Fastly, Inc. (FSLY) Q1 2020 Earnings Call 

May 6, 2020 

Adriel G. Lares Chief Financial Officer, Fastly, Inc. 

Corporate Participants 

Maria Lukens Vice President - Investor Relations, Fastly, Inc. 

Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. 

Artur Bergman Chief Architect and Executive Chairperson and Chairperson of the Board of Directors, Fastly, Inc. 

Other Participants 

Jeff Van Rhee  Analyst, Craig-Hallum Capital Group LLC 

Jonathon Ho Analyst, William Blair & Co. LLC 

Brad Zelnick Analyst, Credit Suisse Securities (USA) LLC 

Charles Erlikh Analyst, Robert W. Baird & Co., Inc. 

James E. Fish Analyst, Piper Jaffray & Co. 

Jacek Rycko Analyst, Citigroup Global Markets, Inc. (Broker). 

Brad Robert Reback Analyst, Stifel, Nicolaus & Co., Inc. 

Robert Majek Analyst, Raymond James & Associates, Inc. 

Rishi N. Jaluria Analyst, D.A. Davidson & Co. 

Management Discussion Section 

Operator Operator

Good afternoon. My name is Christina, and I will be your conference operator today. At this time,  I would like to welcome everyone to the Fastly First Quarter 2020 Earnings Conference Call. All  lines have been placed on mute to prevent any background noise. After the speakers' remarks,  there will be a question-and-answer session. [Operator Instructions] Thank you. 

I would now like to turn the conference over to Maria Lukens, Vice President of Investor  Relations. Please go ahead. 

Maria Lukens Vice President - Investor Relations, Fastly, Inc. 

Hi, everyone. Thank you for joining our first quarter 2020 earnings call. We have Fastly's CEO,  Joshua Bixby; Chief Architect and Executive Chairperson, Artur Bergman; and CFO, Adriel Lares  with us today. Before they start, I would like to mention that we are joining you remotely today  from our home offices and we apologize for any technical difficulties it may cause. 

I also want to remind everyone about the format of our call. We published a shareholder letter  on our Investor Relations website and with the SEC about an hour ago. We hope everyone had a  chance to read it. Since the letter provides a lot of details, we will make some brief opening  remarks and reserve the rest of the time for your questions. 

During this call, we will make forward-looking statements, including the 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. Please take a look at our filings with the SEC and our Q1  2020 Shareholder Letter for a discussion of the factors that could cause our results to differ. 

Also note 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 Chief Executive Officer & Director, Fastly, Inc. Thanks, Maria. Hi, everyone, and welcome. Thank you for joining us today to discuss our first quarter 2020 results. Before we dive into the results, I want to take a moment to acknowledge the COVID-19 pandemic, something that has and is continuing to greatly affect the entire world. As with everyone else, we are closely monitoring the situation and our thoughts are with those whose lives have been so fiercely affected by COVID-19. 

As we collectively navigate these unprecedented times, we at Fastly are intently focused on ensuring the safety of our employees and communities, while simultaneously continuing to provide scalable, reliable and the most secure digital experiences for our customers. To protect our employees and their families, we shifted to a fully remote workforce on March 1 and expanded sick leave benefits. We also suspended all nonessential travel. Staying true to our Fastly values, we're also prioritizing the health and safety of our communities. 

We doubled our open source and nonprofit program to provide $50 million of free Fastly services to nonprofit organizations around the world, and we've contributed to public health organizations fighting the virus. Lastly, but certainly not least, we're prioritizing our customers who rely on Fastly to help protect and deliver news, connections, commerce and entertainment to billions of end users around the world. Our customers' content has never been in higher demand as more people are staying at home and we are proud to be their partner in reliably and securely delivering it. 

To ensure the health and reliability of our network, we applied additional resources to increase monitoring, refine capacity planning and add redundancy to our supply chain. Our network is designed to handle spikes in traffic and continues to perform flawlessly. We are very confident in our underlying business model. The structural changes we anticipate coming out of this pandemic help our business in the short and long term. We remain confident in the long-term efficiency of our business model and we anticipate we will continue to see leverage as we grow. 

Now turning to results. We delivered strong first quarter results with continued top line growth generating $63 million in revenue, up 38% year-over-year. We continued to see strong customer adoption of our edge cloud platform and security products by both new and existing customers across multiple verticals. Our enterprise customer count grew to 297, up from 288 last quarter, with average enterprise customer spend also increasing to $642,000, up from $607,000 in the previous quarter. This resulted in enterprise customers generating 88% of our trailing 12-month total revenue, up from 87% last quarter. Our existing customers are continuing to rely on us more as reflected in a consistently strong dollar-based net expansion rate of 133%.  

