for taking my questions and the graphs and the numbers.

Rudy Kessinger: Thanks again.

Fatima Balani: We will take our next question from Fatima Balani with city your line is open. Hi again afternoon. Thank you for taking my questions.

Fatima Balani: [inaudible] Sorry, just to clarify, when you say pruning customers in the LTV Facebook, what do you mean? Just in terms of, you know, managing the install base for higher quality customers, just wanted to get a sense of, you know, how far down the path are you that, you know, your current install base is, you know, high value, high penetration opportunity versus, you know, some of the customers that you might have part ways with over the course of the year.

Fatima Balani: Just wanted to get a sense of where you are. And that process and mostly sort of done, are you done pruning? Got it. I'm just clarified, we haven't pruned any customers intentionally and, you know, largely, the way that our business runs and the way our infrastructure is built and is able to organically serve customers. I think it's pretty hard. I mean, it's very rare that we would find a customer. That would be not a great fit.

Fatima Balani: When we occasionally have a, I need to prune a customer. The only times I can think of that happening are on terms of use and community guidelines. The infrastructure at that's actually allows for us to have very efficient delivery, especially very efficient delivery of increments of traffic. And so we don't, we haven't done any pruning. I absolutely don't intend to. I do believe we have an opportunity to increase the margin by changing the traffic signature of our total customer base.

Fatima Balani: But the only way that we're, the only thing we're pursuing to do that is focusing on differentiating the verticals that we serve so that the traffic loads will be more balanced across type of day as well as the type of traffic load and working hard to drive our customer acquisition motion into regions where we've got where we have good infrastructure to be able to serve. And so as far as improving the traffic mix on the platform, we certainly do that.

Fatima Balani: We certainly have shifted our focus, but it's all, all of that focuses on the customer acquisition side, not on the pruning side. Understood. I appreciate that. And Ron, I appreciate you're in the planning phases of 2024 right now.

Ron Kisling: But some of the contract negotiations that you're, you know, again, foreshadowing for 2024 that you're going to be addressing. Can you give us a little bit of a flavor as to, you know, how big these body of contracts are going to be, you know, any high level thoughts on, you know, if these contracts may be concentrated with some of your largest customers and any seasonality commentary at high level, you can share with us.

Ron Kisling: That would be really great as we think about the next 12 months. Yeah, I mean, I think starting with the seasonality, I think you know, what we're certainly seeing this year is fairly consistent seasonal patterns, you know, as we worked through Q3, we started to see an increase in traffic. You know, we expect us, you know, to continue to see that accelerating Q4, you know, I think it's reflected our guidance. You know, I think as you look to 2024 from seasonality, I think, you know, again, we expect that the typical seasonal patterns to continue.

Ron Kisling: QQ1 typically is flat to down, you know, a few percentage points, we would expect that to continue into 2024. I think as you look to kind of, you know, customer acquisition, I think, again, there's really two motions that we have that are driving that there's the expansion and the cross selling opportunity and our largest customers and we continue to be really successful at that. Particularly when we see vendor consolidation and where there's multiple vendors, we, because of our performance, you know, gain share and are able to cross sell additional products into those customers.

Ron Kisling: And then our new customer, you know, acquisition engine with a lot of the work we're doing across packages, as well as the channel. We really expect that to sort of drive an acceleration and new customers in 2024. So I think you're going to see both of those motions, driving the performance in 2024, both the expansion motion, which we've consistently done well and the new activity is really driving acceleration of new customer.

Tom Blakey: And we will take our next question from Tom Blakey with Keybank Capital Markets. Your line is open. Hey guys, thanks for joining me in here. I just perfect set up there, you know, Ron, in terms of the channel, you just got some highlights in your press release this morning of this afternoon. Any color Todd, you want to provide for us so we can talk, you know, check the sustainability here. One of the biggest changes that you've implemented, you know, in terms of this dynamic growth.

Tom Blakey: If you're seeing a blade that a follow up for us. Yeah, I think look, it is still early. I hope to have hundreds of partners driving business for fastly and more importantly, delivering services that allow our customers to move more quickly to adopt fastly technology more rapidly. I'd say from a trend point of view, I just think it's an underserved space. There's a lot of systems integrators with high software specialty. They're working very closely with teams that are building out digital experiences and they haven't had the ability to partner closely with a edge cloud provider, especially performance leader and CDN.

Tom Blakey: And so, you know, we've had good reception to this new partner program, we'll be looking and we're viewing it for next year to see ways to make it better, but so far for me that trends are what I want to see. This is moving in the right direction, but I would say for sure partner acquisition and deal right philosophy are trending in the right direction, but for sure we're planning to ramp them hard in 2024.

Todd Nightingale: Does that include just printfall before I ask around the question, is that include like enterprise caliber customers and what are their, why is this, you know, kind of growth unique to fastly and what are the incentives? Sorry, just a lot of growth here at a big opportunity and typically, you know, CDN doesn't benefit from the channel. Yeah, and I really think that the artifact of just the way the first few entrance into this into this product space that operated, I think looking at the market now, there's so much software spend that's already going through the cloud market places, systems integrators know how to operate that and operationalize deals big and small.

