Earnings Call: Q3 2020

Oct 28, 2020

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 Fast Wave 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 Q3 2020 earnings call. We have Fastly's CEO, Joshua Vixie Chief Architect and Executive Chairperson, Artur Bernden and CFO, Adria Lares with us today. Before they 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's 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, strategy's 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 obligation to update 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 Q3 results were impacted by certain customer specific factors that we had not foreseen when we reported our Q2 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 2nd 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 1 of the largest sportswear and footwear retailers in the U. S. And a national U. S. Automotive parts provider. Customer expansion and retention also remained strong with 147 percent dollar based net expansion rate and 141% net retention rate on the last 12 month basis, up from 137% and 136% last quarter, respectively. In the Q3, 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 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 2 distinct challenges that impacted a few key customers, which caused us to miss our original 3rd quarter forecast. One of those was 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 9 months ending September 30, removed a majority of their U. S. And non U. S. 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 U. S. 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 were 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-nineteen related travel and data restrictions in South Asia, the delayed build outs 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 and 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 2 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 2 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 guidance setting and have incorporated our recent experience into Q4 guidance as detailed below. As mentioned earlier, outside of these few customers, our underlying business remains strong. We generated $71,000,000 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 excludes stock based compensation, was 59.8% for the quarter, demonstrating continued leverage with an improvement of over 3 70 basis points year over year. As we've 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 $800,000 of adjusted EBITDA compared to a $5,000,000 loss in Q3 2019. Turning to the balance sheet. We ended the Q3 with $472,000,000 in cash, restricted cash and investments in marketable securities. Note that we used $200,000,000 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 in 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 beyond what is in the public domain for the high end of our Q4 fiscal year 2020 guidance ranges, we forecasted that current reduced traffic levels that we observe 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 level 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 $8,000,000 Lastly, non GAAP operating loss and non GAAP net loss per share guidance accounts were the impacts from the customer specific factors mentioned above as well as Formal Signal Sciences and current Fastly hiring plans. Now turning to specific numbers for the Q4, we expect revenue in the range of $80,000,000 to 84,000,000 dollars non GAAP operating loss in the range of negative $15,200,000 to negative $11,200,000 and non GAAP net loss per share in the range of negative $0.12 to negative $0.08 For the full year 2020, we revised our revenue guidance range to 288.2 dollars to $292,200,000 from $290,000,000 to $300,000,000 non GAAP operating loss range to negative $23,100,000 to negative $19,100,000 from minus $12,000,000 to minus $2,000,000 and non GAAP net loss per share range to negative 0.21 negative $0.17 from negative $0.06 to negative $0.01 In closing, we want to express our confidence in the strong fundamentals underlying Fastly's 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 had significant new top line revenue and will be accretive to gross margin, scale and growth. We will continue to use our balance sheet to strategically invest in our network. We will also finish building out our new SecureEdge offering as well as we have successfully done with ComputeEdge where our deep investments are paying off and allowing us to deliver on our promise of a serverless 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 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. It's 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 that 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. Now 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 isn't the drop off obviously of customer traffic that 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're 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, are you in sort of or your largest customer, are you in sort of active discussions or is this a situation where there's potentially some impact from elections? 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're standing with them, and we're here to support them no matter what the situation is, so long as we can. Your next question comes from the line of Brad Zelnick. Your line is open. Great. Thanks so much, guys. And it's actually good to see the 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 the visibility and control, our customers are able to do things that you can't do with traditional edges that just cash. And so I think what 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. They just 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 these 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 2021 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? I mean, I think we're not in a position yet to speculate on 'twenty one. I can tell you that we are in the early stages of this. If you think about our market penetration into our core customer 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 are we feel this is early. We think the opportunity when you layer in not only the delivery business, which we obviously have are a leader in, but now our continued leadership in the compute business and the security business, there are a lot more than 300 odd enterprise customers in the world. We're talking tens of thousands. And so we really look at this as being in the early stages of this. So I don't think they're 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. Thank you. Your next question comes from the line of 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 U. S. Ban or in the event of no ban, could this be more of a permanent shift in their CDN strategy? Yeah, 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 think I'm not sure we are in certainly no position to have any proprietary insight into any of this 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. And so I don't have any more insight in terms of what that looks like. I think from 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 reserve 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, 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 the 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 appreciate the color you've given us today. Your next question comes from the line of Brad Lubac with Stifel. Your line is open. Great. Thanks very much. Joshua, in the investor letter, you talk about some meaningful commitments from U. S. 