Q3 2020 Fastly Inc Earnings Call
[music].
Good afternoon. My name is what will be your conference operator today.
This time I would like to welcome everyone to the past eight quarters, when and conference call.
All lines have been placed on mute to prevent any background noise. After.
After the speakers remarks, there will be a question answer session if.
If you would like to ask a question. During this time simply press star followed by the number one on the telephone keypad.
If you would like to withdraw your question press the pound key.
Thank you I.
I would now like to turn the conference over to Mr. Lymington, Vice President of Investor Relations. Please go ahead.
Hi, everyone. Thank you for joining our third quarter 2020 earnings call. The Bassi CEO, Josh that Vicky Chief architect Executive Chairperson Archer Burton and CFO, Adrian Lars <unk> with us today.
Let me start I want to remind everybody about the usual format of our call.
Public to shareholder letter on our Investor Relations website, and what the FCC about an hour ago.
Everyone's had a chance to read it.
Since the letter provides a lot of details will make some brief opening remarks and reserve the rest of the time for your questions Joe.
During the call, we will be making forward looking statements, including statements related to the expected performance of our business future financial results strategy long term growth and overall future prospects. These statements are subject to known and unknown risks uncertainties and assumptions that could cause actual results to differ materially from those projected or implied during the call.
Please take a look at our filings with the SEC, particularly the risk factors within those filings and our Q3 2020 shareholder letter for discussion of the factors that could cause our results.
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.
Now I'll turn the call over to Josh.
Thanks Maria.
Hi, everyone and thanks for joining us today, we hope that you're all seeing healthy as we continue to navigate through 2020.
As we disclosed earlier this month, our third quarter results were impacted by certain customer specific factors that we had not foreseen when we reported our second quarter results and therefore, we did not meet the expectations. We set however.
However, despite these challenges, which I will talk about in detail shortly our underlying business remains strong as demonstrated by our 42% year over year top line growth.
Customer demand remains strong we are proud to have achieved the second highest quarter of new customer adds in our history of being a public company demonstrating the strength of our business and the continued acceleration of digital transformation.
We saw customer wins across multiple verticals, including E Commerce media and high Tech. These.
These companies include one of the largest sportswear and footwear retailers in the U.S. and a national U.S. automotive parts provider.
Customer expansion and retention also remains strong with 147% dollar based net expansion rate and 141% net retention rate on a last 12 month basis up from 137% and a 136% last quarter respectively.
In the third quarter. We also saw our highest quarterly new bookings attainment, this year, which we believe bodes well for future growth.
We are thrilled to have closed the acquisition of signal Sciences, which we believe will further bolster our world class security offerings at a time when security at the edge has never been more critical.
And today as promised we launched computed edge to production.
Now I want to provide some more details on the factors that impacted our results outside of a few customers. The business performed as we had forecasted.
Certain macro trends over the past two quarters have created extraordinary and we think lasting demand for our platform are.
Our usage based business model is sensitive to variations in our customers' businesses, which drives us to be customer focused to help drive stability and increased usage on the platform.
At the same time in Q3, we experienced two distinct challenges that impacted a few key customers, which caused us to miss our original third quarter forecast.
One of those was the uncertain regulatory environment surrounding our previously disclosed largest customer and the other was customer timing impacts stay.
Starting with the regulatory environment.
Our previously disclosed largest customer which accounts for 10.8% of our revenue for the nine months ending September thirtyth removed a majority of their us and non us traffic from our platform by the end of the quarter.
Based on publicly available information. We believe this global reduction was in response to the potential of a prohibition of us companies been 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 reproductive 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.
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 reserve capacity for this customer can be reallocated over the medium to long term, where the traffic mix. It 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.
Happy to report that a majority of these timing issues were resolved and we have now seen this traffic come on to the network.
There have been instances, however were isolated timing issues have persisted due to the fact due to certain factors, including our evolving understanding of both COVID-19 related travel and data restrictions.
In South Asia that delayed 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 be on Q4.
