You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current plans, expectations, and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" and in other parts of this Quarterly Report on Form 10-Q. Our fiscal year ends on December 31. As used herein, "Fastly," "we," "our," "the Company" and similar terms include Fastly, Inc. and its subsidiaries, unless the context indicates otherwise.

Overview


Developers are reinventing the way we live, work, and play online. Yet they
repeatedly encounter innovation barriers when delivering modern digital
experiences. Expectations for digital experiences are at an all-time high; they
must be fast, secure, and highly personalized. If they aren't reliable,
end-users simply take their business elsewhere. The challenge today is enabling
developers to deliver a modern digital experience while simultaneously providing
scale, security, and performance. We built our edge cloud platform to solve this
problem.
The edge cloud is a new category of Infrastructure as a Service ("IaaS") that
enables developers to build, secure, and deliver digital experiences, at the
edge of the internet. This service represents the convergence of the Content
Delivery Network ("CDN") with functionality that has been traditionally
delivered by hardware-centric appliances such as Application Delivery
Controllers ("ADC"), Web Application Firewalls ("WAF"), Bot Detection, and
Distributed Denial of Service ("DDoS") solutions. It also includes the emergence
of a new, but growing, edge computing market which aims to move compute power
and logic as close to the end-user as possible. The edge cloud uses the emerging
cloud computing, serverless paradigm in which the cloud provider runs the server
and dynamically manages the allocation of machine resources. When milliseconds
matter, processing at the edge is an ideal way to handle highly dynamic and
time-sensitive data. The edge cloud complements data center, central cloud, and
hybrid solutions.
Our mission is to fuel the next modern digital experience by providing
developers with a programmable and reliable edge cloud platform that they adopt
as their own.
Organizations must keep up with complex and ever-evolving end-user requirements.
We help them surpass their end-users' expectations by powering fast, secure, and
scalable digital experiences. We built a powerful edge cloud platform, designed
from the ground up to be programmable and support agile software development. We
believe our platform gives our customers a significant competitive advantage,
whether they were born into the digital age or are just embarking on their
digital transformation journey. Our platform consists of three key components: a
programmable edge, a software-defined modern network, and a philosophy of
customer empowerment. Our programmable edge provides developers with real-time
visibility and control, where they can write and deploy code to push application
logic to the edge. It supports modern application delivery processes, freeing
developers to innovate without constraints. Our software-defined modern network
is built for the software-defined future. It is powerful, efficient, and
flexible, designed to enable us to rapidly scale to meet the needs of the most
demanding customers and never be a barrier to their growth. As of June 30, 2020,
our 100 terabit software-centric network is located in 72 uniquely designed
Points-of-Presence ("POPs") across 55 markets around the world. Finally, being
developers ourselves, we empower customers to build great things while
supporting their efforts through frictionless tools and a deeply technical
support team that facilitates ongoing collaboration.
We serve both established enterprises and technology-savvy organizations. Our
customers represent a diverse set of organizations across many industries with
one thing in common: they are competing by using the power of software to build
differentiation at the edge. With our edge cloud platform, our customers are
disrupting existing industries and creating new ones. For example, several of
our customers have reinvented digital publishing by connecting readers through
subscription models to indispensable content, helping people understand the
world through deeply reported independent journalism. Our customers' software
