Fastly, Inc. — 2023 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone fourth-quarter earnings report. Filed February 21, 2024.
Business context
Fastly provides an edge cloud platform spanning content delivery, application security, edge computing, and observability. Revenue is predominantly usage-based. In 2023, approximately 95% of revenue came from platform usage, and revenue from new customers contributed less than 10% of total revenue.
Financial performance and liquidity
| Metric | 2023 | 2022 |
|---|---|---|
| Revenue | $506.0 million | $432.7 million |
| Gross profit / gross margin | $266.3 million / 53% | $209.8 million / 48% |
| Operating loss | $198.0 million | $246.2 million |
| Net loss | $133.1 million | $190.8 million |
| Net loss per share, diluted | $1.03 | $1.57 |
| Operating cash flow | $0.4 million provided | $69.6 million used |
- Revenue increased 17% year over year. Management attributed $58.1 million of growth to further adoption of the platform and products and $14.7 million to Signal Sciences products.
- Cost of revenue rose 7%, slower than revenue growth; gross margin improved five percentage points. Operating expenses increased 2% to $464.4 million, including $4.3 million of equipment and software impairment charges.
- Net loss narrowed, but included a $52.4 million gain on extinguishment of debt and $18.2 million of interest income. The operating loss remained substantial.
- Cash, cash equivalents, and marketable securities totaled $328.8 million at year-end, down from $683.1 million. Current assets were $463.7 million and current liabilities were $147.7 million.
- Cash flow from investing activities was $294.9 million provided, primarily reflecting marketable-security maturities and sales. Financing activities used $331.4 million, principally for convertible-note repurchases and finance lease payments.
- Year-end convertible notes had $346.5 million principal outstanding and a $343.5 million carrying value, due March 15, 2026. The company repurchased $367.3 million principal for $309.1 million in 2023. No amounts were drawn under its $100 million revolving credit facility at year-end.
Changes in customer and operating metrics
- DBNER declined to 119.0% from 122.7%; NRR was 110.1% versus 110.7%; and LTM NRR fell to 113.4% from 119.1%. These measures indicate continued expansion among existing customers, but slower expansion than the prior year.
- Under the company’s new customer-count methodology, total customers rose 6% to 3,243 and enterprise customers rose 8% to 578. Fastly changed the methodology in 2023; the new-methodology figures are not comparable with historical figures outside the comparative table in the filing.
- The ten largest customers contributed 37% of revenue, versus 35% in 2022. Affiliated streaming-entertainment business units contributed 12%, versus 11%. No individual customer exceeded 10% of annual revenue.
- International revenue was 27% of total revenue in both years. Research and development expense fell 2%, while sales and marketing expense rose 7%.
Outlook, risks, and unusual items
- The filing does not provide numerical revenue or earnings guidance. Management expects operating losses for the foreseeable future and plans continued investment in product development, network capacity, sales and marketing, and international expansion; it also expects operating expenses to increase as it expands sales and marketing.
- Management stated that cash, available borrowing capacity, and expected operating cash flows should cover anticipated working capital and capital expenditures for at least the next 12 months. This outlook is subject to uncertain future cash generation and investment needs.
- Customer usage volatility and concentration, customer pricing and renewal decisions, competition, outages, cybersecurity incidents, and hardware supply or capacity misestimation are prominent business risks. In 2023, the company wrote off $4.3 million of excess computer and networking equipment and related advances.
- Liquidity and debt items merit attention: the notes mature in 2026, and the revolving credit facility’s maturity was extended after year-end, on February 16, 2024, to June 14, 2024. Fastly reported compliance with the facility’s covenants at December 31, 2023.
- Remaining performance obligations were $235.7 million at year-end; Fastly expected to recognize approximately 80% over the next 12 months. A subsequent contract modification added $9.5 million of commitments.
- The filing reports no legal proceedings expected to have a material adverse effect and no significant accrual for legal loss contingencies. It records a $4.3 million sales-and-use-tax liability, compared with $7.6 million in 2022.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Manually processed revenue was identified as a critical audit matter because it relies on complex procedures; this was not a modification of the audit opinion.
Investor verification priorities
- Verify the drivers and durability of the gross-margin improvement, including bandwidth, depreciation, and the contribution from security products.
- Track DBNER and LTM NRR trends, customer usage, renewals, and concentration among major and affiliated customers.
- Assess the path from near-breakeven operating cash flow to sustainable cash generation, including working-capital movements and continued capital and infrastructure spending.
- Review cash available against the 2026 convertible-note maturity, the remaining facility term and covenants, and any subsequent refinancing or debt actions.
- Monitor stock-based compensation, share issuance, and potential dilution; 2023 stock-based compensation was $136.3 million, and 132.99 million Class A shares were outstanding at year-end.
- Confirm the timing and realization of RPO and monitor the effects of pricing-package changes introduced in 2023.