Aside from these few customers positive customer trends drove the quarters 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 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 Adrian to discuss the financials and our guidance I want to provide more details on our product enhancements.
We continue to hands enhance our offerings 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 October 1st 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 CPI protection solution, which.
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 offerings and we're 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 compute engine production, we have already heard from customers that our investments are paying off we are providing customers serverless compute environments with rock solid performance and features allowing developers to create with enhanced speed agility and security.
With these two core pillars security and compute squarely in place and complementing our delivery business. We're 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 tune for the evolving Dev ops work flow at the edge opening up much broader enterprise customer opportunities.
Now I'll turn it over to Adrian to go over the financials.
Thank you Joshua thank.
Thank you everyone for joining us today.
Joshua noted we experienced two distinct challenges with a few customers this past quarter that impacted our results.
We believe these issues were unique events don't change our overall ability to forecast the business going forward.
That being said, we're always looking to improve their guided setting and have incorporated our recent experience Q4 guidance as detailed below.
As mentioned earlier outside of these few customers our underlying business remains strong.
Generated $71 million in revenue this quarter, representing 42% year over year growth.
GAAP gross margin was 58.5% for the quarter up from 55.2% in the same quarter last year non.
Non-GAAP gross margin, which excludes stock based compensation was 59.8% for the quarter demonstrated continued leverage with an improvement of over 370 basis points year.
For the year.
As Weve 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 its computing solutions.
We also continued our progress towards profitability generating point 8 million of adjusted EBITDA.
Spiritual 5 million loss in Q3 2019.
Turning to the balance sheet, we ended the third quarter with 472 million in cash restricted cash and investments in marketable securities.
Note that we used $200 million this cash at the beginning of Q4 to pay the cash consideration for the signal Sciences acquisition.
In closing.
Despite the uncertainty we present you face in the macro environment as well as the unique challenges we experienced in Q3, we are confident in the future thoughtfully and the ongoing demand for our services.
As mentioned earlier, we expect to see an impact in Q4 from the regulatory uncertainty and timing issues and I want to provide some context around what this means and the guidance we have provided.
Because of the ongoing fluidity and regulatory uncertainty related to our previously disclosed largest customer.
Only assuming revenue from this customer so we expect to build on October 2020 in the low end of our Q4 and fiscal <unk> fiscal year 2020 guidance ranges.
While we have no additional insight.
What is in the public domain for the high end of our Q4 and 2000 at the field from Tony's guidance ranges we.
We forecasted that the current with these traffic levels that we observe will remain only in early November.
Additionally for those few customers.
I have brought on additional traffic to our mobile since Q3, we are only assuming the currently observe traffic level at the low end of our guidance.
At the high end of our range.
From decreased traffic levels from these customers based on our previous seasonal experience in Q4.
Also.
Because we successfully completed our acquisition of signal stances on it for the first 2020, our Q4 guidance now includes the revenue contribution from signal Sciences.
Which we expect to be approximately $8 million.
Lastly.
Non-GAAP operating loss and non-GAAP net loss per share guidance accounts for the impacts from the customer specific factors mentioned above as well as formal signal sciences and current past behind plans.
Now turning to specific numbers for the fourth quarter, we expect.
Revenue in the range of 80 to 84 million.
GAAP operating loss in the range of negative 15.2.
Negative $11.2 million and.
Non-GAAP net loss per share in the range of negative 12 cents to.
Negatively.
For the full year 2020.
The revised revenue guidance range to $288.2 million to $292.2 million.
From $293 million.
Non-GAAP operating loss range to negative 23.1.
To negative $19.1 million from minus 12 to minus 2 million.
And non-GAAP net loss per share range to make.
Negative 21 cents to negative 17 cents.
From negative six cents to negative one cents.
In closing, we want to express our confidence in the strong fundamentals underlying fasteners 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 topline revenue and will be accretive to gross margin scale and growth.
We will continue to use our balance sheet strategically investing our network. We will also finished building out our new secure at edge offerings as well as as we have successfully done looking at unit edge, where our deep investments are paying off and allowing us to deliver on our promise of a service platform with rock solid performance and features.
