Hello. Good afternoon. My name is Jeremy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I’d now like to turn the conference over to Vernon Essi, Investor Relations at Fastly. Please go ahead.

Thank you, and welcome, everyone, to our second quarter 2023 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’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 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. For further information regarding risk factors for our business, please refer to our most recent Form 10-K and Form 10-Q filed with the SEC and our second quarter 2023 earnings release and supplement for a discussion of the factors that could cause our results to differ. Please refer in particular to the sections entitled Risk Factors. We encourage you to read these documents. Also note that the forward-looking statements on this call are based on information available to us as of today’s date. We undertake no obligation to update any forward-looking statements, except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Unless otherwise noted, all numbers we discuss today other than revenue will be on an adjusted non-GAAP basis. Reconciliations to the most directly comparable GAAP financial measures are provided in the earnings release and supplement on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Before we begin our prepared comments, please note that we will be attending two conferences in the third quarter, the KeyBanc Technology Leadership Forum in Vail, Colorado on August 7th and the Piper Sandler Growth Frontiers Conference in Nashville, Tennessee on September 13th. With that, I’ll turn the call over to Todd. Todd?

Thanks, Vern. Hi, everyone, and thanks so much for joining us today. First, I will give a quick summary of our financial results and second quarter highlights, and then I will provide a brief update on the progress made in our product strategy and go-to-market motion before I hand the call over to Ron to discuss the second quarter financial results and guidance in detail. We reported second quarter revenue of $122.8 million, which grew 20% year-over-year and 4% quarter-over-quarter. This represents a significant increase in our year-over-year growth rate of 15% last quarter. I’m glad to see new enterprise customers draw on the Fastly’s platform and a growing momentum within our go-to-market teams. I’m pleased that we exceeded our guidance range as we saw upside during the quarter from some of our larger customers and expect to see that strength carry into the rest of 2023. I’d like to congratulate the Fastly team on pulling together new initiatives in our go-to-market strategy and delivering a strong Q2. I look forward to executing to and possibly exceeding plan for the remainder of 2023. Our customer retention and growth engine remains strong. Our LTM NRR was 116% in the second quarter, flat from Q1 and slightly down from 117% in the year ago quarter. Our DBNER was 123% in the second quarter, up from 121% in Q1 and also from 120% in Q2 of last year. Both of these metrics are indicative of healthy wallet share gains with existing customers. Thanks to our platform’s expansion, we continue to cross-sell more functionality and more traffic to our existing customers. Our total customer count in the second quarter was 3,072 which decreased by 28 customers compared to Q1 but increased 47 year-over-year. About a third of this quarter-over-quarter decline was due to customer…

Thank you, Todd, and thanks to everyone for joining us today. I’ll discuss our business metrics and financial results and then review our forward guidance. Note that unless otherwise stated, all financial results in my discussion are non-GAAP based. Total revenue for the second quarter increased 20% year-over-year to $122.8 million, exceeding the top end of our guidance of $117 million to $120 million. Revenue from Signal Sciences products was 14% of revenue, a 32% year-over-year increase or a 27% increase, excluding the impact of purchase price adjustments related to deferred revenue. Also, note that we calculate growth rates of the actual results with the percentage of revenue rounded to the nearest total percent. As Todd shared, in the second quarter, we saw traffic expansion in major customers as well as strong upsell and cross-selling activity. This led to a better than typical seasonal growth pattern in the second quarter relative to the first, which is usually relatively flat sequentially. We have a number of initiatives focused on increasing demand generation, motions to simplify our pricing and packaging, partnership programs and marketing activities that give us confidence in our 2023 revenue guidance. Our trailing 12-month net retention rate was 116%, flat with the prior quarter and slightly lower than the 117% in the year ago quarter. We continue to experience very low churn and our customer retention dynamics remain strong. As Todd shared, we had 3,072 customers at the end of Q2, of which 551 were classified as enterprise, an increase of 11 compared to an increase of 7 in the first quarter. Enterprise customers accounted for 92% of total revenue on an annualized basis, up from 91% in Q1. Our enterprise customer average spend was $818,000, up 3% from $795,000 in the previous quarter and up 10% from $742,000…

[Operator Instructions] Our first question comes from the line of James Fish.

