TAL Education Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 14 speakers on the call.

Operator

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 Third Quarter 2023 Earnings Thank you. And I would now like to turn the conference over to Vern Essie, Investor Relations at Fastly. Please go ahead.

Speaker 1

Thank you, and welcome everyone to our Q3 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 1 year. Also a replay will be available by dialing 800-770-2030 referencing conference ID number 7,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 Related financial tables and investor supplement, all of which are furnished in our 8 ks 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.

Speaker 1

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 ks and Form 10 Q filed with the SEC and our Q3 2023 earnings release and supplement for a discussion of the factors that would 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.

Speaker 1

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.

Speaker 1

Before we begin our prepared comments, please note that we will be attending 3 conferences in the 4th quarter. The RBC Capital Markets 2023 TINT Conference in New York City on November 15, the D. A. Davidson Technology Summit in New York City on November 16, and the UBS Global Technology Conference in Scottsdale, Arizona on November 29. With that, I'll turn the call over to Todd.

Speaker 1

Todd? Thanks, Vern. Hi, everyone, and thanks so

Speaker 2

much for joining us today. First, I will give a quick summary of our financial results and Q3 highlights, And then I will provide an update on our product strategy, go to market and internal transformation before I hand the call off to Ron to discuss our Q3 financial results and guidance in detail. We reported record 3rd quarter revenue of of $127,800,000 which grew 18% year over year and 4% quarter over quarter. This came in at the very high end of our guidance range driven by strong international traffic. This demonstrates continued momentum in our enterprise customer motion as we continue to benefit from vendor consolidation and seasonal strength in streaming activity.

Speaker 2

Our customer retention efforts, a hallmark of our customer satisfaction, were favorable in the 3rd quarter. Our LTM NRR was 114%, down slightly from Q2. Our debner was 120% in the 3rd quarter, down from 123% in Q2 and also slightly down from 122% in Q3 of last year. Our debner continues to demonstrate healthy wallet We're seeing a lot of share gains in our customers as we continue to cross sell more functionality and grow with our customers' ongoing edge traffic requirements. We're starting to see some effects of budget tightening by our customers, but we continue to see strength in customer expansion, especially cross product expansion across the board.

Speaker 2

Our total customer count in the 3rd quarter was 3,102, which increased by 30 customers compared to Q2 and 63 year over year. Enterprise customers totaled 547 in the quarter, a decrease of 4 from Q2 and an increase of 36 year over year. We have 4 new customers make the enterprise $25,000 threshold in the quarter, number dropped to reflect a sequential decline. As we discussed during our Q1 earnings, our newer enterprise customer count methodology will be slightly more volatile. Our average enterprise customer spend was $858,000 up $40,000 quarter over quarter representing a 5% increase as well as an 11% increase year over year.

Speaker 2

These results point to continued wallet share expansion as we've aligned our customer success teams to be more focused on cross product adoption. Also as we work towards platform unification, we've begun focusing on our goal of making customer cross selling and onboarding as simple as a single click for existing customers. This will be a huge shift in the usability and the expandability of our platform and help drive customer retention as well as expansion. I'm excited to share with you that in the Q3 we acquired Domainer, a real time DNS API provider. We brought on board a small team of highly respected DNS experts And paired with the general availability of Certainly, our certificate authority, we have the opportunity to greatly simplify onboarding to the Fastly platform with security and simplification.

Speaker 2

In the Q3, we landed key new logo wins in highly competitive deals. I'm personally very excited about Wendy's, a true lighthouse account in a new vertical for Fastly that opens up a major market opportunity. As our success in e commerce grows to include more and more adjacent verticals such as food delivery, travel and leisure and consumer brands, We see significant potential to accelerate customer acquisition. Continuing our success in security and privacy proxy implementations, We are excited that Mozilla adopted Fastly's oblivious HTTP Relay. Fastly now serves 3 of the top 4 Internet browsers worldwide.

Speaker 2

On thought leadership, we published our 1st threat intelligence report featuring data and insights from Fastly's network learning exchange as well as continued post on Fastly's technical leadership in the constantly evolving world of DDoS exports. As some of you are aware, a couple of CDN providers are in the process of winding down their services and have sold their remaining customer contracts to our competition. This has created a disruptive environment that Fastly is poised to capitalize on, especially as those contracts come up for renewal. Digital Turbine, a leading digital ad provider is a great example and there are many others already engaged with Fastly to find higher levels of service and performance at competitive rates. We are committed to helping them find their next strategic partner.

Speaker 2

If anyone listening recently had their contracts sold, please feel free to reach out. We're seeing this e commerce expansion internationally as well, closing a top New Zealand grocer and an omnichannel retail fashion house in the UK. We saw continued customer acquisition in the Travel Leisure segment and in the Healthcare Life Sciences. We anticipate continued momentum in these expansion verticals as our sales team is now armed with more reference accounts and pre built use cases. This momentum significantly tilts The win probability of the Fastly and gives us a considerable edge with new customers.

