Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly First Quarter 2024 Earnings Conference Call. I would now like to turn the conference over to Vern Essi, Investor Relations at Fastly. Please go ahead.

Thank you, and welcome, everyone, to our first quarter 2024 earnings conference call. We have Fastly's CEO, Todd Nightingale; and CFO, Ron Kisling, with us today. The webcast of this call can be accessed through our website, fastly.com and will be archived for 1 year. Also, a replay will be available by dialing (800) 770-2030 and referencing conference ID number 754-3239 shortly after the conclusion of today's call. A copy of today's earnings press release, related financial tables and investor supplement, all of which are furnished in our 8-K filing today, can be found in the Investor Relations portion of Fastly's website. During this call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, product sales, 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. For further information regarding risk factors for our business, please refer to our filings with the SEC, including our most recent annual report filed on Form 10-K and quarterly report filed on Form 10-Q filed with the SEC and our first quarter 2024 earnings release and supplement for a discussion of the factors that could cause our results to differ. Please refer in particular to the sections entitled Risk Factors. We encourage you to read these documents. Also note that the forward-looking statements on this call are based on information available to us as of today's date. We undertake no obligation to update any forward-looking statements, except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Unless otherwise noted, all numbers we discuss today, other than revenue, will be on an adjusted non-GAAP basis. Reconciliations to the most directly comparable GAAP financial measures are provided in the earnings release and supplement on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Now I'll turn the call over to Todd. Todd?

