Good afternoon. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly Fourth Quarter 2024 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 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 fourth 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 7543239 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 reports filed on Form 10-Q filed with the SEC and our fourth 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. Before we begin our prepared comments, please note that during the fourth quarter, we will be attending the Oppenheimer 10th Annual Emerging Growth Conference held virtually on February 25, the Raymond James 46th Annual Institutional Investors Conference in Orlando on March 3rd, and the Morgan Stanley Technology, Media & Telecom Conference in San Francisco on March 4th. Now, I'll turn the call over to Todd. Todd?

Thanks, Vern. Hi, everyone, and thank you so much for joining us. Today, I will cover our fourth quarter results and recap 2024 and then move on to our strategy for 2025. I will then hand the call over to Ron to discuss our fourth quarter results and our guidance in detail. We closed out 2024 reporting record fourth quarter revenue of $140.6 million. This exceeded our guidance range of $136 million to $140 million and represented a 2% growth, both year-over-year and quarter-over-quarter. Revenue strength is attributed to better-than-expected seasonal traffic coupled with share gains at the year-end. We closed out 2024 with revenue of $544 million, representing 7% year-over-year growth. As we have discussed in prior quarters, we faced demand headwinds with a few of our largest customers. I'm happy to say we persevered and resumed strength with these larger customers into year-end as we will discuss today. We were also able to grow in other areas to offset these headwinds, and we look to build momentum as we head into 2025. A key component to building lasting predictable growth at Fastly is diversifying our revenue base. Fastly's top 10 customers dropped from 33% of our revenue in the third quarter to 32% in the fourth, this is down from 40% at the end of 2023. Moreover, the revenue outside of our top 10 customers grew 16% year-over-year in the fourth quarter. We are now approaching a healthy mix of our largest customers relative to the rest of our business. Our go-to-market strategy will continue to emphasize logo acquisition to grow the enterprise customer mix outside of our top 10. We will talk more about this in a minute, but the opportunity to drive a greater cross-sell motion through the long tail of our customer race, gives us…

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. Note that unless otherwise stated, all financial results in my discussion are non-GAAP based. Revenue for the fourth quarter increased 2% year-over-year to $140.6 million coming in above the guidance range of $136 million to $140 million. There were no unusual true-up payments in the fourth quarter. Excluding the $2.8 million true-up payment from last year, our fourth quarter revenue growth would have been 4% over the fourth quarter of 2023. Network services revenue of $110.1 million was flat year-over-year, while security revenue grew 4% year-over-year to $26.9 million, normalized for the true-up payment from last year, which was security-based revenue, our security revenue would have grown 17%. Our other segment, which represents emerging products grew 63% year-over-year to $3.6 million, driven primarily by compute products. In the fourth quarter, we saw better-than-expected seasonal traffic, coupled with share gains from customers ramping in Q4. Our annual revenue was $544 million, representing 7% growth over 2023 coming in below our original guidance range of $580 million to $590 million provided one-year ago. As we discussed in prior quarters, we experienced revenue headwinds from a few of our largest customers. We responded during the year with the change to our customer strategy to improve our visibility and engagement. And in the second half, we realigned our costs to be in line with our revised revenue outlook. Our top 10 customers comprised 32% of our total revenue in the fourth quarter of 2024 compared to 33% in Q3 2024 and 40% in the year ago quarter, reflecting the impact of the revenue declines from a few of our largest customers and our strategy to grow our overall customer base.…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We'll take our first question from Frank Louthan at Raymond James.

Great. Thank you. Can you give us an idea of what sort of investments in capital and people you'll need for the Asia Pac expansion? And when can we expect some of these changes to start impacting the topline trajectory? Thanks.

Yes. So from a capital investment perspective, I would say a fairly nominal investment, probably very little on the capital side. Our build-out reflects traffic on a global basis and the expanding traffic rates that we see. From a personnel perspective, we currently have largely the team in place, and this is a leader. I'll let Todd add a little color on the management of that region.

Yes. I think this is really a move to make our total system more efficient. We have the infrastructure in place largely because we're serving so many global customers, but by putting a dedicated APJ or APAC sales leader in place. We have a real opportunity to drive more local business in that market and really focus on that market because there's just so much potential there right now for us, and we are really underpenetrated. So I think from an investment point of view, it's probably pretty small. We're really talking about just bringing out one high-level leader.

Okay. And looking at the group that you're going to hire in sales to focus on new logos, how is that going to change the current sales structure and where you get new logos? How long will it be need to have that team built out? And then how should we think about new logo expansion and when that will sort of hit its stride?