Speaker 2

As these new verticals ramp, a diversified traffic load will provide Fastly with Smoother network and compute demand, providing better infrastructure utilization, leading to future margin improvements. Our gross margin was 55.9 percent for the 3rd quarter, representing a 70 basis point decline quarter over quarter, but a 230 basis point increase year over year. I am pleased with the team's efforts controlling our variable cost of revenue and continuing to get more from our infrastructure footprint. For the Q2 in a row, we saw outsized increases in international traffic, which did cause a short term margin headwind. As with last quarter, these will open up opportunities for us to peer more and negotiate our bandwidth costs to lower our total cost of revenue for the future.

Speaker 2

Our operating expenses were $84,000,000 in the quarter, coming in lower than anticipated. Financial discipline and rigor continued to have Hey, verbal results here. Note this result also reflects heavy sales and marketing spend due to one time events and fees. I'm also pleased that we posted another positive adjusted EBITDA quarter, making this our 2nd quarter in a row. Positive EBITDA should be a normal occurrence moving forward, but You'll excuse my enthusiasm just this one last time.

Speaker 2

Ron will explain our outlook and guidance in more detail. But as you can tell from our OpEx spend, we are readying our model to leverage revenue growth and improve our cash flow for next year. During the quarter, we continued to drive our durable innovation engine strategy and have delivered several key pieces of functionality in the market. You can see these in our supplement including KB Store Shipping GA, which enables more powerful edge applications through very high performance of reads and writes Establishes a Fastly certificate authority to provide domain validated TLS certificates and improve the security and reliability of our customer sites. And our Go Compiler SDK provides edge compute developers with a key capability for a highly requested language.

Speaker 2

During the quarter, we hosted Altitude, our user conference in New York City drawing hundreds of worldwide attendees. Most attendees were Customers and prospects, but there were also industry and investor analysts in attendance. I was extremely pleased with the event. It was very well received. Some of the sessions have been viewed thousands of times online following our social media coverage.

Speaker 2

One of the highlights was a demo of simplified service creation, and our new onboarding workflow and dashboard. This demo was so powerful because it showcased Fastly's new ability to provision a global website for best in class, comp. Low latency user experience worldwide, all in 90 seconds. This combination of power and simplicity is near and dear to my heart. And I believe it's key to rapidly increasing customer acquisition of Fastly.

Speaker 2

Please give it a look if you have a chance, it's bookmarked in our events page and in our supplement. There's also been great progress with our packaging motion. We initiated this motion a little less than a year ago and closed our first handful of of Packaging customers in the Q1 of 2023. Since then, the growth has accelerated. In the Q3, the number of customers that signed packaging deals more than doubled quarter over quarter.

Speaker 2

Almost half the packages sold to date have been computing related with almost a third of the customers buying a standalone compute only package. In terms of the overall number of packages sold, more than 25% of our package deals are platform wins with multiple product lines included, demonstrating the ability for packaging to help us drive our platform strategy and expand our offerings beyond CDN. This data gives us great insight into where we can see our efforts and we plan to continue to drive a single platform cross selling motion across our customer base. I'm very excited about this opportunity. As Ron will explain in just a moment, this is having a favorable impact on our RPO as well.

Speaker 2

Moving on to our channel partner development, we are seeing great progress here. Our 2023 deal registration is already triple that of 2022. You'll recall that during our Investor Day in late June, Brett shared with you that we had 33 partners globally engaged. Today, that number totals 55. Our revenue contribution has grown more than 50% in 2023 year to date when compared to all of 2022 and we expect to see this trend continue into 20 24.

Speaker 2

So far, I'm pleased with the progress we're making in 2023. And this is reflected in our updated projections for the year. We raised our annual guidance for both revenue and operating margin and will strive to find ways to outperform that guidance through strong innovation velocity, strategically lowering the friction of our go to market efforts and streamlining our employee experience. Fastly partners with our customers to deliver the best possible end user experience. This focus uniquely positions us where these market needs intersect the Edge Cloud and there is an enormous opportunity in that intersection.

Speaker 2

The future user experience is fast, safe and engaging without compromise. Organizations spend too much time building best in class digital experiences only to see the value of that effort lost by having to compromise between performance, safety and personalization. This represents a clear architectural opportunity for Fastly. The solution has to be built on the edge and it has to leverage all the benefits of our best in class edge cloud platform, Thank you so much. And now to discuss the financial details of the quarter and guidance, I'll turn the call over to Ron.

Speaker 2

Ron?

Speaker 3

Thank you, Todd, and thanks everyone for joining us today. I'll discuss our business metric 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 Q3 increased 18% year over year to $127,800,000 coming in at the top end of our guidance of $125,000,000 to $128,000,000 Revenue from Signal Sciences products was 14% of revenue, a 33% year over year increase or 31% increase excluding the impact of purchase price adjustments related to deferred revenue. Also note that we calculate gross rates off of the actual results with the percentage of revenue routed to the nearest whole percent.

Speaker 3

In the Q3, we saw traffic expansion at our major customers as well as strong upsell and cross sell activity. Our trailing 12 month net retention rate was 114%, down from 116% in the prior quarter and 118% in the year ago quarter. We continue to experience very low churn and our customer retention dynamics remain strong. Turning to RPO, as I discussed last quarter, our consumption based Revenue model is now being augmented with predictable revenue packages. For the Q3, our RPO was $248,000,000 up 7% from $231,000,000 in the Q2 of 2023 and up 43% from $173,000,000 in the Q3 of 2022.

