Q4 2023 Fastly Inc Earnings Call

Participants

Vern Essi; IR; Fastly Inc.

Todd Nightingale; CEO & Director; Fastly Inc.

Ronald Kisling; Vice President, Finance; Fastly Inc

Fatima Boolani; Analyst; Citigroup Inc.

Madeline Brook; Analyst; BofA Securities, Inc.

Frank Louthan; Analyst; Raymond James Financial, Inc.

Jonathan Ho; Analyst; William Blair & Company

Tim Horan; Analyst; Oppenheimer & Co. Inc.

Jeff Van Rhee; Analyst; Craig-Hallum Capital Group LLC

Rudy Kessinger; Analyst; D.A. Davidson & Co.

Angie Song; Analyst; Morgan Stanley & Co LLC

Rishi Jaluria; Analyst; RBC Capital Markets, LLC

Presentation

Operator

Good afternoon. My name is Krista, and I'll be your conference operator today. (Operator Instructions) Thank you. I would now like to turn the conference over to Vernon Essi, Investor Relations at Fastly. Vernon, Please go ahead.

Vern Essi

Thank you, and welcome, everyone, to our fourth quarter 2023 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 will be archived for one year and also a replay will be available by dialing 807 seven zero two zero three zero and referencing conference ID number seven five four three two three nine 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 quarterly report filed on Form 10-Q filed with the SEC and our fourth quarter 2023 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, and 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.
Before we begin our prepared comments, please note that we will be attending two conferences in the first quarter of 2024 Raymond James Institutional Investor Conference in Orlando on March fourth, and the Morgan Stanley Technology Media and Telecom Conference in San Francisco on March sixth. With that, I'll turn the call over to Todd. Todd?

