Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly First Quarter 2024 Earnings Conference Call. [Operator Instructions]. And I would now like to turn the conference over to Vern Essi, Investor Relations at Fastly. Please go ahead.

Thank you, and welcome, everyone, to our first 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 1 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 filings with the SEC, including our most recent annual report filed on Form 10-K and quarterly report filed on Form 10-Q filed with the SEC and our first quarter 2024 earnings release and supplement for a discussion of the factors that could cause our results to differ. Please refer in particular to the sections entitled Risk Factors. We encourage you to read these documents. Also note 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. Now I'll turn the call over to Todd. Todd?

Thanks, Vern. Hi, everyone, and thanks so much for joining us today. First, I'd like to give a quick summary of our first quarter financial results and related highlights. I'll then discuss our revised revenue outlook and provide an update to our go-to-market initiatives and customer acquisition as it relates to our path forward to drive revenue growth. I will then hand the call over to Ron to discuss the changes in our metrics, our first quarter financial results and our guidance in detail. I'm pleased that we reported revenue of $133.5 million for the first quarter, representing a 14% year-over-year growth and coming in above the midpoint of our $131 million to $135 million guidance range. Our customer growth and retention efforts showed improvement in the first quarter with our LTM NRR at 114%, up slightly from Q4's level of 113% and reversing quarterly declines in this metric since the end of 2022. Our total customer count in the fourth quarter was 3,290 which increased by 47 customers compared to the Q4 and by 190 year-over-year. Enterprise customers totaled 577 in the quarter, a decrease of 1 from Q4. We brought in 18 net new enterprise customers at the $100,000 annual revenue threshold in the quarter. This is mostly offset by customers that dropped below this threshold due to seasonality. On a year-over-year basis, we grew our enterprise customer count by 37. Our gross margin continues to improve and was 58.8% in the first quarter, up 320 basis points year-over-year and ahead of our expectations. Our operating loss was $9.7 million in the first quarter compared to an operating loss of $14.1 million in the first quarter of 2023. I'm very pleased with this result as our loss was materially better than our guidance of $14 million to $10…

Thank you, Todd, and thanks, everyone, for joining us today. I'll first discuss changes to our metrics disclosures before turning to our financial results and business metrics. I will then review our forward guidance. Note that unless otherwise stated, all financial results in my discussion are non-GAAP based. We continue to focus on sharing the business metrics that provide the most useful information to understand and monitor the progress of our business. Beginning with this first quarter 2024 release, we have discontinued the disclosure of quarterly NRR, DBNRR, the number of markets and countires and our bandwidth statistics. Conversely, we are now disclosing our revenue by product line between network services, which is our core delivery products offering, security, which is our growth offering and other, our emerging products offering, which includes compute and absorbability products. We have provided a trended 8-quarter history of this revenue in our Investor Supplement, because we are now providing revenue from our full security portfolio, we will no longer be reporting Signal Sciences revenue on a stand-alone basis. Signal Sciences acquired firewall solution has been integrated with Fastly's legacy firewall, which we now refer to as our Next-Gen WAF. Our legacy firewall revenue has largely transitioned into the Signal Sciences WAF or Next-Gen WAF. Note that our combined security revenue reflects the impact of the decline in our legacy WAF revenue taking place during that integration. Lastly, as our supplement only includes the trailing 8 quarters, I will provide the revenue breakout for the first quarter of 2022 here in my prepared comments. Network Services revenue was $83.9 million. Security revenue was $18.2 million and other revenue totaled $0.3 million. Turning to our financial results. Revenue for the first quarter increased 14% year-over-year to $133.5 million coming in slightly ahead of the midpoint of…

And we will now begin the question-and-answer session. [Operator Instructions]. And your first question comes from Rishi Jaluria with RBC.

Wonderful. Todd, Ron. Todd, let me start with you. Last quarter, after the first guide down, you talked about the pricing environment being relatively kind of in line with how it's been historically. It sounds now like there's maybe a little bit more intensifying pricing pressure in spite of the fact that there is consolidation going on, as you pointed out, and vendors exiting the space. Can you speak to what has maybe changed in the past 90 days in terms of that? And what tools do you have in your arsenal to maybe start to counteract those headwinds. And I've got a quick follow-up for Ron.