Todd Nightingale: Through those systems and direct to vendors and we offer both options. For me, there's one other twist, which is the ability that flexibility in that channel program matters. These are channel partners can operate in the traditional channel sales motion, but also in an agency model that flexibility matters and the way that we've operationalized that I think is. It's important, we're also engaging with partners who are really on the technology consulting side for the first time and those engagements, although it's early days, I think have a lot of potential upside as well.

Todd Nightingale: And those are like technology consultants largely, but. I guess my point of view and I think this will play out in the next 12 months is that this has just been an underserved part of the market and by focusing here we have an opportunity to gain the attention of the channel. Very, very helpful.

Ron Kisling: And then, you know, Ronald, the 50% channel revenue growth, you just all the requisite questions there, over what period of time, what percentage of revenue here, even if it's a range, and where you kind of expect that to, to head in the coming year or two. That'd be helpful. Thanks, guys. The 50% channel growth, you talk about revenue channel growth, you know, just, you know, period of time. It's, it's, it's programs to date, you're over here.

Ron Kisling: Okay, and where are we, in terms of the percentage of revenue, where do you expect that to go, you know, Todd kind of spoke positively there, is that obviously going to increase, just to give us some, like, level set here, we help, yeah. So I think what I would say is, you know, we haven't given the specific, the specific percentage of revenue, but we do expect it to continue to grow as a percentage of revenue, I think in terms of really gaining traction and being a contributor, we see that really gaining traction in 2024. I'll be a lot of the work, you know, sign up and do a redch happen this year, we expect to see that grow as a contributor to our overall revenue in 2024. Great, thank you.

Madeline Brooks: And we'll take our final questions for Madeline Brooks with Bank of America. Your line is open. You team, thanks for taking the question. Just a quick one for me here. It looks like some and edge compute standpoints are a lot of positive signals with the packaging motion.

Todd Nightingale: So, just want to marry that quickly to the budget comments and the lands that you guys are seeing with this light weakness and a lot to know and apologies if this has been asked, something through a few calls that, you know, why do you think of hitting, you know, fastly now versus other companies earlier? And can you call it any specific areas that's impacted more versus less? Thanks so much. Sure, on the compute side, I feel like the momentum is really good for us right now.

Todd Nightingale: I feel like you do need a critical amount of features and functionality before developers can really reach the kind of outcomes that they care about running their services at higher cost, dramatically improving performance and user experience, being able to build sustainable solutions and pull the appropriate workloads from their core into an edge serverless environment that will have the kind of performance, the kind of user experience improvement that they want. And I think we're getting, we're starting to hit our stride, which is great.

Todd Nightingale: I think we have opportunity here on the product side as well and not to estimate source, but I think we can simplify our offering and make it even easier for our customers to onboard and understand all the components there. So I'm not trying to say that we've arrived. We're going to be on the journey for quite a while.

Todd Nightingale: Your second question was around the belt tightening comment in the opening, is that correct? Yeah, correct. I guess we may have briefly mentioned it already. I think what we're seeing as our customers' budgets feel a little pinch to them, that certainly drives vendor consolidation. That tends to be good thing for us as the performance leader we tend to well in those engagements. We do see a little bit of bonus in the deals as vendor changes when customers are leaving some of our competitors and coming to faculty changes in contracts are just getting more scrutiny, requiring more sign-offs, and that can delay some deals.

Todd Nightingale: So we've seen a few deals that have taken a little longer to close than we'd like. But we'll see, I think I mentioned this earlier, like I think we might have a more of a complete perspective of that next Yeah.

Todd Nightingale: I'm sorry, just to quickly clarify that, Todd. So, is it fair today, the deals have you wanted it, but close rates have remained stable throughout the quarter? Yeah, well, we track a few, we track very carefully key deals in the quarter. And we saw a few of them slip a few weeks, nothing material. I mean, some of these are six months engagement. So we saw them slip a few weeks. And that, yeah, that slip is largely due to additional approvals that are needed. I'd say it's anecdotal, but we'll be tracking it closely.

Todd Nightingale: So I might have better data for you next year. Next quarter. Got it. Thanks so much, Nick. Great.

Todd Nightingale: And that concludes our question and answer session. I will turn the call back to Mr. Todd Nightingale for closing remarks. Thank you so much. I do want to take a minute to thank our employees, our customers, partners, and investors. Moving forward, we will continue to remain focused on execution, bringing lasting growth to our business and delivering value to our shareholders. I'd like to close by saying how excited I am about the road ahead.

Todd Nightingale: Of course, there's plenty of work to do, but I believe digital experiences will try a mission and define the success of almost every organization everywhere and faculty. A lot of significant impact on the way digital experience are built and delivered around the world. Our customers have a real passion for fast solutions and employees have a real enthusiasm for our mission to make the internet a better place where all experiences are fast. Safe and engaging. Thank you so much for the time today.

Abby: Ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.

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