Good afternoon. My name is Mary and I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly Second Quarter 2021 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. [Operator Instructions] Thank you. I would now like to turn the conference over to Stefany Flegel, Investor Relations at Fastly. Please go ahead.

Hello everyone. Thank you for joining our second quarter 2021 earnings call. We have Fastly CEO, Joshua Bixby; and CFO, Adriel Lares, on with us today. Before we start, I want to remind everyone 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. 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 make 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 review our filings with the SEC and our Q2 2021 shareholder letter for 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 turn the call over to Joshua.

Thanks Stefany. Hi, everyone and thanks for joining us today. In our second quarter, we managed through a significant outage that impacted our Q2 results and saw several customers delay their launch of new products, which will delay the timing of traffic coming on to our platform. The outage and these delays will also have an impact on our Q3 and full year outlook. Despite these challenges, our mission of fueling and securing the modern digital experience remains strong and relevant. We are confident that our operational rigor, security led go-to-market motion and expansion of computed edge capabilities will continue to drive long-term value for our customers and shareholders. Before we further discuss our strategy, I'd like to discuss the outage and customer delays. In early June, we had a significant outage that impact our Q2 results and will have an impact on our Q3 and full year outlook. The outage resulted from an undiscovered software bug that was triggered by a valid customer configuration change. We detected the bug within one minute and returned 95% of our network to normal within 49 minutes. That being said, our customers were negatively impacted. As a result, we saw traffic volumes decrease and subsequently issued credits to select customers following the incident. Given the usage-based nature of our business model this resulted in impact to our Q2 results. And we expect to see some downstream impact on revenue from the outage in the near to medium-term, as we work with our customers to bring back their traffic to normal levels. We also have a couple of customers one of a top 10 customer, that have not yet returned traffic back to the platform post outage. We also have some additional uncertainty with the timing of several customers ramping additional traffic onto the…

Thank you, Joshua and good afternoon, everyone. Before I get into the numbers, I want to note that the contribution of Signal Sciences has been included in our second quarter financial results, as well as our key metrics. Turning to the quarterly results. Aside from the outage, the business performed as expected. This quarter we generated $85 million in revenue net of a $1.2 million deferred revenue write-down associated with the acquisition of Signal Sciences, representing 14% year-over-year growth. While acknowledging the tough year-over-year comparison to Q2 2020, we are pleased with the ongoing demand and long-term growth potential of the platform. Turning to gross margin. Our GAAP gross margin was 52.6% for the quarter compared to 60.2% in the same quarter a year ago. Please note that this includes accounting adjustments related to the acquisition of Signal Sciences. Our non-GAAP gross margin which excludes stock-based compensation and intangible amortization expenses was 57.6% for the quarter, compared to 61.7% in the same quarter last year. The decrease in gross margin reflects our continued investment in infrastructure and capacity in anticipation of customer demand. We believe we have a tremendous opportunity to invest in our edge cloud mission this year and plan to do so to position Fastly for future growth. As we have said before, we will continue to invest in our network in a disciplined manner, keeping long-term profitability in mind. Turning to the balance sheet. We ended the quarter with $1.1 billion in cash, restricted cash and investments. We remain well capitalized to invest in the future growth of Fastly. As we discuss, our Q3 and full year 2021 guidance, I want to remind everyone that we have a usage-based model, meaning our revenue can be impacted by unforeseen changes in the timing of customers coming on to…

[Operator Instructions] Your first question comes from the line of Will Power from Baird. Your line is open.

Thanks for taking the question. Hoping to just drill into the kind of the confidence level that you have and the visibility you have right now in the expected customer ramp that you mentioned in the back half of the year. If you could just talk a little bit more about the confidence level around that that would be great.

