Fastly, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 30, 2020. Financial statements are unaudited. Fastly provides an edge cloud platform for content delivery, security, and edge computing.
Financial results
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Revenue | $70.6 million | $49.8 million | +42% |
| Gross profit / margin | $41.3 million / 59% | $27.5 million / 55% | Margin +4 percentage points |
| Operating expenses | $64.8 million | $40.3 million | +61% |
| Operating loss | $23.5 million | $12.8 million | Loss widened |
| Net loss | $23.8 million | $12.2 million | Loss widened |
| Net loss per share | $0.22 | $0.13 | Loss per share increased |
For the first nine months of 2020, revenue was $208.2 million, up 47% year over year; gross margin was 59%, versus 56%; operating loss was $49.9 million, versus $32.5 million; and net loss was $50.2 million, versus $37.5 million. Results continued to reflect substantial investment and losses despite revenue growth and improved gross margin.
Cash, liquidity, and debt
- At September 30, cash and cash equivalents were $310.0 million and marketable securities were $92.3 million; restricted cash was $70.1 million. The filing reports $402.3 million of cash, cash equivalents, and marketable securities, excluding restricted cash.
- Nine-month operating cash flow was positive $11.2 million, compared with cash used of $28.2 million in 2019. The filing attributes cash generation in part to higher accrued expenses and other liabilities; it should not be read as evidence of profitability.
- Nine-month investing cash flow was negative $7.6 million and financing cash flow was positive $290.3 million, primarily reflecting $274.9 million of net follow-on offering proceeds.
- Debt and capital lease carrying amounts totaled approximately $32.1 million, including $20.3 million drawn under a cash-collateralized revolving facility. On November 4, 2020, Fastly notified the lender it would terminate the facility and repay the $20.3 million; the related $70.1 million of restricted cash was expected to be released upon termination and repayment.
Changes, operating indicators, and unusual items
- Customer count rose 22% to 2,047; enterprise customers rose 14% to 313. Trailing-12-month dollar-based net expansion rate increased to 147.4% from 134.8%; net retention rate was 121.5%, versus 122.0%.
- Gross margin improvement reflected platform optimization, with revenue from usage growing faster than associated cost of revenue. Cost of revenue nevertheless rose 31% in Q3, including higher bandwidth, colocation, depreciation, and personnel costs.
- General and administrative expense more than doubled year over year in Q3, including $7.2 million of acquisition-related costs. Total Q3 stock-based compensation was $12.1 million, versus $3.8 million a year earlier. Nine-month stock compensation included $4.8 million related to an employee RSU modification.
- Fastly said its largest Q3 customer, with strong China ties, materially reduced usage amid U.S. government actions and represented less than 10% of quarterly revenue. The customer accounted for 11% of revenue for the first nine months. The top ten customers generated 37% of trailing-12-month revenue, up from 29% a year earlier.
Outlook, risks, and contingencies
- The filing provides no specific financial guidance for future periods. Management said it expected delayed South Asia traffic to come onto the network and did not expect those delays to have a negative impact beyond December 31, 2020.
- Management expected cash and cash equivalents, credit facilities, and operating cash flows to cover anticipated working capital and capital expenditure needs for at least 12 months. This outlook predates the cash payment for the subsequent acquisition described below.
- Fastly completed its acquisition of Signal Sciences on October 1, 2020, after quarter-end, for $775 million: approximately $200 million cash and 6,367,709 Class A shares. The purchase accounting was incomplete at filing, and the filing does not provide final acquired asset, liability, or goodwill amounts. Fastly also established a $50 million RSU retention pool.
- COVID-19 contributed to customer uncertainty and delays in traffic ramping and network buildouts. Other key risks include usage volatility, customer concentration, competition, platform reliability and security, international privacy rules, and integration of Signal Sciences.
- Fastly disclosed a consolidated securities class action alleging misleading statements about its business and financials between May 6 and August 5, 2020, including alleged nondisclosure of a major customer’s identity. The cases were consolidated; the company said it could not estimate potential costs and had accrued no loss because a loss was not considered probable.
- Management concluded disclosure controls were ineffective at September 30 because of previously identified material weaknesses in financial reporting controls, including staffing, segregation of duties, IT access and change management, and close and reporting processes. Remediation was ongoing; management said the financial statements fairly presented the company’s results in all material respects.
- Fastly expected to cease qualifying as an emerging growth company on December 31, 2020. It anticipated that adoption of lease accounting would materially increase balance-sheet assets and liabilities, without a material impact on operations or cash flows.
Investor verification priorities
- Track usage, revenue contribution, and any further reduction from the large China-linked customer, along with concentration among the top ten customers.
- Assess whether gross-margin gains persist as network investment and bandwidth costs rise, and whether operating expenses—especially stock compensation and acquisition costs—moderate relative to revenue.
- Reconcile cash and liquidity after the Signal Sciences cash consideration, revolving-facility repayment, and release of restricted cash.
- Review subsequent filings for Signal Sciences purchase accounting, integration progress, and acquisition-related expenses and dilution.
- Monitor the securities litigation, material-weakness remediation, and the auditor’s future assessment of internal controls.