Q2 2024 Fastly Inc Earnings Call
Speaker Change: Thank you for standing by. At this time, I would like to welcome everyone to today's Fastly second quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. Transcribed by https://otter.ai
Operator: second quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.
Speaker Change: After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star 1 on your telephone keypad. Once again, star 1. Thank you. I would now like to turn the call over to Vern Essi, Investor Relations at Fastly. Vern, please go ahead.
Operator: After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star one on your telephone keypad. Once again, star one. Thank you. I would now like to turn the call over to Vern Essi, Investor Relations at Fastly. Vern, please go ahead.
Vern Essi: Welcome, everyone, to our second quarter 2024 earnings conference call. We have Fastly's CEO , Todd Nightingale, and CFO Ron Kisling with us today.
Vernon Essi: Welcome, everyone, to our second quarter 2024 earnings conference call. We have Fastly's CEO, Todd Nightingale, and CFO Ron Kisling with us today. The webcast of this call can be accessed through our website, Fastly.com, and will be archived for one year. Also, a replay will be available by dialing 800-770-2030 and referencing conference ID number 754-3239 shortly after the conclusion of today'
Speaker Change: The webcast of this call can be accessed through our website, Fastly.com, and will be archived for one year.
Speaker Change: Also, a replay will be available by dialing 800-770-2030 and referencing conference ID number 754-3239 shortly after the conclusion of today's call.
Vernon Essi: A copy of today's earnings press release, related financial tables, and investor supplement, all of which are furnished in our AK filing today, can be found in the investor relations portion of Fastly's website. During this call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, product sales, strategy, long-term growth, and overall future prospects. These statements are subject to known and unknown risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected or implied during the call.
Speaker Change: A copy of today's earnings press release, related financial tables, and investor supplement, all of which are furnished in our AK filing today, can be found in the investor relations portion of Fastly's website.
Speaker Change: During this call we will make four 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.
Speaker Change: 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.
Vernon Essi: For further information regarding risk factors for our business, please refer to our filings with the SEC, including our most recent annual report filed in Form 10-K and quarterly reports filed in Form 10-Q filed with the SEC, and our second 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 section entitled Risk Factors. We encourage you to read these documents.
Speaker Change: For further information regarding risk factors for our business, please refer to our filings with the SEC, including our most recent annual report filed in Form 10-K and quarterly reports filed in Form 10-Q filed with the SEC and our second quarter 2024 earnings release and supplement.
Speaker Change: for discussions of the factors that could cause our results to differ.
Speaker Change: Please refer, in particular, to the section entitled Risk Factors. We encourage you to read these documents.
Vernon Essi: Also note that forward-looking statements on this call are based on information available to us as of today's date, and we undertake no obligation to update any forward-looking statements except as required by law. Also, during this call, we will discuss certain non-GAAP financial measures. Unless otherwise noted, all numbers we discuss today, other than revenue, will be on an adjusted non-GAAP basis. Reconciliations and the most directly comparable GAAP financial measures are provided in the earnings release and accompanying material on our investor relations website.
Speaker Change: Also note that 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.
Speaker Change: Also during this call, we will discuss certain non-GAAP financial measures. Unless otherwise noted, all numbers we discuss today, other than revenue, will be on an adjusted non-GAAP basis.
Speaker Change: Reconciliations to the most directly comparable GAAP financial measures are provided in the Earnings Release and Supplement on our Investment Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results.
Vernon Essi: These non-GAAP measures are not intended to be a substitute for our GAAP results. Before we begin our prepared comments, please note that during the third quarter, we will be attending the Piper Sandler Growth Frontiers Conference in Nashville on September 10th. Now, I'll turn the call over to Todd. Thanks.
Speaker Change: Before we begin our prepared comments, please note that during the third quarter, we will be attending the Piper Sandler Growth Frontiers Conference in Nashville on September 10th.
Todd Nightingale: Thanks, Vern. Hi everyone, and thank you so much for joining us. Today, I will cover our results and the dynamics facing our business and then discuss our recent technology developments, go-to-market initiatives, and the path forward. I will then hand the call over to Ron to discuss our second quarter financial results and our guidance in detail. We reported revenue of $132.4 million in the second quarter, coming in above the midpoint of our guidance. Our operating loss of $12.6 million was also favorable to the guidance midpoint, thanks to strong gross margins and good cost control across the business.
Speaker Change: Now I'll turn the call over to Todd. Thanks, Vern. Hi, everyone, and thank you so much for joining us.
Todd Nightingale: While I'm pleased with these results and execution in the second quarter, unfortunately, it does not offset the challenges we currently face with a small set of our largest customers. The industry has been challenged by the largest delivery customers as traffic projections have softened and focus has shifted to profitability. This has put increased pressure on vendors such as Fastly as our projected growth in those accounts has declined. We've taken initiatives to mitigate this impact.
Todd Nightingale: Today, I will cover our results and the dynamics facing our business and then discuss our recent technology developments, go-to-market initiatives, and the path forward. I will then hand the call over to Ron to discuss our second quarter financial results and our guidance in detail.
Todd Nightingale: However, these customers constitute a material portion of Fastly's revenue, and we're seeing those effects in our projections for the rest of the year. For example, our top 10 customers, which is a fair proxy for these large delivery customers, dropped from 38% of revenue in the first quarter to 34% in the second quarter.
Ron Kisling: We reported revenue of $132.4 million for the second quarter, coming in above the midpoint of our guidance. Our operating loss of $12.6 million was also favorable to the guidance midpoint, thanks to strong gross margins and good cost control across the business.
Ron Kisling: While I'm pleased with these results and execution in the second quarter, unfortunately, it does not offset the challenges we currently face with a small set of our largest customers.
Ron Kisling: The industry has been challenged by the largest delivery customers as traffic projections have softened and focus has shifted to profitability.
Ron Kisling: This has put increased pressure on vendors such as Fastly as our projected growth in those accounts has declined.
Ron Kisling: We've taken initiatives to mitigate this impact, however, these customers constitute a material portion of Fastly's revenue and we're seeing those effects in our projections for the rest of the year.
Ron Kisling: Our top 10 customers, which is a fair proxy for these large delivery customers, has dropped from 38% of revenue in the first quarter to 34% in the second quarter.
Todd Nightingale: Despite this drop in our top 10 customer revenue, we still managed to grow our top line revenue 8% year-over-year. This was due to a 13% year-over-year growth in the rest of our customer base as a result of the actions we initiated a year ago in transforming Fastly's business. Specifically, it underscores the changes in our go-to-market strategy as we continue to drive customer acquisition and expand customer wallet share with our platform solution driving cross-sell and upsell. We've taken steps to bifurcate our business strategy to accommodate these large customers with more bespoke efforts that cater to their multi-vendor strategy.
Ron Kisling: Despite this drop in our top 10 customer revenue, we still managed to grow our top line revenue 8% year over year. This was due to a 13% year over year growth in the rest of our customer base as a result of the actions we initiated a year ago in transforming Fastly's business.
Ron Kisling: Specifically, it underscores the changes in our go-to-market strategy as we continue to drive customer acquisition and expand customer wallet share with our platform solution driving cross-sell and up-sell.
Ron Kisling: We've taken steps to bifurcate our business strategy to accommodate these large customers with more bespoke efforts that cater to their multi-vendor strategy.
Todd Nightingale: While we've been busy adjusting our sales and customer success teams to this dynamic, we haven't lost focus on driving customer acquisition and growth in the other two-thirds of our business to effectively outgrow this concentration risk. The success of this transformation will continue to drive top-line revenue growth and become the foundation of our business. This is truly a moment of transition for Fastly; we must mitigate our legacy dependence on large multi-vendor customers, primarily in the media vertical.
Ron Kisling: While we've been busy adjusting our sales and customer success teams to this dynamic, we haven't lost focus on driving customer acquisition and growth in the other two-thirds of our business to effectively outgrow this concentration risk over time.
Ron Kisling: The success in this transformation will continue to drive top line revenue growth and become the foundation of our business.
Ron Kisling: This is truly a moment of transition for Fastly.