With that I'll turn it back over to the operator to take your questions.
At this time I would like to remind everyone in order to ask a question press star and the number one.
We'll pause for just a moment to compile the human Austin.
Your first question comes from the line of Jonathan Ho with William Blair ones.
Hi, Good afternoon, I just wanted to maybe start with the customers that saw the delay in terms of the Onboarding can you give us a sense of the magnitude of that impact and.
I guess the confidence level that you have that that traffic will be able to come back on time.
Sure Hey, Jonathan is 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 data back and we see it having.
No impact.
We did call out that we do have.
A few where we do.
The timing impacts and when you look at those they're very much related as I said to unexpected.
Unexpected timing I think what's really important to remember is this is all net new traffic right. This is new traffic thats 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 information that Israel provided in terms of how we're looking at our largest previously disclosed customer you can really sort of net out.
Where that comes from given that we remain very confident.
In the normal Q4 bump that we see and that's reflected in the numbers.
Got it and then just regarding tick tock, our year end sort of or your largest customer are you in sort of active discussions or is this a situation where on theres potentially some impacts from elections, just want to sort of understand how you're thinking about how we should think about a potential return or 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 should 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.
This 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 stand in with them and we're here to support them no matter what the situation is so long as we can.
Great. Thank you.
Your next question comes from the line of Bernstein. 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 is well follow 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 Youve consistently said you don't take on.
Commodity traffic. So can you maybe just give us a sense of what they are using fastly for and why was it so easy to switch away.
Yes, Josh we're here Brad.
It's nice to hear your voice I think that.
What we have said consistently is that we do things at the edge that most of our customers are forced to do from origin.
Because we are able to bring compute to the edge and because we bring visibility and control our customers are able to do.
Things that you can do with your traditional.
The edges that just cash and so I think what you know.
Organizations have the ability to do the work that we do it's just at origin. When you do it at origin. Its slow its 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 what you see when when organizations are forced to move in a certain direction.
And look at bringing this high value content that we really strive in by by doing this work for the innovators there.
There are options. They just there are trade offs that are part of those options and so I think as I said earlier, our our mandate in this process to stand behind our customer and help them with these processes.
Any customer that has been put in this situation and so that's that's really our our view on how we we look at it and I think as we've talked about in our larger accounts, we have a variety of different traffic profiles.
We we serve for these for all of our all of our largest customers that fit into certain category.
Okay, maybe a follow up I don't know perhaps rate driller yourself.
Despite the customer specific issues in Q3, it seems like traffic growth continued to be durable. So as we think about calendar 21 and beyond.
How should how do you think about the rate at which traffic and growth from elevated levels here and and have an eventual global reopening may impact your business.
Yes, I mean, I think we're not we're not in a position yet to speculate on 21 I can tell you that.
We are in the early stages of this if you think about our market penetration into 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.
Our leader in but now our continued.
Leadership in the compute business in the security business.
There are a lot more than 300.
Odd enterprise customers in the world.
We're talking tens of thousands and so we really look at this as being in the early stages of this I don't I don't think there.
I think the question about where the Internet goes and how traffic increases is one vector, but the way I'd really look look at it from our perspective is just how early we are and how should the opportunity is in front of us.
Fantastic. Thank you so much for the for the thoughtful answers and I wish you all say well. Thanks. Thank you.
Next question comes from the line of Robert.
James Your line is open.
Great. Thanks, following up on the prior questions and I 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 at potential u. S band or in the event of no band could this be more of a permanent shift in their CDN strategy.
Robert Thank you for the question I think this is a very dynamic situation I come back to that.
I think if you 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 and certainly no position to have any.
Hi, Terry 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 we expect the situation to remain unresolved for a period of time and so I I don't.
Have any more insight.
In terms of what that looks like.
I think you know from the publicly available information that we see.
It is it is very clear that it is important for any customer in this position to be able to continue to serve their customers if if and when.
Certain vendors are prohibited.
