Fastly, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results; this is an annual report, not a standalone Q4 filing. Financial amounts below are in U.S. dollars.
Business context
Fastly sells a usage-based edge cloud platform for delivering, processing, and securing digital applications. Usage fees generated approximately 93% of FY 2019 revenue. At year-end, the network comprised 68 points of presence across 53 markets. Fastly completed its IPO in May 2019, raising $192.5 million in net proceeds.
Key financial metrics
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $200.5 million | $144.6 million | +39% |
| Gross profit / margin | $112.1 million / 56% | $79.1 million / 55% | Margin +1 percentage point |
| Operating expenses | $158.7 million | $108.2 million | +47% |
| Loss from operations | $(46.5) million | $(29.1) million | Loss widened |
| Net loss | $(51.6) million | $(30.9) million | Loss widened |
| Net loss per share, diluted | $(0.75) | $(1.27) | Improved per share |
| Cash used in operating activities | $(31.3) million | $(17.0) million | Cash use increased |
| Cash used in investing activities | $(87.7) million | $(47.1) million | Includes marketable-security activity |
Q4 2019: Revenue was $58.9 million, gross profit $33.4 million (57% margin), operating loss $14.0 million, and net loss $14.1 million. Q4 2018 revenue was $40.8 million and net loss was $7.3 million. Revenue rose sequentially from $49.8 million in Q3 2019; quarterly net loss widened from $12.2 million.
Liquidity and debt: Cash, cash equivalents, and marketable securities totaled $131.1 million at year-end, compared with $83.6 million in 2018. Working capital was $212.2 million. An additional $70.1 million of restricted cash served as collateral for the revolving credit agreement and is not freely available. Balance-sheet debt was approximately $29.6 million, including capital leases; $20.3 million was drawn under a $70.0 million cash-collateralized revolving facility. Management stated that available liquidity and expected operating cash flows were sufficient for anticipated needs for at least 12 months.
Material changes versus the prior comparable period
- Revenue growth remained strong, while gross margin improved modestly to 56% from 55%.
- Operating expenses grew faster than revenue, notably general and administrative expense (+75%), including higher personnel, professional-services, insurance, and public-company costs. The annual operating loss and net loss increased.
- International revenue increased 71% to $57.6 million and rose to 29% of revenue from 23%. Enterprise customers increased to 288 from 227; they generated 87% of revenue versus 84%.
- Dollar-Based Net Expansion Rate (DBNER) increased to 135.5% from 132.0%; annual revenue retention was 99.3% versus 98.9%. The top ten customers accounted for about 29% of revenue, down from 32%; no single customer exceeded 10%.
- Operating cash use increased to $31.3 million. Accounts receivable rose $12.8 million, partly reflecting business growth and the timing of receipts from larger customers.
Outlook, risks, contingencies, and unusual items
- No quantified revenue or earnings guidance is provided. Management expects continued investment and increases in operating expenses; it also expects cost of revenue to rise and property-and-equipment investment to increase in absolute terms, potentially as a share of revenue.
- Management cited uncertainty from COVID-19, including potential disruption to selling, travel, customer contracting, and China-sourced server components. The filing does not quantify an expected financial impact.
- Competition, customer usage variability, pricing pressure, dependence on large customers, service interruptions or cyberattacks, and the early-stage nature of the edge-computing market are significant risks. Most customer contracts are typically one year, and many customers can reduce usage.
- A material weakness in internal control over financial reporting remained unremediated at year-end; management also concluded disclosure controls were not effective. Remediation was underway. The auditor gave an unqualified opinion on the financial statements but did not audit or opine on internal-control effectiveness.
- Fastly recorded a $3.9 million liability for sales and use taxes and other indirect taxes. It disclosed routine legal matters and potential indemnification obligations, but no current legal proceeding expected to have a material adverse effect.
- Topic 606 adoption produced a $5.7 million opening equity adjustment, primarily for deferred commissions; management said the adoption did not materially affect revenue. FY 2019 interest expense included accelerated amortization of debt issuance costs after early repayment of prior loans, and other expense included warrant fair-value changes before IPO conversion.
- After year-end, on February 18, 2020, Artur Bergman became Chief Architect and Executive Chairperson, and Joshua Bixby became CEO. The filing also reports substantial equity awards associated with these leadership changes.
Most important facts for investors to verify
- Whether customer usage, enterprise additions, DBNER, and retention sustain revenue growth as expansion rates may fluctuate.
- Whether operating-expense growth and cash burn moderate enough to improve the path toward profitability.
- How much of reported liquidity is readily deployable, given the $70.1 million restricted-cash collateral and debt obligations.
- Progress and independent validation of remediation of the material weakness in financial reporting controls.
- The actual business and supply-chain effects of COVID-19, and any subsequent updates to outlook or risk disclosures.