Good evening. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Fastly Third Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. [Operator instructions] Thank you. I would like to turn the conference over to Stefany Flegel Investor Relations at Fastly. Please go ahead.

Hi everyone. Thank you for joining our third quarter 2021 earnings call. We have Fastly CEO, Joshua Bixby, and CFO, Ron Kisling 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 with the SEC about an hour ago. Since the letter provides a lot of detail, we'll 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 take a look at our filing with the sec and our third quarter 2021 shareholder letter for a discussion of the factors that could cause our results to differ. Also know 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. The most directly comparable gap financial measures are provided in the shareholder letter honor investor relations websites. These non-GAAP measures are not intended to be a substitute for a gap 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 Stephanie. Hi everyone. And thanks for joining us today. And a particular welcome to Ron who has been on board since August and I can truly say it's hit the ground running. We are thrilled to have him on board. I hope you've all had a chance to read this quarter shareholder letter. Before we jump into our results for the quarter, I want to take a step back and discuss where the business is today in the context of our longterm goals. With so many effecting Fastly in recent quarters, we thought it would be helpful to refresh everyone on the big picture. We have faced some unique tailwinds and challenges and navigated ever changing market conditions over the past two years. So our trajectory has not been many. Today though, we are extremely confident that our edge cloud network is going to be the future of how content is created, secured and delivered on the internet. Our computed edge platform continues to provide mission-critical stability and support to the companies fueling our digital lives, including news, e-commerce, entertainment and many more verticals for billions of users globally. We continue to investigate these opportunities and believe that successful execution will lead to a billion dollar business by 2025. $1 billion in revenue by 2025 will be one of our primary business goals as we head into our next phase of growth. With our new CRO, Brett Shirk now fully on board, we are aggressively accelerating our customer acquisition through clarity of direction, accountability, and unrelenting focus. To drive success we've defined three key priorities and outlined additional key goals. First, increase our edge computing platform usage by 50X from current levels by the end of 2022. Seconds, reduce friction for developer-led enterprise adoption and secure 100,000 enterprise developers…

Thank you, Josh and good afternoon, everyone. It's great to be on board. And I look forward to continuing to build relationships with each of you on the call today. And the first couple of months, I've had the opportunity to observe, listen and learn with this talented team. This has only reinforced my excitement for leads potential. It is clear that digital transformation is here to stay. As I get into the numbers. I want to remind everyone that the contribution of signal sciences, I think consolidated into our third quarter financial results, as well as our key metrics in Q3, we generated $87 million of revenue that is 900,000 deferred revenue right down associated with the acquisition of signal sciences representing 23% year over year, top line growth in Q3. Our NRR was 112% up compared to 93% from the prior quarter. Our LTM in remains strong at 114%. And our dollar base net expansion rate was 118%. Our gap gross margin was 52.4% for the quarter compared to 58.5% in the same quarter a year ago, our non-GAAP gross margin, which excludes stock-based compensation is intangible. Amortization expenses was 57.5% for the quarter compared to 59.8% in the same quarter. Last year, this decline in non-GAAP gross margin primarily reflects the return to traditional seasonal usage patterns as compared to the increased traffic we experienced in the prior year due to the onset of the COVID pandemic, which favorably impacted gross margins in 2020, as we previously outlined, we have a tremendous opportunity to invest in our edge cloud network and plan to do so to position Fastly for future growth. Our operating expenses were down 3.8 million largely due to increased capitalization of internal use software. The amount of capitalization of internal use software fluctuates on…

[Operator instructions] Our first question is from Will Power with Baird. Your line is open Please go ahead.

Okay. Cool. Great. Thanks for taking the question. Good afternoon. Yeah, let me I guess try to sneak in a couple of here. Ron, I guess on the guidance commentary would love to get some perspective on the drivers of the flat or slightly down gross margins in the higher cap ex it sounds like that's probably success-based driven or driven by the growth opportunities, but we'd love to better understand that the key drivers there and then have a second question.

Okay. So I think your gross margin, I think the declining gross margin that we saw primarily reflects in the current, wherever your basis, the return does on the traditional feasible usage patterns as compared to the increased traffic we experienced in the prior year to the onset of the COVID pandemic, which favorably impacted gross margins in 2020. I think as we talked about previously, we see a great opportunity to invest in the edge cloud network this year. And we intend to do that to be well positioned for growth. And we're continuously leveraging our investments in infrastructure capacity and customer mix to build a long tradition of gross margin accretion with products like security unit, but we intend to invest in structure. We do expect some quantities going into Q4. One of the drivers is particularly as we expand internationally, a lot of that capacity sites and bandwidth needs to be brought online and in place ahead of traffic. And so you do see a little bit of that. Buy ahead, it's affecting our gross margins as we do this investment.

