Fastly, Inc.

Good afternoon. My name is Tamika, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly third quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, Press star, followed by the number one. I will now hand today's call over to Vern Essie. Investor Relations at Fastly. Please go ahead, sir.

Thank you, and welcome, everyone, to our third 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 8K 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 third quarter 2024 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 during the fourth quarter, we will be attending the RBC Capital Markets Global Technology, Internet, Media, and Telecommunications Conference in New York on November 19th and the UBS Global Technology and AI Conference in Scottsdale, Arizona on December 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 Q3 results and the progress we've made, especially in growing revenue outside of our largest customers and in continuing to improve the profitability of Fastly. I will also discuss our go-to-market and technology initiatives. I will then hand the call over to Ron to discuss our third quarter financial results and our guidance in detail. We reported third quarter revenue of $137.2 million coming in above the high end of our guidance range due to better than expected strength in some of our larger media customers and a balanced mix of share gains outside of our top 10 customers. We reported an operating loss of $520,000, the best result we have achieved in more than four years and materially better than the guidance range. This was the result of higher revenue and gross margins, coupled with the cost benefits from a faster than projected execution of our restructuring. I'm also excited to share with you that Fastly reported a net profit of $2.4 million and positive adjusted EBITDA of $13.3 million in the third quarter, both record levels for the company. I'm pleased to share with you the progress we made in diversifying our revenue. This resulted in a more diverse revenue mix in the third quarter as we grew our top line 7% year over year. In the third quarter, our top 10 customers represented 33% of revenue, down from 40% last year, and down from 34% quarter over quarter. This is a good indicator of continued progress in diversifying our revenue and strengthening our business. Revenue outside of our top 10 accounts which is key to our strategy and goals for the long-term success and growth here at Fastly, grew 20% year-over-year, significant improvement from last quarter's 13%. Last quarter, we called this an inflection point and a moment of transition for Fastly. While the transition doesn't happen in a single moment, we are already experiencing the benefits of a more focused investment in product, customer success, and go-to-market. Specifically, we released a major expansion to our security portfolio, onboarded new sales leadership, pivoted to a more bespoke engagement model with our largest multi-vendor customers, and launched a new self-service demand gen motion. We are seeing early progress in our revenue diversification, customer acquisition growth, and renewed focus on our largest enterprise customers. There is more to come. These changes will drive revenue diversification and faster, more reliable growth for Fastly. Our customer acquisition efforts showed solid gains year over year in the third quarter. Our enterprise customer count was 576 compared to 547, representing a 5% growth rate year over year. Quarter over quarter, enterprise customer count actually declined 4%. We saw more customers dip just below our $100,000 run rate enterprise definition this quarter. We do see quarterly volatility in our enterprise customer account methodology, but we'll be tracking this very carefully and looking to drive growth in all of our mid-sized accounts. We experienced normal churn levels with churn flat quarter over quarter, and while we saw 5% year-over-year growth rate in enterprise customer account, we aren't satisfied with this result and hope to accelerate our growth in enterprise customers in 2025. We had 3,638 customers at the end of Q3 and a net increase of 343 quarter over quarter for a growth rate of 10%. We believe this is the result of our new self-service sales motions, which I will discuss in a moment. Our transition leans heavily into our technology innovation heritage, and we believe it is key to the continued success in customer acquisition and wallet share growth. Fastly's platform is a software-driven edge network that offers best-in-class delivery, network services, security, compute, and observability. We continue to focus investment in leading technology and innovation that not only solidifies our platform, but also extends its features for the future of web application development. The functionality we offer allows our customers to bring their applications to life around the world We believe that our unified platform approach will significantly enhance our customer retention and create efficiencies for FASI in supporting our customer success. Let me share with you some important developments taking place in our security offerings in particular. We continue to experience a favorable customer response from bot mitigation since its release in the first quarter. Our bot mitigation solution, wholly developed within Fastly, attracts customers looking for simple onboarding and ease of use, opening the door for continued opportunities for cross-sell and upsell. Fast following on the heels of our successful launch of bot mitigation, we announced the general