Yes, I appreciate the question. I think in the general market, I would say the pricing trend that we had been seeing, sort of continues. But what we saw in our top 10, 15 large accounts, we saw some -- or slightly more kind of pricing pressure than we're used to in. That's got an outsized impact for us, and we are trying to make sure that we're doing the right adjustments to our projection based on that. Usually would be kind of pricing changes. We see a commensurate volume increase as well. And we still hope to see that, especially in some of these key accounts, but it's really in that high in the large primarily media accounts, we're seeing a little bit more pricing pressure than normal. The rest of the market -- I still feel pretty confident in the pricing. Trends have been pretty good. Anything you could add there, Ron?

No, I think the period of -- we saw a more modest rerates historically. I think that continues across kind of the broad market, but we have seen a change in the largest accounts.

Okay. Got it. That's helpful. And then, Ron, for you, when I look at the investor supplemental, you talked -- you're highlighting now RPO was a metric. Can you maybe speak to why this is now a more relevant leading indicator, especially given you still do have good amount of the business on kind of consumption that isn't pre-committed. And what we should be making of the fact that RPO declined sequentially and then even more so year-over-year. What needs to happen for that to kind of return back to more healthy levels.

Yes. That's a good question. First and foremost, over time, as we start to see more and more of the business packages, I see that momentum gain. As Todd mentioned on the call, we saw more packages in Q1 than we saw in the full first half of last year. Those will be additive. So over time, it will be a better indicator of our business. And as it grows, it's also going to reduce some of the volatility that we've seen, particularly in the first half of this year. In terms of the decline, first and foremost, we really look at it kind of on a year-over-year basis. A lot of our customers do have annual commit. But some of our largest customers do have 2-year contracts. And so what you're really seeing is some of our just customers who have multiyear contracts as they sort of burn through that ahead of their renewal is creating some headwinds or declines on a year-over-year basis in the RPO.

I'll just add this. I think the reason I do believe that's a good metric for us to start looking at and they'll become more and more relevant over time is that for the packaging transition will start to hit. We're seeing more and more of our large enterprise and even in midsized enterprise accounts engaging on packaging, and that impact is going to be shown on that line as we move forward.

We will take our next question from Frank Louthan with Raymond James.

First, just to kind of clarify on the guide. Last year at the Analyst Day, you guided to free cash flow breakeven for the year. Is that still attainable? And then Todd, you mentioned the shift in the engagement approach to customers. How long is it going to take to train the sales team on this engagement shift? And when can we see that turn into higher growth in net retention rate. And then what gives us the confidence in the strategy here versus where you were in mid-February and the market clearly was different. What have you learned in that last few weeks that tells us this new path and the guide are going in the right direction?

Yes. On the free cash flow, I think we're continuing commitment to managing our expenses in line with our revenue outlook. As I mentioned in the prepared remarks, this does create some headwinds, but we expect to be very close to breakeven for 2024 on our free cash flow.

As far as the large account management and large account engagement. Look, I think that's incredibly important question for us right now. And I believe you have to react to the realities of the market and you have to react with real conviction and real speed, and that's what we're doing right now. The top 15 or 20 accounts at Fastly, they carry a lot of our revenue. And the way that we engage with them, the way that we drive platform, like product line penetration, the way we drive price control and discount control, the way that we optimize their performance and drive a more significant and complete technology solution. I believe we have an opportunity in all of those categories to improve the way that we engage and dedicate more resources and more focus to it. And that's exactly what we're doing. Right now, we have already launched a new engagement model. We're driving a far higher touch across all of those major accounts. We've been running it for a couple of weeks now, and we're -- I'm pretty happy with the progress so far. But just looking at the -- where our projection is for those accounts and how much it has changed in just 1 quarter, like you said since last February, I think decisive change in our engagement model was warranted, and that's exactly the transition that we are undergoing right now.

And you've been doing this for 2 weeks, and that's -- and now -- and you think that you've got the right formula or is this going to take a little longer to evolve? How should we think about it?

I mean, look, I think we're going to be evolving that formula for quite a while, but I think we have the right resourcing on it now. We have deployed a lot of resources, a lot of the most significant resources into that effort very quickly, and I'm happy with the progress so far.

We will take our next question from Madeline Brooks with Bank of America.

Todd, I guess this is more suitable for you. If we look at the back half of the year. And if we look at your guide, right? Going down to 7.5% growth for second quarter. And then this reacceleration in the back half of the year to 12% growth, what's given you the confidence in that right now? And additionally, too, if we look into second quarter, what about second quarter is driving so much of the volatility?

