Q1 2024 Fastly Inc Earnings Call
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[music].
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 first quarter 2024 earnings conference call.
All lines have been placed on mute to prevent any background noise and 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 and I would now like to turn the conference over to Vern FC Investor Relations App vastly. Please go ahead.
Thank you and welcome everyone to our first quarter 2024 earnings conference call, we have Fastly CEO, Todd Nightingale, and CFO, Ron Kisling with us today.
Webcast of this call can be accessed through our website <unk> dot com and will be archived for one year.
Also a replay will be available by dialing 870, 702030 and referencing the 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 SaaS 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.
Further information regarding risk factors for our business. Please refer to our filings with the SEC, including our most recent annual report filed on Form 10-K, and quarterly report filed on Form 10-Q filed with the SEC and our first quarter 2024 earnings release and supplement.
For a discussion of the factors that could cause our results to differ.
Please refer in particular to the sections entitled Risk factors, we encourage you to read these documents.
Also note the forward looking statements on this call are based on information available to us as of today's date.
Undertakes 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 with 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.
Now I will turn the call over to Todd.
Todd.
Thanks, Brian Hi, everyone and thanks, so much for joining us today.
First I'd like to give a quick summary of our first quarter financial results and related highlights.
I'll, then discuss our revised revenue outlook and provide an update to our go to market initiatives and customer acquisition as it relates to our path forward to drive revenue growth.
I will then hand, the call over to Ron to discuss the changes in our metrics, our first quarter financial results and our guidance in detail.
I am pleased that we reported revenue of $133 $5 million for the first quarter, representing a 14% year over year growth and coming in above the midpoint of our $1 $31 million to $135 million guidance range.
Our customer growth and retention efforts showed improvement in the first quarter with our <unk> at 114% up slightly from Q4's level of 113% and reversing quarterly declines in those metrics since the end of 2022.
Our total customer count in the fourth quarter was 3290, which increased by 47 customers compared to before and by 190 year over year enterprise customers totaled 577 in the quarter a decrease of one from Q4 regarding 18 net new enterprise customers at the $100000 annual revenue threshold in the quarter. This was mostly office.
By customers that dropped below this threshold due to seasonality.
Year over year basis, we grew our enterprise customer count by 37.
Our gross margin continues to improve and was 58, 8% in the first quarter up 320 basis points year over year and ahead of our expectations. Our operating loss was $9 $7 million in the first quarter compared to an operating loss of $14 1 million in the first quarter of 2023 I'm very pleased with this result, as our loss was.
<unk> better than our guidance of $14 million to $10 billion. The upside was roughly split between higher gross margins and better Opex cost control and Ron will share more details with you in a moment.
Lastly, we posted positive $3 $7 million and adjusted EBITDA, and importantly, an $11 $1 million positive cash flow from operations I am pleased with the continued momentum on operational execution here, especially as it helps us fuel growth moving forward now let me discuss the highlights of the quarter.
In the first quarter, we continued our success in diversifying our logo wins and penetrating new and existing customer verticals.
We had amazing wins in the healthcare sector during the first quarter with a leading health solutions company, a major government research agency and a leading imaging provider. These key lighthouse accounts will help us accelerate more customer acquisition healthcare drive growth and an important sector and deliver better vertical differentiation to our business.
Health care industry has always been focused on reliability and performance, making fastly a perfect fit.
We continued to penetrate the mobile app market and high Tech in the first quarter. We won bending spoons are leading mobile app developer serving over a half billion people across the globe in France. We are now supporting M. W. M top app publisher, where selected path as content delivery and image optimization services to support its AI driven model.
And the business services vertical we're proud to announce that our leading customer data platform will be onboarding with Fastly. We also won one of the world's largest realtor companies with over 100000 agents and over 100 countries.
Great example of how we landed in the real estate vertical with marks he works, which we discussed last quarter and were able to build upon that vertical expertise with this new real estate win.
In the first quarter, we introduced vastly accelerate a series of in person global events develop exclusively for families customer network of developers security professional and business leaders.
First event was held at our headquarters in San Francisco on April four and it was widely attended we will be following up with similar events worldwide in 2024, with London, New York and Sydney to follow.
Lastly, I'm pleased to announce that families OE CDP private related one to 2024 debuts award for best Innovation and services application development.
Our solution is widely used in the top web browsers on the internet to help extend privacy to millions of users is beginning to find other use cases and privacy and security.
In the first quarter, we continued to drive focus and investment into platform unification and expansion. We enabled self service adoption with a universal log and feature across our solutions and improved product trials and upgrades platform wide.
Expanding our platform are key to our platform strategy and that's why I'm. So excited for Bot management, becoming generally available in Q1.
Our bot management solution combat automated bot attacks at the edge and significantly reduces the risk of fraud distributed dos attacks account takeovers on other online abuse.
This is an important cyber security milestone for the company significantly expanding our security offering.
Our Ddos services best in class WAF, and Bot management solution makeup incredibly tight complete security offering in the web application and API security space, we've already seen significant uptick here and it is great to see both customer expansion and acquisition leveraging this new capability so quickly.