We also continued to demonstrate the stickiness of our platform as reflected in our new metric, net retention rate, which was 130%. Additionally, we are seeing the results from the investments 

that we made in 2019 in our demand generation, sales and marketing teams, which is also reflected in the increased total customer count of 1,837, up from 1,743 last quarter. As I touched upon in the shareholder letter, Fastly's platform is playing an important role as we continue to operate in these uncertain times. 

As social distancing measures increased over the March period, we continued to see increased traffic across the Internet and our platform, which certainly provides an additional boost to our results. But more than anything, our first quarter results were driven by Fastly's strong business fundamentals and the quality of our offerings, which we believe will continue to attract the best of the web.  

Fastly is the platform of choice for innovators. We are partnering with the most technologically advanced and creative companies, who we believe will not only weather this storm but will continue to thrive in this environment. Companies are increasingly recognizing the importance of digital transformation, not only to survive during these uncertain times but also for long-term success. As we are seeing this trend accelerate and evolve, we believe we are best positioned to partner and grow with these companies as they look for a trustworthy and modern platform.  

For these reasons, we are even more inspired as we continue building and investing in our offerings and network. More of our customers are using Compute@Edge through the beta program. We've also been learning from them and are inspired to see the variety of innovative use cases that we're enabling. The feedback we are receiving enables us to iterate and improve the product in order to drive further transformation at the edge. We are on track and expect to further expand the availability of Compute@Edge in the second half of the year.  

We are also continuing to adapt our modern network to meet the new demands of Compute@Edge. We want to keep being as efficient, if not more, as we've been in the past. When I stepped into the role of CEO in February, we were just starting to comprehend the magnitude of COVID-19. It was not the challenge I expected to face during the first few months. But I can sincerely say that the challenges we're facing are bringing out the very best in Fastly as well as our community because it's never been clear how instrumental our platform is in making the Internet and people's lives better.  

Our first quarter results and guidance reflect that Fastly is uniquely positioned to empower our customers and will continue to drive growth as we all weather the current storm together. Before I hand off to Adriel to walk through our financial discussion, I want to touch upon a leadership transition.  

Wolfgang Maasberg, Fastly's EVP of Global Sales and Field Operations, will be departing from the company in November 2020 to pursue personal passions. Wolf has been a huge part of Fastly for the past four years and we are grateful for everything he has done. As of the middle of June, I will directly oversee Global Sales and Field Operations with support from Wolf to ensure a seamless transition. During this transition, I will evaluate what leadership mix is required for Fastly's next phase of growth. 

With that, I will turn it over to Adriel. 

Adriel G. Lares Chief Financial Officer, Fastly, Inc. 

Thank you, Joshua, and welcome, everyone. We appreciate you joining during these challenging times and hope everyone is remaining healthy and safe. As Joshua mentioned, Fastly had a strong first quarter as reflected in our robust results and 2020 guidance, which I will talk about in a little more detail shortly.  

Before we move to Q&A, I want to briefly touch upon some of the key financial results. We generated $63 million in revenue, representing 38% year-over-year growth. We also continue to deliver a healthy gross margin as we continue to pursue leverage opportunities in the business as we scale. GAAP gross margin was 56.7% for the quarter, consistent year-over-year. Non-GAAP gross margin, which excludes stock-based compensation, was 57.6% for the quarter, up from 57% in the year prior. 

As we have said, in previous quarters, our gross margin can be impacted by the timing of personnel and infrastructure investments as well as the seasonal ramp of usage and requests by customers on our platform. All that being said, despite the current economic uncertainty, we believe we can continue to drive gross margin expansion next quarter and over time. We ended the quarter with $187 million in cash, restricted cash and investments in marketable securities. We're pleased to have a strong balance sheet and liquidity as we navigate this economic environment. We also continued to make progress on our path towards profitability. 

Our results and guidance reflect the efficiency of our platform and modern network design. We will continue to identify opportunities to drive operating leverage as our network scales and pursue sustainable growth. Although macroeconomic conditions are in flux, we have never been more confident about the demand of our platform and the continued growth of our company. That's why we're raising guidance for the full-year 2020. 

Beginning first with the second quarter, we expect revenue in the range of $70 million to $72 million; non-GAAP operating loss in the range of minus $2 million to breakeven; non-GAAP net loss per share in the range of minus $0.02 to breakeven. For the full-year 2020, we've increased our revenue guidance range to $280 million to $290 million from $255 million to $265 million; with non-GAAP operating loss range of minus $20 million to minus $10 million from a loss of minus $43 million to minus $33 million; and non-GAAP net loss per share in the range of minus $0.15 to minus $0.08 from minus $0.43 to minus $0.32.  

In closing, we believe we are well-positioned to execute during these challenging times. We have a superior edge platform and product offerings, which are serving a diversified customer base that continues to innovate. We're also strategically investing in our network, Compute@Edge and security offerings that will continue to power our future success. 

With that, I'll turn it back to the operator to take your questions. 

Question and Answer Section 

Operator Operator 

[Operator Instructions] Your first question is from Jeff Van Rhee from Craig-Hallum. Your line is open. 