Todd Nightingale

Thanks, Vernon. Hi, everyone, and thanks so much for joining us today. First, I will give a quick summary of our financial results and fourth quarter highlights. I will then provide an update on our go-to-market efforts, customer acquisition and product developments before I hand the call over to Ron to discuss our fourth quarter financial results and guidance in detail.
I'm pleased to report that we closed out 2023 with revenue of $506 million, representing 17% year-over-year growth and coming in above the original $495 million to $505 million range we guided to one year ago. We reported record fourth quarter revenue of $137.8 million, which grew 15% year over year and 8% quarter over quarter.
This result came in at the lower end of our Q4 guidance range driven by weaker than anticipated international traffic, offset by seasonally strong live streaming and gaming activity. Most quarters, we set a new traffic milestone that Fastly, but this quarter was special for the first time, the Fastly platform handled more than 100 terabits per second on November 8.
As part of the celebration of hitting this milestone, we decided to retire the live traffic gauge on our website. Its original intent was to prove the viability of the Facet platform to prospective customers, especially was just starting out. Obviously, we've outgrown the need for this tool and will celebrate its retirement. Our customer retention efforts were stable in the fourth quarter with our LTM NRR at 113%, down slightly from Q3 at 114%.
Our total customer count in the fourth quarter was 3,243, which increased by 141 customers compared to Q3 and increased by 181 customers year over year. Enterprise customers totaled 578 in the quarter, an increase of 31 from Q3, representing the highest level of sequential growth since we've since we acquired Signal Sciences back in 2020.
Our new packaging channel program and a renewed demand gen focus are driving a change in the velocity of customer acquisition at Fastly. This is finally starting to show up in these disclose customer count as these customers grow with Fastly that will fuel our revenue growth for years to come. This customer growth is also diversifying our revenue among verticals, which helps us optimize traffic across our fleet, yielding higher profitability.
Our sales team has been energized by our recent recent success with large customer wins of 31 new enterprise customers this quarter 19 were net new to financing. In addition, our average enterprise customer spend was $880,000, up 7% on a year-over-year basis. While these results demonstrate success in expanding wallet share with existing customers and driving customer acquisition, our journey towards expanding these efforts with a focus on product on marketing and go-to-market initiatives has just begun. Our marketing team is elevating Fastly's brand with an eye towards efficient spend.
This involved clever marketing campaigns, trade shows as well as digital ad campaigns to drive demand. We're closer than ever to delivering complete platform unification for our customers, allowing a far smoother, cross-sell and onboarding with the simplicity of a single click. This will dramatically improve the customer journey in 2024, and we expect to see gains in our customer retention and expansion efforts in the fourth quarter.
We continued our momentum in landing key new logo wins and strategic expansion verticals. Our sales teams are winning new logos in these expansion verticals with prebuilt use cases. One great example of this is in social media where we serve some of the largest players in the space and have recently won a handful of follow-on logos in this area.
This is highlighted most recently by D. real time, their new authentic approach to social media being real chose Fastly due to the power of our platform and its unique ability to quickly scale for their low latency traffic patterns. Members of my senior staff loves this platform. We're happy to have them on board. This has also led to the winning of a social media based shopping application that is rapidly growing, leveraging our expertise in that space as well.
Alongside social media, we added to our list of logos with one of the premier dating apps and are excited to pursue other dynamic traffic opportunities in similar mobile applications. We continue to penetrate new sub verticals in e-commerce. For example, in live auctions, we recently won Phillips option years, which was a follow on wind to Sotheby's, making us a strong partner for our live auction and and its unique e-commerce website content requirements in the travel and leisure space. We continue to penetrate the gaming sub vertical. In addition to Bally's, we added another major player in this space, and these newer verticals served more than just grow our top line. They diversify our traffic load and provide capacity with a smoother network and compute demand, fleet, higher infrastructure utilization and ultimately gross margin improvement. We continue to see a tailwind from vendors who exited the space. Moxy works a tech platform for real estate agents and brokers is a great example of how we capitalize on this disruptive environment. We recently published our new annual global cyber security report the race to adapt uncovering the impacts of cyber attacks on leading businesses across the globe and how 76% of businesses surveyed are planning to increase their cybersecurity budget in 2024. We continue to expand our security offerings to help customers counter these new threats and meet this growing demand. Fastly was also named a leader in the Forrester Wave edge development platforms. Q4 2020 report, highlighted by fast compute platform, receiving the highest possible of five out of five in 22 criteria, including vision, innovation, roadmap pricing, flexibility and transparency. It warms my heart that Forrester statements report Fastly is an excellent fit for enterprises seeking to extend their capabilities from the public cloud with a highly performant and secure edge platform. This is exactly what Fastly can deliver. And if any enterprises out there listening and want to extend their capabilities to the edge, please give us a call we continued to make strong improvements in our gross margins, which was 56.9% in 2023, up 330 basis points over 2022.
In the fourth quarter, our gross margin was 59.2%, a 220 basis point increase year over year. And note that we recognized a one-time $2.8 million true-up payment that benefited the quarter. Ron will share more details with you in a minute, but I'm extremely pleased with this result as our growth in gross margin with or without the true-up payment hasn't been this high in almost three years. And while we were within striking distance of 60% in the quarter, we do hope to produce directly above 60% in 2024.
Our team executed on controlling our variable cost of revenue, especially with lower bandwidth costs compared to the third quarter on a relatively healthy track traffic. Our operating loss was $37 million in 2023, less than half of the $76 million operating loss in 2022 and better than the original $53 million to $47 million operating loss guidance provided a year ago.
In the fourth quarter, our operating loss was only [$2.3 million] coming in better than our guidance, [up $10 million to $6 million]. Additionally, we posted positive net income in the fourth quarter for the first time since Q2 2020, financial discipline and rigor continues at Fastly and this quarter showcases what is possible as we stay focused on those. Ron will explain our outlook and guidance in more detail. But as you can tell from our OpEx spend, we are readying our model to leverage revenue growth and improve our cash flow in 2024. At the end of the fourth quarter, we brought on Kip Compton, our new Chief Product Officer. Kip brings capacity 25 years of senior leadership experience driving innovation most recently as the SVP of Strategy at Cisco networking in his various roles Kip has directed strategy, technology and investment, and it's even at a prior company, built a CDN for a large media organization under Chip's leadership. We will continue to move our product roadmap towards a more complete platform strategy, focusing on unifying strengthening, simplifying and always expanding Fastly is edge platform. In the fourth quarter, we introduced multiple new features on our West, including agent auto update, a simulator for debugging and testing an anomaly signal detect out of band domain requests and simplified attack signal thresholds.
One feature I want to highlight is our plug-in for Hershey Corp Vault. Specifically, the plug-in allows customers to seamlessly access hashtag hashtag Corp's fall to store keys for customers, sites and rotate or place from fall when needed. We released our observability page, which allows customers to monitor Fastly delivery and compute services via collections of metrics and logs. All of this can be viewed and customizable dashboard to give our customers more insight into their inventory of products and features with Fastly and those that are available for them to buy. We introduced our bot mitigation solution in limited availability to select customers and we were very encouraged by the response and the potential We'll discuss this further with the investment community next quarter.
Our new packaging motion gained momentum in 2023 and sets us up well for customer acquisition 2024. I'm pleased to share with you that more customers purchased packages from capacity in the fourth quarter than the first nine months of 2023 combined. The success of packages gives customers reliable billing and shows their confidence in Fastly first by signing up for longer-term commitments.
Moving on to our channel partner development, our growth continues and 2023 deal registration more than tripled that of 2022. And we grew our partner engagement by over 65%. These partners include WWTD. Presidio guide point security and FHM. I'm very pleased with 2023 results and even more excited about the opportunities in 2024, we established our annual guidance of 16% growth to incorporate macro uncertainties, but are, of course, targeting to outperform that guidance with continued financial rigor, strong innovation velocity, strategically lowering the friction of our go-to-market efforts and streamlining both our employee experience and our customer experience organizations around the world invest incredible amounts of time and resources, building best in class digital experiences only to see the value of them lost by having a compromise between performance, safety and personalization solution to this has to be built on the edge. It has to leverage all of the benefits that a best in class edge cloud platform brings at Fastly.
We deliver that platform. We partner with our customers to deliver the best possible end user experience, fast pace and engaging without compromise. Now to discuss the financial details of the quarter and guidance, I will turn the call over to Ron. Ron?