We’ve largely done this through refocusing existing resources. So largely, that team is in place right now. Scott's done a great job sort of repositioning and refocusing the teams we have. I think the area where we are certainly still ramping up is in the security specialization. We have a huge focus on security right now, obviously, bringing Scott in with his security background, all of the R&D focus we've put in and product launches that we saw through 2024. We will be bringing on security expertise into that patch, but into the sales team. But I think that will sort of continue organically throughout the year. Our sales leadership has – our new sales leadership has such a strong security background. I think we feel pretty good about where we are right now.

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

Hey. Good afternoon, guys. This is Mark on for Fatima. Thanks for taking our questions. So maybe just talk first off, it seems like you are getting traction on the bundling initiatives and diversification effort, but really the business mix has remained fairly consistent. Can you maybe just give us an insight on why aren't we seeing a more visible shift in the mix? And then what are some of the gating factors here? And then how should we think of the mix in the context of 2025 guide? Thanks.

Sure. When I think about the business mix, I think about it kind of in two dimensions. One is revenue diversification. And I think we have seen a pretty big shift here. Bundling and specifically the package motion is really designed and targets the mid-market and by swinging the – and to some degree, enterprise accounts, but really not the top 10. And by really sharpening up our playbook there, we've been able to drive this revenue diversification and the strength in the rest of that market outside the top 10. I think that's what we're seeing. We started 2024 with 40% revenue concentration in the top 10. We are able to bring that number all the way down to 32%. As the other dimension I look at when I think of the revenue diversification is along the product line areas. And Ron gave you the normalized view there with the security growth. Obviously, the onetime payment – the onetime take-or-pay payment from 2023 complicated that growth number a little bit. But generally speaking, we do see diversification towards security, towards compute and observability, towards our growth and our expansion part of our portfolio. But I certainly believe we can do better. We can drive a far higher security growth rate, which is why we are placing so much emphasis, which is why we did place so much emphasis in 2024 on the feature velocity in the security space. We're continuing to focus there for sure and it’s why we’re investing and focused so much on the security go-to market.

Okay. Great. Thanks. And then just maybe a follow-up. Just on the NRR trajectory from here. What sort of giving the confidence of expansion in the second half of 2025, especially given some of the sales changes and initiatives you guys are currently undertaking?

Yes. I think from a trajectory perspective, it closely follows kind of the revenue growth and being on an LTM basis, it is going to lag some of the impact that we see from that expansion. We spoke about the efforts in the sales organization to really drive expansion in existing customers. And exiting the year with a complete security portfolio and improved platform unification give us a real opportunity to grow that expansion. Reporting that on the LTM basis, though, it's going to lag kind of the impact that we see in a particular quarter. But we do expect that with that product portfolio and the changes Todd spoke about on the sales team that we should see that start to accelerate in the second half of 2025.

We're also putting a much, much greater focus on the sales team on the cross-sell. And I think this is something that Scott has done a great job bringing up Fastly. That's going to help us drive the security opportunities that exist within our current customer base. And I think help us drive that recurring revenue growth overall.

[Operator Instructions] We'll go next to Rudy Kessinger at D.A. Davidson.

Hey. Great. Thanks for taking my questions, guys. I'm curious just on the exclusion of the TikTok U.S. revenue. Just to be clear, like as of February 12 and year-to-date, like is that traffic still flowing at roughly the sub-2% of revenue rate that it's been flowing at or has it been cut off yet or any segregation to it?

Yes. It's a great question. It's an important one. We're very mindful of ensuring that we're always operating within the bounds of law. We've been in very close contact with authorities to ensure we do that. But yes, currently, it is running. And yes, it's running under kind of normal load. Just to be prudent, we know that there's very kind of increased uncertainty on what will happen to that U.S. traffic after Q1. And so we've just excluded any potential revenue from that U.S. traffic beyond Q1. And sorry, we've excluded it beyond Q1 in our guidance.

Beyond Q1. Okay. Got it. That's helpful. So it's in the Q1 guide but not beyond it. Okay. And then just I’m curious what – just with Edgio shutting their network down, just what benefit, if any, did you see in Q4 post their bankruptcy announcement? And I guess, same question in Q1 and really what is baked into the 2025 guide from share gains and traffic gains from the customers who were running sizable traffic on their network?

Yes. There's been a handful of benefits and some for sure, we predicted and some were a little bit of an upside. It was interesting, we saw some new logos come to Fastly. And I know that a lot of the Edgio, most of the Edgio revenue is – was already on shared Fastly customers. But we did see more than 10 new logo wins from users that we're using and leveraging Edgio and those folks coming over to Fastly. That's a significant chunk. And it was really nice to see that momentum and those customers choosing Fastly across the market. We also have been diligently working on bringing as much of that Edgio traffic on to the Fastly platform instead of other competitors that is a sort of constant engagement with those customers. And it also is driving a lot of that kind of capacity build that we're looking at in 2025 to ensure that we can backfill all of the Edgio traffic that we can possibly bring on to the platform. And we're trying to manage that with being careful in our capital spend and our gross margins. But for sure, we want to be a platform where all the traffic that's possible can come on to the Fastly platform. The last thing I'd say there is certainly, the pricing environment, not just because of Edgio’s shutdown, but a handful of these point CDN providers shutting down. I think the pricing environment in 2025 certainly looks a lot better than it did in 2024. And we're trying to do our best to try to figure out how to quantify that, but it is for sure it's for sure, an upside for 2025.

