Fastly, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial statements are unaudited. Fastly operates an edge cloud platform; substantially all revenue is usage-based. Figures below are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $49.8m | $36.8m | $141.5m | $103.8m |
| Revenue growth | 35% | — | 36% | — |
| Gross profit / margin | $27.5m / 55% | $20.1m / 55% | $78.7m / 56% | $56.0m / 54% |
| Operating loss | $(12.8)m | $(7.7)m | $(32.5)m | $(22.1)m |
| Net loss | $(12.2)m | $(8.5)m | $(37.5)m | $(23.6)m |
| Net loss per share | $(0.13) | $(0.35) | $(0.63) | $(0.98) |
Q3 operating expenses increased 45% to $40.3m, faster than revenue. Sales and marketing rose 42% and general and administrative expense 69%; management cited hiring, stock-based compensation and costs associated with becoming a public company. Nine-month stock-based compensation was $7.6m, versus $2.8m a year earlier.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $54.7m and marketable securities were $153.1m, totaling $207.8m. Current assets were $255.9m and current liabilities $45.4m.
- For the first nine months, operating cash outflow was $28.2m, compared with $16.2m in 2018. Investing cash outflow was $120.2m, largely reflecting purchases of marketable securities; financing provided $166.2m, primarily from IPO proceeds.
- Debt at quarter-end totaled approximately $29.1m, including current and long-term debt. The company repaid a separate $20.0m credit facility in July and reported compliance with its debt covenants at September 30.
- Management said available cash, credit facilities and operating cash flows were expected to cover anticipated working capital and capital expenditures for at least 12 months.
Business trends and changes versus prior periods
- Enterprise customers increased to 274 from 213; total customers rose to 1,684 from 1,516. Enterprise customers generated 86% of trailing-12-month revenue, up from 84%.
- Dollar-based net expansion rate was 134.8%, down from 136.1%. The company expects this metric to trend lower as longer-tenured customers become a larger share of the base.
- International revenue grew faster than U.S. revenue: Q3 international revenue increased 66% to $14.3m, while U.S. revenue increased 26% to $35.5m. The top ten customers accounted for 29% of trailing-12-month revenue, compared with 33% a year earlier.
- Gross margin was flat at 55% in Q3 and improved to 56% from 54% for the nine-month period. Management attributed the nine-month improvement to platform optimization.
- The May 2019 IPO generated $192.5m of net proceeds. Preferred stock converted to Class B common stock; Class B shares carry ten votes per share versus one vote for Class A.
Outlook, risks and unusual items
- No specific financial guidance was provided in the supplied filing text. Management expects operating expenses and network/infrastructure investment to increase, and cautioned that these investments may pressure near-term profitability and margins.
- Fastly adopted the new revenue standard in 2019. It recorded a $5.7m opening-equity adjustment for deferred contract costs; reported Q3 and nine-month net losses were respectively $0.4m and $0.3m lower than under the prior standard. The filing says adoption did not materially affect revenue.
- Management identified material weaknesses in internal control over financial reporting related to accounting staffing, GAAP application, segregation of duties and close/reporting controls. Remediation was underway, but disclosure controls were still deemed ineffective at quarter-end.
- Key risks include dependence on customer usage and renewals, competition and pricing pressure, service interruptions and cyberattacks, bandwidth and colocation capacity, customer concentration, and ongoing operating losses. The company reported routine legal matters with no expected material effect; indemnification obligations can be unlimited, but no related liability was accrued.
- Subsequent to quarter-end, on November 4, Fastly drew $20.3m under a cash-collateralized revolving facility with a $70.0m commitment and repaid the remaining Second Amended and Restated Loan and Security Agreement balance, reported as $20.0m drawn at that date.
Important facts for investors to verify
- Whether revenue and customer usage growth can continue while operating losses and operating cash burn remain substantial.
- Trends in DBNER, enterprise-customer concentration, usage-based revenue, renewals and pricing.
- Progress in remediating the material weaknesses and whether controls are effective in subsequent filings.
- Debt terms, cash collateral requirements and covenant headroom after the November credit-facility transactions.
- Network reliability, capacity spending and the effect of infrastructure costs on gross margin.
- Potential dilution and governance implications of equity awards, share sales and the dual-class voting structure.