Yes. As I look at the second half, projection, and Ron can add color on this as well. We've got ramping customers and new customer acquisition has been strong. We have been able to move the needle there. We're seeing those revenues ramp and new customers being added to the platform. And so I can -- I think we've got pretty high conviction that we're going to see that revenue materialize in the second half. The weakness and the shift in the projection from last quarter this quarter is really in those large accounts. And that's why we've changed our engagement model have been so significantly. But the reason really comes down to that. We've seen a little bit of a pullback in the vendor consolidation trend and that's reversed and we see some folks even adding an additional vendor here in there, and we see a little more pricing pressure up there. And that has -- those are large accounts for us and has a large impact.

The only thing I would add -- on the second half acceleration is typically, we do have seasonality in the business that we historically have about second half tends to be up about 10% or 11%. So when we took a look at the second half, we looked at where the business was in Q2. And as Todd mentioned, a number of new customers that we signed. And we believe that seasonality that we've seen is intact coming off of the dynamics we're seeing in the second quarter.

And then maybe just a quick follow-up, too. As those customer ramp understand what's going on with customer acquisition. But if we just stay in those 15 large customer accounts, do you see those accounts stabilizing after the second quarter relatively? Or do you think we should expect and model declines in that cohort through the end of the year just given the trends that you're seeing in the market now?

Yes. I mean we are -- I think our projection is relatively conservative. I believe we're going to see traffic levels come up, and we're going to find some success in recovering revenue in those large accounts. We're signaling the guide here because Obviously, there's a new projection and we want to reflect that. But look, I believe there's an opportunity for us to beat that projection. And reverse, not just stop the decline, but really reverse the trend in the second half.

We'll take our next question from Fatima Boolani with Citigroup.

This is Mark on for Fatima. Maybe just kick up on the package and borrowing uptake. Can you just give a sense of penetration in the base currently and the impact on -- from a new logo acquisition pipeline [ build standpoint ] and then I understand that annual packaging [ has done ] really deep variability and improve on the visibility on revenues. Can you maybe just quantify in any way how showing up in the revenue predictability today?

Yes. Look, I think in the long run, the channel engagement will help us drive customer acquisition through deal registration. And we're starting to see some effect of that broadening significantly beyond where our channel was strong 1.5 years ago, which was really just in the security portfolio. We're seeing the channel engaging across the board. This past quarter, our largest deal close, our large new booking closed, not just through the partner but also on the packaging solution. And so I think both of these trends are helping not just in the midsized and small accounts, but in large accounts as well. So we've had, I think, some real success on the channel growth and the importance of the channel on the go-to-market. The packaging has, I think, in large part, helped us move more quickly, bringing new customers to the platform, especially midsize and large traditional enterprises to the platform. It has a very kind of attractive feature of sort of a no overages model for those customers to give them very predictable billing. And it really gives us much more predictable revenue, which has been a great -- has had great impact so far. I'm pretty happy with both of those. And I think it -- we're doubling down on both of those initiatives. And really, that's a big part of this kind of initiative across the board, where our biggest focus is on revenue growth and driving that revenue growth back up into the 20s where it really should be.

Got it. Okay. Maybe just a follow-up. We would Just like to touch on some of the recent regulatories scrutiny that one of your largest social media customer is seeing. Can you give us how your -- that logo and the impact of business overall? And is this also reflected in your updated guidance?

I'm sorry, you broke up a little bit. I -- could you repeat that, Mark? I think you're asking about a restructuring of a social media customers, is that what you said?

Oh, no. Can you hear me now?

Yes, much better.

Okay. Great. No, I just want to touch on some of the recent regulatory scrutiny that one of your large social media customers see. Just wanted to get a sense of how you're thinking of that logo and the impact on the business and is it also reflected in your updated guidance?

Yes, completely. And thanks for repeating the question. For sure, I think first and foremost, we are fully committed to supporting, all of our media customers through any sort of transition they happen to be having in this case that you're referring to, should be -- should there be any sort of transition or significant transition there, we're doubling down on being able to support them and support them through that transition, however it may come to life, but our engagement with that account has been super strong, and we're pretty positive on the way that will shake out any way you slice it. We are, of course, modeling some risk in here, but I'm pretty confident in the path forward.

And we will take our next question from James Fish with Piper Sandler.

Guys, maybe the best way to ask this one [indiscernible] is guideline set to the minimum contract level you guys have [ in place ] but what are you assuming for those customers that you're seeing the issues with? And per our discussion, you said you really weren't seeing any large renewals like your competitor, your main competitor was this year. Are you just seeing that earlier now because you saw more volumes than anticipated and so you have moved up or walk me through that.

