Fastly, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial statements are unaudited. Fastly operates an edge cloud platform; its network included 72 points of presence across 55 markets in 26 countries.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $74.7m | $46.2m | $137.6m | $91.7m |
| Gross profit / margin | $45.0m / 60% | $25.4m / 55% | $80.6m / 59% | $51.2m / 56% |
| Operating loss | $(14.4)m | $(11.7)m | $(26.4)m | $(19.8)m |
| Net loss | $(14.5)m | $(15.6)m | $(26.5)m | $(25.3)m |
| Net loss per share, diluted | $(0.14) | $(0.26) | $(0.27) | $(0.59) |
- Q2 revenue grew 62% year over year; first-half revenue grew 50%. Management attributed the growth mainly to higher platform usage, primarily from existing customers.
- Gross margin improved 5 percentage points in Q2 and 3 points in the first half, which management attributed to better platform optimization. Operating expenses rose 60% in Q2 and 51% in the first half; G&A rose particularly quickly, up 103% and 83%, respectively.
- Stock-based compensation was $16.3m in Q2 and $22.6m in the first half, versus $2.2m and $3.7m in the comparable periods. Q2 included $4.8m of accelerated compensation tied to an employee’s change in employment status and $0.6m of severance.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $257.4m, marketable securities $126.6m, and restricted cash $70.1m. The restricted cash collateralizes the revolving credit facility.
- Total liabilities were $65.7m. Reported current and long-term debt totaled approximately $30.0m; $20.3m was drawn under the $70.0m cash-collateralized revolving facility, which matures in November 2022.
- For the first half, operating cash flow was $(16.0)m, investing cash flow $(27.8)m, and financing cash flow $285.1m. Financing included $274.9m net proceeds from the May follow-on offering. The increase in receivables was a significant use of operating cash.
- Management said available cash, credit facilities and operating cash flows should cover anticipated working capital and capital expenditure needs for at least the next 12 months.
Material changes and business indicators
- Fastly sold 6.9m Class A shares at $41.50 per share in a May 2020 follow-on offering, receiving $274.9m net proceeds.
- Customers increased to 1,951 from 1,627; enterprise customers increased to 304 from 262. Trailing-12-month dollar-based net expansion rate was 137.4%, versus 132.3%; net retention rate was 137.8%, versus 110.9%.
- International revenue represented 38% of Q2 revenue, compared with 30% a year earlier. Singapore accounted for 13% of Q2 revenue. One customer, ByteDance, accounted for 13% of Q2 revenue and 12% of first-half revenue; the top ten customers contributed 33% of trailing-12-month revenue.
- Remaining performance obligations were $76.7m, up from $70.7m at December 31, 2019; Fastly expected to recognize 87% within 12 months. This is not full revenue guidance, as certain contracts of one year or less are excluded from the disclosure.
Outlook, risks and unusual matters
- The filing gives no quantified revenue or earnings guidance. Management expected operating expenses and cost of revenue to rise in absolute dollars, and expected property and equipment investment to increase; network investment and bandwidth costs could pressure margins. Over the long term, management expected R&D and sales and marketing expenses to decline as a percentage of revenue, subject to period-to-period fluctuations.
- COVID-19 had increased platform usage, but management warned that usage could decline as restrictions ease. Other stated risks included customer budget reductions, delayed payments or failures, cancelled live events, operational and staffing disruption, and difficulty forecasting demand.
- On August 6, 2020, after quarter-end, the U.S. President issued an executive order banning transactions with ByteDance effective 45 days later. Fastly said the effect was uncertain; losing ByteDance traffic could negatively affect business.
- Management identified material weaknesses in internal control over financial reporting and concluded disclosure controls were not effective as of June 30. Remediation efforts were underway, but the weaknesses were not yet considered remediated.
- Fastly reported no legal proceeding expected to have a material adverse effect. It disclosed routine disputes and potential indemnification obligations, which can be unlimited in certain cases.
Important facts for investors to verify
- Whether ByteDance-related restrictions affect Fastly’s customer relationship, traffic, revenue or receivables.
- Whether elevated usage and customer expansion persist as pandemic-related conditions change, and whether customer concentration or receivables risk increases.
- Whether gross-margin improvement can continue as bandwidth, colocation, network and infrastructure costs rise.
- How much of operating losses and expense growth reflects recurring costs versus stock-based compensation and other unusual items.
- Progress in remediating internal-control weaknesses, particularly ahead of the expected loss of emerging-growth-company exemptions at year-end 2020.
- Actual cash consumption, capital expenditure needs, and terms or availability of the cash-collateralized credit facility.