Jeff Van Rhee Analyst, Craig-Hallum Capital Group LLC 

Great. Thanks for taking my questions, guys. Wow, what a quarter. Hugely impressive here. So a couple of questions for me, maybe Joshua, just starting with the COVID impacts, can you talk about the revenue strength in the quarter in particular and the guide and sort of segment it? What are the relative drivers on the revenue upside? 

Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Sure. Hey, Jeff. Thanks for the question. I think that in order to understand the COVID impacts, we really have to step back and say Q1 was really only impacted for the first two – last two weeks of March, right? So in Q1, we saw a couple of weeks of this, and I think that has impacts all the way through, obviously, the financial statements. I think that we – there are two phenomenons here. The first is that COVID, obviously, as we force – as people have been forced home, the work-from-home, shop-from-home, play-from-home, learn-from-home, and frankly, obsessed-from-home elements are all real and they're increasing. 

The real thing that we saw is that school closures was actually the largest impact and Artur did some great work on pulling this out as we were looking at what was actually happening. We published a blog post on that. So we know that there's an elevation there. I think when you look at our customer base what you see is, we are the platform for innovators. I said that earlier, but you think about Slack and working from home; you think Shopify and shopping from home; or Pinterest, playing from home; or I watch my kids on Khan Academy learn math, all of those experiences are from the most innovative companies, those who have adapted – adopted digital transformation. 

So we have one theme here which is, those digital transformers those who are ready have certainly seen an escalation. I think we're going to see a continuation of that. We definitely have seen a change in how that has happened over this period and I think a continuation. There's another element here. When you see this in the total customer growth and you see that our marketing efforts, our work explaining what innovation can happen on a modern edge cloud, we're starting to see the impact of that. 

And so, I think you're seeing another phenomenon which is at the same time as we are in COVID, we also are seeing the impact of the marketing investments and new customers realizing they have to digitally transform quickly. And you can't digitally transform quickly when you actually can't control or work with your system where you have huge amounts of ProServe that have to go into that where as a system built by developers for developers, we're uniquely positioned to capture that inspiration and to serve the best of the web. 

Jeff Van Rhee Analyst, Craig-Hallum Capital Group LLC 

Very helpful. And I guess if I could shift gears to Compute@Edge, you certainly called that out in your prepared remarks and some of the innovation and unique innovative use cases that you've seen play out there. Can you put a finer point on that in terms of how many betas when it goes GA? How do we sort of put up some bounds around the expectations on revenue and margin impact, maybe just flesh out Compute@Edge a bit more?  

Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Sure. We called it out because, obviously, the core of what we've always brought is to allow developers to innovate and Compute@Edge is the next step in maintaining our significant advances in that market. So I'll answer a few of those and I'd love to pass it to Artur to give you some examples of that, but let me touch on a few of them. We're well on track. We have said in the past and continue to maintain that, we're moving more aggressively through that beta and into the LA phase, limited availability phase, this year and this will have a revenue impact next year in a way that we'll be able to quantify and speak to.  

I think from a margin perspective, this is the high margin side of the business. When you can move application logic from your central cloud or your data center into the edge to have it be more scalable, more performance, more secure, that is the highest margin side of our business. So we definitely see it having an impact there. I think what's really exciting about the last four months, five months of this is to see the innovative use cases and Artur has been very close to that. So, Artur, a couple examples there might help flesh that out for you, Jeff. 

Artur Bergman Chief Architect and Executive Chairperson and Chairperson of the Board of Directors, Fastly, Inc. Hi, Jeff. Thank you, Joshua, and nice to speak to all of you again. Yeah, the use cases we're seeing range from like a couple of different areas. And then, one that is kind of is really cool for me to see because it wasn't [indiscernible] (00:17:15) earlier has to do with digital encryption, signing and trying to protect content and content and applications from attacks, be more smarter at the edge and not letting that kind of traffic go all the way back. Same with our own authentication identity.  We're also seeing kind of data loss protection solutions that people are experimenting with as well as what we talked about before which has to do with even much more personalization. And 

again, when customers personalize, they drive more revenue to drive more engagement. And so, it's been this push and pull where if you personalize you can't use the edge efficiently. So then if it gets slower and if things gets slower you do lose some engagement. And so, customers are really eager to move more of that personalization or all of it as closer to user as possible.  Jeff Van Rhee Analyst, Craig-Hallum Capital Group LLC  Very helpful. Great. Thanks for taking my question guys, and congrats again.  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Thanks, Jeff.  Operator Operator  Your next question comes from the line of Jonathan Ho from William Blair. Your line is open.  Jonathon Ho Analyst, William Blair & Co. LLC Hi. Good afternoon. Let me echo my congratulations as well. One thing that I wanted to understand a little bit better is that historically you've had some revenue tied to live streaming events, and with some of the challenges around COVID, can you maybe quantify for us what those impacts look like? And, yeah, we'll start there.  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Thank you, Jonathan. Thank you for the congratulations. Obviously, it's with mixed emotion because this is a difficult time for everyone. I think what we have been very clear I think in past earnings calls and you know the business very well is that, we don't rely on being an events-driven business, which – and we've said in the past, we don't go build capacity just for events. We have always maintained a really healthy balance here. 

