Fastly, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Fastly operates an edge cloud platform; most revenue is usage-based. Financial statements are unaudited.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $102.5 million | $85.0 million | $204.9 million | $169.9 million |
| Gross profit | $46.1 million | $44.7 million | $94.5 million | $92.1 million |
| Gross margin | 45% | 53% | 46% | 54% |
| Operating loss | $(69.0) million | $(57.5) million | $(132.0) million | $(107.4) million |
| Net loss | $(16.4) million | $(58.3) million | $(80.7) million | $(109.0) million |
| Operating cash flow | Not separately presented quarterly | $(29.9) million | $(27.9) million |
- Q2 and first-half revenue each grew 21% year over year. Growth reflected adoption of the platform and products, including $9.3 million of revenue associated with Signal Sciences products.
- Cost of revenue rose 40% in Q2 and 42% in the first half, outpacing revenue growth. Fastly cited higher bandwidth, colocation, network, depreciation, and personnel costs. Gross margin fell eight percentage points in both comparisons.
- Operating expenses increased 13% in Q2 and 14% in the first half. Research and development and sales and marketing spending rose; general and administrative expense declined, principally due to lower stock-based compensation in that function.
- Net loss narrowed year over year, but Q2 results included a $54.4 million non-operating gain from repurchasing convertible notes below face value. Operating loss increased, so the net-loss comparison does not indicate improved operating profitability.
- Stock-based compensation expense was $35.0 million in Q2 and $75.0 million in the first half.
Liquidity, debt, and cash flows
- At June 30, cash and cash equivalents were $62.5 million; marketable securities were $704.9 million. Together with restricted cash, reported cash and investments totaled $767.4 million. Of the marketable securities, $285.0 million was classified as non-current.
- Operating cash use was $29.9 million in the first half, compared with $27.9 million a year earlier. Investing activities provided $101.6 million, largely reflecting securities maturities and sales exceeding purchases; financing activities used $175.7 million, mainly for the debt repurchase.
- Fastly repurchased $235.0 million principal amount of its 0% convertible notes for $176.4 million cash. Remaining principal was $713.8 million, with a $703.4 million carrying value; the notes mature in 2026. No borrowings were outstanding under the $100 million revolving credit facility, and Fastly reported compliance with its covenants.
- Management said available cash, investments, and borrowing capacity were expected to cover anticipated working-capital and capital-expenditure needs for at least 12 months. It also expects operating losses to continue for the foreseeable future.
Business metrics and material developments
- Fastly reported 2,894 customers and 471 enterprise customers, up from 2,581 and 408, respectively, a year earlier. Enterprise customers generated 88% of trailing-12-month revenue.
- Usage generated approximately 93% of revenue in both Q2 and the first half. The 10 largest customers accounted for 33% of trailing-12-month revenue; the five largest accounted for 24%.
- Retention indicators were mixed: trailing-12-month DBNER was 120.0% versus 126.2% a year earlier; LTM NRR was 117.3% versus 120.7%; June-end NRR was 127.5% versus 93.2%.
- Fastly acquired Glitch Inc. in May for $34.9 million in cash, including an $8.0 million holdback. The acquisition added $32.6 million of provisional goodwill and was not material to reported results.
- After quarter-end, Fastly announced Todd Nightingale as CEO, effective September 1, 2022, replacing Joshua Bixby.
Outlook, risks, and controls
- The filing provides no quantified financial guidance. Management expects continued investment in network capacity, property and equipment, research and development, and sales and marketing; it cautioned that these investments and higher network costs may pressure margins and near-term profitability.
- Key risks include usage volatility and reliance on major customers, competition and pricing pressure, platform outages and cybersecurity incidents, component availability and cost, privacy and cross-border data rules, and macroeconomic uncertainty including inflation and supply-chain disruption. Fastly noted that not all traffic from some large customers had returned to pre-June 2021 outage levels.
- Disclosure controls were deemed ineffective because of three continuing material weaknesses: finance and accounting resource sufficiency, accounting for internal-use software costs, and controls over the stock-plan administration system. Remediation efforts were ongoing; management said the weaknesses would not be considered remediated until controls operated effectively for a sufficient period and were tested.
- Fastly recorded an $8.4 million sales and use tax liability; actual exposure could differ if jurisdictions challenge its assumptions. The company reported no material pending legal proceeding or significant loss-contingency accrual as of June 30.
Investor verification priorities
- Assess operating trends separately from the one-time $54.4 million debt-extinguishment gain, particularly the widening operating loss and lower gross margin.
- Track bandwidth, colocation, depreciation, and capital investment against revenue growth to evaluate whether gross-margin pressure eases.
- Monitor usage and retention measures, major-customer traffic, and customer concentration for signs of stronger or weaker underlying demand.
- Review cash burn, remaining note principal and conversion terms, and capital commitments, including lease and purchase obligations.
- Follow progress in remediating the three material weaknesses and the CEO transition; verify any later disclosures on controls, guidance, or customer traffic.