Todd Nightingale: By developing our channel and demand generation notions and by expanding our portfolio, we are reaching new verticals and building a more diverse customer base. This will drive more stability and higher growth for Fastly in the years to come.
Ron Kisling: We must mitigate our legacy dependence on large multi-vendor customers, primarily in the media vertical. By developing our channel and demand gen notions and by expanding our portfolio, we are reaching new verticals and building a more diverse customer base. This will drive more stability and higher growth for Fastly in the years to come.
Todd Nightingale: On that note, our customer acquisition efforts showed strong improvement in the second quarter, with our enterprise customer count at 601 compared to 577 in the first quarter, an increase of 4% sequentially. And on a year-over-year basis, we grew our enterprise customer count by 50%. Continued innovation is key to durable success in customer acquisition and wallet share growth. The Fastly platform is a software-driven edge network that offers best-in-class delivery, network services, security, compute, and observability.
Speaker Change: On that note, our customer acquisition efforts showed strong improvement in the second quarter with our enterprise customer count at 601 compared to 577 in the first quarter, an increase of 4% sequentially. And on a year-over-year basis, we grew our enterprise customer count by 50.
Ron Kisling: Continued innovation is key to durable success in customer acquisition and wallet share growth.
Ron Kisling: The Fastly platform is a software-driven edge network that offers best-in-class delivery, network services, security, compute, and observability. We continue to focus on investing in leading technology and innovation that not only solidifies our platform, but also extends its features for the future of web application development.
Todd Nightingale: We continue to focus on investing in leading technology and innovation that not only solidifies our platform but also extends its features for the future of web application development. The functionality offered allows our customers to bring their applications to life around the world, and we believe that our unified platform approach will significantly enhance our customer retention and create efficiencies for Fastly in supporting our customer success. Last quarter, we extended our security offering with the general release of our bot mitigation. We're excited to share that we've seen a strong response from customers and its initial ramp has exceeded our expectations.
Ron Kisling: The functionality we offer allows our customers to bring their applications to life around the world, and we believe that our unified platform approach will significantly enhance our customer retention and create efficiencies for Fastly in supporting our customer success.
Ron Kisling: Last quarter we extended our security offering with the general release of our bot mitigation solution. We're excited to share that we have seen a strong response from customers and its initial ramp has exceeded our expectations.
Todd Nightingale: As we shared last year, cross-sell will be a large part of our success in security. Now that we have bot mitigation, in addition to WAF and DDoS prevention, we have a complete security portfolio that will increase cross-sell and revenue growth from existing accounts. One example was a luxury retailer that was already a Fastly delivery and next-gen WAF customer.
Speaker Change: As we shared last year, cross-sell will be a large part of our success in security. Now that we have bot mitigation, in addition to WAF and DDoS prevention, we have a complete security portfolio which will increase cross-sell and revenue growth from existing accounts.
Speaker Change: One example was a luxury retailer that was already a Fastly delivery and next-gen WAF customer. This retailer chose to replace an existing stand-alone box solution with our technology, truly demonstrating the power of Fastly's platform.
Todd Nightingale: This retailer chose to replace an existing stand-alone BOP solution with our technology, truly demonstrating the power of Fastly's platform. Edge compute is the next cornerstone of Fastly's platform, and we're seeing momentum in next-generation applications coming to that platform from existing customers. We've previously discussed how New Relic runs its observability workloads on our compute infrastructure, and there are other customer use cases as well.
Speaker Change: Edge compute is the next cornerstone of Fastly's platform, and we're seeing momentum in next-generation applications coming to that platform from existing customers.
Speaker Change: We've previously discussed how New Relic runs its observability workloads on our compute infrastructure, and there are other customer use cases as well. One great example of this is Yoda.
Todd Nightingale: One great example of this is Yoda, a SaaS platform designed to optimize enterprise online retail websites. Recently, our partnership expanded to include edge compute technology that is complementary to their core service. This gave Yoda engineers access to the Fastly API, as well as to Fastly's cache management and data capture capabilities. After moving to Fastly, Yoda saw a noticeable improvement in performance as brands experienced higher conversions and more engaged shoppers. In June, we launched the beta version of our AI Accelerator, an AI proxy capable of delivering performance and cost savings to application builders leveraging large language models. Fastly's AI accelerator leverages the power of edge computing to deliver unparalleled performance worldwide.
Speaker Change: a SaaS platform designed to optimize enterprise online retail websites.
Speaker Change: Recently, our partnership expanded to include edge compute technology that is complementary to their core service.
Speaker Change: This gave Yoda engineers access to the Fastly API, as well as to Fastly's cache management and data capture capabilities. After moving to Fastly, Yoda saw a noticeable improvement in performance as brands experienced higher conversions and more engaged shoppers.
Todd Nightingale: And importantly, developers can onboard this technology with a single line of code, allowing rapid adoption and a simple, cost-effective developer experience. We announced the AI Accelerator at our developer event in New York and demoed it at our customer event Accelerate in London. The interest and response here has been great. Beta testers have seen a dramatic speed improvement in cache results.
Speaker Change: In June , we launched the beta version of our AI Accelerator, an AI proxy capable of delivering performance and cost savings to application builders leveraging large language models.
Speaker Change: Fastly's AI accelerator leverages the power of edge computing to deliver unparalleled performance worldwide. And importantly, developers can onboard this technology with a single line of code, allowing rapid adoption and a simple, cost-effective developer experience.
Speaker Change: We announced the AI Accelerator at our developer event in New York and demoed it at our customer event Accelerate in London.
Speaker Change: the interest and response here has been great basassesstors have seen the dramatic speed improvement in cash results
Todd Nightingale: And we plan to make this technology generally available in 2024. This is a key milestone for Fastly, our first truly AI product, and the activity here has been amazing. We are incredibly excited about the AI roadmap ahead, turning to go to market. I'm delighted to share with you that we've brought on Scott Lovett as our new chief revenue officer. Scott is an accomplished technology executive with decades of experience in cybersecurity and network service.
Speaker Change: and we plan to make this technology generally available in 2024. This is a key milestone for Fastly, our first truly AI product.
Speaker Change: And the activity here has been amazing. We are incredibly excited about the AI roadmap ahead.
Todd Nightingale: His expertise includes all aspects of the go-to-market process, driving multi-product line solutions and platform strategies, and delivering reliable growth in evolving markets. He's capable of both operating a global enterprise sales team at scale and driving the transformation and evolution we'll need over the next few years on our path to a billion dollars in revenue. Scott joins us from Imperva, a cybersecurity company where he was the Chief Revenue Officer, focusing on new customer acquisition and customer growth. Prior to joining Imperva, he led successful go-to-market teams at Akamai and Cisco. Scott is the ideal candidate for this role, and I'm thrilled to have him on board.
Scott Lovett: Turning to go-to-market, I'm delighted to share with you that we've brought on Scott Lovett as our new Chief Revenue Officer.
Scot Love: Scott is an accomplished technology executive with decades of experience in cybersecurity and network services.
Scot Love: His expertise includes all aspects of the go-to-market motion, driving multi-product line solutions and platform strategies, and delivering reliable growth in evolving markets.
Speaker Change: he's capable of both operating a global enterprise sales teamat scale and driving the transformation and evolution will need over the next few years on our pathto abillion dollars in revenue
Scott Lovett: Scott joins us from Imperva, a cybersecurity company where he was the Chief Revenue Officer focusing on new customer acquisition and customer growth.
Speaker Change: Prior to Imperva, he led successful go-to-market teams at Akamai and Cisco. Scott is the ideal candidate for this role, and I'm thrilled to have him on board.
Todd Nightingale: We continue to build upon the strong packaging foundation we launched last year. We recently launched our new self-service model with mix and match packages and evolved our free tier offerings. This marks the first time our recent PLG work is reaching the market, and you can expect more to come in future quarters. We also saw material ramp-up in our initial observability package, which hit its stride in the second quarter.
Speaker Change: We continue to build upon the strong packaging foundation we launched last year.
