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Fastly Inc
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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.
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 this 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.
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 severely 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 work force on March 1 and expanded sick leave benefits. We also suspended all non-essential travel.
Staying true to our Fastly values, we’re also prioritizing the health and safety of our communities. We doubled our open source and non-profit program to provide $50 million of free Fastly services to non-profit 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 continue 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 continue 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 continue 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 a 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're 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 are 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 had out to Adriel to walk through our financial discussion, I want to touch upon our 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.
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 request 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 overtime.
We ended the quarter with $187 million in cash, restricted cash and investments in marketable securities. We are pleased to have a strong balance sheet and liquidity as we navigate this economic environment. We also continue 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 break even.
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-53 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 the diversified customer base that continues to innovate. We are also strategically investing in our network, Compute@Edge and security offering that will continue to power our future success.
With that, I'll turn it back to the operator to take your questions.
[Operator Instructions]. Your first question is from Jeff Van Rhee from Craig-Hallum. Your line is open.
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 impact, can you talk about the revenue strength in the quarter and in particular in the guide, you know sort of segmented. What are the relative drivers on the revenue upside?
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 statement.
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 and learn-from-home and frankly assess-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 if you think about you know slack and working from home, you think about Shopify and shopping from home or Pinterest, you know playing from home where I watch my kids on Khan Academy learn math, all of those experiences are from the most innovative companies, those who have adopted digital transformation.
So we have one theme here, which is those digital transformers, those who already 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 is 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 you know huge amounts of pro-serve that have to go into that, where as a system built by developers for developers, we are uniquely positioned to capture that inspiration and to serve the best of the web.
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 prove a finer point on that in terms of how many betas, when it goes GA [ph], how you sort of put some bounds around expectations on revenue and margin impact. Maybe just flush out Compute@Edge a bit more.
Sure. We call it out, because obviously the core of what we have always brought is to allow developers to innovate and Compute@Edge is the next step in maintaining our significant advance in that market. So I’ll answer a few of those and then 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 are 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 will be able to quantify and speak to you.
I think from a margin perspective, you know 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 of example there might help flush that out for you and Jeff.
Hi Jeff, Joshua and nice to speak to all of you again. Yeah, the use cases we're seeing, you know the range here in a couple of different areas, and then one that is kind of, like it’s really kind of cool for me to see, because it wasn’t – so the one that would come earlier has to do with digital inscription, signing and trying to protect home terms, home terms and applications from our facts [ph], being more smarter at the Edge and not letting that kind of traffic go all the way back.
Same around authentication, identity. We are also seeing data loss protection solutions that people are experimenting with, as well as what we talked about, which has to do with much more personalization and again, when customers personalize, they drive more revenue, drive more engagement and it's always been this push and pull where if you personalize and kind of view the Edge work efficiently, so then it may get slower and if things are slower you do some engagement, and so customers are really eager to move more of that personalization or all of it as closely used as possible.
Very helpful. Thanks for taking my questions guys and congrats again.
Thanks Jeff.
Your next question comes from the line of Jonathan Ho from William Blair. Your line is open.
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 had some revenue tied to live streaming events and with some of the challenges around COVID. Can you maybe you know quantify for us what those impacts look like and yeah, well we'll start there.
Thank you, Johnson. Thank you for the congratulations. Obviously it's with mixed emotion, because this is a difficult time for everyone. You know 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 you know 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, you know because we haven't relied on those, I think the impact to us compared to others in the 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 a 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.
Got it. And then just relative to pricing, can you talk about whether you've seen any sort of benefit or pick up, you know just given that you have the capacity put into place related to COVID or otherwise and in terms of your ability to maybe accept better pricing in this environment.
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 are 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 pro-serve people, can't be enabled by technology, can't configure yourself or integrate it into our development environment or that isn't ready for the enterprise.
And so actually one of the things that we’re seen I think, and again it's early days, is the special attributes that we uniquely bring to the market around our ability to do you know application logic and Compute@Edge. Our ability to have everything to be transparent, be a product that feels and acts like your own, something you can build directly into your enterprise, you know CI/CD environment.
All of those things allow us to be uniquely positioned and we've seen some examples over the last six weeks, you know 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 – you know and to innovate ultimately really look at the market and don't see a lot of incredible choices.
So it’s early to say, but I think it's, our unique value proposition is showing up pretty strongly in terms of updating any price pressure that might have – you know might exist in the market, at least from our perspective.
Thank you.
Your next question comes from Brad Zelnick from Credit Suisse. Your line is open.
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.
Josh 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?
Sure, let me answer at the high level and then Artur’s been very deeply involved in some of this, so I'd love to get his perspective on this as well. I think you know what you see in the CapEx numbers obviously is that you know we recognize 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 and 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 you know thankfully we have that.
I think Artur’s 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 that?
