Good afternoon, my name is David and I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly Third Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. 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 third quarter 2020 earnings call. We have Fastly CEO, Joshua Bixby; Chief Architect and Executive Chairperson, Artur Bergman; and CFO, Adriel Lares with us today. Before we start, I want to remind everybody about the usual 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 has had a chance to read it. Since the letter provides a lot of details, we'll make some brief opening remarks and reserve the rest of the time for your questions. During the call, we will be making forward-looking statements, including statements related to the expected performance of our business, future financial results, strategies, 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, particularly the risk factors within those filings and our Q3 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 obligations to any forward-looking statements except as required by law. Also during the 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 thanks for joining us today. We hope that you're all staying healthy as we continue to navigate through 2020. As we disclosed earlier this month, our third-quarter results were impacted by certain customer-specific factors that we had not foreseen when we reported our second-quarter results and therefore we did not meet the expectations we set. However, despite these challenges, which I will talk about in detail shortly, our underlying business remains strong as demonstrated by our 42% year-over-year top-line growth. Customer demand remains strong. We are proud to have achieved the second highest quarter of new customer adds in our history of being a public company, demonstrating the strength of our business and the continued acceleration of digital transformation. We saw customer wins across multiple verticals including e-commerce, media and high-tech. These companies include one of the largest sportswear and footwear retailers in the US and a national US automotive parts provider. Customer expansion and retention also remains strong with a 147% dollar-based net expansion rate and a 141% net retention rate on the last 12-month basis, up from 137% and 136% last quarter, respectively. In the third quarter, we also saw our highest quarterly new booking attainment this year, which we believe bodes well for future growth. We are thrilled to have closed the acquisition of Signal Sciences, which we believe will further bolster our world-class security offerings at a time when security at the edge has never been more critical and today, as promised, we launched Computed Edge to production. Now I want to provide some more details on the factors that impacted our results. Outside of a few customers, the business performed as we had forecasted. Certain macro trends over the past two quarters have created extraordinary, and we think lasting demand for our platform. Our usage-based business model is sensitive to variations in our customers' businesses which drive us to be customer-focused to help drive stability and increase usage on the platform. At the same time, in Q3, we experienced two distinct challenges that impacted a few key customers, which caused us to miss our original third-quarter forecast, one of those with the uncertain regulatory environment surrounding our previously disclosed largest customer, and the other was customer timing impacts. Starting with the regulatory environment, our previously disclosed largest customer, which accounts for 10.8% of our revenue for the nine months ending September 30, removed a majority of their US and non-US traffic from our platform by the end of the quarter. Based on publicly available information, we believe this global reduction was in response to the potential of a prohibition of US companies being able to work with this customer in any fashion. This clearly impacted Q3 and based on the continued turbulence of the situation, we anticipate the traffic reduction to continue into Q4, as reflected in our guidance. One of our core values is to focus on our customer and we intend to fully support this customer unless and until we are prohibited from doing so. We are prepared to accept additional traffic from this customer if conditions enable it to return. However, if it becomes clear that we should no longer support this customer, we believe the reserved capacity for this customer can be reallocated over the medium to long term with a traffic mix that is consistent with our gross margin objectives. Now moving to the customer timing impacts, in the latter part of Q3, our forecast for new traffic coming onto our network from a few existing customers did not meet our expectations. I'm happy to report that a majority of these timing issues resolved and we have now seen this traffic come onto the network. There have been instances, however, where isolated timing issues have persisted due to the fact - due to certain factors including our evolving understanding of both COVID-19 related travel and data restrictions in South Asia that delayed buildouts beyond our expectations and the timing of customer code freezes. We anticipate this traffic to come onto the network and not have a negative impact beyond Q4. Aside from these few customers, positive customer trends drove the quarter's otherwise strong results as highlighted earlier. In addition to these two factors, our Q4 guidance now includes the revenue contribution from Signal Sciences. Specifically, we saw strong renewals, expanded market share and healthy traffic growth. Looking ahead, we remain confident in the future of Fastly, both in the short and long term, while also accounting for the unique uncertainties we face in supporting our previously disclosed largest customer. Before I turn it over to Adriel to discuss the financials and our guidance, I want to provide more details on our product enhancements. We continue to enhance our offering to meet the needs of customers and developers as they shift more components to the Edge. As I mentioned at the beginning of the call, we successfully completed our acquisition of Signal Sciences on October 1, and the integration of their stellar team and products is well underway. Their technology, combined with ours, will form the basis of our upcoming modern unified web application API protection solution which will power and protect companies at a time when security at the edge has never been more critical. Our customers have already expressed great enthusiasm for this offering and we are very optimistic about the immediate cross-sell and up-sell opportunities within our combined customer base. In addition to these developments on the security front, with Computed Edge in production, we have already heard from customers that our investments are paying off. We are providing customers serverless compute environments with rock-solid performance and features, allowing developers to create with enhanced speed, agility and security. With these two core pillars, security and compute squarely in place and complementing our delivery business, we are now fully executing on our platform vision of providing the most complete Edge cloud solution in the market. We are supplying enterprise builders of all kinds from developers to security operators with the speed and confidence they need to continue expanding and differentiating. With that, we believe we are exceptionally well-positioned in the current enterprise technology environment, delivering multiple powerful solutions tuned for the evolving DevOps workflow at the Edge, opening up much broader enterprise customer opportunities. Now, I'll turn it over to Adriel to go over the financials.

