Fastly Earnings 2020-03-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________________________

FORM 10-Q

____________________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38897

____________________________

FASTLY, INC.

(Exact name of registrant as specified in its charter)

____________________________



Delaware		27-5411834
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

475 Brannan Street, Suite 300

San Francisco, CA 94107

(Address of principal executive offices) (Zip code)

(844) 432-7859

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address, or former fiscal year, if changed since last report)

____________________________

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $0.00002 par value	FSLY	The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 5, 2020, 72.7 million shares of the registrants’ Class A common stock were outstanding and 23.6 million shares of registrant's Class B common stock were outstanding.

TABLE OF CONTENTS



		Page
	Part I - Financial Information
Item 1.	Financial Statements (unaudited)	5
	Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019	5
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019	6
	Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019	7
	Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit) for the Three Months Ended March 31, 2020 and 2019	8
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019	9
	Notes to Condensed Consolidated Financial Statements	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45
Item 4.	Controls and Procedures	45
	Part II - Other Information	47
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78
Item 3.	Defaults Upon Senior Securities	78
Item 4.	Mine Safety Disclosures	79
Item 5.	Other Information	79
Item 6.	Exhibits	80
	Signatures	81

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial condition, business strategy, and plans and objectives of management for future operations, are forward-looking statements. In some cases, forward-looking statements may be identified by words such as "anticipate," "believe," "continue," "could," "design," "estimate," "expect," "intend," "may," "plan," "potentially," "predict," "project," "should," "will," or the negative of these terms or other similar expressions.

Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q, regarding, among other things:


•	our ability to attract and retain customers;


•	our ability to increase the usage of our platform by existing customers;


•	defects, interruptions, security breaches, delays in performance, or similar problems with our platform;


•	the potential impact of the COVID-19 pandemic on our business, operations, and the markets and communities in which we, our partners, and our customers operate;


•	our financial performance, including our revenue, cost of revenue, operating expenses, and our ability to attain and sustain profitability;


•	our ability to adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations, and changing customer needs, requirements, or preferences;


•	the growth of our relevant markets;


•	our platform’s functionality, scalability, performance, ease of use, reliability, and cost effectiveness relative to that of our competitors’ products and services;


•	our ability to compete effectively with existing competitors and new market entrants;


•	our ability to attract and retain qualified employees and key personnel;


•	our ability to maintain, protect, and enhance our intellectual property; and


•	our ability to comply with laws and regulations that currently apply or may become applicable to our business both in the United States and internationally.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

Other sections of this Quarterly Report on Form 10-Q may include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in, or implied by, any forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report or to conform these statements to actual results or to changes in our expectations. You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to this report with the understanding that our actual future results, levels of activity, performance, and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (www.investors.fastly.com), our filings with the Securities and Exchange Commission, webcasts, press releases, and conference calls. We use these mediums, including our website, to communicate with investors and the general public about our company, our products, and other issues. It is possible that the information that we make available on our website may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FASTLY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)



	As of March 31, 2020			As of December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	22,501		$	16,142
Marketable securities	94,084			114,967
Accounts receivable, net of allowance for doubtful accounts of $1,821 and $1,816 as of March 31, 2020 and December 31, 2019, respectively	43,017			37,136
Restricted cash	70,087			70,087
Prepaid expenses and other current assets	12,139			10,991
Total current assets	241,828			249,323
Property and equipment, net	69,069			60,037
Goodwill	348			372
Intangible assets, net	1,089			1,125
Other assets	11,512			10,112
Total assets	$	323,846		$	320,969
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,457		$	4,602
Accrued expenses	20,218			19,878
Current portion of long-term debt	5,291			4,472
Other current liabilities	5,430			8,169
Total current liabilities	40,396			37,121
Long-term debt, less current portion	26,043			25,158
Other long-term liabilities	1,357			1,038
Total liabilities	67,796			63,317
Commitments and contingencies (Note 9)
Stockholders’ equity:
Class A and Class B common stock	2			2
Additional paid-in capital	459,360			449,463
Accumulated other comprehensive income	687			196
Accumulated deficit	(203,999		)	(192,009		)
Total stockholders’ equity	256,050			257,652
Total liabilities and stockholders’ equity	$	323,846		$	320,969

The accompanying notes are an integral part of the condensed consolidated financial statements.

FASTLY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	Three months ended March 31,
	2020			2019
Revenue	$	62,924		$	45,556
Cost of revenue	27,265			19,718
Gross profit	35,659			25,838
Operating expenses:
Research and development	14,298			10,176
Sales and marketing	19,168			15,039
General and administrative	14,169			8,700
Total operating expenses	47,635			33,915
Loss from operations	(11,976		)	(8,077		)
Interest income	719			416
Interest expense	(316		)	(1,235		)
Other income (expense), net	402			(776		)
Loss before income taxes	(11,171		)	(9,672		)
Income taxes	819			55
Net loss	$	(11,990	)	$	(9,727	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.13	)	$	(0.38	)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted	95,401			25,290

The accompanying notes are an integral part of the condensed consolidated financial statements.