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? Thanks. Yes. Thanks, Brad. You're seeing both. I mean, I think as we migrate into a multiproduct business and really engage with that, I think you're starting to see some of the first and 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's 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 are who care deeply about their quality, that's paying off. And so when you look at the vendors that are 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're also seeing 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 D. A. Davidson. Your line is open. Hey, guys. Thanks for taking my questions. 2 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 $500,000 In the shareholder letter, you talked about how there's some shortfall related to new traffic. 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, you know, squaring out also away with the fact that your DDNER was really strong and 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 were bringing on additional traffic onto the network and for sort of the completion of reasons associated with bringing that on, there was just a bit of a delay and the majority of those situations it's onto the network today. And we've forecasted quite widely 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 some of the summer sets are 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, It's what you while you still see the investments that we're making across the business as you see as our non GAAP operating loss profile. So from that standpoint, I think we're still feeling pretty good. Okay, great. That's helpful. 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. That's totally fair. 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. So, and I know they're not 100% apples to apples, right? The BBNER was 147%, NRR on a trailing 12 month basis was 141%. Again, I'm acknowledging they're 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 closer to 1.5%. And I imagine revenue from your largest customer in spite of Q3 was still up on a trailing 12 month basis. So can you help us square, A, if that's the right way of thinking about things or if the numbers are just calculated so differently that that comparison is meaningless? B, if there was in fact elevated churn in Q3 relative to Q2? Thanks. Sure. Adrienne, why don't you take that one, please? Yes. I think on both of those metrics, as you know, they're sort of backwards driven that is the trailing 12 months and the segment perspective excludes churn and then in the net revenue retention even on the trailing 12 net centric. So I think what's that really it's really more speaks of is really the comparison as you include Q3 from last year versus Q3 from 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 unprecedented nature of the current disruptions with our previously disclosed largest customer that that was still a decently good metric, which I think sort of flows well to the overall growth rate you saw year on year on the 42%. So I think it's much more of an output than it is necessarily in the fit. Your next question comes from the line of Jeff Van Rache with Craig Hallum. Your line is open. Great. Thanks for taking my questions. 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 the sort of the execution standpoint, common touch points, common buyer? Just talk about the ability, 1, that's helped you validate the cross sell, upsell? And 2, Signal Sciences EPS impact in Q4, if you can color that in? Sure. I'll take the cross sell upsell and I'll hand the EPS question off to Adriel. It's 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 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, either as customers or who 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 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, very natural. There 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 in 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're 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 is 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 4 years is that. So very optimistic, a tremendous amount of enthusiasm at this point. Very helpful. Adriel on the GTS question. Yes. And Jeff, I can take the second part of that question. I'll sort of abstract it up just a little bit, which is, I think from given that we're still early into the integration phase of the Civil Sciences, I think that clearly the estimated burn impact on a non GAAP operating loss perspective is about $4,000,000 to $5,000,000 So if you think about the kind of non GAAP operating loss, that kind of gives you a sense of sort of the magnitude of impact in Q4 and now that InfoSciences is 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, it sounds like there might have been more than a few, but really comes down to a couple. 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? Can you tell us anything else about what was common or not common about those kind of few main customers that led to that shortfall? Yes. I mean, these are all unique customer specific issues. There's no significant commonality, no threat that you can pull either industry or even what led to the timing related issues. And as you say, this is a small number of customers. So just happy to report the majority are back to exactly what we had expected and our billing and that the few remaining won't have an impact Q4, but nothing that would draw a link between them or speak to any pattern. Your next question comes from the line of Will Power with Baird. Your line is open. Okay, great. Yes, thanks. And thanks for all the disclosures. I think a lot of my questions on the customer challenges have probably been answered. Let me maybe switch gears on Signal Sciences. I think you're guiding to $8,000,000 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, up sells to kind of get to that figure? And any early flavor as to how we should think about growth expectations for that segment as we move into next year? Sure. Adriel, why don't you take that one? Hey, Will, it's Adriel. Thanks for the question. Yes, we're actually for that sort of the number that we put out, we're not assuming really any sort of additional sort of in quarter contributions at this point. I think we're trying to be a bit conservative here. So you can think about that stuff coming kind of directly from the balance sheet that we sort of already had when we came into it. But we are it is growing quite nicely. As we mentioned when we first we announced the transaction there in Q2, they're growing faster than we were. So, I think from our standpoint, we're really excited about sort of 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 cross sell and upsell opportunities are, not only for our customers, but also SuperSciences customers that we want to sort of introduce fast delivery to and computer ledges too. 