Thank you, Joshua, and thank you everyone for joining us today. As Joshua noted, we experienced two distinct challenges with a few key customers this past quarter that impacted our results. We believe these issues were unique events and don't change our overall ability to forecast the business going forward. That being said, we're always looking to improve our guided setting and have incorporated our recent experience to keep our guidance as detailed below. As mentioned earlier, outside of these few customers, our underlying business remains strong. We generated 71 million in revenue this quarter, representing 42% year-over-year growth. GAAP gross margin was 58.5% for the quarter, up from 55.2% in the same quarter last year. Non-GAAP gross margin, which includes stock-based compensation, was 59.8% for the quarter, demonstrating continued leverage with an improvement of over 370 basis points year-over-year. As we said, 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. We also continued our progress towards profitability, generating $0.8 million of adjusted EBITDA compared to the 5 million loss in Q3 2019. Turning to the balance sheet, we ended the third quarter with $472 million in cash, restricted cash and investments in marketable securities. Note that we used $200 million of this cash at the beginning of Q4 to pay the cash consideration for the Signal Sciences acquisition upon closing. Despite the uncertainties we presently face in the macro-environment, as well as the unique challenges we experienced in Q3, we are confident in the future of Fastly and the ongoing demand for our services. As mentioned earlier, we expect to see an impact in Q4 from the regulatory uncertainty and timing issues and I want to provide some context around what this means and the guidance we have provided. Because of the ongoing fluidity and regulatory uncertainty related to our previously disclosed largest customer, we are only assuming revenue from this customer that we expect to bill in October 2020 in the low end of our Q4 and fiscal year 2020 guidance ranges. While we have no additional insight, you know, what is in the public domain for the high end of our Q4 in fiscal year 2020 guidance ranges, we forecasted that the current reduced traffic levels that we observed will remain only through early November. Additionally, for those few customers that have brought on additional traffic to our network since Q3, we are only assuming the currently observed traffic levels at the low end of our guidance. At the high end of our range, we are forecasting increased traffic levels from these customers based on our previous seasonal experience in Q4. Also, because we successfully completed our acquisition of Signal Sciences on October 1, 2020, our Q4 guidance now includes the revenue contribution from Signal Sciences which we expect to be approximately $8 million. Lastly, non-GAAP operating loss and non-GAAP net loss per share guidance accounts for the impacts from the customer-specific factors mentioned above as well as former Signal Sciences and current Fastly hiring plans. Now, turning to specific numbers for the fourth quarter, we expect revenue in the range of $80 million to $84 million, non-GAAP operating loss in the range of negative $15.2 million to negative $11.2 million and non-GAAP net loss per share in the range of negative $0.12 to negative $0.8. For the full-year 2020, we revised our revenue guidance range to $288.2 million to $292.2 million from $290 to $390. Non-GAAP operating loss range to negative $23.1 million to negative $19.1 million from minus $12 to $92 million and non-GAAP net loss per share range to negative $0.21 to negative $0.17 from negative $0.06 to negative $0.01. In closing, we want to express our confidence in a strong fundamental underlying Fastly business. We believe we are well-positioned to execute and continue our growth. We have a strong company which has now been further strengthened by our completed acquisition of Signal Sciences which has significant new topline revenue and will be accretive to gross margin scale and growth. We will continue to leverage our balance sheet to strategically invest in our network. We will also finish building out our new secured Edge offering as well as we have successfully done with Computed Edge, where our deep investments are paying off and allowing us to deliver on our promise of a service platform with rock-solid performance and features. With that, I'll turn it back over to the operator to take your questions.

