Fastly FSLY Q2 2020 Earnings Call Transcript

Operator: (00:01)
Good afternoon. My name is Josh and I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly second quarter 2020 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 the pound key. Thank you. I would now like to turn the conference over to Maria Lukens Vice president of investor relations. Please go ahead.

Maria Lukens : (00:33)
Hi everyone. Thank you for joining our second quarter of 2020 earnings call. We have Fastly CEO and executive chairperson, Artur Bergman, and CFO Adriel Lares is with us today. I want to remind everyone about the format of our call. We published a shareholder letter on our investor relations website and with the SEC [inaudible 00:00:52] a chance to read it. Since the letter provides a lot of details, we’ll make some brief opening remarks and reserve the rest of the time for your questions. During this call, we will be making forward looking statements, including statements related to the expected performance of our business, future financial results, strategy, longterm growth, and overall future prospects.

Maria Lukens : (01:13)
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. Please take a look at our filings with the SEC, in particular the risk factors within those filings and our Q2 2020 shareholder letter for our results to differ. Also, know that the forward looking statements on this call are based on information available to us as of today’s date, we disclaim any obligation to update any forward looking statements except as required by law. Also, during this call, we will discuss certain non-GAAP financial measures, reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our investor relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call is being webcast and will be archived on our website shortly afterwards, with that I’ll turn the call over to Joshua.

Joshua Bixby: (02:13)
Thanks Maria, for joining us today. We hope that you’re all keeping healthy and safe. Q2 was another exceptionally strong quarter for Fastly [inaudible 00:02:25] rapidly. The structural and societal changes resulting from this pandemic, tolerate the need for organizations to prioritize their digital transformation. We are in some of the most uncertain times in modern history, but we now see clearly that the major shift to digital will be long lasting, trustworthy, and modern Edge platform has never been greater. Developers and security operators are at the center of the transformation and they can only drive transformation effectively if they can build quickly and securely. We believe in developer and security partner with them to create simplified, frictionless, fast, and secure solutions at scale to support the evolving needs of billions of users around the world.

The strength of our Edge platform continues to show in our results. Fastly delivered another quarter of solid execution. Thanks to the team’s continued focus and performance. We delivered exceptional top line growth, generating $75 million in revenue, which was up 62% year over year. Despite these turbulent times, we continued to see robust customer adoption of our Edge platform and security products by both new and existing customers across. We grew our total customer count to 1,951 from 1,837 in the previous quarter. The largest quarterly increase since going public. Our enterprise customer count grew to 304 up from 297 last quarter. We are pleased with the number of new enterprise customers, as well as customers who grew into the enterprise category.

However, this strong growth was offset by some customers falling out of the category in COVID impacted industries. In addition, ByteDance, the operator TikTok was our largest customer in the quarter. Any band of the TikTok app by the US would create uncertainty around our ability to support this customer. While we believe we are in a position to backfill the majority of this traffic in case they are no longer able to operate in the US. The loss of this customers [inaudible 00:04:54] our average [inaudible 00:04:56] to 716,000 from 642 [inaudible 00:05: 02]. Our existing customers are relying on us more and more as reflected in our increased net retention rate of 138% and dollar base net expansion rate of 137% up from 133% last quarter.

Looking ahead, developers now more than ever need to build differentiation at the Edge and rapidly adopt new architectures. This is why we continue to invest in our network and offerings specifically Compute@Edge and security. Many of our customers are further embracing Compute@Edge, our real time, serverless architecture for high performance applications. This quarter, we enhanced our offering with valuable new observability features, including logging, tracing, and granular real time metrics. Bringing observability to the forefront of the serverless computing environment. We are on track for and expect to further expand the availability of Compute@Edge. We continue to learn from our customers and are inspired by the variety of innovative use cases we are enabling. Including new ways they are thinking about security.

As transformation drives more code and applications to the Edge, it’s evolving into an increasingly critical place to secure websites and applications. This quarter, we delivered new key security features, including Fastly flow control. Security has always been a key focus for us, and we will continue to invest significantly in this area. We are also continuing to scale and build our network at a record pace to meet today’s digital demand. We reached 100 terabytes per second of global capacity, an important milestone for us representing 35% growth since the beginning of the year. Our results and guidance reflect that Fastly is uniquely positioned to empower our customers. And we’ll continue to drive growth during these uncertain times. With that, I will turn it over to Adriel to walk through the financial details.