Security is a great example of innovation velocity as Fastly, our WAF continues to be highly differentiated with low false positives and a predominance of customers operating in full blocking mode.
Our Bot management solution was 100% developed in house and is already competing well against the most mature products on the market and there is significant innovation and product enhancements to come.
We set up a very strong foundation in 2023 with our newly introduced packaging motion, but gained momentum throughout the year in the first quarter of 2024, we updated pathway packages by launching observer ability skus fixed price add ons and enhancements to our packages, especially in security to continue delivering simplicity value and choice for our customers.
<unk>.
I'm excited to share with you that in the first quarter, we already exceeded all the customer packaging purchases sold in the first half of 2023 <unk>.
Packaging motion gives customers a reliable billing and shows their confidence in <unk> by signing up for longer term commitments pack.
Package billing provides predictable pricing for our customers and predictable reliable revenue for Fastly.
Additionally, our channel program continues to grow and mature in the first quarter deal registration and revenue contribution more than doubled year over year. In fact for the first time the largest deal in our quarter closed through a channel relationship our channel partners continue to have strategic importance in our go to market efforts.
Our CFO search has been a key focus this quarter I am happy with the progress. We've made is we're now in the final stages. We've interviewed numerous candidates to find the right expertise and a balance of operational expertise and the strategic ability to grow and scale I'm pleased that we've narrowed our candidate Tom to just a handful and we should.
Have a selection finalized within a few weeks I expect to announce a new chief revenue officer in the second quarter.
Yes.
Now, let me turn to address our outlook going forward, our second quarter guidance of 6% to 9% year over year growth and modified 2024 annual guidance of 12% year over year growth are not where we expected our business to perform and of course, our disappointing Ron will discuss the financial details to this forecast in a moment, but let me first address this out.
Look in our path forward.
There are a few factors that contributed to a challenging short term environment. The biggest factor is the reduction of revenue from a small number of our largest customers.
The first quarter revenue from our top 10 customers dropped from 40% to 38%.
Many of the top 10 accounts run a multi vendor strategy and we did see significant volatility here and there are a few reasons for this.
Firstly <unk>.
Historically <unk> Fastly is gradually one greater traffic share in our largest accounts, but with the timing of rate and volume changes we saw increased volatility this quarter.
To be clear, we have not been removed from any of our largest customers and we remain in a strong strategic position with each of them long term.
Secondly in some accounts, we did see an addition of CDN vendors a reversal of the vendor consolidation we saw last year.
And thirdly, we are seeing a slight uptick from the typical level of re rates with our largest customers.
We have not yet seen the commensurate traffic expansion usually associated with this motion.
Very positively we are seeing continued success with the new customer acquisition.
<unk> and notably added two very large new logos in Q1, one of which will move into the top 10 over the course of the year.
We aim to see the long term results of our new customer acquisition motion, having an increasing effect on our revenue as the year goes on.
Going forward, we strongly believe our strategy is correct and we will remain committed to our focus on growth.
We will continue to invest in our customer acquisition and go to market motions. We are shifting the way, we engage with our largest multi vendor customers to focus on improving our visibility and driving traffic and revenue share in those accounts.
We remain committed to platform unification and expansion, helping us drive cross sell and growth. We will continue to drive engineering investment in this effort coupled with the expansion of our security portfolio with Bot management to drive stickiness and wallet share with our customers.
As a backdrop to these investments we will continue to drive disciplined in managing our spend with a clear focus on efforts leading to long term growth.
In summary, we are pleased with our first quarter performance, but we are not satisfied with our Q2 outlook and 2024 guidance. We're laser focused on revenue growth initiatives innovation velocity and customer acquisition.
And 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 changes to our metrics disclosures before turning to our financial results and business metrics.
I will then review our forward guidance note that unless otherwise stated all financial results in my discussion of our non-GAAP based.
We continue to focus on sharing the business metrics that provide the most useful information to understand and monitor the progress of our business.
Beginning with this first quarter 2024 release, we have discontinued the disclosure of quarterly and RR <unk>.
<unk>, the number of markets and countries and our bandwidth statistics.
Conversely, we are now disclosing our revenue by product line between network services, which is our core delivery products offering security, which is our gross offering and other our emerging products offering which includes compute and the durability products.
We have provided a trended eight quarter history of this revenue in our Investor supplement.
Because we are now providing revenue from our full security portfolio, we will no longer be reporting signal science's revenue on a standalone basis.
Sigma Sciences acquired firewall solution has been integrated with faster these legacy firewall, which we now refer to as our Nextgen wax.
Our legacy firewall revenue has largely transitioned into the signal sciences, Wap or Nextgen Wap.
Note that our combined security revenue reflects the impact of the decline in our legacy WAF revenue taking place during that integration.
Lastly, as our supplement only includes the trailing eight quarters I will provide the revenue breakout for the first quarter of 2022 here in my prepared comments.
Network services revenue was $83 9 million.