applications use our edge cloud platform to ensure concert goers can buy tickets
to the live events they love, travelers can book flights seamlessly and embark
on their next great adventure, and sports fans can stream events in real time,
across all devices. The range of applications that developers build with our
edge cloud platform continues to surpass our expectations.
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We generate substantially all of our revenue from charging our customers based
on their usage of our platform. Initially, customers typically choose to become
platform customers, for which we charge fees based on their committed or actual
use of our platform, as measured in gigabytes and requests. Many of our
customers generate billings in excess of their minimum commitment. We also
generate revenue from additional products as well as professional and other
services, such as implementation. We charge a flat one-time or recurring fee for
these additional products and services.
We focus our direct selling efforts on medium to large organizations as well as
smaller companies that are exhibiting significant growth. We engage with and
support these customers with our field sales representatives, account managers,
and technical account managers who focus on customer satisfaction and drive
expansion of their usage of our platform and products. These teams work with
technical and business leaders to help our customers' end-users receive the best
possible digital experience, while also lowering our customers' total cost of
ownership. Potential customers have the opportunity to test our platform for
free. If they choose to make use of our platform for live production delivery,
they have the ability to sign up online by providing their credit card
information and agreeing to a nominal monthly fee.
We have established and continue to maintain our position by improving upon our
programmable edge platform and software-defined modern network architecture. We
continue to focus on empowering our developer community through events and
conferences and online digital engagement. The success of these direct selling
efforts is reflected by our 304 enterprise customers as of June 30, 2020 that
generated 88% of our total revenue for the trailing 12 months ended June 30,
2020.
As our customers become more successful and grow, they typically increase their
usage of our platform and adopt additional Fastly products. A meaningful
indicator of the increased activity from our existing customer accounts and
overall customer satisfaction is our Dollar-Based Net Expansion Rate ("DBNER"),
which was 137.4% and 132.3% for the trailing 12 months ended June 30, 2020 and
2019, respectively. Our Net Retention Rate ("NRR") was 137.8% and 110.9% for the
trailing twelve months ended June 30, 2020 and 2019, respectively. For a more
complete description and discussion of DBNER and NRR, refer to the section
titled "Key Business Metrics".
Customers that have negotiated contracts with us generate a substantial majority
of our revenue. These customers typically purchase one or more products, for
which we charge a monthly recurring or one-time fee depending on the products
selected. Some of these customers also choose to purchase various levels of
account management and enhanced customer support for a monthly fee. Typically,
the term of these contracts is 12 months and includes a minimum monthly billing
commitment in exchange for more favorable pricing terms.
The timing of our sales is difficult to predict. The length of our sales cycle,
from initial evaluation to payment, can range from several months to well over a
year and can vary substantially from customer to customer. Similarly, the
onboarding and ramping process with new enterprise customers can take several
months.
We have achieved significant growth in recent periods. For the three months
ended June 30, 2020 and 2019, our revenue was $74.7 million and $46.2 million,
respectively, an increase of 62%. Our 10 largest customers generated an
aggregate of 33% and 30% of our revenue in the trailing 12 months ended June 30,
2020 and 2019, respectively. We incurred a net loss of $14.5 million and $15.6
million in the three months ended June 30, 2020 and 2019, respectively.

