Fastly, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. Fastly operates an edge cloud platform for delivering and securing applications and content. This unaudited filing covers the three months ended March 31, 2023, compared with the same period in 2022.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $117.6 million | $102.4 million |
| Gross profit / margin | $60.3 million / 51% | $48.5 million / 47% |
| Operating loss | $47.3 million | $63.0 million |
| Net loss | $44.7 million | $64.3 million |
| Net loss per share, basic and diluted | $0.36 | $0.54 |
| Cash used in operating activities | $8.9 million | $13.2 million |
Revenue grew 15% year over year. Gross margin improved four percentage points. Operating expenses fell 4% to $107.5 million; stock-based compensation was $28.2 million, down from $40.0 million.
At March 31, 2023, cash and cash equivalents were $348.5 million and marketable securities were $315.6 million; restricted cash was $0.2 million. The filing cites approximately $664.1 million in cash, cash equivalents, marketable securities and restricted cash. Long-term debt, net of issuance costs, was $705.4 million; the remaining convertible notes had $713.8 million principal and mature in March 2026. Finance lease liabilities totaled $35.6 million. No amounts were drawn on the $100 million credit facility, and Fastly reported covenant compliance.
Investing activities provided $219.5 million, primarily from marketable-security maturities; financing activities used $5.7 million, mainly for finance-lease payments. Cash, cash equivalents and restricted cash increased $205.1 million during the quarter. The balance-sheet accumulated deficit was $746.4 million.
Material changes versus the prior period
- Revenue increased $15.2 million, supported by platform and product adoption and a $3.0 million increase related to Signal Sciences products. Approximately 94% of revenue in each period was usage-driven.
- Cost of revenue rose 6%, slower than revenue growth; management attributed the higher gross margin to platform adoption and improved network efficiency.
- Research and development expense declined 7%, while sales and marketing expense increased 7%; general and administrative expense declined 13%.
- Interest income rose to $4.2 million from $0.7 million, primarily reflecting higher interest rates. Net loss narrowed by $19.6 million.
- Fastly changed its customer-count methodology and presented comparative figures under both methods. Under the new method, enterprise customers were 540 versus 488; DBNER was 121.4% versus 117.9%, NRR was 104.5% versus 114.0%, and LTM NRR was 116.2% versus 115.0%.
Outlook, risks and contingencies
The filing provides no specific quarterly or annual revenue or earnings guidance. Management expects operating losses to continue for the foreseeable future as it invests in growth, and says available liquidity, operating cash flows and borrowing capacity should meet working-capital and capital-expenditure needs for at least 12 months. Management also expects operating expenses to increase as it expands sales and marketing, while describing potential long-term gross-margin improvement from operational efficiencies.
Key risks include service outages and cyberattacks; customer usage reductions, churn and concentration; competition and pricing pressure; forecasting uncertainty; infrastructure and supplier constraints; and privacy, data-transfer and other regulatory requirements. The five largest customers represented 26% of trailing-12-month revenue, versus 22% a year earlier; the ten largest represented 35%, versus 32%. One customer exceeded 10% of accounts receivable at quarter-end. In March 2023, Silicon Valley Bank failed; Fastly said its deposits were protected through the FDIC resolution, but cautioned that the closure or broader banking impacts could affect access to its credit facility.
Other items include $242.4 million of remaining performance obligations, of which Fastly expected to recognize approximately 80% over the next 12 months; $58.6 million of disclosed future purchase commitments, excluding lease commitments; and a $5.7 million liability for sales and use taxes. Fastly reported no material legal proceedings, significant loss-contingency accruals, or goodwill or intangible-asset impairment charges. Management stated disclosure controls were effective at a reasonable-assurance level.
Investor verification points
- Track usage-based revenue, enterprise-customer growth and retention measures, noting the revised customer-count methodology and the decline in quarterly NRR.
- Assess customer concentration and exposure to large streaming-related customers, including receivables concentration.
- Reconcile operating cash use with the reported increase in cash, which was driven chiefly by securities maturities, and monitor future cash burn.
- Review the $713.8 million convertible-note principal due in 2026, potential conversion or cash-repayment requirements, and continued access to the undrawn credit facility.
- Monitor gross-margin durability, stock-based compensation and contractual commitments as Fastly continues investing while operating at a loss.