Fastly, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 2, 2023. Fastly operates an edge cloud platform for delivering and securing applications and content. Financial statements are unaudited and prepared under U.S. GAAP. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $127.8m | $108.5m | $368.2m | $313.4m |
| Gross profit | $66.1m | $52.7m | $190.6m | $147.2m |
| Gross margin | 52% | 49% | 52% | 47% |
| Operating loss | $58.3m | $65.8m | $155.4m | $197.7m |
| Net loss | $54.3m | $63.4m | $109.7m | $144.1m |
| Net loss per share, diluted | $0.42 | $0.52 | $0.86 | $1.19 |
| Operating cash flow | Not provided for the quarter | $7.7m | $(57.5)m |
Balance sheet at September 30, 2023: Cash and cash equivalents of $270.3m and marketable securities of $190.3m, totaling $460.6m; current assets $551.5m and current liabilities $143.3m. Long-term debt was $472.8m, consisting of 0% convertible notes due 2026; no credit-facility borrowings were outstanding. Total assets were $1.641bn, total liabilities $672.1m, and stockholders’ equity $968.6m.
Cash flow detail: Nine-month investing cash inflow was $332.2m, mainly reflecting maturities and sales of marketable securities; financing cash outflow was $213.6m, including $196.9m for debt repurchases and $21.2m of finance-lease payments. Cash, cash equivalents and restricted cash increased $126.9m to $270.5m.
Changes versus prior comparable periods
- Revenue increased 18% in Q3 and 17% for the first nine months. Management attributed growth to further adoption of the edge platform and products; new customers contributed less than 10% of revenue.
- Gross margin expanded 3 percentage points in Q3 and 5 points year to date. Fastly cited improved network efficiency and lower bandwidth costs as a share of revenue.
- Operating losses narrowed, while net losses improved year over year. The nine-month 2023 result included a $36.8m gain from repurchasing convertible notes; 2022 included a $54.4m gain. These non-operating gains benefit reported net loss but do not represent operating profit.
- Q3 operating expenses rose 5% to $124.4m, including a $4.3m equipment impairment charge. Nine-month operating expenses were broadly flat at $346.0m; research and development and general and administrative costs declined, while sales and marketing costs increased.
- Customer expansion and retention measures softened: DBNER was 120.1% versus 121.5%, NRR 110.3% versus 114.6%, and LTM NRR 113.6% versus 118.0%. Enterprise customer counts increased, although the company changed its customer-count methodology in 2023; the filing presents both methods for comparison.
Outlook, management commentary, risks and unusual items
- Fastly provided no specific revenue, earnings, or cash-flow guidance in the supplied filing text. Management said cash, cash equivalents, available credit capacity and operating cash flows should meet anticipated working-capital and capital-expenditure needs for at least 12 months, while cautioning that operating losses are expected to continue for the foreseeable future.
- Management plans continued investment in sales and marketing, product development, and network infrastructure. It expects operating expenses to increase as it expands, while expecting gross-margin improvement over the long term from operating efficiencies.
- Usage-based revenue and a concentrated customer base are important risks: one customer generated 12% of Q3 revenue; two affiliated streaming-entertainment customers generated 14%. The top 10 customers represented 37% of trailing-12-month revenue.
- Fastly recorded a $4.3m Q3 impairment, primarily for excess computer and networking equipment and related software it does not expect to use. It also reported $4.8m of accrued sales-and-use-tax exposure; actual exposure could differ if jurisdictions challenge its assumptions.
- Remaining performance obligations were $247.6m at quarter-end, with approximately 82% expected to be recognized over the next 12 months. This excludes certain service contracts with original terms of one year or less.
- The remaining convertible-note principal was $477.4m, due March 2026. The notes were not convertible as of September 30, 2023 because conversion conditions had not been met. Cash repayment, conversion settlement, dilution, or refinancing needs remain relevant risks.
- Other material risks discussed include outages and service-level claims, cybersecurity incidents, competition and pricing pressure, customer usage reductions, component availability and network-capacity forecasting, international and data-transfer regulation, and macroeconomic uncertainty. Fastly said the Russia-Ukraine and Israel-Hamas conflicts were not then expected to materially affect results, but warned of potential indirect economic and cyber risks.
- Fastly reported compliance with credit-facility covenants and effective disclosure controls at September 30, 2023. It reported no legal proceedings expected to have a material effect and no significant loss-contingency accruals.
Important facts for investors to verify
- Whether revenue growth and improving gross margin persist, particularly as customer usage, pricing, bandwidth costs, and network investment change.
- Trends in DBNER, NRR, LTM NRR, enterprise-customer growth, and major-customer concentration; account for the 2023 change in customer-count methodology.
- Operating cash generation excluding non-cash items and debt-extinguishment gains, and the trajectory toward profitability.
- Liquidity and potential cash needs related to the $477.4m convertible notes due in 2026, including conversion terms and any future repurchases or refinancing.
- Whether sales-tax exposure, customer credit risk, purchase commitments, lease obligations, and other contingencies change materially.
- Execution and financial impact of planned spending, server-capacity decisions, and security or availability incidents.