So I think if you look at each customer, if you work with the large customers are different dynamics in each one. And within their multiyear commit, the amount of traffic that they're running, in some instances, as Todd spoke about, we did see some pricing changes that were not accompanied with traffic increases. Our renewals sort of spread across the year. And then secondly, we did see some of our largest customers where they added in an additional CDN that reduced some of our traffic levels at those customers. And so those were the dynamics, each one is a little bit different, but it was really a combination of the pricing changes, traffic share with increasing the number of CDNs at some of our largest customers.

Right, Ron. But my question is more, look, you guys intend to have -- RPO doesn't reflect this to Rishi's earlier kind of question where RPO all include essentially the minimum contract levels that you guys have. I think historically, you guys have had roughly 80% visibility to any given year just on those minimum contract level. So as we think about this kind of revised guide, I guess, how much above like minimum contract level are you guys having that. We're not going to be sitting here another 90 days saying, why is Fastly dropping guide again?

Yes. I guess 2 things to clarify. I mean when you look at our largest customers, while some of them do have commitment, a significant portion of them are utility-based, not commitment-based. And so that's, I guess that's not reflected within the RPO when there is not an underlying commitment on the customer contract. And so you're going to see a mix of customers that do have a commit and customers where they don't -- even in the cases of commit, the customer may be running traffic above that consistently. And so we are still predicting it or forecasting it based on a level of traffic or utility basis.

To look at that just from a slightly broader lens, I think like, it's fair to say that we've seen some more rerates in our largest 10 or 15 accounts in the past quarter. And I take your point on the competitive messaging we've heard. I think that is a fair point, I've got high confidence in the adjusted guide here because I think we shipped through that largely, and we're really moving back to the path of growing those accounts and expanding not just the volume we see but the product penetration in those accounts as well.

And we will take our next question from Tim Horan with Oppenheimer.

Sort of to hammer on the same topic here. But so maybe when you mentioned like multiple products, like what else is in that network services revenue, like how many of those -- how many different products do you have in there? And what are you typically selling to customers?

Yes. So on the network services side of the house, we sell services around, obviously, content delivery, which includes both video streaming and full site delivery and replication around the world. We sell it -- different kinds of technology in terms of image optimization and live events and streaming and live event monitoring, rate reservations, et cetera. When I talk about product penetration across the platform, now I'm talking about expansion into security, expansion into observability and largely and -- starting to really gain traction, expansion into compute as well.

Well -- and thanks for the revenue breakdown, but I mean it looks like computes only 1% of revenue. And is observability in network services? Or is that in a different category?

Observability falls into other.

And one of your largest competitors last quarter said they were going to bundle really aggressively with compute. They kind of imply they were going to use price on CDN to win customer's back. I mean, are you seeing them pull back on that at this point? I mean, it would seem like that would last for a year or 2, if they're going to make comments like that and pursue that strategy. Are you seeing them pull back? Or do you think your quality at this point is such that your core customers are not going to be impacted by what they do on the pricing or bundling front?

The largest customers, I don't think they're going to be impacted on the pricing front there because it is -- these are high-tech customers that are deeply engaged in the performance, the service levels, the reliability especially. And there's -- I think the customers are extremely mature and there's only so much sort of pricing flexibility that you can deploy in an account like that. We are super aggressive, not just on the performance, but on the pricing as well in those top 10 accounts. And again, I think we're driving a new level of engagement in those accounts to really return that cohort back to growth. But I do think that bundling has real potential, stronger bundling downmarket. And if anything on the competitive front, that's where I've seen some success. We are also with our packaging solution getting more aggressive in bundling, and we've seen success there as well.

But I guess to be fair, I mean, Akamai has -- they're going after basically legacy, virtual machine workloads and legacy storage, which is a huge market and if they could price that down, would that impact customers' decision on the core -- on your core network services business? Or do you think that's like not enough to make customers move back to Akamai or somebody else?

I think customers who are moving to Fastly, they are looking for sort of next-gen solutions, serverless compute, edge storage, the type of technology that we're delivering. Moving back to sort of legacy virtual machines. I don't -- I don't see that as being compelling. I do think though there's real opportunity on the compute side. I wouldn't discount it because it's currently small. It's growing quickly. It has extreme -- it drives extremely high stickiness with accounts. Our compute customers are -- have very high customer sat. We're pushing on that business very hard because it works so complementary with our CDN business that helps drive both sides of our customer engagement there.