Speaker 3

As Todd shared, We had 3,102 customers at the end of Q3, of which 547 were classified as enterprise, A net decrease of 4 compared to an increase of 11 in the second quarter. As a reminder, we changed our calculation of enterprise customers year to customers with an annualized revenue run rate of $100,000 or $25,000 in the current quarter, which results in more quarter to quarter volatility than the previous 12 months trailing $100,000 definition. Using our prior methodology, enterprise customer count increased by 10 customers in the 3rd quarter to 530 compared to an increase of 6 in the prior quarter. Enterprise customers accounted for 92% of total revenue on an annualized in both Q3 and Q2. And enterprise customer average spend was 858,000 up 5% from $818,000 in the previous quarter and up 11% from $771,000 in Q3 of last year.

Speaker 3

Our top 10 customers comprised 40% of our total revenues in the Q3 of 2023, an increase from the 37% contribution in Q2 2023, reflecting in part the impact of vendor consolidation and expansion of our traffic at some of our largest customers, which also drove one customer to account for 12% of revenue in the 3rd quarter. I'll now turn to the rest of our financial results for the Q3. Our gross margin was 55.9% compared to 56.6% in the Q2 of 2023, slightly above our expectation of a 100 basis point sequential decline. We saw increased bandwidth costs from higher than expected growth in traffic from customers outside the U. S.

Speaker 3

And EU, which was partially offset by reductions in our other variable and fixed costs of revenue. As we've discussed, In 2022, we implemented new and more robust network capacity planning to better align network capacity investments with our expected traffic demand. These steps have driven significant reductions to our cash CapEx investment as a percentage of revenue, which declined from 14% in 2021 to a current range of 6% to 8%. As part of this capacity planning, we identified approximately $4,300,000 of hardware, software and related commitments primarily acquired or committed to in 2021 that are in excess of our requirements. We recorded an impairment charge for $4,300,000 in Q3 to reserve for this excess equipment and commitment.

Speaker 3

We excluded the impact of this charge in our non GAAP results. Operating expenses were $84,000,000 in the 3rd quarter, an 8% increase compared to Q3 2022 and up 9% sequentially from the Q2.

Speaker 1

A portion of this growth was

Speaker 3

a tax benefit of 3 point $4,000,000 recorded in the 2nd quarter that did not recur in Q3 and one time marketing expenses related to events and fees in addition to our normal investments in R and D and sales and marketing. The benefits from our continued focus on cost discipline and financial rigor offset these investments, resulting in OpEx coming in slightly below our expectations. This favorability Combined with revenue at the upper end of our guidance range and gross margin slightly ahead of expectations resulted in an operating loss of $12,600,000 exceeding the high end of our operating loss guidance range of $15,000,000 to $13,000,000 Our net loss in the 3rd quarter was $8,000,000 or of $15,800,000 and a $0.14 loss per basic and diluted share in Q3 2022. I'm pleased to report that our adjusted EBITDA was positive in the 3rd quarter coming in at $700,000 compared to negative $9,100,000 in Q3 2022. Turning to the balance sheet, We ended the quarter with approximately $461,000,000 in cash, cash equivalents, marketable securities and investments, including those classified as long term.

Speaker 3

Our free cash flow for the Q3 was negative $19,700,000 a $27,000,000 sequential decrease from positive $7,800,000 in the 2nd quarter. This decrease was primarily driven by changes in working capital and lower operating margins as compared to Q2, which benefited from the aforementioned non recurring sales and use tax refund of $3,400,000 Our cash capital expenditures were approximately 4% of revenue in the 3rd quarter, below the low end of our outlook of 6 to 8% of revenue for 2023. We expect to accelerate the purchase of certain hardware in the Q4 for deployment in 2024, which will drive our annual CapEx for 2023 as a percentage of revenue to the high end of our 6% to 8% range. As this demonstrates, We expect to continue to see quarterly fluctuations in the timing of our capital expenditures, but for them to align with our range on an annual basis. As a reminder, our cash capital expenditures include capitalized internal use software.

Speaker 3

I I will now discuss our outlook for the Q4 and full year 2023. I'd like to remind everyone again that the following statements are based on and current expectations as of today and include forward looking statements. Actual results may differ materially. We undertake no obligation to update these forward looking statements in the future except as required by law. Our Q4 and full year 2023 outlook reflect our continued ability to deliver strong top line growth via improved customer acquisition, upsell and cross sell expansion in our existing customers, Driven in part by new and enhanced products, our revenue guidance is based on the visibility that we have today.

Speaker 3

Historically, our revenue experience is sequential growth in the second half that accelerates into the 4th quarter. For the Q4, we expect revenue in the range of $137,000,000 to $141,000,000 representing 16% annual growth and 9% sequential growth at the midpoint. As we shared on our previous calls, we saw some increase in price declines in the first half as a result of winning additional traffic from a major customer. As we entered the second half of twenty twenty three, we experienced increased traffic in international markets where we saw favorable pricing. As a result, our pricing trajectory was more favorable than its normal course and we expect that to continue for the remainder of 2023.