Thanks, Vern. Hi, everyone, and thanks so much for joining us today. First, I'd like to give a quick summary of our first quarter financial results and related highlights. I'll then discuss our revised revenue outlook and provide an update to our go-to-market initiatives and customer acquisition as it relates to our path forward to drive revenue growth. I will then hand the call over to Ron to discuss the changes in our metrics, our first quarter financial results, and our guidance in detail. I'm pleased that we reported revenue of $133.5 million for the first quarter, representing a 14% year-over-year growth and coming in above the midpoint of our $131 million to $135 million guidance range. Our customer growth and retention efforts showed improvement in the first quarter with our LTM NRR at 114%, up slightly from Q4's level of 113% and reversing quarterly declines in this metric since the end of 2022. Our total customer count in the fourth quarter was 3,290, which increased by 47 customers compared to Q4 and by 190 year-over-year. Enterprise customers totaled 577 in the quarter, a decrease of 1 from Q4. We brought in 18 net new enterprise customers at the $100,000 annual revenue threshold in the quarter. This is mostly offset by customers that dropped below this threshold due to seasonality. On a year-over-year basis, we grew our enterprise customer count by 37. Our gross margin continues to improve and was 58.8% in the first quarter, up 320 basis points year-over-year and ahead of our expectations. Our operating loss was $9.7 million in the first quarter compared to an operating loss of $14.1 million in the first quarter of 2023. I'm very pleased with this result as our loss was materially better than our guidance of $14 million to $10 million. The upside was roughly split between higher gross margins and better OpEx cost control, and Ron will share more details with you in a moment. Lastly, we posted positive $3.7 million in adjusted EBITDA and, importantly, an $11.1 million positive cash flow from operations. I'm pleased with the continued momentum on operational execution here, especially as it helps us fuel growth moving forward. Now let me discuss the highlights of the quarter. In the first quarter, we continued our success in diversifying our logo wins and penetrating new and existing customer verticals. We had amazing wins in the healthcare sector during the first quarter with a leading health solutions company, a major government research agency, and a leading imaging provider. These key lighthouse accounts will help us accelerate more customer acquisition in healthcare, drive growth in an important sector, and deliver better vertical differentiation to our business. The healthcare industry has always been focused on reliability and performance, making Fastly a perfect fit. We continue to penetrate the mobile app market in high tech. In the first quarter, we won Bending Spoons, a leading mobile app developer serving over 500 million people across the globe. In France, we are now supporting MWM, a top app publisher, which selected Fastly's content delivery and image optimization services to support its AI-driven model. In the business services vertical, we're proud to announce that a leading customer data platform will be onboarding with Fastly. We also won one of the world's largest realtor companies with over 100,000 agents in over 100 countries. It's a great example of how we landed in the real estate vertical with MoxiWorks, which we discussed last quarter, and we're able to build upon that vertical expertise with this new real estate win. In the first quarter, we introduced Fastly Accelerate, a series of in-person global events developed exclusively for Fastly's customer network of developers, security professionals, and business leaders. The first event was held at our headquarters in San Francisco on April 4 and was widely attended. We will be following up with similar events worldwide in 2024 with London, New York, and Sydney to follow. Lastly, I'm pleased to announce that Fastly's OHTTP private Relay won the 2024 DEVIES Award for Best Innovation in Services: Application Development! Our solution is widely used in the top web browsers on the Internet to help extend privacy to millions of users and is beginning to find other use cases in privacy and security. In the first quarter, we continued to drive focus and investment into platform unification and expansion. We enabled self-service adoption with a universal login feature across our solutions and improved product trials and upgrades platform-wide. Expanding our platform is key to our platform strategy, and that's why I'm so excited for bot management to become generally available in Q1. Our bot management solutions combat automated bot attacks at the edge and significantly reduce the risk of fraud, distributed bot attacks, account takeovers, and other online abuse. This is an important cybersecurity milestone for the company, significantly expanding our security offering. Our DDoS services best-in-class WAF and bot management solutions make up an incredibly tight