Speaker Change: we recently launched our new self-service model with mix and that match packages and evolved our free tier offerings this marks the first time our recent plgwork is reaching the market and you can expect more to come in future quarters
Todd Nightingale: As a result, our packaging motion is accelerating, and in the second quarter, our customer packaging purchases approximately doubled the first quarter. Our channel partners continue to have strategic importance in our go-to-market efforts. In the second quarter, our deal registrations grew 33% compared to the first quarter, and our 2024 year-to-date revenue contribution from the channel has more than doubled compared to the second quarter of 2024. We anticipate more opportunities to leverage our channel and use it to help us drive top line growth.
Speaker Change: We also saw a material ramp in our initial observability package, which hit its stride in the second quarter. As a result, our packaging motion is accelerating, and in the second quarter, our customer packaging purchases approximately doubled the first quarter's purchases.
Speaker Change: Our channel partners continue to have strategic importance in our go-to-market efforts. In the second quarter, our deal registrations grew 33% compared to the first quarter, and our 2024 year-to-date revenue contribution from the channel has more than doubled compared to the second quarter of 2023.
Speaker Change: We anticipate more opportunities to leverage our channel and use it to help us drive top-line growth.
Todd Nightingale: Now, let me conclude with a discussion of our outlook and the path forward. The large customer headwinds we've seen have continued to impact our business. Unfortunately, our revenue outlook proved more dynamic as the quarter progressed than we expected. And, as I discussed previously, this is a moment of transition, and we take this very seriously. We must continue to acquire new customers and grow accounts outside our large media cohort. This will diversify and strengthen our business, and this is exactly the path that we're on.
Speaker Change: Now let me conclude with a discussion of our outlook and the path forward.
Speaker Change: The large customer headwinds we've seen have continued to impact our business.
Speaker Change: unfortunately our revenue outlook proved more dynamic as the quarter progressed than we expected
Speaker Change: And as I discussed previously, this is a moment of transition and we take this very seriously.
Speaker Change: We must continue to acquire new customers and grow accounts outside our large media cohort. This will diversify and strengthen our business, and this is exactly the path that we're on.
Todd Nightingale: Our third quarter guidance of 3% year-over-year growth and modified 2024 guidance of 6% year-over-year growth are materially below our budgeted. We have to take appropriate action to align our costs with this level of revenue, while also positioning ourselves to invest in future growth. Over the past year, we've controlled expenses effectively through efficiencies in our infrastructure, measured headcount management, and trimming overhead. Now we are intensely focused on growing our business through customer acquisition, portfolio expansion, and innovation at the edge that drives lasting differentiation for application and web development.
Speaker Change: Our third quarter guidance of 3% year-over-year growth and modified 2024 guidance of 6% year-over-year growth are materially below our budgeted plans.
Speaker Change: we have to take appropriate action to align our costs with this level of revenue while also positioning ourselves to invest in future growth
Speaker Change: Over the past year, we've controlled expenses effectively through efficiencies in our infrastructure, measured headcount management, and trimming overhead.
Speaker Change: Now we are intensely focused on growing our business through customer acquisition, portfolio expansion, and innovation at the edge that drives lasting differentiation for application and web development teams.
Todd Nightingale: In order to achieve this next level of focus and growth, we will be restructuring the company. This will include a reduction in discretionary spend and a review of our workforce staffing levels. While this is an extremely difficult decision, we believe this step is critical to secure our position in maintaining a path toward operating profit and positive free cash. Furthermore, this additional financial rigor enables Fastly to continue to invest in top-line growth and to maintain our differentiation and competitiveness in 2025 and beyond. And now, to discuss the financial details of the quarter and guidance, I will turn the call over to you, Todd. Thank you.
Speaker Change: In order to achieve this next level of focus and growth, we will be restructuring the company.
Speaker Change: This will include a reduction in discretionary spend and a review of our workforce staffing levels.
Speaker Change: While this is an extremely difficult decision, we believe this step is critical to secure our position in maintaining a path toward operating profit and positive free cash flow.
Speaker Change: Furthermore, this additional financial rigor enables Fastly to continue to invest in top-line growth and to maintain our differentiation and competitiveness in 2025 and beyond.
Ronald Kisling: Thank you, Todd. And thanks, everyone, for joining us today. I'll discuss our financial results and business metrics before turning to our Forward Guide. Note that, unless otherwise stated, all financial results in my discussion are non-GAAP based. Revenue for the second quarter increased 8% year-over-year to $132.4 million, coming in slightly ahead of the midpoint of our guidance of $130 to $134 million. Network Services revenue grew 6% year-over-year to $104.2 million, and security revenue grew 13% year-over-year to $25.4 million.
Speaker Change: And now to discuss the financial details of the quarter and guidance, I will turn the call over to Ron.
Ron Kisling: Thank you, Todd, and thanks, everyone, for joining us today. I'll discuss our financial results and business metrics before turning to our forward guidance.
Ron Kisling: Note that unless otherwise stated, all financial results in my discussion are non-GAAP based.
Ron Kisling: Revenue for the second quarter increased 8% year-over-year to $132.4 million, coming in slightly ahead of the midpoint of our guidance of $130 to $134 million.
Speaker Change: Network Services Revenue grew 6% year-over-year to $104.2 million and Security Revenue grew 13% year-over-year to $25.4 million.
Ronald Kisling: In the second quarter, we continued to see sequential declines in revenue from some of our largest customers to partially offset growth in revenue from other areas, particularly social media, development platforms, and gaming. The sequential declines in revenue from our largest customers were driven by further impacts from the reversal and the consolidation of network services vendors last year that we discussed in Q1, and also a continuation of lower follow-on traffic than we have historically seen following typical customer re-rates. As a result, network services revenue per gigabit declined more year over year than the historical trend line we typically experience.
Speaker Change: In the second quarter, we continue to see sequential declines in revenue from some of our largest customers that partially offset growth in revenue from other areas, particularly social media, development platforms, and gaming.
Speaker Change: The sequential declines in revenue from our largest customers were driven by further impacts from the reversal and the consolidation of network services vendors last year that we discussed in Q1 and also a continuation of lower follow-on traffic than we have historically seen following typical customer re-rate.
Speaker Change: As a result, network services revenue per gigabit declined more year over year than the historical trend line we've typically experienced.
Ronald Kisling: We anticipate this dynamic will continue throughout Q3 and then begin to moderate in the fourth quarter. Our top 10 customers comprised 34% of our total revenues in the second quarter of 2024, compared to 38% in Q1 2024, reflecting the impact of the revenue decline from some of our largest customers. Also, no customer accounted for more than 10% of revenue in the second quarter.
Speaker Change: We anticipate this dynamic will continue throughout Q3 and then begin to moderate in the fourth quarter.
Speaker Change: Our top 10 customers comprised 34% of our total revenues in the second quarter of 2024, compared to 38% in Q1 2024, reflecting the impact of the revenue declines from some of our largest customers.
Speaker Change: Also, no customer accounted for more than 10% of revenue in the second quarter.
Ronald Kisling: As Todd discussed, customers outside of our top 10 grew revenue 13% year over year. As we continue to transform our business towards a bifurcated customer strategy, we will continue to focus our customer acquisition strategy and direct more development and go-to-market investment towards the broader market opportunity outside our top 10 customers. Our trailing 12-month net retention rate was 110%, down from 114% in the prior quarter and down from 116% in the year-ago quarter.
Speaker Change: As Todd discussed, customers outside of our top ten
Todd Nightingale: Group Revenue 13% year-over-year.
Speaker Change: As we continue to transform our business towards a bifurcated customer strategy.
Speaker Change: We will continue to focus our customer acquisition strategy and direct more development and go-to-market investment towards the broader market opportunity outside our top 10 customers.
Speaker Change: Our trailing 12-month net retention rate was 110%, down from 114% in the prior quarter, and down from 116% in the year-ago quarter. The decline is primarily due to the revenue declines in some of our largest customers.
Ronald Kisling: The decline is primarily due to revenue declines in some of our largest customers. We anticipate this will continue to be a headwind to our LTM, NRR, and revenue growth throughout the remainder of 2024. At the end of the second quarter, our RPO was $223 million, down 2% from $227 million in the first quarter of 2024 and down 3% from $231 million in the second quarter of 2023. This decline is primarily due to our largest customers working through their remaining obligations over their contract term, partially offset by customers increasing their adoption of our packaging products, which are sold on a subscription or SAS basis and add to our committed RPO.
