Q4 2023 Fastly Inc Earnings Call
Good afternoon, My name is Krista and I'll be your conference operator today at this time I would like to welcome everyone to the Fastly fourth 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'd like to ask a question during that time simply press star followed by the number one on your telephone keypad and if you'd like to withdraw your question again press Star one. Thank you I would now like to turn the conference over to Vern Etsy Investor Relations at Foster.
Lee Burns. Please go ahead.
Thank you and welcome everyone to our fourth quarter 2023 earnings Conference call.
The CEO, Todd Nightingale, and CFO, Ron Kisling with us today.
The webcast of this call can be accessed through our website <unk> dot com.
Vernon P. Essi: Be archived for one year.
Also a replay will be available by dialing 877 zero.
2030, 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.
These statements are subject to known and unknown risks uncertainties and assumptions that could cause actual results to differ materially from those projected or implied during the call.
For further information regarding risk factors for our business. Please refer to our filings with the SEC, including our most recent quarterly report filed on Form 10-Q filed with the SEC and our fourth quarter 2023 earnings release and supplement for a discussion of the factors that could cause our results to differ please refer in particular to the sections entitled risk factors.
We encourage you to read these documents.
Vernon P. Essi: 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.
Otherwise noted all numbers, we discuss today other than revenue will be on an adjusted non-GAAP basis.
Reconciliations to the most directly comparable GAAP financial measures are provided in the earnings release and supplement on our Investor Relations website.
These non-GAAP measures are not intended to be a substitute for our GAAP results.
Before we begin our prepared comments. Please note that we will be attending two conferences in the first quarter of 2020 for Raymond James Institutional Investor Conference in Orlando on March four and the Morgan Stanley Technology Media and Telecom conference in San Francisco on March six.
With that I'll turn the call over to Todd.
Vernon P. Essi: Todd.
Thanks, Burton hi, everyone and thanks, so much for joining us today.
First I will give a quick summary of our financial results and fourth quarter highlights I will then provide an update on our go to market efforts customer acquisition and product developments before I hand, the call over to Ron to discuss our fourth quarter financial results and guidance in detail.
I'm pleased to report that we closed out 2023 with revenue of $506 million, representing 17% year over year growth and coming in above the original $4 95 to $5 $5 million range, we guided to one year ago.
We reported record fourth quarter revenue of $137 $8 million, which grew 15% year over year and 8% quarter over quarter.
This result came in at the lower end of our fourth quarter guidance range, driven by weaker than anticipated international traffic offset by seasonally strong live streaming and gaming activity.
Most quarters, we set a new traffic milestone that faster, but this quarter was special for the first time. The Fastly platform are handled more than 100 Terabits per second on November eight as part of the celebration for hitting this milestone we have decided to retire the live traffic gauge on our web site. Its original intent was to prove the viability of the <unk>.
<unk> platform to prospective customers, especially with just starting out obviously, we've outgrown the need for this tool and will celebrate its retirement.
Our customer retention efforts were stable in the fourth quarter with our LTM and are are at 113% down slightly from Q3s, 114%.
Our total customer count in the fourth quarter was 3243, which increased by 141 customers compared to Q3 and increased by 181 customers year over year.
Enterprise customers totaled $5 78 in the quarter, an increase of 31 from Q3, representing the highest level of sequential growth since we since we acquired signal sciences back in 2020.
Our new packaging channel program and a renewed demand Gen focus are driving a change in the velocity of customer acquisition at Fastly and this is finally, starting to show up in these disclosed customer counts.
As these customers grow with vastly they will fuel our revenue growth for years to come.
This customer growth is also diversifying our revenue among verticals, which helps us optimize traffic across our fleet yielding higher profitability.
Our sales team has been energized by our recent success with large customer wins of the 31, new enterprise customers. This COVID-19 were net new to Fastly.
In addition, our average enterprise customer spend with $880000 up 7% on a year over year basis.
While these results demonstrate success and expanding wallet share with existing customers and driving customer acquisition, our journey towards expanding these efforts with a focus on product on marketing and go to market initiatives have just begun our marketing team is elevating <unk> brand with an eye towards efficient spend this involved a clever marketing cam.
Paint at trade shows as well as digital AD campaigns to drive demand, Jim we're closer than ever to delivering complete platform unification for our customers, allowing a far smoother cross sell and onboarding with the simplicity of a single click this will dramatically improve the customer journey in 2024 and we.
We expect to see gains in our customer retention and expansion efforts.
Our sales teams are winning new logos and these expansion verticals with prebuilt use cases, one great example of this is in social media, where we serve some of the largest players in the space and have recently won a handful of follow on logos in this area.
This is highlighted most recently by being real and there are new authentic approach to social media feed real chose past due to the power of our platform and its unique ability to quickly scale for their low latency traffic patterns.
Members of my senior staff loved this platform, we're happy to have them onboard. This has also led to the winning of a social media based shopping application that is rapidly growing leveraging our expertise in that space as well.
Alongside social media, we added to our list of logos with one of the Premier dating apps and are excited to pursue other dynamic traffic opportunities in similar mobile applications. We continue.