<unk> revenue was $18 2 million.
And other revenue totaled <unk> 3 million.
Turning to our financial results rare.
<unk> revenue for the first quarter increased 14% year over year to $133 5 million coming in slightly ahead of the midpoint of our guidance range of $1 $31 million to $135 million.
Specifically on our two largest product lines network services grew 12% year over year to $106 million and security revenue grew 16% year over year to $24 6 million.
In the first quarter, we experienced normal seasonal traffic pattern.
This resulted in a sequential decline in revenue highlighted by expansion in some areas, particularly gaming offset to a lesser degree e-commerce related traffic and lower traffic at our largest customers.
Our top 10 customers comprised 38% of our total revenues in the first quarter of 2024 compared to 40% in Q4 2023, reflecting the impact of lower traffic at our largest customers.
Also no customer accounted for over 10% of revenue in the first quarter.
Our trailing 12 months net retention rate was 114% up from 113% in the prior quarter and down from 116% in the year ago quarter.
These figures continue to demonstrate our very low churn and healthy customer retention dynamics.
At the end of the first quarter.
Our <unk> was $227 million down 4% from $236 million in the fourth quarter of 2003 and down 6% from $242 million in the first quarter of 2023.
This decline is primarily due to our largest customers working through the remaining obligations over their contract terms.
As Todd shared earlier, we had 3200 90 customers at the end of Q1 of which 577 were classified as enterprise a net decrease of one compared to an increase of 31 in the fourth quarter.
Enterprise customers accounted for 91% of total revenue on an annualized basis in Q1 compared to <unk>, 92% in Q4.
And enterprise customer average spend was 846000.
Down 4% from 880000 in the previous quarter and up 6% from 795000 in Q1 of last year.
I will now turn to the rest of our financial results for the first quarter.
Our gross margin was 58, 8% compared to 59, 2% in the fourth quarter of 2023.
Recall that fourth quarter gross margins were 58, 3% after adjusting for the one time $2 8 million take or pay true up payment, reflecting a 50 basis point quarter over quarter improvement.
Our gross margin improvement was the result of continued cost control efforts and bandwidth transit cost and related services costs.
Operating expenses were $88 2 million in the first quarter, and 11% increase compared to Q1, 2023 and up 5% sequentially from the fourth quarter.
While our operating expenses were better than expected due to our continued management of costs remember that we do see a seasonal increase in our employee costs in the first half of the calendar year, the increased employer payroll taxes.
This favorability in our operating expenses combined with slightly better than expected gross profit resulted in an operating loss of $9 7 million in the first quarter exceeding the high end of our operating loss guidance range of $14 million to $10 million.
In the first quarter, we reported a net loss of $6 5 million or five loss for basic and diluted share compared to a loss of $10 8 million.
<unk> nine loss per basic and diluted share in Q1 2023.
Our adjusted EBITDA was positive in the first quarter coming in at $3 7 million.
Compared to negative $1 9 million in Q1 2023.
Turning to the balance sheet. We ended the quarter was approximately $331 million in cash cash equivalents marketable securities and investments, including those classified as long term up from $329 million at the end of Q4 2023.
Our free cash flow for the first quarter was negative $2 2 million.
$19 $7 million sequential increase from negative $21 $9 million in the fourth quarter.
This increase was primarily driven by an increase in our cash from operations to positive $11 $1 million.
Paired to negative $7 4 million in the fourth quarter.
Our cash capital expenditures were approximately 9% of revenue in the first quarter coming in just above the high end of our guidance of 6% to 8% of revenue we shared on our Q4 call.
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 second 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.
As Scott shared in his remarks.
We are facing a challenging environment of revenue declines in our largest customers overshadowing the impact of new customer acquisition and product pipeline our.
Our guidance reflects these dynamics in our business and the visibility that we have today.
We expect a flattish to modest sequential decline in Q2 revenues compared to our Q1 results future lower traffic specifically at our largest customers.
For the second quarter, we expect revenue in the range of $130 million to $134 million representing.
Representing 6% to 9% annual growth.
We continue to be very disciplined in our network investment and cost of revenues, which contributed to our first quarter gross margins being approximately 60 basis points better than we had initially expected.
We typically see a seasonal decline in gross margins in the first half with improvement in the second half as we build capacity for peak traffic.
For the second quarter, we anticipate our gross margins will decrease approximately 130 basis points relative to the first quarter, plus or minus 50 basis points.
As we mentioned previously our Q1 operating loss was moderately better than our earlier expectations by continued cost management and slightly slower hiring.
Our second quarter operating results reflect the impact of the seasonal decrease in gross margins and the impact to our operating expenses of higher first half employer payroll expenses.
As a result for the second quarter, we expect our non-GAAP operating loss to increase to 16% to $12 million and our non-GAAP loss to be 10 to <unk> <unk> per share.
For calendar year 2024, we expect revenue in the range of $555 million to $565 million.
Reflecting annual growth of 11% at the midpoint.
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 points, plus or minus 100 basis points relative to 2023.