Sure. Hey Will, it's Joshua. Our confidence remains high. These are customers who moved based on their own timelines. This is not directly related to us. And those seem strong. So right now, we see -- it's only a handful of customers. Again these are timelines that are based on situations that are either regulatory or licensing for example there are a few of them. And in most cases what we see is, those timelines more or less locked in, but again, later than what we had anticipated. I think the important thing in these situations is our relationships strong with these customers and we continue to work closely with them. As you know, in our usage-based business, we don't always get a chance to time exactly when large initiatives come. What's really great is these are new and large initiatives. And we remain confident in that. But we also at least when we look at our guidance, we want to be very careful, given the history. And so, we are only going with what we see and we expect a material impact in revenue in 2022 from the deals that have pushed out.

Got you. Thanks, Joshua. And then one for Adriel. Adriel, how should we think about gross margins for the rest of this year and beyond as well?

Yes. I think the -- from a gross margin standpoint, as you know seasonally, Q2 from a revenue standpoint was relatively flat. Clearly, 2020 was a tough compare, because Q2 wasn't seasonally strong based on the pandemic. And so as a result, you saw in some respects unexpected leverage last year. So this year was sort of more normalized from a revenue standpoint. Now, the outage did have an impact from that standpoint because when you think about gross margin, it's really much more about the utilization and whatnot. So the way that I think about it is, it kind of goes along with revenue. Normally, what you see is revenue should drive into the second half of the year into Q3 and ultimately into Q4, which is where you drive your leverage. But when I think about sort of the longer term, I still feel confident about sort of the longer term, I just think this year, given sort of the recent impact of the outage I think that's what impacted, Q2 sort of more unusually than normal.

Got you. Thanks, guys.

Thanks, Will.

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

Hi. Good afternoon. Can you give us a little bit more color on maybe the actions that you're taking to restore confidence in maybe some of the customers that haven't fully returned their traffic or – just maybe give us a sense of also what gives you the confidence that some of these customers that have delayed will come back as well?

Sure. Yeah, absolutely, and I think we should separate those two things. As we talk to the customers that have delayed that we called out specifically are really unrelated to the outage. I think, if you specifically focus on the outage as we talked about, we've got one top 10 customer, I think, if you flip this around, what you see is 99% of the enterprise customers or more came back and continue to grow with us. We are lucky. Our customers are technologists like us in many cases, they understand that outages occur. And that's not to downplay the outages just to acknowledge that it happened. We own it. It's our responsibility. But I've got a chance as of Artur and others to get it on the phone with these executives. And what you hear is, one, an understanding, two, a real appreciation for how transparent we were during that process and after. We talked about we put a blog post out. We talked about what happened in the outage, and we talked about what we're going to do. I think – it's also important to remember that, although, we won't tell you who those customers are, if we did, I think it wouldn't be surprising because these are the most stringent high-performance and technologically advanced companies in the world. So they have very high requirements and a very high bar. And when we had the outage, I think all of us noticed – that's not the case for every other outage, and it's because of the type of customers we have. So, specifically, in the short term, there was a lot of questions about the remediation. There were a lot of questions about the actions that we took and how we could make sure that those actions couldn't…

That's helpful. And one for you Adriel, just in terms of the actual credits and the actual costs associated with the outage. Is there a way for you to maybe quantify for us either revenue lost or it had to be applied? And maybe what that impact was on the quarter and what you expect it to be for the full year? Thank you.

Yeah, Jonathan. There's two – there's sort of two impacts. There's clearly one, which is the impact of the outage and those customers at the time that had not yet ramped or brought that traffic. Clearly, when it, it occurred in June. So you could imagine that the impact for lost revenue, lost traffic occurred in June. The other impact of the actual sort of credits that we actually ended up giving out. All that stuff is reflected in our June quarter. So that's -- those are all complete. And from my standpoint, the fact that it occurred in June, it would have clearly had we not had this occurred we probably would have been a bit higher than that. The fact that we were sort of within the range as a result even within -- as a result of -- despite the credits, I think all things being equal as a thankful outcome just given [Indiscernible] is it wasn't -- wasn't longer and that we [Indiscernible] respond quickly to it. But just maybe sort of keep sort of the TLDR but is that credit is already included in the June quarter, relatively immaterial, but certainly impacted the month of June. And I think it's really much more of what could we have generated had the traffic kept on as it was and that's a bit of an unknown.

