Fastly, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Fastly operates an edge cloud platform for content delivery, security, and computing. The unaudited interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $86.7m | $70.6m | $256.6m | $208.2m |
| Gross profit / margin | $45.5m / 52% | $41.3m / 59% | $137.6m / 54% | $122.0m / 59% |
| Operating loss | ($54.9m) | ($23.5m) | ($162.4m) | ($49.9m) |
| Net loss | ($56.2m) | ($23.8m) | ($165.2m) | ($50.2m) |
| Net loss per share, diluted | ($0.48) | ($0.22) | ($1.43) | ($0.50) |
- Quarterly and year-to-date revenue each grew 23%. Management attributed growth to continued Signal Sciences customer revenue, sales of its security products, and broader adoption of Fastly’s platform; purchase-accounting adjustments partially offset growth.
- Gross margin fell 7 percentage points in Q3 and 5 points year to date. Fastly cited infrastructure and capacity investment, a return to more typical seasonal usage after elevated pandemic-period traffic, and Signal Sciences acquired-intangible amortization and other purchase-accounting effects.
- Operating expenses rose 55% in Q3 and 75% year to date, led by higher personnel and stock-based compensation, including costs associated with Signal Sciences, and greater sales and marketing investment. Stock-based compensation was $36.6m in Q3 and $100.9m year to date.
- Cash used in operations was $30.6m for the first nine months, versus $11.2m provided in the prior-year period. Investing activities used $683.8m, including substantial purchases of marketable securities and network-related spending. Financing provided $933.9m, principally from the convertible notes.
- At September 30, cash and cash equivalents were $282.1m and marketable securities were $790.8m, totaling $1.073bn. Current assets were $719.9m and current liabilities $107.3m. Long-term debt had a $932.3m carrying value; the notes’ principal was $948.8m. Fastly reported no outstanding draws on its $100m secured credit facility and compliance with its covenants.
Changes, outlook, and significant items
- Customer count increased to 2,748 from 2,047; enterprise customers increased to 430 from 313. However, trailing-twelve-month DBNER declined to 118.4% from 147.4%, NRR to 112.5% from 121.5%, and LTM NRR to 114.4% from 141.2%.
- Fastly reported no numerical revenue or earnings guidance in this filing. Management expects operating losses to continue for the foreseeable future, while stating available cash, investments, and credit facilities should cover anticipated working-capital and capital needs for at least 12 months. It expects continued spending on sales and marketing, research and development, and network capacity; these investments may pressure near-term profitability and margins.
- The June 8, 2021 global outage, caused by a software bug triggered by a valid customer configuration change, led some customers to reduce or remove traffic and generated service-level claims. Fastly said 95% of its network was operating normally within 49 minutes. A January 2021 software-update incident also resulted in customer claims.
- Disclosure controls were deemed ineffective because of material weaknesses in financial reporting: insufficient technical accounting resources for complex transactions, and incomplete, untimely identification of internal-use software costs. Fastly recorded a $5.1m out-of-period capitalization adjustment in Q3, which management considered quantitatively and qualitatively immaterial, and reported remediation efforts underway.
- A securities class action and related shareholder derivative litigation remain pending. Fastly had not accrued a loss for the lawsuits because it did not consider a loss probable; it said the potential cost could not be estimated. It also recorded a $7.5m liability for sales and use taxes and cautioned actual exposure could differ materially.
- Other risks include customer concentration and usage variability, component shortages and delays, COVID-19 effects, privacy and cross-border data-transfer requirements, competition, and execution and integration risks. The ten largest customers generated 31% of trailing-twelve-month revenue. The filing also notes the CFO transition, with Ronald Kisling beginning in the role in August 2021.
Investor verification priorities
- Track gross-margin recovery against network expansion, bandwidth and colocation costs, and acquired-intangible amortization.
- Assess whether customer expansion and retention metrics stabilize, and monitor the usage and renewal behavior of large customers following the outages.
- Reconcile operating cash burn and capital investment with cash, marketable securities, lease commitments, and the $948.8m convertible-note principal, including possible cash or share settlement and dilution.
- Follow remediation and independent testing of both disclosed material weaknesses, particularly controls over software capitalization and complex accounting.
- Monitor developments in the securities litigation, sales-tax exposure, service-level claims, supply constraints, and privacy compliance risks.