I think one of the phenomenons that we're seeing in this work-from-home, play-from-home, shop-from-home world is although there aren't the same live events especially on the sporting side that we would have seen, we are continuing to see live linear. So other live linear examples continue to be important for customers. And so, because we haven't relied on those, I think the impact to us compared to others in this space is obviously very different.  

But we all are – because we are the platform for innovators and we serve the most valuable content, the most valuable content is really the content that's being consumed the most as people are sheltering. So we have seen overall growth in that area of the business, notwithstanding the lack of traditional live events. I think that just speaks to the exposure that we have more than anything. 

 Jonathon Ho Analyst, William Blair & Co. LLC Got it. And then just relative to pricing, can you talk about whether you've seen any sort of benefit or pick up just given that you have the capacity put into place related to COVID or otherwise in terms of your ability to maybe extract better pricing in this environment?  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Sure. I mean, this is early, obviously, and early days. I think we're seeing a really interesting phenomenon and I alluded to it earlier which is, as organizations try to grapple with this new reality, they realize that digital transformation – and we all know that that's a code word euphemism sort of story arc, but what it really means is go faster and adapt and innovate. We're seeing this trend where organizations who are perhaps on a legacy provider realize that the speed at which they want to go can't be enabled by an army of ProServe people, can't be enabled by technology, you can't configure it yourself or integrate it into your development environment or that isn't ready for the enterprise. 

And so, actually one of the things that we're seeing I think, and again it's early days, is the special attributes that we uniquely bring to the market around our ability to do application logic and compute at the edge. Our ability to have everything be transparent, be a product that feels and acts like your own, something you can build directly into your enterprise, CI/CD environment. All of those things allow us to be uniquely positioned. 

And we've seen some examples over the last six weeks, some protracted negotiations that have gone on that have just sped up dramatically. Price is not the underlying issue and neither are some of the terms because organizations that want to be the platform of – to innovate, ultimately, really look at the market and don't see a lot of credible choices. So it's early to say, but I think it's our unique value proposition is showing up pretty strongly in terms of abating any price pressure that might have – might exist in the market for – at least from our perspective.  Jonathon Ho Analyst, William Blair & Co. LLC Thank you.   Operator Operator  Your next question comes from Brad Zelnick from Credit Suisse. Your line is open.  Brad Zelnick Analyst, Credit Suisse Securities (USA) LLC Great. Thanks so much, and congrats on the strong momentum and being there to power so many of the digital experiences we've become only more dependent on during the last couple of 

months. Joshua, maybe for you, just as we try to understand the demand and CapEx dynamics that we're seeing here in the numbers and that you've spoken to, were you at all constrained from a capacity perspective in Q1 as the pandemic hit in any region? And can you talk about where the average utilization of the network was in March maybe compared to prior months or even a year ago? And how has utilization been since then?  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Sure. Let me answer at the high level and then Artur has been very deeply involved in some of this, so I'd love to get his perspective on this as well. I think what you see in the CapEx numbers, obviously, is that we recognized very early that there was something amiss in the numbers. One of the amazing things about being the platform for innovators is that you get a bit of an early warning sign of what innovative companies will do, and we saw them well before we closed our business in March. We saw them start adapting and so we adapted.  

So what you're seeing in that CapEx number is us being proactive in pulling some of the CapEx that normally would have been in Q2 up into Q1 in order to deal with any particular capacity need. We've talked in the past about being such a high-growth business that we always have to have room on the network and thankfully we have that. I think Artur is probably in a good position to give you some more insight into the specifics. But, ultimately, we saw it early and we were very well prepared. 

Artur, anything else to add to that?  Artur Bergman Chief Architect and Executive Chairperson and Chairperson of the Board of Directors, Fastly, Inc. Yeah. We have had significant growth in usage. We've had a couple of places that have had run harder than we kind of wanted, but we've had capacity nearby that has been able to handle that traffic without a problem. We did publish the blog post, Joshua mentioned earlier, couple of weeks ago that kind of has some of the countries in there that shows load. 

But our general locality of how we want to grow the network and the kind of spare capacity we want to have because of our rapid growth certainly served us well when this hit because we used up some of that – or fair amount of that spare capacity, but that was – that supply was there and that's why we – how we forecast out into the future. So we have not been constrained on capacity to our customers. We have been able to deliver what they purchased in the past and what they're purchasing and asking for right now.  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. One thing, Brad, I think you know...   

