Fastly, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results; comparisons are with Q1 2019 unless stated otherwise. Fastly operates an edge cloud platform for delivering and securing applications and content. At quarter-end, its network comprised 72 points of presence across 55 markets.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $62.9 million | $45.6 million; up 38% |
| Gross profit and margin | $35.7 million; 57% | $25.8 million; 57% |
| Operating loss | $12.0 million; 19% of revenue | $8.1 million; 18% of revenue |
| Net loss | $12.0 million | $9.7 million |
| Operating cash flow | $(7.2) million | $(10.1) million |
| Cash, cash equivalents and marketable securities | $116.6 million | $131.1 million at December 31, 2019 |
| Debt and capital lease obligations | $31.5 million principal | $29.8 million principal at December 31, 2019 |
- Operating expenses rose 40% to $47.6 million. Research and development increased 41% to $14.3 million; sales and marketing increased 27% to $19.2 million; and general and administrative increased 63% to $14.2 million.
- Cash used in investing activities was $9.7 million of cash provided, mainly from $21.4 million in marketable-security maturities, partly offset by $10.2 million of property and equipment purchases and $1.4 million of capitalized software. Financing provided $3.8 million.
- At March 31, cash and cash equivalents were $22.5 million, marketable securities were $94.1 million, and restricted cash was $70.1 million. Restricted cash collateralizes the revolving credit facility and should not be treated as freely available liquidity. Current assets were $241.8 million and current liabilities were $40.4 million.
- The company had drawn $20.3 million of its $70.0 million cash-collateralized revolving credit facility, maturing November 2022. The reported balance-sheet debt carrying value was $31.3 million, including the facility and capital leases.
Material changes and operating indicators
- Revenue growth was supported by customer and usage expansion. Customers increased 13% to 1,837 and enterprise customers increased 22% to 297. Trailing-12-month dollar-based net expansion rate rose to 133.0% from 130.4%.
- International revenue grew 81% to $21.9 million and represented 35% of revenue, versus 27% a year earlier. U.S. revenue grew 23% to $41.0 million.
- Gross margin held at 57% as cost of revenue grew at the same rate as revenue. Higher bandwidth, colocation, depreciation, network and personnel costs contributed to the increase in cost of revenue.
- Stock-based compensation increased to $6.3 million from $1.5 million. Net loss per share was $(0.13), compared with $(0.38); the per-share comparison is affected by the substantially larger weighted-average share count following the 2019 IPO.
- CEO Joshua Bixby was appointed in February 2020; former CEO Artur Bergman became Chief Architect and Executive Chairperson.
Outlook, risks and unusual items
- Management said cash, cash equivalents, credit facilities and operating cash flows were expected to cover anticipated working-capital and capital-expenditure needs for at least 12 months. No specific revenue or earnings guidance was provided in the filing text.
- Management expects continued investment in sales and marketing, research and development, and network infrastructure. It warned that these investments and network-provider costs could pressure profitability and margins.
- Fastly reported increased platform usage following COVID-19 containment measures, but described the pandemic’s effects as uncertain. Risks include customer spending cuts, delayed or renegotiated contracts, customer failures and collection issues, cancelled live events, remote-work disruption, and delays in network deployment or server-component supply. Management said the pandemic had not materially adversely affected financial operations to date.
- Management identified material weaknesses in internal control over financial reporting related to accounting and IT staffing, segregation of duties, access and change controls, and financial close and reporting processes. Remediation was underway, but controls were not yet considered effective; disclosure controls were also concluded to be ineffective as of March 31, 2020. Management nevertheless stated that the financial statements fairly presented the company’s financial position and results in all material respects.
- Remaining performance obligations were $71.0 million; management expected to recognize 88% within the next 12 months. Minimum future cost-of-revenue commitments were $51.6 million. Routine legal matters were not expected by management to have a material effect; indemnification obligations can be uncapped, though the company maintains insurance for certain claims.
- Revenue concentration is notable: one customer generated 10.5% of Q1 2020 revenue, and the top ten generated 31% of trailing-12-month revenue. The filing also highlights service reliability, cybersecurity, competition, customer usage variability, and continued operating losses as risks.
Key facts for investors to verify
- Whether usage growth and customer expansion can persist, particularly amid COVID-19 uncertainty, and how customer concentration affects revenue risk.
- Whether investment spending and network costs can be absorbed while improving operating losses and maintaining gross margin.
- How much liquidity is practically available after accounting for the $70.1 million restricted cash collateral and debt and lease obligations.
- Progress and testing of the internal-control remediation plan, including whether the identified material weaknesses are fully remediated.
- Whether customer collections, cost-of-revenue commitments, and network or hardware supply conditions develop as management anticipates.