Fastly Inc

NYSE:FSLY

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon. My name is Jesse and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Conference Call. [Operator Instructions] Thank you.

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

[Maria Lukens, VP of IR]

Hi, everyone. Thank you for joining our Second Quarter 2019 Earnings Call. We have Fastly's CEO, Artur Bergman; President, Joshua Bixby; and CFO, Adriel Lares with us today.

First, we'd like to outline the format for this and future earnings announcement. We will publish a shareholder letter with our financial results on our Investor Relations website and with SEC shortly after market close on the day of our earnings release. Since the shareholder letter provides a lot of detail, we will begin each call with brief remarks before opening the line for questions. Our hope is that this format will - in result have greater transparency and provide a more open dialogue.

We would also like to remind everyone that we'll be making forward-looking statements on this call. Today. Fastly will discuss the unaudited financials that were distributed on August 8th, 2019. Certain statements on this call include forward-looking statements, including 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 this call. You should not rely upon them as predicted as future events.

All forward-looking statements that are made on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them. Please refer to our risk factors filed in the final prospectus in connection with our initial public offering and those to be included in our quarterly report on Form 10-Q. Also our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not a substitute for or in isolation from our GAAP results. A reconciliation of GAAP to not-GAAP measures is included in today's shareholder letter. The shareholder letter and accompanying financial tables can be found on our website at investors.fastly.com. Finally, this call in its entirety is being webcast and will be archived on our website shortly after the call.

With that, I'll turn the call over to our Artur.

[Artur Bergman, CEO]

Hello, everyone. Thank you, Maria and thank you all for joining us on this call.

I'm going to start with a special thanks to all of our employees, customers, investors and all the developers around the world who use us for the support, hard work and gotten us to this point, becoming a public company was a big step for us and we're very happy that we've done that.

We create a trustworthy Internet with some of the best customers in the world and to do that, we really need the right people in our team. So we strive to be a company full of kind, honest, passionate and ethical people and to keep growing at a high rate and sustainable rate, we will continue to maintain that culture.

So we have intentionally grown values first and scaled our workforce, services and customer portfolio purposefully. I'm proud to say that we've grown with integrity and we'll continue to do so.

This afternoon, we issued a shareholder letter with detailed remarks, which I encourage everyone to read. On this call, I'd like to focus on a few key takeaways from our most recent quarter. We generated $46 million of revenue in Q2, up 34% year-over-year.

Our dollar based net expansion rate was 132%, up from 130% last quarter. Revenue from enterprise customers as a percentage of total last 12 months revenue increased to 86%, up from 82% year-over-year.

Enterprise customer account increased to 262 up from 190 year-over-year. We have added to our network and now have 64 POPs online, providing access to 52 terabytes per second of global network capacity.

And we continue to identify opportunities to drive leverage and expect to maintain our path toward profitability in the years to come. We've built a powerful edge cloud platform that fuels modern digital experiences, allows agile development as close to end users as possible. We really are powering the best of the Internet.

Our platform enables high quality, low latency delivery of applications, content, security and edge compute capabilities. This edge cloud platform is based on three core tenants, developers must be empowered to innovate, platforms must innovate ahead of market demands while still being reliable, scalable and secure and vendors must provide exceptional flexibility and support.

We will continue to see increased developer demands for our edge cloud platform. Our long-term growth strategies will be driven by two key factors, winning new enterprise customers and expanding usage from existing customers and partners.

I believe that our results demonstrate continued success in pursuit of this strategy and our team remains focused on building upon this momentum. We'll continue to invest in our edge cloud platform, when we make it faster, more secure and more flexible for our customers and developers.

For example, we have our new edge cloud developer tools released this week that make it faster, safer for developers to discover, test, customize and deploy edge cloud solutions with pretested, prebase solutions.

We believe this will drive continued growth throughout the third quarter and the remainder of the year. We're encouraged by recent progress, we're excited about our future and we look forward to sharing our progress with you for many quarters and Adriel and Joshua and I would like to reserve the rest of this time for Q&A.

[Operator]

[Operator Instructions] Your first question comes from Brad Zelnick with Credit Suisse. Your line is open.