To penetrate new sub verticals in E. Commerce for example in live auctions. We recently won Phillips Auctioneers, which was a follow on when to Sotheby's, making up a strong partner for our live auctioning and its unique e-commerce website content requirements.
In the travel and leisure space, we continue to penetrate the gaming sub vertical in addition to valleys. We added another major player in this space.
And these newer verticals serving more than just grow our topline they diversify our traffic load and provide passenger with a smoother network and compute demand this leads to higher infrastructure utilization and ultimately gross margin improvement.
Okay.
We continue to see a tailwind from vendors, who exited the space Moxie works a tech platform for real estate agents and brokers is a great example of how we capitalize on this disruptive environment.
We recently published our new annual Global Cyber Security report the race to adapt uncovering the impacts of cyber attacks on leading businesses across the globe and how 76% of businesses surveyed are planning to increase their cyber security budgets. In 2024, we continue to expand our security offerings to help customers counter these new threats and meat.
This growing demand.
He was also named a leader in the Forrester wave edge development platforms Q4, 2023 report highlighted by Fas compute platform, receiving the highest possible of five out of five and 'twenty two criteria, including vision innovation road map pricing flexibility and transparency.
It warms my heart that Forrester stayed in this report.
He is an excellent fit for enterprises seeking to extend their capabilities from the public cloud with a highly performing and secure edge platform. This is exactly what fast they can deliver and if any enterprises out there listening and want to extend their capabilities to the edge. Please give us a call.
We continue to make strong improvements in our gross margins.
Which was 56, 9% in 2023 up 330 basis points over 2022 in the fourth quarter. Our gross margin was 59, 2% at 220 basis point increase year over year.
And note that we recognized a one time $2 $8 million true up payment that benefited the quarter.
Ron will share more details with you in a minute, but I'm extremely pleased with this result, as our growth gross margin with or without the true up payment hasn't been this high in almost three years and while we were within striking distance of 60% in the quarter.
Ron: We do hope to produce direct hits above 60% in 2024.
Our team executed on controlling our variable cost of revenue, especially with lower bandwidth cost compared to the third quarter on a relatively healthy track traffic mix.
Our operating loss was $37 million in 2023 less than half of the $76 million operating loss in 2022 and better than the original $53 47 million to our operating loss guidance provided a year ago.
In the fourth quarter, our operating loss was only $2 $3 million coming in better than our guidance of $10 million to $15 million.
Additionally, we posted positive net income in the fourth quarter for the first time since Q2 2020.
Ron: Financial discipline and rigor continues at passing on this corner showcases what is possible as we stay focused.
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 in 2024.
At the end of the fourth quarter, we brought on Kipp Compton, our new Chief product Officer, Kip brings to past 25 years of senior leadership experience driving innovation. Most recently as the SVP of strategy at Cisco networking and his various roles Kip has directed strategy technology and investment and it's even at a prior.
Ron: Company built a CDN for our large media organization under <unk> leadership, we will continue to move our product roadmap towards a more complete platform strategy focusing on unifying.
Lengthening simplifying and always expanding fastly edge platform.
In the fourth quarter, we introduced multiple new features on our wack, including agent auto update a simulator for debugging of testing an anomaly signaled protect out of band domain request and simplified attack signal thresholds. One feature I want to highlight is our plug in for Hershey Corp vault, specifically the plug in allows customers to seamlessly access.
Hershey Corp's fault, the store keys for customers sites, and rotate or a place from Paul when needed.
We released our observer ability page.
Which allows customers to monitor capacity delivery and compute services via collections of metrics and logs.
All of this can be viewed and customizable dashboard that give our customers more insight into their inventory of products and features with fastly and those that are available for them to buy.
We introduced our bot mitigation solution and limited availability to select customers and we were very encouraged by the response and the potential will discuss this further with the investment community next quarter.
Our new packaging motion gained momentum in 2023 and sets us up well for customer acquisition in 2024, I'm pleased to share with you that more customers purchase packages from capacity in the fourth quarter than the first nine months of 2023 combined.
SaaS or packages gives customers reliable billing and shows their confidence in pathway by signing up for longer term commitments.
Moving on to our channel partner development. Our growth continues in 2023 deal registration more than tripled that of 2022, and we grew our partner engagement by over 65%. These partners include Ww T. Chris video Guide point security and FHA.
I'm very pleased with 2023 result, and even more excited about the opportunities in 2024, we established our annual guidance of 16% growth to incorporate macro uncertainties, but are of course targeting to outperform that guidance with continued financial rigor.
Ron: Strong innovation velocity strategically lowering the friction of our go to market efforts and streamlining both our employee experience and our customer experience.
Organizations around the world invest incredible amounts of time and resources building best in class digital experiences only to see the value of them lost by having a compromise between performance safety and personalization.
The solution to this has to be built on the edge and has to leverage all of the benefits that are best in class edge cloud platform brings.
Fastly, we deliver that platform, we partner with our customers to deliver the best possible end user experience fast paced and engaging without compromise.