Speaker 3

And recall that normal reductions in our bandwidth costs and ongoing network optimization, combined with increasing traffic into our fixed cost base typically offset our pricing decline. Looking more closely into these dynamics on the cost side, in the second half of twenty twenty three, we saw a larger increase than previously expected in traffic from customers outside the U. S. And EU markets. Within these markets, our bandwidth costs today are higher than those in the U.

Speaker 3

S. And EU markets and has had a modest adverse impact on our gross margins. While this increased traffic gives us the opportunity to renegotiate our bandwidth rates and increase peering, Reducing costs for all customers in these regions, it will have a modest near term impact on gross margins while we complete these negotiations. We continue to be very disciplined in our network investment and cost of revenues, which contributed to our 3rd quarter gross margins being approximately 30 basis points better than we initially expected. For the Q4, we now anticipate our gross margins will increase approximately 100 basis points relative to the Q3 plus or minus 50 basis points.

Speaker 3

As we mentioned previously, Our Q3 operating loss was moderately better than our earlier expectations as our continued cost controls offset increased seasonal spending in marketing. For the Q4, we will see the benefit of increased revenue as we continue our cost control efforts. As a result, For the Q4, we expect our non GAAP operating loss to decrease by approximately $3,000,000 to $7,000,000 to $10,000,000 to $6,000,000 and our non GAAP loss to be $0.05 to $0.01 per share. We reported nominally positive EBITDA in our Q3 and expect our adjusted EBITDA to remain positive and to improve materially in the Q4. For calendar year 2023, we are raising the midpoint of our revenue guidance from a range of $500,000,000 to $510,000,000 to a range of $505,000,000 to $509,000,000 This increase represents 17% annual growth at the midpoint.

Speaker 3

We expect our non GAAP operating loss to improve to a range of $44,000,000 to $40,000,000 reflecting an operating margin of negative 8% at the midpoint, which compares favorably to our prior guide of negative 9% at the midpoint and our operating margin of negative 18% in 2022. We expect our non GAAP net loss per share to improve to $0.23 to $0.19 reflecting the improvement in our operating loss expectations compared to our prior range of a net loss per share of $0.27 to $0.21 And we expect our adjusted EBITDA for calendar year 2023 to be positive compared to negative $32,900,000 in 2022. Before we open the line for questions, we'd like to thank you for your interest and your support in Fastly. Operator?

Operator

Thank We will take our first question from Frank Louthan with Raymond James. Your line is open.

Speaker 4

Great. Thank you. Just Following up

Speaker 3

on the guidance, any change to the longer term metrics you gave at the Analyst Day, particularly the free cash flow guide from 2024. And then to follow-up on the OpEx declines, how much further can

Speaker 4

that can we see that decline

Speaker 3

and what sort of a good run rate for that going forward? Thanks. Yes. I think if you look at the sort of outlook, particularly with respect to cash flow that we gave back on the Investor Day, That is still intact. If we look toward 2024 on our cash flow basis, we would look to be breakeven ish on a cash basis.

Speaker 5

On the OpEx side, I'm pretty happy with the cost control across the Company right now. But I'll tell you, we've got we still have some significant benefits here. I mean, it takes a while to Unravel long term SaaS contracts and commitments. We're still seeing that. We're still reaping the benefits there.

Speaker 5

And we've done I think a pretty good job of putting business model rubrics in place to control the headcount and control the operating models for our teams so that going forward, we don't expect And I think that's going to be the key for us.

Speaker 3

All right, great. All right, thank you.

Operator

And we will take our next question from Jonathan Ho with William Blair. Your line is open.

Speaker 6

Hi, good afternoon. Just wanted to get a little bit more color on what you're seeing in terms of the spending environment and some of the budget tightening comp.

Speaker 5

Yes, it's super interesting. We're seeing we see budget tightening in some of our conference. That leads to that can lead to vendor consolidation. They don't want to manage as many vendors. That tends to be good news for us, because As the performance leader in almost all of those deals, they tend to want Fastly to be part of their solution, even if they stick with a multi vendor play.

Speaker 5

There are some cases where we've seen deals taking a little longer to close as more approvals are needed. I think that might be the nature of the current economic environment that we're in. And we haven't seen those deals dissolve. We've seen them take a Slightly longer than usual, but we're tracking that very carefully. Kind of I might have a little bit more interesting information next quarter on it, But we haven't really been too worried about it so far, but we're noticing something.

Speaker 5

Got it. And just as

Speaker 6

a follow-up, How should we think about where you're growing in terms of the international markets? Is there a way for you to maybe help us understand what market Is there a specific vertical that you're seeing traction internationally? And how long does it sort of take for some of these contract negotiations to take. Thank you.

Speaker 5

Sure. We see we've been pushing on our international go to market for sure. And that drives local business with local traffic in those expanding regions for us. But What is interesting and what is causing some of our models to shift a tiny bit is we've got large multinationals Who are successfully penetrating new regions themselves and they're using Fastly to partner to deliver that content. We see it in media largely.

Speaker 5

And I think it's really good news. It's helping us Grow into those markets and modernize our infrastructure and our or I should say, mature our infrastructure. And that's what leads to those contract negotiations because with more traffic, we're able to negotiate and peer more effectively in those regions and that improves the margin for all of our traffic In that region, not just the multinationals, but the local traffic as well. It can take us a little bit quarter, But more likely probably 6 months. It doesn't take a full year generally speaking because those contracts have a much tighter turn on renegotiation.