And if I can can you help us understand your strategy in managing the reserved capacity for this period the smartest customer.
Currently allocate that assay to other customers and what gives you the comp or you can backfill that traffic.
With traffic that meet your gross margin objectives on potentially short notice.
Sure. So I think you know like I talked about a medium and long term.
In terms of thinking about how how we can shift that and I think.
We have confidence based on the relationships that we have as we talked about previously we.
We have great relationships with with our customers and we feel.
That's a strong possibility for us obviously until we start doing it we won't know the exact.
Results of that and I think from a strategy perspective, given the uncertainty in how dynamic. The situation is we we feel it is very much in our interest to.
Remain.
Yeah.
You know steadfastly behind this customer.
Given the timing I think the answer will be when we believe we should we should start that process in earnest.
We will but thats thats based on 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.
Next question comes from the line of Brad Reback.
Your line.
Okay, great. Thanks, very much Josh when the Investor letter you talked about some meaningful commitments from newer 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 Youre seeing both I mean, I think as we as we migrate into a multi product business and really engage with that.
I think you're starting to see some of the first.
Turning to see continued growth in that area I think what you're also seeing.
Which which is something we've talked about in the past, which is there is obviously a commodity market here in the.
In the high volume, if you think about where we really focus its in the high quality.
And I think now more than ever those who are who care deeply about their quality.
Thats paying off and so when you look at the vendors that are that when you look at the platforms that are really excelling I think you will see a correlation between.
How fast they are how consistent they are.
And.
That is.
A unique value proposition for us and.
We're also seeing in a lot of those instances and I think this is important in this because we are so good at what we do we're able to offload the central cloud from a lot of traffic and so you know as as as Youre Central cloud costs go down when you bring in a lot.
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 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 are seeing.
Really impressive.
Well Sir.
Excellent. Thank you very much.
Your next question comes from the line of Brinci to learn.
Tim Your line.
Hey, guys. Thanks for taking my question.
Your.
First just drilling down into into the Q3 results.
If we look at that.
Kind of do the math right.
Absent the headwinds from your largest customer revenue still declined sequentially about half a million dollars in the shareholder letter you talk about how you know, there's some shortfall related to new traffic. So.
So maybe can you help give us color on why even absent the largest customer headwinds we still saw a sequential decline was that just a function of traffic. It's all being down sequentially was there some pricing stuff and I think screenhouse away with the fact that your TV any or was it was really strong and even better than Q2 and I want to follow.
Yeah.
Sure Andrew you want to take the first one.
Sure, Hey, Rishi, yes definitely.
Really much more a function of the timing.
Some of the that you disclosed in the letter there's a few customers that we're bringing on additional traffic.
Onto the network and for sort of.
The completion of reasons.
Associated with bringing that on that just a bit of a delay and you guys in a majority of those situations it's onto them today and we forecasted.
Yes.
Why is it conservatively in terms of what it looks like for Q4 at the same time, we're also bringing into seasonality.
With Q4 that we've experienced historically so that's you can see some distinguish some respect your sequential up from Q4 over Q3 at the midpoint.
From at those levels.
And I think from our standpoint, we're still feeling pretty good about sort of our long term prospects for you. What is what you guys are you still see the investments that we're making across the business as you've seen as our non-GAAP operating loss profile. So from that standpoint, I think we're still feeling pretty good.
Okay. Great. Thanks, guys. Appreciate it I'd also add that also add to that that that Q2 is it was obviously a.
Very difficult.
Time for all of Us as a lockdowns came in and so I think if you normalize this you'd be seeing normal normal increases in line with what we'd expect from a from a seasonality perspective.
Now that's not necessarily from and definitely appreciate that.
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 DB anymore.
So and I know, they're not 100% apples to apples right.
147% and our or on a trailing 12 month basis is 141%.
No again, acknowledging or calculate it slightly differently that does imply though that your churn on a trailing 12 month basis is about 6% versus last quarter figure that similar sort of map is a lot lower probably closer to one and a half.
