Fastly, Inc. (NYSE:FSLY) Q4 2023 Earnings Call Transcript

Operator: Your next question comes from the line of Tim Horan from Oppenheimer. Please go ahead.

Timothy Horan: Thank guys. Can you talk a little bit more about the distribution business? How does your kind of quality compared to your peers out there and maybe pricing? And are you — are you thinking of more major sporting events because of the improvement in quality.

Todd Nightingale: When you say distribution, I mean like CDN content distribution, right?

Timothy Horan: Yes, yes.

Todd Nightingale: Yes. Sorry about that. Sometimes we call it delivery distribution. Yes. Look, I think this is an area where we believe we’ve got a very strong competitive advantage from a performance point of view and in many major markets, a capacity point of view. But one hole, I think that we are continuing to grow into is that true, like longest tail of global coverage and we’re continuing to evolve there. But competitively in major markets, we feel extremely strong about our performance advantage. We also are extremely proud of the feature completeness. The fact that our security and our compute portfolio is available on every single node that delivery is available on. There’s — our customer never have to trade those things off.

Our edge is fully capable everywhere that it exists around the world, and that gives us a boost when it comes to content delivery as well. So we are feeling pretty good about that. Live sporting events or any live events, we’re starting to see some interest in other kinds of live events as well is, I think, a huge win for us. And that continued trend towards more live events can only help Fastly. It’s an area where our differentiation just continues to be Fastly [ph].

Timothy Horan: And is your own offering improving over the last couple of years in terms of lower latency, more capacity, lower generate etcetera?

Todd Nightingale: Absolutely. Both performance, like you said, lower latency, greater capacity, closer distributing our nodes closer and closer to the user, but also just the completeness of the platform, the feature set, the flexibility that it gives. One thing I think we’re going to start to see in live events is an increase in broadcasters trying to combat piracy and advanced feature set at the edge really matters there. And advanced focused on more personalization, not just on the ad flow, but in other parts of the experience. Again, advanced feature set is going to matter there. We’re very proud of the performance of our infrastructure, especially in terms of live event, but the feature set is just as important.

Timothy Horan: Very helpful. Thank you.

Operator: Your next question comes from the line of Jeff Van Rhee from Craig-Hallum. Please go ahead.

Jeff Van Rhee: Great. Thanks for taking the questions. I’ve got a few. Just on the new customer numbers, good to see the enterprise capture number strong. It didn’t transition or translate to the RPO acceleration. The — were the initial landing size of these customers as large as expected? Were they potentially smaller deals? That’s one and two, just in terms of the pipeline, have you turned the corner and is this a new repeatable level of enterprise ads quarterly?

Todd Nightingale: Yes. Great question. As far as the new customer adds and like their average size, I can’t — and we don’t disclose the size of new enterprise customers, but the average enterprise customer size increased and I think those new customers — enterprise customers, I would call typical, we don’t have…

Jeff Van Rhee: I missed that you’d call them what — what was that?

Todd Nightingale: They are typical of our other enterprise customers. They’re not smaller, not bigger. The — as far as the trajectory goes, it’s absolutely our intention to maintain that level. We’ll be pushing hard to do so. I’m sure, of course, there will be fluctuation as there always is, but I believe we have an opportunity to achieve levels like that moving forward, and we’re going to keep that.

Jeff Van Rhee: Okay. And then if I look at the…

RonKisling: I’m just going to add on the RPO, the mix of which of those customers when we sign new enterprise customers that actually have a commit, not all of our customers have a commit to the extent they do a consumption-based deal with no commit, it’s not going to show up in the RPO. So that is also something to think about that there’s not 100% translation for new customers into the RPO.

Jeff Van Rhee: Yes. Got it. And then if I look at the overall guide, just the acceleration that you’re looking for throughout year. The quarter was a bit below Q1 looks a bit below, but the year kind of brackets the consensus on top line and it implies acceleration. What’s the visibility to that? What do you have to assume there? What are you assuming in terms of like the international weakness thus far? Does that have to improve materially? Do you assume continued international weakness to hit that back half of the year? Just give us maybe a little more comfort where you’re getting your conviction later in the year.