Brad Zelnick Analyst, Credit Suisse Securities (USA) LLC Thank you, guys. That's good...  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. ...you're well familiar with, of course, is the sort of the efficiency of the network, and that certainly has been a strong part. Our software-defined modern network is very different obviously than our competitors' networks or the competitor – the entire subset of the competitive network and our ability to do the same with in the orders of magnitude less servers certainly played into this as well. And I think that efficiency just continues – or the gap in that efficiency just continues to build for us.   Brad Zelnick Analyst, Credit Suisse Securities (USA) LLC Makes perfect sense to me. Maybe if I can just follow up with a quick one for Adriel. Adriel, your guidance implies nice leverage in the business and appreciate your comments on gross margin leverage. But more broadly, how are you thinking about the path to profitability in your current capital position here? Has anything changed just given what's going on in the world?  Adriel G. Lares Chief Financial Officer, Fastly, Inc.  Thanks, Brad. And, I mean, generally, we felt good about our path to profitability sort of pre-COVID. I think we feel just as good about it, if not maybe a little bit more confident about it, just based on the fact that we are seeing stronger demand which is reflected in our sort of annual top line revenue guidance. And so, from where we are from the cash position, where we are from the profitability position, I would say that nothing's changed other than [indiscernible] (00:27:04) incrementally more confident if and everything we're seeing at that time.  Brad Zelnick Analyst, Credit Suisse Securities (USA) LLC Awesome. Thank you so much, guys.  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Thanks, Brad.  Operator Operator  Your next question comes from the line of Will Power from Baird. Your line is open.   

Charles Erlikh Analyst, Robert W. Baird & Co., Inc.  Hey, guys. This is actually Charlie Erlikh on for Will. Thanks for taking our question, and congrats on the really strong results. I'm wondering if you could talk about your exposure to some of the more impacted customer verticals, like oil and gas, hospitality, travel, consumer discretionary. Is there a rough way maybe to think about what percentages of your customers are in those verticals?  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. No. We don't break that out, Charlie. Overall, it's a very small percentage. I mean, when you think about oil and gas and then the hospitality and travel business together, you're looking at small single digits.  Charles Erlikh Analyst, Robert W. Baird & Co., Inc.  Great. Thanks. And I'm also wondering if you could unpack maybe your assumptions in Q2 and for the rest of the year in terms of maybe contract repricings or customer nonpayments or things related to some of the customers' segments feeling pressure. I know it's a small percentage but are you baking in some assumptions for bad debt or contract repricings and things like that?  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Sure. Let me go with that way at a high level and then I'll hand it off to Adriel. I think at a high level, the fact that we are a platform for innovators, and the innovators are seeing success in this market because they digitally transformed and built their businesses for exactly these moments, I think that is a very different profile than you'd see in others. But like everyone there is some exposure. And Adriel has some more – would have some more insight into that.  Adriel G. Lares Chief Financial Officer, Fastly, Inc.  Yeah. Thanks, Joshua. And thanks, Charlie, for the question. Yeah, at least at this time, we're not seeing anything yet. And to Joshua's point, the majority of the customers that we have on our platform are those innovators, are those sort of larger enterprise customers, which makes up the bulk of our revenue. And so far, they seem to be in good shape. There was a slight uptick in DSO but there wasn't anything concerning from a – as a long-term basis, at least what we can see right now, it is something that we continue to monitor on sort of a weekly basis, daily basis. But at this time, we're not seeing anything at least concerning from a sort of a Q2 perspective.    

Charles Erlikh Analyst, Robert W. Baird & Co., Inc.  Great. And thanks for taking my question, and congrats again on the very strong results.  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Thanks, Charlie.  Charles Erlikh Analyst, Robert W. Baird & Co., Inc.  Thank you.  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Give our best to Will.  Charles Erlikh Analyst, Robert W. Baird & Co., Inc.  Will do.  Operator Operator  Your next question comes from the line of Rishi Jaluria from D.A. Davidson. Your line is open.  Rishi N. Jaluria Analyst, D.A. Davidson & Co. Hey, guys. Thanks so much for taking my questions, and I'm glad everyone's staying safe out there. Two questions I wanted to ask, one financial and one a little bit more philosophical. So on the financial side, clearly margins are coming up nicely especially with the spike in traffic and especially local guidance, a chance we could see maybe even EBITDA positive next year – next quarter. Just as we think about the full year with your operating margin guidance, how should we be thinking about cash conversion in this environment? Are there any customers that are talking about changing the minimum traffic commitments or talking about extending payment terms or anything like that? And then I've got a follow-up.  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Sure. Adriel, why don't you grab that one?     