Recent Events
Follow-on Public Offering
On May 26, 2020 we completed a follow-on public offering in which we sold
6,900,000 shares of Class A common stock, which included 900,000 shares sold
pursuant to the exercise by the underwriters of an option to purchase additional
shares, at the public offering price of $41.50 per share. We received net
proceeds of $274.9 million, after deducting underwriting discounts and
commissions, from sales of our shares in the public offering.
Amendment to Amended and Restated Certificate of Incorporation

On June 10, 2020 we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation (the "Amendment") which amended Article IV(D)(1)(d) of our Amended and Restated Certificate of Incorporation to change the final conversion date of our Class B common stock from ten years following our initial public offering to seven years following our initial public offering. The Amendment was approved at our 2020 Annual Meeting of Shareholders on June 9, 2020. by the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Class A common stock and Class


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B common stock voting together as a single class, and the affirmative vote of the holders of a majority of the voting power of the outstanding shares of Class B common stock voting as a separate class.

Further details on the Amendment are described in our Current Report on Form 8-K filed on June 10, 2020.



Factors Affecting Our Performance
Winning New Customers
We are focused on continuing to attract new customers. Our customer base
includes both large, established enterprises that are undergoing digital
transformation and emerging companies spanning a wide array of industries and
verticals. In both instances, developers within these companies often use and
advocate the adoption of our platform by their companies. We also benefit from
word-of-mouth promotion across the broader developer community. We will continue
to invest in our developer outreach, leveraging it as a cost-efficient approach
to attracting new customers. We also plan to dedicate significant resources to
sales and marketing programs, including various online marketing activities as
well as targeted account-based advertising.
This will require us to dedicate significant resources to further develop the
market for our platform and differentiate our platform from competitive products
and services. We will also need to expand, retain, and motivate our sales and
marketing personnel in order to target our sales efforts at larger enterprises
and senior management of these potential customers.
Expanding within our Existing Customer Base
We emphasize retaining our customers and expanding their usage of our platform
and adoption of our other products. Customers often begin with smaller
deployments of our programmable edge platform and then expand their usage over
time. In addition, our programmable edge platform includes a variety of other
offerings, such as load balancing, shielding, web security, and WAF. As our
customers mature, we assist them in expanding their use of our platform,
including the use of additional offerings beyond edge cloud delivery. As
enterprises grow and experience increased traffic, their needs evolve, leading
them to find additional use cases for our platform and expand their usage
accordingly. In addition, given that customer acquisition costs are incurred
largely for acquiring and initial onboarding, we gain operating leverage to the
extent that existing customers expand their use of our platform and products.
Our ability to retain our customers and expand their usage could be impaired for
a variety of reasons, including a customer moving to another provider or
reducing usage within the term of their contract to their minimum usage
commitment. Even if our customers expand their usage of our platform, we cannot
guarantee that they will maintain those usage levels for any meaningful period
of time or that they will renew their commitments.
We also cannot be certain what actions the U.S. or another country's government
may take with respect to certain of our customers that may adversely affect our
ability to do business with our customers that operate in China, target China as
a market or that have strong business ties to China. ByteDance, the operator of
the TikTok application, operates in and has strong business ties to China and is
our top customer, accounting for 13% and 12% of revenue for the three and six
months ended June 30, 2020, respectively. On August 6, 2020, President Trump
issued an executive order banning transactions with ByteDance, effective 45 days
after the execution of the order. The TikTok application has also been the
subject of a ban in other countries. While we are still assessing the impact of
these bans, the ban of the TikTok application by the U.S. government, and any
other governments, creates uncertainty around our ability to support ByteDance.
The loss of this customer's traffic could have a negative impact on our
business.
For additional details, refer to the section titled "Risk Factors."
International Customer Growth
We intend to continue expanding our efforts to attract customers outside of the
United States by augmenting our sales teams and strategically increasing the
number of POPs in select international locations. As of June 30, 2020 and 2019,
52% and 46% of our customers were headquartered outside of the United States,
respectively.
Our international expansion, including our global sales efforts, will add
increased complexity and cost to our business. This will require us to
significantly expand our sales and marketing capabilities outside of the United
States, as well as increase the number of POPs around the world to support our
customers. We have limited experience managing the administrative aspects of a
global organization, and we have only recently begun to establish and operate
offices in foreign countries, which could place a strain on our business and
culture.
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Investing in Sales and Marketing
Our customers have been pivotal in driving brand awareness and broadening our
reach. While we continue to leverage our self-service approach to drive adoption
by developers, we intend to continue to expand our sales and marketing efforts,
with an increased focus on sales to enterprises globally. Utilizing our direct