Okay. And then maybe just to follow up on the success you're seeing in computed edge, I mean, I think you referenced the trillion requests it seems like you're seeing, and, and you alluded to some of the early customer use cases. Is there any way to kind of frame, revenue contribution or growth rate, from that segment, where we said today, they're quantitatively or qualitatively, I guess it be the same question for security, just trying to better understand kind of the, the growth rates and in magnitude of those key pieces of the business.

Yeah. So I think, security is probably the first one to talk about because it's been, it's been out there, it's been a big contributor since the acquisition of signal sciences backing it, Q4 2020 in Q3 signal sciences community about 11% of our revenues. And that's up from 8% in Q4 of last year, which was the first combined quarter. And I think importantly kind of look at the growth rates we're seeing out of quarters quarter cases, we're seeing growth at 12%. So we're seeing healthy growth that I think, what we see is it's important to customers and there's, cross-selling upsells, that is an opportunity to talk and to drive that that road and see it contributing a bigger piece of our revenues over time. I think on the computer, it's still nascent, it's early days and it's not, not a material amount of revenue that's far. We believe it has a great opportunity as we attract developers and add more applications to the edge compute network.

Our next question is from James Fish with Piper Sandler. Your line is open.

Hey guys, thanks for the questions here. I guess maybe starting on the signal sciences side, I guess how's the integration of signal sciences and Fastly going, the security edge now generally available, or what's left to integrate still to make it more broadly available. And I guess why the confidence and going up 10X here reaching about 400 million in four years, because really when you think about it, very few companies have actually been able to have that growth rate in security, and usually they're in the big endpoint or network markets compared to where you're at today. So trying to understand also how much of that is going to come from inorganic opportunities, as well as where these new products are being launched in.

Sure. Hey, Jim it's Josh here. I think, let me start on the integration side. So it's been three quarters as, as Ron talked about earlier we had really strong success. We have launched the first phase of having things I'd be available at the edge, but, and that has gone well, and we're going to continue to invest there. We haven't fully completed that plan. We're looking at a target in the Q2 range to have that ready in and out. In broader availability. I think the important aspect, when you actually look at signal sciences, one of the things that attracted us and certainly attracted our customer stat platform was the variability of implementation options. So this can be implemented on premise. It can be implemented in the cloud, it can be implemented through a variety of ways. And I think the success that we've seen in that revenue growth and what we, as you can tell from our, from our ambitious goals, speak to the continued broad adoption, we think that that's one of the assets. So it's not, we're not stalled here. We're seeing that growth. We definitely want to get something that's at the edge that is in general availability, but it also has to meet the requirements that we have, which has massive scale. And we need to make sure that it fits in with the portfolio. So I tell you there's some work to do. We're making good progress. I think we all wish it would be faster, but we're seeing that progress, I think in terms of the overall arching goal. And it, if we step back here a little bit we see we see ourselves being at the start of this journey. So we don't talk about 400 on enterprise customers. If you just go and look at our largest direct competitor, they have eight to 10,000, but if you cast your eye over the legacy software and appliance vendors, you're talking about companies that have 20, 30, 40, 50,000 enterprise customers. So when we look at the position that we're in today, and we look at the trends, which are the, the, all of these security components, appliances, legacy infrastructure, it's all disappearing. And it's all coming to the edge cloud. We feel extremely confident. We are in the dawning of this New Year where every appliance we believe over the next few years, it's going to be replaced. We believe that this idea of having this proliferation of many appliances all with specialized workloads is something our customers don't want. So we are looking at billions of dollars in revenue that we feel is up for grabs. And when we look at, the 10X target, we certainly feel like that's ambitious, but it's something that we feel we're well situated for it. This is all coming to the cloud.

All right. And if I can sneak up, stick another one in there doing what we'll do it. And talking about computer that, you brought up example with Maccari of pre-processing the data via computer tag, but then it gets sent on to a central data warehouse. Do you guys feel like you need to do more on the storage side at the edge, like some of your competitors have done in the edge space or even kind of a centralized storage environment to really bring on the full developer suite.