Adriel G. Lares Chief Financial Officer, Fastly, Inc.  Sure. So I think on some respects, similar to sort of the last question we received, we haven't seen anything as of late even from sort of a payment terms collection standpoint, but as well as on the contractual terms we haven't seen anything major just than a few folks. And you could probably get those verticals that have asked for some additional payment terms, and some of them have asked for some slight changes but nothing of any sort of magnitude, and especially given just what it represents today of our revenue that's been sort of reflected in our current guidance.  Rishi N. Jaluria Analyst, D.A. Davidson & Co. Got it. And Adriel, just how should we be thinking about cash conversion relative to what you've guided for non-GAAP operating income?  Adriel G. Lares Chief Financial Officer, Fastly, Inc.  Are you sort of getting to our cash flow sort of ultimately down to the bottom line?  Rishi N. Jaluria Analyst, D.A. Davidson & Co. Yeah. Ultimately, trying to think about cash flow and then and I think you've already guided to CapEx, but just trying to think of what does that look like in terms of the operating cash side of the equation?  Adriel G. Lares Chief Financial Officer, Fastly, Inc.  Yeah. I'd say that – yeah, the biggest driver from sort of the free cash version – free cash flow perspective is really going to be driven by the non-GAAP operating or sort of EBITDA-like metrics. And to the extent that we feel like we're getting better there, which you can see in the guidance we are reflecting more leverage and better leverage that will ultimately drive itself down to free cash flow.  

I think the other thing we are going to continue to monitor is, as Joshua pointed out earlier, if there are any sort of near-term impacts with respect to traffic surges or the resurfacing of COVID-19 impacts later in the year that we need to account for, we may sort of think about from a CapEx standpoint, but at least at this point think about the leverage coming directly from sort of the operations side of it, I don't necessarily see anything majorly negative with respect to working capital. 

At this point, working capital seems to be in line with what we're expecting. And then, the only other thing could be on the CapEx side that, at least from what I can tell and what I can see, I 

still feel comfortable with the 13% to 14% sort of CapEx percentage of revenue guidance range. And I think hopefully that gives you some perspective on that.  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Rishi, I'd also add to that that we're in the early innings of a gigantic market and I think our bet on Compute@Edge and our continued investment in security speaks to that. So I think that the other side of this is obviously we're going to continue to invest, we're in the early innings of this. And so, there's a balance between those two that Adriel and I spent a lot of time talking about. But there's definitely an emphasis on the investment side as well.  Rishi N. Jaluria Analyst, D.A. Davidson & Co. Okay. Great. That's helpful. And then just philosophically, clearly, you're getting a benefit from software in play stay at home, work from home, all that. And I think that's very strongly reflected in the Q2 guidance. Given that now some places are starting to talk about reopening offices or are starting to reopen parts of the economy. Even California, which is the first state [ph] to be in a true (00:33:54) lockdown is starting to talk about that, obviously, wonder why there are more people going outside.  

How do you think about how kind of long-lasting these benefits from social distancing are? I mean, is there a – some of these changes in behavior irreversible? Should it kind of go back to more normalized growth rates that we used to see pre-COVID? Just what's the way that you're thinking about this as you are forecasting investment business? Thanks.  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Sure. Yeah. It's a great question. Obviously, it's difficult to predict a couple – 1.5 months into this I think. From our perspective, one of the things that you see when you look at our DBNER, the new stat that we brought out around net retention, what you see is that when customers try us, they see – they haven't – they see a new world, right? This is a platform that is just so different, faster, more secure, and more scalable. It just – it is a platform from which you can't go back. 

And so, I think one of the things that we see in these disruptive times is people taking risks and innovating as we've talked about. So when you look at the world that we predict and we certainly hope that we get back to a normal world as quickly as we possibly can, we do think that there is going to be some lasting impacts. But you're seeing two phenomenon here. One is, that's going to take time. But the other and I think more important phenomenon that you're seeing here is actually the phenomenon of the acceleration of digital transformations.  

So what you're actually seeing is customers that normally maybe would have stayed with the incumbent, stayed in 

a pretty modern world, an antique world, actually are taking the opportunity that change presents to really bring out the – to really enact to this form of digital transformation, which is really only possible on our platform. And so, I do think we are going to see some lasting trends. 

I mean, I did my first grocery store order to my house 20 years ago. And I didn't do anything for 19 years and I'm now doing groceries to home and I don't think I'm ever going to go back. I really like that this happens for me during this time. I think we are going to see patterns like that stay. But, overall, I think what we are predicting, and when you look at our story arc for the year and beyond this, is just a fundamental transformation in how people look at the role the edge plays, and more importantly a modern edge.  Rishi N. Jaluria Analyst, D.A. Davidson & Co. That’s helpful. Thank you so much.   Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Thank you.  Operator Operator  Your next question comes from the line of James Fish from Piper Sandler. Your line is open.  James E. Fish Analyst, Piper Sandler & Co.   Hey, guys. Nice quarter. Hope you're doing – sounds like you're doing pretty well despite the difficult time, and hope the same for your families and friends. Just two related questions. First, so you guys are kind of the newer vendor on the block here. How much of an impact related to COVID-19 do you think impacted actually your enterprise sales process, including more so on the security related sales?  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Yeah. It's Joshua here. Obviously, early to tell in an enterprise sales cycle. As I alluded to earlier, we are seeing an acceleration of the sales cycle in certain instances where customers are realizing they need to innovate, but – and that goes not just for the sort of delivery, content delivery side, it's also on the security side. So we're seeing patterns in both. It's early days, so I would say I'm optimistic, but we'll check back within a quarter to tell you what a whole quarter looks like of COVID-related sales.     