And I imagine revenue from your largest customer in spite of Q3 was probably still up on a trailing 12 month basis. So can you help us square a if thats the right way of thinking about things or if the numbers are just catherine so definitely that that comparison, meaning less than on B. If there was in fact elevated churn.
Churn in Q3 relative to Q. Thanks.
Sure Andrew wanting to bankers.
Yes, I think on both of those inventories as you know.
Got it backwards.
Backwards driven that is the answer.
Trailing 12 months and from the segment perspective excludes churn and then in the.
Revenue retention, even on the truck trailing 12 months interest. So I think what is that really it's really more speaks that was really the comparison. As you include Q3 from last year versus Q3 going this year sort of working backwards I don't I don't see anything.
Usual from that standpoint in fact, I think the key thing to take away is that despite.
Sort of it the sort of unprecedented nature of the curve disruptions I will do our previously disclosed largest customer that that is still a decently good metric, which I think sort of bodes 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.
Got it that's helpful. Thank you guys.
Thank you.
Your next question comes from the line of Jeff Van Rhee with Craig Hallum Your line.
Great. Thanks for taking my questions. A few from me I think you guys see just from the.
Signal Sciences, maybe if you could spend a minute there just you talked a bit about the cross sell up sell what opportunity we've had to go out and validate that cross sell up sell.
From from the sort of the execution standpoint, common touch points common buyer just talk about the ability one it's just help to validate the cross sell Upselling to signal Sciences EPS impact in Q4 two component.
Sure I'll I'll take the cross sell up sell and I'll hand, the EPS question off the ITL, Josh we're 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 and innovators tool kit is that we have this unique perspective into.
One other tools are pretty in the tool kit. So before this process even kicked off.
With signal Sciences, we knew.
You know 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 love 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 other as customers are already looked at it so I think whats.
Exciting about working within the same try but ultimately is the ability that we come into that conversation.
With 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 again 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 30 conversations that we had been having customers come to us and say hey, we're 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. We're just gives us a huge advantage.
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 Thats part of what we're really excited about is capturing that some people start on the delivery front, but what both of those past lead to is the understanding that you need control and visibility that the platform has to feel and act like your own and as a builder.
I have to trust that you can build on it and what we saw in signal Sciences, and what has been confirmed not only in our diligence, but as I say through our customers lenses for the last four years is that so very optimistic a tremendous amount of enthusiasm at this point.
Okay drill omni jeffs question, yes.
Yes, and Jeff I can take the second part of the question.
I'll sort of.
Obstructed up just a little bit which is I think from given that we're still early into the integration phase of physical sciences, I think that clearly the estimated burn impact on a non-GAAP operating loss perspective is about four to 5 million. So.
So if you think about the non-GAAP operating loss that kind of gives you some sense of the magnitude of impact in.
In Q4, Megabits expenses as part of this.
Got it.
Very helpful. And then just if I could briefly back to the customer time. The few customers primarily sounds like it's really central to EPS view 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 fee customers was there any other commonality or these common similar type plus.
Summers similar use cases can you tell us anything else about what was common or not comment about those kind of few main customers eliminates referral.
Yes, I mean.
These are all unique customer specific issues. There is no. There is no significant commonality no threat that you can pull either industry or even what led to the timing related issues and as you say there is there 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 be on Q4, but nothing nothing that would draw.
A link between them or speak to any pattern.
Got it fair enough. Thanks, so much appreciate it thank you.
Your next question comes from the line will power and your line.
Okay, great. Yes. Thanks, Thanks for all the disclosures look a lot of my questions on the customer chances are probably been asked you won't let me switch gears on Cignal Sciences, I think you're guiding to $8 million of revenue in the quarter is that principally based on the existing run rate from.
That business, where you are you assuming anything.
In terms of cross sells upsells to kind of get to that figure and any early flavor as to how we should think about growth expectations.
Yes for that segment as we move into next year.
Sure Hey drawn into account.
Hey, well with Israel. Thanks for the question yes.
Yes, we're actually.