Your first question comes from the line of Jonathan Ho with William Blair. Your line is open.

Hi, good afternoon. I just wanted to maybe start with the customers that saw the delay in terms of the onboarding. Can you give us a sense of the magnitude of that impact and I guess the confidence level that you have that traffic will be able to come back on time?

Sure. Hey, Jonathan. It's Joshua here. Thank you for the question. We've been looking forward to having this conversation for the last few weeks. I think as I said, we are really happy to report that in the majority of those situations that's back and we see it having no impact. We did call out, but we do have a few where we do see timing impacts and when you look at those, they're very much related as I said to unexpected timing. I think what's really important to remember is this is all net new traffic, right? This is new traffic that's coming onto the network from customers who love us and want to give us more. This is going to drop off obviously if customer traffic is there, and if you look at the guidance and the information that Adriel provided in terms of how we're looking at our largest previously disclosed customer, you can really sort of net out where that comes from given that we remain very confident in the normal Q4 bump that we see and that's reflected in the numbers.

Got it. And then just regarding TikTok, your largest customer, are you in sort of active discussions or is this a situation where there is potentially some impact from elections? I just want to sort of understand how you're thinking about how we should think about a potential return of traffic, if that's even possible at this point.

Yes, I mean it's a very dynamic situation and it's very much driven by an uncertain process. So we don't have clarity on the process. We expect the situation to remain unresolved for a while as it works through. We have the information that's available in the public domain, as you do, and I think dynamic is the right way to put it. So I wouldn't want to speculate on that. I think the one thing that's really important for us, given that we are such a customer-focused organization, is that we're standing behind this customer, we are standing with them and we're here to support them, no matter what the situation is, as long as we can.

Your next question comes from the line of Brad. Your line is open.

Great, thanks so much guys. It's actually good to see that business remains very strong outside of the isolated customer issues, but my question as well follows the last one about the largest customer, and it seems that they were able to move traffic off of your platform pretty quickly and I know you've consistently said you don't take on commodity traffic, so can you maybe just give us a sense of what they're using Fastly for and why was it so easy to switch away?

Yes, it's Joshua here, Brad. It's nice to hear your voice. I think that what we have said consistently is that we do things at the edge that most of our customers are forced to do from Origin. Because we are able to bring compute to the Edge and because we bring visibility and control, our customers are able to do things that you can't do with traditional edges, such as cache, and so I think organizations have the ability to do the work that we do, it's just at Origin. When you do it at Origin, it's slow. It potentially could be slower, it doesn't scale as much obviously. It's a very different profile on the security side. And so I think what you see when organizations are forced to move in a certain direction and look at bringing this high-value content that we really thrive in by doing this work for the innovators, there are options, there are trade-offs that are part of those options, and so I think as I said earlier, our mandate in this process is to stand behind our customer and help them with these processes, any customer that is put in this situation and so that's really our view on how we look at it and I think as we've talked about in our larger accounts, we have a variety of different traffic profiles that we serve for all of our largest customers that fit into a certain category.