Operator

We will take our next question from James Fish with Piper Sandler. Your line is open.

Speaker 7

Hey guys, nice quarter here. Todd, maybe for you, Channel partner deal registration up 3 times year to date. Can you just talk about what those channel partners are leading with between delivery that tends to be more self serve versus security, understanding you gave some of those metrics there. And really the crux is kind of what kind of economics you're seeing versus the Traditional Fastly model and then I've got a follow-up for Ron.

Speaker 5

Yes, no worries. Our partner community has largely historically been around the security business and we're starting to see that branch out from just security to them being able to operate across the portfolio, which is awesome. And that's been UHIC Health, Especially new partners that we're bringing on board, they're capable of operating and in some cases have a much broader expertise. And that's why for me, The jump of partners in the program up to 55 really matters. I think that is a broadening of the expertise of our partner community.

Speaker 5

And I think we'll also help customers who engage with those partners onboard faster, which is an important metric to our business. And the other thing is just on the geographic side. We've got our traditional Partner Program before the revamp was really heavily focused in the U. S. We're seeing it start to ramp up outside of the U.

Speaker 5

S. And that's helping quite a bit. And I should say the partnership with the cloud providers helps that move a little faster. In some cases, it's easier for partners to onboard because they're already operating through a cloud marketplace and that is a nice synergy for them and it's valuable for us as well, it lowers our operating costs.

Speaker 7

Got it. And not surprised to see the top 10 up, just you guys own the relationships with those top 10 customers and it's a bit of a double edged sword, especially as you think about the history of this space. So I guess how are you guys trying to mitigate some of that risk Around those top 10 customers, are you looking to sign those customers for longer contracts? And also, Ron, any puts and takes on 24 to think about understanding you're not going to guide here for it specifically, but especially as we start to think about how this packaging can kind of impact growth rates moving forward? Thanks.

Speaker 5

I'll tell you, I'm proud of the growth in the top 10 accounts and we take that very seriously at Fastly. The largest, the most sophisticated users of this tech, they trust Fastly and they're leaning into the platform more and more strategically, which is a good thing. The only way that I look to combat that is through enterprise customer acquisition, especially large strategic customers. I have we love engaging with those large customers. I have no interest in doing anything but growing those accounts as fast as we can And adding more and more technology to those partnerships.

Speaker 5

But it's a long term mitigation that has to come through customer acquisition, especially differentiated vertical customer acquisition and that's why we're so focused on that. That's why we mentioned some of the expansion verticals, especially e commerce expansion verticals that we're focused on.

Speaker 3

Yes. I think looking to 2024, I mean, we haven't really shared our 2024 guidance. We talked a little bit about Some of the cash flow expectations are at Investor Day. We will share that as we've historically done on our Q4 call in February. I think what I would say is, I think we're excited about the progress to date.

Speaker 3

We continue to believe in our ability to outperform the market continuing into 2024.

Speaker 5

Thanks guys. Thanks. We will

Operator

take our next question from Rishi Jaluria with RBC Capital Markets. Your line is open.

Speaker 8

Hey, this is Richard Polin on for Rishi Jaluria. Thanks for taking my question. So I guess first one, just any sense for how much Of that top 10 account expansion was on the traffic side versus a cross sell of the broader portfolio, maybe getting more security products in there, just any color around kind of the breakdown of that?

Speaker 5

It is a good question. We don't disclose it, although we do track it. The peak in international traffic that came from the large multinationals, that's largely traffic expansion. But there are new use cases being added with those folks all the time. I guess it's hard for us to Disclosed details on that.

Speaker 5

Maybe we'll look and see if there's something that we can share in the longer term. Anything you'd

Speaker 9

add there? I mean, the only

Speaker 3

thing I'd add, I think as you look That growth, I mean vendor consolidation that we saw at one of our largest customers clearly was a contributor in that concentration. I think as I said earlier, I think as we look forward to the benefits from some of the sales and marketing, the packaging and the channel, if that accelerates new customer acquisition, Yes, that should be a counter motion to the expansion we're going to continue to see, particularly our largest customers that you see in that top ten number.

Speaker 8

Thank you. That's very helpful. And then just a quick follow-up on the security portfolio. I think if I recall correctly, the bot management solution was still in beta as of last quarter. So any update there and just kind of how The progress of the expansion of the security portfolios, Connor?

Speaker 8

Thanks.

Speaker 5

Yes, that's great. Our bot product is We have like a very large number of folks on the beta. It's going limited availability this quarter. I hope to actually be able to close some deals on it this quarter And then GA in the first half. We've had an amazing success.

Speaker 5

I've been really happy with how many customers have leaned in to the beta and are helping us really co develop that solution. And we've got one more feature To check off and it'll become available to customers and to our sales team to start closing deals. So I'm super excited about that. We're also looking at a couple of other important areas on the security side. Our productization of the potential productization, I should say, deeper DDoS analytics, visualization and services as well as deeper feature set in API security.

Speaker 5

It's become really clear to us that the buyer in this space that's looking for strategic edge partner in CDN, security, edge compute, etcetera, They're looking for a suite, a security suite that includes bot, DDoS, next gen WAF and API security and We plan on pushing hard on all of those components.