Hey, guys. Congrats on the quarter. A couple of questions for you guys. Just first, if I look at your net retention rates, it’s nice to see that trailing 12 months stabilize, but you’re about to come off some high numbers kind of next quarter. I guess, what’s given the confidence that we can see the number move higher? How should we think about net retention rates in the back half of the year, especially given you did shed some customers, what you did sound like you landed some increased traffic at one of your larger customers. And Ron, can you help us understand the gross number of new adds this quarter as just trying to -- and quality underneath as it looked like new business was quite good here?

When we look at net retention rate, there is some organic growth in terms of usage of the platform, and that has a strong seasonal effect. But I think our biggest lever here and the reason we’re seeing confidence from our teams in that retention rate is really about the cross-sell. We’ve made a lot of progress with platform unification and simplifying that sales motion. More and more of our largest deals are platform wins, even on the new logo side, meaning multi-portfolio wins. And our cross-sell motion is just getting really -- I think, gaining a lot of momentum. And so that’s, I think, really why we see confidence there on the net retention rate.

And looking at total customers, I think, one, as you saw, our enterprise customers actually accelerated a little bit from plus 6% to plus 11%. When you look at the aggregate number of customers, when you exclude customers at the low end, we actually did see a net add. If you take customers under 1,000 ARR, you would have seen some increase in the total customer number on a quarter-on-quarter basis. So, at the medium and high end, we’re seeing good customer quality and adds.

Got it. And Todd, maybe for you, sales incentives mainly have aligned for kind of new use cases today. But at the Analyst Day, we all talked about the big security opportunity, both as a spear for new logos and for expansion in the existing base. I guess, what’s going to be the differentiation and ability to replace your competitors and a lot of these overlapping and major customer accounts? And additionally, do you feel a need to potentially change sales incentives to align more with security cross-sell rather than new logos at all?

We are primarily focusing sales incentives around new logo growth, of course, total revenue growth, but new logo growth, especially when we look at SPIFs or special incentives. The security cross-sell, I think, in a lot of ways -- is it’s a natural extension of the sales motion relationship, customers with whom we have a great relationship and really best-in-class offering, especially in Next-Gen WAF. I think the last piece to that puzzle is really completing the platform unification play. This past quarter, we saw feature parity on our Edge WAP, our on Fastly platform Next-Gen WAF solution with the traditional SigSci solution, which is a big, big step in making that cross-sell smoother and the platform unification for management claim, which we hope to have in the market by the end of the year, we’ll really, I think, complete that story. I’m not really anticipating that we’re going to need special sales incentives around the cross-sell. I would expect new customer acquisition primarily.

Our next question comes from the line of Frank Louthan. Frank, Please go ahead. Frank, are you there? You might be on mute.

Sorry about that. Okay. Hey. Thanks a lot. Can you walk us through the status of the channel program, kind of when does that begin? And where are you seeing that -- there? And then maybe a little more details on your cross-sell efforts here with Signal Sciences and delivery, where are you on being able to roll that out with customers and with the response?

Yes. The channel program was launched I think, two quarters ago. And we’ve had, I think, a pretty good uptick. We’re seeing significant increase in deal registration, which for me, is kind of the leading indicator here in terms of a healthy channel launch. And deal registration also drives new logo acquisition, which obviously is a huge focus of ours across the board. We’ve seen some really creative partnerships as well. Traditional systems integrators, especially on the security side, incredibly strong. But folks who actually embedded Fastly technology onto their platforms have been able to resell it that way, like A10 that’s been incredibly successful so far, too. So, right now, we’re feeling pretty bullish about where the channel program lies. There’s one interesting piece, which is the channel that we sort of have been incubating for the last year before the big channel launch started with the Signal Sciences business. And because of that, the Signal Sciences business had historically been primarily North American based. So our channel has a little bit more maturity in the -- in North America. We’re working hard to build out a comparable channel in the EU, but certainly, it lags, and we see that. We’re investing there to make sure that we’ve got good channel coverage in at least both of those primary markets.

Great. And with that on the channel side, can you give us what sort of percentage of your sales came from channel in the quarter, or where do you expect that to end up by year-end?

Yes. So, the channel launch, the particularly the security side coming from Signal Sciences has been a heavily channel-led business. And that business in the aggregate was 13% in the quarter or 14% of revenue in the quarter. The big piece of that is channel led. The channel delivery, which we’ve launched two months ago is we’re starting to see some early traction. But in terms of a percentage, it’s still a fairly nominal percentage at this point. We should start to see that ramp more in the second half and more of the business outside of Signal Sciences being sold through the channel partners.