Ronald Kisling

Thank you, Todd, and thanks, everyone, for joining us today. I'll first discuss the housekeeping items, then I'll discuss our business metrics and financial results. And lastly, I will review our forward guidance. Note that unless otherwise stated, all financial results in my discussion are non-GAAP based. We are always focused on providing the most useful business metrics that help investors understand the fundamentals of our business and our progress toward our goals.
Beginning with the first quarter of 2024, we will discontinue disclosing quarterly in our R&D webinar as well as our market countries and bandwidth statistics. We believe these were used in frequently by the investment community and candidly weren't particularly helpful in understanding our business.
Finally, we will begin disclosing revenue by product area, split between core growth and emerging products. Specifically the core segment includes our delivery and network services. The growth segment includes our security offering and the emerging segment includes our compute and observability offerings. Again, these will commence with our next quarter earnings release and will provide further details at that time.
Turning to our financial results, revenue for the fourth quarter increased 15% year over year to $137.8 million coming in at the lower end of our guidance range of $137 million to $141 million. Revenue for Signal Sciences products was 13% of revenue, a 25% year-over-year increase or 24% increase, excluding the impact of purchase price adjustments related to deferred revenue. Also note that we calculate growth rates off the actual results with a percentage of revenue rounded to the nearest whole percentage. In the fourth quarter, we saw traffic expansion at our major customers, coupled with healthy upsell and cross selling activity. However, we saw a weaker international traffic in the fourth quarter, a reversal from what we saw in the third quarter, resulting in lower revenue growth, but higher gross margin which I'll touch on in a moment. Our annual revenue was $506 million, representing 17% growth over 2022 and coming in above our original guidance range of $495 million to $505 million provided one year ago. For the fourth quarter, RPO was $245 million, down 1% from $248 million in the third quarter of 2023 and up 24% from $198 million in the fourth quarter of 2022. As our consumption-based revenue model is now being augmented with predictable revenue packages, we believe that RPO will become a more meaningful indicator to the health of our business in 2024. As Todd shared earlier, we had 3,243 customers at the end of the fourth quarter, of which 578 were classified as enterprise, a net increase of 31 compared to a decrease of four in the third quarter and an increase of 22 in the fourth quarter of 2022. Our trailing 12 month net retention rate was 113%, down from 114% in the prior quarter and 119% in the year ago quarter. Our annual revenue retention rate, which we reported fiscal year end was 99.2% for 2023, up from 98.9% in 2022. These figures continue to reflect our very low churn and healthy customer retention dynamics. Enterprise customers accounted for 92% of total revenue on an annualized basis in both Q4 and Q3, with average enterprise customer spend of $880,000, up 3% from $858,000 in the previous quarter and up 7% from $822,000 in Q4 of last year. Our top 10 customers comprise 40% of our total revenues in the fourth quarter of 2023, flat with their contribution in three, reflecting in part the impact of vendor consolidation and expansion of traffic at some of our largest customers, which also drove one customer to account for more than 10% of revenue in the fourth quarter.
I will now turn to the rest of our financial results for the fourth quarter. Our gross margin was 59.2% in Q4 compared to 55.9% in Q3 of 2023, well above our expectations of a 100 basis point sequential increase. As I noted in my discussion of fourth quarter revenue, we saw weaker international traffic in the fourth quarter, a reversal from the stronger international traffic we saw in the third quarter, which resulted in lower revenue growth, but had a positive impact on our gross margins. Our team also executed on controlling our variable cost of revenue, especially with lower transit costs with successful renegotiation of our transit rates in several international markets. As Todd explained, we recognized a one-time $2.8 million take-or-pay true-up payment that benefited gross margins in the quarter had this benefit not been reflected. Gross margin would have been 58.3% in the fourth quarter. Our 2023 annual gross margin was 56.9%, up 330 basis points over 2022's gross margin of 53.6%. Discounting the benefit of the $2.8 million true up in the fourth quarter of 2023 and the $3.3 million true up in the fourth quarter of 2022, the gross margin improvement would have been 350 basis points year over year. I'm very pleased with the cross-functional work that took place in aligning our network capacity investments with expected traffic demand and our cost control efforts and bandwidth transit costs and our progress in pursuing beneficial peering relationships. While we have made significant gains in our cost of sales, there's still room for further improvement as we scale, and we remain committed to demonstrating an 80% incremental gross margin in our financial model going forward.