availability of Fastly's adaptive DDoS protection on the platform. This solution provides automatic protection from Layer 7 and other application-level DDoS attacks. Our platform enables frictionless onboarding and implementation of this solution with just the click of a button. We've had a long heritage of DDoS protection at Fastly, partnering with some of the largest, most sophisticated customers in the industry. We are tapping into this intellectual property and productizing it to address the entire market so that our broader customer base can benefit. Additionally, this solution allows us to layer proprietary, auto-adaptive response intelligence within the author. We believe this innovative DDoS release is a new enterprise customer acquisition vector for Fastly in addition to driving customer growth and cross-sell opportunities. Last quarter, I shared with you that we launched the beta version of our AI accelerator, an AI proxy capable of delivering performance and cost savings to application builders leveraging large language models. The interest and response has been very favorable from our customers, and we've added LLM support beyond OpenAI to include Google Gemini as well. We expect AI Accelerator will be generally available for purchase by the end of the year, and I'm excited to make this announcement as it demonstrates the increase of innovation velocity at Fastly, and I look forward to announcing more product launches before year end. I'll now discuss the transition taking place within our go-to-market efforts. Since joining us in the second quarter, our new CRO, Scott Lovett, has taken the first steps towards driving transformation within the sales order to close more new enterprise logos. He's particularly focused on driving wins in security with new and existing customers. And with our new security offerings and deep experience in this space, we're excited about the opportunities ahead. Beyond sales, our go-to-market success is also the culmination of branding, messaging, and sharing our expertise with subject matter experts. In the third quarter, we released the Fastly Threat Insights report, providing the latest attack trends across the web application and API security landscape. The report found that 91% of cyberattacks targeted multiple customers using mass scanning techniques to exploit vulnerabilities. We also released the results of our new survey, Bot Wars, How Bad Bots Are Hurting Businesses. which revealed 59% of IT professionals reported an increase in bot attacks over the past year, with significant incidents costing companies an average of $2.9 million. These results seem closely in line with the interest we're seeing in our security portfolio and our new security offers. We are now in the second year of our packaging efforts, which truly demonstrates our focus on simplicity, not just in our product, but in pricing and our ease of implementation. Our new self-service model with mix and match packages was rolled out last quarter, kicking off our initial PLG efforts at Fastly. These efforts have resulted in growing our overall customer count while also attracting critical developers to the Fastly platform. In the third quarter, our packaging efforts demonstrated strong growth, and we more than doubled the number of packages sold year over year. Our new logo packages tripled and represented 43% of the packages sold in the third quarter compared to 16% a year ago. Lastly, our channel partners rounded out our go-to-market efforts. In the third quarter, our deal registrations grew 33% year-over-year, and our year-to-date bookings grew 46% year-over-year. We anticipate more opportunities to leverage our channel and drive top-line growth as we move forward. Now, let me conclude with a discussion on our outlook as we close out the year. Looking back one year ago, we did not foresee all the challenges we faced. In 2024, we suffered revenue declines from our largest customers and this in turn prompted us to realign our growth strategy and our investment strategy. Ultimately, we implemented a workforce reduction and overall transition that impacted every department at Fastly. I believe we are pulling through these difficult times and we are turning a corner. The cost discipline and financial rigor on our drive towards profitability growth has never been better. We've shown signs of progress this quarter that should make the team proud, and though there's more work on the horizon, I'm pleased with the efforts across the board over these past three months. Heading into the fourth quarter, typically very seasonally strong, we do not believe we'll be benefiting from as much of the typical sequential lift we've experienced in prior years, and this is reflected in our fourth quarter revenue guidance. While this could be dismissed as conservatism on our part, it is more the result of what we have shared over the past three quarters with the dynamics we are seeing taking place at some of these largest accounts. We do believe that we've moved past the worst of these impacts and have a strategy in place to keep our strong position at these very large accounts, while also focusing heavily on healthy revenue growth outside of our largest customers, driving important revenue diversification. I'm very optimistic on Fastly's prospects in 2025 and continue to believe our inherent platform advantages afford us the opportunity to capture more share of the world's web application workloads. And now, to discuss the financial details of the quarter and guidance in detail, I will turn the call over to Ron.