complete security offering in the web application and API security space. We've already seen significant uptick here, and it is great to see both customer expansion and acquisition leveraging this new capability so quickly. Security is a great example of innovation velocity at Fastly. Our WAF continues to be highly differentiated with low false positives and a predominance of customers operating in full blocking mode. Our bot management solution was 100% developed in-house and is already competing well against the most mature products on the market, and there are significant innovations and product enhancements to come. We set up a very strong foundation in 2023 with our newly introduced packaging motion that gained momentum throughout the year. In the first quarter of 2024, we updated Fastly packages by launching observability SKUs, fixed price add-ons, and enhancements to our packages, especially in security to continue delivering simplicity, value, and choice to our customers. I'm excited to share with you that in the first quarter, we already exceeded all the customer packaging purchases sold in the first half of 2023. Our packaging motion gives customers reliable billing and shows their confidence in Fastly by signing up for longer-term commitments. Package billing provides predictable pricing for our customers and predictable, reliable revenue for Fastly. Additionally, our channel program continues to grow and mature. In the first quarter, deal registrations and revenue contribution more than doubled year-over-year. In fact, for the first time, the largest deal in a quarter closed through a channel relationship. Our channel partners continue to have strategic importance in our go-to-market efforts. Our CEO search has been a key focus this quarter. I'm happy with the progress we've made as we're now in the final stages. We've interviewed numerous candidates to find the right expertise and a balance of operational know-how and the strategic ability to grow and scale. I'm pleased that we've narrowed our candidate down to just a handful, and we should have a selection finalized within a few weeks. I expect to announce a new Chief Revenue Officer in the second quarter. Now let me turn to address our outlook going forward. Our second quarter guidance of 6% to 9% year-over-year growth and modified 2024 annual guidance of 12% year-over-year growth are not where we expected our business to perform, and of course, are disappointing. Ron will discuss the financial details to this forecast in a moment, but let me first address this outlook and our path forward. There are a few factors that contributed to a challenging short-term environment. The biggest factor is a reduction of revenue from a small number of our largest customers. The first quarter revenue from our top 10 customers dropped from 40% to 38%. Many of the top 10 accounts run a multi-vendor strategy, and we did see significant volatility here, and there are a few reasons for this. Firstly, historically, Fastly has gradually won greater traffic share in our largest accounts, but with the timing of rate and volume changes, we saw increased volatility this quarter. To be clear, we have not been removed from any of our largest customers, and we remain in a strong strategic position with each of them long-term. Secondly, in some accounts, we did see an addition of CDN vendors, a reversal of the vendor consolidation we saw last year. And thirdly, we are seeing a slight uptick from the typical level of rerates with our largest customers. But we have not yet seen the commensurate traffic expansion usually associated with this motion. Very positively, we are seeing continued success with the new customer acquisition motions and notably added 2 very large new logos in Q1, one of which will move into the top 10 over the course of the year. We aim to see the long-term results of our new customer acquisition motion having an increasing effect on our revenue as the year goes on. Going forward, we strongly believe our strategy is correct, and we will remain committed to our focus on growth. We will continue to invest in our customer acquisition and go-to-market motions. We are shifting the way we engage with our largest multi-vendor customers to focus on improving our visibility and driving traffic and revenue share in those accounts. We remain committed to platform unification and expansion, helping us drive cross-sell and growth. We will continue to drive engineering investment in this effort coupled with the expansion of our security portfolio with bot management to drive stickiness and wallet share with our customers. As a backdrop to these investments, we will continue to drive discipline in managing our spend with a clear focus on efforts leading to long-term growth. In summary, we are pleased with our first quarter performance, but we are not satisfied with our Q2 outlook and 2024 guidance. We're laser-focused on revenue growth initiatives, innovation velocity, and customer acquisition. And now to discuss the financial details of the quarter and guidance, I will turn the call over to Ron. Ron?