I’ll just try to highlight more of the channel deals and get the clearance to share more of that in the future. But it was nice to see, and I thought it matter -- a handful of our biggest deals, some of the top 5 deals in the quarter went through the channel and were sourced there. And that actually makes a big difference. Internally, it signals to our sales team that you can find success through the channel. And that helps us continue that momentum there.

Our next question comes from the line of Sanjit Singh.

Congrats on the quarter and regaining that 20% growth threshold. I want to get a sense of, Todd, from your perspective, as you guys sort of expand into new industries and you guys called out tech, how is the composition of traffic on the network changing? And does that have any sort of impact or mix effect on sort of your -- the gross margins that you expect that you still saw a lot this current quarter and what you sort of expect going forward?

You know what, that is a really great question because we have some of that conversation internally. So, the mix shift by vertical, it matters actually a lot when it comes to time of day loading. Our infrastructure tends to be highest -- under highest load in the evenings when people are streaming entertainment, most commonly. And so, things like tech that tend to have a more balanced workload tends to be a good margin tailwind to us. And you can imagine other types of verticals that have that shape will -- that type of time of day mix is a margin tailwind for us for sure. It’s also the case that tech hospitality people with large personalization requirements, e-commerce, retail, they tend to be pretty interested in the compute platform. And that, again, is a mix that will tend to be a tailwind to our margins. So, those things have been helpful. And I think we’re going to start to see more of that effect in the coming 24 months.

And then sort of a broader question sort of picking up on some of the themes from the Investor Day. The sort of one Fastly kind of unifying go-to-market product engineering, sort of customer advocacy. What inning do you think we’re in? I mean, you sort of launched the channel program, which you talked about a couple of minutes ago, but what’s more coming down the pipe over the next 3 to 4 quarters that we should be paying attention to?

When we think about one facet, the biggest piece that’s coming is the full platform unification. And what that means is all of the product offerings can be managed from a single management suite, no swivel care management regardless of which type of Next-Gen WAF deployment you’re using, if you have Next-Gen WAF and you add content delivery, if you expand the compute, if you deploy observability, there’s one platform, meaning one management plane, one API and importantly, one set of infrastructure. And what that means is a benefit for the user experience because they don’t have that civil chair, it’s easier for them to operate and expand from one portfolio to the next. It makes our sales team’s job in that land and expand easier for sure. And of course, it drives a real simplicity in our operation. We don’t have to run multiple different types of infrastructure. We don’t have a completely different infrastructure for compute. We have one set of infrastructure where all of our services run, one management plane, one API. And I think there’s benefit from the ops and sales and certainly in the customer experience. You asked what inning. I’m saying we’re in the fourth.

Our next question comes from the line of Jonathan Ho.

Congrats on the strong results. Can you give us a little bit more color on sort of the AI opportunity that you described? And maybe what some of the specific use cases are, what the potential for revenue is? And how soon should we sort of expect this to become -- or will it even become sort of a meaningful driver?

Yes. I mean, I think it’s a good question when it will become a meaningful driver. You should know we’re not planning for it to be a meaningful driver for the remainder of this year. But the use cases are incredibly interesting. We see AI and especially inference-based algorithms that are being used for deep personalization, content recommendation, product recommendation, et cetera. And the sophistication of that algorithm truly matters directly to the ROI of some of our customers, especially in e-commerce and media, et cetera. And I think those folks are starting [ph] with it right now. But this is a very interesting intersection for us, where personalization matters and user experience matters. And where there’s a strong ability for those two things in our sector, I feel like that’s where we’re going to see AI at the edge. And this is a great example of the kind of multi-cloud strategy that we talked about at Investor Day. We know these models are going to be trained in central cloud on AWS and GCP and then deployed to the edge in order to make those real-time decisions. And I think that’s good. I think that’s the way developers want to operate, and that puts the central cloud and the edge in a place where they can both shine.

And then just in terms of the new traffic patterns that you described that potentially impact gross margins. Is there any additional detail that you can provide? And do you expect this to be a continued trend over time?