Our perspective on storage has it hasn't changed, which is that our customers are looking for us to provide that high value service of manipulation of data and of and ensuring and adding value to that data. And they want us to offload their origins from as much work as possible. We've got these amazing partnerships with the large clouds and other companies that are really, really good at storage. And, and we feel like those, we see an ecosystem of partnerships here. So I think the answer is we are going to continue to invest in the in, in ensuring that we have the data that our customers need us to have, but we also acknowledge and recognize that there's a place for the central clouds here. And we have a different perspective in terms of looking at it as an ecosystem. It's how we looked at our entire business. If you think about, all the partnerships that we have across logging across data across, the broader portfolio that we're doing in compute, we believe in an ecosystem, we do not believe in a walled garden. And I think that approach, you will see also on data. So we have a job to do, which is to make sure that we have the content that our customers want, and the origins are getting as few requests as possible. We are best in the world at that. We intend to keep staying best in the world at that.

Thanks, Josh, appreciate the questions, Jim. Thank you.

Our next question is from Phil Rigby with RBC Capital Markets. Your line is open.

Hey guys, thanks for taking the question. I want to start on this promotion. You announced for the computed and it first, I know we're in early days here, but can you give us a sense on what you're seeing in terms of adoption or interest, or maybe your expectations there, and then second any ideas you can give us on how we should be thinking about this in terms of revenue impact over the next 12 months?

Sure. It's just what here? I think on the computer as motion, we have a long, our entire company's experience is based on this idea that developers at time of inspiration can use our product, try our product, and they can have this sort of self-referential and self-reinforcing process where they don't have to go through an arduous enterprise sales cycle. They don't have to go through all these hoops, they just get to try it. And that's been the case for our delivery product and the first generation of our compute product. It's now true for the second generation of our company product. And what we know is that that seed the future of innovation. And so I would tell you that the motion that we announced recently around come try it which is a really big step for us, the continued investment in the recipes and the additional sort of use cases. This is just the start. You are going to see more and more as we build out these ecosystems in terms of us feeding that developer mindset and showing the path for how compute is going to change the world. And so I would tell you that motion we have been doing this in our, in our own little ecosystem, that's changed. We believe that the next year is a very important year in terms of getting that enterprise traction bite developer traction. You saw set some ambitious goals. If I get a 100,000 enterprise developers by 2023. And again, the enterprise developers that are really important to the work that we do. So I would tell you that we are unleashing that capability and it's something that our customers have been demanding. It's something we're truly excited about. And we're certainly going to be reporting back to you and others on how, on, how we're progressing. I'll hand it off to Ron on the revenue side, from a downside perspective, there's all of these are new things, and people are going to be trying that they wouldn't have necessarily launched into the network as quickly. So ultimately as more and more experimentation and these things get built out, they will bring them into production. And so we believe this will add traffic. This will add applications to the edge over the course of the year. And and it's not, it's really good be added to revenue as these things get deployed. From a cost perspective, I think the cost of actually supporting this really all over that period of time.

Got it. That's super helpful guys. And Josh, you talked about, circling back on kind of progress product progress, I guess, on these three goals. It what should we expect in terms future disclosures or, or milestones to kind of track how you're executing there?

Yeah, we set out some pretty clear milestones, obviously, a couple of them. We already have been reporting revenue growth course and security. I think we're looking to formalize that in terms of what we've already done with signal sciences, formalize that into a cadence that we think is appropriate, obviously with the new goal around that, new public school today around going from one to $50 trillion requests on the platform and getting to a hundred thousand enterprise developers, we'll be giving you a regular updating cadence on those as well. We didn't get to this position in our business by not setting audacious goals. We've always said important goals for the business. We think we're at a stage where would be really helpful to give a little bit more visibility and be more public with them. That's a decision that we made and we will be updating you and others regularly on that progress.

Our next question is from Tal Liani with Bank of America. Your line is open.

I want to ask about gross margin. You said in the in the press release that margins are going to be flat, and if I understand your recent acquisition, the margins are higher. So does it mean that your core business there is margin pressure or any pricing pressure?

Yeah, so I think there's two, two drivers, as you note, the acquisition of the signal sciences product does have a higher gross margin. Some of that is mitigated a little bit by purchase price adjustments that, that tend to get pretty diminimous as you go into 2022, what's largely offset that has been aren't desperate and get the edge cloud network, but both the bandwidth and infrastructure to support the growth that we've seen in new customers and to be prepared for additional growth going forward. And as I indicated, particularly as we're looking at a global expansion, a lot of those costs that you get are natural markets or costs that you incur, before the traffic hits. And so that's been the bigger driver, I think, from a price perspective, while there are price declined, we've actually seen a deceleration in the rate of price declines in, in 2021. So I think from that perspective we feel that it's not really pricing as much as investments, there is this year over year comparison where, because of, the COVID pandemic and the very quick spike in traffic, we saw exceptionally good increases in our, in our gross margin in 2020. And what we're seeing this year, it's kind of returning to where we were before and investment offset. Some of the benefits from the signal sciences higher gross margins. I think as you look at the medium to long term, as we grow security businesses, we spoke about earlier RO other products that computed edge applications they continue to add and accelerate enterprise customers. Those are things that will be a creative to gross margins over the long term. But to bring those customers on, we need to have, a global robust network. Got it. Thank you. Thank you.