[Brad Zelnick, Credit Suisse]

Excellent, thanks so much and congratulations on the initial quarter here as a public company. Great to see the strong results. I guess maybe just for starters, if I look at your cost of goods in the quarter, it was at least percentage wise a little bit higher than we were expecting. And you commented in the letter and in your remarks that you're investing ahead of an expected strong second half. But could you maybe just unpack your cost of goods? And if we look at them by their various components and then we look to your largest competitor in CDN I know that they're talking a lot about capital investments ahead of expected - an expected surge in OTT traffic. Is that - if we think of your business in terms of traffic mix and what it is that you're pursuing, are you going after that same opportunity? And how should we think about the mix of traffic on the platform? Thanks.

[Adriel Lares, CFO]

It's Adriel here and thanks for joining us on the call and again happy to be here. So I think one way to think about it is we've talked about this before, we're building basically ahead of the second half.

And from an allocation standpoint, we're allocating much of this CapEx ahead of time from a percentage standpoint of 1 percentage of CapEx in terms of total revenue, I still feel comfortable with where we'll get sort of a 10% of revenue as a percentage as CapEx percentage of total revenue over the long run. And then this year we're going to continue to make progress in that vein. Some of the challenges here is where we make these strategic bets around the world.

And in terms of what we've seen in previous years, usually the first half of the year is where you'll see a sort of CapEx percentage of revenue higher than the second half, because normally the second half we've now made those - we sort of signed up those contracts from a booking standpoint and you see the ramp over time.

[Brad Zelnick, Credit Suisse]

And if I could just follow-up with another question. At the time of the IPO, at least a portion of the proceeds were intended to invest in building out your go to market. Can you maybe just give us an update, I know it's only been a couple of few months or what have you, but in terms of the progress in hiring, I mean, the enterprise customer growth seems to be very strong, it was at 36% or 38%, but from the leading indicators that you look to in terms of the productivity in the ramp that you're seeing in some of these hires, how do you feel you're doing relative to expectations?

[Adriel Lares, CFO]

Yes, on the hiring front, I think we are on our expectations of where we want it to be, we've gotten folks into sales and marketing, especially in sort of the demand generation of the company's marketing initiatives. And so from that standpoint, I feel like we're on our sort of expectations. In terms of sort of the progress we've made so far, you're right, it is a bit early, but I'll let Joshua comment a little bit more further on that.

[Joshua Bixby, President]

Thank you, Adriel, Brad. Thanks for joining. You know, I think as we talked about, this is an area that we have historically under invested in. We are a company that has grown through word of mouth for the most part. And we know that that's an area that - with the proceeds of the IPO and with our intentions long-term of continuing strong growth we have to invest in.

It has been what feels like a very short two months since the IPO timeline, but we've made good progress, as Adriel said, we're on track from a headcount perspective, on the marketing, we're on track on the spend perspective. Now, these are large enterprise deals, so as you know, they do take time to work their way through, but all signs indicate really positive results from our investments thus far, but it is early.

[Brad Zelnick, Credit Suisse]

Awesome and at the risk of being greedy, I just want to slip in one more for Artur. You know, to us, perhaps the most exciting future opportunity is in edge compute and with a lot of the capabilities that you most recently announced, Artur. Can you maybe just talk about some of the excitement, maybe some of the leading use cases and the confidence that you have in - more and more compute and programmatic complexity actually occurring out at the edge? Thanks so much.

[Artur Bergman, CEO]

The, I mean the demand for use cases of edge compute on an environment where you can do just more, ranges is pretty wide, lot of it has to do with personalization, content filtering, applying different rules at the edge for different users. So you can see this, I can see this, aggregating data from IoT devices so that you don't have to communicate all the way back to a beta center, You can actually do most of the edge and then feed the data back.

There are mapping companies I've talked to that want to be much more creative and how they package to maps that you want to get, these are all use cases that we perhaps could have developed in the past, but they are kind of very specific, some customers in the actual product use case.

And we are seeing a lot of demand for customers to just go up and do that final bit of the customization on their own. We're also driven the graft well evolving standards around how to interact between clients and servers.

So yes, you can really assemble API requests at the edge, also drives the kind of demand for this. And then I think, last but not least, once you can deploy more code that does more at the edge, you can start evolving security, introspection functionality that's very customized for your application and try and prevent attacks as far away from your data centers or your cloud as possible.