I do expect it to be a trend. I think any vertical -- we are obviously focusing on vertical differentiation in the customer base and new logo acquisition in non-media, non-publishing verticals. And that differentiation, it matters. It does matter because of the time of day. But also, it does matter because of the type of workloads that they have, compute and security workloads tend to be a tailwind to our gross margin. We’ll have to give it some thought. I don’t have any other data points that I could disclose right now there, but I definitely do expect it to be a tailwind as we continue to differentiate the customer base.

Our next question comes from the line of Madeleine Brooks. [Ph]

Congrats on the strong quarter. Just two quick follow-ups from me. I guess, first, it’s the environment. From a guidance perspective, it looks like the most of the raise is really coming from the beat this quarter. So how are you feeling about the environment going into the back half of the year? And then just one quick follow-up on AI after that. Thanks.

Sure. As far as the environment goes, I think we are actually pretty bullish. We’ve seen some of our -- some other folks in the market be a little bit concerned about the growth in their user base. And I think maybe there’s some of that down market, but we have very little exposure to it. Maybe some in service provider or banking, again, we don’t have a lot of exposure there. I’d like more, we don’t have any. Look, I think as far as the guidance goes, and I think you make a good call out, we want to be very clear that we are being responsible about the guidance, so we have very high confidence in hitting those numbers. I was proud of the fact that the team was able to get real clarity and pull up the annual guide here. I hope to do it again.

And then on AI, understand training the model at the core and then really doing everything on the edge. From a SaaS perspective, do you see inferencing and doing storage on the edge be something that will require more CapEx than you’re already planning for when it does become an opportunity, or do you feel confident that the CapEx that you have spent so far is sufficient for that storage at the edge?

No. We have absolutely deployed for this. And you see it in the future releases over the last few quarters. We launched big store as well as KV Store, key value pair store, which is -- which can absolutely be used in order to deliver outcomes using an inference-based model. And you’re going to see more storage features from us as we go forward. But this has been in the plan. And edge storage as part of our compute platform is absolutely part of what we have already built out for. We’re not expecting a significant change to our build plan because of that.

Our next question comes from the line of Will Power.

Just on pricing and packaging. I think you mentioned that you started to introduce it this quarter. Kind of where would you say you are in that journey right now? And when do you expect to finish the transition? And when do you expect the bulk of the benefits to kind of kick in there? Any color would be great. Thanks.

Yes. I think it’s going to be a relatively long transition, in part because we’re not trying to force it. We have lots of customers that want to run a true utility motion. And especially customers in media, entertainment back promotion, they want to run. We have no intention of making any changes there. But there’s a huge chunk of the enterprise market that wants an all in one package and especially, they want reliable billing. And that’s something that I think is good for us and that it makes our revenue a little bit more reliable, gives us a strong sort of monthly renewing or monthly commit and revenue. We’re seeing the improvement in things like the RPO, which run out into the disclosure this time around. And in part, I think, so that you can track the progress here. I would say our sales motion, I hope to be kind of transition maybe in another 12 months. But I think the customer base will shift towards this maybe over the next two years until we hit kind of a steady state. It was nice to see that, again, some of the big deals that we called out and named were using packages. And that new packaging system was a reason why some of them made the change from a deeply entrenched incumbent. Flat rate packaging, no overages all in one feature set. That was nice to see.

And then just quickly on the competitive environment. What are you seeing in the core CDN biz, the business there? Any changes on the competitive environment? Thanks.

We have seen some consolidation in the market and some interest. But largely, the two big trends we see is -- there are large customers with a multi-CDN that are looking at vendor consolidation, and that tends to be good for us when we see that because they tend to choose the performance leader as one of their down selected vendors. And I think what we’re seeing is that CDN more and more is being bought as part of an edge cloud solution. And so having the complete platform is an enormous tool. And we see some of our large competitors targeting that same kind of motion. And I think it’s good for the industry that this is becoming much more of a platform play instead of a point solution.

Our next question comes from the line of Rudy Kessinger.

I just had two quick ones for you. First off, I know you guys had said at the Analyst Day that revenue per server in Q2 was roughly -- I’m sorry, in Q1 was roughly 12% below the peak. And I was just curious if you guys saw any further improvement in Q2?