Moreover, the 330 basis point improvement in gross margin year over year, coupled with 17% revenue growth resulted in gross profit growing by $56 million or 24% over 2022. Operating expenses were $84 million in the fourth quarter, a 5% increase compared to Q4 2022 and sequentially, flat with the third quarter. Our operating expenses were lower than expected due to continued cost management efforts and Q4 hiring coming in slightly below our expectations. Recall that our sales and marketing expenses in the third quarter were impacted by one-time marketing expenses related to events and fees, which benefited the sequential comparisons and OpEx. This favorability, combined with gross profit ahead of expectations, resulted in an operating loss of [$2.3 million] in the fourth quarter exceeding the high end of our operating loss guidance range of [$10 million to $6 million]. For 2023, our total operating expenses were $325 million, up 5% from $308 million in 2022. Given our revenue and gross profit growth rate of 17% and 24% respectively, we are able to leverage our lower OpEx growth to reduce our operating loss margin by more than half from 17.7% in 2022 to 7.2%. The majority of our OpEx progress was due to company-wide financial rigor we've discussed over the course of the year, including notable larger items such as reducing duplicative or unnecessary SaaS and IT tools in our organization. In the fourth quarter, we reported a net profit of $1.7 million, or $0.01 per diluted share compared to a net loss of $9.5 million or an $0.08 loss per basic and diluted share in Q4 2022, demonstrating our ability to drive towards sustainable profits in our business. Our adjusted EBITDA was positive in the fourth quarter coming in at $11.5 million compared to negative $0.1 million in Q4 2022. I'm pleased to report that our 2023 full year EBITDA was positive $15.5 million compared to negative $32.9 million in 2022.
Turning to the balance sheet. We ended the quarter with approximately $329 million in cash equivalents, marketable securities and investments, including those classified as long term. We continued our repurchase of convertible debt principal in the fourth quarter, resulting in a reduction of our convertible debt principal balance by more than 50% from $713.8 million at the end of 2022 to $346.5 million at the end of 2023. And specifically in the fourth quarter, we repurchased $130.9 million in principal amount of our convertible notes for $113.6 million in cash or approximately [$0.87 from $1], coupled with a larger repurchase back in May, our 2023 repurchases totaled $367.3 million in principle for $310.5 million in cash or approximately [$0.85 from $1].
Our free cash flow for the fourth quarter was negative $21.9 million, a $2 million sequential decline from negative $19.7 million in the third quarter. This decline was primarily driven by an increase in our capital expenditure compared to the third quarter. Our 2023 free cash flow improved by $113 million over the prior year to negative $59 million from negative $172 million in 2022. This year-over-year improvement was driven by approximately a $70 million increase in cash from operations and a $42 million reduction in advanced payments for equipment. Our cash capital expenditures were approximately 11% of revenue in the fourth quarter and totaled 8% for 2023 coming in at the high end of our guidance of 6% to 8% of revenue.
As we shared on our Q3 call, we accelerated certain 2024 deployments into late 2023. 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 first 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 and actual results may differ materially, and we undertake no obligation to update these forward-looking statements in the future. Except as required by law, our first quarter and full year 2024 outlook reflect our continued ability to deliver strong top line growth, improved customer acquisition and upsell and cross-sell expansion in our existing customers, driven in part by new and enhanced products. Our revenue guidance is based on the visibility that we have today. Similar to Q1 2023, we expect revenues to decline sequentially from our seasonally high Q4 results due to lower traffic patterns and the absence of the $2.8 million take-or-pay true-up recognized in the fourth quarter. For the first quarter, we expect revenue in the range of $131 million to 135 million representing 13% annual growth at the midpoint. We continue to be very disciplined in our network investment and cost of revenues, which contributed to our quarter gross margins being approximately 200 basis points better than we initially expected. We typically see a seasonal decline in gross margins in the first quarter with improvement in the second half as we build capacity for peak traffic for the first quarter. We anticipate our gross margins will decrease approximately 100 basis points relative to the fourth quarter, plus or minus 50 basis points. As we mentioned previously, our Q4 operating loss was moderately better than our earlier expectations on continued cost management and slightly slower hiring. Our first quarter operating results will reflect the impact of the seasonal decrease in gross margin and the impact to our operating expense as the first half employer payroll tax increases. As a result, for the first quarter, we expect our non-GAAP operating loss to increase to a loss of $14 million to 10 million and our non-GAAP net loss to be [$9 to $0.05] per share.
For calendar year 2024, we expect revenue in the range of $580 million to 590 million, an annual growth rate of 16% at the midpoint. This guidance reflects our expectation for quarter on quarter acceleration in revenue growth through the year, driven by new customer acquisition and continued expansion at existing customers. 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 and to exit the year with gross margins at 60% or better. As a result, we expect our non-GAAP operating loss to improve to a range of $20 million to $14 million, reflecting an operating margin of negative 3% at the midpoint, an improvement of over 50% over 2023's operating loss margin of 7.2% and by over 80% over 2022's operating loss of 17.7%. We expect our non-GAAP net loss per share to improve to $0.06 to breakeven, reflecting the improvement in our operating loss expectations. And we expect free cash flow to be breakeven in 2024 compared to negative $59 million in 2023.
Before we open the line for questions, we'd like to thank you for your interest and your support in Fastly. Operator?