Thank you.

Thanks, Jonathan.

Next question comes from the line of Rudy Kessinger from D.A. Davidson. Your line is open.

Hey, guys. Thanks for taking my question. Joshua, I missed just the first couple of minutes of your piece, so I apologize if these were already addressed. I'm curious on the step down in the annual guide the $40 million reduction. Is there any way you could break that out between the customers that had delays and launch and ramping traffic, and then also, the customers and particularly, the top 10 that hasn't returned to the platform yet. Just what's the split in the reduction?

Yes. We -- if you think about it they both have a pretty significant impact to that number. You know our top customers have large dollar figures associated to their monthly. So if you think about a few of those and you think about either an unknown, which is the case with our -- the top 10 customer we're talking about in terms of when they come back and we want to be cautious and really put into guidance what we see. And then, you talk about what we do know, which is the delay in a few customers. There's sort of roughly 60-40, I would say. In terms of how that plays out or 50-50, they both have a significant impact.

Got it. And then, I'm curious to know that on the compute edge the announcement JavaScript now being able to be compared to weather. Just how meaningful and important is that for the longer-term prospects of Compute@Edge for your customers?

It's incredibly meaningful. I mean this is the number one thing our customers have been asking for. But it's not just JavaScript. They want to program the language of their choice. And what we know is that JavaScript is the language of choice for many. So it really helps democratize the platform bring it into a number of developers, who may not have been as comfortable. What we know with developers is these ecosystems be it Ruby Group, be it JavaScript, all of these ecosystems have their own cultures, their own communities around them. And this is -- Compute@Edge is about going into those communities and about meeting people where they're at. That's really the goal of it. So, it really allows us to assemble a really large group of developers. And we're already seeing that momentum. I mean we talked in the script about some amazing projects, which are being built on Compute@Edge. So companies who are relying on Compute@Edge. Look, for example, like the graft CDN folks who have looked at the entire industry, looked at all of the solutions out there, they were a fantastic blog post business about why our Compute@Edge was the right thing to build their business on. We're seeing more and more of that. It's very exciting. It's becoming a much larger part of the calls, for example that I'm on when I talk to customers. This is a true differentiator for us.

Got it. Helpful. Thanks.

Thanks.

Your next question comes from the line of Tyler Radke from Citi. Your line is open.

Hey, good afternoon. Thanks for taking my question. I wanted to ask you about the customers related to the outage that have left the platform. I guess first, do you have visibility on where they're going? Are they going to a competitor? Are they taking this in-house? And secondly, just kind of what's your confidence level in terms of the new customer conversations you have that the recent outage is not impacting the ability to land new customers? Thank you.

Sure. I think on the outage, first of all, we have not seen any significant change in our churn yet in terms of that. As I said, we do have a couple of customers. But if you look at churn, it certainly continues to look and act like it historically has which is very low. So we are looking at customers who have at least in the top 10 the ability to pull it in-house. But one of the reasons customers like this works with us even though they have in-house capabilities is because of the incredible advanced capabilities that we bring. And so if you actually -- if I think back to the conversations that I've been having with customers and this one in particular, it is a drive to get back onto the platform because they know how important speed it. So I would say this is about the advancements we bring. And yes, it's nice to have a stop gap and something you can bring in-house, but there's a reason the customers pick us. So I think on that that's what we see. I think on the large customers and large projects as we indicated in guidance. Those are delayed for things unrelated to the work that we're doing internally and unrelated to the outage for the most part. This is just not a churn issue.

Great. And if I could sneak in one more for Adriel. Is there a way to quantify kind of the performance of Signal Science in the quarter? And just trying to understand kind of as you look your outlook kind of the assumptions embedded in there? I know you talked about a strong performance, but if there's any metrics you could give so we can kind of look at the performance on a revenue basis?