That’s a great question. We don’t track revenue per server every quarter. I guess, what I can tell you is we did not have to deploy any significant additional hardware in this quarter and the revenue went up. So, I feel like there’s a good chance that the revenue per server increased. But to be honest, it’s not a figure we track every single quarter. It was disclosed during Investor Day because the trend was interesting and certainly in hindsight, I think painted the picture, but it’s really the cost of revenue that we are tracking most carefully. If I can optimize cost of revenue by adding a few servers and reducing other types of costs, we’ll take that trade-off all day long. I don’t want my ops team chasing down a goal around revenue per server instead of just optimizing for gross margin overall.

And then just second one, just any early feedback you’ve gotten from the bot mitigation beta? And then when will bot and DDoS products go GA?

That’s a great question. My security team will be so excited. No, we’ve had a great response on the bot mitigation, and we have a bunch of beta deployments out in the -- in customers’ hands right now. It’s been going great, and we’re really excited about that play. On the DDoS side, obviously, we’ve had lots of DDoS technology available from Fastly for years and years, but getting more DDoS visibility has been a win. The most interesting part of that has been an enormous amount of customer interest in the full managed security service, which includes the DDoS mitigation there. And that’s been a nice tailwind. And to be honest, I think a really attractive service. It’s something some of our competitors have had in the past. It gives a direct access to our security operations team, really in-depth threat mitigation. And those two, the security MSS and the bot mitigation, we’re incredibly confident in, and I think we’re seeing a really healthy pipeline growth right now.

[Operator Instructions] Our next question comes from the line of Rishi Jaluria.

This is Rich Poland on for Rishi. Thanks for taking my questions. First one is just on the pricing and packaging, you mentioned it’s good for some of those new industry wins and use cases, I think you called out retail and hi-tech in particular. Is there anything else besides the pricing and packaging that you’ve done over the past couple of quarters to help be more suitable for those types of use cases? And just anything now that you could expand on a little bit?

Sure. I mean, we’ve pushed really hard on automation. You saw in the supplement, there’s details on Dynamic Backends, which helps automate Fastly management pushed on the security side of the house with Mutual TLS. There’s a bunch of work that we’re doing to make the platform itself more powerful and, to be honest, easier to use and automate. And I think there’s a lot more work we have here on just simplifying our customer experience, making Fastly not just the most powerful as cloud platform, but the easiest to use and the easiest to develop for, and we’re working hard at that. The strength of the platform has been, I think, really steadily increasing, we’re very excited about. Certainly, we’re very excited about some of the security efficacy improvements we’ve seen. But if there was one thing that I could say that we’re really pushing on hard where we’ve already seen benefits and we hope to see a lot more, it’s real platform unification. Because -- while the media vertical, I think, is very focused on direct content delivery, most other enterprise verticals really need to complete edge suite. They want a single platform, a single strategic vendor and they want that to be as easy to onboard as possible. So, we’ve seen improvements in our -- in account linking and UI, consolidation. But as we get the full platform unification story, I think that’s really going to help us knock down a lot of new logos in some of these expansion verticals.

And then just a follow-up on some of the security products that are rolling out. How should we think about just in terms of like monetization for some of those products? And how does that kind of flow into the model as we think about maybe just generally speaking, but then also as it applies to the pricing and packaging changes.

Sure. So, the security -- the web application security solution, we kind of try to sell that as one unified package, especially in our new modern packaging solutions. So think DDoS, anti-bot mitigation Next-Gen WAF. That as one consistent package, I think that will be our primary motion more and more. We obviously sell them à la carte, but you’re going to see -- I think we’re going to see more and more of that as sold as a package, web application security. The TLS and the certificate solution usually gets sold kind of in conjunction with the CDN and certainly is really going to make that a lot easier, especially for a platform, what we call platform TLS, folks that view that support a lot of yours that have a lot of different web presences and certainly is going to help us make that radically simpler for them. But I do think that will be sold separately. So there’s a little bit of a different motion there. Yes. I guess, that’s sort of how we see it. Largely, the core security solution being sold as a package and things like TLS, certificate management, et cetera, being sold à la carte.

And that looks like all of our questions. I would now like to turn it back over to Todd and the team.

Thanks so much. Before we close the call, I want to thank our employees, our customers, our partners and our investors. We remain as committed as ever to make the internet a better place where all experiences are fast, safe and engaging. Moving forward, we remain focused on execution and bringing lasting growth to our business and delivering value to all of our shareholders. Thank you so much for your time today.

That concludes today’s call. Have a pleasant day.