sales force, we have multiple selling points within organizations to acquire new
customers and increase usage from our existing customers. We intend to increase
our discretionary marketing spend, including account based and brand spend, to
drive the effectiveness of our sales teams. As a result, we expect our total
operating expenses to increase as we continue to expand. Our investments in our
sales and marketing teams are intended to help accelerate our sales, onboarding,
and ramp cycles.
These efforts will require us to invest significantly in financial and other
resources. Furthermore, we believe that there is significant competition for
sales personnel with the skills and technical knowledge that we require. Our
ability to achieve significant revenue growth will depend, in large part, on our
success in recruiting, training, and retaining sufficient numbers of sales
personnel to support our growth.
Continued Investment in Our Platform and Network Infrastructure
We must continue to invest in our platform and network infrastructure to
maintain our position in the market. We expect our revenue growth to be
dependent on an expanding customer base and continued adoption of our edge cloud
platform. In anticipation of winning new customers and staying ahead of our
customers' needs, we plan to continue to invest in order to expand the scale and
capacity of our software-defined modern network, resulting in increased network
service provider fees, which could adversely affect our gross margins if we are
unable to offset these costs with revenue from new customers and increase
revenue from existing customers. Our customers require constant innovation
within their own organizations and expect the same from us. Therefore, we will
continue to invest in resources to enhance our development capabilities and
introduce new products and features on our platform. We believe that investment
in research and development will contribute to our long-term growth but may also
negatively impact our short-term profitability. For the three and six months
ended June 30, 2020, our research and development expenses as a percentage of
revenue was 22% and 22%, respectively.
Developers use our platform to build custom applications and require a
state-of-the-art infrastructure to test and run these applications. We will
continue to invest in our network infrastructure by strategically increasing our
POPs. We also anticipate making investments in upgrading our technology and
hardware to continue providing our customers a fast and secure platform. Our
total investment in property and equipment for the three and six months ended
June 30, 2020 was $1.1 million and $14.6 million representing 1% and 11% of our
revenue in such periods. We expect our investment in property and equipment to
increase on an absolute basis and may increase as a percentage of revenue in
future periods. Our gross margins and operating results are impacted by these
investments. As of June 30, 2020, we had 72 POPs and are located in 55 markets
across 26 countries.
In the event that there are errors in software, failures of hardware, damages to
a facility or misconfigurations of any of our services-whether caused by our
products, third-party error, our own error, natural disasters, or security
breaches-we could experience lengthy interruptions in our platform as well as
delays and additional expenses in arranging new facilities and services. In
addition, there can be no assurance that we are adequately prepared for
unexpected increases in bandwidth demands by our customers, particularly when
customers experience cyber-attacks. The bandwidth we have contracted to purchase
may become unavailable for a variety of reasons, including service outages,
payment disputes, network providers going out of business, natural disasters,
networks imposing traffic limits, or governments adopting regulations that
impact network operations.
Uncertainty of Coronavirus (COVID-19) Pandemic
The ongoing global COVID-19 pandemic has adversely impacted, and may continue to
adversely impact, many aspects of our business. As certain of our customers or
potential customers experience downturns or uncertainty in their own business
operations and revenue resulting from the spread of COVID-19, they have and may
continue to decrease or delay their technology spending, request pricing
concessions or payment extensions, or seek renegotiations of their contracts,
any of which have resulted in and may continue to result in delayed or decreased
revenue for us. We have experienced and may continue to experience customer
losses, including due to bankruptcy or our customers ceasing operations, which
has resulted in delays and inability to collect receivables from these customers
and slow-downs in our sales cycles. In addition, a portion of our revenue is
related to usage of our platform in connection with live events, such as
sporting events that have been or may be postponed or cancelled. A decline in
revenue or the collectability of our receivables could harm our business. The
nature and extent of the impact of the COVID-19 pandemic on our customers and
our customers' response to the COVID-19 pandemic is difficult to assess or
predict, and we may be unable to accurately forecast our revenues or financial
results, especially given that the near
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and long term impact of the pandemic remains uncertain. We have seen an increase in usage of our platform following the implementation of preventative measures to contain or mitigate the outbreak of COVID-19. However, we cannot predict how long we will see this increased level of usage as these preventative measures, including shelter-in-place orders, school closures, travel bans and restrictions, limitations on business activity, quarantines, and other related measures and community practices, change over time. In addition, there is no assurance that customers will continue to use our platform, or to the same extent, after the COVID-19 pandemic begins to taper or has ended. We may see a decline in customers or usage when shelter-in-place measures are eased or terminated, and individuals are no longer working or attending work or school from home. Our results of operations could be materially above or below our forecasts, which could adversely affect our results of operations, disappoint analysts and investors, and/or cause our stock price to decline.