Adriel Lares: (07:05)
Thank you, Joshua, and thank you everyone for joining us today. Fastly had a strong second quarter as reflected in our results and raised 2020 guidance, which I will talk about in more detail shortly. First, I want to briefly touch upon some of the key financial results. This quarter, we generated 75 million in revenue representing 62% year over year growth. We also continued to deliver a healthy gross margin, as we continue to scale. GAAP gross margin was 60.2% for the quarter up from 55% in the same quarter last year. Non-GAAP gross margin was 61.7% for the quarter, demonstrate an increased leverage of our software defined network realizing over 600 basis points up year. As we have said in previous quarters, our gross margin will continue to be impacted by the time and the personnel and infrastructure investments along with the seasonal fluctuations of platform usage by our customers. Despite continuing economic uncertainty, we remain confident in our ability to deliver incremental annual gross margin expansion. As we continue to scale and deliver innovative security and Edge computing solutions.

Finally, this quarter, mark a significant shift towards profitability. As we delivered our first quarter of positive EBITDA. Turning to the balance sheet, we holstered it with a successful follow on offering and ended the quarter with 454 million in cash, restricted cash, and investments in marketable securities. We’re pleased to have a strong balance sheet and liquidity as we navigate the current uncertain economic environment. We remain optimistic about our strong fundamentals, the demand for our mission critical services, Q3 and future periods. That’s why we’re raising guidance again for the full year 2020. For the third quarter, we expect revenue in the range of 73.5 to 75.5 million. Non-GAAP operating income in the range of negative one million to positive one million. Non-GAAP net income per share, and the range of negative 1 cent per share to positive 1 cent per share. For the full year 2020, we increased our revenue guidance range to 290 to 300 million from 280 to 290 million. Non-GAAP operating loss range to minus 12, to minus two million from minus 20 to minus 10 million. Non-GAAP net loss per share range to minus 6 cents to minus 1 cent, from minus 15 cents minus 8 cents. In closing, we continue to believe we are well positioned to execute and further our growth. Our Edge platform and product offerings serve a diversified customer base that continues to require more from Fastly to fuel innovation. We have a strong balance sheet and we’ll continue to strategically invest on our network and offerings, including Compute@Edge and security. Finally, we believe the ongoing pandemic has permanently accelerated the need for businesses to focus on digital transformation. Fastly has focused on helping developers adapt their business and succeed in the world that emerges by providing a fast, secure, and reliable Edge platform that evolves with their needs. With that I’ll turn it back to the operator to take your questions,

Operator: (10:36)
In order to ask a question, please press star, then the number one on your telephone keypad, if you would like to withdraw your question, please press the pound key. And your first question comes from Robert Majek with Raymond James, please go ahead.

Robert Majek : (10:50)
Thanks. My questions are around the image delivery business, part of what you’re offering there is put on that driver. And then furthermore, I’m curious if your mix of business three and if so what impact that might have on revenue growth, just given the higher…

Hi Robert, it’s Joshua. So image optimization and the [inaudible 00:11:14] the Edge is obviously inherent in the underlying story of Fastly. We started out with Edge program. In general, IO remains a very strong part of the vertical dependence some verticals absolutely rely on it. We’re seeing [inaudible 00:11:36] around image when it comes to Compute@Edge, but we continue to look at the growth for the quarter. We continue to see it widespread across verticals, across geographies and strong. We’re not seeing a significant shift in the business mix. For this quarter was the same as last quarter. So this is just about broad, strong, and image optimization included.

Robert Majek : (12:07)
Perhaps just one more from me. I know it’s early for Compute@Edge, but curious if you could just highlight some of the interesting use cases that customers are exploring today.

Who’s deep in this? Artur, I know you have some interesting stories in this.

Artur Bergman: (12:22)
Yeah. Hello, everyone. Good to be chatting to all of you again. Yeah, we’ve started to see more early our beta customers during POCs and testing and we’ve seen a couple of use cases come up. One is online retailer that wants to migrate availability stock and pricing microservices to the Edge, where they can deliver live updates and faster updates to end users. We have another use case about also online retailer, where they want to do much smarter waiting rooms with…

… where they want to do much smarter waiting rooms with tokens to purchases, so that they can be more responsive, simplify their own architecture and be more fair in how those tokens are handed out. We have other online retailers that want to cache way more data at the edge and personalize responses even when their origins are overloaded because of surges, so they still deliver as best they can. We have examples in the video space of someone who wants to do significantly smarter health checking of their origins from each edge so that they can pick the best origin, the best live encoder, so that there’s less buffering and playback Interactions. So it’s kind of a little bit all over to place, but really some that we expected and some that I think are more advanced than I would have expected at this point in time.

