Fastly, Inc. Q2 FY2020 Earnings Call

Good afternoon. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly Second Quarter 2020 Earnings Conference Call. Thank you. I would now like to turn the conference over to Maria Lukens, Vice President of Investor Relations. Please go ahead.

Hi, everyone. Thank you for joining our second quarter 2020 earnings call. We have Fastly's CEO, Joshua Bixby; Chief Architect and Executive Chairperson, Artur Bergman; and CFO, Adriel Lares, with us today. I want to remind everyone about the format of our call; we published a shareholder letter on our Investor Relations website and with the SEC about an hour ago. We hope everyone had a chance to read it. Since the letter provides a lot of details, we will make some brief opening remarks and reserve the rest of the time for your questions. During this call, we will be making 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 the call. Please take a look at our filings with the SEC, in particular, the risk factors within those filings and our Q2 2020 shareholder letter for a discussion of the factors that could cause our results to differ. Also, note that the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call is being webcast and will be archived on our website shortly afterwards. With that, I'll turn the call over to Joshua.

Thanks, Maria. Hi, everyone and welcome. Thank you for joining us today. We hope that you're all keeping healthy and safe. Q2 was another exceptionally strong quarter for Fastly in a world that continues to change rapidly. The structural and societal changes resulting from this pandemic have continued to significantly accelerate the need for organizations to prioritize their digital transformation. We are in some of the most uncertain times in modern history, but we now see clearly that the major shift to digital will be long-lasting. The need for a trustworthy and modern edge platform has never been greater. Developers and security operators are at the center of the transformation, and they can only drive transformation effectively if they can build quickly and securely. We believe in developer and security operator empowerment. We partner with them to create simplified, frictionless, fast, and secure solutions at scale to support the evolving needs of billions of users around the world. The strength of our edge platform continues to show in our results. Fastly delivered another quarter of solid execution thanks to the team's continued focus and performance. We delivered exceptional top-line growth, generating $75 million in revenue, which was up 62% year-over-year. Despite these turbulent times, we continue to see robust customer adoption of our edge platform and security products by both new and existing customers across multiple verticals and geographies. We grew our total customer count to 1,951 from 1,837 in the previous quarter, the largest quarterly increase since going public. Our enterprise customer count grew to 304, up from 297 last quarter. We are pleased with the number of new enterprise customers as well as customers who grew into the enterprise category. However, this strong growth was offset by some customers falling out of the category in COVID-impacted industries. In addition, ByteDance, the operator of TikTok, was our largest customer in the quarter. Any ban of the TikTok app by the US would create uncertainty around our ability to support this customer. While we believe we are in a position to backfill the majority of this traffic in case they are no longer able to operate in the US, the loss of this customer's traffic would have an impact on our business. Our average enterprise customer spend increased to $716,000 from $642,000 in the previous quarter. Our existing customers are relying on us more and more as reflected in our increased net retention rate of 138%, up from 130% last quarter, and dollar-based net expansion rate of 137%, up from 133% last quarter. Looking ahead, developers now more than ever need to build differentiation at the edge and rapidly adopt new architectures. This is why we continue to invest in our network and offerings specifically Compute@Edge and security. Many of our customers are further embracing Compute@Edge, our real-time serverless architecture for high-performance applications. This quarter, we enhanced our offering with valuable new observability features, including logging, tracing, and granular real-time metrics bringing observability to the forefront of the serverless computing environment. We are on track for and expect to further expand the availability of Compute@Edge. We continue to learn from our customers and are inspired by the variety of innovative use cases we are enabling including new ways they are thinking about security. As transformation drives more code and applications to the edge, it’s evolving into an increasingly critical place for secure websites and applications. This quarter, we delivered new key security features including Fastly Flow Control. Security has always been a key focus for us, and we will continue to invest significantly in this area. We are also continuing to scale and build our network at a record pace to meet today's digital demand. We reached 100 terabits per second of global capacity, an important milestone for us, representing 35% growth since the beginning of the year. Our results and guidance reflect that Fastly is uniquely positioned to empower our customers and will continue to drive growth during these uncertain times. With that, I will turn it over to Adriel to walk through the financial details.

