Fastly, Inc. — Q2 2023 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2023. Fastly operates an edge cloud platform for delivering, securing, and processing customers’ applications and content. The filing is unaudited.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $122.8 million | $102.5 million | $240.4 million | $204.9 million |
| Gross profit | $64.2 million | $46.1 million | $124.5 million | $94.5 million |
| Gross margin | 52% | 45% | 52% | 46% |
| Operating loss | $49.8 million | $69.0 million | $97.1 million | $132.0 million |
| Net loss | $10.7 million | $16.4 million | $55.4 million | $80.7 million |
| Net loss per share | $0.08 | $0.14 | $0.44 | $0.67 |
- Q2 revenue increased 20% year over year; first-half revenue increased 17%. Management attributed growth to greater adoption of the edge platform and products.
- Q2 operating expenses were $114.0 million, down 1% year over year; first-half operating expenses were $221.6 million, down 2%. Stock-based compensation was $37.0 million in Q2 and $65.1 million in the first half.
- Q2 results included a $36.8 million gain on extinguishment of debt; Q2 2022 included a $54.4 million gain. These gains reduced reported net losses and are not operating revenue.
- Six-month operating cash flow was $16.1 million provided, versus $29.9 million used in the prior-year period. Investing activities provided $324.5 million, principally from marketable-security maturities; financing activities used $210.9 million, primarily for debt repurchases and finance leases.
- At June 30, cash and cash equivalents were $273.7 million and marketable securities were $201.6 million. Long-term debt had a $472.4 million carrying value and $477.4 million principal amount. The $100 million revolving credit facility was undrawn, and the company reported covenant compliance.
- Current assets were $505.1 million and current liabilities were $131.6 million. The company reported $230.9 million of remaining performance obligations and expected to recognize approximately 85% within 12 months.
Changes and business metrics
- Gross margin improved by 7 percentage points in Q2 and 6 points in the first half, which management attributed to revenue growth, improved network efficiency, and lower bandwidth costs as a share of revenue.
- Customer expansion and retention indicators were mixed: trailing-12-month DBNER rose to 122.5% from 120.0%, while NRR fell to 105.5% from 127.5% and LTM NRR eased to 116.1% from 117.3%.
- Under the updated customer-count methodology, enterprise customers increased 10% year over year to 551; average enterprise customer spend increased to $818,000 from $742,000. The company said the revised methodology is not comparable with historical periods outside the comparative data it presents.
- The 10 largest customers accounted for 36% of trailing-12-month revenue, up from 33%; the five largest accounted for 27%, up from 24%. Affiliated streaming-entertainment customers contributed 11% in both periods.
- In May 2023, Fastly repurchased approximately $236.4 million principal amount of its 0% convertible notes for approximately $195.7 million, plus transaction costs. Remaining notes mature in March 2026.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management expects operating losses to continue for the foreseeable future and expects operating expenses to increase as it invests in sales and marketing, product development, and network infrastructure. It also expects longer-term gross-margin improvement from operating efficiencies.
- Management stated that available cash, operating cash flows, and borrowing capacity should cover anticipated working-capital and capital-expenditure needs for at least 12 months. Future cash needs remain dependent on growth, cash generation, and economic conditions.
- Key risks include service outages or cyberattacks; reliance on major customers and usage-based revenue; competition and pricing pressure; accurately forecasting demand and network capacity; component supply constraints; evolving privacy, data-localization, and cross-border transfer rules; and continued operating losses.
- The filing notes a $4.5 million estimated liability for sales and use taxes, down from $7.6 million at year-end, and says actual exposure could differ. It reports no legal proceedings expected to have a material effect and no significant loss-contingency accruals.
- Fastly amended its credit agreement to replace LIBOR with SOFR. It reported effective disclosure controls and procedures at quarter-end.
Important facts for investors to verify
- Whether enterprise-customer usage and retention trends, particularly the sharp year-over-year decline in NRR, support continued revenue growth.
- How customer concentration and usage changes among major customers affect revenue, given the increased share from the largest customers.
- Underlying operating performance excluding debt-extinguishment gains, and the path toward reducing operating losses and stock-based compensation burden.
- Cash generation and funding needs after debt repurchases, capital spending, and the remaining $477.4 million note principal due in 2026.
- The cash-flow narrative contains an apparent inconsistency: the cash-flow statement reports $16.1 million provided by operating activities in the first half, while the MD&A narrative calls the amount “cash used.” Confirm the intended description against the financial statements.