Todd Nightingale: Yes. That’s a great question. And we looked at that very carefully because I guess we knew we had this question. We project the revenue down to the account level for a very large number of accounts and look at the trend across the board. And this is the best projection we’ve got. I feel very, very confident in it. As far as the international traffic goes, if we saw another surge in one of those more high-priced regions, you’d expect that to be to a tailwind to revenue in any quarter that had happened. If we saw a particular large strategic new customer come on board, we could again see a tailwind. As far as the Q1 number versus the rest of the year number, our projection is for the full year, and we’re trying to track it very, very carefully.

The biggest thing you’re seeing in Q1, I think, is the step down from the onetime true-up [ph] payments from Q4 to Q1, which our model obviously takes into account. And so we see that, but the driving the continued growth rate through the rest of the year, I think it is, in fact, sort of like the baseline for our projection.

Jeff Van Rhee: Okay. And maybe, sorry, just to go back, if I could, one more on international, just to understand. It sounded like you were — I guess, I’m a little confused. You’re saying some of the revenue shifted from one country to another, it sounded like it might be very concentrated. I don’t — were you suggesting it was concentrated to a specific customer, just indulge me there and maybe just explain that one more time?

Todd Nightingale: Yes. Some traffic moved out of one country. So there’s a handful of countries in the world where delivery services are just very expensive because of the way Internet service providers and technology vendors operate in that country, and the rate is very high. And we don’t pass all of that cost on to our customers. So because of that, the margins tend to be very low. When we see a spike of traffic in a region like that, we see an increase in the top line, but headwind to gross margin. And we saw that in Q3, and we saw it come down in Q4, which was the headwind on the top line and the tailwind on gross margin. We try our best to predict and project that, but that is what happened.

Operator: Your next question comes from the line of Rudy Kissinger from D.A. Davidson. Please go ahead.

Rudy Kessinger: Hey thanks for taking my questions. Just to follow on to that. I mean just with this traffic being lower in this one country, was that from your largest customer that’s over 10%. And secondly, what was the reason for the lower traffic in that one country? Was — did they — did you lose share to another provider? What was the — was it not enough new content in the quarter? Was it live sporting event related, not as much viewership? What was the reason for the lower traffic in that one country?

Todd Nightingale: Sorry, I can’t comment on which customer it was from. But — it’s just a natural variability, like you said, how much new content or what types of content being published in a particular region for streamers has volatility. When it comes down to the granularity of a single country in the world, you get volatility in that space. And so that’s what we saw. We tried to make sure that our 2024 projections are really the baseline traffic in countries like that. And if we see surges, then they’ll show up as a tailwind moving forward.

Rudy Kessinger: Okay, Ron. And two, just kind of housekeeping keeping clarification questions. Revenue acceleration on a year-over-year growth basis every quarter. So Q2 growth should accelerate from Q1. And then on gross margins, you said Q1 down about 100 basis points versus Q4. Is that versus the reported 59.2% or the adjusted 58.3%?

Ron Kisling: Yes. So I’ll get on the latter one, just to clarify, that’s against the reported 59.2% sort of 100 basis points, plus or minus against what we actually reported. In terms of the acceleration, I mean, I think you will see it across the course of the year. I think I expect that to be generally in line with what we’ve seen historically from a seasonality and some acceleration across the year.

Operator: Your next question comes from the line of Angie Song from Morgan Stanley. Please go ahead.

Angie Song: Hi, can you guys hear me?

Ron Kisling: Yes.

Angie Song: Thanks so much for taking my questions today. So just wanted to dig in on gross margins. You mentioned the 80% incremental gross margin — could you just speak to what drives this? And on the 60% margin, is it somewhat more — is it somewhat more aspirational? Or is this something that you have a line of sight on?

Ron Kisling: Yes. I think on the latter question, in terms of our outlook for gross margins for 2024 and achieving by year-end, margins at the 60% or a little above that is — it’s really our plan. We have line of sight to it. It is continued rigor in our investment in capacity. It’s continuing to improve our bandwidth or transit costs through both negotiations and increasing our peering. It’s network efficiency. And then as we just continue to grow, it allows us, particularly international to improve our cost structure. And — so those are kind of the big drivers that give us line of sight to that improvement that we expect to continue to see that improvement across 2024.

Operator: Our next question comes from the line of Rishi Jaluria from RBC Capital Markets. Please go ahead.