James E. Fish Analyst, Piper Sandler & Co.   Got it. And then keeping on the security discussion, peers have made moves to own the bot management space and you guys partner in this space with a private vendor. I guess, why do you view it as a strength to partner here as opposed to own the space when web traffic more than half of it is coming from bots today?  

< <A – [06FLDK-E]Joshua Bixby – Fastly, Inc.>: Yes. It's a really good question in a very important market. I think, if you look at our approach to almost all of the markets we're in, it stems from this developer-oriented mentality, which is we think people should have choice. And if you look at some of our investments, for example, in image optimization or other areas, we do have a homegrown solution in that. We also are the backbone and the platform for the most innovative image IO companies in the world. 

And so, I think what you will see on the bot side is a similar strategy, which is we certainly partner with a few vendors. And over time to your point as this becomes a – continues to be an important element, we are always considering whether that's something that we should also bring out ourselves. I think the point that you raise is that it's very important, and we've continued to partner and invest in that area as well. So that's a – it's a very important area to our customers.  James E. Fish Analyst, Piper Sandler & Co.   Got it. Well, thanks, guys and have – good luck.  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Thanks, James. And the best to you and your family as well.  James E. Fish Analyst, Piper Sandler & Co.   Thanks.  Operator Operator  [Operator Instructions] Your next question comes from Jacek Rycko from Citigroup. Your line is open.  Jacek Rycko Analyst, Citigroup Global Markets, Inc. (Broker) Hi. Thank you for taking my question. This is the Jacek in for Walter. We heard lots of views positive commentary from you regarding uptick of the edge platform. And so, looking at your revised full-year guidance, just setting aside what has already been accomplished in Q1, when 

we look at the remainder of the year the guidance seems to imply over $20 million of upside at close to 80% operating margin. So the question – a two-fold question here. One, to what extent is this positive operating leverage uplift? To what can we ascribe it to larger demand for your higher value software services? And when we try to translate that operating leverage into gross margin, how much of it to be ascribed to gross margin and what factors should we consider, things like more favorable mix, efficiencies and maybe pricing? And I do have a follow-up.  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Sure. I'll take that from a high level and then pass that to Adriel. I think in many ways all of the above. We continue to see demand for the higher value products that we offer. And that – it's really difficult to separate these from a customer perspective. When one of the biggest sort of vendors that we've run across, for example, one of the world's largest e-commerce platforms that we mentioned in the letter comes to us, you're not having a conversation that doesn't include security.  

I mean, that's just not a conversation you can have. It's not a reasonable conversation to have. So I think, at the outset, we are seeing that customers don't think of delivery and security separately or delivery scale and security separately, this is all one thing. So I think I would start from that premise and then hand it off to Adriel to sort of talk through some of the other nuances of it.  Adriel G. Lares Chief Financial Officer, Fastly, Inc.  Yeah, Jacek, it's Adriel here. With respect to sort of what we are reflecting in operating leverage for the rest of the year, I'll start first on the gross margin side. So for Q2, I do think we're going to get some incremental gross margin improvement in Q2 relative to Q1. Big reason there is we only had a couple of weeks' worth of sort of that revenue, and I think just given what we're seeing at the sort of – from what we saw in March, I think we should see a good outcome in Q2 relative to on gross margin.  

Now as you get beyond that, I think that's where we're taking sort of high-level revenue. We're trying to figure out also where we think gross margin will be. We talked in the past why we don't guide gross margin generally just because of sort of the ins and outs of requests versus [ph] then with respect to usage (00:41:55), et cetera, etcetera. But at least on the – as you go down to the bottom line, the other thing we're trying to figure out is how well we will be able to spend efficiently. How do we make sure that the folks that we do bring onboard and recruit make them effective? Whether we'll actually be able to do that during this time as we've gone to a work-from-home situation and we've got to sort of rethink a lot of our processes and be thoughtful about that.  

And I think I'm reflecting a bit not only the revenue, I think sort of a – with some respect to normalized gross margin pattern that we've seen historically, and then also accounting for what do we think we're going to build, spend and spend thoughtfully and wisely.  Jacek Rycko Analyst, Citigroup Global Markets, Inc. (Broker) Thank you. And how do you approach hiring for sales and technical roles in the current environment? Do you find yourself hiring opportunistically or expecting to do so?  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Yeah. It's Joshua here. Hiring has – obviously, the environment's changed. We can't meet people face-to-face. We have many of our groups, as you would expect, who are home and who are taking care of kids, taking care of elderly folk, and the rest – and their community. 