Now to discuss the financial details of the quarter and guidance I will turn the call over to Ron.
Brian.
Thank you Todd and thanks, everyone for joining us today I'll first discuss some housekeeping items, then I will discuss our business metrics and financial results and lastly, I will review our forward guidance.
Note that unless otherwise stated all financial results in my discussion on non-GAAP basis.
We are always focused on providing the most useful business metrics that help investors understand the fundamentals of our business and our progress toward our goals.
Beginning with the first quarter of 2024, we will discontinue disclosing quarterly and are are in Denver as well as our markets countries and bandwidth statistics. We believe these were used in frequently by the investment community and candidly work, particularly helpful in understanding our business.
Finally, we will begin disclosing revenue by product area split between core growth and emerging products specifically the core segment includes our delivery and network services.
The growth segment includes our security offering and the emerging segment includes our compute and observe ability offering again. These will commence with our next quarter earnings release and will provide further details at that time.
Turning to our financial results.
Revenue for the fourth quarter increased 15% year over year to $137 $8 million.
Coming in at the lower end of our guidance range of $1 37 to $1 $41 million.
Revenue for signals Sciences products was 13% of revenue at 25% year over year increase or 24% increase excluding the impact of purchase price adjustments related to deferred revenue.
Also note that we calculate growth rate off the actual results with the percentage of revenue rounded to the nearest whole percent.
In the fourth quarter, we saw traffic expansion at our major customers, coupled with healthy upsell and cross selling activity.
However, we saw weaker international traffic in the fourth quarter, a reversal from what we saw in the third quarter, resulting in lower revenue growth, but higher gross margins, which I'll touch on in a moment.
Our annual revenue was $506 million, representing 17% growth over 2022 and coming in above our original guidance range of $4 $95 million to $505 million.
Ron: Provided one year ago.
For the fourth quarter, RP O was $245 million.
One 1% from $248 million in the third quarter of 2023 and up 24% from $198 million in the fourth quarter of 2022.
As our consumption based revenue model is now being augmented with predictable revenue packages, we believe that <unk> will become a more meaningful indicator to the health of our business in 2024 as Todd shared earlier, we had 3200 43 customers at the end of the fourth quarter of which 578 were classified as enterprise.
Ron: A net increase of 31 compared to a decrease of four in the third quarter and an increase of 22 in the fourth quarter of 2022.
Our trailing 12 month net retention rate was 113% down from 114% in the prior quarter at 119% in the year ago quarter.
Annual revenue retention rate, which we reported fiscal year end with 99, 2% for 2023 up from 98, 9% in 2022.
These figures continue to reflect our very low churn and healthy customer retention dynamic.
Enterprise customers accounted for 92% of total revenue on an annualized basis in both Q4 and Q3 with average enterprise customer spend of $880000 up 3% from $858000 in the previous quarter and up 7% from $822000 in Q4 of <unk>.
Last year.
Top 10 customers comprised 40% of our total revenues in the fourth quarter of 2023 flat with their contribution in Q3, reflecting in part the impact of vendor consolidation and expansion of traffic at some of our largest customers, which also drove one customer to account for more than 10% of revenue in the fourth quarter.
I will now turn to the rest of our financial results for the fourth quarter.
Our gross margin was 59, 2% in Q4 compared to 55, 9% in Q3 of 2023, well above our expectations of a 100 basis point sequential increase.
As I noted in my discussion of fourth quarter revenue, we saw weaker international traffic in the fourth quarter, a reversal from the stronger international traffic, we saw in the third quarter, which resulted in lower revenue growth, but had a positive impact on our gross margins are.
Our team also executed on controlling our variable cost of revenue, especially with lower transit cost with successful renegotiation of our transit rate in several international markets.
As Todd explained we recognized a one time $2 $8 million of cake or pay true up payment that benefited gross margins in the quarter.
Had this benefit not been reflected gross margin would have been 58, 3% in the fourth quarter.
Our 2023 annual gross margin was 56, 9% up 330 basis points over 2022 gross margin of 53, 6%.
Discounting the benefit of the $2 $8 million true up in the fourth quarter of 2023.
And the $3 $3 million true up in the fourth quarter of 2022, the gross margin improvement would have been 350 basis points year over year.
I'm very pleased with the cross functional work that took place and aligning our network capacity investments with expected traffic demand our cost control efforts and bandwidth transit cost and our progress in pursuing beneficial peering relationships.
While we have made significant gains in our cost of sales there is still room for further improvement as we scale and.
And we remain committed to demonstrating an 80% incremental gross margin in our financial model going forward.
Moreover, the 330 basis point improvement in gross margin year over year, coupled with 17% revenue growth resulted in gross profit growing by $56 million or 24% over 2022.
Operating expenses were $84 million in the fourth quarter, a 5% increase compared to Q4, 2022 and sequentially flat with the third quarter.
Our operating expenses were lower than expected due to continued cost management efforts and fourth quarter hiring coming in slightly below our expectation.