Sure. So I think as I spoke about earlier this year, when we initially gave sort of annual guidance for the year, at the beginning of the year, we talked about them being about 10% of revenue. I think in Q1 that was closer to sort of the high 9s. Q2 is expected to be in sort of the 10% level. So I think in this case, the outage clearly impacting sort of the heritage facility revenue. So Signal Sciences continues to sort of deliver where they were doing and where they were growing. In fact, a lot of our new customer wins actually occurred after the outage and it was specifically led by a lot of the Signal Sciences products that sort of came in through the acquisition. So I think from that standpoint that still remains the case. I would imagine that given that the revenue came in a little bit on the lower end as a result of the impact on the credit of -- it probably was sort of technical bit higher than 10%. But generally, they're still sort of progressing as we expected.

Great. Thank you.

Thank you.

Your next question comes from the line of James Fish from Piper Sandler. Your line is open.

Hey, guys. Thanks for the questions. Just want to go off to Tyler's a little bit there. [Indiscernible] have been really strong and the demand itself. I guess first, what are you seeing for demand with Signal Sciences that you can give a little bit more color on than you just did? And how should we think about the mix of new business for them versus expansionary at this point? And what amount of the business is coming from the self-hosted term license products versus the cloud-based SaaS web application firewall and DDoS solutions?

Sure. Hey, Jim, it's Josh. Let me start at the high end the demand as you said is very high. I mean, when you look at the -- every metric from the pipeline to deals that are closed we're seeing continued momentum through that and through the entire quarter and the start of this quarter. So from our perspective, it's a great story. And I think as that gains momentum and gets to -- continues to increase in size, it's going to be incredibly helpful. It's a really important wedge. It helps us get into accounts. Overall, we continue to see the ratio be as we've historically we're seeing about 90% SaaS, 10% license in that range. And from a mix of business perspective, one of the initiatives that Brett is driving in his transformation of the go-to-market engine is a real sales shift with the security being at the forefront. And so it should be no surprise as we fill up that pipe with the security-led motion that we're going to see more and more of that. We're also innovating on the product side. As I talked about we brought out SigSci capabilities at the edge and we're going to continue to drive for that. All of that further drives margin and performance. There's a real virtuous cycle there. So overall we're seeing a really nice mix of business and a lot of this is actually new business, which I think is the most exciting part, as we see that roll through the business it gives us a lot of confidence about 2022.

Got you. That's helpful. But we're up to 145 terabit per second network really of size at this point and you're typically 30 terabits a second at various stages in a day, so does it make sense to actually continue to focus on building out more capacity at this point, especially when the supply chain shortages are out there, or does it make more sense to actually focus and refocus the business on execution and go-to-market? And really Adriel if the credits are super material here, can you actually quantify the impact in the quarter, because it does sound like it was material? And I think it would be helpful to all of us here to understand how much it was material and we can have an understanding this thing can happen. So how much was it in the quarter? And then also if it's a downstream impact, how much is it impacting your Q3 guide? Thanks guys.

Sure. Yes. Let me start on the network side. The macro number on the network side doesn't always tell the story, because what we're really looking at is building out strategically in locations. And you have to think of our business as if we have a lot of capacity in a certain region, but the demand is in is it one place or one area that global number is not as applicable. So we're constantly looking at where can we build out, where do we build out capacity, where do our customers need us. And as you know we have to build ahead of our customers. So although, we have some delays as we talked about two, three, four months delays still warrant us continuing to be thoughtful about where we build, but it's something that we're certainly always thinking about. And if you think of this time last year, right? We were in a position where the network was extremely hot. And we're in a position this year where we built out for some demand that's pushed out a few months, but it's -- we still have the confidence it coming. So I would spend sort of less time on the aggregate number. If you look at the CapEx spending that we did in this quarter and that we're doing over the year, I think, it's very much in line with the demand that we're expecting. You do point out an important issue the chips are a challenge for all vendors. I think we've been really lucky about how we've managed our relationships and that's not -- it's a risk, but it's not a risk that has impacted us in the quarter. I think on the credit side Adriel, do you want to answer that?