Okay. Maybe a follow-up, I don't know, perhaps for Adriel or yourself, despite the customer-specific issues in Q3, it seems like traffic growth continued to be durable. So, as we think about calendar '21 and beyond, how do you think about the rate at which traffic can grow from elevated levels here and how an eventual global reopening may impact your business?

Yes, I mean I think we're not in a position yet to speculate on '21. I can tell you that we are in the early stages of this. If you think about our market penetration into the core customers and the core verticals that we're in, we're still small single digits and in some of the large customers that we already have, we don't have the majority of their wallet share, and so I think if you just look through a very simple lens, we are in a position where we are investing. We feel this is early, we think the opportunity when you layer in not only the delivery business, which we obviously are a leader in but now our continued leadership in the compute business in the security business, there are a lot more than 300 odd enterprise customers in the world, we're talking 10s of thousands. And so we really look at this as being in the early stages of this so I think the question about where the internet goes and how traffic increases is one vector, but the way I'd really look at it from our perspective is just how early we are and how huge the opportunity is in front of us.

Fantastic, thank you so much for the thoughtful answers and I wish you all stay well, thank you.

Your next question comes from the line Robert Majek with Raymond James, your line is open.

Great, thanks. Following up on the prior questions and understand that you have limited details, but on the topic of your largest customer, are they moving traffic as a temporary measure to avoid any disruption in the potential US ban, or in the event of no ban, could this be more of a permanent shift in their CDN strategy?

Hey Robert, thank you for the question. I think this is a very dynamic situation. I come back to that. I think if you think about the timeline over the last few months since we last spoke, a lot has changed, a lot that we thought was going to happen may not happen. So I'm not sure. We are in certainly no position to have any proprietary insight into any of the situation. I think what we would say in general is it's very dynamic. We don't have clarity on the process and we expect the situation to remain unresolved for a period of time, so I don't have any more insight in terms of what that looks like. I think on the publicly available information that we see, it is very clear that it is important for any customer in this position to be able to continue to serve their customers if and when certain vendors are prohibited.

And if I can, can you help us understand your strategy in managing the reserved capacity for this largest customer? At what point will you allocate that capacity to other customers and what gives you the confidence that you can backfill that traffic with traffic that meets your gross margin objectives on potentially short notice?

Sure. So I talked about a medium and long-term in terms of thinking about how we can shift that and I think we have confidence based on the relationships that we have. As we talked about previously, we have great relationships with our customers and we feel that's a strong possibility for us. Obviously, until we start doing it, we won't know the exact results of that and I think from a strategy perspective, given the uncertainty and how dynamic this situation is, we feel it is very much in our interest to remain steadfastly behind this customer, given the timing. I think the answer will be when we believe we should start that process in earnest, we will, but that's based on the information that we have and the uncertainty in the process, that's not where we're at right now.

Great, thanks. And I appreciate the color you've given us today.

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

Great, thanks very much. Joshua, in the investor letter, you talk about some meaningful commitments from US media conglomerates producing what it says higher profit renewals. Could you dig into that a little bit? Is that expanded pricing for existing functionality or did they take additional product down to improve the profit on? Thanks.

Yes, thanks Brad. You're seeing both, I mean I think as we migrate into a multi-product business and really engage with that, I think you're starting to see some of the first - starting to see continued growth in that area. I think what you're also seeing, which is something we've talked about in the past, which is there is obviously a commodity market here in the high volume. If you think about where we really focus, it's in the high quality, and I think now more than ever, those who care deeply about their quality, that's paying off, and so when you look at the platforms that are really excelling, I think you'll see a correlation between how fast they are, how consistent they are, and that is a unique value proposition for us. We've also seen in a lot of those instances, and I think this is important, is because we are so good at what we do, we're able to offload the central cloud from a lot of traffic and so as your central cloud costs go down, when you bring in a modern intelligent Edge cloud, you also see a really significant payback there, so I think you're seeing a combination of the ROI showing up, you're seeing a combination of the unique value proposition that we provide. You're also seeing the adoption of multiple products and I think across all of those vectors, if you add them all up, that's really where you're seeing really impressive results there.