Speaker 8

Awesome. Very helpful, Todd. Thank you.

Speaker 5

Great.

Operator

We'll take our next question from Will Power with Baird. Your line is open.

Speaker 9

Okay, great. Thanks. Yes, I guess a couple. Maybe just starting on competition. I mean, you kind of noted and I guess we've seen a couple of smaller players Selling off contracts and I guess exiting the business.

Speaker 9

I just wanted more broadly kind of what you're seeing from a pricing environment, at least in the U. S, it sounds like International pricing is helping probably overall, but just any kind of color as to kind of how the competitive environment is looking today?

Speaker 3

Yes. I think from a pricing perspective, as we said, the international mix, we do have slightly favorable pricing relative to kind of the major markets in the U. S. And EU. And that really provided, if you will, some strength kind of in the quarter to quarter pricing.

Speaker 3

I'd say generally in the U. S, the trend has been generally in line with our long term trend. We Did have some deceleration in the first half from some of the vendor consolidation. And I would say outside of that international or if you look at it by market, It's generally been a return to more of those long term trends. We haven't seen any acceleration, And we still see a good pricing environment, I think, at this point across the industry.

Speaker 9

Okay. And then I guess, Ron, just on the gross margin comments, it sounds like some headwinds just given international traffic in Q4. But how would you kind of frame up how to think about gross margin progression next year? I mean, I know you've generally been expecting it to rise, but how quickly do you get kind of international kind of behind you and back kind of maybe on the targets where you were?

Speaker 3

Yes. I think if you look at kind of that timeline, I mean, I think the medium to long term gross margin dynamics are still intact. And I think the 80% gross margin that we had mentioned at the Investor Day in that medium to long term, our incremental gross margins are intact. I think if you look at that gross incremental gross margins that we've seen, the last four quarters have been above 60% Compared to the teens kind of in early 2020, I think as we go through that contract negotiations, that's probably a couple of quarters work. I think we generally In 2024, address most of those headwinds and get back to that medium to long term

Operator

We will take our next question from Tim Horan with Oppenheimer. Your line is open.

Speaker 10

Thanks guys. Can you talk a little bit about the Q2 products? What customers are using it for and why are they using you? And any color when that kind of starts to move the revenue needle? Thanks.

Speaker 1

We missed the first part of that. Could you repeat the question?

Speaker 3

Yes, I apologize.

Speaker 10

Can you talk about which compute products Your customers are using, what are they using it for and why are they using you guys? And when do you

Speaker 5

guys Yes.

Speaker 2

It might move in the queue? Thank you.

Speaker 5

Yes, great question. The customer we track our compute business on customer acquisition. People tend to come To Fastly, because we are really delivering freedom to developers, especially with a technology called WASM that allows them to comp. Compiler own language and running on the Fastly platform. You saw there was a release, I think it's in the supplement of our Go SDK.

Speaker 5

And I think that gives you a real sense of supporting languages that developers are that are top of mind for developers that give them the freedom to go and build serverless components at the edge. The second thing is people come in the Fastly to deliver use cases that are already proven out and that's a big deal, Especially around personalization, shopping cart management, content recommendation, etcetera. That's been really A big push there. And from a vertical point of view, there's a very strong focus from high-tech companies who are They tend to be the most sophisticated. They tend to get be able to get a lot out of it very quickly, especially with pretty mature documentation and developer enablement from Fastly, In part, thanks to the Glitch acquisition.

Speaker 5

And I think that's what brings folks to the Fastly program. It's really an organic developer first motion. I plan on tracking this business largely in customer acquisition through next year as it's still truly in incubation, but I think we're going to start to see it hit the In some material way, hit the revenue line and I hope by the tail end of 'twenty four and 'twenty five, but we'll see.

Speaker 10

Great. And can you just give us some kind of revenue breakdown now if possible like on media delivery or application delivery or any other color would be great?

Speaker 3

Yes. We haven't provided that breakdown between media and other delivery across the verticals in our revenue breakdown. Sorry

Speaker 5

about that.

Speaker 3

Okay. Thanks.

Operator

We will take our next question from Rudy Kessinger with D. A. Davidson, your line is open.

Speaker 4

Hey, great. Thanks for taking my questions, guys. I guess Just with those smaller CDN players exiting the business in the quarter, did you pick up any material business from the smaller players that exit?

Speaker 5

We do pick up we've seen a few already move over and we've got quite a few additionally already in the pipeline. Those folks have contracts. And so what really I think the real pattern here is that As their contracts come due, they tend to stick their head up and make a new vendor selection. That's really good news for us. We saw with Digital Turbine those guys, pretty sophisticated group, they were able to move quickly.

Speaker 5

I'm hoping that we're going to see more of that Really Q4 and Q1 on the new customer acquisition side.

Speaker 4

Got it. And then Just general traffic growth trends across the board, anything to call out, any material changes or just how is general traffic trend traffic growth trending?

Speaker 5

Traffic trends pretty had been sort of interesting.

Speaker 2

There have been a lot of interesting events. We're starting to see the

Speaker 5

seasonal Sporting event trends, we even saw some peaks from content drops Some of the streaming platforms, I think it's fairly close to what we were expecting with the addition of Some of the international some additional volume on the international side. Yes.

