Fastly, Inc.

My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Fastly fourth quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star 1 once again. Thank you, Vern Essie, Investor Relations at Fastly. Please go ahead with your conference.

Thank you, and welcome, everyone, to our fourth quarter and full year 2022 earnings conference call. We have Fastly's CEO, Todd Nightingale, and CFO, Ron Kisling, with us today. The webcast of this call can be accessed through our website, Fastly.com, and will be archived for one year. Also, a replay will be available by dialing 800-770-2030 and referencing conference ID number 754-3239 shortly after the conclusion of today's call. A copy of today's earnings press release, related financial tables, and investor supplement, all of which are furnished in our AK filing today, can be found in the investor relations portion of FASB's website. During this call, we will make forward-looking statements. including statements related to the expected performance of our business, future financial results, strategy, long-term growth, and overall future prospects. These statements are subject to known and unknown risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected or implied during the call. For further information regarding risk factors for our business, please refer to our most recent quarterly report on Form 10-Q, filed with the SEC, and our fourth quarter 2022 earnings release and supplement, for discussion of the factors that could cause our results to differ. Please refer in particular to the sections entitled Risk Factors. We encourage you to read these documents. Also note that the forward-looking statements on this call are based on information available to us as of today's date. We undertake no obligation to update any forward-looking statements except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Unless otherwise noted, all numbers we discuss today, other than revenue, will be on an adjusted non-GAAP basis. Reconciliations to the most directly comparable GAAP financial measures are provided in the earnings release and supplement on our investor relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Before we begin our prepared comments, please note that we will be attending two conferences in the first quarter. the Raymond James 44th Annual Institutional Investor Conference in Orlando on March 6th, and the Morgan Stanley Technology, Media, and Telecom Conference in San Francisco on March 8th. And also mark your calendars for our Investor Day, taking place on June 22nd at the New York Stock Exchange. With that, I'll turn the call over to Todd.