Question and Answer Session

Operator

(Operator Instructions) Fatima Boolani, Citi.

Fatima Boolani

Good afternoon. Thank you for taking my question. I wanted to ask about the backlog performance in the quarter. You did have some prepared remarks around it, but it really isn't typical to see a sequential decline in backlog. And certainly we couldn't find an instance of this in our model going back several years. So I was hoping if you could unpack with a little bit more detail as to that sequential decline and to the extent some of the package momentum. How is that really going to help blunt some of these impact? And then I have a quick follow-up as well, please. Thank you.

Ronald Kisling

Yeah, on the RPO what we have seen is beginning of the year was a pretty big increases. We've been focusing on building your multiyear commitments. What that drove was you're going to do one or two year commitments, larger amounts. And so those were with some of our largest customers. And so as those burn down, you're going to see a little more quarter-to-quarter fluctuation as they come down. And over time, I think looking at it on a year-over-year basis is probably going to be important, particularly given that Q4 being our highest quarter, you're going to see some of the biggest usage of those commitments during the fourth quarter.

Todd Nightingale

Yeah, I think it's a great question. The I think the point on RPO is right. I think we're going to see we are going to see some choppiness in that number, but the package momentum has been great. That's the packaging is just one way, though, that we drive RPM large annual contracts with a with a annual commit like the one that we had a true-up payment form to form that back the other way that we see RPO driven up. But on packaging, it really it was an amazing result in Q4, which gives us a ton of confidence, not just in the mid-market side of the house, but even in large enterprise accounts. And I think that really demonstrates that their desire in the market for reliable pricing and a simpler, all in construct for edge cloud that resonates up and down the market. So we're going to continue to invest there for sure.

Fatima Boolani

I appreciate that. And Todd, since I have you, can you speak to any succession in planning or any updated thought process in play with regards to the Chief Revenue Officer seat. I understand that Brett left the company later in the quarter. So just wanted to get a sense of where the management team. Is that with respect to filling that vacancy and get it to the extent that maybe had an impact in the quarter as well, if you can speak to that? Thank you very much.

Todd Nightingale

Sure. Absolutely. I really don't think it had any impact on the quarter. I'm remembering that Brett left the company very late in the quarter and beyond TT. left, the extremely strong sales team, both on the regional account side, but also on the sandbox front. We've been super happy with the team operating assets, but that being said, we realize this is an incredibly important role for the Company, especially as we run a true CRO model at Fastly, both on as the role covers both the sales side of the house as well as the customer success side of the house. We're going to be very, very methodical and choosing the absolute best candidate for that role to that end we're in the process of retaining one of the top recruiting agencies in the world for CMO roles. And we've already even before that begun discussions with the key candidate as we speak.

Fatima Boolani

Thank you.

Operator

Madeline Brook, Bank of America.

Madeline Brook

Hey, team, can you hear me?

Todd Nightingale

Yeah.

Madeline Brook

Okay. Perfect. Sorry about that. And I guess if you want to take a little bit into expectations and visibility for next year, I think Keno, candidly, the guidance came in a little bit light versus Street expectations. So just want to hear I know where you're seeing them to have both strengths for this coming year that in security compute and Unum, but maybe where is the weakness coming from, of course, outside of the macro comments and just more specific to Fastly?

Todd Nightingale

Yes, totally from a portfolio point of view, pretty happy actually the way the mix is evolving and the excitement around compute continues to build. And so from that point of view, we've been pretty pretty steady. And I think the progress is really good. And I think the macro is a big deal for us for sure. And we want to make sure that we are being conservative and taking into account that uncertainty. We, of course, have a desire to overachieve on that guide. But we and we know we know that there is macro risks, just like all of you do That being said, the new customer acquisition motion and the engine that we've been building here, not just with packaging, but with the efforts and channel, the focus on demand gen and especially really creative demand gen engine being built right now in marketing team, we are really happy to see the indicator that that trajectory is changing. And I believe that is the real key to moving the needle and driving up that guidance in the future reports. So that's what we'll be focusing on.

Madeline Brook

And just some follow-up questions I had, and then the macro commentary did anything get worse last quarter versus 3Q to 3Q? It's really kind of the first quarter we heard from you guys macro a lot of your competitors in the rest of software and started talking about macro much earlier. So just wondering, as you know, we shouldn't view this as hitting Fastly a little bit behind the ball compared to the industry or if some things materially changed from your perspective?

Todd Nightingale

No, I think it was pretty much as we saw last year last quarter, a handful of deals maybe taking a little longer than we thought a little bit of deals elongation, but now that we are seeing some of it just like we saw last quarter, we saw this quarter. Again, we want to make sure we build that into the guide. It may not get ahead of our [SKUs] for 2024.

Madeline Brook

Thank you so much.

Operator

Frank Louthan, Raymond James.

Frank Louthan

Nufarm be a household name a day out of it that way. So you you've talked about bringing on some some products that are more recurring revenue in nature and maybe walk us through those and how that's going to to fit the fit in into the revenue mix going forward? And then kind of a follow-up, where are you with sort of the converged on mobility ability sell to converge both delivery and Signal Sciences with the sales team? Thanks.