For that sort of number that we put out we're not assuming any sort of additional sort of in quarter contribution to this point I think we tried to be.
A bit conservative here.
You think about that stuff coming and kind of directly from the balance sheet.
Sort of already had became came into it but we are it is growing quite nicely.
As we mentioned the new stores.
When we announced the transaction there.
Q2, they are growing faster than you are so I think from our standpoint.
We're really excited about some of the future impacts of this as we think about future.
Future years, together and we're still early in the process of trying to figure out where the.
The cross sell and upsell opportunities not only for our customers, but also.
You know.
To the sciences customers that we want to sort of introduce.
Faster delivery to in computer energy too so.
At this point.
We're just very excited about the prospects going forward.
Okay, and maybe a margin question.
If I can I know in the shareholder letter, maybe even the prepared remarks I'd drill you alluded to ongoing kind of puts and takes in gross margins will touch a bit different impacts maybe just to kind of make sure. We're on the right pace going into Q4 any thoughts as to how we should think about gross margins positives negatives.
Quarter end and how does the other single sizes as Melissa.
Yes, I'll go and sort of reverse order, which is typical signs of this is the.
We've been attractive security.
Software as a service model base business their gross margins are in sort of 80 plus percent range.
Which is fantastic I think we should see the value that signal sciences brings to their customers.
Now I live customers. So I think thats going to have a nice uplift just from the standpoint, the mix within the current bookings from Fastly today.
That's some of the things that have spoken about before which is our security and computer based businesses.
Don't have been with US has a big cost component to it so by that very mutually it's the it's a nice if that's what we have today historically prior to signal Sciences.
Being part of family, 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 the size of the middle part of that.
Okay, great. Thank you thank.
Thank you.
Your next question comes from the line.
Good morning with Oppenheimer.
So.
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 base, maybe kind of mix that change in mix and them.
I think Evan.
Terabytes of capacity this quarter.
Capex is up quite a bit I know last in the fourth quarter, you ready 16, its clients from down expenses.
Thanks.
Just maybe whats going on with the capacity.
With increased capex. Thanks.
Sure they really want to go on both of those.
Absolutely.
HM Okay.
Although diverse where again.
Capex side.
Before in the past annually now sometimes little to the sort of the.
The Capex we see.
The report of the bounce up and down, but I've always talked about within a particular year.
We should be and especially in 2020, we should be around the sort of 13% to 14%, which I still think is likely to be the case, our long term model, but we're sort of looking to get to buy your if I post the IPO, we want to get to sort of 10% clearly 2019, we were just a hair below 10%.
And ice adjustments when 20 that we're going to be more like two.
2018, which is where we're still investing in I think this year.
We'll we'll still hit those numbers and so I think.
One particular quarter may sort of.
Mick you think otherwise, but I still feel that overall on the annual basis would you sum it all up we should be in that sort of 30% to 40% range from a capacity standpoint, and then on the former question.
The license based versus usage I.
I don't know that it's changed too much at this point given what weve disclosed in the past so at this point I can't I.
I think it's much more about the timing of invoices more than anything else.
But I wouldn't read too much into that.
Hey, Joe certainly my question on the Capex.
Does that six terabits of capacity this quarter. If you went back three four quarters going revenue like 16 seems to be pretty big slowdown and the capacity year end.
Oh, sorry.
When I think about capacity and Thats.
I think you mentioned capex physical infrastructure pose too.
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 the passes were often building ahead of the typical the holiday season embedded in the Q4 and so.
That sort of volatile kind of you've done previously before.
Tim There is also a dynamic here that when you buy the servers get to 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's. 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 their imagine those are actually different different contracts different vendors. So there is.
A bit of an art to 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 they'll sell 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 you.
Again, we would like to ask a question press Star then the number one on your telephone keypad.
Your next question comes from the line of gene.
Hi person.
Hey, guys I want to go back to Will's question.
Any way to think about the impact to signal sciences revenue and gross margins as you move it towards a usage based model via secured yet edge.