Thank you, Joshua, and thank you everyone for joining us today. Fastly had a strong second quarter, as reflected in our results and raised 2020 guidance, which I will talk about in more detail shortly. First, I want to briefly touch upon some of the key financial results. This quarter, we generated $75 million in revenue, representing 62% year-over-year growth. We also continue to deliver a healthy gross margin as we continue to scale. GAAP gross margin was 60.2% for the quarter, up from 55% in the same quarter last year. Non-GAAP gross margin was 61.7% for the quarter, demonstrating increased leverage of our software-defined network, realizing over 600 basis points of operating leverage improvement year-over-year. As we have said in previous quarters, our gross margin will continue to be impacted by the timing of personnel and infrastructure investments along with the seasonal fluctuations of platform usage by our customers. Despite continuing economic uncertainty, we remain confident in our ability to deliver incremental annual gross margin expansion as we continue to scale and deliver innovative security and edge computing solutions. Finally, this quarter marked a significant shift toward profitability as we delivered our first quarter of positive EBITDA. Turning to the balance sheet, we bolstered it with a successful follow-on offering and ended the quarter with $454 million in cash, restricted cash, and investments in marketable securities. We're pleased to have a strong balance sheet and liquidity as we navigate the current uncertain economic environment. We remain optimistic about our strong fundamentals, the demand for our mission-critical services, and the underlying growth of our business into Q3 and future periods. That's why we're raising guidance again for the full year 2020. For the third quarter, we expect revenue in the range of $73.5 million to $75.5 million. Non-GAAP operating income in the range of negative $1 million to positive $1 million. Non-GAAP net income per share in the range of negative $0.01 per share to positive $0.01 per share. For the full year 2020, we increased our revenue guidance range to $290 million to $300 million from $280 million to $290 million. Non-GAAP operating loss range to minus $12 million to minus $2 million from minus $20 million to minus $10 million. Non-GAAP net loss per share range to minus $0.06 to minus $0.01 from minus $0.15 to minus $0.08. In closing, we continue to believe we are well positioned to execute and further our growth. Our edge platform and product offerings serve a diversified customer base that continues to require more from Fastly to fuel innovation. We have a strong balance sheet and will continue to strategically invest in our network and offerings, including Compute@Edge and security. Finally, we believe the ongoing pandemic has permanently accelerated the need for businesses to focus on digital transformation. Fastly has focused on helping developers adapt their business and succeed in the world that emerges by providing a fast, secure and reliable edge platform that evolves with their needs. With that, I'll turn it back to the operator to take your questions.

And your first question comes from Robert Majek with Raymond James. Please go ahead.

Thanks. My questions are around the image delivery business; part of what you're offering there is personalization at scale. Can you just elaborate on that driver? And then furthermore, I'm curious if your mix of business is shifting towards image delivery and if so, what impact that might have on revenue growth given the higher average selling prices?

Hey, Rob, it's Joshua. Image optimization and the concept of personalization at the edge are central to Fastly's core story. We initially focused on edge program mobility; it was critical for us. Overall, image optimization remains a strong aspect of our business, depending on the vertical, as some sectors heavily depend on it. We are observing innovative use cases for images with Compute@Edge. Looking at our growth for the quarter, it's clear that this trend is widespread across different sectors and regions. We have not experienced any significant changes in our business mix; in fact, this quarter's mix was similar to last quarter's. This indicates broad, strong growth across all sectors, including image optimization.

Perhaps just one more from me. I know it's early on FERC Compute@Edge, but curious if you could just highlight some of the interesting use cases that customers are exploring today.

Yes, absolutely. I turn to Artur, who is deep in this. Artur, I know you have some interesting stories in this.

Hello, everyone, it’s great to connect with you all again. We’ve begun to see more of our beta customers engaging in proof of concepts and testing, and we’ve identified a few use cases. One involves an online retailer aiming to shift their availability, stock, and pricing microservices to the edge to provide live updates and quicker responses to end users. Another online retailer is looking to implement smarter waiting rooms with tokens for purchases, allowing them to become more responsive, streamline their architecture, and ensure fairness in distributing those tokens. Additionally, we have other online retailers interested in caching significantly more data at the edge and personalizing responses, even during surges when their origins are overloaded, to maintain service quality. There are also examples in the video sector where a client wants to enhance health checking of their origins at each edge to select the best origin and live encoder, minimizing buffering and optimizing playback interactivity. The use cases are diverse, some aligning with our expectations and others more advanced than I had anticipated at this stage.

