Fastly, Inc.

Ladies and gentlemen, good afternoon. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly first quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 a second time. Thank you, and I would now like to turn the conference over to Vern Essie, Investor Relations at Fastly. Please go ahead.

Thank you, and welcome, everyone, to our first quarter 2024 earnings conference call. We have Fastly's CEO, Todd Nightingale, and CFO, Ron Kisling, with us today. The webcast of this call can be accessed through our website, Fastly.com, and will be archived for 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 FASA's website. During this call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, product sales, strategy, long-term growth, and overall future prospects. These statements are subject to known and unknown risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected or implied during the call. For further information regarding risk factors for our business, please refer to our filings with the SEC. including our most recent annual report, filed on Form 10-K, and quarterly report, filed on Form 10-Q, filed with the SEC, and our first quarter 2024 earnings release and supplement, for a discussion of the factors that could cause our results to differ. Please refer in particular to the sections entitled Risk Factors. We encourage you to read these documents. Also note that the forward-looking statements on this call are based on information available to us as of today's date. We undertake no obligation to update any forward-looking statements except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Unless otherwise noted, all numbers we discuss today, other than revenue, will be on an adjusted non-GAAP basis. Reconciliations with most directly comparable GAAP financial measures are provided in the earnings release and supplement on our investor relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Now we'll turn the call over to Todd. Todd?

