Fastly, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Fastly operates an edge cloud platform for content delivery, security and edge computing. The unaudited results are presented against the comparable 2020 periods.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $85.0 million | $74.7 million | $169.9 million | $137.6 million |
| Gross profit | $44.7 million | $45.0 million | $92.1 million | $80.6 million |
| Gross margin | 53% | 60% | 54% | 59% |
| Operating loss | $57.5 million | $14.4 million | $107.4 million | $26.4 million |
| Net loss | $58.3 million | $14.5 million | $109.0 million | $26.5 million |
| Basic and diluted loss per share | $0.51 | $0.14 | $0.95 | $0.27 |
Revenue grew 14% in Q2 and 23% in the first half. Growth reflected Signal Sciences and broader adoption of Fastly’s platform, partly offset by customer credits related to the June outage. Q2 cost of revenue rose 36%, while operating expenses rose 72%; stock-based compensation was $33.4 million for the quarter and $64.3 million for the first half.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $688.0 million and marketable securities were $415.0 million, totaling $1.103 billion. Restricted cash was approximately $1.0 million.
- First-half operating cash use was $27.9 million, versus $16.0 million in 2020. Investing cash use was $279.9 million, largely reflecting purchases of marketable securities; financing provided $933.0 million.
- Fastly issued $948.8 million principal amount of 0% convertible senior notes due 2026 in March, receiving approximately $930.0 million net proceeds. The balance-sheet carrying value was $931.4 million. The notes were not convertible as of June 30; the initial conversion price was approximately $102.80 per share.
- A $100 million senior secured credit facility was undrawn at quarter-end. Fastly reported compliance with its covenants. Management said available cash, cash equivalents, marketable securities and credit facilities were expected to cover working capital and capital expenditure needs for at least 12 months.
Material changes and operating indicators
- Gross margin fell to 53% from 60% in Q2. Management cited infrastructure and capacity investment, the return to more typical seasonal usage after elevated 2020 pandemic traffic, Signal Sciences acquisition-related amortization and purchase accounting, and outage-related revenue reductions.
- Operating expenses increased substantially, particularly research and development, sales and marketing, and general and administrative costs. Management expects operating expenses to increase as it invests in growth; it also expects operating losses for the foreseeable future.
- Fastly reported 2,581 customers and 408 enterprise customers, up from 1,951 and 304, respectively. Enterprise customers generated 89% of trailing-12-month revenue.
- Customer expansion and retention indicators weakened year over year: DBNER was 126.2% versus 137.4%; NRR was 93.2% versus 137.8%; and LTM NRR was 120.7% versus 135.6%.
- Revenue concentration remains notable: the top 10 customers accounted for 35% of trailing-12-month revenue. No customer exceeded 10% of Q2 or first-half 2021 revenue, but one customer exceeded 10% of accounts receivable at June 30.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management expects continued investment in the network, platform, research and development, and sales and marketing. It expects cost of revenue to rise in absolute terms and possibly as a share of revenue; margins may be pressured if growth does not offset infrastructure costs.
- On June 8, 2021, a software bug triggered by human error and a valid customer configuration change caused a global platform outage. Fastly said 95% of its network was operating normally within 49 minutes. The incident led some customers, including large customers, to reduce or remove traffic, generated service-level claims and customer credits, and may affect customer acquisition and retention.
- COVID-19-related uncertainty, component and microchip shortages, supplier delays, and data-center or network build-out constraints could affect usage, operations and capacity expansion. Privacy rules and uncertainty around cross-border data transfers may complicate European sales.
- Fastly disclosed a material weakness in internal control over financial reporting, related to insufficient qualified accounting resources and technical accounting expertise. Disclosure controls and procedures were therefore deemed ineffective at June 30, although management stated the financial statements fairly present results under GAAP and remediation work was ongoing.
- A securities class action and consolidated shareholder derivative litigation were pending. Fastly had not accrued a loss for these matters because management did not consider a loss probable; it said the potential cost could not be estimated.
- The CFO was scheduled to transition: Ron Kisling was appointed and expected to assume the role on August 9, 2021. Fastly’s dual-class structure converted to a single class on July 12, 2021, after quarter-end.
Investor verification priorities
- Track customer traffic and retention following the June outage, including service credits, claims and any effect on renewals or large-customer usage.
- Assess the drivers and durability of lower gross margins and the pace at which revenue growth can absorb infrastructure and operating expense increases.
- Monitor NRR, DBNER, LTM NRR, customer concentration and the usage trends of major customers.
- Review cash burn, planned network and capital spending, convertible-note conversion and settlement terms, and compliance with credit-facility covenants.
- Check progress remediating the material weakness and the status and potential financial exposure of the pending litigation.