Great. Thanks a lot.

Thanks, Robert.

Your next question comes from Brad Reback with Stifel. Please go ahead.

Great. Thanks very much. Joshua, maybe we can dig a little bit more into TikTok, can you give us a sense what percent of the traffic is US versus the rest of the world and maybe just high level, what percent of revenue it represents for you?

Sure. So over the last six months, it represents just about 12% of revenue, trailing six months ending June 30. Less than 50% of that is in the US. We continue to monitor the situation closely, obviously, what's unique about TikTok in this sector and other apps that are on us is that they are an innovator and like historically with the innovators that we have, we are working with the innovators in the high-value areas of the business. So think about APIs and other areas, not just to deliver a video, which is also something we help with when it's important. So we have looked at this risk, we obviously wanted to make sure everyone heard about it, as I stated in the prepared remarks, we are very confident because of our strategy on how we've looked at this side of traffic that there is a meaningful amount of traffic that we could work in case something didn't move in the right direction at short notice, but that's not what we're seeing today.

Great. And then, Adriel, just following up on this line of thought. As you look at the back half guidance, have you assumed a status quo with TikTok or have you made any changes in the assumptions? Thanks.

Hey, Brad. Yes, nothing at this time. We were kind of assuming a bit of a status quo for now, and as Joshua mentioned, getting into the latter half of the year gives us more time to respond. That's part of our approach.

Perfect. Thanks very much.

Thanks, Brad.

Your next question comes from Will Power with Baird. Please go ahead.

Okay, great, thanks. Yes, I guess maybe just following up on that a bit. Adriel, wonder if you could just talk about more broadly the factors that are informing Q3 guidance. I mean, when I look historically, normally you have a pretty good pick up sequentially from Q2 to Q3 and guidance assumes something that's flatter to maybe down slightly at the midpoint. And so I'm just trying to figure out how much of that is conservatism versus maybe any change in trend? And I guess along those lines, you've created kind of your sense for what you have been seeing in the traffic trends as you go from May, June into July?

Hey, Will. Yes. Generally, we are beginning to see some improvement from Q2 to Q3. It's important to note that Q2 this year, compared to last year, was relatively flat seasonally when looking at Q2 versus Q1. However, that wasn't our experience this year, creating a comparison challenge when considering Q2 to Q3. Despite this, it's worth highlighting that we are experiencing strong year-over-year growth rates at this midpoint. Last quarter, we anticipated that people would return to a more normal lifestyle after shelter-in-place measures, and while that is largely happening, there is some uncertainty about how the rest of the world and parts of the United States will navigate this. As a result, normal seasonality is somewhat muted. However, regarding Q3, this situation is somewhat alleviated when comparing it to a very strong Q2.

If I could follow up on the financial side, gross margins were significantly stronger. Could you discuss some of the factors contributing to the gross margin and what our expectations are for its trajectory moving forward?

Yes, we definitely as you know, last quarter I did for the first time actually talk about the fact that I was going to be guiding gross margin sequentially upward. So I was pleased to see that we were able to deliver pretty meaningful growth quarter-over-quarter let alone from year-over-year. I think that given that we're sort of more normalizing Q3 over Q2, I'm sort of going to give the mix of traffic, I think the one thing that always makes that challenging to project. I do believe that on an annual basis, we're going to still contribute well over 100 basis points year-on-year. So I feel pretty confident about the leverage we're going to deliver this year. I think when we go into now the normalized Q3 versus Q2, I'm going to sort of hold before sort of guiding a little bit where gross margins are going to go from here.

Okay, great. Thank you.

Thanks, Will.

Your next question comes from Jonathan Ho with William Blair. Please go ahead.

Hi, good afternoon. I wanted to start by asking if you could provide a rough estimate of how much COVID-19 and stay-at-home measures contributed to growth this quarter.