Thank you, Todd, and thanks, everyone, for joining us today. I'll first discuss changes to our metrics disclosures before turning to our financial results and business metrics. I will then review our forward guidance. Note that unless otherwise stated, all financial results in my discussion are on a non-GAAP basis. We continue to focus on sharing the business metrics that provide the most useful information to understand and monitor the progress of our business. Beginning with this first quarter 2024 release, we have discontinued the disclosure of quarterly NRR, DBNRR, the number of markets and countries and our bandwidth statistics. Conversely, we are now disclosing our revenue by product line between network services, which is our core delivery products offering, security, which is our growth offering, and other, our emerging products offering, which includes compute and observability products. We have provided a trended 8-quarter history of this revenue in our Investor Supplement because we are now providing revenue from our full security portfolio; we will no longer be reporting Signal Sciences revenue on a stand-alone basis. Signal Sciences' acquired firewall solution has been integrated with Fastly's legacy firewall, which we now refer to as our Next-Gen WAF. Our legacy firewall revenue has largely transitioned into the Signal Sciences WAF or Next-Gen WAF. Note that our combined security revenue reflects the impact of the decline in our legacy WAF revenue taking place during that integration. Lastly, as our supplement only includes the trailing 8 quarters, I will provide the revenue breakout for the first quarter of 2022 here in my prepared comments. Network Services revenue was $83.9 million. Security revenue was $18.2 million, and other revenue totaled $0.3 million. Turning to our financial results. Revenue for the first quarter increased 14% year-over-year to $133.5 million, coming in slightly ahead of the midpoint of our guidance range of $131 million to $135 million. Specifically, on our two largest product lines, Network Services grew 12% year-over-year to $106 million, and security revenue grew 16% year-over-year to $24.6 million. In the first quarter, we experienced normal seasonal traffic patterns. This resulted in a sequential decline in revenue, highlighted by expansion in some areas, particularly gaming, offset to a lesser degree by e-commerce-related traffic and lower traffic at our largest customers. Our top 10 customers comprised 38% of our total revenues in the first quarter of 2024. Compared to 40% in Q4 2023, reflecting the impact of lower traffic at our largest customers. Also, no customer accounted for over 10% of revenue in the first quarter. Our trailing 12 months net retention rate was 114%, up from 113% in the prior quarter and down from 116% in the year-ago quarter. These figures continue to demonstrate our very low churn and healthy customer retention dynamics. At the end of the first quarter, our RPO was $227 million, down 4% from $236 million in the fourth quarter of 2023 and down 6% from $242 million in the first quarter of 2023. This decline is primarily due to our largest customers working through the remaining obligations over their contract terms. As Todd shared earlier, we had 3,290 customers at the end of Q1, of which 577 were classified as enterprise, a net decrease of 1 compared to an increase of 31 in the fourth quarter. Enterprise customers accounted for 91% of total revenue on an annualized basis in Q1 compared to 92% in Q4, and the average spend of enterprise customers was $846,000, down 4% from $880,000 in the previous quarter and up 6% from $795,000 in Q1 of last year. I will now turn to the rest of our financial results for the first quarter. Our gross margin was 58.8% compared to 59.2% in the fourth quarter of 2023. Recall that fourth quarter gross margins were 58.3% after adjusting for the one-time $2.8 million take-or-pay true-up payment, reflecting a 50 basis point quarter-over-quarter improvement. Our gross margin improvement was a result of continued cost control efforts in bandwidth transit costs and related services costs. Operating expenses were $88.2 million in the first quarter, an 11% increase compared to Q1 2023 and up 5% sequentially from the fourth quarter. While our operating expenses were better than expected due to our continued management of costs, remember that we do see a seasonal increase in our employee costs in the first half of the calendar year due to increased employer payroll taxes. This favorability in our operating expenses, combined with slightly better-than-expected gross profit, resulted in an operating loss of $9.7 million in the first quarter, exceeding the high end of our operating loss guidance range of $14 million to $10 million. In the first quarter, we reported a net loss of $6.5 million or $0.05 loss per basic and diluted share, compared to a loss of $10.8 million or $0.09 loss per basic and diluted share in Q1 2023. Our adjusted EBITDA was positive in the first quarter, coming in at $3.7 million compared to negative $1.9 million in Q1 2023. Turning to the balance sheet. We ended the quarter with approximately $331 million in cash, cash equivalents, marketable securities and investments including those classified as long-term, up from $329 million at the end of Q4 2023. Our free cash flow for the first quarter was negative $2.2 million, a $19.7 million sequential increase from negative $21.9 million in the fourth quarter. This increase was primarily driven by an increase in our cash from operations to positive $11.1 million compared to negative $7.4 million in the fourth quarter. Our cash capital expenditures were approximately 9% of revenue in the first quarter coming in just above the high end of our guidance of 6% to 8% of revenue we shared on our Q4 call. As a reminder, our cash capital expenditures include capitalized internal use software. For 2024, we anticipate our cash CapEx will be in the 6% to 8% range with deployments to be weighted toward the first half of the year. I will now discuss our outlook for the second quarter and full year 2024. I'd like to remind everyone again that the following statements are based on current expectations as of today and include forward-looking statements. Actual results may differ materially, and we undertake no obligation to update these forward-looking statements in the future, except as required by law. As Todd shared in his remarks, we are facing a challenging environment of revenue decline, and our largest customers overshadowing the impact of new customer acquisition and product pipeline. Our guidance reflects these dynamics in our business and the visibility that we have today. We expect a flat to modest sequential decline in Q2 revenues compared to our Q1 results due to lower traffic, specifically at our largest customers. We also will not benefit in 2024 from the favorable impact of the CDN consolidation that occurred in early 2023 that drove favorable sequential growth in the prior year same period. For the second quarter, we expect revenue in the range of $130 million to $134 million, representing 6% to 9% annual growth. We continue to be very disciplined in our network investment and cost of revenues, which contributed to our first quarter gross margin being approximately 60 basis points better than we had initially expected. We typically see a seasonal decline in gross margins in the first half with improvement in the second half as we build capacity for peak traffic. For the second quarter, we anticipate our gross margins will decrease approximately 130 basis points relative to the first quarter, plus or minus 50 basis points. As we had mentioned previously, our Q1 operating loss was moderately better than our earlier expectations due to continued cost management and slightly slower hiring. Our second-quarter operating results will reflect the impact of the seasonal decrease in gross margin and the impact on our operating expenses of higher first half employer payroll expenses. As a result, for the second quarter, we expect our non-GAAP operating loss to increase to $16 million to $12 million and our non-GAAP loss to be $0.10 to $0.06 per share. For calendar year 2024, we expect revenue in the range of $555 million to $565 million, reflecting annual growth of 11% at the midpoint. We expect to continue to see gross margin improvement in 2024 and to continue our spending discipline while increasing our investment in go-to-market and product development. We anticipate our 2024 gross margins will improve by approximately 200 basis points, plus or minus 100 basis points relative to 2023. As a result, we expect our non-GAAP operating loss to increase to a range of $28 million to $22 million, reflecting an operating margin of negative 4.5% at the midpoint, an improvement of over 35% over 2023's operating loss margin of 7.2% and by over 70% over 2022's operating loss of 17.7%. We expect our non-GAAP loss per share to improve to $0.12 to $0.06, reflecting the improvement in our operating loss expectations, and we expect our free cash flow to be close to breakeven in 2024 compared to negative $59 million in 2023. Before we open the line for questions, we would like to thank you for your interest and your support in Fastly.

