Fastly, Inc. Q1 FY2025 earnings call

• Financial Performance: Q1 revenue was $144.5 million, exceeding expectations, with an 8% year-over-year growth. Gross margin was 57.3%, better than projections. Operating loss was $6 million, better than guidance. Free cash flow was $8 million.
• Go-to-Market Transformation: New segmented go-to-market efforts have increased touch with large accounts, driven enterprise and mid-market customer acquisition. Packaging deals more than doubled year-over-year, with new logo deals growing over 80%.
• Product Portfolio: Nearly half of customers leverage two or more Fastly product lines, generating three quarters of revenue. Security portfolio expanded from 1 offering to 3 core offerings, with enhancements in Q1. Compute products drove significant growth in other products, with 64% year-over-year growth.
• Customer Dynamics: Top 10 customers accounted for 33% of revenue, down from 38% in Q1 2024. Revenue outside the top 10 grew 17% year-over-year. New enterprise customers with $100,000 annual revenue threshold were 19 in Q1, and average enterprise customer spend grew 4% quarter-over-quarter to $907,000.

In the first quarter, Fastly's revenue was $144.5 million, up 8% year-over-year. Network services revenue was $113.2 million, growing 7% year-over-year, accounting for approximately 78.3% of total revenue. Security revenue was $26.4 million, also growing 7% year-over-year, making up about 18.3% of total revenue. Other products contributed $4.8 million to revenue, growing 64% year-over-year, representing around 3.3% of total revenue. The customer count was 3,035 and enterprise customer count was 595. The RPO stood at $303 million, growing 33% year-over-year.

• Second Quarter: Expected revenue in the range of $143 million to $147 million, representing 10% annual growth at the midpoint. Anticipates gross margins will increase approximately 50 basis points relative to the first quarter.
• Full Year 2025: Raised revenue guidance to the range of $585 million to $595 million, reflecting annual growth of 9% at the midpoint. Anticipates operating profit in the second half of 2025. Free cash flow expected to be in the range of negative $10 million to breakeven.

• Macro uncertainties could impact 2025 operations, including potential tariff effects on CapEx. - Uncertainty regarding the U.S. policy on TikTok, with revenue from its U.S. traffic after June 19 excluded from guidance. - Market competition may lead to pricing pressures.

Q: Hi. Thank you for taking my question. Really good job on the quarter. I wanted to firstly dive into your network side and the drivers for the upside. What's really driving incremental customer demand? And then I had a follow-up on the security.

A: Yes. It’s a great question. We are pretty happy with the results across the board. We saw strong customer acquisition in some of the strategic verticals we mentioned. And I think that the sales team's ability to execute not just the customer acquisition, but the cross-sell has been enhanced, for sure on under Scott's leadership and under a new incentive plan there. And we've also certainly accelerated our recovery in the largest, in our largest media accounts. And by doing so, posted better-than-expected results, in that top 10 cohort as well.

Q: Hi, good afternoon and congratulations on the strong results. I wanted to start out with your compute and observability business just given the 64% growth there. Can you give us some additional detail into maybe what products drove that and what the demand drivers were and how we should think about that business growth for the rest of the year?

A: Yes. Absolutely. The biggest chunk of that growth is in compute for sure. And it’s interesting we are seeing a lot more of those strategic expansion verticals really focusing on that dynamic user experience. And so they’re using serverless edge compute to be able to give real time experiences, like we mentioned with airlines or travel companies that real time engagement, in the web experience is so important. We are seeing expansion there. And we’ve had some interesting launches specifically on the storage side, allowing some really creative use cases and really the ability to take compute and leverage it everywhere across our network, and drive some real innovation. So it's both in the storage, kind of innovative storage side of the house and that dynamic user experience.

Q: Yes, hi. Thank you for taking the questions. I wanted to ask about the sequential increase in RPO this quarter. It's like the largest in some I mean, if you sort of unpack the drivers there, whether it was sort of the packaging motion and is there any sort of additional sales incentives to the salespeople to sign up these larger commitment contracts? Just want to understand the dynamics behind the strong RPO growth this quarter.

A: Yes. And I think you mentioned a lot of the drivers there. So there’s really three drivers. We had strategic renewals at large accounts, which is great, helps us maintain the predictability of that large customer cohort for the long-term. We have an incentive program that is driving our sales team to negotiate for better and better commits, and that’s across our entire sales force, and that’s certainly helping us drive that number. And the packaging solution, which is becoming more and more kind of the default motion that we're using in the mid market and commercial accounts, that drives RPO by its very nature. And all of those all three of those are contributing factors, I'm certain that that's why we saw a record number on the RPO side of the house and why we are seeing good growth year-over-year. Anything you would add? Ronald Kisling: The only thing I would add, I think last year, we put in an effort to just improve our engagement at more senior levels across our largest accounts. And I think we've also seen some benefit from that engagement in driving larger commits as a percent of their traffic when we see renewals. So I think that's an additional impact that's driving some of success we’re seeing in RPO.