Yes, it's Joshua here. Jonathan, it's difficult to determine that in general. As you can see from our guidance, we are not viewing this as a one-time occurrence. We are anticipating and observing long-term sustained improvements. Fastly is positioned uniquely within a usage-based model alongside the most innovative companies in the world. When you consider the largest innovators and examine their results, like those of Pinterest or Shopify, it’s clear that they are demonstrating significant strength. The narratives from these companies highlight ongoing robust performance. It's challenging to differentiate, but it seems that the innovators are continuously gaining remarkable momentum, indicating a generational shift in certain industries. Another exciting aspect of this quarter for us is the increase in new customer counts. This isn't solely about existing platform users; it reflects the highest rise in net new customers we’ve experienced in a selling environment that has clearly evolved. The early successes we discussed during the last earnings call have shown progress over the past few weeks. This quarter reveals a far more sustained trajectory of strength moving forward. While hard to pinpoint, we are undeniably witnessing sustained strength ahead.

Got it. Regarding the wins you mentioned for the quarter and the digital transformation aspect, what were some of the main determining factors behind why companies are seeing this success?

Jonathan, check out there…

I think the question has dropped. So your next question comes from…

I'll try to address that question as I understand the focus on our success. The strong themes we see, particularly with our enterprise customers, revolve around programmability. We are built by developers for developers, and this remains crucial in the era of digital transformation. While digital transformation is a widely discussed topic, our results reflect its actual impact. We are experiencing increased engagement because companies are investing in programmability, driven by the need to innovate and trust their developers. Additionally, our security offerings are compelling, and we plan to further enhance them. We are also heavily investing in Compute@Edge, which differentiates us from our competitors in the enterprise space. There are many reasons for our current position, and we are proud of our progress in this area. I'm ready for the next question.

Your next question comes from Brad Zelnick with Credit Suisse. Please go ahead.

Great, thanks so much. And congrats guys on all the success. I've got a couple of questions. For starters, I think I've heard you emphasize the SecOps audience today, more so than ever. You also highlighted investments and capabilities like Flow Control. Can you just double click on the security use case a bit more? Because quite honestly, I think investors had always viewed that side of your business as less mature than others in the market. And I'd just be curious for you to remind us of how you view the opportunity, where we are today, and if you look back in three or five years, what percentage of the mix might it be?

Yes, I mean, that's a great question. I do think that people don't understand our security DNA. I think people don't understand how heavily we invest and how deeply we invest in that area. So I think stepping back, there are a number of things which makes us unique; one, of course, which we talk a lot about is one secure network, right, where we don't have a network for DDoS or a network for one application. That provides a tremendous amount of benefit to us both efficiencies but for customers' visibility and control. So customers are really coming to us when they don't want to have to call for professional services to deal with the real-time battle of security. I mean, these are adversaries who are in the middle of changing every second, every minute. And if you get, for example, data that's in our hold, that's pretty hard. I think that one of the other areas and tenants for us is just our own culture. I mean, we drive data privacy. The customers we pick to put on our platform, all of that gets driven down into the culture, and I think that's coming through and we're getting some really big wins. We talked about some of those in the letter, be it on education or e-commerce or financial services, all of those are coming because we are at our heart seen as a company that is really strong in that area. We've talked about the portfolio in the past from WAF to denial of service protection, TLS, and in many of those categories, we are leading. This is, however, an area that we continue to invest in pretty strongly. And you see some of that investment coming through in Compute@Edge, right. The way that we've built Compute@Edge to isolate each of these requests and responses so that we don't reuse the environment allows us to really have an enterprise offering that customers would like. And one of the areas that I think is really interesting around Compute@Edge is how many use cases we're seeing that are security-related. But we continue to look for investment opportunities, both organic and inorganic. And we are certainly looking to find both partners in some form of proximity to us that are proven leaders in their space, have revenue and really focus on this DevOps-Sec intersection, where we believe the future is. So we are certainly out in the market looking to find ways to partner with those innovators. But to your point, I do think it's a misunderstood part of our story and one that you'll hear a lot more from us about in the future.

Fantastic. Thank you, Joshua. And if I could just squeeze in one more. It's nice to see the record customer adds in the quarter. What can you tell us about the size and wallet of the customers you're adding today and as well, how would you characterize what you're seeing in the funnel in terms of propensity to spend?