As a result, we expect our non-GAAP operating loss to increase to a range of 28% to $22 million.
<unk> operating margin of negative four 5% at the midpoint and improvement of over 35% over 2020, Three's operating loss margin of seven 2% and by over 70% over 2020 two's operating loss of 17, 7%.
We expect our non-GAAP loss per share to improved to $12 <unk>, reflecting the improvement in our operating loss expectations and we expect our free cash flow to be close to breakeven in 2024 compared to negative $59 million in 2023.
Before we open the line for questions, we would like to thank you for your interest and your support and factually.
Operator.
Yeah.
Thank you.
And we will now begin the question and answer session.
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And your first question comes from Rishi Galeria with RBC. Your line is open.
Oh wonderful I had thought hey, Ron Thanks, So much for taking my question Todd Let me start with you.
Last quarter.
The first Guy Dan you talked about the pricing environment and being relatively kind of in line with how it's been historically it sounds now like there's maybe a little bit more intensifying pricing pressure in spite of the fact that there is.
Is consolidation going on as you pointed out it vendors exiting the space can you just speak to what has maybe changed in the past 90 days in terms of that and what tools do you have in your Arsenal to maybe start to counteract those headlines and I've got a quick follow up for Ron. Thanks.
Yes, I appreciate the question.
I think in the general market I would say the pricing trend.
That we had been seeing sort of continues.
But what we saw in our top 10 15.
Largest accounts we saw.
Our slightly more kind of pricing pressure than we're used to in <unk>.
That's got an outsized impact for us and we are trying to make sure that we're doing the right adjustments to our projection based on that.
Usually with these kinds of pricing changes, we see commensurate volume increase as well and we still hope to see that especially in some of these key accounts, but it's really in that higher than that in the.
Large.
Primarily media accounts, we're seeing a little bit more pricing pressure than normal the rest of the market I still feel pretty confident in the pricing.
Trends have been pretty good I mean anything to add there no I think.
I think the period market, we saw a more modest re rates historically I think that continues across kind of the broad market, but we have seen a change in the largest accounts.
Yeah.
Speaker Change: Okay got it that's helpful. And then one for you when I look at the Investor supplemental you talk Youre highlighting now our appeal with a metric can you maybe speak to why this is now a more relevant leading indicator, especially given you still do have a good amount of the business on kind of consumption that is pre committed and what we should be making.
The fact that our Apio declined sequentially and then even more so year over year, what what needs to happen for that to kind of return back to more healthy levels. Thank you.
Yeah, that's a good question.
Speaker Change: First and foremost overtime as we start to see more and more of the business packages and see that momentum gain as Todd mentioned on the call we saw.
More packages in Q1 than we saw in the full first half of last year those will be additive. So over time, it'll be a better indicator of our business and as it grows. It's also going to reduce some of the volatility that we've seen particularly in the first half of this year.
In terms of the decline.
First and foremost I'd really look at it kind of on a year over year basis, a lot of our customers do have annual commit but some of our largest customers do have two year contract.
So what youre really seeing is some of our largest customers who have multi year contract.
They sort of burn through that ahead of their renewals is creating some headwinds or declines on a year over year basis in the RPM.
I'll just add that I think.
The reason I do believe that's a good metric for us to start looking at and it'll become more and more relevant over time as that part of the packaging.
Transition, we will start to head, we're seeing more and more of our.
Large enterprise uneven and mid sized enterprise accounts engaging on packaging and that impact is going to be shown on that line.
As we move forward.
Alright wonderful thank you guys.
So we will take our next question from Frank Louthan with Raymond James Your line is open.
Frank Garrett Louthan: Great. Thank you first just to kind of clarify on the guide last year at the Analyst day, you guided to free cash flow breakeven for the year is that still attainable and then Todd you mentioned the shift in the engagement approach to customers. How long is it going to take the train the sales team on this engagement shifts and when can we see that.
Frank Garrett Louthan: Turn into higher growth in net retention rate and then what gives us the confidence in the strategy here.
Frank Garrett Louthan: Versus where you were in mid February and the market clearly was different or what have you learned in that last few weeks that tells us is new.
Frank Garrett Louthan: And the guide or are in the right direction.
Frank Garrett Louthan: Okay.
Frank Garrett Louthan: Yes on the free cash flow I think we're continuing commitment to managing our expenses in line with our revenue outlook as I mentioned in the prepared remarks.
Frank Garrett Louthan: But it does create some headwinds, but we expect to be very close to breakeven for 2024 on our free cash flow.
Frank Garrett Louthan: As far as the large accounts.
Frank Garrett Louthan: Management and large account engagement.
Speaker Change: That's incredibly important question for us right now.
Speaker Change: The top 15 or 20 accounted vastly.
Speaker Change: They carry a lot of our revenue and the way that we engage with them the way that we drive.
Speaker Change: <unk> like products product volume penetration the way, we drive price control and discount control the way that we optimize their performance in driving work more significant and complete technology solution.
Speaker Change: I believe we have an opportunity in all of those categories to improve.