We'll go next to Sanjit Singh at Morgan Stanley.

Hi. Thank you for taking the questions. I wanted to get back to sort of the business mix shift dynamics going between your top 10 customers and your non-top 10 customers. It looks like the second derivative on growth improved on the top 10 customer side. And I think, Ron, correct me if I'm wrong, that you're pointing to that mix stabilizing in the low to mid-30s. What sort of like gives you confidence on that underlying stabilization and some of the improvements that you saw this quarter on a secondary basis?

So we've moved to a much higher-touch customer engagement near customer success motion. We're leveraging a whole host of new analytics and statistics both internal and external. We have a much tighter executive engagement. We're doing very, very high-touch revenue projections for all of these accounts. And so I think we have a much better view of sort of what is on the horizon for each of those major customers. We've also been able to bring on new workloads on many of those customers. And as we're starting to see them ramp we're able to sort of project what the revenue will be like in 2025 there. Of course, we did have a pretty precipitous decline in that customer cohort in the middle or beginning and middle of 2024. And so as we kind of shape past the year-over-year compares for that, then the growth rate – the year-over-year growth rates will start to improve.

Understood. And then on the security business, excluding the true-up, 17% growth is a pretty nice number. It looks like an acceleration versus the past couple of quarters. You have a new DDoS service out. Just any sort of expectations on whether the growth rates that you're seeing, call it, sort of mid to high-teens that should prove sustainable going forward to 2025 and some of the drivers for that? Thank you.

Sure. It's a great question. On the security front, I think the 70% growth rate is okay. But I certainly think we can do better than that. I think the market is actually growing at about that rate. And certainly, we're looking to pick up share here. The portfolio maturity, bringing on fully turnkey reactive DDoS, bringing on a fully capable home ground bot solution has helped really complete the portfolio, and be able – and put us in a position to be able to sell the entire security offering, including a managed service offering there to pretty much every one of our accounts. I don't think we felt the full acceleration of that yet. The go-to-market change, the security specialization, our sales team, the cross-sell incentives, et cetera, are really just starting to take hold. And so certainly, I'm hoping that we'll be able to do better in 2025 than 2024.

We'll go next to Madeline Brooks at Bank of America.

Hi, team. Thanks for taking the question today. I guess I want to ask on the security growth and segment mix a little bit different. If I take this segment contribution from 4Q and just apply it roughly to the fiscal year guide. I think the guide is calling for a majority of the revenues to actually be flat. But more importantly, security growth still continues to look weak. And I'm just comparing that on a year-over-year comp, it's not that difficult. But more importantly, when I look at the space, the space is growing, and there are really only two other players in the space, and they're both larger than you, but also growing faster, which I guess just means that there's still a problem with growth. And I appreciate the packaging and the changes in go-to-market, but it feels like maybe there's other underlying issues as well. And I'm just wondering how you can do better given your smaller size in the market? Thanks.

Yes. Look, I think it's a good question. And I think for sure, we can do better than we're doing. I think, 17% year-over-year growth here is a good result. But I fully believe we can do better than that in 2025. I think the reality here is – number one, we may be smaller, but we are far more focused. We don't participate or build products for the entire market. We only focus on edge delivered security technology that is targeted to the web application and API protection space. And that means we're selling to the web developers, the cloud engineering, platform engineering teams, the same people who buy our observability, our delivery and our compute product line. So we have greater focus and we have a great architectural platform to build on top of. We have the highest-performing edge platform in the world. I think that gives us a real leg up in how we can compete even if we're smaller than some of those competitors. I believe the biggest lever in 2025 for security growth is going to be on the go-to-market focus, expertise, specialization and leadership. We feel really comfortable with the way the portfolio has shaped up now. We’re going to be leaning into that go-to-market motion in 2025.

Got it. And on the security piece as well, do you feel as though there are any additional talent hires you need to make to really drive differentiated change in strategy here to help you meet those goals?

Well, I'll tell you what. I think on the go-to-market side, bringing on great leadership like the new APJ position that we have, that we are searching for right now. I think that will absolutely help us. And there's tons of security opportunity in APJ that just hasn't been tapped yet. But we've made great leadership hires, new Head of our SE organization, new Head of our U.S. enterprise sales, both with security background. I feel pretty good about the way the leadership, our go-to-market leadership is shaping up, especially looking at their security background from Scott on down.