Robert: (14:12)
Great. Thanks a lot.

Thanks, Robert.

Speaker 1: (14:16)
Your next question comes from Brad Reback with Stifel. Please go ahead.

Brad Reback: (14:22)
Great. Thanks very much. Joshua, maybe we can dig a little bit more into TikTok. Can you give us a sense what percent of the traffic is US versus rest of the world and maybe just high level, what percent of revenue it represents for you?

Sure. So over the last six months, it represents just about 12% of revenue, trailing six months ending June 30. Less than 50% of that is in the US. We continue to monitor the situation closely, obviously. What’s unique about TikTok and other apps that are on us is that they are an innovator, and like historically with the innovators that we have, we are working with the innovators in the high value areas of the business, so think about APIs and other areas, not just the delivery of video, which is also something we help with when it’s important. So we have looked at this risk; we obviously wanted to make sure everyone heard about it. As I stated in the prepared remarks, we are very confident because of our strategy on how we’ve looked at this side of traffic that there is a meaningful amount of traffic that we could work in case something didn’t move in the right direction at short notice, but that’s not what we’re seeing today.

Great. And then, Adriel, just following up on this line of thought. As you look at the back half guidance, have you assumed a status quo with TikTok or have you made any changes in the assumptions? Thanks.

Hey, Brad. Yes, nothing at this time. I mean, we were sort of assuming a little bit of a status quo at this moment and, again, as Joshua sort of mentioned, as you get to sort of the latter half of the year also it gives us a lot more time to react, so that’s sort of built into that.

[inaudible 00:16:21] very much.

Thanks, Brad.

Speaker 1: (16:24)
Your next question comes from Will Power with Baird. Please go ahead.

Will Power: (16:31)
Okay, great. Thanks. Yeah, I guess maybe just following up on that a bit. Adriel, I wonder if you could just talk about more broadly the factors that are informing Q3 guidance. I mean, when I look historically, normally you have a pretty good pick up sequentially from Q2 to Q3, and guidance assumes something that’s flatter to maybe down slightly at the midpoint. So I’m just trying to figure out how much of that is conservatism versus maybe any change in trend? And I guess along those lines, you’ve created your sense of what you have been seeing in the traffic trends as you go from May, June into July?

Hey, Will. Yes. So in general, we begin to see some pick up from sort of Q2 to Q3. I think the thing to keep in mind clearly is Q2 this year relative to previous year, seasonally Q2 versus Q1 is actually relatively flat. Of course, that’s not what we experienced this year, so I think you have a bit of a comparison challenge when you think about Q2 to Q3 for the fact that we’re still at the midpoint here getting some pretty strong year-over-year growth rate I think is worth noting.

So from our standpoint, we had built in last quarter the idea that folks would be getting back to normal life from a shelter-in-place [inaudible 00:17:52] from before, and we’re beginning to see that as a mixed bag. It’s mostly coming true, but what’s a little bit uncertain here is kind of how the rest of the world and in some respects to rest of the United States is going to sort of play that out. So in some respects, the normal seasonality is being sort of thought of in Q4, but with respect to Q3, it’s somewhat respective, ameliorated a bit by the comparison to a very, very strong Q2.

Will Power: (18:19)
Okay. If I could just follow-up, sticking on the financial side, gross margins were a good deal stronger. Maybe talk about some of the benefits to gross margin, how we think about the trajectory for that going forward from here?

Yes, we definitely as you know, last quarter I did for the first time actually talk about the fact that I was going to be guiding gross margin sequentially upward, so I was pleased to see that we were able to deliver pretty meaningful growth quarter-over-quarter let alone from year-over-year. I think that given that we’re more normalizing Q3 over Q2, I’m sort of going to give … The mix of traffic, I think is the thing that always makes that challenging the project. I do believe that, on an annual basis, we’re going to still contribute well over 100 basis points year-on-year, so I feel pretty confident about the leverage we’re going to deliver this year. I think when we go into now the normalized Q3 versus Q2, I’m going to hold before guiding a little bit where gross margins are going to go from here.

Will Power: (19:22)
Okay, great. Thank you.

Thanks, Will.