Yes, I believe you are familiar with our strategy for the small and medium-sized business market, which involves partnering with other companies. Recently, we have witnessed the effectiveness of this approach. Instead of trying to create a sales machine to monetize many individual domains, we are collaborating with major aggregators like Shopify, Wix, and Adobe. This strategy is beneficial for us, and we plan to continue pursuing it. The new customers we are attracting generally include larger enterprise clients who will gain significant advantages from working directly with us. For the smaller customers, we will continue to partner with established channels, as we have historically done. To give you some context, while we have around 300 enterprise customers, some of our largest competitors have between 6,000 and 7,000 enterprise clients. From our perspective, we are just beginning to explore this market. The number of enterprise customers available is somewhat constrained by the lack of programmability and innovation in traditional sectors. When we look at companies with 30,000 or 100,000 enterprise customers, that is definitely a market we are interested in. We recognize that we are at the beginning of this journey, but we are making progress and seeing an acceleration, which is exciting for us.

Awesome. Thank you so much for taking the questions.

Thank you.

Your next question comes from Rishi Jaluria with DA Davidson. Please go ahead.

Hey, everyone. I appreciate you taking my questions. I have one for Joshua and one for Adriel. Joshua, in the shareholder letter, you mentioned some notable customer wins, particularly in the education sector, which I found quite interesting. There’s a US university using Fastly to facilitate its transition to online learning, especially as more universities are going fully virtual or at least hybrid this semester and possibly for the academic year. Could you elaborate on how the education sector is evolving and in what ways these customers are utilizing Fastly to enhance the online learning experience for students? I also have a follow-up question for Adriel.

Sure. That's an exciting sector for us right now, and this particular win is especially thrilling due to the nature of the client. Overall, we are witnessing a complete re-evaluation of education. From my perspective as a parent, I see my three boys learning through Khan Academy, which is delivered via our platform. The educational institutions they attend are really grappling with how to rapidly get content online and how to ensure that any content they do deliver is personalized and accurate. These challenges highlight the role of developers as key decision-makers in this space. Within schools, there are remarkable developers innovating, which is resulting in personalized and seamless experiences for users. The driving force behind the surge in digital innovation and transformation is the demand for frictionless, scalable, and secure digital experiences, and universities are leading in this area. This represents a significant growth opportunity for us, and I'm very enthusiastic about this win and others. The core idea remains unchanged: the modern economy is all about universities and the digital landscape, and there is an urgent need for accelerated digital transformation for survival.

Alright, that's helpful. Adriel, it's great to see some significant margin expansion on both the gross margin and the bottom line. However, on the cash flow side, there seems to be a notable increase in accounts receivable sequentially, which explains why cash flow remains negative for the quarter. Could you elaborate on what's happening there? Is this mainly due to customer and COVID dynamics as you aim to be supportive partners, or is there another factor at play? Additionally, looking beyond this quarter, how should we consider the conversion of EBITDA or non-GAAP operating income to operating cash flow? Thanks.

Yes, good question Rishi. And I think you sort of news on the head. It was definitely one of the situations. We're certainly trying to partner with our customers especially early on in terms of the COVID-19 pandemic. A lot of customers face a lot of uncertainty in terms of what's going to happen to them in the future, and I think as I've mentioned in the last call, most of those partnering and negotiations with customers is really much more on payment terms than it was on rates. So from my standpoint, I was pleased to see that the majority of what really swung DSO in Q2, most of that was collected already we've collected here in the first month of the quarter. So I was pleased to you that, I think in general, you will begin to still see some of that effect folks are trying to be really focused on cash, which I understand. And one of the primary reasons why we went out and saw some additional cash ourselves. Just to sort of have the balance sheet a little bit more if we feel comfortable before and I think we feel even more comfortable now.

Alright, great. Thank you, guys.

Thank you.

Your next question comes from Tim Horan with Oppenheimer. Please go ahead.

Thanks, guys. Artur, can you talk a little bit more about Compute@Edge and maybe just compare and contrast a little bit to what AWS and Azure are doing? I know you talk server-less. How does that kind of compare and contrast at all to what the Lambda products, which I guess the biggest server-less product out there? And can you compare and contrast your competitors that are kind of more legacy CDN guys? Let's say they have an edge product like why, why is your product basically better than theirs at this point? Thank you.