Speaker Change: We anticipate this will continue to be a headwind to our LTM, NRR, and revenue growth throughout the remainder of 2024.
Speaker Change: At the end of the second quarter, our RPO was $223 million.
Speaker Change: Down 2% from $227 million in the first quarter of 2024, and down 3% from $231 million in the second quarter of 2023.
Speaker Change: This decline is primarily due to our largest customers working through their remaining obligations over their contract term partially offset by customers increasing their adoption of our packaging products which are sold on a subscription or SAS basis and add to our committed RPO.
Ronald Kisling: We had 601 enterprise customers at the end of Q2, a net increase of 24 compared to a decrease of one in the first quarter. This represented a 4% sequential increase in enterprise customer growth quarter over quarter. We had 3,295 customers at the end of Q2, a net increase of five from the prior quarter, and Enterprise customers accounted for 91% of total revenue on an annualized basis in Q2, consistent with Q1. The average spend for Enterprise customers was $804,000, down 5% from $846,000 in the prior quarter and down 2% from $818,000 in Q2 of last year.
Speaker Change: We had 601 enterprise customers at the end of Q2, a net increase of 24 compared to a decrease of 1 in the first quarter. This represented a 4% sequential increase in enterprise customer growth quarter over quarter.
Speaker Change: We had 3,295 customers at the end of Q2, a net increase of five from the prior quarter.
Speaker Change: And enterprise customers accounted for 91% of total revenue on an annualized basis in Q2, consistent with Q1.
Speaker Change: Enterprise customer average spend was $804,000 down 5% from $846,000 in the prior quarter and down 2% from $818,000 in Q2 of last year.
Ronald Kisling: I will now turn to the rest of our financial results for the second quarter. Our gross margin was 58.5% compared to 58.8% in the first quarter of 2024 and up 190 basis points from 56.6% in Q2 2023, as we continued to benefit from cost control efforts in bandwidth transit costs and related hosting and managed services costs, which were offset by our maintenance and support costs. Operating expenses were $90.1 million in the second quarter, slightly better than our expectations. We saw higher commissions and event-related costs for RSA, and our accelerated customer events impacting sales and marketing.
Speaker Change: I will now turn to the rest of our financial results for the second quarter.
Speaker Change: Our gross margin was 58.5% compared to 58.8% in the first quarter of 2024 and up 190 basis points from 56.6% in Q2 2023 as we continue to benefit from cost control efforts in bandwidth transit costs and related hosting and managed services costs.
Speaker Change: which were offset by her maintenance and support costs.
Speaker Change: Operating expenses were $90.1 million in the second quarter, slightly better than our expectations.
Speaker Change: We saw higher commissions and event-related costs for RSA and our Accelerate customer events impacting sales and marketing.
Ronald Kisling: This was offset by lower R&D expenses driven in part by an increase in capitalized internal use software related expenses. This was a 17% increase compared to Q2 2023 and up 2% sequentially from the first quarter. Recall, we recorded the $3.4 million sales and use tax benefit that favorably impacted our G&A expense in the second quarter of 2023. Adjusting for this benefit in 2023, operating expenses increased 12% year over year.
Speaker Change: This was offset by lower R&D expenses, driven in part by an increase in capitalized internal use software related expenses.
Speaker Change: This was a 17% increase compared to Q2 2023 and up 2% sequentially from the first quarter.
Speaker Change: Recall, we recorded the $3.4 million sales and use tax benefit that favorably impacted our G&A expense in the second quarter of 2023. Adjusting for this benefit in 2023, operating expenses increased 12% year over year.
Ronald Kisling: This modest favorable variance in our operating expenses, combined with better-than-expected gross profits, resulted in an operating loss of $12.7 million in the second quarter, coming in at the lower end of our operating loss guidance range of $16 to $12 million. In the second quarter, we reported a net loss of $9.3 million, or a $0.07 loss per basic and diluted share, compared to a net loss of $4.6 million, or a $0.04 loss per basic and diluted share in Q2 2023.
Speaker Change: This modest favorability in our operating expenses, combined with better than expected gross profit, resulted in an operating loss of $12.7 million in the second quarter, coming in at the lower end of our operating loss guidance range of $16 to $12 million.
Speaker Change: In the second quarter, we reported a net loss of $9.3 million, or a $0.07 loss per basic and diluted share, compared to a net loss of $4.6 million, or a $0.04 loss per basic and diluted share in Q2 2023.
Ronald Kisling: The one-time $3.4 million sales and use tax benefit in Q2 2023 adversely impacts our year-over-year profit-related comparisons. However, our adjusted EBITDA was positive in the second quarter, coming in at $0.8 million, compared to $5.2 million in Q2 2023. Turning to the balance sheet, we ended the quarter with approximately $312 million in cash, cash equivalents, marketable securities, and investments, including those classified as long-term. Our free cash flow for the second quarter was negative $18.5 million, a $16.4 million sequential decrease from negative $2.2 million in the first quarter.
Speaker Change: The one-time $3.4 million sales and use tax benefit in Q2 2023 adversely impacts our year-over-year profit-related comparisons.
Speaker Change: Our adjusted EBITDA was positive in the second quarter, coming in at $0.8 million compared to $5.2 million in Q2 2023.
Speaker Change: Turning to the balance sheet, we ended the quarter with approximately $312 million in cash, cash equivalents, marketable securities, and investments, including those classified as long-term.
Speaker Change: Our free cash flow for the second quarter was negative $18.5 million, a $16.4 million dollar sequential decrease from negative $2.2 million in the first quarter.
Ronald Kisling: This decrease was primarily driven by a decrease in our cash from operations to negative $4.9 million compared to $11.1 million in the first quarter, as first quarter cash from operations benefited from year-end 2023 receivables that were collected in the first quarter. Our cash capital expenditures were approximately 10% of revenue in the second quarter, coming in above the high end of our guidance of 6-8% of revenue we shared on our Q1 call. As a reminder, our cash capital expenditures include capitalized internal use software.
Speaker Change: This decrease was primarily driven by a decrease in our cash from operations to negative $4.9 million compared to $11.1 million in the first quarter, as first quarter cash from operations benefited from year-end 2023 receivables that were collected in the first quarter.
Speaker Change: Our cash capital expenditures were approximately 10% of revenue in the second quarter, coming in above the high end of our guidance of 6-8% of revenue we shared on our Q1 call. As a reminder, our cash capital expenditures include capitalized internal use software.
Ronald Kisling: For 2024, we anticipate our cash CapEx will increase to 9 to 10%. However, we continue to expect our medium to long-term cash CapEx to fall closer to our previous 6 to 8% of revenue expectation. I will now discuss our outlook for the third 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 forwarding 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 Todd shared in his remarks.
Speaker Change: For 2024, we anticipate our cash CapEx will increase to 9 to 10%. However, we continue to expect our medium to long-term cash CapEx to fall closer to our previous 6 to 8% of revenue expectation.
Speaker Change: I will now discuss our outlook for the third quarter and full year 2024.
Speaker Change: I'd like to remind everyone again that the following statements are based on current expectations as of today and include forward-looking statements.
Speaker Change: Actual results may differ materially, and we undertake no obligation to update these forward-looking statements in the future, except as required by law.
Ronald Kisling: Well, we are seeing growth and new customer acquisition, which we believe will lead to further revenue expansion in the longer term. However, we are facing a challenging environment of revenue decline from some of our largest customers continuing throughout the course of 2024, which is adversely impacting our revenue growth. Our revenue guidance reflects these dynamics in our business and is based on the visibility that we have today. We expect somewhat flat to modest sequential growth in Q3 revenues compared to Q2 due to lower revenue at some of our largest companies.
Speaker Change: As Todd shared in his remark,
Todd Nightingale: While we are seeing growth in new customer acquisition, which we believe will lead to further revenue expansion longer term, we are facing a challenging environment of revenue decline from some of our largest customers continuing throughout the course of 2024, which is adversely impacting our revenue growth.
