Fastly, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Fastly operates an edge cloud platform for delivering and securing applications and content. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $108.5 | $86.7 | $313.4 | $256.6 |
| Gross profit / margin | $52.7 / 49% | $45.5 / 52% | $147.2 / 47% | $137.6 / 54% |
| Operating expenses | $118.4 | $100.4 | $344.9 | $299.9 |
| Operating loss | $(65.8) | $(54.9) | $(197.7) | $(162.4) |
| Net loss | $(63.4) | $(56.2) | $(144.1) | $(165.2) |
- Q3 revenue increased 25% year over year; nine-month revenue increased 22%. Management attributed growth to greater adoption of the edge platform and products, including Signal Sciences.
- Gross margin declined 3 percentage points in Q3 and 7 points for the nine-month period, reflecting higher bandwidth, colocation, hosting, network, depreciation and personnel costs.
- Operating loss widened in both comparisons. The nine-month net loss narrowed, primarily because of a $54.4 million gain on extinguishment of debt—not improved operating performance.
- Stock-based compensation was $39.4 million in Q3 and $114.4 million for nine months. Q3 general and administrative expense included $4.2 million of executive transition costs.
- Cash used in operations was $57.5 million for the first nine months, versus $30.6 million in 2021. Investing activities provided $163.2 million, largely reflecting net marketable-security maturities and sales; financing activities used $184.1 million.
Liquidity, debt and balance sheet
- At September 30, 2022, cash, cash equivalents and marketable securities totaled $719.0 million; $186.1 million of marketable securities was classified as noncurrent. Cash and cash equivalents alone were $87.9 million.
- Long-term debt had a $704.0 million carrying value and $713.8 million principal balance. The remaining 0% convertible notes mature March 15, 2026. The company repurchased approximately $235 million principal amount for $176.4 million in May, recording the $54.4 million gain. No borrowings were outstanding under its $100 million SVB credit facility; the company reported covenant compliance.
- Total assets were $1.907 billion, total liabilities $939.6 million, and stockholders’ equity $967.0 million. Accumulated deficit was $655.0 million.
- Remaining performance obligations were $173.0 million; Fastly expected to recognize approximately 78% within 12 months.
Changes, outlook and key risks
- Customer count rose to 2,925 from 2,748 a year earlier; enterprise customers increased to 482 from 430. Enterprise customers generated 89% of trailing-12-month revenue. The ten largest customers represented 34% of trailing-12-month revenue, up from 31%.
- Usage drove approximately 94% of revenue in the quarter and nine-month period. DBNER was 121.5%, NRR 114.6%, and LTM NRR 118.0%.
- Management said it expects operating losses to continue for the foreseeable future and expects investment in property and equipment to increase in absolute terms. It believes available liquidity and borrowing capacity will cover anticipated working capital and capital expenditure needs for at least 12 months. The filing provides no specific quarterly or full-year revenue or earnings guidance.
- Key risks include usage volatility and customer concentration, competition and pricing pressure, service outages and security incidents, bandwidth and hardware supply constraints, international privacy and data-transfer regulation, and macroeconomic uncertainty. Management said the Russia-Ukraine conflict was not then expected to materially affect results, while noting that worsening disruption could do so.
- Disclosure controls were deemed ineffective at quarter-end because of three continuing material weaknesses: insufficient qualified finance and accounting resources, controls over capitalization of internal-use software costs, and stock-plan system implementation controls. Remediation was ongoing; management did not specify when it would be complete.
- CEO Todd Nightingale succeeded Joshua Bixby effective September 1, 2022. The company acquired Glitch in May for $34.9 million in cash; its results were not material to the period.
Investor verification priorities
- Track gross-margin recovery against bandwidth, colocation, hosting and infrastructure investment costs.
- Assess operating cash burn and capital commitments alongside the $719.0 million reported cash and securities balance.
- Monitor revenue exposure to major customers and usage changes, and evaluate whether retention and expansion metrics translate into durable growth.
- Follow progress in remediating all three material weaknesses and the effectiveness of related controls.
- Review the remaining convertible-note terms, potential dilution or cash settlement needs, and the status of credit-facility covenant compliance.
- Evaluate platform reliability, security, supply-chain, and data-transfer risks, including any developments after the filing date.