Speaker Change: Improve the way that we engage in and dedicate.
Speaker Change: Kate more resources and more focus to pass exactly what we're doing.
Speaker Change: Right now we have already launched a new engagement model we are driving.
Speaker Change: A far higher touch across all of those major accounts, we've been running it for a couple of weeks now and where I am.
Speaker Change: Pretty happy with the progress so far but.
Speaker Change: Just looking at the.
Speaker Change: Where our projection is for those accounts and how much it's changed and Jeff.
Speaker Change: One quarter like you said since last February I think.
Speaker Change: Decisive changed our engagement model was warranted and that is exactly the.
Speaker Change: Transition that we're undergoing right now.
Speaker Change: And <unk> been doing this for two weeks and that's in and now and you think that you've got the right formula or it's just going to take a little longer to evolve how should we think about it.
Speaker Change: Yes.
Speaker Change: I mean look I think we're going to be evolving that formula.
Speaker Change: For quite a while but I think we have the right resources on it now.
Speaker Change: Deployed a lot of resources a lot of the most significant resources into that effort very quickly and I am happy with the progress so far.
Speaker Change: Okay. Thanks.
Speaker Change: We will take our next question from Madeline Brooks with Bank of America. Your line is open.
Madeline Nicole Brooks: Hi team. Thanks, so much for taking the question and Todd I guess this is more so for you. If we look at the back half of the year and if we look at your guide down to 7% growth.
Madeline Nicole Brooks: Our second quarter, and then the re acceleration in the back half of the year to 12% growth, what's giving you the confidence in that right now and additionally to if we're looking at the second quarter, what about second quarter is driving so much of the volatility.
Madeline Nicole Brooks: Yeah.
Speaker Change: As I look at the second half projections.
Speaker Change: Brian can add color on this as well, we've got ramping customers and new customer acquisition has been strong we have been able to move the needle there we're seeing those revenues ramp and new customers being added to the platform.
Brian: So I can I think we've got pretty high conviction that we're going to see that.
Brian: That revenue materialize in the second half.
Brian: Weakness in the shift in that projection.
Brian: From last quarter. This quarter is really in those in those large accounts and that's why we've changed our engagement model with them.
Brian: So significantly but the reason really comes down to that we've seen a little bit of a pullback in the vendor consolidation trend and that that has reversed and we see some folks even adding.
Brian: Additional vendor here and there and we've seen a little more pricing pressure up there that has those are large accounts for us and has a has a large impact.
Speaker Change: Yeah, the only thing I would add on the accelerator.
Speaker Change: Yeah go ahead.
Speaker Change: No go ahead only thing I would add that.
Speaker Change: At half acceleration is.
Speaker Change: Typically we do have seasonality in the business than we historically have about second half tends to be up about 10 or 11%. So when we took a look at the second half we looked at where the business was in Q2.
Speaker Change: And as Todd mentioned, the number of new customers that we've signed and we believe that seasonality that we've seen is intact coming off of the dynamics, we're seeing in the second quarter.
Speaker Change: And then maybe just a quick follow up to you.
Speaker Change: Those customers to ramp I understand what's going on with customer acquisition, but if we just take in those 15 large customer accounts do you see those account stabilizing after the second quarter volatility or do you think we should expect and model declines in that cohort through the end of the year, just given the trends that youre seeing in the market now.
Speaker Change: Yes.
Speaker Change: Yes, I mean, we are.
Speaker Change: So I think our projection is relatively conservative I believe we're going to see traffic levels come up and we're going to find some success in recovering revenue.
Speaker Change: <unk>.
Speaker Change: In those large accounts.
Speaker Change: We're signaling the guide here because obviously there is.
Speaker Change: Theres, a new projection and we want to reflect back but look I believe there is an opportunity for us to beat that projection and.
Speaker Change: Reverse not just stopped.
Speaker Change: Decline, but really reverse the trend in the second half.
Speaker Change: Great. Thanks, so much.
Speaker Change: Yes.
Speaker Change: We will take our next question from Fatima <unk> with Citigroup. Your line is open.
Fatima: Hi, Good afternoon, guys. This is mark costs for <unk>, Thanks for taking our question.
Fatima: But maybe just to kick off on the package on bunker bottling uptake.
Mark: Maybe just give us a sense of the penetration in the base currently and the impact on from a new logo acquisition pipeline built.
Mark: And then understand that you know of packaging.
Mark: Variability through the visibility on revenues can you maybe just quantify in any way.
Mark: It's showing up in the revenue predictability today. Thanks.
Speaker Change: Yes look I think in the long run.
Speaker Change: The channel engagement will help us drive customer acquisition through deal registration and we're starting to see some effect of that.
Speaker Change: Broadening significantly beyond where our channel was strong a year and a half ago, which was really just in the security portfolio. We are seeing the channel engaging across the board.
Speaker Change: This past quarter, our largest deal.
Speaker Change: Those are large new booking close not just through the partner, but also the packaging solution and so I think the both of these trends are are helping not just in the mid size and small accounts and large accounts as well.