Our next question is from Frank Louthan with Raymond James. Your line is open.

Great. Thank you. What's the pace of new customer acquisitions we can expect going forward and give us an idea of what sort of percentage of sales that you have that comes from existing customers. And then I've got a follow up.

Sure. From a customer acquisition perspective, Brett came into the role of chief revenue officer about six months ago, and he's been making some profound and important changes in that organization. I think historically you can see the trend, I think, over the medium and long-term, we expect that trend to uptick. Now, is it going to be linear? It won't be, if you look at how we count, for example, enterprise customer growth, it's a backward looking metric where we're looking back in time and adding up that revenue. So I would say over the short term, I think we will continue to see progress, but it won't necessarily be linear, but our expectation is that in the medium and longterm, we will continue to see that growth as Brett and transformed that organization. We're already seeing that obviously this quarter showed some real strength on the enterprise count number, and that is not surprising. It's times with when he's coming, what you've done and how he's come in. You've got, he's a real hard nose, traditional sales leader who has brought a tremendous amount of discipline. Now with that discipline comes change and with change, you have to let that change play through yet, let those players get on the field and you've let them play the game. So I think we're going to really see in Q2 and beyond, we'll see that consistent, steady growth. This is part of the transformation we're in and, those numbers speak to real progress at this time. In terms of what percentage of sales from existing customers. I think that's something that we've disclosed. We haven't disclosed that we do focus on the new customers is kind of the metric of how we're adding to that base.

Okay, great. And then quick follow up when you're winning computed edge customers, who are you competing with, who can be seen out there in the market, and where is this traffic coming from?

A lot of the computed edge, a lot of the computed edge use cases are new use cases. If you think about what we shared in the shareholder letter. And, and these are use cases that traditionally work done in the central cloud central data center. These are things that are optimized and certainly made much faster and more effective at the edge. And so it's, and because the capabilities that we have in the enterprise so far exceed anyone else that's able to play at the scale and the sophistication, this isn't a takeaway game, our major competitors or certainly competitor in the enterprise is not does not have a computed edge offerings that we feel is competitive. And so most of these use cases are impossible to do other than on ours, on our, on our solution at the edge. So this is a lot of new use cases. And as Ron said, I think that's really emerging for us. I think that's something that we see as a strong differentiator. Do you see the progress that we've made? And for example, the Forrester report that came out recently, it really speaks to the core differentiation and the enterprise readiness of our product, particularly around the things that the enterprise cares about, like security, so novel use cases for the most part.

Our next question is from Rudy Kessinger with D.A Davidson. Your line is open.

Hey guys, thanks for taking my questions. What start with the customers that had, taken traffic away. Then I read in the letter that they've all since come back, I guess. And any more details you could share in that and just have all of them come back, just to what extent have they brought their traffic back? When do you expect them to kind of be back at the run rate that they were prior to when they turned it off, et cetera, that kind of stuff.

Yeah. So I think, as we've said, the top customer didn't return traffic, they returned to traffic. They do continue to ramp and they get on the larger customers, when they come back, typically wrap their profit pack over time. I don't have a specific timeline, but they are back and that will increase over time.

Got it. And then the 1 billion revenue target by 2025 that kind of assumes a 30% revenue CAGR, your Q4 guide implies, but 11% growth year of year at the midpoint. So I guess, that $1 billion target against, should we think of that as an organic target? Or should we assume that includes maybe some M and a, and then just how quickly do you think you can get back up to kind of the 30%-ish growth range?

So, one thing I would add, I think, as we look at kind of that growth rate is, 2020 was sort of an outside growth rate. So some of the cops do tend to negatively impact our, our growth rates on a year over year basis versus 2020. If you do look at just kind of the existing growth rate, going back to 2019 that that category is, closer to that 30% that kind of is in line with kind of that ramp to get there. So I think, that that's one thing to keep in mind as you do it. And then Joshua here on the inorganic organic side, I think, we're looking at this and looking at the opportunity, right? So we're stepping back over this long horizon and saying, does the market -- what's the size of this market opportunity and how quickly can we grow?

