Fastly, Inc. (NASDAQ:FSLY) is a leading provider of edge cloud computing solutions, empowering businesses to deliver fast, secure, and engaging digital experiences. The company has faced a challenging environment in recent quarters, navigating through revenue declines and operational headwinds. However, Fastly remains committed to its strategic initiatives, focusing on customer acquisition, platform unification, and product innovation to drive long-term growth.

Financials

In the fiscal year 2023, Fastly reported annual revenue of $505,988,000, a decrease from the previous year's figure. The company's annual net income stood at -$133,088,000, reflecting the ongoing investments in the business. Fastly's annual operating cash flow was $361,999,000, while its annual free cash flow was -$31,906,001.

For the first quarter of 2024, Fastly reported revenue of $133,520,000, representing a 14% year-over-year increase. The company's gross margin improved to 58.8% in the quarter, up from 55% in the same period last year. Fastly's operating loss for the quarter was $9,700,000, a significant improvement from the $14,100,000 loss in the first quarter of 2023.

Fastly's revenue growth was driven by strong performance across its product lines. Network Services, the company's core delivery offering, grew 12% year-over-year to $105,996,000. Security revenue, a key growth area for Fastly, increased by 16% to $24,600,000. The company's Other segment, which includes Compute and Observability solutions, saw a 43% jump in revenue to $2,924,000.

The company's geographic revenue breakdown shows that the United States accounted for 74% of total revenue in the first quarter of 2024, while international markets contributed the remaining 26%. Fastly's enterprise customers, defined as those with annualized current quarter revenue exceeding $100,000, generated 91% of the company's total revenue during the quarter.

Customer Base and Retention

Fastly's customer base continued to expand, with the total number of customers reaching 3,290 as of March 31, 2024, up from 3,100 in the same period last year. The company's enterprise customer count stood at 577, a net decrease of 1 from the previous quarter but an increase of 37 year-over-year.

The company's Last-Twelve Months Net Retention Rate (LTM NRR), a key metric that measures customer retention and expansion, was 114% in the first quarter of 2024, up slightly from 113% in the previous quarter but down from 116% in the same period last year.

Risks and Challenges

Fastly's management has identified several factors contributing to the company's recent revenue challenges, including a reduction in revenue from a small number of its largest customers. The company has seen increased volatility in these top accounts, with some customers adding additional content delivery network (CDN) vendors, reversing the vendor consolidation trend observed in the past. Additionally, Fastly has experienced slightly higher pricing pressure in some of its largest accounts, without the corresponding increase in traffic volume that has historically accompanied such pricing changes.

In response to these headwinds, Fastly is taking decisive action to enhance its engagement with its largest customers. The company has implemented a new customer engagement model, dedicating more resources and focus to these key accounts to drive platform penetration, price control, and overall performance optimization. Fastly believes this strategic shift will help the company regain momentum and return these large accounts to growth.

Outlook

Looking ahead, Fastly has provided guidance for the second quarter of 2024, expecting revenue in the range of $130 million to $134 million, representing 6% to 9% annual growth. The company anticipates a seasonal decline in gross margins, with an expected decrease of approximately 130 basis points relative to the first quarter. Fastly expects its non-GAAP operating loss to increase to a range of $16 million to $12 million for the second quarter.

For the full year 2024, Fastly has revised its revenue guidance to a range of $555 million to $565 million, reflecting annual growth of 11% at the midpoint. The company expects to continue its focus on gross margin improvement, anticipating an increase of approximately 200 basis points, plus or minus 100 basis points, compared to 2023. Fastly's non-GAAP operating loss is expected to improve to a range of $28 million to $22 million, representing an operating margin of -4.5% at the midpoint, a significant improvement over the previous year's operating loss margin of -7.2%.

Recent Developments

Fastly's strategic initiatives, including its focus on customer acquisition, platform unification, and product innovation, are expected to drive long-term growth. The company's recent introduction of Fastly Accelerate, a series of global events for its customer network, and the general availability of its bot management solution, demonstrate its commitment to enhancing the value proposition for its customers.

The company's channel program has also gained traction, with deal registrations and revenue contribution more than doubling year-over-year in the first quarter. Fastly's packaging motion, which provides customers with predictable pricing and reliable revenue for the company, has also seen strong momentum, with the first quarter of 2024 exceeding all the customer packaging purchases sold in the first half of 2023.

Conclusion

Despite the near-term challenges, Fastly remains well-positioned to capitalize on the growing demand for edge cloud computing solutions. The company's focus on innovation, customer engagement, and operational discipline positions it to navigate the current volatility and chart a path towards sustainable growth in the years ahead.