[Operator]

Your next question comes from Will Power with Baird. Your line is open.

[Will Power, Baird]

Yes, thanks for taking the question albeit the allocated time here. Let me first just start from a high level perspective, as you look at the strong year-over-year growth, the dollar based net expansion rate improvement sequentially, I wonder if could you just talk from a high level as to what the key drivers are? Yeah, I know video has been a key driver live video, maybe just help us break apart what those key secular themes have been that's driving that revenue growth?

[Joshua Bixby, President]

Will, it's Joshua, thanks for the question. You know, there are a number of them. I would start certainly with edge compute and security. I mean, as Artur said, we continue to evolve edge compute, but we are by far the leader in that space and we continue to see incredible innovation. We came out as Artur said with a developer library that really is a collection of tools that help continue to push our strong leadership on the edge solution space. So people are coming to us because they know that they can do more at the edge and they want that and that is continuing to drive growth.

We continue to see as we talked about in the past a strong connection between our growth and the security needs of our customers. We continue to see underlying growth in the security space, which if you look at the market in general there should be no surprise. I think we're also seeing a strong demand in the live video, the higher value side of that market, which is - which is driving us.

So I think, you know, as we start seeing edge computer security and the OTP growth, as well as some of the really nice tailwinds around 5G and other things that are coming forward, we're seeing a lot of important, important growth vectors and I would say it's across those ones for sure.

[Will Power, Baird]

And then maybe for Adriel, just maybe come back to the earlier gross margin commentary. I wonder if you could just comment on kind of what you're seeing competitively out there, whether it's been any meaningful shifts in the pricing environment, if that's contributing the weakness, it sounds like again, it's more about, you know, investing in front of the second half. Then I guess as part of that, how do we think about the gross margin outlook from here? Is that something that should tick up a little bit in the second half? And, you know, any thoughts then over the next couple of years from here?

[Adriel Lares, CFO]

Yes, thanks Will, I think to the second part of your question, yeah, you should see some upticks for the second half and in general I'm comfortable in delivering gross margin leverage on the year-on-your bases. We talked previously in the past that, you know, our sort of primary goal right now is to evangelize the Fastly solution, talk about age compute, talk about all the benefits that you have coming on to Fastly platform.

And from our standpoint, we're not leading with price, but we certainly don't want to lose on price. There's just too much opportunity out there and we know that once the customer comes onboard to Fastly, we have our 98% retention rate.

We've got our strong DBNER1 and we want to take advantage of just bringing a customer onboard. So we'll - but there is the normal seasonality that we experience which Q2 is sort of no different where we're getting ready to build ahead of time for the second half of the year. And so you should see leverage both in gross margin and as well as sort of an operating leverage over that time frame.

[Operator]

Your next question comes from Tal Liana with Bank of America Merrill Lynch. Your line is open.

[Tal Liana, Bank of America Merrill Lynch]

Is there - it was - was there anything that changed since you went public until now that drove gross margin roughly to 100 basis points below what you just told us a few weeks ago, trying to understand the gross margin part.

[Adriel Lares, CFO]

Yes, sure. One of the biggest difference is just from Q1 to Q2 is Q1, as we talked about on the roadshow had a particularly strong February, which we up until this point of the company's history, we hadn't broadcast that particular sporting event in the past. And we had actually built CapEx wise in Q4 of last year ahead of that period of time. And so we had the benefit of that one time sporting event which didn't replicate the football season, doesn't go into Q2.

So that provided us a bit of a bump. But from a - if you think about it from a year-on-year basis over a 12 month timeframe, you actually do see gross margin going up on a year-on-year sort of 12 month basis. And so we should continue to see that trend over time, but seasonally you have another factor in Q2, you have two 30 day month, so you have a little bit shorter amount of days for revenue.

And so most of those pressures in Q2 sort of I mean that explains really sort of the quarter-on-quarter contraction in gross margin. But overall, in terms of where I think gross margin will be from a longer term perspective, I'm still confident in.

[Tal Liana, Bank of America Merrill Lynch]

The other question is anything change in the revenue trajectory versus what you thought before or does it?