I do. I just needed to find my new button my apologies. From a credit standpoint, Jim is about 1%. So hopefully that gives you some perspective about, sort of, magnitude. I think from us it's really it's more of a question about we were trying to bring traffic clearly back which we think we would have done better had we not had the outage we would have been more on track. And more importantly, as this impacts the rest of the year in terms of where that traffic would have been had all that been, sort of, normal.

Thank you, guys.

Thank you.

Your next question comes from the line of Rishi Jaluria from RBC. Your line is open.

Hi, Joshua and Adriel. Thanks for taking my question. First, I want to go back to the discussion around churn. And, I guess, in this case thinking about churn as well as customers maybe downgrading their spend with fastly. If I look at the NRR in the quarter itself as the first time I've ever seen this number drop below 100% and that's kind of a little bit of a scary number to see. Can you maybe walk me through why was NRR so low this quarter at 93%. What is that -- when you have customers that are shrinking their footprint -- is it bringing more to competitors? Is it bringing more in-house. Maybe walk us through that number and how we should be thinking about that metric going forward? And then I have a follow-up.

Sure. Adriel, do you want to take that one?

Hi, Rishi. Yes, happy to walk through this one. As, you know, the net retention rate metric compares two months in to solicit as opposed to the last 12 months takes a clearly 12 months, which takes out a lot of volatility. In this particular case, you're basically comparing June of 2021 to June of 2020. And as June of 2020 was a great month for a lot of unexpected reasons as a result of the pandemic. And then consequently, June 2021 was also the month also that we actually pulled all the credit. So all of the credits hit that month as opposed to spread through the quarter as well as not spread over, sort of, a 12-month period. So I think you're comparing two months sort of impacted that particular metric much more forcefully than it would have otherwise.

Okay. Got it. Got it. And then maybe something a little bit more philosophical as you think about the longer-term trajectory, right? I understand there's some kind of onetime issues and obviously the compares are really tough especially in Q2 but even for the remainder of the year. But if we look at the print I mean this is low single-digit organic growth and kind of looking at that for the back half of the year as well. Maybe getting out of this year and when some of these investments start to show dividends, the integration of Signal Sciences starts to pay off. I guess how should we be thinking about the growth profile of this company longer term? Is this a double-digit type grower? Is this a 20% type grower which is the story kind of that were told at IPO time. Just philosophically how should we think about the growth profile of this business over the next three years, five years putting aside these current issues and the tough comparison last year? Thanks.

Yes, absolutely. I mean, I think, from my perspective we still see the next three years to five years holding the growth pattern that we had assumed the market has only grown. If you look at our CAGR over since IPO it's in that range we've had some ups and downs. But if you just fundamentally step back and I like the idea of looking at the philosophical, we've got so many trends which are driving towards a complete rethink of how security looks for almost every organization in the world. We've got a complete change to how applications are built with the edge now being a critical part of that. We have technology trends like 5G and others pushing more and more content more and more interactive capabilities. And if you just look at that and then you look at the huge budgets that are associated with these areas, many of them still remain in appliances and legacy enterprise companies who are not servicing the need. So, if you think about our business we've got 400-odd enterprise customers. If you think of the businesses who came before us they have 100,000 or 120,000 enterprise customers. So, we look at this and say we are in the early innings. This is an early story. And so absolutely when it's early some of the larger accounts may have a larger influence is our base is smaller. But the reality of this story for us is that the entire world is changing with this digital transformation that has only been accelerated by the pandemic. And we look at that and we see opportunity. So, we are certainly -- notwithstanding the pushouts in the year, our optimism remains high. We think we are on the right side of history here.

Got it. Its helpful. Thank you so much.

[Operator Instructions] Your next question comes from the line of Tim Horan from Oppenheimer. Your line is open.