Recall that our sales and marketing expenses in the third quarter were impacted by one time marketing expenses related to events and Cid, which benefited the sequential comparisons in opex.
This favorability combined with gross profit ahead of expectations resulted in an operating loss of $2 3 million in the fourth quarter exceeding the high end of our operating loss guidance range of $10 million to $6 million.
For 2023, our total operating expenses were $325 million.
Up 5% from $308 million in 2022, given our revenue and gross profit growth rate of 17% and 24%, respectively. We were able to leverage our lower opex growth to reduce our operating loss margin by more than half from 17, 7% in 2022 to seven 2%.
The majority of our Opex progress was due to company wide financial rigor, we've discussed over the course of the year, including notable larger items, such as reducing duplicative or unnecessary SaaS and <unk> tool.
And our organization.
In the fourth quarter, we reported a net profit of $1 $7 million or one cent per diluted share compared to a net loss of $9 5 million or <unk> <unk> loss per basic and diluted share in Q4, 2022, demonstrating our ability to drive towards sustainable profit in our business.
Our adjusted EBITDA was positive in the fourth quarter coming in at $11 5 million compared to negative $1 million in Q4 2022.
I'm pleased to report that our 2023 full year EBITDA was positive $15 5 million compared to negative $32 9 million in 2022.
Ron: Turning to the balance sheet, we ended the quarter with approximately $329 million in cash equivalents marketable securities and investments, including those classified as long term.
We continued our repurchase of convertible debt principal in the fourth quarter, resulting in a reduction of our convertible debt principal balance by more than 50% from $713 $8 million at the end of 2022 to $346 5 million at the end of 2023 and.
And specifically in the fourth quarter, we repurchased $139 million and principal amount of our convertible notes for $113 $6 million in cash.
Approximately 87 cents on the dollar Cup.
Coupled with a larger repurchase back in May 2023 repurchases totaled $367 3 million in principal for $310 5 million in cash or approximately 85 cents on the dollar.
Our free cash flow for the fourth quarter was negative $21 9 million or $2 million sequential decline from negative $19 7 million in the third quarter.
This decline was primarily driven by an increase in our capital expenditure compared to the third quarter.
Our 2023 free cash flow improved by $113 million over the prior year to negative $59 million from negative $172 million in 2022.
This year over year improvement was driven by approximately a $70 million increase in cash from operations and a $42 million reduction in advanced payments for equipment.
Our cash capital expenditures were approximately 11% of revenue in the fourth quarter and totaled 8% for 2023 coming in at the high end of our guidance of 6% to 8% of revenue.
As we shared on our Q3 call we accelerated certain 2024 deployments into late 2023.
As a reminder, our cash capital expenditures include capitalized internal use software.
For 2024, we anticipate our cash capex will be in the 6% to 8% range with deployments to be weighted towards the first half of the year.
I will now discuss our outlook for the first quarter and full year 2024.
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 and we undertake no obligation to update these forward looking statements in the future except as required by law.
Our first quarter and full year 2024 outlook reflect our continued ability to deliver strong top line growth via improved customer acquisition, and upsell and cross sell expansion in our existing customers driven in part by new and enhanced products are.
Our revenue guidance is based on the visibility that we have today.
Similar to Q1 2023, we expect revenues to decline sequentially from our seasonally high Q4 result, due to lower traffic pattern and the absence of the $2 $8 million take or pay true up recognized in the fourth quarter.
For the first quarter, we expect revenue in the range of $131 million to $135 million, representing 13% annual growth at the midpoint.
We continue to be very disciplined in our network investment in cost of revenues, which contributed to our fourth quarter gross margins being approximately 200 basis points better than we initially expected.
We typically see a seasonal decline in gross margins in the first quarter with improvement in the second half as we build capacity for peak traffic.
For the first quarter, we anticipate our gross margins will decrease approximately 100 basis points relative to the fourth quarter, plus or minus 50 basis points.
As we mentioned previously our Q4 operating loss was moderately better than our earlier expectations on continued cost management and slightly slower hiring.
Our first quarter operating results will reflect the impact of the seasonal decrease in gross margin and the impact to our operating expenses the first half employer payroll tax increases.
As a result for the first quarter, we expect our non-GAAP operating loss to increase to a loss of <unk> $14 million to $10 million.
And our non-GAAP net loss to be nine to five cents per share.
For calendar year 2024, we expect revenue in the range of $580 million to $590 million in annual growth rate of 16% at the midpoint.
This guidance reflects our expectation for quarter on quarter acceleration in revenue growth through the year, driven by new customer acquisition and continued expansion in existing customers.
We expect to continue to see gross margin improvement in 2024 and to continue our spending discipline, while increasing our investment in go to market and product development.
We anticipate our 2024 gross margins will improve by approximately 200 basis point, plus or minus 100 basis points relative to 2023.
And to exit the year with gross margins at 60% or better.
As a result, we expect our non-GAAP operating loss to improve to a range of $20 million to $14 million.
Reflecting an operating margin of negative 3% at the midpoint.
Improvement of over 50% over 2020, Three's operating loss margin of seven 2% and by over 80% over 2020 two's operating loss of 17, 7%.