Speaker 3

Yes. I think the normal seasonal uptick we start The easy exit Q3, we're continuing to see this year.

Speaker 4

Got it. Great. Thanks for taking my questions and congrats on the numbers.

Speaker 5

Thanks. Thank you.

Operator

We will take our next question from Fatima Boolani with Citi. Your line is open.

Speaker 11

Hi, good afternoon. Thank you for taking my questions. Ron, maybe these are for you. First thing, Over the course of this year, you all have been very intentional about managing your installed base and sort of pruning the less economical or lower LTV type customers in your base and that's been pretty obvious. I'm curious if you can comment on if you're sort of through the halfway point or towards the end of that process such that we can start seeing some of the robust growth in that metric?

Speaker 11

And then just a quick follow-up on some of the contract negotiations that you are foreshadowing for next year.

Speaker 5

Sorry, just to clarify, when you say pruning customers in the LTV space, what do you mean?

Speaker 11

Just in terms of managing the installed base for higher quality customers, just wanted to get a sense of How far down the path are you that your current installed base is high value, high penetration opportunity versus some of the customers that you might have parted ways with over the course of the year. Just wanted to get a sense of where you are in that process and is it mostly sort of done? Are you done pruning.

Speaker 5

Got it. I'll just clarify that we haven't pruned any customers Intentionally and largely the way that our business runs and the way our infrastructure It's built and is able to organically serve customers. I think it's pretty hard. I mean, it's very rare that we would find a customer That would be not a great fit. When we occasionally have a I need to point to customer, the only times I can think of that happening are on terms of use and community guidelines.

Speaker 5

Infrastructure at Fastly allows for us to have very efficient Delivery, especially very efficient delivery of incremental traffic. And so we don't we haven't done any pruning. I absolutely don't intend to. I do believe we have an opportunity to increase the margin by changing the traffic Signature of our total customer base. But the only way that we're the only thing we're pursuing to do that is Focusing on differentiating the verticals that we serve so that the traffic load will be more balanced across type of day as well as the type of traffic load and working hard to drive our customer acquisition motion into regions where we've got, where we have good And so as far as improving the traffic mix on the platform, we certainly do that.

Speaker 5

We certainly have shifted our focus, but All of that focus is on the customer acquisition side, not on the pruning side.

Speaker 11

Understood. I appreciate that. And Ron, I appreciate you're in the planning phases of 2024 right now. But some of the contract negotiations that you're Again, foreshadowing for 2024 that you're going to be addressing, can you give us a little bit of a flavor as to how big these body of contracts is going to be, any high level thoughts on if these contracts maybe concentrated with some of your largest customers and any seasonality commentary at high level you can share with us that would be really great as

Speaker 3

Yes. I mean, I think starting with the seasonality, I think what we're certainly seeing this year is Fairly consistent seasonal patterns. As we work through Q3, we started to see an increase in traffic. We expect us to continue to see that Accelerate in Q4. I think it's reflected in our guidance.

Speaker 3

I think as you look to 2024 from seasonality, I think, again, we expect The typical seasonal patterns to continue, Q1 typically is flat to down a few percentage points. We would expect that to continue into 2024. I think as you look to kind of customer acquisition, I think, Again, there's really two motions that we have that are driving that. There's the expansion and the cross selling opportunity in our largest customers and we We continue to be really successful at that, particularly when we see vendor consolidation and we're, there are multiple vendors. We, Because of our performance, gained share and are able to cross sell additional products into those customers.

Speaker 3

And then our new customer Your acquisition engine with a lot of the work we're doing across packages, as well as the channel, We really expect that to sort of drive an acceleration in new customers in 2024. So I think you're going to see both of those motions Driving the performance in 2024, both the expansion of Ocean, which we've consistently done well and The new activity is really driving acceleration of new customer.

Operator

And we will take our next question from Tom Blakey with KeyBanc Capital Markets. Your line is open.

Speaker 12

Hey, guys. Thanks for squeezing me in here. I just perfect setup there. Ron, in terms of the channel, you discussed some highlights in your press release Good morning or this afternoon. Any color, Todd, you want to provide for us so we can check the sustainability here?

Speaker 12

What are the biggest changes that you've implemented in terms of this dynamic growth you're seeing of late? And I have a follow-up for Rob.

Speaker 5

Yes, I think look, it is still early days. I hope to have 100 of partners driving business for Fastly and more importantly delivering services that allow our customers to move more quickly to adopt Fastly technology More rapidly. I'd say from a trend point of view,

Speaker 2

I just think it's an

Speaker 5

underserved space. There's a lot of systems integrators with high software specialty. They're working very closely with Teams that are building out digital experiences and they haven't had the ability to partner closely with And so we've had good Reception to this new partner program, we'll be looking and reviewing it for next year to see ways to make it better. But So far for me, the trends are what I want to see. This is moving in the right direction, but I would say for sure, Partner acquisition and deal ready philosophy are trending in the right direction, but for sure we're planning to ramp them hard in 2024.

Speaker 12

Does that include just quick follow-up before I ask Ron a question. Does that include like enterprise caliber customers? And what are their why is this Kind of growth unique to Fastly and what are the incentives, Todd? Sorry, just a lot of growth here and a big opportunity. And typically, CDN doesn't You'll benefit from the channel.