Todd Nightingale

Great. We should mention all of our portfolio is recurring revenue. It's just on a utility billing motion largely and or it has traditionally been on a utility build motion, which is, I think, amazing for large and especially particularly sophisticated users who want to lean in and control their usage by providing buy for folks who are looking for a more turnkey solution and perhaps a more holistic strategic partner. And if it can help, it can be a great opportunity just to buy a edge solutions like ours as a SaaS product, a straight have a cash style build with predictable, regular recurring revenue, and that's what our packages are. So all of that, all the discussion all the mentioned in the report here on the new packaging model. It's built around that model, predictable billing, a monthly commit regular recurring revenue. It gives our sales team the opportunity to easily cross-sell from one product line to the next to continue to land and expand and grow the customer over time. But it gives the customer the sort of ease of use financially at knowing what their bill will be every month. And so that's been very successful for us so far. They've been in the market for about a year, and we're pretty happy with that result.

Frank Louthan

Right. Great. Thank you.

Todd Nightingale

Sorry, Frank, Did I miss the second part of your question. I just want to make sure I got the second part.

Operator

Frank, can you press star one again, please?

Todd Nightingale

Sorry, man.

Ronald Kisling

(inaudible) the consolidated security.

Todd Nightingale

Sorry, you asked about product unification and being able to sell a single science and the traditional Fastly portfolio as well. We've made amazing progress actually. And our customers are seeing that there is amazing unification in the UY. and a panel that allows you to simply flip between the two we're not done yet. We've got a full single sign-on offering that's going live this week or next week rather. And then a new navigation, which will be really a super seamless user experience which be coming out at the end of the quarter, which I'm super excited about. And I think at that point, we'll have a really best-in-class unified ad platform for delivery network services, compute, security and observability, which to me is really where we want to be a cutting edge edge cloud platform with a suite of solution that allows just about any organization to move to a Fastly edge for the best possible user experience.

Operator

Jonathan Ho, William Blair.

Jonathan Ho

Hi, good afternoon. I just wanted to get a little bit of additional color on what happened with international. And can you maybe help us understand what changed relative to your expectations and what do you sort of expect to persist? I know there were some macro commentary, but would you expect to persist on internationally into 2024?

Todd Nightingale

Yeah. It's important to note the difference between the our mix of international business versus what shows up is international traffic on our platform. So our mix of international business was pretty much as we predicted. We ran 27% of our revenue international this year, up from 26% in '22. We expect that trying to continue a slow increase of flow balancing of our revenue globally, but this particular quarter, what happened was that some of our traffic mix from them really to be on one particular country with a very high rate, slowed down that traffic wound up landing in other regions. And because of that traffic change, we wound up with a little bit of headwinds to revenue, as Ron said earlier, but a little bit of tailwind to gross margin. And what I mean by that is traffic that lands in that particular country tends to be billed at high rate, but it is less profitable for us. And so we see that in the numbers and that that is a reality that showed up in our numbers this quarter. So you'll see better profitability and because of that traffic shift, but a little headwind to the topline and it's put it there.

Jonathan Ho

Okay, great. And just one additional question. In terms of net retention and the depth and their trends over time. Can you give us a sense of your signed this large cohort of new enterprise customers? Are they fully contributing out of the gate or would you expect this group to maybe increase spend over time and maybe start helping those trends out? Thank you.

Todd Nightingale

Yeah, 100% in respect of the new enterprise customers and really all new customers be helping that trend out over time, in fact, and this is sort of an interesting reality. The fasteners business and I think most SaaS utility build businesses, LTM NRR, even dampener is actually highly dependent on new customer acquisition because customers ramp their spend pretty hard over the first three years -- 2.5, 3 years. And then that ramp tends to tail off as we continue to grow, but at a slower rate and you could get pretty good data on those trends. If you looked at our disclosures from Investor Day earlier in 2023, we presented a graph on exactly that phenomenon. And so yes, I think your point of your question is the right one, those that surge in new customer acquisition will absolutely help us drive our better LTM NRR rate in the next two years.

Jonathan Ho

Thank you.

Operator

Tim Horan, Oppenheimer.

Tim Horan

Thanks, guys. Can you talk a little bit more about the distribution business? Or how does your kind of quality compare to your peers out there and maybe pricing? And are you picking up more major sporting events because of the improvement in quality?

Todd Nightingale

When you say distribution, you mean like CDN content distribution right?

Tim Horan

Yeah.