Wonderful. Todd, Ron. Todd, let me start with you. Last quarter, after the first guide down, you talked about the pricing environment being relatively kind of in line with how it's been historically. It sounds now like there's maybe a little bit more intensifying pricing pressure in spite of the fact that there is consolidation going on, as you pointed out, and vendors exiting the space. Can you speak to what has maybe changed in the past 90 days in terms of that? And what tools do you have in your arsenal to maybe start to counteract those headwinds? And I've got a quick follow-up for Ron.

Yes, I appreciate the question. I think in the general market, I would say the pricing trend that we had been seeing sort of continues. But what we saw in our top 10, 15 large accounts, we saw slightly more kind of pricing pressure than we're used to. That's had an outsized impact for us, and we are trying to make sure that we're doing the right adjustments to our projection based on that. Usually, pricing changes we see a commensurate volume increase as well. We still hope to see that, especially in some of these key accounts, but it's really in the high in the large primarily media accounts where we're seeing a little bit more pricing pressure than normal. The rest of the market, I still feel pretty confident in the pricing. Trends have been pretty good. Anything you could add there, Ron?

No, I think the period of we saw a more modest rerates historically. I think that continues across the broad market, but we have seen a change in the largest accounts.

Okay. That's helpful. Ron, regarding the investor supplemental, you mentioned highlighting RPO as a key metric. Can you explain why this is now considered a more important leading indicator, especially since a significant portion of the business is still based on consumption rather than pre-commitment? Also, how should we interpret the sequential and year-over-year decline in RPO? What needs to occur for that figure to return to healthier levels?

Yes. That's a good question. First and foremost, over time, as we start to see more and more of the business packaged, I see that momentum gain. As Todd mentioned on the call, we saw more packages in Q1 than we saw in the full first half of last year. Those will be additive. So over time, it will be a better indicator of our business. And as it grows, it's also going to reduce some of the volatility that we've seen, particularly in the first half of this year. In terms of the decline, first and foremost, we really look at it kind of on a year-over-year basis. A lot of our customers do have annual commitments. But some of our largest customers do have 2-year contracts. And so what you're really seeing is some of our customers who have multiyear contracts as they sort of burn through that ahead of their renewal is creating some headwinds or declines on a year-over-year basis in the RPO.

I'll just add this. I think the reason I do believe that's a good metric for us to start looking at, and they'll become more and more relevant over time, is that for the packaging transition will start to hit. We're seeing more and more of our large enterprise and even in midsized enterprise accounts engaging on packaging, and that impact is going to be shown on that line as we move forward.

First, just to kind of clarify on the guide. Last year at the Analyst Day, you guided to free cash flow breakeven for the year. Is that still attainable? And then Todd, you mentioned the shift in the engagement approach to customers. How long is it going to take to train the sales team on this engagement shift? And when can we see that turn into higher growth in net retention rate? And then what gives us the confidence in the strategy here versus where you were in mid-February and the market clearly was different? What have you learned in that last few weeks that tells us this new path and the guide are going in the right direction?

Yes. On the free cash flow, I think we're continuing commitment to managing our expenses in line with our revenue outlook. As I mentioned in the prepared remarks, this does create some headwinds, but we expect to be very close to breakeven for 2024 on our free cash flow.