Speaker Change: So we've had I think some real success on the Omnichannel growth and the importance of the channel on the go to market.
Speaker Change: Our traditional enterprises for the platform.
Speaker Change: As a.
Speaker Change: A very kind of attractive.
Speaker Change: Feature of sort of a no overages model for those customers that give them very predictable billing and it really gives us much more predictable revenue, which has been which has been a great.
Speaker Change: <unk> had great impact so far I'm pretty happy with both of those and I think.
Speaker Change: We're doubling down on both of those initiatives and really thats.
Speaker Change: A big part of this kind of initiative across the board, where our biggest focus is on revenue growth and driving that revenue growth back up into the twenty's, where it really should be.
Speaker Change: Got it okay. Thank you for that maybe just books all up.
Speaker Change: Can you just touch on.
Speaker Change: The retail inventory.
Speaker Change: One of your large social media customers.
Speaker Change:
Speaker Change: Given how youre that logo MP impact business overall.
Speaker Change: Also reflected in your updated guidance.
Speaker Change: I'm, sorry, you broke up a little bit.
Speaker Change: Could you repeat that marketing you asked about a restructuring of our social media customers.
Speaker Change: Oh no.
Speaker Change: Can you hear me now.
Speaker Change: Yes, much better.
Speaker Change: Okay, Great No I was just wanted to touch on some of the recent regulatory scrutiny that one of your largest social media customers.
Speaker Change: Just wanted to get a sense of how youre thinking of that logo and the impact on the business.
Speaker Change: Is it also reflected an updated guidance. Thanks.
Speaker Change: Yes completely.
Speaker Change: And thanks for repeating the question for sure I think first and foremost we are fully committed to supporting all of our media customers.
Speaker Change: Through any sort of transition that happened to be having in this case that youre referring to.
Speaker Change: Should be should there be any sort of transition or significant transition there, we're doubling down on being able to support them and support them through that transition. However, it may come to life at our engagement with that account has been super strong.
Speaker Change: Sure.
Speaker Change: A pretty positive on the way that will shake out any way you slice it.
Speaker Change: Correspond with some risk in here, but im not.
Speaker Change: Im pretty confident in the path forward.
Speaker Change: And we will take our next question from James Fish with Piper Sandler Your line is open.
Speaker Change: Hello.
James Edward Fish: Hey, guys.
James Edward Fish: Maybe the best way to ask this one.
James Edward Fish: Ron do.
James Edward Fish: Now to the minimum contract levels, you guys Havent been great.
James Edward Fish: What are you assuming for those customers that you are seeing the issues with and per our discussions you said you really weren't seeing any large renewals.
Speaker Change: How does the bank.
Speaker Change: Competitor. What's this year are you just seeing the earlier now just because you saw more volumes than anticipated and so rooftop or walk you through that.
Speaker Change: So I think if you look at each customer I think you look at the large customers are different dynamics in each one.
Speaker Change: And within their multi year commit the amount of traffic that they're running in some instances.
Speaker Change: Todd spoke about we did see some pricing changes that were not accompanied with.
Speaker Change: Traffic increases.
Speaker Change: Our renewals sort of spread across the year.
Speaker Change: And then secondly, we did see some of our largest customers where they added is an additional CDN.
Speaker Change: <unk> reduced some of our traffic levels at those customers and so those were the dynamics so each one's a little bit different but it was really a combination of the pricing changes.
Speaker Change: Traffic share with.
Speaker Change: Increasing the number.
Speaker Change: <unk> at four of our largest customers.
Speaker Change: Okay.
Speaker Change: Right, Rob, but my question is more look you guys tend to have.
Speaker Change: RPI doesn't reflect this to receipts earlier kind of question.
Speaker Change: Our RPM.
Speaker Change: I'll include essentially but the minimum contract levels, but you guys. I think historically you guys have had roughly 80% visibility to any given year just on those minimum contract levels. So as we think about this kind of revised guide I guess, how much above the minimum contracted level are you guys having that.
Speaker Change: We're not going to be sitting here in another 90 days, saying wireless pathway dropping again.
Speaker Change: Yes.
Speaker Change: Two things to clarify I mean, when you look at our largest customers while some of them do have commitments.
Speaker Change: A significant portion of them are utility base.
Speaker Change: Not commitment based and so that's I guess, that's not reflected in the RP O. When there is not an underlying commitment.
Speaker Change: Customer contract.
Speaker Change: And so youre going to see a mix of customers that do have a commit.
Speaker Change: And customers were they.
Speaker Change: Don't even in the cases of commit the customer maybe running traffic above that.
Speaker Change: <unk>.
Speaker Change: So we are still predicting or forecasting it based on a <unk>.
Speaker Change: To look at that just from a slightly broader lens I think it's fair to say that we've seen.
Speaker Change: Some more re rates in our largest 10 or 15 accounts and this past quarter.
Speaker Change: And I take your point on the competitive messaging, we've heard I think that is a fair point.
Speaker Change: I'm, sorry, I've got high confidence in.