Todd? Thanks, Vern. Hi, everyone, and thanks so much for joining us today. First, I will give a quick summary of our financial results and fourth quarter highlights, and then provide a brief update on our product strategy and go to market motion. I will then hand the call over to Ron to discuss the fourth quarter and annual financial results and guidance in detail. We reported record fourth quarter revenue of $119.3 million, which grew 22% year over year and 10% quarter over quarter. Included in this revenue is a $3.3 million take or pay true up payment, materially above a similar $973,000 true-up payment from Q4 of last year. Correcting for these non-recurring payments, our revenue would have been $116.1 million, growing 20% year over year. We reported 2022 revenue of $433 million, up 22% year over year. I'd like to congratulate the FASA team on closing out a strong Q4. However, as I said last quarter, I still believe there remains an opportunity for us to outperform this level in 2023 and beyond. Our customer retention and growth engine remains strong. Our LTNNRR was 119% in the fourth quarter, up from 118% in Q3, and our debner was 123% in the fourth quarter, up from 122% in Q3. Our average enterprise customer spend was $782,000, representing a 3% quarter-over-quarter increase and continues to demonstrate the success of Fastly's land and expand approach and strategic accounts. In the fourth quarter, we saw continued momentum in our portfolio expansion strategy with strong cross-selling activity, just as we discussed last quarter, and had multiple follow-on sales for our next-gen last technology. In addition, we had multiple new logo wins for this product at the standalone sale. We anticipate over time having the opportunity to sell these customers our network service delivery, as well as our edge compute and observability features. I'm also excited to share with you that we're gaining traction across multiple verticals. The fourth quarter marked six new logo wins in travel and leisure, a vertical that is more and more focused on the digital user experience. This is highlighted by one of the world's largest corporate travel management platforms moving to Fastly. We complemented this with four new logo wins in healthcare and life sciences, highlighted by our first win at McKesson. Our total customer count in the fourth quarter was 2,958, which increased by 33 customers compared to Q3. Enterprise customers totaled 493 in the quarter, an increase of 11 compared to Q3. Our gross margin was 57% for the fourth quarter, representing a 340 basis point improvement quarter over quarter. I am very pleased with this outcome, and I believe it underscores our new cost control rigor and discipline. We found savings with continued increases in peering and improvements in network optimization, coupled with improved hardware maintenance costs. We will continue to be focused on margin improvement through 2023. In the quarter, we were also able to reduce our hardware purchase commitments by over $10 million, reflecting our increased platform efficiency at a cost of $2 million. This $2 million cancellation charge impacted our cost of revenue this quarter, but we believe it will support our margin improvement trajectory moving forward and reduce our cash spent. Excluding the impact of this $2 million payment and the take or pay true up payment I discussed earlier, Our gross margin would have been 57.5% in Q4, increasing 390 basis points from 53.6% in Q3. During the quarter, we continued to drive our durable innovation strategy and release powerful, important technology to our customer base in all of our product lines. A selection of them are listed in our investor supplement for your reference, and a few highlights include... one we achieve pci certification as a level one service provider expanding our e-commerce customer reach and making it easier for e-commerce customers to onboard fastly two our javascript sdk for computed edge went ga offering unmatched initialization performance further differentiating the ability for fastly to provide among the fastest load times in the industry we believe this is a big step forward for developer adoption three Our Fastly Next-Gen WAF now supports automated provisioning and management via Terraform for our cloud-based deployment option. And four, as we continue to see advanced bot and DDoS activity, we expanded our Next-Gen WAF advanced rate limiting rules. Security is top of mind for all of our customers, so we are excited that for the fifth year in a row, Fastly's next-gen WAPT has been recognized as a customer's choice in the Gartner Peer Insights Voice of the Customer Cloud Web Application and API Protection Report. Fastly is the only vendor to receive this recognition for all five years. We're especially proud that customers gave Fastly an overall five out of five stars, the highest of any vendor, and 97% that they are willing to recommend it to others. In keeping with our continued support of our developer community and strong user base, we were happy to bring back our Altitude User Conference live in New York City in November. We had 15 keynote speakers, including multiple customers at the conference. Videos of most of the conference are now publicly available. Also at Altitude, we relaunched our open source and nonprofit program Fast Forward with a renewed focus on building community among the builders and maintainers of a faster, safer, and more inclusive internet. Our developer community continues to grow through our addition of Glitch. It has been less than a year since we acquired their team, but the results thus far have been impressive with over 2 million developers. That community is already starting to drive our compute roadmap and early adoption. And now I'd like to share my thoughts on my first six months at Fastly. I remain incredibly impressed by this team and its potential. Fastly has an amazing culture and a talented employee base. The team here is passionate about every customer, passionate about the technology we build, and most importantly, passionate about our mission to make the internet a better place where all experiences are fast, safe, and engaging. There is tremendous opportunity in Fastly as an edge cloud platform, delivering cutting edge digital experiences for everyone, everywhere. We believe we have an amazing opportunity to achieve our goal to become a more complete one-stop shop for the edge cloud, delivering a more complete experiences for our developers and for our users. We have a real opportunity to run a high velocity, low friction, go to market motion and fastly reaching more customers and onboarding them more efficiently. I'm excited with how the teams have realigned for FY23 to put the customer first and run a more focused, more efficient sales motion. I've also been pleased that we're making progress to simplify our packaging as we ready our package offerings for the second quarter to streamline customer acquisition and success and provide our Edge Cloud platform services with reliable billing, simple renewals, and a more complete, simple offer. The progress driving gross margin correction has been amazing. I'm incredibly impressed by our team, and we remain committed to ongoing gross margin improvements and continue our efforts to make progress in building a more financially stable Fastly. When we look to 2023, we are guiding to 16% revenue growth. There are many uncertainties out there, but I believe Fastly is well positioned to outpace the market. Gaining market share through customer acquisition and portfolio expansion is key to our strategy, and that is exactly where we are aligning our efforts. Additionally, I remain committed to meaningfully reducing our operating losses in 2023, both in percentage and dollar amounts. Let me close by saying I'm very excited about the opportunity here. Our customers have a real passion for Fastly Solutions, and our employees have a real enthusiasm for Fastly's mission. Of course, there is plenty of work to come, and I'm excited about the road ahead, but most of all, I believe digital experiences will redefine the success and drive the mission of almost every organization everywhere. And FASI will have a significant impact on the way digital experiences are built and delivered around the world. I look forward to sharing more with you regarding our progress, our focus on fueling growth, our customer acquisition, and our velocity of innovation in the coming quarters and at our investor day in June. And now to discuss the financial details of the quarter and guidance,