Todd Nightingale

Yeah, sorry about that. Sometimes I call it delivery and distribution. yeah, I think this is an area where we believe we've got a very strong competitive advantage from a performance point of view and in many major markets the capacity point of view, the wonderful I think that we are continuing to grow into Is that true like longest tail of global coverage, and we're continuing to evolve there.
But and competitively in major markets. We feel extremely strong about our performance advantage, but we also are extremely proud of the feature completeness, the fact that our security and our compute portfolio is available on every single node that delivery is available on theirs and our customer never has to trade those things off. Our edge is fully capable everywhere that it exists around the world. And that gives us a boost when it comes to content delivery as well.
So we are feeling pretty good about that live sporting events or any live events are starting to see some interest in other kinds of live events as well. It's I think, a huge win for us and that continued trend towards more live events can only help Fastly. It's an area where art differentiation just continues to be a priority and is your own offering and improving it over the last couple of years in terms of lower latency more import capacity, lower generics that are absolutely both performance, like you said, lower latency, greater capacity, closer, distributing our nodes closer and closer to the user, but also just the completeness of the platform, the feature set, the flexibility that it gives one thing I think we're going to start to see in live events.
It is an increase in broadcasters trying to combat piracy and advanced feature set at the edge really matters there and advanced focused on more personalization, not just on the ad flow, but other parts of the experience, again, advanced feature set is going to matter there. The we're very proud of the performance of our infrastructure, especially in comes a lot of events. But the feature set is just isn't very helpful.

Tim Horan

Thank you.

Operator

Jeff Van Rhee, Craig-Hallum.

Jeff Van Rhee

Great. Thanks for taking the questions. I've got a few just on the new customer numbers, good to see the enterprise capture number strong. It didn't transition or translate to the RPO acceleration. The would the initial landing size of these these customers as large as expected, were there potentially smaller deals? That's one and two, just in terms of the pipeline, have you turned the corner and is this a new repeatable level of enterprise adds quarterly?

Todd Nightingale

Yeah, great question. As far as the new customer adds and like their average size, I can't and we don't disclose the size of new enterprise customers, but average enterprise customer size increased. And I think those new customer enterprise customers, I would call typical moderate. We don't have --

Jeff Van Rhee

I guess you'd call them what was that for?

Todd Nightingale

They're typical of our other enterprise customers they are not smaller, they are not bigger. As far as the trajectory goes, it's absolutely our intention to maintain that level. We'll be pushing hard to do so. I'm sure of course, there will be fluctuation as there always is, but I believe we have an opportunity to achieve levels like that moving forward and we're going to keep that.

Ronald Kisling

I'm just going to add on CRPO, the mix of which of those customers when we sign new enterprise customers have actually have a commit. Not all of our customers have an extent they do a consumption based deal with Bulkamid is not going to show up in the RPO. So you have that it is also something to think about that. There's not 100% translation through customers into the RPO.

Jeff Van Rhee

Yes. Got it. And then if I look at the overall guide, just the acceleration that you're looking for throughout the year, the quarter was a bit below Q1, looks a bit below, but the year kind of brackets, the consensus on top line and it implies acceleration. What's the visibility to that? What do you have to assume there what are you assuming in terms of like the international weakness thus far? Does that have to improve materially? Do you assume continued international weakness to hit that back half of the year. Just give us maybe a little more comfort where you're getting your conviction later in the year?

Todd Nightingale

Yeah, great question. And we we looked at that very carefully because I guess we knew we have this question and we project the revenue down to the account level for a very large number of accounts and look at the trend across the board. And this is the best projection we've got cycle. I feel very, very confident in it from as far as the international traffic goes, if we saw another surge in one of those more high priced regions, you'd expect that to be a tailwind to revenue in any quarter that it happened. And if we saw a particular large strategic new customer come onboard, we could again see a tailwind from as far as the Q1 number versus the rest of the year number in our projection, it is for the full year and we're trying to track it very, very carefully.
The biggest thing you're seeing in Q1, I think is the step down from the one-time true-up payments from Q4 to Q1, which yes, our model obviously takes into account. And so we see that. But the driving the continued growth through the rest of the year, I think stability is, in fact, sort of like the baseline for our protection.

Jeff Van Rhee

And maybe sorry, just to go back, if I could, one more on international, just to understand it sounded like you were I guess I'm a little confused. You're saying some of the revenue shifted from from one country to another. It sounds like it might be very concentrated. I don't where you suggested. It was concentrated to a specific customer, just just indulge me there and maybe just explain that one more time.

Todd Nightingale

Yeah, some traffic moved out of one country. So there's a handful of countries in the world where delivery services are just very expensive because of the way Internet service providers and technology vendors operate in that country and the rate is very high, and we don't pass all of that cost on to our onto our customers. So because of that, the margins tend to be very low when we see a spike of traffic in a region like that, we see an increase in the top line, but the headwinds to gross margin, and we saw that in Q3, and we saw it come down in Q4, which was the that was the headwind on the top line and a tailwind on gross margin. But we tried our best to predict that to predict and project that. But that is what happened.

Operator

Rudy Kessinger, D.A. Davidson.

Rudy Kessinger

My question is just to follow on to that. I mean, just with this traffic being lower in this one country, was that from your largest customer that's over 10%? And secondly, what was the reason for the lower traffic in that one country was did they did you lose share to another provider that what was there? Was it not enough new content in the quarter was a live sporting event related not as much viewership. What is the reason for the lower traffic in that number of countries?