The COVID-19 pandemic has been declared a national emergency in many countries. In response to the COVID-19 pandemic, many state, local, and foreign governments have put in place, and others in the future may put in place, quarantines, executive orders, shelter-in-place orders, and similar government orders and restrictions in order to control the spread of the disease. Such orders or restrictions, or the perception that such orders or restrictions could occur, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions, and cancellation or postponement of events, among other effects that could negatively impact productivity and disrupt our operations and those of our partners and customers. In March 2020, we closed all of our offices, suspended non-essential travel, cancelled or postponed Fastly-sponsored events, and we are not permitting employee attendance at industry events and in-person work-related meetings. We may take further actions that alter our operations as may be required by federal, state, or local authorities, or which we determine are in our best interests. While much of our operations can be performed remotely, certain activities such as expanding and maintaining our network of POPs around the world often require personnel to be on-site, and our ability to carry out these activities may be negatively impacted if our employees or local data center personnel are not able to travel. In addition, travel restrictions may also affect our ability to complete audits of our data centers and facilities, which may in turn affect our compliance certifications and cause customers to reduce or cease using our services. For activities that may be conducted remotely, there is no guarantee that we will be as effective while working remotely because our team is dispersed, some employees have experienced, and may continue to experience, less capacity to work due to increased personal obligations (such as childcare, eldercare, or caring for family who become sick), some have become sick themselves and been unable to work, or may be otherwise negatively affected, mentally or physically, by the COVID-19 pandemic and prolonged social distancing. Decreased effectiveness and availability of our team could adversely affect our results due to slow-downs in our sales cycles and recruiting and onboarding efforts, delays in our entry into customer contracts, delays in addressing performance issues, delays in product development, delays and inefficiencies among various operational aspects of our business, including our financial organization, or other decreases in productivity that could seriously harm our business. Moreover, our finance organization's ability to ensure that we comply with the requirements of Section 404 may be impaired, including the ability of our registered public accounting firm to issue an attestation report on management's assessment of our internal control over financial reporting. Furthermore, we may decide to postpone or cancel planned investments in our business in response to changes in our business as a result of the spread of COVID-19, which may impact our ability to attract and retain customers and our rate of innovation, either of which could harm our business.