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

Hey, guys. Thanks for taking my question, two here. First, just drilling down into the Q3 results, if we look at, kind of do the math, right, absent the headwinds from your largest customer, revenue still declined sequentially, about $0.5 million and the shareholder a lot of you talk about how there is some shortfall related to new traffic, so maybe can you help give us color on why even absent the largest customer headwinds you still saw a sequential decline? Was that just a function of traffic itself being down sequentially, was there some pricing stuff, and I think square analysis away with the fact that your DBNER was really strong, even better than Q2, and then I've got a follow-up.

Sure. Adriel, you want to take the first one?

Sure. Hey Rishi. Yes it's definitely really much more a function of the timing of some of the - we disclosed in the letter, there's a few key customers that we're bringing on additional traffic onto the network and for sort of a completion of reasons associated with bringing it on, there was just a bit of a delay and you guys, the majority of the situation, it's onto the network today and we forecasted quite conservatively in terms of what it looks like for Q4. At the same time, we're also bringing in the seasonality with Q4 that we've experienced historically so that you can see in some respects were sequential up from Q4 over Q3 at the midpoint at those levels, and I think from our standpoint, we're still feeling pretty good about sort of our long-term prospects, that is why you still see the investments that we're making across the business, as you've seen as our non-GAAP operating loss profile. So from that standpoint, I think we're still feeling pretty good.

Okay, great, that's it.

Rishi, I'd also add to that that Q2 was obviously a very difficult time for all of us as the lockdowns came in and so I think if you normalize this, you'd be seeing normal increases in line with what we'd expect from a seasonality perspective.

Yes. And definitely appreciate the conservatism in Q4 guidance, definitely in my opinion the right thing to do. And then I just wanted to drill a little bit more into the DBNER, and I know they're not 100% apples to apples, right? The DBNER was 147% NRR on a trailing 12-month basis with 141%, and again acknowledging they are calculated slightly differently, that does imply though that your churn on a trailing 12-month basis is about 6% versus last quarter. If you do that similar sort of math it was a lot lower, probably question 1.5 and I imagine revenue from the largest customer in spite of Q3 was probably still up on a trailing 12-month basis. So can you help us square if that's the right way of thinking about things, the numbers you just calculate so definitely about that comparisons meaning less and be if there was in fact elevated churn in Q3 relative to Q2. Thanks.

Sure.

Yes, I think on both of those metrics. As you know, sort of backwards driven that is there trailing 12 months in the perspective excludes churn. And then the revenue retention to be even on the trailing 12-centric. So I think what's that really as well as much because was really the comparison as you include Q3 from last year versus Q2. And this year sort of working backwards. I don't, see anything unusual from that standpoint. In fact, I think the key thing to take away is that despite sort of the sort of unprecedented nature of the current disruptions with our previously disclosed largest customer that is still a decently good metric, which I think sort of as well to the overall growth rate, you saw a year-on-year on the 42%. So I think it's much more than output than it is necessarily in the pit.

Yes. Got it. That's helpful. Thank you, guys.

Thank you.

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

Great, thanks for taking my questions. A few from me. I think you guys said Joshua with the Signal Sciences, maybe if you could spend a minute there just, you talked a bit about the cross-sell up-sell what opportunity we had to go out and validate that cross-sell up-sell from sort of the execution standpoint common touch points common buyer just talk about the ability, one that's helped to validate the cross-sell up-sell in to Signal Sciences EPS impact in Q4. If you can call it that it.