Todd Nightingale

Sorry, I can't comment on which customer it was from, but it's just a natural variability like you said, how much new content or what types of content being published in a particular region pack for first streamers has volatility when it comes down to the granularity of a single country in the world, you get volatility in that in that space. And so that's what we saw. We tried to make sure that our 2024 projections for really the baseline traffic in countries like that. And if we see surges then they'll show up as a tailwind moving forward.

Rudy Kessinger

Okay. Ron, just kind of housekeeping keeping clarification questions on revenue acceleration on a year-over-year growth basis every quarter. So Q2 growth should accelerate from Q1. And then on gross margins, you said in Q1 down about 100 basis points versus Q4. Is that versus the reported 59.2% or the adjusted 58.3%?

Ronald Kisling

Yes. So I guess on the latter one, just to clarify, that's against the reported 59.21 hundred basis points plus or minus against what we actually reported in terms of the acceleration. I mean, I think you will see it across the course of the year. And I think I expect it to be generally in line with what we've seen historically from a seasonality and from acceleration across the year.

Operator

Angie Song, Morgan Stanley.

Angie Song

Hi, can you guys hear me?

Todd Nightingale

Yes.

Angie Song

All right. Thanks so much for taking my question today. So just wanted to dig in on gross margins. You mentioned that 80% incremental gross margins. Could you just speak to what drives this? And on the 60% margin, is it somewhat more aspirational or is this something that you have a line of sight on?

Ronald Kisling

Yeah, I think on the latter question, in terms of our outlook for gross margins for 2024 and achieving by year end margins at the 60% or a little above that is it's really our plan. We have line of sight to it is your continued rigor in our field investments in capacity. It's continuing to improve our bandwidth, our transit costs through both negotiations and increasing our peering network efficiency. And then as we just continue to grow. It allows us particularly international to improve our cost structure. And and so those are kind of the big drivers that give us line of sight to that improvement that we expect to continue to see that improvement across 2024.

Operator

Rishi Jaluria, RBC Capital Markets.

Rishi Jaluria

Wonderful. That's a new way to pronounce my name. This is Rishi Jaluria from RBC. Thanks so much for taking my question, maybe I want to start with just looking a little bit closer at Signal Sciences. We saw a little bit of a slowdown after a few quarters of acceleration. I know there's there's obviously comps and scale and everything like that. But just any color on what drove that and how we should be thinking about that growth going forward? And I've got a quick follow-up.

Todd Nightingale

Yes, it's a great question. We always see a little bit of a surge in delivery in Q4. And so the security growth can tend to slow down a little bit on both, and I'll check into it, but it hasn't been a huge shift there. The SailPoint seems to be running pretty smoothly. There could be that we have a little bit of a backup on folks who are waiting for that unified experience coming out this quarter, which will be exciting. But we've been pretty confident in that security side of the business this quarter.

Rishi Jaluria

Okay. Got it. That's helpful. And then maybe just sticking with security on you. As you have the new BOP medical product out there. What sort of early feedback have you gotten from select customers that are actively using it in production today? Thanks.

Todd Nightingale

Yeah, we've had some really solid feedback. In fact, we had a couple of customers actually make purchases in Q4, even though is just an early availability, that was a nice confidence. I think it showed a maturity in our beta motion. And I'll tell you the biggest piece of feedback that I have heard is just our very broad interest in this technology, and that's been great. And with a ton of interest in expanded feature sets that we are starting to look at monetizing some private access tokens as part of that solution as well because we've gotten just so much interest and that side of the house, I think there's a ton of revenue opportunity here for our security portfolio on the box side, and we're going to be pushing that. I think it's easy to imagine that the only people who would be super motivated around bot management might be quite big incredibly versus the retailers that do big product drops, but its nature it's a pretty broad, probably applicable product with a bunch of use cases, some as simple as customers who don't want their competitors scraping their data off the website of popular websites and that that's super interesting and it's something we're going to be pushing hard at continuing to invest in. I think even as we go GA this quarter, we're going to continue to add functionality here for probably for years to come. There's a ton of interest and a ton of innovation here at wonderful.

Rishi Jaluria

Thank you so much.

Operator

That concludes our question and answer session. I will now turn the call back Chief Executive Officer, Todd Nightingale, for closing remarks.

Todd Nightingale

Thanks, everyone, for joining us on Valentine's Day. I want to thank our employees, customers partners and investors. We remain focused on execution, bringing lasting growth to our business and delivering value to our shareholders.
Let me close by saying, I believe digital experiences will drive the mission and define the success and almost every organization everywhere and Fastly will have a significant impact on the way digital experiences are built and delivered around the world. Our customers have a real passion and capacity solutions. And our employees have real enthusiasm for pathways mission to make the Internet a better place where all experiences are fast, state and engaging. Thank you so much.

Operator

This concludes today's conference call. Thank you for your participation, and you may now disconnect.