Speaker 1: (19:27)
Your next question comes from Jonathan Ho with William Blair. Please go ahead.

Jonathan Ho: (19:32)
Hi. Good afternoon. I just wanted to maybe start out with, maybe if you could quantify for us, I know this is challenging, but just a rough sense of how much COVID-19 and stay at home actually contributed to growth this quarter?

Yeah, it’s Joshua here. Jonathan, that is hard to assess in general. I mean, we are not projecting, as you see in our guidance, that this is a one-time event. We are assuming and we are seeing that there is long-term sustained improvements here. I think Fastly is in this unique position to be a usage-based model with the most innovative companies in the world, and so when you stack on the largest innovators and you look just at their results, whether it be Pinterest or Shopify or the list goes on and on, I think what you’re seeing is just really strong strength. If you look at the story that those companies are telling, sustained strength, so hard to parse out. I think this is a factor of the innovators are continuing to gain tremendous momentum, and we think there’s a generational shift in some of these industries.

But I think the other thing that is particularly exciting about this quarter from our perspective is looking at the new customer count, so this isn’t just about the people on the platform. This is about the largest increase that we’ve seen in net new customers in the selling environment that is obviously changed. I think seeing the early success, which we talked about in the last earnings call, we’ve seen a couple of weeks of this. I think this quarter demonstrates a much more sustained story arc, which is strength going forward in that regard. It’s hard to parse out, but we are seeing that sustained strength going forward unquestionably.

Jonathan Ho: (21:23)
Got it. And then, just in terms of the wins that you highlighted in the quarter and the digital transformation side of things, what were some of the main determining factors in terms of why companies …

Jonathan, I heard you check out there.

Speaker 1: (21:44)
The questioner has dropped, so your next question comes from-

I’ll actually try to answer that question because I think I know where it was going in terms of story arcs of why we’re winning. Jonathan, you can rejoin or at least to hear this in the recording. I think that really strong thematic elements. One, the story arc of programmability continues to be strong with our enterprise customers. We are built by developers for developers and that notion is as strong as ever in this world of digital transformation. So digital transformation is this great idea. You can write a book about it, you can see it in an article, but ultimately our results are the output of digital transformation. We are the ones that are benefiting from those who have seen this world. So the reality of what we’re seeing is people are coming to us because of programmability stronger than ever because they’re being forced to build and not by differentiation, and they’re their trusting their developers.

Another piece that’s strong and we’re continuing to invest in this is on the security side, which is customers are coming to us because our security offerings are strong. We’re looking to continue to invest and make them stronger, but that is a strong signal as well. One of the areas that we’re investing very heavily and as you know is around Compute@Edge, which continues to very much separate us from the competitive set in the enterprise category, which is people want to continue to be able to do more. So lots of reasons and we’re particularly proud of where we are in that category. Happy to take the next question.

Speaker 1: (23:20)
Your next question comes from Brad Zelnick with Credit Suisse. Please go ahead.

Brad Zelnick: (23:25)
Great, thanks so much and congrats, guys, on all the success. I’ve got a couple of questions. For starters, I think I’ve heard you emphasize the SecOps audience today, more so than ever. You also highlighted investments and capabilities, like Flow Control. Can you just double click on the security use case a bit more, because quite honestly, I think investors had always viewed that side of your business as less mature than others in the market. I’d just be curious for you to remind us of how you view the opportunity, where we are today, and if you look back in three or five years, what percentage of the mix might it be?

Yeah. That’s a great question. I do think that people don’t understand our security DNA. I think people don’t understand how heavily we invest and how deeply we invest in that area. So I think stepping back, there are a number of things which makes us unique. One, of course which we talk a lot about is one secure network, right, where we don’t have a network for DDoS or a network for one application. That provides a tremendous amount of benefit to us, both efficiencies but for customers’ visibility and control, so customers are really coming to us when they don’t want to have to call for professional services to deal with the real-time battle of security. These are adversaries who are in the middle of changing every second, every minute, and if you get, for example, data that’s in our hold, that’s pretty hard.

I think that one of the other areas and tenants for us is just our own culture. We drive data privacy. The customers we pick to put on our platform, all of that gets driven down into the culture, and I think that’s coming through and we’re getting some really big wins. We talked about some of those in the letter, be it on an education or e-commerce or financial services. All of those are coming because we are, at our heart, seen as a company that is really strong in that area.