Thanks guys. Did you say the top 10 customer that left wants to come back because the performance is substantially better. And what's it going to take to get him back on?

Yes. I mean we aren't going to count our chickens before they hatch. But as I said I've been in meetings with them Archer has this is what we are being told at this point is a temporary checkpoint to make sure that the remediations are in place as expected. And our hope certainly is that the customer comes back and continues which is the expectation of the team or the whole I should say of the team working on the project. So relationships are strong. Dialogue is great And I hope as I said to be in this call in a few months and talk about the fact that that traffic is back and larger than ever.

And do you think that customer and others are going to maybe increase their multisource basically relationships? And how easy would it be for customers switch from you to a competitor I guess if there is an outage is there a way to kind of make that easier to make people more confident that look at there is an outage we will totally go down at this point.

I mean Fastly is not the only one that had outages of the last few months others have as well. And I think what that speaks to is that something everyone has to look at in terms of their residence in planning. I think when you look at the resiliency planning that our customers want they want to take advantage of the benefits and the unique benefits that the platform brings. And so when we're exploring resiliency with our customers it's actually about exploring different ways to have resiliency on the Fastly. And there are a number of really innovative ideas and ways that we can do that. So, imagine you could have your own copies of things in case we went down and other ideas like that are being talked about a lot so that we aren't -- you have the benefit of the technology, but you have multiple capabilities upon which to deliver and scale it. So I would say that's the thrust of the conversations that we're having. And because everyone has seen that all vendors are not immune to this. It sort of sparks a different conversation which is if this risk lies everywhere why would you go to the lowest common denominator where you actually don't bring the performance and the security that you want? Are there other ways to achieve this? I think we're going to see some real novel and interesting ways. We already see this in our customers as you know we managed a private offering. Some of our customers use the managed or private offering in order to be redundant. So we're redundant with ourselves. I think we're going to see a lot more of that.

Got it. Interesting. And then on just computed Edge can you give us a certain sense of what kind of revenues are getting there or maybe, what it's growing at or when it can start to be material. Thanks.

Sure. I mean we've talked about this and I think we're well on track. We said that 2022 is going to be the year where we really see material benefit. On the revenue side, we are already seeing and we talked about some examples about the growth that we've seen and the examples that we have. So it's out there in the wild and providing significant value today but we really see 2022 as the year, where it hits is that inflection point where revenue will be more meaningful.

Thank you.

Thank you.

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

Great. Thanks very much. Josh you have over $1 billion of cash on the balance sheet. Clearly, a lot of dry powder. Do you need to fix the business before you do additional deals, or can you do those concurrently?

I look at the success of the Signal Sciences deal and what we're seeing there and it gives me a tremendous optimism about our ability to do deals. I think we are undergoing a transformation but it was very much aided by a transaction like that. So I think for us, we don't see anything broken right now. We certainly see that the transformation that our customers are asking us to bring to the table, which is more security, more compute is absolutely underway. But I think the lesson that we can take so far at least is that we can do that and do that successfully.

Great. Thanks very much.

Thank you.

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

Thank you, operator. I'm inspired by how our team responded and incredible resilience and commitment every Fastly employee has shown for our customers around the world. I can honestly say that I've never been more motivated and committed to providing a fast, secure, reliable and trustworthy Internet for all. I am confident in the future Fastly and I hope you took that from our call today. We look forward to regaining any of the trust we have lost throughout the year. Turning to leadership changes. I want to welcome Ron Kisling, as our new Chief Financial Officer who will join us later this month. Ron brings strong leadership principles to Fastly as an excellent -- and is an excellent addition to the executive team. His experience in leading sophisticated financial organizations in high-growth environments will make an immediate and I believe a very positive impact on SaaS as we continue to grow and scale our business. Also on behalf of all Fastly, I'd like to extend our gratitude to Adriel for his tremendous effort in getting us to where we are today. We wish him the best of luck with his new endeavor. Before we sign off I want to sincerely thank you the entire Fastly community for your continued support. Thank you.

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