Fastly, Inc. — Q1 2021 Form 10-Q
Business context and period. Fastly provides an edge cloud platform for content delivery, security and edge computing. This unaudited report covers the three months ended March 31, 2021, compared with the same period in 2020. Results include Signal Sciences, acquired in October 2020; its products contributed $7.6 million of Q1 2021 revenue.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $84.9 million | $62.9 million |
| Gross profit / margin | $47.4 million / 56% | $35.7 million / 57% |
| Operating expenses | $97.3 million | $47.6 million |
| Operating loss | $50.0 million | $12.0 million |
| Net loss | $50.7 million | $12.0 million |
| Net loss per share, basic and diluted | $0.44 | $0.13 |
| Cash used in operating activities | $10.9 million | $7.2 million |
Revenue rose 35% year over year. Gross margin declined one percentage point, primarily reflecting network investment and amortization of acquired Signal Sciences intangibles. Operating expenses more than doubled, with higher personnel and stock-based compensation, marketing, and acquisition-related intangible amortization among the drivers. Stock-based compensation was $30.8 million, versus $6.3 million.
At March 31, 2021, cash, cash equivalents and marketable securities totaled $1.126 billion, with an additional $1.0 million of restricted cash. The company reported $948.8 million of cash and cash equivalents and $177.7 million of marketable securities. It had $930.3 million of convertible notes recorded as long-term debt, net of issuance costs; the notes’ principal amount was $948.8 million. The $100 million secured credit facility was undrawn. Management said available liquidity and expected operating cash flows would be sufficient for anticipated working-capital and capital-expenditure needs for at least 12 months, while noting operating losses are expected to continue.
Financing activities provided $932.3 million, principally from the March issuance of 0% convertible senior notes due 2026. Investing activities used $35.4 million; purchases of property and equipment and capitalized software were approximately $9.1 million. The company had an accumulated deficit of $338.9 million.
Material changes and operating metrics
- Revenue growth included acquired Signal Sciences revenue. Excluding Signal Sciences, Fastly’s customer count increased 20% to 2,207 and enterprise customers increased 13% to 336 year over year.
- U.S. revenue increased 53% to $62.7 million, while international revenue was nearly flat at $22.1 million, up 1%. U.S. revenue was 74% of the total, compared with 65% a year earlier.
- Excluding Signal Sciences, trailing-12-month DBNER improved to 139.3% from 133.0%, and LTM NRR rose to 133.2% from 129.3%. Point-in-time NRR fell to 107.1% from 129.6%.
- The ten largest customers represented 35% of trailing-12-month revenue, compared with 31% in the prior comparable period. Management said the largest customer from 2020 had significantly reduced platform usage in late 2020.
- Research and development, sales and marketing, and general and administrative expenses increased 103%, 82%, and 136%, respectively. Management expects continued investment in sales, marketing, product development and network infrastructure; it expects operating expenses to increase as the business expands.
Outlook, risks and unusual items
- The filing provides no specific quarterly or full-year revenue, earnings, or margin guidance. Management cautioned that Q1 results are not necessarily indicative of the full year and cited uncertainty in forecasting usage-based revenue.
- In January 2021, a platform interruption affected some customers and made certain customers eligible for service credits. Reliability, security, bandwidth capacity and third-party infrastructure remain material business risks.
- COVID-19 continued to create uncertainty, including possible changes in customer spending and usage, live-event traffic, data-center access, network deployment and operating productivity.
- A securities class action alleges misleading statements about Fastly’s business and financials during May–October 2020; related derivative cases were consolidated and stayed. Fastly had not accrued a loss because management did not consider a loss probable and could not estimate potential costs.
- Disclosure controls were deemed ineffective at March 31, 2021 due to a partially unremediated material weakness involving insufficient qualified accounting resources for complex transactions. Management reported remediation efforts were underway; it concluded the financial statements were fairly presented in all material respects.
- On May 5, 2021, Fastly announced CFO Adriel Lares would transition from the role as the company searches for a successor. The filing also describes potential severance and equity-vesting provisions.
- The convertible notes have an initial conversion price of approximately $102.80 per share and could represent about 9.2 million shares if converted, subject to terms and adjustments. Conversion conditions had not been met at quarter-end.
Important facts for investors to verify
- Whether revenue growth and customer expansion continue, particularly given the decline in point-in-time NRR, concentration in large customers and the prior usage reduction by a major customer.
- Whether operating-expense growth, stock-based compensation and infrastructure investment can be supported by revenue growth, and whether gross margins stabilize or improve.
- How much of reported growth and future performance is attributable to Signal Sciences, and whether its integration delivers the intended product and commercial benefits.
- Progress in remediating the material weakness and whether disclosure controls become effective.
- Developments in the securities and derivative litigation, the January service interruption, and any resulting credits or costs.
- The terms and potential dilution or cash-settlement implications of the convertible notes, and compliance with the secured credit facility’s financial covenants.