Speaker Change: We will take our next question from Tim Horan with Oppenheimer. Your line is open.
Timothy Kelly Horan: So maybe when you mentioned like multiple products like what else is in that network services revenue like how many of those how many different products that you have in there.
Timothy Kelly Horan: What do you typically selling to customers.
Timothy Kelly Horan: Yes.
Speaker Change: Yes, so on the network services side of the house.
Speaker Change: Sell services around.
Speaker Change: Obviously content delivery, which includes both <unk>.
Speaker Change: <unk> streaming and full site delivery and replication around the world we sell in different kinds of technology in terms of image optimization.
Speaker Change: And live events and live streaming and live event monitoring right reservations et cetera.
Speaker Change: When I talk about product penetration across the platform, but I'm talking about expansion into.
Speaker Change: Security.
Speaker Change: Expansion into observer ability and largely.
Speaker Change: And starting to really gain traction expansion into computing as well.
Speaker Change: Well, thanks for the revenue breakdowns, but I mean, it looks like in Q2, only 1% of revenue and is observer ability and network services or is that in a different category.
Speaker Change: Observer ability falls into other.
Speaker Change: Okay.
Speaker Change: And one of your largest competitors last quarter said, they were going to bundle really aggressively.
Speaker Change: Shoot.
Speaker Change: They kind of imply that we're going to use price on CDN to win customers back.
Speaker Change:
Speaker Change: Are you seeing them pull back on that at this point I mean, it would seem like that would last for a year.
Speaker Change: Year, or two if theyre going to make comments like that and pursue that strategy.
Speaker Change: Are you seeing them pull back or do you think your quality at this point.
Speaker Change: As such that your core.
Speaker Change: Customers are not going to be impacted by the by what they do on the pricing or bundling fronts.
Speaker Change: The largest customers I don't think theyre going to be impact on the pricing front there because it is either high tech customers that are deeply engaged in the performance servicer level of reliability, especially.
Speaker Change: And.
Speaker Change: I think the customers are extremely mature and.
Speaker Change: There's only so much sort of pricing flexibility that you can deploy in an account like that we are we are super aggressive not just on the performance, but on the pricing as well and those top 10 accounts and again I think we're driving a new level of engagement in those accounts to really return that cohort.
Speaker Change: Back to growth.
Speaker Change: But I do think that bundling has real potential stronger bundling down market and if anything on the competitive front, that's where I've seen.
Speaker Change: Some success.
Speaker Change: Also with our packaging solution getting more aggressive in bundling and we've seen we've seen success there as well.
Speaker Change: I guess it would be fair I mean, akamai has theyre going after basically legacy virtual machine workloads and legacy storage, which is a huge market.
Speaker Change: If they could price step down would that impact customers decision on on the core on core network services business or do you think that's like not enough to make customers move back the akamai or somebody else.
Speaker Change: I think customers, who are moving to fast they are looking for sort of Nextgen solution server list compute edge storage the type of technology.
Speaker Change: Technology that we're delivering moving back to sort of legacy virtual machines out.
Speaker Change: I don't see that as being compelling.
Speaker Change: I do think though there is real opportunity on the compute side I wouldn't discount it because it is currently small it's growing quickly. It has extreme drive extremely high stickiness with accounts. Our compute customers are have very high customer sat we're pushing on that business very hard because it works so complementary with our CDN.
Speaker Change: Business It helps drive both sides of our customer engagement there.
Speaker Change: As a reminder, press star one if you would like to ask a question.
Speaker Change: And we will take our next question from Rudy Kevin <unk> with D. A Davidson your line is open.
Speaker Change: Yes.
Rudy Grayson Kessinger: Hey, Thanks for taking my question. So I just wanted to understand.
Rudy Grayson Kessinger: You guys gave that guide halfway through Q1 when exactly in the quarter did these customers start.
Rudy Grayson Kessinger: Re pricing contracts and.
Rudy Grayson Kessinger: And adding other CDN and moving share et cetera.
Rudy Grayson Kessinger: With these re pricings I guess you guys just have no control over it whatsoever.
Rudy Grayson Kessinger: Just ask a repricing you guys do it within a couple of days I mean, I just don't understand how.
Rudy Grayson Kessinger: Three months ago, you told US you didn't have any large re price can be expected.
Rudy Grayson Kessinger: And now it turns out you did within a six week timeframe.
Rudy Grayson Kessinger: Okay.
Speaker Change: Yes, I think a couple of things I think in terms of the dynamics that Todd spoke about both in terms of the pricing a lot of that arose you'll really at the end of March and in early April when.
Speaker Change: The we saw one the motion of some of our customers.
Speaker Change: Kind of reversing the trend of consolidating on Cdm's, which affected our traffic projections for the year.
Speaker Change: And then as we engaged in some of the re rates that we knew were coming.
Speaker Change: Those negotiations resulted in bigger discounts than we thought that did not come with the typical increase in traffic that we've seen historically so.
Speaker Change: Those were the big drivers I would say the timeframe really was late March early April when we saw these.