In addition, while the potential impact and duration of the COVID-19 pandemic on the global economy and our business in particular may be difficult to assess or predict, the pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, may reduce our ability to access capital, which could negatively affect our liquidity in the future.

The global impact of COVID-19 continues to rapidly evolve, and we will continue to monitor the situation closely. We have substantially completed business continuity planning to identify and address risks to our business posed by this pandemic, which included, among other things, the elimination of single points of failure among our employees to address the decrease in employee productivity. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, operations, or the global economy as a whole. While the spread of COVID-19 may eventually be contained or mitigated, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur, or that the global economy will recover, either of which could harm our business.

For additional details, refer to the section titled "Risk Factors."

Key Business Metrics We regularly review a number of metrics, including the key metrics presented in the table below, to evaluate our business, measure our performance, identify trends affecting our business, prepare financial projections, and make strategic


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decisions. The calculation of the key metrics and other measures discussed below may differ from other similarly titled metrics used by other companies, securities analysts, or investors.


                                                                   June 30,
                                                              2020         2019
Number of customers (as of end of period)                    1,951        1,627
Number of enterprise customers (as of end of period)           304          262
DBNER (trailing 12 months)                                   137.4  %     132.3  %
NRR                                                          137.8  %     110.9  %


Number of Customers
We believe that the number of customers is an important indicator of the
adoption of our platform. Our definition of a customer consists of identifiable
operating entities with which we have a billing relationship in good standing,
from which we recognized revenue during the period, and are active as of the end
of the period. In addition to our paying customers, we also have trial,
developer, nonprofit and open source program, and other non-paying accounts that
are excluded from our customer count metric. As of June 30, 2020 and 2019, we
had 1,951 and 1,627 customers, respectively.
Number of Enterprise Customers
Historically our revenue has been driven primarily by a subset of customers who
have leveraged our platform substantially from a usage standpoint. These
enterprise customers are defined as customers with revenue in excess of $100,000
over the previous 12-month period. As of June 30, 2020, we had 304 enterprise
customers which generated 88% of our revenue for the trailing 12 months ended
June 30, 2020. As of June 30, 2019, we had 262 enterprise customers which
generated 86% of our revenue for the trailing 12 months ended June 30, 2019. We
believe the recruitment and cultivation of enterprise customers is critical to
our long-term success.
Dollar Based Net Expansion Rate ("DBNER")
Our ability to generate and increase our revenue is dependent upon our ability
to increase the number of new customers and usage of our platform and increase
the purchase of additional products by our existing customers. We track our
performance in this area by measuring our DBNER. Our DBNER increases when
customers increase their usage of our platform or purchase additional products,
and declines when they reduce their usage, benefit from lower pricing on their
existing usage, or curtail their purchases of additional products. We believe
DBNER is a key metric in measuring the long-term value of our customer
relationships and our ability to grow our revenue through increased usage of our
platform and purchase of additional products by our existing customers. However,
our calculation of DBNER indicates only expansion among continuing customers and
does not indicate any decrease in revenue attributable to former customers,
which may differ from similar metrics of other companies.
We calculate DBNER by dividing the revenue for a given period from customers who
remained customers as of the last day of the given period ("current period") by
the revenue from the same customers for the same period measured one year prior
("base period"). The revenue included in the current period excludes revenue
from (i) customers that churned after the end of the base period and (ii) new
customers that entered into a customer agreement after the end of the base
period. For example, to calculate our DBNER for the trailing 12 months ended
June 30, 2020, we divide (i) revenue, for the trailing 12 months ended June 30,
2020, from customers that entered into a customer agreement on or before June
30, 2019, and that remained customers as of June 30, 2020, by (ii) revenue, for
the trailing 12 months ended June 30, 2019, from the same set of customers.
For the trailing 12 months ended June 30, 2020 and 2019 our DBNER was 137.4% and
132.3%, respectively. We believe that an annual cohort analysis of our customers
demonstrates our success in customer expansion. Once a customer begins to
generate revenue for us, they tend to increase their usage of our platform, in
particular in their second year. Customer accounts acquired in 2017, 2018, and
2019 are referred to as the 2017 Cohort, 2018 Cohort, and 2019 Cohort,
respectively. As described above, our customers tend to increase their usage of
our platform in their second year, which is typically followed by more modest
increases in usage, if any, in ensuing years. For example, the DBNER for the
2017 Cohort was 305.5% for the year ended December 31, 2018. However, the DBNER
for the 2017 Cohort was 144.3% for the year ended December 31, 2019, which
generally represents their third year as a customer, depending on when they
entered into a customer agreement. While DBNER may fluctuate from quarter to
quarter based on, among other things, the timing associated with new customer
accounts,
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we expect our DBNER to continue to decrease as customers that have used our
platform for more than two years become a larger portion of both our overall
customer base and the revenue that we use to calculate DBNER.
Net Retention Rate ("NRR")
Our ability to generate and increase our revenue is also dependent upon our
ability to retain our existing customers. In addition to measuring expansion
using DBNER, NRR allows us to track customer retention which demonstrates the
stickiness of our edge cloud platform. Our NRR measures the net change in
monthly revenue from existing customers in the last month of the period (the
"current" period month) compared to the last month of the same period one year
prior (the "prior" period month), and includes revenue contraction due to
billing decreases or customer churn, revenue expansion due to billing increases,
but excludes revenue from new customers. We calculate Net Retention Rate by
dividing the revenue from the current period month by the revenue in the prior
period month.
For the last month of the quarters ended June 30, 2020 and 2019 our NRR was
137.8% and 110.9%, respectively.