We'll move to our next question from Jeff Van Rhee at Craig-Hallum.

Great. Thanks for taking the question. Just a couple. On the gross margin side and as you look at the push in international markets on the delivery portion of the business, just talk about the vision for international and how long you would expect that to be a drag on the overall gross margins? Or asked differently, just the higher-level picture in terms of the push towards international markets given the lower gross margins you've called out?

Yes. I mean there's a couple of drivers going into that across the year. Certainly exiting 2024 where we did see in a handful of our largest customers greater price declines than we've seen historically. We think that reverses in 2025, which will largely impact favorably 2026 margins. Todd touched on the fact that we have some incremental investments to rapidly bring our capacity to accommodate the Edgio traffic. And then we do see the international traffic as we grow, that becomes a bigger percentage. That headwind largely gets resolved. As that traffic grows, we continue to make improvements in the rates and efficiency of our cost structures internationally. And so I think that works its way through largely in 2025 as that capacity grows.

And on the delivery side, I think you had called out you had your large media customers were unusually focused on profitability and not so much on growth, and that was why we were seeing very challenged bit growth. Just curious how you'd characterize their posture and approach right now?

Yes. You know what, I don't think it's changed too much. I think we found a new normal and maybe a healthier normal for the market in general. And we've taken the correction and now we're sort of back to the growth path, that we'd like to be on. What we're seeing in most of those large accounts is a real opportunity for us to expand the use cases, expand the areas in which they use Fastly and that they bring workloads to our platform, not just in delivery but across the portfolio.

[Operator Instructions] We'll go next to Rishi Jaluria at RBC Capital Markets.

Hi. This is Chris Fountain on for Rishi Jaluria. Thanks for taking my question. Could you share some more details on what drove the decision to evolve the sales incentives as you discussed? And does this decision have any impact on your 2025 guidance philosophy?

I'll leave the guidance philosophy to Ron, but we've spent – we know that the path forward here the best and strongest path forward is to build a more diversified Fastly, not just in customer mix, but in portfolio mix, including the security, compute observability product lines. And so by incentivizing the sales team to drive that, number one, we are incentivizing the cross-sell revenue, which tends to be more efficient for us to acquire, but it also builds, if you build a stickier multi-portfolio, multi-product line customer relationship and a stronger, more diversified revenue base.

On the overall guide, I would say philosophically, we haven't made any real changes to how we look at it. There are a couple of important things in 2025, though. The engagement we have with our largest customer gives a better visibility to their traffic profile and expectations around those customers, which we think reduces some of the volatility that we saw last year. We spoke about how we've addressed some of the volatility around TikTok, particularly around the U.S. So there are particular events that we’ve taken into account. But overall, philosophically, it hasn't changed. We've provided guidance around what the visibility is we have today, taking into account those dynamics.

Got it. Thank you.

And we'll take our next question from James Fish at Piper Sandler.

Hey, guys. Thanks. This is Quinton on for Jim Fish. Todd, maybe for you. The edge computing story seems to be a little bit lost here even though I think as we talk about AI inferencing, it's only increased across the space. So maybe help us understand what you're doing from a go-to-market or messaging perspective to drive adoption of the Fastly compute platform. And then how you're balancing kind of adoption with actual monetization of that platform?

Yes. And I'm sorry, if it seems lost. I feel really bullish about the compute trajectory here, especially the launch of AI Accelerator and our focus on those AI workloads. And how the edge really works in that AI architecture, driving cost savings, driving responsiveness and a low latency more organic feeling interaction. In 2025, I believe the big growth leverage here is going to be on the security side, and maybe that's why we've focused more about it. But I do feel pretty good about where the compute portfolio is. We're seeing significantly increased workloads and demand on the system and some very interesting use cases coming out of the customer base right now.

Got it. That's helpful. And then, Ron, maybe for you digging a little bit deeper into a prior question that was asked. With Edgio customers where you've already had exposure, so kind of shared customers at this point, are you seeing those customers willing to accept a decrease in overall CDN exposure? Or do you expect and have they messaged to you that they will diversify over a kind of medium-term and so this is more of like a near-term bump that may kind of be spread over the longer term. Thanks.

Yes. Yes. No, that's a good question. We have not seen any indications that the departure of Edgio means that they would be looking to sort of replace them with another party in terms of diversifying their overall traffic. I think most of these players are already multi-CDN and they still have a healthy mix of passenger. But there is an opportunity for us to that share that Edgio had to pick up a big piece of that.

And that concludes our Q&A session. I will now turn the conference back over to Todd for closing remarks.

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

And this concludes today's conference call. Thank you for your participation. You may now disconnect.