Sure, I'll take the cross-sell up-sell and I'll hand the EPS question after Joshua here and Jeff. Thanks for the question. I think one of the amazing attributes of working with the innovators of the internet and acknowledging that we are building and innovators toolkit is that we have this unique perspective into what other tools are putting in the toolkit. So before this process even kicked off with Signal Sciences, we knew because of the choices that our customers were making we knew exactly what the buyers were looking at how they were looking at the problem, what they loved and as we went through our most innovative customers and those that are truly on this path of digital transformation pioneering this path. They were already down the road there is customers are you looked at it. So I think what's exciting about working within the same tribe ultimately is the ability that we come into that conversation with a bit of an advantage. I think the other advantage is we already there was already a way for our products to work together and before we even walk into this because of all the mutual customers in the conversations we've had now, admittedly, the scale is different, but we had seen it already at enterprise scale so those conversations have seemed in the early days. And again we're only a few weeks into this for natural 30 conversation that we had been having a customer would come to us and say, hey, we're integrating with Signal Sciences we need you to work closely with them so I feel like being the in the toolbox of innovators like a Signal Sciences was there, too. Just gives us a huge advantage, so overall we're seeing tremendous interest. We're seeing a lot of interest on both sides. So it's existing Signal Sciences customers that haven't thought about delivery in this way, because people will start this path of going down agile platforms in different format. Some people started on the security front and that's part of what we're really excited about of capturing that some people started on the delivery front. But what both of those past lead to is the understanding that you need control and visibility that the platform has to feel and act like your own and is a builder, you have to trust that you can build on it and what we saw in Signal Sciences and what has been confirmed, not only in our diligence. But as I say, through our customers lenses for the last four years is that so very optimistic a tremendous amount of enthusiasm at this point.

Yes, and Jeff, I can take the second part of the question. I'll sort of sort of pick just a little bit, which is I think from given that we're still early into the integration phase of Signal Sciences. I think that clearly the estimated burn impact on our non-GAAP operating loss perspective is about $45 million. So if you think about the non-GAAP operating, also it gives you a sense of the magnitude of impact in Q4 and then Sciences as part of us.

Got it. Very helpful. And then just if I could briefly back to the customer timing the few customers primarily. It sounds like it's really central to a few. I mean, sounds like it might have been more than a few, but really comes down to a couple. I just want to validate that. And then with respect to those few customers. Was there any other commonality or these common similar type customers, similar use case, can you tell us anything else about what was common or not common about those kind of few customers that led to that shortfall.

Yes, I mean these are all unique customer-specific issues, there is no significant commonality no threat that you can pull either industry or even what led to the timing related issues and as you say, is a small number of customers. So just happy to report the majority of our back to exactly what we had expected and our billing and that the few remaining won't have an impact beyond Q4 but nothing, that would draw a link between them or speak to any pattern.

Got it. Fair enough. Thanks so much. Appreciate it.

Thank you.

The next question comes from the line of Will Power with Baird, your line is open.

Okay, great, thanks, and thanks for all the disclosures. I think a lot of my questions on the customer front have probably been answered, let me switch gears on Signal Sciences, I think you're guiding to $8 million of revenue in the quarter, is that principally based on the existing run rate from that business are you assuming anything in terms of cross-sells upsells to kind of get to that figure and any early flavor as to how we should think about growth expectations if that segment as we move into next year?

Yes, we are actually for that sort of the number that we felt were not assuming really be any sort of additional sort of in quarter contribution at this point, I think we're trying to be the conservative here so you can think about that stuff coming kind of directly from the balance sheet that we, you sort of only had, what we can became into it. So we are, it is growing quite nicely. As we mentioned the we announced the transaction and in Q2 they growing faster than you were. So I think from our simple with the group we're really excited about for the future impacts of this as we think about future years together and we're still early in the process of trying to figure out where the in the cross-sell and up-sell opportunities are not only for our customers but also to the Sciences customers that we want to sort of introduce and roughly delivery to and Compute venture to. So at this point we're just excited about the prospects going forward.

Okay and maybe a margin question if I can, I know in the shareholder letter, or maybe even the prepared remarks I you alluded to growing kind of puts and takes of gross margins in terms of the different impacts. Maybe just to kind of make sure run the by-page going into Q4. Any thoughts as to how we should think about gross margins positives negatives end of the quarter end. And how does the kind of Signal Sciences influence that?