[Adriel Lares, CFO]

Everything at least from what I can see right now still seems to be on course. We're continuing to win the deals that we need to go when get the PFCs and we need to get out there. It's - we're still I think a relatively small player in terms of numbers of deals over end, if anything, we're just not in enough parties to actually go and try to compete for that business, which is why we are ramping up sales and marketing now and then to the end of the year.

And, you know, part of the balancing act that we're trying to do is grow revenue, grow share while also delivering discipline and leverage as well. So I think we're still continuing to do that. And at least at this point, nothing has changed in terms of what I think will actually go deliver.

[Operator]

Your next question comes from Jonathan Ho with William Blair. Your line is open.

[Jonathan Ho, William Blair]

I just wanted to start out with some of your comments around the streaming business. Can you maybe provide a little bit more color on what drove the strength there. And if there's any marquee events, does that sort of - what does that mean for maybe future opportunities?

[Artur Bergman, CEO]

I'll speak a little bit the way I look at it from a finance standpoint and then our CFO or Joshua have any sort of follow-up on that. From my standpoint, I look at some of the marquee events especially in Q1 and some of them similar, maybe some episodes in Q2 that came to a series end that I can't talk too much about.

But nevertheless, the effectively all of the different providers there who they know who all the different edge providers can be and which ones are succeeding. And the more that we - when we become they become beacons if you will of reference points for while they can deliver-- they can deliver time to first view of sub X or consistency of stream without interruption.

All of that really does make a difference and it enables our future, our current and our future sellers to go out and win more of this business, which then gives me from a finance standpoint more confidence from forecasting standpoint to in this case, you know, give the guidance that we're giving for Q3, as well as for Q4, that's all right as well as for the rest of the year.

[Adriel Lares, CFO]

I think on the importance of these events is absolutely a signal that we are now a player that can handle a very, very large event. And that's important not only because of the LTT events, but also when you go talk to large enterprise or commerce customers because they know how large these events are. So for them, you know, suddenly if you can handle the largest sporting event in the US, I just don't need to worry at all that you can handle my traffic. And so there is a very strong, a tailwind that helps with.

And on the OTP side, we focus on the live streaming and our underlying technology platform, with the modern software defined network how we've architected it, we are very, very well suited for the kind of traffic that life streams are under traffic like that, API calls during election, for example, where a lot of people are just trying to get the same object, right? And that's we - are really, really good at delivering that with a very, very consistent quantity.

And as the OTT providers on live especially in sports are trying to get the delay from glass down to short bring shorter, we have customers aiming for 500 milliseconds delay. That consistency in the delivery really high volume is key to them. And so, platform wise, it's - we're very well suited to it. And it really helps us in all parts of the business to be able to say that we can deliver these amounts. Thank you.

[Jonathan Ho, William Blair]

And then just as a follow-up, I just want to understand if you're seeing any shifts in the competitive environment. I know there's a few competitors that had outages during the quarter, but is there anything there or any opportunities that creates?

[Adriel Lares, CFO]

Yes, great question, Jonathan. You know, I have - we have not seen significant changes in that. You know, as you know, we're in the enterprise as you see the number of enterprise customers in the price of our deals, there were certainly outages in the small and medium CDN side of the business, but we continue to be laser focused on the largest and those that aspire largest customers and those that aspire to be and that targets directly in the legacy CDN space and that environment hasn't changed at all.

[Operator]

Your next question comes from Michael Turits with Raymond James. Your line is open.

[Michael Turits, Raymond James]

First, Adriel, on CapEx came in higher on CapEx this quarter than was in our model, wondering if there's a change in the outlook or prospects for the year on CapEx?

[Adriel Lares, CFO]

Yes, from a - hey Michael, from a year standpoint, I still think CapEx as a percentage of revenue should be at or near where we were in 2018. And so we're still targeting that. As you can see, some of our investments in Q2 were much more timely related as we think about what we see in our pipe in terms of our customers that we believe are going to be ramping up, which is reflected in our guidance and nothing over a sort of a year or sort of longer timeframe has changed in that regard. It just might have been more timing from sort of a quarter Q3 to Q2 basis.

[Michael Turits, Raymond James]

And then a question on program ability which is obviously been where you guys have been winning share. Maybe an update in two respects, one in terms of your product roadmap there were advancing program ability. And secondly, your assessment of the competitive landscape in terms of whether or not others in the space are making any changes that will change your competitive advantage.