The management of large accounts and engagement with them is a vital concern for us at this moment. We need to respond to market realities with both conviction and urgency, which is exactly what we are doing. Our top 15 to 20 accounts contribute significantly to our revenue, and we are focusing on how we interact with them, enhance product adoption, manage pricing and discounts, and optimize their performance through a comprehensive technology solution. We see an opportunity to improve our engagement across all these areas and are committing more resources and attention to them. Currently, we have introduced a new engagement model that emphasizes higher interaction with our major accounts. We've been implementing this for a few weeks, and I am pleased with the progress we are making. Observing the changes in our projections for these accounts over just one quarter since February, it was clear that a significant shift in our engagement strategy was necessary, and we are actively making that transition now.

You've been doing this for 2 weeks now, and do you believe you've found the right formula, or is it going to take a bit longer to develop? How should we view this?

I mean, look, I think we're going to be evolving that formula for quite a while, but I think we have the right resources on it now. We have deployed a lot of resources, a lot of the most significant resources into that effort very quickly, and I'm happy with the progress so far.

Todd, I guess this is more suitable for you. If we look at the back half of the year. And if we look at your guide, right? Going down to 7.5% growth for second quarter. And then this reacceleration in the back half of the year to 12% growth, what's given you the confidence in that right now? And additionally, too, if we look into the second quarter, what about second quarter is driving so much of the volatility?

Yes. Looking at the projections for the second half of the year, we have seen an increase in both ramping customers and new customer acquisition. This is driving revenue growth as new customers join the platform. I am quite confident that we will see this revenue growth in the second half. The change in our revenue projections from the last quarter to this quarter is mainly due to the large accounts. Consequently, we have significantly adjusted our engagement model. The reason for this shift is that we have observed a slight pullback in the vendor consolidation trend, which has reversed, leading some customers to even add additional vendors. Additionally, we are experiencing more pricing pressure in this segment. These large accounts are crucial for us, and their performance has a significant impact on our overall results.

I would like to add that in the second half, we typically experience seasonality in the business, with the second half usually seeing an increase of about 10% or 11%. When we evaluated the second half, we considered the business situation in Q2 and, as Todd mentioned, we have signed a number of new customers. We believe that the seasonality we have observed is consistent with the dynamics we're seeing in the second quarter.

And then maybe just a quick follow-up, too. As those customer ramps understand what's going on with customer acquisition. But if we just stay in those 15 large customer accounts, do you see those accounts stabilizing after the second quarter relatively? Or do you think we should expect and model declines in that cohort through the end of the year just given the trends that you're seeing in the market now?

Yes, I think our projection is fairly cautious. I believe we will see an increase in traffic levels, and we will succeed in recovering revenue from those large accounts. We're providing this guidance because there's a new projection that we want to be transparent about. However, I see potential for us to exceed that projection and not only halt the decline but truly turn the trend around in the second half.

This is Mark speaking for Fatima. Could you provide some insights on the current package and borrowing uptake? Specifically, how are we doing in terms of penetration within our customer base and the impact from acquiring new logos? Additionally, I've heard that the annual packaging has shown considerable variability and improved revenue visibility. Can you quantify how this is reflected in today's revenue predictability?

Yes. Look, I think in the long run, the channel engagement will help us drive customer acquisition through deal registration. And we're starting to see some effect of that broadening significantly beyond where our channel was strong 1.5 years ago, which was really just in the security portfolio. We're seeing the channel engaging across the board. This past quarter, our largest deal closed, our large new booking closed, not just through the partner but also on the packaging solution. And so I think both of these trends are helping not just in the midsized and small accounts but in large accounts as well. So we've had, I think, some real success on the channel growth and the importance of the channel on the go-to-market. The packaging has, I think, in large part, helped us move more quickly, bringing new customers to the platform, especially midsize and large traditional enterprises to the platform. It has a very attractive feature of sort of a no overages model for those customers to give them very predictable billing. And it really gives us much more predictable revenue, which has had a great impact so far. I'm pretty happy with both of those. And I think we're doubling down on both of those initiatives. And really, that's a big part of this kind of initiative across the board, where our biggest focus is on revenue growth and driving that revenue growth back up into the 20s where it really should be.