Yes, it is indeed a serverless product, specifically designed to operate at the edge and provide the functionalities that customers seek in that space. As mentioned earlier, a crucial aspect for us is balancing multi-tenancy and security needs against the speed and efficiency that are essential in more limited environments, as opposed to traditional large data centers. The technology we utilize is based on WebAssembly, allowing each request to run in its own isolated memory environment or sandbox. This is similar to how a web browser works: if one tab fails, it doesn't affect the entire browser. By minimizing startup time and memory costs, we can ensure safety guarantees, especially for enterprises concerned about shared state issues and memory challenges seen in the CPU world. We can efficiently deliver at scale to our customers, which is a significant technological advantage. Additionally, since WebAssembly supports multiple programming languages, we can effectively cater to a broader range of environments and languages. This expands our market for developers using those languages, thereby enhancing our offering. Ultimately, this capability enables users to shift workloads that typically run in centralized locations to the edge, while still accessing our robust features in logging, visibility, and cache storage, along with improved programmatic access from the edge.

That is great color. And maybe just when do you think this is really going to start to take off and do you have a certain sense of the size of the market versus what your products look like now? Thank you.

Rishi, it's Joshua here. Yes, we're still on track. We said that this would go through our normal cycle in '20 and hit in '21 and we're still on track for that. In fact, as I mentioned in the prepared remarks, we continue to add functionality to that and it continues to be successful. I think we've talked about this having some impact in '21, but like with many of our products, we're going to see customers adopt this as a full package. So we'll definitely see impact in '21; that's what we're driving towards.

Thank you.

Your next question comes from Jeff Van Rhee with Craig-Hallum Capital Group. Please go ahead.

Hi, this is Rudy filling in for Jeff. I appreciate the opportunity to ask my questions. To start, I know Wolfgang left back in June, and Adriel, you mentioned last quarter that you would temporarily take over his responsibilities. What are your plans moving forward regarding the hiring of a new Head of Sales? What are your thoughts on this at the moment?

Yes. Rudy, it's Joshua. So that's me, I'm stepping in in that role currently. I think that we are looking for a new leader. Wolfe continues to support us in that transition and I think importantly, and I think the results speak this quarter to just an excellent group that has been established below Wolfe. We have a seasoned group of sales executives who are running the business and I think the results speak for themselves. They have a lot of swagger and certainly deserve to have a lot of swagger given the results that they're putting up on the board. So not feeling a sense of urgency in the sense that that's an important role to fill, but we're going to fill it with the right person and we have ample time to do that.

I met you and Adriel. As a follow-up, I’m curious about traffic trends related to COVID. If you think month to month, COVID emerged in March, and traffic likely peaked in April. How has traffic trended since then, and is it still growing? Specifically, how does traffic growth in June and July compare to the typical seasonality seen in prior years?

Yes, Artur has been spending a lot of time in this area. So I'll hand it off to him to give you some insight. He's done some really brilliant analysis on this.

Yes, you're correct; the traffic growth in late March and April was quite significant. However, in May, June, and July, it was less pronounced. The challenge in understanding this trend lies in the absence of seasonal comparisons, and it's clear that traffic has increased more in the second quarter than in any previous second quarter we've experienced. A major factor contributing to the rise in traffic was school closures. Starting in June, schools were no longer closed in the same way, as kids were back in school. This makes it difficult to determine the extent of the decrease in traffic attributed to people going outside as they usually do in June and July, versus any impact from still elevated COVID numbers. Unfortunately, I don’t have a definitive answer, but I believe that when we revisit this in a year and can compare three consecutive years, including this one where we see the most significant effect, I will be able to provide a clearer answer.

Got it. Great. Thanks, guys.

Thanks, Rudy.

And your next question comes from Tal Liani with Bank of America. Please go ahead.

Hi, guys. I have two questions; one is just on the numbers. I'm trying to understand seasonality. I'm trying to understand what happened this quarter versus the next quarter. On one hand, you're guiding for flat revenue growth for next quarter. While last year, you had about 8%, the year before similar, but on the other hand, this quarter you grew way more than before. So it kind of evens out between the two. So, was there any project or anything that happened that pulled forward demand between 3Q and 2Q and this is why we see kind of very strong 2Q and flat 3Q? So that's my first question.

Sure, yes. Adriel, why don't you take the first one, then we'll handle the next one. Thanks, Tal.