[Artur Bergman, CEO]

Artur here. Thank you. On the product roadmap innovation side, we're investing heavily into a technology called WebAssembly, which is driven by us and a couple of large companies to create a safe and secure environment to run code.

Initially it was to run code safely and securely on your desktop and we have adapted that for server side use and are involved heavily into the ecosystem, the WebAssembly ecosystem to make that run very well on the servers and kind of evangelize it.

And one of the key things with it is that it frees us up to allow many different programming languages. And so customers can use a wide variety of those. We have to help the adoption of this, we have open sourced a tool called lucet that's part of our commitment to this technology and just help drive usage of it across developer base. And we're very, very excited.

One of the cool aspects of this technology is that every single request that we get from a customer for our end user will run essentially equivalent to its own sandbox. And so we can really offer a high degree of safety and security for our users, both for eventual potential attackers or if they have problems internally we can help them detect that and mitigate that, so that's on the R&D side. And then on the competitive side. I'll hand over to Joshua.

[Joshua Bixby, President]

The competitive landscape hasn't changed dramatically. I think we're definitely seeing particularly from the legacy CDN players, a lot more developer friendly overtures. So we're seeing a lot of marketing story arcs, but fundamentally our customers refer to the legacy providers as the anti cloud because you have to get professional services and engage on a non developer friendly sort of platform.

So we have not seen any dramatic changes in the competitive landscape in the enterprise space, other than some marketing information that's come out. But competitively, we remain the dominant edge cloud and the only one today that really allows you to build the type of programmability that a modern developer needs.

[Operator]

Your next question comes from Tim Horan with Oppenheimer. Your line is open.

[Tim Horan, Oppenheimer]

Any particular customer segment or maybe any other more color on applications that are growing faster than what you've seen in the past or yes any color around that would be great.

[Joshua Bixby, President]

Joshua here, thanks for the question, Tim. I wouldn't say that we've seen a dramatic shift in the overall base at all. We continue to see strong growth across the core verticals if you think about areas like e-commerce, travel, high tech, we continue to see a lot of really big brands who often are in a time of digital transformation. And that is often one of the precursors that brings us in.

So we'll see examples like Ticketmaster is a great example where we over the history of that business as they have evolved their platform, they build us in early and are able to replatform, which really is less of a shifting out of a vendor and more shifting in a platform. And we see that type of evolution in a lot of those core verticals, high tech follows that same pattern.

I think on the platform side, we continue to see growth as we've talked about in the past, we believe very strongly that the way into the S&B market, the most efficient path is through platform vendors where we sell to one vendor and they're able to sell to hundreds of thousands of customers and we continue to see strong growth.

But I wouldn't say it's anything outside of the historical norm. They are all - they're all growing and I think the edge delivery and programmability continues to anchor along with the security use cases.

[Tim Horan, Oppenheimer]

And maybe just a touch more color on edge compute. You know, I know you're saying you're well, well ahead of your peers and it clearly appears to be the case and is WebAssembly, kind of an example of this where you do need the programmability at the or developers need the programmability and other features and functionality, especially in this new tool box that you rolled out. And I guess given that this is a brand new market, do you have a kind of a sense of what percentage of revenue this can ultimately get to and maybe what it is now even I know it's very small now, but yeah any more color would be great?

[Artur Bergman, CEO]

I think it's hard to say the percentage of revenue, but a large amount of our customers to a certain degree use our edge compute capability. And so quite often not very much, but it is accelerating and I think we'll continue to see that accelerating over time. And the use cases are really as Joshua said as earlier, really diverse. What I find really interesting is that even if you take something that ostensibly sounds kind of why would it need edge compute, so OTT live streaming.

Well, it turns out that if you can personalize the ads and do real time ad insertion at the edge, that's the most efficient place to do it, the fastest way to do it and you can drive more revenue to you because you're not showing everyone the same ad. To do efficient ad insertion for each individual user, you need edge compute capability. So we're seeing it advance functionality like across a lot of different most areas of the business.

[Operator]

Your next question comes from Rishi Jaluria with Davidson. Your line is open.