I don't think we rule in or out M&A in general, what you saw is we were very opportunistic and very thoughtful at the same time when it came to augmenting our security. And I think we will continue to do so if the opportunity presents itself, but this is really about how the, the, the incredible transformation that's occurring in spend that the number of dollars that are being thrown up from traditional vendors who are not meeting the needs, who are locking people into solutions that, that worked in the two thousands. And certainly don't work today is unprecedented. I would say we're at this word, this incredible inflection point. So regardless of sort of how exactly how, how it's achieved. I think right now we firmly believe that growth is their organic or inorganic, and we will certainly be pursuing what's in the best interest of customers, but I don't think I don't think today we have significant plans on the inorganic side.

Our next question is from Tim Horan with Oppenheimer. Your line is open.

Just, maybe just talk about the overall product offering and go to market. Or are you thinking this is going to be like a bundled strategy where customers come in and they start using more compute at the edge, and the security is easy to add on and website acceleration, and the developers almost become your go to market strategy, or just any thoughts about how you envision this playing out, both from the product and the go to market.

Sure. Tim is a great question. I think it's great to have 10 years of history here where we can look back and just see what works. And, when you look at the 400 plus enterprise customers that we have, most of them have, we've gained the same way, which is, there's a dual motion, which we talked about at the IPO, which stays, central today to our thesis is ever, which is developers at the moment of inspiration are able to play, build dream with Fastly and that's with Fastly compute. That's what Fastly on the delivery side, that's what Fastly on the security side, they are solving problems. They're not looking for Fastly, they're out, they're out trying to solve problems. And that's where we come in. And we come in at moments of inspiration at 2:00 AM and we're, built for them. We work the way they want to work. We give them control. So that's the first element of the motion. And if you look at what's happening the enterprise motion, which has to come on top of that, because we are so central, we are so core to the to these organizations that we do need senior executives often to come into this process. That is a top down process that needs to combine with the bottoms up process. So our go to market is really different than a lot other companies who either have one or the other. There aren't a lot of companies that have both. And in that top down motion, what you see as important if people are out solving a problem. And so what you're going to see from us and what you will continue, what you have seen from us and continue to see from that is pretty nice…

Our next question is from Jonathan Ho with William Blair. Your line is open.

John Wattam [ph] for Jonathan. Thanks for taking a questions. Just the question on your perspective on the COVID-19 roll off of the follow on us of other of the COVID-19 rolling off. What can you talk about your expectations for the normalization activities now versus where you think it might be COVID caused us to change the way we do things. Can you talk a little bit about your, some of your assumptions of, of end user activities and such?

Sure. Yeah, we've said over the last couple of earnings calls that we are predicting the world getting back to normal. That's what we're seeing, I'm in a room with Ron today, which feels like it's back to normal at night, that it's next to be in the same room. And, and I think a lot of people are getting back to normal. However, the processes that kicked off during COVID the digital transformation, the drive to do things differently, none of that has abated. And I think we are at a new normal, and we see that with our customers and we see that with the pace of their innovation. So I believe we are not predicting that consumer behaviors which obviously have a large impact to us have any variation other than traditional seasonal seasonality going forward. We are not, we're not predicting any more lockdowns, we're not predicting anything that would be outside the normal course of business or normal seasonality, so that none of that's baked into how we're looking at the future. It's generally back to normal and it's a new normal, but it's generally back to normal.

Okay. Thank you. And last question you mentioned that in forthcoming quarters, should we talking about roadmap of new products, a solid, any press release? Are you at Liberty to tell us what areas might be more focused like security delivery versus compute, or do you think it'll be even hated across the board?

Yeah, I think that for us there's development going on in all areas, I think the most I think the one that will probably attack, attract the most attention are on the security and the compute side. And, and you're absolutely right. We, we are, we have a, we have a, a nice pipeline. We have a lot of work that's come out of the, the brilliant engineers that we've brought in from signal sciences and will augment, for example, the security platform. So there's a lot coming, we're not at Liberty to disclose them until they come out, but, but it's something that our customers are asking us to not to take the leadership position that we are in and do even more. One of our commitments to our customers is we're going to keep them modern. And in the security space, the world changes all the time. So I do think security and compute are the two areas where you will continue to see continue to see innovation because you actually saw a number of things over the last six months on that as well.

We have no further questions at this time, Mr. Bixby, I'll turn the call back over to you.

Great. Thank you. Before we sign off, I want to thank our employees, our customers, our partners, and our investors. We remain as committed as ever to fueling and securing digital experiences. And moving forward, we remain focused on execution, bringing lasting growth to our business and delivering the value to our shareholders that we outlined from the very beginning as we continue to execute against our longstanding goal of being a billion dollar business in 2025. We look forward to connecting with many of you and hope to see many of you at the upcoming Needham, RBC and Raymond James conferences. Thank you,

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.