So I think the answer is, we remain open for hiring. We are continuing to hire. We are being more thoughtful about the load that that brings to the business, and hiring has actually gotten more difficult in this environment. But when you're growing like we are growing, obviously, that's something that we are continuing to invest in.  Jacek Rycko Analyst, Citigroup Global Markets, Inc. (Broker) Thank you so much.   Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Thanks, Jacek.  Operator Operator  Your next question comes from Brad Reback from Stifel. Your line is open.  Brad Robert Reback Analyst, Stifel, Nicolaus & Co., Inc.  Great. Thanks very much. Guys, if we think about the – from a high level that $25 million guide up for the year, how much would you attribute to COVID-related workload like you talked about work-from-home, school-from-home versus where the organic business was running pre-COVID? Thanks.  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Adriel, do you want to take that?  

 Adriel G. Lares Chief Financial Officer, Fastly, Inc.  Yeah. Hey, Brad. Adriel here. So it's a bit difficult to distinguish, especially given that we're sort of only two weeks into it. A lot of our – if you've noticed, our ranges are kind of stuck to where they were before, so we applied effectively the same methodology that we had before. And I think as we get more data, we'll get a better sense of how much of this is just sort of longer term impacts that COVID has touched off or catalyzed, how much of this is sort of relatively near term.  

But I think there's also just the seasonal aspect of normally in the second half of our year we tend to accelerate. We tend to have – folks tend to shop as a result of holidays and [indiscernible] (00:44:53) we have the fact that we have more of these commerce-native e-commerce companies on our platform, I think that benefits us as well. So, again, I think we'll have a little bit more sense of that I think once we get past Q2 in terms of maybe what the mix of that or at least what we're seeing and you may see some of the blog post that we maybe will publish on or maybe talk about on an earnings call.  

But at least at this point, it's kind of a little bit difficult to sort of disentangle the two. I mean a lot of what we're seeing here is just based on sort of current traffic patterns that we're seeing and tried to extrapolate as best we could and also taking feedback directly from customers in terms of what they're seeing.  Brad Robert Reback Analyst, Stifel, Nicolaus & Co., Inc.  Great. Thanks very much.  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Thanks, Brad.  Adriel G. Lares Chief Financial Officer, Fastly, Inc.  Thanks, Brad.  Operator Operator  And your next question comes from Michael Turits from Raymond James. Your line is open.  Robert Majek Analyst, Raymond James & Associates, Inc. Hey. This is actually Robert Majek on for Michael today. Congrats on the strong results this quarter. Just wanted to follow up on the previous question, is your full-year revenue guide 

implied – full-year guide implied strong incremental margins on the $25 million revenue raise. I think part of that – a lot of that is underutilized server capacity going into the quarter and you'll have to add a [indiscernible] (00:46:05) server costs at some point on an income statement perspective. Just how should I think about that dynamic and how may incremental margins look like [indiscernible] (00:46:13) further revenue upside here this year or going into 2021?  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Sure. Adriel, do you want to take that one as well?  Adriel G. Lares Chief Financial Officer, Fastly, Inc.  Yeah. I'll take this one. Thanks. It's not – the other thing I would sort of add to that is not just servers. And you have colo, you've got a number of other things that we're going to have to sort of think about as we see what demand we're seeing out there as well. And, overall, we as a company have committed just given our very efficient footprint from a server standpoint to continue to drive leverage. Now all that being said, we also want to make sure that we can deliver the flexibility that our customers are asking of us. So I think it's a bit of a – it's why gross margin is more challenging to sort of forecast than anything else. But I think what you're seeing mostly is on the operating margin side again, and that really is more from an operating expense side. In terms of, again, the thoughtfulness and the challenge with actually hiring in this environment, ramping people, and our ability to spend both on the sales side and from a marketing standpoint, we do believe we're going to get to a more normal situation that we've see before, which is – and we're intending to do that because, historically, we've gotten a good return on that investment. And so, I think that is what's being incorporated into that non-GAAP operating guide for the entirety of the year.  Robert Majek Analyst, Raymond James & Associates, Inc. Appreciate it.  Adriel G. Lares Chief Financial Officer, Fastly, Inc.  Thank you.  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. Thanks, Robert.      

Operator Operator  There are no further questions at this time. Mr. Bixby, I turn the call back over to you.  Joshua Bixby Chief Executive Officer & Director, Fastly, Inc. I want to thank our employees and their families, along with our customers, partners and investors, without whom we could not have achieved a strong quarter and success over the years. We look forward to connecting with many of you in the near future, and hope to virtually see most of you at the upcoming Craig-Hallum, [ph] BMO (00:48:03) and Baird conferences. We are confident about our future and can't wait to share more with you in the quarters to come. Thank you.                             

  

Fastly, Inc. (FSLY) Raymond James Technology Investors Conference 

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