[Rishi Jaluria, Davidson]

First, I wanted to start off by asking about, you know, international, wanted to see what your traction there looks like. We did see the announcement recently about you expanding your Australia presence. I think any color you can give in terms of international traction be it with local companies out there for which international parts of American companies I think that would be helpful and then I've got a follow-up.

[Artur Bergman, CEO]

The international we talk about this we classify the traffic based on, you know, where it happens, but for revenue, we attribute that to wherever the customer is based. So the growth that we're seeing when we talk about international numbers, then roadshow is from customers in those regions.

And we're seeing that the strategy has been that we enter a region for our existing customers, that's how we have the justification to build a physical presence. And as we build those networks up, we start getting local customers who notice this network and want to work with us. And once we have a mass of those, that's when we start investing people into actually selling into those markets.

And we have had really good success with this international is accelerating. And we're going to keep on, as you said, Australia, where we have a really fantastic network being with four pulse in Australia, two pulse in New Zealand. And so we think that's a large untapped market. Europe is behind the US, when it comes to digital transformation. And so kind of that what we're taking and doing here is very much applicable around the world. And so there is a little bit behind like we're actually really well-positioned to help them.

[Adriel Lares, CFO]

And Rishi, it's Adriel, just a quick follow up. So the actual revenue contributed internationally in terms of just where the billing locations are with 30% in Q2.

[Rishi Jaluria, Davidson]

And then I just better ask a little bit about kind of the gaming opportunities. We've had some of your competitors out there talking about capitalizing on gaming opportunity beyond just [indiscernible] things like live streaming which is probably at the intersection of gaming and OTP and even on these car gaming platforms down the line. We'd love to kind of get a sense from you, how are you thinking about the gaming opportunity, is that something that you think you can probably capitalize on the secular tail wind. Thanks.

[Artur Bergman, CEO]

I think, this is Artur, thank you. I think its definitely it is a large growth area. And as the gaming companies also are adapting to an online world in a way where it's not just on downloading a game and kind of moving to more modern architectures.

We do see a lot of opportunity around delivering part of the game experience, delivering the API's around it, delivering metadata and doing enhancing that edge compute to give personalized experiences through those games. We have some really good gaming customers and we do believe that there is a large growth area for us that the evolution of the edge computing platform fits really well with that.

We also do help the - we also do help the live streaming of games. And going back to my comment earlier about the time from glass latency sensitivity, that's an area in East Forge where they really want to be as close as possible and being 15, 20 seconds behind is not acceptable. And so we have customers in that segment.

[Operator]

Your next question comes from [indiscernible] with Citi. Your line is open.

[Unidentified Analyst]

I wanted to return to the question of CapEx and maybe to the sources of the CapEx then, because in entirety of 2018 you spent around $19 million and just in the first half of this year you spent $21 million in CapEx and in most recent quarter it was $12 million. So I was wondering, could you help us unbucket, there's sort of the kinds of projects that you're invested in especially in Q2 that contributed towards this larger number.

[Adriel Lares, CFO]

Sure. So as I sort of mentioned earlier, as a percentage of revenue, I do expect over time that that should get to about 10% of revenue overall in CapEx and that's inclusive of around 2% of software capitalization. So as a percentage of revenue in 2018, we've probably seen somewhere around 13%. And so I think we'll probably land somewhere in that range in 2019.

Keep in mind that in 2018, 2018 benefited a bit from a big investment we did in 2017 and there was a large investment we did across the network to upgrade I believe the protocol in terms of we went from 10 to 100 gig Internet, either 100 gig here at ports in the back, which really upgraded the entire network, which that alone in terms of doing that with the fastest network I would find would be a real challenge for any other provider to do that.

So if you sort of streamline those two years, it would sort of average out a little bit more smoothly versus sort of the bump that we did in 2017. But returning back to your question, there was again a bit of front loading in the first half of 2019, but I still expect for the second half of the year you won't see nearly that amount of CapEx in the second half of the year.

[Unidentified Analyst]

Just turning to the nature of projects, was this due to geographical expansion, what were invested in?