We’ve talked about the portfolio in the past from WAF to denial of service protection, TLS, and in many of those categories, we are leading. This is, however, an area that we continue to invest in pretty strongly, and you see some of that investment coming through in Compute@Edge. The way that we’ve built Compute@Edge to isolate each of these requests and responses so that we don’t reuse the environment allows us to really have an enterprise offering that customers would like. One of the areas that I think is really interesting around Compute@Edge is how many use cases we’re seeing and that are security-related. But we continue to look for investment opportunities, both …

We continue to look for investment opportunities, both organic and inorganic, and we are certainly looking to find both partners in some form of proximity to us that are proven leaders in their space, have revenue and really focus on this DevOps SEK intersection, where we believe the future is. So we are certainly out in the market looking to find ways to partner with those innovators. But to your point, I do think it’s a misunderstood part of our story and one that you’ll hear a lot more from us about in the future.

Fantastic. Thank you, Joshua, and if I could just squeeze in one more.

Please.

It’s nice to see the record customer adds in the quarter. What can you tell us about the size and wallet of the customers you’re adding today, and as well, how would you characterize what you’re seeing in the funnel in terms of propensity to spend?

Yeah. So I think you know, Brad, pretty well our strategy on the SMB market, which is to go to market with our partners. I think in the last few months, we’ve really seen the strength and the wisdom of that approach where instead of going and figuring out how we can monetize tens, hundreds, millions of individual domains by building a sales machine that does that, we have gone to the largest aggregators and the most sophisticated aggregators, the Shopifys and the Wicks and the Adobes and others. That’s a strong play for us, and it’s something that we want to continue to do. So if you look at the customers that we have in that category of new customers, they tend to be obviously the larger enterprise customers who really will benefit from a direct relationship with us. Most of the smaller customers we would work with our partners on, which we have done historically.

So you’re talking about large wallet sizes, I mean, to put our 300 enterprise customers into perspective, some of our largest competitors in the space have 6,000, 7,000 of these. We are in the early days of this market from our perspective, and I think that universe of 6,000 to 7,000 enterprise customers is very much limited by the lack of programmability and innovation in the traditional sectors. So if you sort of capturize wider to some of these other companies that have 30,000 or 100,000 enterprise customers, that’s certainly where we’re looking at. So we are humbled about where we are at in the journey. It is early, but we’re really stepping into it and seeing that acceleration and pretty excited about it right now.

Awesome. Thank you so much for taking the questions.

Thank you.

Speaker 2: (28:37)
Your next question comes from Rishi Jaluria with DA Davidson. Please go ahead.

Rishi Jaluria: (28:42)
Hey, guys. Thanks so much for taking my questions. One for Joshua, one for Adriel. Joshua, in the shareholder letter, you talk about some notable customer wins, one of those being in the education vertical, which I thought was really interesting, where you have a US university using Fastly to help transition for online learning. Look, as more universities are going fully virtual or at least hybrid this semester or even the academic year, can you talk a little bit about how the education vertical is and how these customers are using Fastly to make that online learning experience better for the students? And I’ve got a follow-up for Adriel.

Sure. Yeah, absolutely. That’s an exciting sector for us right now, and that particular win is particularly exciting just given the nature of who they are. But I think in general, what we’re seeing is a complete rethink of education. When I think just through the eyes of my three boys, I walk upstairs and they are learning on Khan Academy. That’s delivered through us. When I look at the educational institutions that they are a part of, those institutions are really struggling with how do they get content online? How do they do it quickly? What happens if they have content that isn’t right? How can they make sure it’s personalized? All these questions play beautifully into the story arc that developers are the new decision makers, and so at the schools, you have some amazing developers that are innovating.

That innovation is leading to personalized, frictionless experiences. I think if there’s one thing that’s underpinning the gold rush of digital innovation and digital transformation it’s frictionless, scalable, secure digital experiences, and universities are at the forefront of that. So it’s a real growth vertical for us. Very excited about that win and others, and I don’t think the underlying thesis is different. The gold that is coming out of the hills of the modern economy and the golden thread that leads through all of these is actually the same, university space, digital, the need to accelerate digital transformation by years like everyone else does in order to survive.

All right, that’s helpful. Adriel, nice to see some great margin expansion both on the gross margin side as well as just the bottom line. On the cash flow side though, maybe you wanted to … It looks like there was a big increase in AR sequentially, and that’s the reason cash flow is still negative in the quarter. Can you talk a little bit about what is going on there, is that just a customer and COVID dynamic and you wanted to be good partners to your customers, or is there something else going on? Maybe looking beyond the quarter, how should we just be thinking about the translation of EBITDA or non-GAAP operating income to operating cash flow? Thanks.