Ron: We expect our non-GAAP net loss per share improved <unk> <unk> to breakeven, reflecting the improvement in our operating loss expectation.
And we expect free cash flow to be breakeven in 2024 compared to negative $59 million in 2023.
Before we open the line for questions, we'd like to thank you for your interest and your support is vastly operator.
Thank you.
Good afternoon. Thank you for taking my questions.
I wanted to ask about the backlog performance in the quarter you did have some prepared remarks around it but it really isn't typical to see a sequential decline in backlog and certainly we couldn't find an instance of that.
Speaker Change: And our model going back several years. So I was hoping if you could unpack with a little bit more detail to that sequential decline.
The extent of some of the package momentum.
Is that really going to help blunt some of these impact and then I have a quick follow up as well. Thank you.
Yes on the <unk>.
What we have seen at the beginning of the year was a pretty big increases we've been focusing on building multi year commitments.
And over time, I think looking at it on a year over year basis is probably going to be important, particularly given the Q4 being our highest quarter youre going to see some of the biggest usage of those commitments during the fourth quarter.
Yes, Tim I think it is.
Great question.
I think thats probably on RPI.
Right I think we're going to see.
We are going to see some choppiness in that number but the package momentum has been great. That's the packaging is just one way.
So that we drive RPI.
Large annual contracts with a.
With annual commit like the one that we had a true up payment for in Q4.
That's the other way that we see are driven out.
But on packaging it.
Speaker Change: It was amazing.
Results in Q4, which gives us a ton of confidence not just in the mid market side of the house, but even in large enterprise accounts.
And I think that really demonstrates that there is a desire in the market for reliable pricing in a simpler all in construct for edge cloud that resonates.
And down the market. So we're going to continue to invest there.
I appreciate that.
Tom since I have you.
Can you speak to any succession planning or any updated thought processes.
With regards to the Chief revenue Officer, Steve I understand.
Let the company later in the quarter. So just wanted to get a sense of.
Tom: Where the management team is that with respect to selling that vacancy.
And to the extent that maybe had an impact on the quarter as well if you could speak to that thank you very much.
Sure absolutely.
I really don't think it had any impact on the quarter.
Remembering that.
Yeah.
Right.
The company Youre very late in the quarter and to be honest he left the extremely strong.
Tom: Sales team.
On the regional and account side, but also on the sales ops front. So we've been super happy with the team operating as it is now that being said.
We realize this is an incredibly important role with the company.
Especially as we run a true CRM model at Fastly.
Both of them as.
Has the roll covers both the sales side of the house as well as the customer success side of the house, we're going to be very very methodical in choosing the absolute best candidate for that role to that and we're in the process of retaining one of the top recruiting agencies in the world for CFO roles and we.
Already even before that begun discussions with <unk>.
Key candidates.
Great.
Thank you.
Tom: Okay.
Your next question comes from the line of Madeline Brooks from Bank of America. Please go ahead.
Yes.
Madeline Brooks: Not Atlanta.
Hey, Tim can you hear me.
Yes, yes, yes.
The strength for this coming year is that in security compute.
Madeline Brooks: Where's the weakness coming from of course outside of the macro comments and just more specific to fastly.
Tim: Yes totally.
From a portfolio point of view pretty happy actually.
And so.
From that point of view we've been.
Pretty pretty steady and I think the progress is really good.
I think the macro is a big deal for us for sure and we want to make sure that we are.
Being conservative in.
Taking into account.
That uncertainty.
We of course have a desire to overachieve on that guide, but we.
Tim: We know we know that there is.
Macro risk just like all of you do that being said the.
New customer acquisition motion and the engine that we've been building here not just with packaging, but would be efforts in channel to focus on <unk>.
Demand Gen, and especially really creative demand Gen engine being built right now and marketing team.
We are.
Really happy to see the indicator that that trajectory is changing.
And I believe that is the real key.
Moving the needle and driving up that guidance in future reports, so that's what we'll be focusing on.
And then just one follow up question from Todd on the macro commentary.
I think you get worse than last quarter versus three Q&A. Jack <unk> is really kind of the first quarter. We heard from you guys macro a lot of competitors in the rest of software and started talking about macro much earlier. So just wondering if we should view this is hitting fastly, a little bit behind the ball compared to the industry or some things that materially changed.
From your perspective.
Yes.
No I think it was pretty much as we saw it last year last quarter.
A handful of deals maybe taking a little longer than we thought a little bit of deal elongation.
But.
And now that we are seeing some of it just like we saw last quarter result, this quarter again, we wanted to make sure we built it into the guide.
Get ahead of our Skus for 2024.
Speaker Change: Got it thank you so much.
Sure.
Speaker Change: Your next question comes from the line of Frank Louthan from Raymond Stanley.
Raymond James Please go ahead.
New firm be a household name any day.
Great.
So you.
You've talked about bringing on some some products that are more recurring revenue in nature, and maybe walk us through those and how thats going to going to fit.