[Adriel Lares, CFO]

Yes, it is a bit of it in Q2, they're much more APAC expansion in terms of as our customers in some respects pull us there to serve traffic in those areas. Then it allows us to actually sell into those areas more prospectively. But in general, it was overall traffic growth signal that we're receiving from regions like APAC and EMEA, but as well as just overall signals we're receiving in terms of bookings, in terms of overall traffic growth.

[Unidentified Analyst]

So just maybe a as a last question because what this brings is probably one of the key questions on people's minds right now and that you would do compete again in a very well, geographically diversified, albeit clumsy incumbents. And the question comes, does this level of CapEx then become a really semi-permanent part of your strategy as you are entering this new stage of competition, that reach across geographies.

[Adriel Lares, CFO]

I think if I understand your question correctly, given where we're competing would - are we seeing that this is driving CapEx dollars as a percentage of revenue, put in as substantial total revenue here, would that change the guidance or at least the perception of where we would go in the future? And the answer is no. I think that what we're beginning to realize and what you'll see overall in gross margin is most many investments that are needed to get us to a point of scale, especially in light of the fixed cost areas that incrementally are unrelated to bandwidth and some of the servers that are deployed worldwide. We do a lot of catch up to get for enhancing 24/7 support, customer support, technical account manager, et cetera, et cetera.

As we grow, we will get scale and then as we realize scale in those areas. But that is what drove a bit of the impact in Q2, as well as the preparation for the second half of the year. But there's nothing that at least that I have seen so far that moves me off of our efficiency in terms of where we need to be long run in terms of CapEx or percentage of revenues sort of around 10%.

[Operator]

Your next question comes from Jeff Van Rhee with Craig-Hallum. Your line is open.

[Jeff Van Rhee, Craig-Hallum]

Just a couple for me. I think in terms of the pipeline, maybe guys just spend a minute and expand a bit more there. I'd be curious if you see any variability in terms of what's working through the pipe. Obviously, you've had some very large high profile events. You've seen that result in a very notable shift and say deal sizes in the pipe use cases, verticals, etc cetera, just maybe a little more color in terms of any variance of what's coming through the pipe?

[Adriel Lares, CFO]

I'll take a stab at it first, just from a finance standpoint. I think some of the in general and we're bringing on a customer of any size, I think it's really more of the opportunities that are getting bigger. But in general, customers who come onboard, there is a ramped period. So you will see a ramp period and that hasn't changed. But I think the size of the opportunity in terms of what we actually are being invited to take to take on is increasing, in terms of the - the names of those opportunities and the scale up and it certainly is growing.

In addition to that, as we expand our solution into areas that then make our solution more attractive for areas like e-commerce or financial services in many of those areas are dependent on having qualifications like SOC 2 or PCI or security offerings such as web application firewall. As we add more and enhance our solutions, we're able to win those faster and ultimately ramp those faster.

But in general, nothing has changed other than sort of the size and the scope which is incrementally changed. I didn't see anything significantly different, although I will say we probably got a lot more inbound post our little event in Q1, but that's sort of my perspective, Joshua. If you have some sense of your side.

[Joshua Bixby, President]

No, I would. The only thing I would add is that the publicity around the IPO is also very helpful, we're certainly seeing, you know, larger deals and some change to how that pipe moves in the sense that people can look at us and they and they can they can see our financial position and that does certainly helps.

But we are seeing some larger deals, we're definitely I think seeing the potential to see, at least over the long-term some of those timelines come down in terms of the sales cycle. But as Adriel said, we're not seeing a dramatic shift in any underlying vertical percent.

[Jeff Van Rhee, Craig-Hallum]

And then I think in terms of the business in the quarter, any variance with respect to the usage versus committed percentages? And then one other housekeeper on the DBNER, just a little maybe an update on your thinking about that nice uptick in the quarter thoughts next 12 to 24 months in terms of how you think that trends?

[Adriel Lares, CFO]

Sure, it's Adriel here. I'll take the second part of your question first. So on DBNER, we talked a bit about over time that will likely come down. And all of our teammates here at Fastly, we focus on delivering just the best service to our customers.

We feel like we've innovated a lot with partners like Slack, we offer Slack support for many of our customers. And from our standpoint to the extent that we keep doing that, we feel like that puts upward pressure on DBNER and the extent that we can with the PECO account manager show and educate our customers on all the solutions and the possibility that you can in terms of moving traffic over to us.

