Fastly, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. Although the request refers to 2020 Q4, this filing is an annual report; the supplied text does not provide a complete standalone fourth-quarter income statement or cash-flow statement. Signal Sciences results are consolidated from its October 1, 2020 acquisition date.
Business context and financial performance
Fastly operates a usage-based edge cloud platform for content delivery, computing and security. It acquired web application and API security provider Signal Sciences during 2020 to expand its security offerings.
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $290.9 million | $200.5 million |
| Gross profit / margin | $170.9 million / 59% | $112.1 million / 56% |
| Operating loss | $107.2 million | $46.5 million |
| Net loss | $95.9 million | $51.6 million |
| Cash used in operating activities | $19.9 million | $31.3 million |
| Cash used in investing activities | $275.0 million | $87.7 million |
| Cash provided by financing activities | $272.7 million | $168.1 million |
- Revenue rose 45%; gross margin improved by 3 percentage points, which management attributed mainly to platform optimization and usage growth outpacing related costs. Signal Sciences purchase-accounting effects partly offset the improvement.
- Operating expenses increased 75% to $278.1 million, including $19.5 million of acquisition-related expenses in general and administrative costs and substantially higher stock-based compensation. Stock-based compensation totaled $64.4 million versus $12.1 million in 2019.
- Cash, cash equivalents and marketable securities totaled $214.6 million at year-end. Current assets were $261.3 million and current liabilities $94.1 million. Long-term debt was zero at year-end; finance lease liabilities totaled $25.7 million, and operating lease liabilities totaled $64.8 million.
- Investing cash outflow included $201.0 million for acquisitions, net of cash acquired, and $29.6 million for property and equipment. Financing cash inflow included $274.9 million net proceeds from a follow-on stock offering.
Business trends and material changes
- Fastly-only customer count increased 20% to 2,084; enterprise customers rose 13% to 324. Those enterprise customers generated 89% of trailing-12-month revenue, versus 87% in 2019.
- Excluding Signal Sciences, dollar-based net expansion rate increased to 142.9% from 135.5%; net retention rate fell to 114.5% from 143.7%; LTM net retention rate increased to 136.5% from 131.6%. These measures are not yet consolidated with Signal Sciences.
- The ten largest customers generated 38% of revenue, up from 29% in 2019. The largest customer significantly reduced usage in the second half of 2020, which negatively affected revenue; the filing cites the customer’s China-related business ties and government actions as a possible factor.
- International revenue increased 64% to $94.3 million and represented 32% of revenue, compared with 29% in 2019.
Outlook, risks and unusual items
- No numerical revenue, earnings or margin guidance is provided in the supplied filing text. Management expects continued investment in product development, sales and marketing, network capacity and international expansion; it expects operating losses to continue for the foreseeable future.
- The Signal Sciences acquisition had a stated aggregate purchase price of $759.4 million, approximately $223.0 million in cash and equity consideration. It contributed $6.7 million of revenue and $23.0 million of net loss from October 1 through year-end. Goodwill was $635.6 million at December 31. The filing also reports a $57.4 million post-earnings-announcement adjustment to goodwill and additional paid-in capital.
- COVID-19 affected customer spending uncertainty, live-event traffic, network build-outs and sales ramps; the duration and financial effects remained uncertain. Fastly also reported a January 2021 platform interruption affecting certain customers, for which some customers may receive service credits.
- Fastly and certain officers faced securities class-action litigation filed in 2020, and officers and directors faced shareholder derivative suits. The company had not accrued losses for these cases, stating that an adverse loss was not considered probable; potential costs could not be estimated.
- Management and the auditor identified a material weakness in financial reporting controls related to insufficient qualified accounting resources and complex-transaction accounting. Management concluded disclosure controls were ineffective; the auditor issued an adverse opinion on internal control over financial reporting, while giving an unqualified opinion on the financial statements.
- In February 2021, Fastly entered a $100 million senior secured credit facility. It includes a minimum adjusted quick-ratio covenant and a springing revenue-growth covenant under specified conditions. This was a subsequent event, not year-end debt.
Important facts for investors to verify
- How much of reported revenue growth came from organic Fastly usage versus Signal Sciences and other acquisition effects.
- Whether retention and expansion trends stabilize, and how results change when Fastly begins reporting consolidated customer metrics.
- The usage trajectory of the largest customers and the concentration of revenue among major accounts.
- Progress toward profitability and the effect of operating expenses, stock-based compensation and network investment on cash burn.
- Remediation of the material weakness, the accuracy of acquisition valuations and accounting, and any subsequent changes to the litigation or service-outage exposure.
- Liquidity and covenant headroom under the new credit facility, alongside lease and other contractual commitments.