Fit in into the revenue mix going forward and then kind of a follow up where are you with sort of a converged ability ability to sell the converged both delivery and signal sciences out the sales team.
Yes, great.
<unk>.
We should mention all of our portfolio. It's recurring revenue, it's just on a utility billing motion largely.
And or it has traditionally been on our utility build motion, which is I think amazing for large.
And especially particularly sophisticated users who want to lean in and control their usage fees.
But for folks who are looking for.
Speaker Change: And more turnkey solution and perhaps a more holistic strategic partner.
It can help it can be a great opportunity just to buy.
Edge solutions like ours, as a SaaS product straight.
SaaS style build with predictable regular recurring revenue.
And that's what our packages are so all of the all the discussion on as I mentioned in our report here.
The new packaging model is built around that model predictable billing.
Monthly commit.
Recurring revenue.
It gives our sales team the opportunity to easily cross sell from one product line to the next to continue to land and expand and grow the customer over time, but it gives the customer the.
<unk> sort of ease of use financially of knowing what their bill will be every month and so that's been very successful for us so far they have been in the market for about a year and we're pretty happy with that result.
Yeah.
Speaker Change: Alright, great. Thank you.
Sorry, Frank did I Miss the second part of your question is I'll make sure I got the second part.
Speaker Change: Frank can you press star one again please.
Sorry, Matt.
Being able to sell the <unk>.
<unk> Securities.
Speaker Change: Sorry, you asked about product unification and being able to sell.
Signal science, and the traditional fast food portfolio as well.
Speaker Change: Made amazing progress actually in our customers are seeing that there is amazing unification in the UI and a panel that allows you to simply flip between the two we're not done yet we've got.
A full single sign on offering that's going live this week.
Speaker Change: Next week rather.
And then a new navigation, which will be really.
Super seamless user experience, which should be coming out at the end of the quarter, which I'm Super excited about and I think at that point, we'll have a really best in class unified AD platform for delivery.
<unk> services compute security and observer ability, which to me is really where we want to be at the cutting edge edge cloud platform with a suite of solution.
Laos, just about any organization to move to Fastly edge for the best possible user experience.
Your next question comes from the line of Jonathan Ho from William Blair. Please go ahead.
Hi, Good afternoon, I, just wanted to get a little bit of additional color on what happened with international and can you maybe help us understand what changed relative to your expectations and what do you sort of expect to persist I know there was some macro commentary, but what do you expect to persist on internationally into 2024.
Yes.
It is important to note the difference between the.
Mix of international business versus.
What shows up as international traffic on our platform. So.
Our mix of international business was pretty much as we predicted we ran 27%.
Our revenue international this year up from 26% in 'twenty two we expect.
That trying to continue a slow.
Increased slow balancing of our revenue.
Speaker Change: Globally.
But this particular quarter what happened was that some of our traffic mix from.
Really to be off one particular country with a very high rate slowed down traffic wound up landing in other regions and because of that.
Traffic change, we wound up with a little bit of a headwind to revenue.
<unk> said earlier, but a little bit of a tailwind to gross margin.
What I mean by that is traffic that lands in that particular country tends to be build at a high rate.
But.
It is less profitable for us and so we see that in the numbers in.
That is a reality that showed up in our numbers this quarter, so youll see better profitability.
Because of that traffic shift but.
Little headwind to the topline.
Okay.
Okay.
Great.
One additional question in terms of net retention in the debonair trends over time can you give us a sense of.
This large cohort of new enterprise customers are they fully contributing out of the gate or would you expect this group to maybe increased spend over time and maybe start helping those trends out. Thank you.
Yes, 100% as expected.
New enterprise customers and really all new customers to be helping that trend.
Overtime and.
In fact.
And this is sort of an interesting reality the Fas These business and I think most SaaS utility build businesses.
LTM NRI or even Dampener is is actually highly dependent on new customer acquisition, because customers ramp their spend pretty hard over the first three years, two and a half three years and then that ramp tends to tail off continues to grow but at a slower rate.
And you could get pretty good data on those trends if you look at our disclosures from Investor day earlier in 2023.
<unk> presented a graph on exactly that phenomenon.
Yeah.
Your point your question is the right one those that surge in new customer acquisition will absolutely help us drive.
Better LTM at our rates.
In the next few years.
Thank you.
Sure.
Your next question comes from the line of Tim Horan from Oppenheimer. Please go ahead.
Thanks, guys can you talk a little bit more about the distribution business. So how does your kind of quality compared to your peers out there and maybe.
Pricing in our U R.
Timothy Horan: Are you picking up more major sporting events because of the improvement in quality.
When you say distribution mean like CDN content distribution right, yes, yes.
Yes, sorry about that sometimes we call it delivery.
Distribution.
Yes look I think this is an area where we believe.
We've got a very strong competitive advantage from a performance point of view and in many major markets a capacity point of view.
But one hole I think that we're continuing to grow into is that true like longest tail of global coverage and we're continuing to evolve there but.
<unk> in major markets, we feel extremely strong about.
About our performance advantage. We also are extremely proud of the feature completeness, the fact that our security and our compute.