Speaker Change: Our revenue guidance reflects these dynamics in our business and is based on the visibility that we have today.
Speaker Change: We expect somewhat flat to modest sequential growth in Q3 revenues compared to Q2, due to lower revenue at some of our largest customers.
Ronald Kisling: For the third quarter, we expect revenue in the range of $130 to $134 million, representing 2 to 5% annual growth. We continue to be very disciplined in our network investment and cost of revenues, which contributed to our second quarter gross margins being approximately 100 basis points better than we initially expected. For the third quarter, we anticipate our gross margins will decrease by approximately 150 basis points relative to the second quarter, plus or minus 50 basis points.
Speaker Change: For the third quarter, we expect revenue in the range of $130 to $134 million, representing 2 to 5% annual growth.
Speaker Change: We continue to be very disciplined in our network investment and cost of revenues, which contributed to our second quarter gross margins, being approximately 100 basis points better than we initially expected.
Speaker Change: For the third quarter, we anticipate our gross margins will decrease approximately 150 basis points relative to the second quarter, plus or minus 50 basis points.
Ronald Kisling: As Todd mentioned, we will be taking measures to align our cost structure to the challenging demand environment. This will enable Fastly to focus our investment on go-to-market and product innovation to capitalize on our new customer acquisition momentum while achieving our operating profit and cash flow goals. These measures include a review of discretionary spending, contract renewals, new hire requisitions, and overall staff.
Speaker Change: As Todd mentioned, we will be taking measures to align our cost structure to the challenging demand environment.
Todd Nightingale: This will enable Fastly to focus our investment on go-to-market and product innovations to capitalize on our new customer acquisition momentum while achieving our operating profit and cash flow goals.
Tod: These measures include a review of discretionary spending, contract renewals, new hire requisitions, and overall staffing.
Ronald Kisling: As a result, we expect to generate approximately $14 million in operating expense reductions throughout the second half of 2024. These savings will be spread across R&D, Sales, and Marketing at GNA.
Speaker Change: As a result, we expect to generate approximately $14 million in operating expense reductions throughout the second half of 2024.
Speaker Change: These savings will be spread across R&D, sales and marketing, and G&A.
Ronald Kisling: We expect that roughly one-third of the savings will impact the third quarter, with the remainder impacting the fourth quarter. As a result, we anticipate recording a one-time gap restructuring charge in the mid-single-digit millions in the third quarter, excluding the impact of stock compensation. Our third quarter operating results will reflect the impact of the decrease in gross margins and the beneficial impact of the operating expense reductions I just mentioned. As a result, for the third quarter, we expect our non-GAAP operating loss to decrease to $12 to $8 million and a non-GAAP net loss of $0.08 to $0.03 per share.
Speaker Change: We expect that roughly one-third of the savings will impact the third quarter, with the remainder impacting the fourth quarter.
Speaker Change: As a result, we anticipate recording a one-time GAAP restructuring charge in the mid-single-digit millions in the third quarter, excluding the impact of stock compensation.
Speaker Change: Our third quarter operating results will reflect the impact of the decrease in gross margins and the beneficial impact of the operating expense reductions I just mentioned.
Speaker Change: As a result, for the third quarter we expect our non-GAAP operating loss to decrease to twelve to eight million dollars and a non-GAAP net loss of eight to three cents per share.
Ronald Kisling: For calendar year 2024, we expect revenue in the range of $530 to $540 million, reflecting annual growth of 6% at the mid-term. This reflects continued weakness of some of our largest customers offset by growth outside of our largest existing customers and newer enterprises.
Speaker Change: For calendar year 2024, we expect revenue in the range of $530 to $540 million, reflecting annual growth of 6% at the midpoint.
Speaker Change: This reflects continued weakness that some of our largest customers offset by growth outside of our largest existing customers and newer enterprise customers.
Ronald Kisling: We expect to continue to see gross margin improvement in 2024 compared to 2023 as we leverage costs on incremental yet lower revenue growth. Our recommended gross margin remains north of 75% on a trailing basis, and as a result, we anticipate our 2024 gross margins will improve by approximately 100 basis points, plus or minus 100 basis points, relative to 2023. As a result, we expect our non-GAAP operating loss to be in the range of $33 to $27 million, reflecting an operating margin of negative 5.6% at the mid-period, an improvement of 23% over 2023 operating loss margin of 7.2%.
Speaker Change: We expect to continue to see gross margin improvement in 2024 compared to 2023 as we leverage costs on incremental yet lower revenue growth.
Speaker Change: Our recommended gross margin remains north of 75% on a trailing basis, and as a result, we anticipate our 2024 gross margins will improve by approximately 100 basis points, plus or minus 100 basis points, relative to 2023.
Speaker Change: As a result, we expect our non-GAAP operating loss to be in the range of $33 to $27 million, reflecting an operating margin of negative 5.6% at the midpoint.
Speaker Change: An improvement of 23% over 2023's operating loss margin of 7.2%.
Ronald Kisling: We expect our non-GAAP net loss per share to improve to 16 to 11 cents, reflecting the improvement in our operating loss expectation. And we expect free cash flow to be in the range of negative 20 to negative 10 million in 2024 compared to negative 59 million in 2023. As we look to 2025, we believe this cost realignment will enable us to focus investment and go-to-market and product development to continue to drive new customer acquisition and revenue growth while improving shareholder return. This brings into focus the goal of achieving operating income and free cash flow breakeven in 2025. Before we open the line for questions, we'd like to thank you for your interest and your support of Fastly.
Speaker Change: We expect our non-GAAP net loss per share to improve to $0.16 to $0.11, reflecting the improvement in our operating loss expectations.
Speaker Change: And we expect free cash flow to be in the range of negative 20 to negative 10 million in 2024 compared to negative 59 million in 2023.
Speaker Change: As we look to 2025, we believe this cost realignment will enable us to focus investment in go-to-market and product development, to continue to drive new customer acquisition and revenue growth, while improving shareholder returns.
Speaker Change: This brings into focus the goal of achieving operating income and free cash flow breakeven in 2025.
Ashley: before we open myline for questions we'd like to thank you for your interest in your support and passashley
Operator: And at this time, I would like to remind everyone that in order to ask a question, press star and the number one on your telephone keypad. Once again, press star one. In the interest of time, we ask that you limit your questions to one primary question and one follow-up. Thank you.
Speaker Change: Operator.
Operator: Thank you. And at this time, I would like to remind everyone that in order to ask a question, press star and the number one on your telephone keypad. Once again, star one. In the interest of time, we ask that you limit your questions to one primary question and one follow up. Thank you for understanding.
Operator: And we'll pause just a moment to compile the Q&A roster, and our first question today comes from Jonathan Ho on behalf of William Blair. Jonathan, please go ahead.
Speaker Change: And we'll pause just a moment to compile the Q&A roster.
Speaker Change: And our first question today comes from the line of Jonathan Ho with William Blair. Jonathan, please go ahead.
Jonathan Ho: Hi, good afternoon. I just wanted to start out with a little bit more detail on what happened with regard to these large customers and maybe what caught you off guard with these sort of declines. Are they continuing, or should we expect sort of stabilization at these levels?
Jonathan Ho: Hi, good afternoon. I just wanted to start out with a little bit more detail on what happened with regards to these large customers and maybe what caught you off guard with these sort of declines. Are they continuing or should we expect sort of stabilization at these levels?
Todd Nightingale: Yeah, yeah, we mentioned there's definitely softness in the traffic at those large accounts, primarily media, large media accounts. And there's certainly a push for profitability from within those teams. And we're seeing that and trying to react to their needs and the business priorities of those customers. We've really transformed our customer success process. For these large multivendor customers, we're focusing on delivering the kind of differentiation and the kind of service that they're looking for in a very bespoke way. So, you know, we have encountered, obviously, some headwinds here in terms of the revenue projection for the back half, which you see in our, in our outlook. But yeah, we believe we've stabilized those accounts.
Speaker Change: yeah
Speaker Change: Yeah, we mentioned, there's definitely softness.