Sure thing, Joshua. Hello, Tal. Yes, as Artur mentioned earlier, Q2 was significant, showing a 62% year-on-year growth. The traffic we experienced, measured in trillions of bits, surged at an unprecedented rate. Typically, we see Q3 performing better than Q2 as we approach Q4, our strongest season. What we are witnessing is a comparison challenge from Q2 to Q3. Taking the midpoint of our guidance implies around a 50% year-on-year growth for Q3, indicating solid growth despite the challenges. Additionally, there is some uncertainty regarding one of our largest customers and how school closures will affect deployments. Q2 was unique since the entire world was basically synchronized with shelter-in-place orders and school closures. Moving forward into Q3 and Q4, the situation is less predictable, and we may adopt a more cautious approach.

Got it. You said that TikTok was 12% of revenues this quarter, how much was it the same quarter last year?

Yes. So what we said was it's 12% of revenue for the last six months ending June 30, 2020. Yes, we have not talked about what it was previous to that.

I understand. My second question is about your edge cloud. While there are competitors in this space, you mentioned your technical advantages. Are there specific applications or software architectures that are more suited to your offering? I'm trying to figure out if there's a market segmentation where certain types of applications, like traditional applications versus ERP, are more inclined to choose your solution compared to newer applications. Essentially, I'm looking to clarify the niche you are targeting with your solution.

Sure. Artur, do you want to take the first half of that?

Sure. I think when considering serverless migrations, it's primarily about new development and new applications rather than traditional migrations. The key point I make is that if you're processing data for a specific user, it’s beneficial to gather that data and handle it as close to the user as possible, at the edge. For instance, when collecting data into a data warehouse and running large models on it, it's better to do so rather than just relying on our central cloud. Even in ERP applications, the end user accesses data from multiple sources, which requires authenticating and securing the client to ensure proper access. After managing the edge and connecting to various resources—some of which may be cached or may need to reach central data centers—we compile that information at the edge. It remains tailored for the user's needs before being handed off. Thus, in such scenarios, utilizing the edge is highly beneficial. Overall, when data is assembled, personalized, secured, and authenticated for a specific user, it certainly makes sense to execute that logic close to the user.

Tal, I believe one way to view this is that edge computing does not completely replace the central cloud. That's not the message we are conveying. There will still be compute jobs that require the central cloud. For instance, tasks like machine learning training need large datasets and long-running jobs, which are well suited to the central cloud. Once a model is trained and you're ready to infer from it, as Artur mentioned, that is where edge computing shines. Additionally, situations requiring large, persistent data stores, such as databases like Oracle, are also best handled by the central cloud due to the ease of maintaining consistency. So, I tend to think about what does not work well in this scenario, which has helped me identify strong use cases where each method excels, providing a slightly different perspective on the issue.

Got it. Thank you.

Thanks, Tal.

Your next question comes from Walter Pritchard with Citi. Please go ahead.

Hi, Adriel. Can you discuss the contracted revenue compared to overage revenue and how this has trended this quarter in relation to historical data?

Hi, Walter. Yes, it's still about the same, around 50%. Revenue will be committed, and then approximately 50% will be usage over that commitment. I would say in Q2 it's a bit higher, but historically, we should return to that level since each quarter we encounter new renewals and commitments, and people tend to readjust their spending based on their usual run rates.

And then, I guess for Joshua on just a new customer demand that's come in; how would you characterize the consumption of some of these customers that have come on in this current environment in terms of services they're consuming from you versus what you've typically seen? Is it more of a kind of get online to get basic services or do they tend to take the full kind of the full offering of products as your installed base does?

Yes, it aligns with our installed base, which varies by industry. However, most of our customers utilize our edge coding along with our security features. This bundled approach has been the norm for about five years now. Conversations about delivering content without security are no longer happening. Security and delivery are always considered together; you can't separate them. Innovators need visibility and control over both aspects to succeed. This trend is widespread and reflects our core customer base, which is why we're noticing strong growth in new customer additions, consistent with historical patterns.

Okay, great. Thank you.

Thanks, Walter.

There are no further questions at this time, Mr. Bixby, I turn the call back over to you for closing remarks.

Before we sign-off, I want to say thank you to our employees, customers, partners and investors. All of you contribute to our ongoing success and growth, and we're deeply grateful. We look forward to connecting with many of you in the near future, and hope to virtually see most of you at the upcoming Oppenheimer & KeyBanc conferences. We are confident about our future and look forward to sharing more in the quarters to come. Thank you.

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