Got it. Okay. Maybe just a follow-up. We would like to discuss some of the recent regulatory scrutiny facing one of your largest social media customers. Can you explain how that is affecting your business overall? Is this also reflected in your updated guidance?

Yes, completely. And thanks for repeating the question. For sure, I think first and foremost, we are fully committed to supporting all of our media customers through any sort of transition they happen to be having in this case that you're referring to, should there be any sort of transition or significant transition there, we're doubling down on being able to support them and support them through that transition, however it may come to life, but our engagement with that account has been super strong, and we're pretty positive on the way that will shake out any way you slice it. We are, of course, modeling some risk in here, but I'm pretty confident in the path forward.

And we will take our next question from James Fish with Piper Sandler.

Guys, maybe the best way to ask this one is guideline set to the minimum contract level you guys have, but what are you assuming for those customers that you're seeing the issues with? And per our discussion, you said you really weren't seeing any large renewals like your competitor, your main competitor was this year. Are you just seeing that earlier now because you saw more volumes than anticipated, and so you have moved up or walk me through that?

So I think if you look at each customer, if you work with the large customers, there are different dynamics in each one. And within their multiyear commitments, the amount of traffic that they're running in some instances, as Todd spoke about, we did see some pricing changes that were not accompanied with traffic increases. Our renewals sort of spread across the year. And then secondly, we did see some of our largest customers where they added in an additional CDN that reduced some of our traffic levels at those customers. And so those were the dynamics, each one is a little bit different, but it was really a combination of the pricing changes and traffic share with increasing the number of CDNs at some of our largest customers.

Right, Ron. My question is about your intention regarding RPO, which doesn't reflect Rishi's previous question, as RPO mainly includes the minimum contract levels you have. Historically, you have had around 80% visibility for any given year based on those minimum contract levels. As we consider this revised guidance, I'm wondering how much above the minimum contract level you are currently experiencing, so we won't find ourselves in another 90 days asking why Fastly is lowering its guidance again.

Yes. I have two things to clarify. When looking at our largest customers, while some have commitments, a significant portion operates on a utility basis rather than a committed one. This means that it's not reflected in our RPO when there's no underlying commitment in the customer contract. Consequently, you will see a mix of customers with commitments and those without. Even in cases where there is a commitment, a customer may consistently run traffic above that level. We are still predicting or forecasting based on the traffic levels or utility usage.

To look at that just from a slightly broader lens, I think it's fair to say that we've seen some more rerates in our largest 10 or 15 accounts in the past quarter. And I take your point on the competitive messaging we've heard. I think that is a fair point; I've got high confidence in the adjusted guide here because I think we shipped through that largely, and we're really moving back to the path of growing those accounts and expanding not just the volume we see but the product penetration in those accounts as well.

To focus on the same subject, could you clarify what else is included in the network services revenue? Specifically, how many different products do you offer in that category, and what are you generally selling to your customers?

Yes. On the network services side of the business, we offer services related to content delivery, which includes video streaming and full site delivery and replication globally. We utilize various technologies for image optimization, live events, streaming, live event monitoring, rate reservations, and more. When I refer to product penetration across the platform, I mean our growth in security, observability, and increasingly in compute as well.

Thank you for the revenue breakdown, but it seems that compute only accounts for 1% of revenue. Is observability categorized under network services, or does it fall into a different category?

Observability falls into other.

And one of your largest competitors last quarter said they were going to bundle really aggressively with compute. They kind of imply they were going to use price on CDN to win back customers. I mean, are you seeing them pull back on that at this point? I mean, it would seem like that would last for a year or two, if they're going to make comments like that and pursue that strategy. Are you seeing them pull back? Or do you think your quality at this point is such that your core customers are not going to be impacted by what they do on the pricing or bundling front?

I don't believe the largest customers will be affected by pricing changes because they are high-tech clients who prioritize performance, service levels, and reliability. These customers are quite experienced, and there’s limited pricing flexibility in such accounts. We are highly competitive not only in performance but also in pricing with our top 10 accounts. I believe we are fostering a new level of engagement in these accounts to return that group to growth. Additionally, I see significant potential in bundling, particularly downmarket, and that’s where I've noticed some success against competitors. Our packaging solution is also making strides in bundling, and we have observed success in that area as well.