Yes, I'll go in sort of reverse order, which is Signal Sciences. This is going to attractive security software as a service model-based business. So their gross margins are sort of these 80 plus percent range, which is fantastic kind of the value that Signal Sciences brings to their customers. And now I customers. So I think that's going to have a nice uplift just from the standpoint of the mix within the current business from Fastly today and that's some of the things they spoken about before, which is our security and completed Edge businesses don't have bandwidth as a big cost component to it. So by that very neutral. It's a make-up to what we have today. Historically prior to Signal Sciences being part of Fastly our Q4, which is where we drove leverage in our annual on an annual basis. So I think that trend should continue, but I think right now it makes it a little bit more likely given the Signal Sciences is now part of Fastly.

Okay, great, thank you.

Thank you.

Your next question comes from the line of Timothy Horan with Oppenheimer. Your line's open.

Hi everyone. I have two questions. First, could you provide some insight into the dynamics between your license-based revenue and usage-based revenue, particularly any changes in the mix? Additionally, I believe I added 6 terabytes of capacity this quarter. I noticed that capital expenditures have increased significantly. Last quarter, it was around 16, and it seems to be trending down since then. Could you explain what’s happening with the capacity and the rise in capital expenditures? Thank you.

Sure, Adriel, do you want to go as well to this?

Absolutely. Hey, Tim. I'll go in reverse order again. On the CapEx side, as you've seen before in the past, annually now, and sometimes the CapEx we see that we report will bounce up and down, but I've always talked about this in a particular year, and especially in 2020 we should be around the sort of 13% to 14% which I still think is likely to be the case. Our long-term model that we were sort of looking to get to by year five plus the IPO, we want to get to sort of 10%, clearly 2019 we were just a hair below 10% and it was suggested in 2020 that we're going to be more like 2018, which is where we were still investing and I think this year we'll still hit those numbers. And so I think one particular quarter may sort of make you think otherwise, but I still feel that although on the annual basis, once you sum it all up, we should be in that sort of 13% to 14% range from a capacity standpoint. And then on the former question, the license base versus usage. I don't know that it's changed too much at this point, given what we've disclosed in the past. So at this point I can't, I think it's much more about the timing of invoices more than anything else, but I wouldn't read too much into that.

Oh sorry, when I think about capacity, I was thinking we mentioned CapEx physical infrastructure close to bandwidth, from that perspective. And so I think, I don't know that there's too much more in that. I think it's much more about just where we see and has been done before in the past is we're often building ahead of the typical holiday season, and that is in the Q4, and so that sort of followed the pattern we've done previously before.

Tim, there's also a dynamic here that when you buy, get the servers, get them in, you're trying to time the bandwidth side of this, so that you're incurring those costs when the traffic is there. So these things don't always go hand in hand in terms of sort of when the servers are there and when the bandwidth is there. I imagine those are actually different contracts, different vendors. So there is a bit of an art in terms of how we augment existing pops where you don't have to necessarily augment the bandwidth. So over time they'll map, but in shorter periods of time, you might not see the map and I think that's what you're seeing in this quarter as well. Specifically, because so much of the CapEx has gone into augmentation.

Your next question comes from the line of an unidentified caller. Your line is open.

Great, thanks for taking my collections, a few from me. Hey guys, hey Joshua, Signal Sciences, maybe if you could spend a minute there, just you talked a bit about the cross-sell/up-sell, what opportunity have you had to go out and validate that cross-sell/up-sell from sort of the execution standpoint, common touch - common buyer, just talk about the ability one, that's helped you validate the cross-sell/up-sell, and 2) Signal Sciences EPS impact in Q4, if you can color that in?