[Operator Instructions]. And we will take our next question from Rudy Kessinger with D.A. Davidson.

So I just want to understand, I mean, you guys gave that guide halfway through Q1. When exactly in the quarter did these customers start repricing contracts and adding other CDNs and moving share, et cetera. And with these repricings, I guess, you guys just have no control over it whatsoever. They just asked for repricing. You guys do it within a couple of days. I mean I just don't understand how 3 months ago, you told us you didn't have any large repricing expected. And now it turns out you did within a 6-week time frame.

Yes, I think a couple of things. I think in terms of the dynamics that Todd spoke about, both in terms of the pricing, a lot of that arose really at the end of March and in early April when the -- we saw one, the motion of some of our customers, kind of reversing their trend of consolidating on CDNs, which affected our traffic projections for the year. And then as we engage in some of the rerates that we knew were coming, those negotiations resulted in bigger discounts than we thought that did not come with the typical increase in traffic that we've seen historically. And so those were the big drivers. I would say the time frame really was late March, early April, when we saw these different dynamics, but all affecting some of our largest customers that have an outside impact on our revenue outlook and growth rate.

Okay. And so is it -- the larger-than-expected pricing pressure, I guess it would go against your conventional wisdom when several of just the smaller low-cost vendors have exited the space over the last 6 months. And so what -- just any thoughts on why you had to concede so much on price with less traffic growth than typical given there's fewer competitors, fewer low-cost competitors in the space. And then lastly, Ron, just what level of visibility do you have this second half revenue? Like what percent of that second half -- implied second half revenue guide is actually the minimum for mix...

Yes. I'll take the first half. I think, look, I think it's a fair question. We did see the pricing and traffic projections changed a lot at the end of the quarter, and the beginning of this quarter, Q2. But I think an important piece of this is, look, there's a small number of accounts where we had -- where our projection, our revenue projection has pulled back. And those are large accounts that have very significant swing, and they need to be handled and managed and optimized very specifically. It's why we're changing our motion there. And look, I believe we have an opportunity to move back to growth in those accounts, but our projection reflects where we currently are.

I think the only thing I would add on the second part is, while, again, a significant portion of our business is on a utility basis. The largest accounts had their pricing and/or these adjustments in traffic in March and April. And so our outlook reflects those activities that occurred in the largest accounts. And so the variability in the smaller accounts should have less volatility as we move through the year.

And we will take our next question from Jeff Van Rhee with Craig-Hallum.

This is Daniel on for Jeff. You referenced earlier the volatility with some of the larger customers, can you just expand on that in terms of volatility. Volatility is a term referencing some onetime changes or some quarterly changes just to this quarter? Or just sort of what did you mean in terms of some of the volatility?

Yes. We had a couple of accounts in that very large set that negotiated rerates in the past quarter. Usually, a rerate like that would come up -- would come with like a commensurate volume increase, and we try to model that very carefully, but our projection there was a little bit aggressive, I believe. And we have seen this trend towards -- which we saw a strong trend last year towards vendor consolidation as folks with 5 or 6 CDN vendors consolidate all the way down to 2 or 3. We saw a little bit of pulling back there and people adding a vendor here or there. And those 2 trends caused some volatility, which affected our projection.

And then just a second for me. One, I believe earlier when you were asked about the assumptions contemplated in the guidance and just with the top 15 customers, what sort of is baked in, in terms of the traffic levels. Let me just read you back and see if I got that correct? Was the notion that you expected you were modeling in for those traffic levels to stay flat from Q2 into Q3 and Q4, although you actually thought that was conservative, if you thought it could actually tick up from Q2. Is that correct? And what would you think would drive those to actually go up somewhat here in Q3 and Q4?

What we're modeling all the time is sort of the seasonality of our traffic patterns, but I believe we have an opportunity to increase the revenue in the wallet share at those large counts by demonstrating superior performance showing and demonstrating the ROI of using faster, more clearly and expanding the product portfolio that those accounts use. And so It's why I think it was so pertinent for us to really change our engagement model and move very quickly here to react to what we're seeing in the market, why we're pushing so hard on that right now.

And ladies and gentlemen, that concludes our question-and-answer session. I'll now turn the conference back to Mr. Todd Nightingale for closing remarks.

Thanks so much. I want to thank all our employees, our customers, our partners and our investors. We remain focused on execution, bringing lasting growth to our business and delivering value to all of our shareholders. Thank you so much for your time today.

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