Yes, good question Rishi. I think you sort of nailed on the head. It was definitely one of these situations where we’re certainly trying to partner with our customers, especially early on in terms of the COVID-19 pandemic. A lot of customers face a lot of uncertainty in terms of what’s going to happen to them in the future, and I think as I’ve mentioned in the last call, most of those partnering in the negotiations with customers is really much more on payment terms that it was on rates. So from my standpoint, I was pleased to see that the majority of what really swung DSO in Q2, most of that was already collected here in the first in the first month of the quarter, so I was pleased to you that. I think in general, you will begin to still see some of that effect. Folks are trying to be really focused on cash, which I understand, and one of the primary reasons why we went out and sought some additional cash ourselves, just to pad the balance sheet a little bit more. We felt comfortable before, and I think we feel even more comfortable now.

All right, great. Thank you, guys.

Thank you.

Speaker 2: (32:40)
Your next question comes from Tim Horan with Oppenheimer. Please go ahead.

Tim Horan: (32:45)
Thanks, guys. Artur, can you talk a little bit more about Compute@Edge and maybe just compare and contrast a little bit to what AWS and Azure are doing? I know you talk server-less. How does that compare and contrast at all to the Lambda products, which I guess is the biggest server-less product out there? Can you compare and contrast your competitors that are kind of more legacy CDN guys that say they have an edge product? Why is your product basically better than theirs at this point? Thank you.

Yes, of course. Hi. Yeah, I mean, it is a serverless product but one adapted to run at edge and deliver the kind of functionality the customers need at the edge. As Joshua said earlier, one of the key things we really need to do is how do you weigh the multi-tenancy and security requirements against the speed requirements and efficiency requirements that comes from operating in a more constrained environment. We’re not in massive data centers in the middle of nowhere, because if we were, we wouldn’t be at the edge. And so, first of all is the underlying technology that we chose to use, which is based on web assembly, and the core notion is that each request run through its own isolated memory environment or sandbox. Kind of like in your browser, if one of your tabs break, it doesn’t take down the entire browser. Same thing here applies.

By making that really [inaudible 00:34:35] for start-up time, for memory, we can deliver that kind of safety guarantees that the enterprise is looking at, especially considering the different shared state attacks that we’ve seen in the CPU world or state sharing attacks. We can deliver that at scale efficiently to our customers. I think that a key is the core technology differentiation. Also, since web assembly is written to support multiple languages, we can very efficiently support the language as the target web assembly, and as more environments and languages target web assembly, that addressable market for people writing in those languages will automatically add to our offering.

But I think that is a huge difference, and that’s what I think will allow people to take a lot more of what they normally just could run in a central location and move out to the edge, and then they will still have access to all the amazing features we have around logging and visibility and the cache storage, but you have much more detailed programmatic access from the edge.

Tim Horan: (36:04)
That is great color. And maybe just when do you think this is really going to start to take off, and do you have a certain sense of the size of the market versus what your product suite looks like now? Thank you.

Yeah. It’s Joshua here.

I’ll pass that one over to Joshua.

Yeah. We’re still on track. We said that this would go through our normal cycle in ’20 and hit in ’21, and we’re still on track for that. In fact, as I mentioned in the prepared remarks, we continue to add functionality to that, and it continues to be successful. I think we’ve talked about this having some impact in ’21, but like with many of our products, we’re going to see customers adopt this as a full package, so we’ll definitely see impact in ’21. That’s what we’re driving towards.

Tim Horan: (36:57)
Thank you.

Speaker 2: (37:00)
Your next question comes from Jeff Van Rhee with Craig-Hallum Capital Group. Please go ahead.

Rudy: (37:06)
Hi, guys, this is Rudy on for Jeff. Thanks for taking my questions. Wanted to start out, I know Wolfgang had left I think back in June, and Adriel, I think you said last quarter for the time being, you would be sort of stepping into his role and overseeing that. I guess, just what are the plans at this point going forward, maybe hiring a new head of sales? What are you guys’ thoughts there at this point?