So we think those are upward pressures, although at the same time, you know, I'm as a finance person, I'm well aware sort of the large numbers and the challenges associated with that. So I was very happy to see the uptick quarter-over-quarter in DBNER.

But again, I think it's one of the things we work on sort of 24/7 all the time, but I can't sort of - nothing has changed my tune about eventually we'll see some attrition there, but at least so far we're focused on keep that as high as we can. In terms of your first question, nothing changed from a split standpoint commit versus usage over the commit still around 50/50. And I don't expect that to change too much into the future and if it does change significantly, we'll certainly let you know.

[Jeff Van Rhee, Craig-Hallum]

And last one for me, then I'll just on the sales reps, where are you now rep count wise. And then I mean, you obviously came into the year and out of the IPO looking to add a lot of capacity, are you finding the hedge are you finding the pace, are you onboarding them at pace, just maybe a little more color about the sales adds, the ability to find them and any maybe a little early to get a sense of incremental ramp, but any thoughts on ramp as well?

[Adriel Lares, CFO]

Yes, I think as you can see from our total head count, 544 at the end of Q2. In general, everything is going the way that we expect it to. And we still have a target rep count somewhere around 60 by the end of the year and we still feel like we're on track to hit that number. So from that standpoint, it's not like things - things are in line with what we expect.

[Operator]

Your next question comes from Brad Reback with Stifel. Your line is open.

[Brad Reback, Stifel]

So many of mine have been asked, but maybe on the pricing front, Adriel, as you look at longer dated customers as they come up for renewal, what have been the pricing trends there? Thanks.

[Adriel Lares, CFO]

Nothing has changed too much on that front, you know, there are still situations where if the customer is coming up for renewal and I sort of generally think about our business as we are still in evangelical sale, but given the fact that our DBNER is 132% and that encapsulates renewals into that metric.

So I still feel like we're doing a good job there. And so from our standpoint, it's still takes a lot of work and the way that we can reduce pressure on renewals is to continue to not talk to a customer at renewal time, but continue to deliver great service and great support throughout the year. So from that standpoint, nothing unusual has changed in Q2 as it relates to that.

[Operator]

[Operator Instructions] Your next question comes from Michael Turits with Raymond James. Your line is open.

[Michael Turits, Raymond James]

Thanks for letting me take a follow up. So maybe you explain this and I missed it, I'm sorry, but - so are you saying, Adriel, that in the end COGS is about where you would have expected it for the full year and this is just as a pull forward so like a CapEx or COGS is going to end up higher than expected for the year. And if so, why is COGS higher but CapEx is not, what's the difference and where you need to invest?

[Adriel Lares, CFO]

I think it's the former, but I would replace COGS with CapEx and the sense that overall CapEx on an absolute and as a percentage basis, you know, given where we've given guidance, should be about where we expect, it's really more of a pull forward to that.

As you again, if you pull CapEx forward, you start the depreciation at that time. So there may be what we're assuming there is that over time as the depreciation starts to kick in COGS as a percentage should still hit the numbers that we want to deliver overall gross margin leverage year-on-year.

So think about 2019, we should be able to deliver gross margin leverage relative to 2018. And what you see in Q2 specifically is gross margin was up year-on-year. What you saw the difference there being is that Q1 to Q2 you didn't have that one event in Q1. And then as we get ready for Q2, it sort of depressed a little bit before we get to the second half. Does that answer your question?

[Michael Turits, Raymond James]

Sort of it. I'm just wondering if COGS as an absolute never ends up higher for the year and if so, is that just because you pushed CapEx forward and you're depreciating earlier or because your expenditures outside of depreciation in COGS are higher?

[Adriel Lares, CFO]

If COGS is going to be up on an absolute basis is because revenue should be driving that up as well. And the reason we're then in the CapEx ahead of time is because we expect the revenue to continue to grow.

[Operator]

There are no further questions. I turn the call back to the presenters for any closing remarks.

[Adriel Lares, CFO]

And this is Adriel, I want to thank everybody for joining us in our first public conference call. We look forward to seeing you out on the road. We're going to be at the KeyBanc Conference on Monday. And we look forward to seeing you out on the road.

[Operator]

This concludes today’s conference call. You may now disconnect.