Yeah, I mean we have had significant growth in usage. We've had you know a couple places that have run harder than we kind of want to, but then we've had capacity nearby that of course we’ve been able to handle that traffic without a problem. We did publish the blog post Joshua mentioned earlier, a couple of weeks ago that kind of has some of the countries in there that shows load.
But our general, closer view of how we want to grow the network and what kind of spare capacity we want to have to get more rapid growth definitely served us well when this hit, because we’ve used out some of that, a fair amount of that spare capacity, but that’s why it was there and that’s why we – how we forecast out into the future, so we had not been constrained on capacity to our customers. We have been able to deliver what they purchased in the past, and what they are purchasing and asking for right now.
One thing Brad I think you're well familiar with of course is the, sort of the efficiency of the network and that certainly has been a strong part. You know our software defined modern network is very different obviously than our competitors networks or the competitor – the entire subset of the competitive networking and our ability to do the same with orders of magnitude, less servers certainly played into this as well and I think that efficiency just continued or the gap in that efficiency just continued to build for us.
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 I 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?
Thanks Brad, and 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 a – where we are from a cash position, where we are from a profitability position, I would say that nothing's changed other than any of – well, they are incrementally more confident just based on everything we are seeing at this time.
Awesome! Thank you so much guys.
Thanks Brad.
Your next question comes from the line of Will Power from Baird. Your line is open.
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. You know is there a rough way maybe to think about what percentage of your customers are in those verticals?
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.
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 repricing or customer non-payment or things related to some of the customer segment seeing pressure. I know it’s a small percentage, but are you baking some assumptions for bad debt or contract repricing and things like that.
Sure, let me go with actually the high level and then I’ll hand it off to Adriel. I think at a high level, you know 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 you know like everyone there is some exposure and Adriel would have some more insight into that.
Yeah, thanks Joshua and thanks Charlie for the question. Yeah, at least at this time we're not seen 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 DSL, but there wasn’t anything concerning from a long term basis, at least where 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 are not seeing anything, at least concerning from sort of a Q2 perspective.
Right. Thanks for taking my question and congrats again on the really strong results.
Thanks Charlie. Give our best to Will.
Will do.
Your next question comes from the line of Rishi Jaluria from D.A. Davidson. Your line is open.
Hey guys, thanks so much for taking my questions and I’m glad everyone is staying safe out there.
Two questions I wanted to ask, one financial and one a little bit more philosophical. So on the financial side, you know clearly margins are coming up nicely, especially with the spike in traffic and especially looking at guidance, you know the chance we could see, maybe even EBITDA positive next year – sorry, 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 minimum traffic in advance or talking about extending payment terms or anything like that and then I got a follow-up.
Sure. Adriel, I know you got that one.
Sure. So I think on some respects, some of its just over 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. There’s been 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.
Got it, and you know just to actually be thinking about cash conversion, you know relative to where you got it, sort of non-GAAP operating income.
When – you sort of get into the cash flows, so they are ultimately down to the bottom line.
Yeah, ultimately trying to think about cash lending and I think you know you've already guided to CapEx, but just trying to think of you know what would like from the operating cash typically.
Yeah, the biggest driver you know 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 metric 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're 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 that there are – 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 operation 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, 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 or revenue guidance range and I think hopefully that gives you some perspective on that.
Rishi, I’d also add to that, that you know we're in the early innings of a gigantic market and I think you know our bet on Compute@Edge and our continued investment in security speaks to that. So I think that you know the other side of this is obviously we are going to continue to invest, we’re in the early innings of this and so there's a balance between those two that you know Adriel and I spend a lot of time talking about, but you know there's definitely an emphasis on the investment side as well.
Okay, great, that's helpful. And then just philosophically, you know clearly you’re getting a benefit from [inaudible] stay-at-home, work-from-home and all that you know and I think that’s – they are certainly reflected in the Q2 guidance. Given that now some places are starting to talk about reopening offices or starting to reopen parts of the economy here in California, which is the first state to do it, actually walk down as they are starting to talk about that; obviously warmer weather, more people going outside.
How do you think about how this kind of long lasting, you know these benefits from social distancing are? I mean is there a – some of these changes are and behaviors reversible? 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 the investment business? Thanks.
Sure, yeah it's a great question. Obviously it's you know difficult to predict, a couple – you know a month and a half into this. I think you know 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 – you know they haven't – they see a new world, right. This is a platform that is so different faster, more secure, 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's going to be some lasting impacts, but you're seen two phenomenons 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 pre-modern world, an antique world, actually you're taking the opportunity that change presents, to really bring out – to really enact 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 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 when you look at our story for the year and beyond this is just that a fundamental transformation and how people look at the role the Edge plays and more importantly, a modern Edge.
That’s helpful. Thank you so much.
Thank you.
Your next question comes from the line of James Fish from Piper Sandler. Your line is open.
Hey guys, nice quarter. Hope you're doing – it sounds like you're doing pretty well despite the difficult time and I 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 you think impacted actually your enterprise sales process, including more so on the security related sales.