Let me, let me start with that and then I'll pass it off to Andrew 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 you're going to see two phenomenons come out one of them is youre going to see US continue obviously to strong pushing that usage based business model for.
Large subsets of our customers and will bring be bringing signal sciences along for that I think we're also learning from signifying says that there.
And from our customers that there is a certain subset of customer here that really likes the consistency of what they're bringing I think one of the things that I'm really excited about with FIS merging of of our of our two sort of cultures as we're learning a lot about how that looks with the us 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 thats good for customers, particularly those that want a predictable bill month in month out.
Hey, Jim Pedro here, and I'm actually going to build on that concept that predictability because one of the things that you know historically fastly.
It was about 50% sort of.
Contract sprinkle committed versus 50% usage about those commit you actually just mixing signals.
No signs is that the way that they build today there is a big work with their customers that actually pushes up critical that sort of the committed annual fixed portion of our revenue almost closer to 60% as it gets to 50 50, So I think from my perspective.
There's a lot we can learn from political science done things and how they work with their customers and.
Theres certainly.
I think some attractiveness to that from a financial capabilities can think it certainly we're going to keep looking at that we have made a determination yet about how we're going to do that and how much we're going to blend those products and more usage based model, but it is certainly something we're going to look at.
Got it and.
On the enterprise net adds is that just a factor of kind of being the newer vendor on the street you're against incumbents.
And just sticking with the little bit of a status quo because it was only nine again this quarter and April is there any way to think about how many customers specifically enterprise customers a signal sciences will add.
Let me start with the first one Jim then and then I'll hand, it off to drill for the latter I think that.
What we said last quarter still applies which is really.
Happy about those it expanded are 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 eight second full quarter of of coated 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 are.
Still seem that work its way through and.
And so we are if you were to look at the total ads.
No nothing that you would see that there's strong theres their 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 given the situation it or you can go on the second one.
Yes, Thanks, Joshua and Jim actually when you disclosed.
Acquisition announcements I think.
It was about 70% of those 60 plus expenses customers are expected to be.
Likely enterprise customers. So if you do the math there about around 14, we at this point, it's hard to sort. The historically, we have been able to figure out how much of those enterprise.
Yes, because many of them come from our current base, but at least from a signals I just think that the pull through it gives you some sense of what ballpark estimate of what we hope to add at least in Q4.
Thanks, I appreciate the extra color guys.
Thank you.
Your next question comes from the line of Walter Pritchard with Citi. Your line.
Hi, Thanks, just a question for you on how we should think about Q4 Q1 seasonality. That's typical there you have some M&A coming in in this Q4 you have some other factors you've talked about just relative to past years, what color can you give us as we start to think about next year.
Pedro.
Yes, I think I think we are going to reserve sort of talking about next year until we get to that point is I kind of want to see how single Sciences works.
Within Fastly, especially from a selling motion perspective.
In through Q4, I mean, historically fastly has been.
On an annual basis Q4 in a normal year again non coated related.
Before has been sort of our stronger growth from Q3, the Q4 and typically.
You sort of are sort of flattish Q.
Q4 to Q1, and then again flattish again until you hit the Q4 again in the following year. So at this point.
Hopefully when we're sort of out of Covidien postscript, if you could just sort of a more regular.
Cadence, but we are.
We are really interest to sort of see in terms of what growth opportunities do exist, which business lines with minimum sort of wait until we get to Q4 sort of comment on that.
Okay got it and then just maybe one more question on the on the largest customer was their commit part on that one as well that still in there in the revenue coming through or is that was that the customer primarily transactional traffic based.
Andrew Yes.
Yeah, Josh I can take that one.
Yes, traditionally with the with our current Cisco's largest customer it was a relatively low commit so from that standpoint. This is traffic that they chose to.
Keep on us.
At least you know what do we have through October and Thats. What we currently are built into the lower end of our range.
Okay, great. Thank you.
Yes, or no further questions at this time.
I turn the call back over to you for closing remarks.
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.
Today's conference call.
Yes.
Okay.
Hi.
[music].