Speaker Change: Dynamics, but all affecting some of our largest customers that have.
Speaker Change: Outside impact on our revenue outlook and growth rate.
Rudy Grayson Kessinger: Yes.
Speaker Change: Okay, and so is it is it.
Speaker Change: The larger than expected pricing pressure I guess it would go against the conventional wisdom when several of.
Speaker Change: The smaller low cost vendors have exited the space over the last six months and so what.
Speaker Change: Any thoughts on why you had to concede so much on price with less traffic growth and typical given theres fewer competitors fewer low cost competitors in the space and then lastly, Ron.
Speaker Change: Just what level of visibility.
Rudy Grayson Kessinger: Do you have the second half revenue like what percent of that second half implied second half revenue guide is actually the minimum commitment.
Ron: Yeah I'll take the first half I think look I think it's a fair question we did see.
Ron: Pricing and traffic projections changed a lot at the end of the quarter beginning in the beginning of this quarter.
Rudy Grayson Kessinger: Q2, but.
Speaker Change: I think it is.
Speaker Change: An important piece of this is look there are a small number of accounts, where we had.
Rudy Grayson Kessinger: Where our projection our revenue projection has pulled back.
Rudy Grayson Kessinger: And those are large accounts that are very significant swing and they need to be handled and managed.
Rudy Grayson Kessinger: And optimized very specifically, it's why we're changing our motion there.
Rudy Grayson Kessinger: And look I believe we have an opportunity to move back to growth in those accounts, but.
Rudy Grayson Kessinger: Our projection reflects where we currently are.
Rudy Grayson Kessinger: I think the only thing I would add on the second part is while again a significant portion of our business is on a utility basis.
Rudy Grayson Kessinger: <unk> accounts.
Rudy Grayson Kessinger: Had there pricing and or these adjustments in traffic.
Rudy Grayson Kessinger: In March and April and so our outlook.
Rudy Grayson Kessinger: Flex.
Rudy Grayson Kessinger: Those activities that occurred in those largest accounts and so the variability is in the smaller accounts should have less volatility as we move through the year.
Rudy Grayson Kessinger: And we will take our next question from Jeff Van <unk> with Craig Hallum. Your line is open.
Rudy Grayson Kessinger: Thanks for taking my question. This is Daniel on for Jeff.
Daniel: You referenced earlier, the volatility with some of the larger customers.
Daniel: Expand on that in terms of volatility volatility is a term referencing some one time changes or some some quarterly changes just because this quarter just sort of what did you mean in terms of some of the volatility.
Daniel: Yes.
Daniel: <unk> had a couple of.
Daniel: Accounts and that very large sat fat.
Daniel: Negotiated rebates.
Daniel: The past quarter, usually a re rate like that we'd come up would come with like a comment commensurate volume increase and we tried to model that very carefully but our projections.
Daniel: There was a little bit aggressive I believe.
Rudy Grayson Kessinger: And we have seen this trend towards which we saw a strong trend last year towards vendor consolidation as folks with five or six CDN vendors consolidated all the way down to.
Rudy Grayson Kessinger: Two or three we saw a little bit of pulling back there and people, adding a vendor here or there in those two trends caused some volatility.
Rudy Grayson Kessinger: Which affected our projection.
Rudy Grayson Kessinger: And then just second for me one I believe earlier when you were asked about the assumptions contemplated in the guidance and just put the top 15 customers what sort of is baked in in terms of the traffic levels.
Speaker Change: Let me just read your back and see if I got that correctly is the notion that you expected you were modeling in for those traffic levels to stay flat from Q2 into Q3 and Q4, although you actually thought that was conservative. If you thought you could actually tick up from Q2 is that correct and what would you think would drive those two actually.
Speaker Change: Go back up somewhat here in Q3 and Q4.
Rudy Grayson Kessinger: Yes.
Rudy Grayson Kessinger: But what we're modeling.
Rudy Grayson Kessinger: All the time and started the season that the seasonality of our traffic patterns, but I believe we have an opportunity to increase the revenue and the wallet share at those large accounts.
Rudy Grayson Kessinger: By demonstrating superior performance.
Rudy Grayson Kessinger: Showing and demonstrating the ROI of using fast and more clearly and expanding the product portfolio.
Rudy Grayson Kessinger: Those accounts use and so it's why I think it was so pertinent for us to really change our engagement model and move very quickly here to react to what we're seeing in the market why we're pushing so hard on that right now.
Speaker Change: Thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: And ladies and gentlemen that concludes our question and answer session. I will now turn the conference back to Mr. Todd Mike Mcgill for closing remarks.
Speaker Change: Thanks, so much I want to thank all our employees our customers our partners and our investors, we remain focused on execution, bringing lasting growth to our business and delivering value to all of our shareholders. Thank you. So much for your time today.
Speaker Change: Ladies and gentlemen, this concludes today's call and we thank you for your participation you may now disconnect.
Speaker Change: Please wait the conference will begin shortly.
Speaker Change: Yes.
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Speaker Change: Thanks.
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