Our portfolio is available on every single node that delivery is available on our customer never has to trade those things off our edge is fully capable everywhere that it exists around the world and that gives us a boost when it comes to content delivery as well. So we are feeling pretty good about that.
Live sporting events or any live events, we're starting to see some interest and other kinds of live events as well.
Timothy Horan: Is I think a huge win for us and that continued trend towards more live events can only help Vasily it's an area, where our differentiation just continues to be.
Very soon.
And is your own offering and improving.
You know over the last couple of years, so for in terms of lower latency more port capacity, what widget or et cetera.
Absolutely both performance like you said lower latency greater capacity closer distributing our nodes closer and closer to the user but also just the completeness of the platform. The feature set the flexibility that it gives one thing I think we're going to start to see and live events.
Timothy Horan: Is an increase in <unk>.
Broadcasters trying to combat piracy and advanced feature set at the edge really matters there.
And advanced focused.
More personalization not just on the AD Flo by other parts of the experience again.
Vance feature set is going to matter there b, we're very proud of the performance of our infrastructure, especially in terms of live events, but the feature set is just as important.
Okay.
Your next question comes from the line of Jeff Van <unk> from Craig Hallum. Please go ahead.
Great. Thanks for taking my questions I've got a few just on the new customer numbers good to see the enterprise capture number is strong it didnt transition or translate to the <unk> acceleration.
With the initial landing size of these these customers.
As large as expected would there potentially smaller deals that's one and two just in terms of the pipeline have you turned the corner and is this a new repeatable level of enterprise adds quarterly.
Yes, great question as far as the new customer adds and like their average size I cant.
We don't disclose the size of new enterprise customers, but.
Average enterprise customer size increased and I think those new customer enterprise customers, if I recall pinnacle.
Yes, we don't have I guess you'd call them, what what was that.
They are typical of our other enterprise customers are not smaller not bigger.
B.
As far as the trajectory goes.
Absolutely.
Our intention to maintain that level, we'll be pushing hard.
To do so I'm sure that of course, there will be fluctuation.
As there always is but I believe we have an opportunity.
Achieved levels like that moving forward and we're going to keep that.
Okay.
Yes.
So I'm just going to add up.
The mix of which of those customers when we signed new enterprise customers that actually have a committed not all of our customers.
They do a consumption based deal with no commit is not going to show up in the <unk> so that.
Timothy Horan: It is also something to think about that theres about a 100% in translation new customers into the <unk>.
Yes.
Got it and then if I look at the overall guide just the acceleration that youre looking for throughout the year the quarter was a bit below Q1 looks a bit below but the year kind of brackets consensus on topline.
And it implies acceleration, what's the visibility to that what do you have to assume there. What are you. What are you assuming in terms of the international weakness. Thus far does that have to improve materially do you assume continued international weakness to hit that back half of the year, just give us maybe a little more comfort where you're getting your conviction later in the year.
Yes, great question and.
We looked at that very carefully because I guess, we knew we'd have this question.
We project the revenue down to the account level for a very large number of accounts and look at the trend across the board.
And.
This is basically is the best projection we've got.
I feel very very confident in it.
Sure.
As far as the international traffic goes if we saw another surge.
In one of those more high priced regions you'd expect that to be a tailwind to revenue in any quarter that had happened.
We saw a particular large strategic.
New customer come onboard we could again see a tailwind.
As far as the Q1 number versus the rest of the year number our projection.
As for the full year and we're trying to track it very very carefully.
The biggest thing Youre seeing in Q1, I think is the step down from a one time true up payments from Q4 to Q1, which our model obviously takes into account and so we see that but the driving the continued growth through the rest of the year I think it is in fact sort of like the baseline for our projection.
Okay, and maybe sorry, just to go back if I could one more on international just to understand it sounded like you were I guess I'm a little confused you are saying some of the revenue shifted from from one country to another it sounded like it might be very concentrated.
Jessica was concentrated too.
A specific customer just just indulge me there, but maybe just explain that one more time.
Yes, some some traffic moved out of one country. So.
There is a handful of countries in the world where.
Delivery services are just very expensive.
Because of the way.
Internet service providers.
Acknowledging vendors operate in that country and the rate is very high and we don't have all of that cost onto our onto our customers. So because of that the margins tend to be very low when we see a spike of traffic in a region like that.
See an increase in the top line, but a headwind to gross margin.
And we saw that in Q3, and we saw it come down in Q4, which was the.
The headwind on the topline and a tailwind on gross margin.
We try our best to protect that to predict and project that.
But that is what happened.
Your next question comes from the line of Rudy Kessinger from D. A Davidson. Please go ahead.
Hey, Thanks for taking my questions just a follow on to that I mean, just.
With this strategy being lower in this one country.
Was that from your largest customer that's over 10% and secondly.
What was the reason for the lower traffic in that one country was did they did you lose share to another provider what.
What was the was it not enough new content in the quarter was at live sporting event related and not as much viewership what was the reason for the lower traffic in that one country.