Speaker Change: in the traffic at those large accounts, primarily media, large media accounts. And there's certainly a push to profitability from within those teams. And we're seeing that and trying to react to their needs and their business priorities of those customers. We've really transformed our customer success motion.
Speaker Change: for these large multi vendor customers, we're focusing on delivering the kind of differentiation and the kind of service that they're looking for in a very bespoke way. So, you know, we we have consumed obviously,
Speaker Change: Some headwinds here in terms of the revenue projection for the back half, which you see in our in our outlook, but Yeah, we believe we've stabilized those accounts at this point
Todd Nightingale: Got it, got it. And then, you know, just in terms of the guidance, can you maybe help us understand, you know, how you sort of came up with these parameters, you know, with the revised guidance? What is the risk you feel at this point? And, you know, are there any other large contract renewals that are coming up in the back half of the year? I think investors really want to understand the downside potential here, or whether it's just been completely taken out. Thank you.
Speaker Change: Got it, got it. And then, you know, just in terms of the guidance, can you maybe help us understand, you know, how you sort of came up with these parameters, you know, with the revised guidance, you know, how do you risk you feel at this point, and
Speaker Change: You know, are there any other large contract renewals that are coming up in the back half of the year? I think investors really want to understand the downside potential here or whether it's just been completely taken out. Thank you.
Ronald Kisling: Sure. Um, the...
Ronald Kisling: I should mention that the correction or the adjustments we made to our guides weren't, largely weren't due to renewals, but they were due to softness in the traffic projections in the back half, and obviously pushing profitability from those accounts. And you know, look, we were taking a much more high-touch, much more bespoke approach to these accounts. And that's given us more confidence in our projections now. This change in sort of the customer engagement movement and the internal analytics that we're using to make those projections are pretty significant and fundamental to how we're operating.
Speaker Change: Sure, the...
Speaker Change: I should mention that the correction, or the adjustments we made to our guides were
Speaker Change: largely weren't due to renewals, but they were due to softness in the traffic projections in the back half. The and obviously pushes profitability from those accounts.
Speaker Change: and, you know, look, we're taking a much more high-touch, much more bespoke approach to these accounts.
Speaker Change: and that's given us more confidence in our projections now.
Speaker Change: This change in sort of the customer engagement motion and the internal analytics that we're using to make those projections.
Ronald Kisling: And it's giving us a lot more insight into the dynamics in the top 10. And we believe we've got a pretty good view here for the back. I mean, the only thing I would add is that I think, you know, with our overall process,
Speaker Change: are pretty significant and fundamental to how we're operating, and it's giving us a lot more insight into the dynamics in the top 10. We believe we've got a pretty good view here for the back half of the year.
Ronald Kisling: I mean, the only thing I would add is that, you know, with our overall process, as Todd mentioned, we've kind of revised our engagement model. We've added regular senior engagement with these largest customers. We believe that's given us a lot better visibility into the dynamics of these customers than we had at the beginning of the year, and we have a much more reliable outlook.
Speaker Change: I mean, the only thing I would add is, I think, you know...
Speaker Change: With our overall process, you know Todd mentioned we've kind of revised our engagement model. We've added regular senior engagement with these largest customers
Speaker Change: We believe that's given us a lot better visibility into the dynamics of these customers than we had at the beginning of the year.
Speaker Change: and we have a much more reliable outlook in terms of what the dynamics are at those customers that where patterns really changed a lot earlier this year.
Operator: All right. Thank you for the question, Jonathan. Our next question comes from the line of Fatima Boolani with Citi. Fatima, please go ahead.
Speaker Change: All right. Thank you for the question, Jonathan. Our next question comes from the line of Fatima Boolani with Citi. Fatima, please go ahead.
Fatima Boolani: Good afternoon. Thank you for taking my question. I wanted to ask you about the restructuring efforts that are going to be underway and crystallized in the back half of this year. I wanted to specifically zero in on your comment that, "hey, this is going to be more of a broad-based recalibration in terms of resources." But why would sales and marketing be kind of lumped into that? Specifically, it's the aspirations for driving new customer acquisition.
Speaker Change: Good afternoon. Thank you for taking my question. I wanted to ask you about the restructuring efforts that are going to be underway and crystallized in the back half of this year. I wanted to specifically zero in on your comment that, hey, this is going to be more of a broad-based
Fatima Boolani: And so why would it be more of a blanket? Structure, you know, what kind of gives confidence that you're not, you know, potentially hollowing out your sales capacity and your sales organization that could prove kind of detrimental potentially to some of those other growth operations. And then I have a follow up.
Speaker Change: Recalibration in terms of resources. But why would sales and marketing be kind of lumped into that, specifically if the aspirations are for driving new customer acquisition? And so why would it be more of a blanket?
Speaker Change: structure, you know, what kind of gave confidence that you're not, you know, potentially hollowing out your sales capacity and your sales organization that could prove kind of detrimental potentially to some of those other growth aspirations. And then I have a follow-up.
Speaker Change: Yeah, absolutely, and I think the question points at the real point for the restructuring
Speaker Change: We need to adjust our spend to the top line, and we're always focused on delivering discipline on the bottom line, regardless of volatility in the top line.
Todd Nightingale: Yeah, absolutely. And I think the question points at the real point for the restructuring; we need to adjust our spend to the top line. And we're always focused on delivering discipline on the bottom line, regardless of volatility in the top line. But how we're doing this as a restructuring, and very specifically, not a sort of peanut buttering across the org, is we're restructuring the company in order to allow ourselves to invest in the go-to-market, and most importantly, the most efficient parts of our go-to-market that help us drive customer acquisition and wallet share growth in key accounts.
Speaker Change: But how we're doing this...
Speaker Change: as a restructuring and very specifically, not a sort of peanut buttering across the org is we're restructuring the company in order to allow ourselves to invest in
Speaker Change: The Go-To-Market, and most importantly, the most efficient parts of our Go-To-Market that help us drive customer acquisition and wallet share growth in key accounts.
Todd Nightingale: And at the same time, investing in technological innovation that will help us drive revenue growth and sales efficiency in the long run. And specifically, that really means, you know, focus on security, on compute, and on AI. And the restructuring is really designed not just to align our spend to our top line to maintain that discipline, but also to give us room to continue to invest in customer acquisition and in these key areas of innovation.
Speaker Change: And at the same time, in technology innovation that will help us drive revenue growth and sales efficiency in the long run, and specifically, that really means, you know, focus on security, on compute, and on AI.
Speaker Change: And the restructuring is really designed not just to align our spend to our top line to maintain that discipline, but also to give us room to continue to invest in customer acquisition and in these key areas of innovation.
Fatima Boolani: Got it. And then just to follow up on Ron's commentary with regard to CapEx, I think you talked about 9 to 10% along with her model of 6 to 8, but you just have come out of a pretty meaningful network rebuild, re-architect, and up-leveling. So I'm wondering why that envelope still remains high, particularly in the context of some of your large media delivery customers, you know, ratcheting back their traffic levels. So why would that not alleviate some of the incremental CapEx pressures?
Speaker Change: Got it. And then just to follow up on Ron's commentary with regards to cat bags, we think you talked to nine to ten percent.
Speaker Change: along with her model of six to eight, but you just have come out of a pretty meaningful network rebuild, re-architect, and up-leveling. So I'm wondering why that envelope still remains high, particularly in the context of some of your large media delivery customers, you know, ratcheting back their traffic.
Ronald Kisling: Thank you.
Speaker Change: level. So why would that not alleviate some of the incremental capex pressures? Thank you, that's it for me.
Ronald Kisling: Yeah, I mean, there's a lot of dynamics beyond that. I think one of the things that we have seen this year that has been a positive thing is, you know, on a global basis, more traffic. And so as we look at, you know, traffic levels geographically, a lot of this is, you know, the CapEx needed to support regions where we've seen expanding traffic levels, which, in the long term, will play out well because, as we see higher traffic levels, some of these low, historically low volume areas are able to drive, you know, lower costs on bandwidth and other costs that, ultimately, in the long term, will drive efficiency.