Yeah. Hey, Rudy. It’s Joshua. So that’s me. I’m stepping in in that role currently. I think that we are looking for a new leader. Wolfe continues to support us in that transition, and I think importantly and I think the results speak this quarter to just an excellent group that has been established below Wolfe. We have a seasoned group of sales executives who are running the business, and I think the results speak for themselves. They have a lot of swagger and certainly deserve to have a lot of swagger given the results that they’re putting up on the board. So not feeling a sense of urgency in the sense that that’s an important role to fill, but we’re going to fill it with the right person, and we have ample time to do that.

Rudy: (38:22)
Great. Got it. Yes, I meant you, not Adriel. And then another one, just as a follow-up, if you think about the … I’m not sure if you could quantify this, but I’m just curious on traffic trends as related to COVID. If you just think month to month, COVID emerges March, traffic probably peaked in April. Just how traffic is trended towards now and if it is still growing now, how has traffic growth, call it May to June, June, July compare to typical seasonality you’ve seen in prior years?

Yeah. Artur has been spending a lot of time in this area, so I’ll hand it off to him to give you some insight. He’s done some really brilliant analysis on this.

… some insight. He’s done some really brilliant analysis on this.

Yeah, hi. I mean, you’re right. The traffic growth in end of March and April was pretty dramatic, and then in May and then in June and July, it’s been less dramatic. The issue we have in trying to parse this out really is the lack of comparisons with seasonality, and clearly traffic has grown more in Q2 than it historically has in any of the previous Q2s we’ve ever had. But one of the things that drove the biggest traffic increases was school closures and, of course, starting in June, schools weren’t closed in the sense that kids were home at school, but schools were just closed. So it’s really hard to answer exactly how the split is. As traffic growth went down, is it mainly because people just started going outside as they usually did in June, July, and how much of that was compensated by the still elevated COVID numbers?

So I’m afraid I don’t really have a great answer, and I’m sure when we have this call a year from now and I can compare three years in a row with that, this year being the one we’ll have the strongest effect, I’ll be able to answer that better.

Rudy: (40:34)
Got it. Great. Thanks, guys.

Thanks, Rudy.

Operator: (40:38)
As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. And your next question comes from Tal Liani with Bank of America. Please go ahead.

Tal Liani: (40:48)
Hi, guys. I have two questions. One is just on the numbers. I’m trying to understand seasonality, and I’m trying to understand what happened this quarter versus next quarter. On one hand, you’re guiding for flat revenue growth for next quarter, while last year you had about 8%, the year before similar, but on the other hand this quarter you grew way more than before, so it kind of evens out between the two. Was there any project or anything that happened that pulled forward demand between 3Q and 2Q, and this is why we see kind of very strong 2Q and flat 3Q? So that’s my first question. Second question is more technical, so maybe we’ll take one at a time.

Sure, yes. Adriel, why don’t you take the first one, then we’ll handle the next one. Thanks, Tal.

Sure. Thanks, Joshua, and hello, Tal. Yes, I think as Joshua, not Joshua but Artur just alluded to earlier and I spoke a little bit as well, which is Q2 was definitely … I mean, it was 62% year-on-year. The traffic growth that we saw in terms of the trillions of bits that we were sort of piping through the network was in an unprecedented pace. I think so you mix that with, traditionally, you normally see Q3 up over Q2 as you begin to head into Q4, which is seasonally our strongest quarter. So I think what you’re seeing is sort of a comparison challenge here, which is really Q2 to Q3, and even then, if you take the midpoint of our guidance, that basically implies about a 50% year-on-year growth. It’s still relatively strong growth I believe in Q3, so from that standpoint, I think that’s probably the biggest thing.

Then there is just uncertainty, as you know, just with respect to one of our largest customers, as well as with respect to school closures, how those will be deployed, and in some respect, how they will be a Q2 regionally. Q2 was unique in the sense that effectively the entire world was working in lockstep with respect to shelter-in-place orders and school closures, and I think as we move beyond that period into Q3 and into Q4, it’s a bit uncertain and uneven how it’s all going to play out, so you’ll probably see a little bit of conservatism there as well.

Tal Liani: (43:01)
Got it. You said that TikTok was 12% of revenues this quarter. How much was it the same quarter last year?

Yeah. So what we said was it’s 12% of revenue for the last six months ending June 30, 2020. Yeah, we have not talked about what it was previous to that.