And we will take our next question from Rudy Kessinger with D.A. Davidson.

So I just want to understand, I mean, you guys gave that guide halfway through Q1. When exactly in the quarter did these customers start repricing contracts and adding other CDNs and moving share, et cetera? And with these repricings, I guess, you guys just have no control over it whatsoever? They just asked for repricing. You guys do it within a couple of days. I mean, I just don't understand how three months ago, you told us you didn't have any large repricing expected. And now it turns out you did within a 6-week time frame.

Yes, I think a couple of things. Regarding the dynamics Todd mentioned about pricing, a lot of that developed towards the end of March and early April when we noticed some of our customers reversing their trend of consolidating on CDNs, which impacted our traffic projections for the year. As we engaged in some of the expected rerates, those negotiations resulted in larger discounts than anticipated, without the typical increase in traffic we have historically experienced. These were the key factors. The relevant timeframe was late March to early April when we observed these various dynamics affecting some of our largest customers, which have a significant impact on our revenue outlook and growth rate.

Okay. The larger-than-expected pricing pressure seems to contradict expectations, especially considering that several smaller low-cost vendors have exited the market in the past six months. What are your thoughts on why you had to lower prices significantly despite experiencing less traffic growth than usual, given that there are now fewer competitors and fewer low-cost options available? Lastly, Ron, how much visibility do you have regarding revenue for the second half of the year? What percentage of the implied second-half revenue guidance represents the minimum for mix?

Yes. I'll take the first half. I think it's a fair question. We saw significant changes in pricing and traffic projections at the end of the quarter and the beginning of the second quarter. An important point is that there are a few accounts where our revenue forecast has decreased. These are large accounts that can fluctuate greatly, and they require specific handling and optimization. This is why we're adjusting our approach there. I believe we have the opportunity to return to growth in those accounts, but our projection reflects our current situation.

I think the only thing I would add on the second part is, while again, a significant portion of our business is on a utility basis. The largest accounts had their pricing and/or these adjustments in traffic in March and April. And so our outlook reflects those activities that occurred in the largest accounts. And so the variability in the smaller accounts should have less volatility as we move through the year.

And we will take our next question from Jeff Van Rhee with Craig-Hallum. This is Daniel on for Jeff. You referenced earlier the volatility with some of the larger customers, can you just expand on that in terms of volatility? Volatility is a term referencing some one-time changes or some quarterly changes just to this quarter? Or just sort of what did you mean in terms of some of the volatility?

Yes, we had a few accounts in that large group that negotiated rate adjustments in the previous quarter. Typically, such an adjustment would be accompanied by a proportional increase in volume, and we attempt to model that carefully. However, our forecast was somewhat optimistic. We observed a strong trend last year towards vendor consolidation, where companies with five or six CDN providers reduced their number to two or three. Recently, we noticed a slight reversal, with some customers adding a vendor. These two trends resulted in some fluctuations that impacted our projections.

And then just a second for me. One, I believe earlier when you were asked about the assumptions contemplated in the guidance, and just with the top 15 customers, what sort of is baked in, in terms of the traffic levels. Let me just read you back and see if I got that correct? Was the notion that you expected you were modeling in for those traffic levels to stay flat from Q2 into Q3 and Q4, although you actually thought that was conservative, if you thought it could actually tick up from Q2? Is that correct? And what would you think would drive those to actually go up somewhat here in Q3 and Q4?

What we're modeling all the time is sort of the seasonality of our traffic patterns, but I believe we have an opportunity to increase the revenue in the wallet share at those large counts by demonstrating superior performance showing and demonstrating the ROI of using faster, more clearly and expanding the product portfolio that those accounts use. And so it's why I think it was so pertinent for us to really change our engagement model and move very quickly here to react to what we're seeing in the market, why we're pushing so hard on that right now. Thanks so much. I want to thank all our employees, our customers, our partners, and our investors. We remain focused on execution, bringing lasting growth to our business and delivering value to all of our shareholders. Thank you so much for your time today.

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.