Speaker Change: Yeah, I mean there's a lot of dynamics beyond it. I think one of the things that we have seen this year
Speaker Change: has been a positive thing is, you know, on a global basis, more traffic. And so as we look at
Speaker Change: You know, traffic levels geographically, a lot of this is, you know, the capex needed.
Speaker Change: to support regions where we've seen expanding traffic levels.
Speaker Change: which ultimately in the long term play out well because as we see higher traffic levels in some of these low, historically low volume areas, we're able to drive, you know, lower cost.
Ronald Kisling: So some of it is largely driven by some of the just the changes in the geographic traffic mix and why we believe in the medium to long term that 68% of revenue is still the right amount in the medium to long term as we really adjust our geographic footprint.
Speaker Change: on bandwidth and other costs that ultimately in the long term will drive efficiency. So some of it is is largely driven by some of the just the changes in the geographic traffic mix.
Speaker Change: And why we believe in the medium to long term, that 68% of revenue is still the right medium to long term as we really adjust our geographic footprint.
Operator: All right. Thanks for the question, Fatima. And our next question comes from the line of Frank Louthan with Raymond James. Frank, please go ahead.
Speaker Change: All right, thanks for the question, Fatima. And our next question comes from the line of Frank Louthan with Raymond James. Frank, please go ahead.
Frank Louthan: Great, thank you. Has Scott changed sales metrics, or revised any quota guidelines so far, and if not, when will that be completed? And then where do you think it is – where is the quarter-bearing headcount now, and where does that need to be to reach your goals? Thanks.
Frank Louthan: Great, thank you. Has Scott changed sales metrics, revised any quota guidelines so far? And if not, when will that be completed? And then where do you think, where is quarter bearing headcount now? Where does that need to be to reach your goals? Thanks.
Todd Nightingale: Scott's only been on for a couple months, and it's amazing how much impact he's had already. He's got a pretty great sort of focus on both the customer acquisition side, but also driving right revenue growth specifically through cross sell. And he's been looking very carefully at that. And, you know, look, I've been incredibly impressed with the way he has come up to speed in our business, which probably shouldn't be surprising, given his background, and how quickly he's been making changes already, including changes here in order to make that team more efficient and capable of growing and maturing in the really short term.
Speaker Change: thethisdiscuss only been on couple months and it's amazing how much impact you've had already you've got i think a pretty great sort of
Speaker Change: focus on both the customer acquisition side but also driving right revenue growth specifically through cross sell and he's been looking very carefully at that and you know whatlook i've been incredibly impressed with the way he has
Speaker Change: come up to speed in our business, which probably shouldn't be surprising, giving his background and how quickly he's been making changes already, including, you know, changes here in order to make that team more efficient and capable of growing and maturing in really in the short term.
Todd Nightingale: Okay, and can you clarify what percent of your sales come from the channel today?
Speaker Change: Okay, and can you clarify what percentage of your sales come from the channel today?
Todd Nightingale: We don't disclose the percent from the channel. We've had pretty, pretty good success growing that channel, and we'll continue to invest there. But it's not a number we disclose. I will say I think a part of the future success of this transformation is going to be in optimizing those channel investments, especially around leveraging that channel to drive deal registration and customer acquisition.
Speaker Change: We don't disclose the percent from the channel, we've had pretty good success growing that channel and we'll continue to invest there, but it's not a number we disclose. I will say, I think...
Speaker Change: A part of this future success of this transformation is going to be in optimizing those channel investments, especially around leveraging that channel to drive deal registration and customer acquisition.
Operator: Okay, thanks for the question, Frank. And our next question comes from the line of Sanjit Singh with Morgan Stanley. Sanjit, please go ahead.
Speaker Change: Okay, thanks for the question, Frank, and our next question comes from the line of Sanjit Singh with Morgan Stanley . Sanjit, please go ahead.
Sanjit Singh: Thank you for taking the question. I just have a higher-level question in terms of where Fastly is on its growth and sort of profitability curve, with overall top-line growth coming down to the low single digits. The company is still unprofitable, and understanding the restructuring actions you're taking, it is still likely to be unprofitable. And with a sort of uncertain macro backdrop, I mean, is there a risk that you start to see weakness in sort of your non-media business?
Sanjit: san it you there
Sanjit Singh: Thank you for taking the question. I just have a higher level question in terms of
Sanjit Singh: where Fastly is in its growth and sort of profitability curve with overall top line growth coming down to the low single digits.
Speaker Change: The company is still unprofitable and understanding the restructuring actions you're taking still likely to be unprofitable.
Speaker Change: And with a sort of uncertain macro backdrop, I mean, is there a risk that you start to see weakness on sort of your non-media business? And does that sort of, I just want to get a sense of like, how you guys are thinking about...
Sanjit Singh: And does that sort of – I just want to get a sense of how you guys are thinking about pushing further on the profitability side, while the top line may seem still uncertain at least for the next few quarters or maybe for a couple of years if we go into more of a macro downturn.
Speaker Change: pushing further on the profitability side while the top line may seem still uncertain at least you know for the next few quarters or maybe for a couple of years if you go into more of a macro downturn.
Todd Nightingale: No, I think it's an important question. Really, I mean, I think the way we see this is as a moment of transition; you can see the change in our customer concentration happening extremely rapidly here. And what we're doing is really building a foundation in those non-top 10 large media multi CDN accounts. And that's the foundation upon which we'll really build the business, and especially build that business around a complete edge platform, including not just delivery but security, compute, observability, AI, etc.
Speaker Change: no i think it'san important question really me ansred the way we see this is as a moment of transition
Speaker Change: You can see the change in our customer concentration happening extremely rapidly here.
Speaker Change: and what we're doing is with building a foundation and in those non top ten large media multi see the end accounts and that's that's the foundation upon which will really build the business
Speaker Change: and especially build that business around a complete edge platform, including not just delivery, but security, compute, observability, AI, etc.
Todd Nightingale: And we really see this as a period of transition. It's why we're restructuring in order to be able to drive investments into those other areas and drive investments in the go-to-market that's needed to run a true platform play, a true multi-product line play to make that revenue base stronger, stickier, and drive higher growth through cross-sell. We are adjusting that top line. We are adjusting our spend to our top line to maintain bottom-line discipline despite this volatility. We're doing it in a way to really transform the company and take this as an opportunity to drive growth in 2025 as well as profits.
Speaker Change: and
Speaker Change: We really see this as a period of transition, it's why we're restructuring in order to be able to drive investments into those other areas and drive investments in the go-to-market that's needed to run a true platform play, a true multi-product line play to make that revenue base stronger, stickier, and higher growth through cross-sell.
Speaker Change: We are adjusting our spend to our top line to maintain bottom line discipline, despite this volatility. We're doing it in a way.
Speaker Change: to really transform the company and take this as an opportunity to drive growth in 2025 as well as profitability.
Todd Nightingale: And with the new chief revenue officer, you know, being onboarded, how do you see the sort of go-to-market strategy execution and sort of year one of his tenure in terms of the magnitude of change that you expect him to bring to the organization?
Speaker Change: And with the new Chief Revenue Officer being on boarded, how do you see the sort of
Speaker Change: go-to-market strategy execution and sort of year one of his tenure in terms of the magnitude of change that you expect him to bring to the organization.
Todd Nightingale: Yeah, the restructuring is kind of accelerating that in a lot of ways. And the big chunk of the restructuring and the reconfiguration that Scott had begun planning for next year, I think we're able to do now instead of taking this as an opportunity to drive urgency. And pulling that forward, I think is great. I think it's also helping us prepare to really push hard on the cross cell motion and up cell motion throughout that long, long tail of enterprise accounts.
Speaker Change: Yeah, the restructuring is kind of accelerating that in a lot of ways, and a big chunk of the restructuring and the reconfiguration that's
Speaker Change: Scott had begun planning for next year. I think we're able to do now instead by taking this as an opportunity to drive urgency. I'm pulling that forward. I think it's great. I think it's also helping us
Speaker Change: prepare to really push hard on the cross-sell motion and up-sell motion throughout that long, long tail of enterprise accounts.