Thanks, Vern. Hi, everyone, and thanks so much for joining us today. First, I'd like to give a quick summary of our first quarter financial results and related highlights. I'll then discuss our revised revenue outlook and provide an update to our go-to-market initiatives and customer acquisition as it relates to our path forward to drive revenue growth. I will then hand the call over to Ron to discuss the changes in our metrics, our first quarter financial results, and our guidance in detail. I'm pleased that we reported revenue of $133.5 million for the first quarter, representing a 14% year-over-year growth and coming in above the midpoint of our $131 to $135 million guidance range. Our customer growth and retention efforts showed improvement in the first quarter with our LTM NRR at 114%, up slightly from Q4's level of 113%, and reversing quarterly declines in this metric since the end of 2022. Our total customer count in the fourth quarter was 3,290, which increased by 47 customers compared to Q4 and by 190 year over year. Enterprise customers totaled 577 in the quarter, a decrease of one from Q4. We brought in 18 new enterprise customers at the $100,000 annual revenue threshold in the quarter. This was mostly offset by customers that dropped below this threshold due to seasonality. On a year over year basis, we grew our enterprise customer count by 37. Our gross margin continues to improve and was 58.8% in the first quarter of 320 basis points year over year and ahead of our expectations. Our operating loss was $9.7 million in the first quarter compared to an operating loss of 14.1 million in the first quarter of 2023. I'm very pleased with this result as our loss was materially better than our guidance for $14 million to $10 million. The upside was roughly split between higher gross margins and better OPEX cost control. And Ron will share more details with you in a moment. Lastly, we posted positive $3.7 million in adjusted EBITDA, and importantly, an $11.1 million positive cash flow from operations. I'm pleased with the continued momentum on operational execution here, especially as it helps us fuel growth moving forward. Now, let me discuss the highlights of the quarter. In the first quarter, we continued our success in diversifying our logo wins and penetrating new and existing customer verticals. We had amazing wins in the healthcare sector during the first quarter with a leading health solutions company, a major government research agency, and a leading imaging provider. These key Lighthouse accounts will help us accelerate more customer acquisition in healthcare, drive growth in an important sector, and deliver better vertical differentiation to our business. The healthcare industry has always been focused on reliability and performance, making Fastly a perfect fit. We continued to penetrate the mobile app market in high tech. In the first quarter, we won Bending Spoons, a leading mobile app developer serving over a half billion people across the globe. In France, we are now supporting MWM, a top app publisher, which selected Fastly's content delivery and image optimization services to support its AI-driven model. In the business services vertical, we're proud to announce that a leading customer data platform will be onboarding with Fastly. We also won one of the world's largest realtor companies with over 100,000 agents in over 100 countries. It's a great example of how we landed in the real estate vertical with Moxiworks, which we discussed last quarter, and we're able to build upon that vertical expertise with this new real estate win. In the first quarter, we introduced Fastly Accelerate, a series of in-person global events developed exclusively for Fastly's customer network of developers, security professionals, and business leaders. The first event was held at our headquarters in San Francisco on April 4th and was widely attended. We will be following up with similar events worldwide in 2024 with London, New York, and Sydney to follow. Lastly, I'm pleased to announce that Fastly's OACTP Private Relay won the 2024 Devy's Award for Best Innovation in Services Application Development. Our solution is widely used in the top web browsers on the internet to help extend privacy to millions of users and is beginning to find other use cases in privacy and security. In the first quarter, we continued to drive focus and investment into platform unification and expansion. We enabled self-service adoption with a universal login feature across our solutions and improved product trials and upgrades platform-wide. Expanding our platform is key to our platform strategy, and that's why I'm so excited for bot management becoming generally available in Q1. Our bot management solution combats automated bot attacks at the edge and significantly reduces the risk of fraud, distributed DOS attacks, account takeovers, and other online abuse. This is an important cybersecurity milestone for the company, significantly expanding our security offering. Our DDoS services, best-in-class WAF, and bot management solution make up an incredibly tight, complete security offering in the web application and API security space. We've already seen significant uptick here, and it is great to see both customer expansion and acquisition leveraging this new capability so quickly. Security is a great example of innovation velocity at Fastly. Our WAF continues to be highly differentiated with low false positives and a predominance of customers operating in full blocking mode. Our bot management solution was 100% developed in-house and is already competing well against the most mature products on the market, and there is significant innovation and product enhancement to come. We set up a very strong foundation in 2023 with our newly introduced packaging motion that gained momentum throughout the year. In the first quarter of 2024, we updated Fastly packages by launching observability SKUs, fixed price add-ons, and enhancements to our packages, especially in security, to continue delivering simplicity, value, and choice for our customers. I'm excited to share with you that in the first quarter, we already exceeded all the customer packaging purchases sold in the first half of 2023. Our packaging motion gives customers reliable billing and shows their confidence in Fastly by signing up for longer-term commitments. Package billing provides predictable pricing for our customers and predictable, reliable revenue for Fastly. Additionally, our channel program continues to grow and mature. In the first quarter, deal registrations and revenue contribution more than doubled year over year. In fact, for the first time, the largest deal in a quarter closed through a channel relationship. Our channel partners continue to have strategic importance in our go-to-market efforts. Our COO search has been a key focus this quarter. I'm happy with the progress we've made as we're now in the final stages. We've interviewed numerous candidates to find the right expertise and a balance of operational expertise and the strategic ability to grow and scale. I'm pleased that we've narrowed our candidates down to just a handful and we should have a selection finalized within a few weeks. I expect to announce a new chief revenue officer in the second quarter. Now let me turn to address our outlook going forward. Our second quarter guidance of 6% to 9% year-over-year growth and modified 2024 annual guidance of 12% year-over-year growth are not where we expected our business to perform and, of course, are disappointing. Ron will discuss the financial details to this forecast in a moment, but let me first address this outlook and our path forward. There are a few factors that contributed to a challenging short-term environment. The biggest factor is a reduction of revenue from a small number of our largest customers. the first quarter revenue from our top 10 customers dropped from 40 to 38%. Many of the top 10 accounts run a multi-vendor strategy, and we did see significant volatility here, and there are a few reasons for this. Firstly, historically, Fastly has gradually won greater traffic share in our largest accounts, but with the timing of rate and volume changes, we saw increased volatility this quarter. To be clear, we have not been removed from any of our largest customers, and we remain in a strong strategic position with each of them long-term. Secondly, in some accounts, we did see an addition of CDN vendors, a reversal of the vendor consolidation we saw last year. And thirdly, we are seeing a slight uptick from the typical level of re-rates with our largest customers, but we have not yet seen the commensurate traffic expansion usually associated with this motion. Very positively, we are seeing continued success with the new customer acquisition motions and notably added two very large new logos in Q1, one of which will move into the top 10 over the course of the year. We aim to see the long-term results of our new customer acquisition motion having an increasing effect on our revenue as the year goes on. Going forward, we strongly believe our strategy is correct, and we will remain committed to our focus on growth. We will continue to invest in our customer acquisition and go to market motions. We are shifting the way we engage with our largest multi-vendor customers to focus on improving our visibility and driving traffic and revenue share in those accounts. We remain committed to platform unification and expansion, helping us drive cross-sell and growth. We will continue to drive engineering investment in this effort, coupled with the expansion of our security portfolio with bot management to drive stickiness and wallet share with our customers. As a backdrop to these investments, we will continue to drive discipline in managing our spend with a clear focus on efforts leading to long-term growth. In summary, we are pleased with our first quarter performance, but we are not satisfied with our Q2 outlook and 2024 guidance. We're laser-focused on revenue growth initiatives, innovation, velocity, and customer acquisition. And now, to discuss the financial details of the quarter and guidance, I will turn the call over to Ron. Ron?