Speaker 5

Yes. And I really think that's an artifact Just the way the first few entrants into this product space have operated. I think looking at the market now, there's so much Software spend that's already going through the cloud marketplaces, systems integration know how to operate that and operationalize deals big and small Through those systems and direct to vendors, we offer both options. For me, there's one other twist, which is the ability the flexibility in that channel program matters. These our channel partners can operate in a traditional Channel sales motion, but also in an agency model.

Speaker 5

That flexibility matters and the way that we've operationalized that I think It's important. We're also engaging with partners who are really on the technology consulting side for the first time. And those engagements, although it's early days, I think have a lot of potential upside as well. And those are like technology consultants largely. But I guess my point of view and I think this will play out in the next 12 months is that this is just an underserved part of the And by focusing here, we have an opportunity to gain the attention of the channel community.

Speaker 12

Very helpful. And then Ron, on the 50% channel revenue growth, just all the requisite questions there. Over what period of time, what percentage of revenue here, even if it's a range and where you kind of expect that to head in the coming year or 2? That'd be helpful. Thanks, guys.

Speaker 3

This is to present channel growth.

Speaker 12

You talked about revenue channel growth, you're just over what period of time is that?

Speaker 3

It's programmed to date year over year.

Speaker 12

Okay. And where are we in terms of a percentage of revenue? Where do you expect that to go? Todd kind of spoke positively there. Is that obviously going to increase just To give us some like level set here would be helpful.

Speaker 12

Yes.

Speaker 5

So I think what I

Speaker 3

would say is, we haven't given the specific percentage of revenue, but we do expect To continue to grow as a percentage of revenue, I think in terms of really gaining traction and being a contributor, We see that really gaining traction in 2024. A lot of the work, sign ups and deal reg happened this year. We expect to see that grow As a contributor to our overall revenue in 2024.

Speaker 12

Great. Thank you.

Operator

And we'll take our final questions from Madelyn Brooks with Bank of America. Your line is open.

Speaker 13

Hey, team. Thanks so much for taking the question. Just a Quick one from me here. It looks like from an edge compute standpoint, you've got a lot of positive signals with the packaging motion. So just want to marry that quickly to the budget comments and the landscape you guys are seeing with the slight weakness.

Speaker 13

And just want to know and apologies if this has been asked jumping through a few calls, but Why do you think of paying Fastly now versus other companies earlier? And can you call out any specific areas that's impacted more versus last. Thanks so much.

Speaker 5

Sure. On the compute side, I feel like the momentum is really good for us right now. I feel like You do need a critical amount of feature set and functionality before developers can really Reach the outcomes that they care about running their services at higher costs, dramatically improving performance and user experience, being able to build sustainable solutions And pull the appropriate workloads from their core into an edge serverless environment that will have the kind of performance, the kind of user experience improvement that they want. And I think we're getting we're starting to hit our stride, which is great.

Speaker 2

I think we have opportunity here

Speaker 5

on the product side as well and not to I think we can simplify our offering and make it even easier for our customers to onboard and understand all the Conference. So I'm not to say that we've arrived. We're going to be on this journey for quite a while. Your second question was around the belt tightening comment in the opening. Is that correct?

Speaker 13

Yes, that's correct.

Speaker 5

Yes. I guess we may have briefly mentioned it already. I think what we're seeing as our customers' budgets, just feel a little pinch to them, that certainly drives Vendor consolidation, that tends to be good thing for us as the performance leader. We tend to fare well in those engagements. We do see a little bit of So missing the deals as vendor changes when customers are leaving, some of our competitors that come into Fastly, Changes in contracts are just getting more scrutiny, requiring more sign offs and that can delay some deals.

Speaker 5

So we've seen a few deals that have Taking a little longer to close than we'd like, but we'll see I think I mentioned this earlier, like I think We might have more of a complete perspective of that next quarter.

Speaker 13

Got it. And sorry, just to quickly clarify that, Todd. So Is it fair to say the deals have elongated, but close rates have remained stable throughout this quarter?

Speaker 5

Yes. Well, we track a few we track Very carefully key deals in the quarter and we saw a few of them slip a few weeks, nothing material. I mean, some of these are 6 months Engagements and we saw them slip a few weeks and that yes, that slip is largely due to additional approvals that are needed. I'd say it's anecdotal, but we'll be tracking it closely. So I might have better data for you next year next quarter.

Speaker 13

Got it. Thanks so much. Nice quarter.

Speaker 5

Great. Thank you.

Operator

And that concludes our question and answer session. I will now I'll turn the call back to Mr. Todd Nightingale for closing remarks.

Speaker 2

Thank you so much. I I do want

Speaker 5

to take a minute to thank our employees, our customers, partners and investors. Moving forward, we will continue to remain focused on Of course, there's plenty of work to do, but I believe digital experiences will drive the mission and define the success of almost every organization everywhere and Fastly We'll have a significant impact on the way digital experiences are built and delivered around the world. Our customers have a real passion for Fastly solutions and employees have a real enthusiasm for our mission to make the Internet a better place where all experiences are fast, safe and Engaging. Thank you so much for the time today.

Operator

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

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Earnings Conference Call
Inhibrx Q3 2023
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