Tal Liani: (43:19)
Got it. My second question is about your edge cloud. So there are competitors in edge cloud, but you talked about your technical advantages. Are there any applications or any architecture of software that is more favorable to what you’re [inaudible 00:43:41]? I’m trying to understand if there is any segmentation to the market where one type of applications is more likely to come to you, let’s say, traditional applications, ERP, et cetera, versus more newer applications. I’m just trying to understand kind of the niche going after with your solution?

Sure. Artur, you want to take first half of that?

Sure. I think in general when you think of the migration to serverless, a lot of that is new development, a new kind of applications instead on something migrating. But the real way that I look at it is if you’re processing data that is targeted to one user, it makes sense to assemble that data and processes as close to that user as possible, the edge. If you’re collecting data into a data warehouse and then running large models on it, well, then it belongs on a central cloud. So even on the ERP application, the display that I am seeing at the end user pulls data from a whole bunch of different sources, and pulling that data, first of all, authenticating and securing the client and making sure that someone has access, and then after you’ve done that on the edge, going out to different resources. Maybe some of it is cash, maybe some of it has to go back to a central data center or two different ones. Then you assemble that information at the edge. You filter it for what you need, and then you hand it off to the client.

So I think even in that kind of application to me it makes tremendous amount of sense to leverage the edge. So really if it’s data that’s assembled and personal life for the secured and authenticated, one of those things for one specific user, it absolutely makes sense to move that logic as close to the user as possible.

Tal, I think one of the ways that I’ve thought about this, and I’m not as technical as Artur anyway, but edge does not replace the central cloud completely, right? That’s not the story that we’re telling. There are going to be compute jobs. One of the ways that I think about it is things like machine learning training. If you require enormous datasets, really long running training jobs, specialized processes like GPUs, that type of learning and training is very well suited to the central cloud. However, once you’ve trained a model and you’re ready to infer from it in the way that Artur is talking about, that’s a great use case for the edge.

The other area that I think is worth calling out is when you need tremendous large amounts of large persistent data stores like a database like Oracle, for example, lots of information that’s persisted a long period of time, those are also really good candidates for the central cloud where it’s easier to maintain that consistency. So I think about it in the opposite sense, which is what isn’t a good candidate, and that’s really helped me think about where these use cases, where we flourish. It’s just a slightly different way to think about it.

Tal Liani: (47:03)
Got it. Thank you.

Thanks, Tal.

Operator: (47:05)
Your next question comes from Walter Pritchard with Citi. Please go ahead.

Walter Pritchard: (47:12)
Hi. Question for Adriel. On the revenue sources, can you talk about contracted revenue that’s coming in versus overage and how that trended this quarter versus what it’s been historically?

Hi, Walter. Yes. It’s still actually relatively the same, so we’re still about 50% revenue is “committed,” and then about 50% usage of over the commit. I’d say that probably in Q2 it’s a bit higher, but I think from a historical standpoint, we should get back to that level, because every quarter you’re coming up on two new renewals and commitments and whatnot, and folks will readjust their spend for where they normally want to be based on their run rates.

And then I guess for Joshua, on just the new customer demand that’s come in, how would you characterize the consumption of some of these customers that have come on in this current environment in terms of services they’re consuming from you versus what you’ve typically seen. Is it more of a kind of get online to get basic services, or do they tend to take the full offering of products as your install base does?

Yeah. I mean, it matches the install base. It is vertical dependent, but for the majority of our customers, they code at the edge. They use our security features. I mean, this is all bundled together. Possibly five years ago, you had somebody coming to you and say, “Hey, I want to deliver my content but not secure it.” That conversation doesn’t exist anymore. This is always together. You can’t think about one without the other, and honestly, you can’t think about doing this if you are an innovator without having the programmability, visibility control into both security and delivery. So it’s very widespread, and it mirrors exactly the core customer base. That’s what we’re seeing with this really strong net new add of customers, exactly the same thing as we’ve seen in the past.

Okay, great. Thank you.

Thanks, Walter.

Operator: (49:14)
There are no further questions at this time. Mr. Bixby, I turn the call back over to you for closing remarks.

Before we sign-off, I want to say thank you to our employees, customers, partners and investors. All of you contribute to our ongoing success and growth, and we’re deeply grateful. We look forward to connecting with many of you in the near future and hope to virtually see most of you at the upcoming Oppenheimer and KeyBanc conferences. We are confident about our future and look forward to sharing more in the quarters to come. Thank you.

Operator: (49:47)
This concludes today’s conference call. You may now [inaudible 00:49:49].

Fastly FSLY Q2 2020 Earnings Call Transcript

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