Sure I can't I can't comment on which customer it was from but.
It's just a natural.
Natural variability like you said, how much new content or what types of content being published in a particular region.
For for Streamers has volatility when it comes down to the granularity of our single country in the world.
Get volatility in that in that space and so that's what we saw.
Tried to make sure that our 2020 forward projections are really the baseline traffic in countries like that and if we see.
Timothy Horan: Surges, then they'll show up as a <unk>.
Tailwind moving forward.
Okay, Ron and just kind of housekeeping keeping clarification questions.
Revenue acceleration on a year over year growth basis every quarter. So Q2 grocery accelerate from Q1 and then on gross margins you said in Q1 down about 100 basis points versus Q4 is that versus the reported 59, 2% or the adjusted <unk> 58, 3%.
Yes, so I guess on the latter one just to clarify that's against the reported 59 to 100 basis points plus or minus against what we actually reported.
In terms of the acceleration I mean, I think you will see it across the course of the year.
I think I expect that to be generally in line with what we've seen historically from a seasonality and from acceleration across the year.
Yeah.
Yeah.
Your next question comes from the line of Angie song from Morgan Stanley. Please go ahead.
Hi can you guys hear me.
Yes.
Perfect. Thanks, so much for taking my question today.
So just wanted to dig in on gross margins, you mentioned that 80% incremental gross margins could.
Could you just speak to what drives this and on the 60% margins.
Look more somewhat more aspirational or is this something that you have a line of sight on.
Yes, I think on the latter question in terms of our outlook for gross margins for 2024 and <unk>.
<unk> bye.
By year end margins at 60% or a little above that is.
It's really our plan, we have line of sight to it.
It is continued.
Rigor and our.
Investments in capacity.
It's continuing to improve our bandwidth or transit costs through both negotiations and increasing our PRA.
Network efficiency and then as we just continue to grow it allows us, particularly international to improve our cost structure.
And.
Timothy Horan: And so those are kind of the big drivers that give us line of sight to that improvement that we expect to continue to see that improvement.
Across 2024.
Okay.
I mean, you are right.
Alright.
Next question comes from the line of Richie Deloria from RBC capital markets. Please go ahead.
Wonderful that's a new way.
Pronounced my name all of this is Richie deloria from RBC. Thanks, So much for taking my question, maybe you don't want to start with just looking a little bit closer at signal Sciences.
Saw a little bit of a slowdown in that for a few quarters of acceleration I know, there's obviously comps in scale and everything like that but just any color on what drove that.
And how we should be thinking about that growth going forward.
Okay.
Yes, it's a great question, we see a little bit of a.
Timothy Horan: We always see a little bit of a surge in delivery in Q4.
And so.
Security growth.
So down a little bit.
But.
I will check into it.
It hasn't been a huge shift there the sales margin seems to be running.
Smoothly there could be that we have a little bit of a backup.
Folks who are waiting for that unified experience coming out this quarter, which will be exciting but.
We've been pretty confident in that security side of the business this quarter.
Okay got it that's helpful and then maybe just sticking with security.
As you have the new Bot management product out there what sort of early feedback have you gotten from select customers that are actively using it in production today.
Yes, we've had some really solid feedback in fact, we had a couple of customers actually make purchases in Q4, even though it was just an early availability that wasn't nice confidence I think it showed a maturity in our beta motion.
I'll tell you the biggest piece of feedback that I have heard is just a very broad interest in this technology and thats been great.
And a ton of interest in an expanded feature set we're starting to look at.
Prototyping, some private access tokens as part of that solution as well because we've gotten just so much interest.
That side of the house I think there's a ton of revenue opportunity here for our security portfolio on the box side, and we're going to be pushing that I think it's easy to imagine that the only people who would be super motivated.
Around bot management might be.
Right.
Incredibly bursty retailers that do big product drops, but its not sure.
Pretty broad.
Probably applicable.
Product with a bunch of use cases, something as simple as customers, who don't want their competitors scraping their data off the website offer websites.
That's super interesting and it's something we're going to be pushing hard at and continuing to invest and I think even as we go G&A. This quarter, we're going to continue to add functionality here.
For probably for years to come and there is a ton of interest in a ton of innovation here.
Wonderful. Thank you so much.
Okay.
That concludes our question and answer session I will now turn the call back to Chief Executive Officer, Todd Nightingale for closing remarks.
Thanks, everyone for joining us on Valentines day, I want to thank our employees customers partners and investors, we remain focused on execution, bringing lasting growth to our business and delivering value to our shareholders.
Let me close by saying I believe digital experiences will drive the mission and define the success of almost every organization everywhere.
<unk> will have a significant impact on the way digital experiences are built and delivered around the world.
Our customers have a real passion for <unk> solutions, and our employees have real enthusiasm for craft. These mission to make the internet a better place where all experiences are fast safe and engaging.
Thank you so much.
This concludes today's conference call. Thank you for your participation and you may now disconnect.
Please wait the conference will begin shortly.
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Yes.
Timothy Horan: [music].
Yeah.
Yes.
Yes.
Yes.
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