Key Components of Statement of Operations
Revenue
We derive our revenue primarily from usage-based fees earned from customers
using our platform. We also earn flat fees from certain products and services.
Customers are generally invoiced in arrears on a monthly basis. Many customers
have tiered usage pricing which reflects discounted rates as usage increases.
Usage charges are determined on a monthly basis based on actual usage within the
month and do not impact usage charges within any other month. Our larger
customers often enter into contracts that contain minimum billing commitments
and reflect discounted pricing associated with such usage levels.
We define U.S. revenue as revenue from customers that have a billing address in
the United States, and we define international revenue as revenue from customers
that have a billing address outside of the United States. Our revenue has been
and will continue to be impacted by new and existing customers' usage of our
products, international expansion, and the success of our sales efforts.
Cost of Revenue and Gross Margin
Cost of revenue consists primarily of fees paid for bandwidth, peering, and
colocation. Cost of revenue also includes personnel costs, such as salaries,
benefits, bonuses, and stock-based compensation for our customer support and
infrastructure employees, and non-personnel costs, such as amortization of
capitalized internal-use software development costs and depreciation of our
network equipment. Our arrangements with network service providers require us to
pay fees based on bandwidth use, in some cases subject to minimum commitments,
which may be underutilized. We expect our cost of revenue to continue to
increase on an absolute basis and may increase as a percentage of revenue,
including as a result of depreciation and amortization associated with capital
expenditures in future periods.
Our gross margin has been and will continue to be affected by a number of
factors, including the timing and extent of our investments in our operations,
our ability to manage our network service providers and cloud
infrastructure-related fees, the timing of amortization of capitalized software
development costs, depreciation of our network equipment, and the extent to
which we periodically choose to pass on our cost savings from network
optimization efforts to our customers in the form of lower usage rates.
Research and Development
Research and development expenses consist primarily of personnel costs,
including salaries, benefits, bonuses, and stock-based compensation. Research
and development expenses also include cloud infrastructure fees for development
and testing, amortization of capitalized internal-use software development
costs, and an allocation of our general overhead expenses. We capitalize the
portion of our software development costs that meet the criteria for
capitalization.
We continue to focus our research and development efforts on adding new features
and products including new use cases, improving the efficiency and performance
of our network, and increasing the functionality of our existing products. We
expect our research and development expenses to continue to increase in absolute
dollars as we continue to invest in efforts to
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enhance the functionality of our platform and develop new products and features
to produce next-generation edge computing solutions. Over the long term we
expect our research and development expenses to decrease as a percentage of our
revenue. However, our research and development expenses may fluctuate as a
percentage of our revenue from period to period due to the timing and extent of
these expenses.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel costs, including
commissions for our sales employees, salaries, benefits, bonuses, and
stock-based compensation. Sales and marketing expenses also include expenditures
related to advertising, marketing, our brand awareness activities, costs related
to our company sponsored events, professional services fees, and an allocation
of our general overhead expenses.
We focus our sales and marketing efforts on generating awareness of our company,
platform and products, creating sales leads, and establishing and promoting our
brand, both domestically and internationally. We plan to increase our investment
in sales and marketing by hiring additional sales and marketing personnel,
expanding our sales channels, driving our go-to-market strategies, building our
brand awareness, and sponsoring additional marketing events. As a result, we
expect our sales and marketing expenses to continue to increase in absolute
dollars and may increase as a percentage of revenue in the foreseeable future.
Over the long term, we expect our sales and marketing expenses to decrease as a
percentage of our revenue. However, our sales and marketing expenses may
fluctuate as a percentage of our revenue from period to period due to the timing
and extent of these expenses.
General and Administrative
General and administrative expenses consist primarily of personnel costs,
including salaries, benefits bonuses, and stock-based compensation for our
accounting, finance, legal, human resources and administrative support
personnel, and executives. General and administrative expenses also include
costs related to legal and other professional services fees, sales and other
taxes, depreciation and amortization, an allocation of our general overhead
expenses, and bad debt expense. We expect that we will incur costs associated
with supporting the growth of our business, our operation as a public company,
and to meet the increased compliance requirements associated with our
international expansion.
Our general and administrative expenses include a significant amount of sales
and other taxes to which we are subject based on the manner we sell and deliver
our products. Historically, we have not collected such taxes from our customers
and have therefore recorded such taxes as general and administrative expenses.
We expect that these expenses will decline in future years as we continue to
implement our sales tax collection mechanisms and start collecting these taxes
from our customers. We expect our general and administrative expenses to
continue to increase in absolute dollars and as a percentage of revenue in the
foreseeable future. Over the long term, we expect our general and administrative
expenses to decrease as a percentage of our revenue. However, our general and
administrative expenses may fluctuate as a percentage of our revenue from period
to period due to the timing and extent of these expenses.
Income Taxes
Our income tax expense consists primarily of income taxes in certain foreign
jurisdictions where we conduct business and state minimum income taxes in the
United States. We have a full valuation allowance on our U.S. Federal and state
deferred tax assets. We expect to maintain this valuation allowance for the
foreseeable future.

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