Fastly, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Fastly operates an edge cloud platform for delivering and securing applications and digital content. The unaudited financial statements are prepared under U.S. GAAP.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $102.4 million | $84.9 million | +21% |
| Gross profit / margin | $48.5 million / 47% | $47.4 million / 56% | Gross profit +2%; margin down 9 percentage points |
| Operating expenses | $111.5 million | $97.3 million | +15% |
| Operating loss | $63.0 million | $50.0 million | Loss increased |
| Net loss | $64.3 million | $50.7 million | Loss increased |
| Diluted net loss per share | $0.54 | $0.44 | Loss per share increased |
| Cash used in operating activities | $13.2 million | $10.9 million | Cash use increased |
- Revenue mix and customers: Enterprise customers generated $91.1 million of quarterly revenue. Fastly had 2,880 customers and 457 enterprise customers, up from 2,458 and 395, respectively. Usage on the platform drove approximately 94% of revenue. The top 10 customers represented 33% of quarterly revenue, versus 35% a year earlier.
- Customer retention: Trailing-12-month DBNER declined to 117.9% from 141.0%, and LTM NRR declined to 115.0% from 135.0%. Point-in-time NRR rose to 114.0% from 109.8%.
- Margins and spending: Cost of revenue grew 44%, faster than revenue, primarily due to bandwidth, colocation, network, depreciation and personnel costs. R&D rose 39% and sales and marketing rose 19%; general and administrative expense fell 12%.
- Liquidity: Cash, cash equivalents and marketable securities totaled $1.034 billion at March 31, 2022, compared with $1.057 billion at year-end 2021. Current assets were $737.1 million and current liabilities $140.2 million. Investing cash flow was positive $87.7 million, mainly reflecting net maturities and sales of marketable securities, not operating cash generation.
- Debt and commitments: Fastly reported $934.1 million of convertible notes, net of issuance costs, with $948.8 million principal due in 2026 and a 0% coupon. The notes were not convertible as of March 31, 2022. No borrowings were outstanding under its $100 million credit facility; the company reported compliance with its covenants. Finance and operating lease liabilities totaled $138.0 million, with additional purchase commitments of $82.0 million.
Changes, outlook and risks
- Management attributed 21% revenue growth to increased adoption of its platform and products, including $4.6 million of revenue from Signal Sciences products. U.S. and international revenue each grew 21% year over year.
- Gross margin fell as infrastructure and capacity costs grew ahead of expected customer traffic. Management expects cost of revenue to rise in absolute terms and says it may also rise as a percentage of revenue. It expects continued operating losses while investing in growth and believes available liquidity is sufficient for anticipated needs for at least the next 12 months. The filing provides no numerical forward revenue or earnings guidance.
- Management cited customer ramp delays related in part to travel and data-center restrictions in South Asia and COVID-19-related issues. It also identified component availability and cost, inflation, usage volatility, competition, customer concentration, cybersecurity and service reliability, and privacy and cross-border data rules as risks.
- Fastly reported three ongoing material weaknesses in internal controls: insufficient qualified finance and accounting resources, controls over capitalization of internal-use software costs, and stock-plan system implementation controls. Disclosure controls were deemed ineffective at March 31, 2022. Remediation was underway, but management gave no assurance as to timing; management stated the financial statements fairly present results in all material respects.
- Unusual items included $40.0 million of stock-based compensation, up from $30.8 million, including expenses tied to modified restricted shares and the 2022 bonus program. Available-for-sale securities had $6.7 million of unrealized losses in other comprehensive loss; the company recorded no impairment and considered the declines temporary. A $7.7 million reserve was recorded for sales and use taxes. Fastly said it was not party to legal proceedings expected to have a material adverse effect.
- After quarter-end, Fastly disclosed that CEO Joshua Bixby would resign when a replacement is appointed; the filing also noted the Chief Legal and Trust Officer’s planned departure. The company said the Russia-Ukraine conflict had not materially affected results to date, but worsening disruption could do so.
Important facts for investors to verify
- Whether growth in revenue and enterprise customers can offset lower gross margin and declining DBNER and LTM NRR.
- Usage trends and exposure to large customers: the top 10 generated 33% of Q1 revenue, while customer usage can change quickly.
- Operating cash use, ongoing losses, infrastructure spending and the distinction between cash generation and investment-portfolio maturities.
- Progress and testing of remediation for all three material weaknesses, and any effects on reporting reliability.
- CEO succession, broader leadership changes, the 2026 convertible notes and potential cash or dilution consequences upon conversion or maturity.
- Changes in the sales-and-use-tax exposure, supply constraints, platform reliability and cybersecurity risks.