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, maybe even in the prepared remarks, like, Adriel, you alluded to ongoing kind of puts and takes in gross margins, potential different impacts. Maybe just to kind of make sure we're on the right page going into Q4, any thoughts as to how we should think about gross margins, positives and negatives at the end of the quarter? And then how does the how does Signal Sciences influence that? Yes. I'll go in sort of reverse order, which is with Signal Sciences, this is an attractive security software as a service model based business. So their gross margins are in sort of the 80 plus percent range, which is fantastic and I think really shows the value that Signal Sciences brings to their customers and now our 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 that I've spoken about before, which is our security and computer edge businesses don't have bandwidth as a big cost component to it. So that very nature, it's a nice uplift to what we have today. Historically, prior to Signal Sciences being part of Fastly, our Q4 was 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 that signalscience is now a part of Fastly. Okay, great. Thank you. Thank you. Your next question comes from the line of Timothy Foran with Oppenheimer. Your line is open. Hi, guys. Two questions. One, can you maybe give us a little bit of color what's going on with your license based revenue versus usage based, maybe any kind of mix or change in mix? And secondly, I think you added 6 terabits of capacity this quarter. The CapEx is up quite a bit. I know last year in the 4th quarter you were adding 16% and it's kind of trending down kind of since then. Just maybe what's going on with the capacity with increased CapEx? Thanks. Sure. Adriel, you want to go on both of those? Absolutely. Hey, Tim. I'll go in reverse order again. On the CapEx side, as we've seen before in the past annually now, sometimes the CapEx we see that we report will bounce up and down. But I've always talked about within a particular year, we should be 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 5 post the IPO, we want to get to sort of 10%. Clearly, 2019, we were just below 10%. And I suggested in 2020 that we're going to be more like 2018, which is where 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 overall 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 yes, I wouldn't read too much into that. Hey, Joe, sorry. My question on the CapEx. I think you guys added 6 terabits of capacity this quarter. If you went back 3, 4 quarters ago, you were adding like 16. It seems to be a pretty big slowdown in the capacity you're adding. Sorry. When I think about capacity, I was thinking you had mentioned CapEx, physical infrastructure as opposed 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 as we've 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 a 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 not 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 those are not 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. Thank Your next question comes from the line of James Fish with Piper Sandler. Your line is open. Hey, guys. I want to go back to Will's question. Is there any way to think about the impact of Signal Sciences revenue and gross margins as you move it towards a usage based model via security at Edge? Let me start with that and then I'll pass it off to Adriel. I think one of the things that our customers are asking us for in certain segments is more consistency in their billing. And so I think you're going to see 2 phenomenons come out. One of them is you are going to see us continue, obviously, the strong push in the usage based business model for large subsets of our customers and we'll bring be bringing Signal Sciences along for that. I think we're also learning from Signal Sciences that there and from our customers that there's a certain subset of customer here that really likes the consistency of what they're bringing. And I think one of the things that I'm really excited about with this merging of our 2 sort of cultures is we're learning a lot about how that looks with this builder audience and how we can really take advantage of both. So I think what you're going to see is a bit of both. And overall, I think that's good for customers, particularly those that want a predictable bill month in month out. Hey, Jim. It's Adriel here. And I'm actually going to build on that concept of predictability because one of the things that you know historically Fastly was about 50% sort of contracts committed versus 50% usage above those commit. If you actually just mix in signals sciences with the way that they build today and the way that they work with their customers, that actually pushes up that sort of the committed and or fixed portion of our revenue almost closer to 60% as opposed to fifty-fifty. So I think from my perspective, there's a lot we can learn from how Signal Sciences has done things and how they work with customers. And there's certainly, I think, some attractiveness to that from a financial predictability standpoint. So certainly, we're going to keep looking at that. We haven't made a determination yet about how we're going to do that and how much we're going to blend those products in a more use space model, but it is certainly something we're going to look at. Got it. And then on the enterprise net adds, is that just a factor of kind of being the newer vendor on the street here against the incumbents and just sticking with a little bit of the status quo because it was only 9 again this quarter. And Adriel, is there any way to think about how many customers, specifically enterprise customers that Signal Sciences will add? Let me start with the first one, Jim, and then I'll hand it off to Pedro for the latter. I think that what we said last quarter still applies, which is we're really happy about those that expanded or added into this category. But given the way that we calculate this, which is looking back in the mirror over 12 months, what you're seeing is now a second full quarter of COVID related impacts to some of the verticals that have been impacted. Now thankfully, for our business, that was a very small percentage of our business, but you're still seeing that work its way through. And so we're if you were to look at the total ads, not the net, you would see that there's strong there's strength there. And I think we'll see another one more quarter of where that works through the system. But overall, we are happy with that number given the situation. Adriel, you can go on the second one. Yes. Thanks, Joshua. And Jim, actually when we disclosed the acquisition announcement, I think we disclosed about 70% of those 60 plus signal sciences customers are expected to be likely enterprise customers. So, if you do the math, they're about around 40%. At this point, it's hard to historically, we haven't been able to figure out how much of those enterprise customers are going to come from our current base. But at least from a signal sciences perspective, hopefully, that gives you some sense of what ballpark estimate of what we hope to add at least in Q4. Your 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 and 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? Pedro? Yes, I think we're going to reserve sort of talking about 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 you sort of are sort of flattish Q4 to Q1 and then it's again flattish again until you hit the Q4 again in the following year. So at this point, hopefully, the nerve sort of out of COVID and post COVID, it gets to sort of a more regular cadence. But we are really interested to sort of see in terms of what growth opportunities do exist with Signalsciences, but I'm sort of waiting until we get through Q4 to sort of comment 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 based? Pedro? Yes, Joshua, I can take that one. Yes, traditionally with our previous disclosed largest customer, it was a relatively low commit. So from that standpoint, this was 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. Thank you. Before we sign off, I want to say thank you to our employees, customers, partners and investors. Our shared vision has got us to where we are today. We're proud of the role we play in providing mission critical services to meet the needs of our customers in this moment and in the future. We look forward to connecting with many of you and hope to virtually see most of you at the upcoming Stifel, Needham, Credit Suisse and Wells Fargo conferences. Thank you. Stay healthy.