Yes, it’s Joshua here. You know 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 are seeing patterns in both. Its early days, so I would say I'm optimistic, but you know we'll check back with you in a quarter to tell you what a whole quarter looks like of COVID related sales.
Got it! And then keeping on security discussions, 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 for Bot today.
Yes, it’s a really good question and a very important market. I think you know if you look at our approach to almost all of the markets we’re in, its 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 home grown solution in that, we also are the backbone in 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 – you know it 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 have you know continued to partner and invest in that area as well. So it’s a very important area to our customers.
Got it. Well, thanks guys and good luck.
Thanks James, and the best to you and your family as well.
Thanks.
[Operator Instructions]. Your next question comes from [Inaudible] from Citigroup. Your line is open.
Hi! Thank you for taking my question. This is [Inaudible] in for Walter. We've heard lots of good positive commentary from you regarding optic of the Edge platform. And so looking at your revised full year guidance, just setting aside what has already been accomplished in Q1, when you look at the remainder of the year, the guidance seems to imply over $20 million of upside, close to 80% operating margins.
So the question, a two-fold question here. One, to what extent is this positive operating leverage uplift? To what extent can we ascribe it to larger demands for your higher value software services? And when we try to translate that operating leverage into gross margin, how much of it should be expected gross margin and what factors should we consider, things like more favorable mix, efficiencies and maybe pricing, and I do have a follow-up.
Sure, I’ll take that from a high level and then pass that to Adriel. I think in many ways all the above, we continue to see demand for the higher value products that we offer and that, you know it's really difficult to separate these from a customer perspective when one of the biggest sort of vendors that we run across; for example, one of 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, you know at the outset we are seeing that customers don't think of delivering 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.
Yeah, it’s Adriel here. With respect to what we're 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. A 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 what we saw in March, I think we should see a good outcome in Q2 relative to gross margin.
Now as you get beyond that, I think that's where we're taking sort of high level revenue, we are 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 it's sort of the ins and outs of requests versus bandwidth versus usage, etcetera, etcetera. But at least as you go down to the bottom line, the other thing we're trying to figure out is how well will we be able to spend efficiently? How do we make sure that the folks that we do bring onboard and recruit make them effective? Weather we’ll actually be able to do that during this time as we've gone to work-from-home situations.
We’ve had 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 some respect to normalized gross margin pattern that we’ve seen historically and then also accounting for where do we think we're going to build spend and spend thoughtfully and wisely.
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?
Yes, it’s Joshua here. You know hiring has – obviously the environments 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 you know taking care of kids, taking care of elderly folks and their communities.
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 got more difficult in this environment, but when your growing like we are growing, obviously that's something that we are continuing to invest in.
Thank you so much.
Thanks [inaudible].
Your next question comes from Brad Reback from Stifel. Your line is open.
Great! Thanks very much. Guys, if we think about the – from a high level the $25 million guide-up for the year, how much would you attribute to COVID related workloads like you talked about you know work-from-home, school-from-home versus where the organic business was running pre-COVID? Thanks.
Adriel, do you want to take that?
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’ve 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 you know just with 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 – you know folks tend to shop as a result of holidays and this actually – 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 is and what are we sought of are seeing and you may see some of the blocks [ph] that we maybe we’ll publish on or maybe talk about in an earnings call. At least at this point it’s kind of a little bit difficult to sort of just entangle the two. I mean, a lot of what we're seeing here is just based on sort of current traffic patterns the we are seeing and trying to extrapolate as best we could and also taking feedback directly from customers in terms of what they're seeing.
Great! Thanks very much.
Thanks Brad.
Thanks Brad.
Your next question comes from Michael Turits from Raymond James. Your line is open.
Hey, this is actually Robert Majek on for Michael today. Congrats on the strong results this quarter. I just wanted to follow-up on the previous questions. Your full year revenue guide imply – full year guide implies strong incremental margins on the $25 million revenue rates. I assume part of that, a lot of that is underutilized server capacity going into the quarter and you'll have to add a slug of server cost at some point on an income statement perspective. Just how should I think about that dynamic and how may our incremental margins look like and I mean further revenue upside either this year or going into 2021?
Sure. Adriel, do you want to take that one as well.
I’ll take this one. Thanks. No, it’s not, the other thing I would sort of add to that is not just servers, you have [inaudible], you got a number of other things that we’re going to have to sort of think about as we see what demand we are 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 about. So I think it’s a bit of – that’s why gross margin is more challenging to forecast than anything else.
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, ranking 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 seen before, and we are intending to do that, because historically we've got a good return on that investment. So I think that is what’s being incorporated into that non-GAAP operating guide for the entirety of the year.
I appreciate it.
Thank you.
Thanks Robert.
There are no further questions at this time. Mr. Bixby, I turn the call back over to you.
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, BAML [ph] 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.