Operator: All right, thanks for the question, Sanjit. And one more reminder, folks, if you'd like to ask a question, again, just press star one on your telephone keypad, once again, star one. And our next question comes from the line of James Fish with Piper Sandler. James, please go ahead.
Speaker Change: all right thanks for the question s it and one more reminder folks if you'd like to a question again star one on your telephone key ad once again star one
Speaker Change: And our next question comes from the line of James Fish with Piper Sandler. James, please go ahead.
James Fish: Hey, guys, this is Quinton. I'm for Jim Fish.
Quinton: Hey guys, this is Quinton. I'm for Jim Fish. Thanks for taking our questions. You know, maybe first for Ron, as we think about the guide change here, when you got in the prior quarter, it had sounded like delivery expectations for these largest customers had been dropped down essentially just to minimum commitment levels.
Quinton Gabrielli: Thanks for taking our questions. You know, maybe first for Ron, as we think about the guide change here, when you came in the prior quarter, it sounded like delivery expectations for these largest customers had been dropped down essentially just to the minimum commitment level. Was this not the case? And so now the updated guide is just embedding minimum commits? Or are you seeing those top 10 customers fall below prior kinds of minimum commits, and so the downside is just a little bit tougher to get?
Speaker Change: Was this not the case, and so now the updated guide is just embedding minimum commits? Or are you seeing those top 10 customers fall below prior kind of minimum commits, and so the downside is just a little bit tougher to gauge?
Ronald Kisling: Yeah, so when you look at our largest customers, not all of them actually have a commit. And in many instances, the commit levels are well below or meaningfully below where their expected traffic levels are. So the commit really isn't, if you will, a good guide. Think of these customers as really on a utility basis with variable traffic, and I think that's something.
Speaker Change: Yeah, so when you look at our largest customers, not all of them actually have a commit.
Speaker Change: And in many instances, you know, their commit levels are well below.
Speaker Change: or meaningfully below.
Speaker Change: where their expected traffic levels are, so.
Speaker Change: You know the commit really isn't, if you will, a good guide. Think of these customers as really on a utility basis.
Ronald Kisling: And I think while historically we had a reliable model around this, I think the break in patterns that we saw with these largest customers really had a significant impact because they're our largest customers, and this impact was a lot greater and more sustained than we had anticipated last quarter. I do believe with the increased engagement model that we put in place, the senior level engagement regularly with these customers, we now have much better visibility into their own internal dynamics around their traffic expectations and traffic allocations. That visibility translates into a much more reliable view of how their business will play out over the remainder of the year.
Quinton: it' able traffic and i think that's something we've spoken about in terms of kind of the dynamics
Speaker Change: of our forecasting process.
Speaker Change: And I think while historically we had a reliable model around this, I think the break in patterns that we saw with these largest customers.
Speaker Change: really had a significant impact because there are largest customers and this impact was a lot greater and more sustained than we can anticipated last quarter
Speaker Change: I do believe with the increased engagement model that we put in place, the senior level engagement regularly with these customers is that we now have much better visibility into their own internal dynamics around their traffic expectations and traffic allocations.
Speaker Change: And that visibility translates into a much more reliable view of how their business will play out over the remainder of the year.
Speaker Change: Got it. That's helpful. And then, you know, sticking with the top 10 customers.
Speaker Change: Obviously, it sounds like the vast majority of pressure sits on the delivery side rather than security.
Speaker Change: Are there any sort of impacts from the customers taking down traffic that's impacting security that's kind of driving some of this deceleration? Or what do you need to kind of see a re-acceleration? It sounds like packaging is going well and the incentives across kind of sales and marketing are in place, but we just haven't seen kind of stabilization across that segment.
Todd Nightingale: Top 10, those top 10 accounts tend to be very delivery heavy, very media heavy. And so it does tend to be concentrated on the delivery side, and certainly concentrated in the media vertical. And we see the momentum building outside those top 10 accounts and, very specifically, outside of these large multi-vendor, primarily media accounts. And it's about putting fuel on that fire. It's about investing in that enterprise movement while at the same time, building bespoke customer engagement with those top accounts and returning them to growth and the growth we've been used to there. And it's really, our focus is really on trying to make sure that we stay on top of both of those initiatives.
Speaker Change: Thanks.
Speaker Change: Those top 10 accounts tend to be very delivery-heavy, very media-heavy, and so it does tend to be a...
Speaker Change: Concentrated on the delivery side, and certainly concentrated in the media vertical. We see the momentum building outside those top ten accounts, and very specifically outside of these large multi-vendor, primarily media accounts.
Speaker Change: and it's about putting fuel on that fire it's not investing in that enterprise motion while the same time building bespoke customer engagement with those top accounts
Speaker Change: and returning them to growth and the growth we've been used to there and it's really our focus is really on trying to make sure that we stay on top of both of those initiatives at the same time.
Operator: All right. Thanks, Quinton. And our next question comes from the line of Will Power from Baird. Will, please go ahead.
Speaker Change: All right. Thanks, Quentin. And our next question comes from the line of Will Power from Baird. Will, please go ahead.
William Power: Thanks. I was hoping just to drill down maybe just a little bit more on the top 10 pressure. I guess I'm just trying to understand, is this two or three customers, or is it really kind of broad-based across all the top 10? And anything else you could share just on, you know, industry traffic trends versus potential share loss to, you know, competitors?
Will Power: Great, thanks. I was hoping just to drill down maybe just a little bit more on the top 10 pressure. I guess I'm just trying to understand is it is this, you know, two or three customers? Or is it really kind of broad based across all the top 10?
Speaker Change: And anything else you could share just on, you know, industry traffic trends versus potential, you know, share loss to, you know, competitors?
Todd Nightingale: Yeah, it really is a small number of accounts. It's not all of the top 10. It's a small handful, less than a handful, I guess.
Unknown Speaker: Unknown Speaker Yeah, it's a
Speaker Change: thank
Speaker Change: Yeah, it really is a small number of accounts. It's not all of the top ten. It's a small handful, less than a handful, I guess. And, but these are large accounts and there's...
Todd Nightingale: But these are large accounts, and there's a lot of revenue in those accounts, and we take them very, very seriously. It's why we've changed our approach and the way we engage, not just in those handful, but across that top tier of media, multi-CDN accounts. There really is strength in the rest of that business, and as we're bringing more technology to market, especially on the security side, we're starting to see some real potential for the remainder of the business. We've also seen a lot of stabilization in the top 10, just at a lower level than we'd expect. You got that.
Speaker Change: There's a lot of revenue in those accounts, and we take it very, very seriously. It's why we've changed our motion and the way we engage, not just in those handful, but across that top tier of media, multi-CDN accounts.
Speaker Change: There really is strength in the rest of that business and as we're bringing more technology.
Speaker Change: To market, especially on the security side, we're starting to see some real potential for the remainder of the business. And we've also seen a lot of stabilization in the top 10, just at a lower level than we've expected.
Larry Novak: Larry Novak Thank you. All right.
Adam: Thank you, Adam
Adam: Until then thank you.
William Power: Well, no; I was just going to ask if there was any other color on, you know, this being, you know, more of an industry slowdown in traffic versus some of your top 10 customers just looking to diversify their vendors to, you know, reduce costs.
Adam: No, go ahead.
Adam: Well, no, I was just going to ask if there was any other color on this being more of an industry slowdown in traffic versus some of your top 10 customers just looking to diversify their vendors to reduce costs.
Todd Nightingale: Yeah, the I mean, we mentioned this in the call last time there's certainly softness in the traffic projections that we're expecting. There are people who are again, like focused on that multi-vendor strategy and maybe adding a vendor here or there. We haven't, like, been removed from any of those accounts. We continue to have very strong partnerships in each of them. We just have drops in the revenue projection, which is affecting the guy.
Speaker Change: Yeah, I mean, we mentioned this in the call last time, there's
Speaker Change: There's certainly softness in the traffic projections that we were expecting. There are people who are, again, like, focused on that multi-vendor strategy and maybe adding a vendor here or there. We haven't...
Speaker Change: like been removed from any of those accounts. We continue to have very strong partnerships in each of them. We're just have drops in the revenue projection, which is affecting the guy.
Operator: All right. Thank you, Will.