Sure, I'll take the cross-sell/up-sell, and I'll hand the EPS question off to Adriel. Joshua here, Jeff thanks for the question. I think one of the amazing attributes of working with the innovators of the internet, and acknowledging that we are building an innovator's toolkit is that we have this unique perspective into what other tools they are putting in the tool kit. So, before this process even kicked off with Signal Sciences, we knew because of the choices that our customers were making, we knew exactly what the buyers were looking at, how they were looking at the problem, what they loved, and as we went through our most innovative customers and those that are truly on this path of digital transformation pioneering this path, they were already down the road. Their customers had already looked at it so I think what's exciting about working within the same tribe ultimately is the ability that we come into that conversation with a bit of an advantage. I think the other advantage is we already there was already a way for our products to work together before we even walked into this, because of all the mutual customers and the conversations we've had. Now, admittedly the scale is different but we have seen an already at enterprise scale, so those conversations have seemed in the early days, and again we're only a few weeks into this, they are natural. They are already conversations that we had been having. A customer would come to us and say hey, we're integrating with Signal Sciences, we need you to work closely with them, so I feel like being the toolbox of innovators like - and Signal Sciences was there too, it just gives us a huge advantage, so overall we're seeing tremendous interest. We are seeing a lot of interest on both sides so existing Signal Sciences customers that haven't thought about delivery in this way, because people start this path of going down agile platforms in different formats. Some people started on the security front and that's part of what we're really excited about capturing that. Some people started on the delivery front, but what both of those paths lead to is the understanding that you need control and visibility that the platform has to feel and act like your own and as a builder, you have to trust that you can build on it, and what we saw in Signal Sciences and what has been confirmed not only in our diligence but as I say through our customers' lenses for the last four years is that, so very optimistic, a tremendous amount of enthusiasm at this point.

And Jeff, I can take the second part of that question. I'll sort of pick, abstract it just a little bit which is I think from given that we're still early into the integration phase of the Signal Sciences, I think that sort of the estimated burn intact along that offering lost perspective at about $45 million, so if you think about the non-GAAP operating office, it gives you some sense of the magnitude of impact in Q4, now that Signal Sciences is part of this.

Very helpful, and just if I could briefly back to the customer time, the few customers parting early, it sounds like it's really central to a few, I mean it sounds like there might have been even more than a few, but really it comes down to a couple, I just want to validate that and then with respect to those few customers, was there any other commonality, are these common, similar type customers, similar use cases, if you would tell us anything else about what was common or not common about those kinds of few customers?

Yes, I mean these are all unique customer-specific issues. There is no significant commonality, no thread that you could pull either industry or even what led to the timing related issues, and as you say, it is a small number of customers so just happy to report the majority are back to exactly what we had expected and are billing and the few remaining won't have an impact beyond Q4 but nothing that would draw a link between them or speak to any pattern.

Got it. Fair enough, thanks so much, appreciate it.

Thank you.

The next question comes from the line of Walter Pritchard with Citi. Your line is open.

Hi, thanks. Just a question for you on how we should think about Q4, Q1 seasonality that's typical, there you have some M&A coming in. In this Q4, you have some other factors you've talked about, just relative to past years, what color can you give us as we start to think about next year?

Yes, I think, I think we're going to reserve sort of talk about it next year, until we get to that point, because I kind of want to see how Signal Sciences works within Fastly, especially from a selling motion perspective into Q4. I mean historically Fastly has been on an annual basis, Q4 in a normal year again, non-COVID related Q4 has been sort of our stronger growth from Q3 to Q4 and typically a flattish Q4 to Q1 and then it's flattish again until you hit the Q4 again in the following year. So at this point, hopefully when we're sort of out of COVID and post-COVID, it gets us sort of a more regular cadence, but we are very interested to sort of see in terms of what growth opportunities do exist with Signal Sciences but I'm also waiting until we get through Q4 to sort of comment on that.

Okay, got it. And then just maybe one more question on the largest customer, was there a commit part on that one as well that's still in there in the revenue coming through or was that customer primarily transactional traffic?

Yes, I can take that one. Traditionally, with our customers, it was a relatively low commit, so from that standpoint this is traffic that they chose to keep on us at least through whatever we have through October and that's what we currently are built into the lower end of our range.

Okay, great. Thank you.

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