FASTLY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)



	Three months ended March 31,
	2020			2019
Net loss	$	(11,990	)	$	(9,727	)
Other comprehensive income:
Foreign currency translation adjustment	$	13		$	27
Income on investments in available-for-sale-securities	478			29
Total other comprehensive income	$	491		$	56
Comprehensive loss	$	(11,499	)	$	(9,671	)

The accompanying notes are an integral part of the condensed consolidated financial statements.

FASTLY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except share amounts)

(unaudited)



	Three months ended March 31, 2020
	Common Stock—Class A			Common Stock—Class B				Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount		Shares		Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders’ Equity
Balance as of December 31, 2019	60,954,694	$	1	33,863,021		$	1	$	449,463	$	196	$	(192,009	)	$	257,652
Exercise of stock options	1,106,688	—		—		—		3,174		—		—			3,174
Vesting of early exercised stock options	—	—		36,590		—		146		—		—			146
Stock-based compensation	—	—		—		—		6,577		—					6,577
Conversion of Class B to Class A Stock	9,727,897	—		(9,727,897	)	—		—		—		—			—
Net loss	—	—		—		—		—				(11,990		)	(11,990		)
Other comprehensive income	—	—		—		—		—		491		—			491
Balance as of March 31, 2020	71,789,279	$	1	24,171,714		$	1	$	459,360	$	687	$	(203,999	)	$	256,050



	Three months ended March 31, 2019
	Convertible Preferred Stock			Common Stock			Additional Paid-in Capital		Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Deficit
	Shares	Amount		Shares	Amount		Additional Paid-in Capital		Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Deficit
Balance at December 31, 2018	53,630,213	$	219,584	25,025,836	$	1	$	16,403	$	(2,109	)	$	(36	)	$	(146,186	)	$	(131,927	)
Impact of change in accounting policy	—	—		—	—		—		—			—			5,727			5,727
Exercise of stock options	—	—		449,751	—		639		—			—			—			639
Vesting of early exercised stock options	—	—		40,524	—		155		—			—			—			155
Stock-based compensation	—	—		—	—		1,467		—			—			—			1,467
Repayment of stockholder note	—	—		5,297	—		12		—			—			—			12
Net loss	—	—		—	—		—		—			—			(9,727		)	(9,727		)
Other comprehensive income	—	—		—	—		—		—			56			—			56
Balance as of March 31, 2019	53,630,213	$	219,584	25,521,408	$	1	$	18,676	$	(2,109	)	$	20		$	(150,186	)	$	(133,598	)

The accompanying notes are an integral part of the condensed consolidated financial statements.

FASTLY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Three months ended March 31,
	2020			2019
Cash flows from operating activities:
Net loss	$	(11,990	)	$	(9,727	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	4,715			3,738
Amortization of deferred rent	204			17
Amortization of debt issuance costs	19			159
Stock-based compensation	6,329			1,467
Provision for doubtful accounts	150			602
Change in fair value of preferred stock warrant liabilities	—			706
Other adjustments	(39		)	(224		)
Interest paid on capital leases	(119		)	(77		)
Loss on disposals of property and equipment	—			36
Changes in operating assets and liabilities:
Accounts receivable	(6,031		)	(4,586		)
Prepaid expenses and other current assets	(1,148		)	(931		)
Other assets	(1,400		)	(1,860		)
Accounts payable	3,112			1,686
Accrued expenses	(1,495		)	(507		)
Other liabilities	507			(582		)
Net cash used in operating activities	(7,186		)	(10,083		)
Cash flows from investing activities:
Purchases of marketable securities	—			(20,088		)
Sales of marketable securities	—			3,578
Maturities of marketable securities	21,400			17,700
Purchases of property and equipment	(10,221		)	(4,025		)
Capitalized internal-use software	(1,437		)	(759		)
Net cash provided by (used in) investing activities	9,742			(3,594		)
Cash flows from financing activities:
Repayments of notes payable	—			(2,488		)
Repayments of capital leases	(1,541		)	(336		)
Proceeds from employee stock purchase plan	2,133			—
Proceeds from exercise of vested stock options	3,174			639
Proceeds from early exercise of stock options	—			250
Proceeds from payment of stockholder note	—			12
Net cash provided by (used in) financing activities	3,766			(1,923		)
Effects of exchange rate changes on cash, cash equivalents, and restricted cash	37			(8		)
Net increase in cash, cash equivalents, and restricted cash	6,359			(15,608		)
Cash, cash equivalents, and restricted cash at beginning of period	86,229			36,963
Cash, cash equivalents, and restricted cash at end of period	$	92,588		$	21,355

The accompanying notes are an integral part of the condensed consolidated financial statements.

FASTLY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—Continued

(in thousands)

(unaudited)



	Three months ended March 31,
	2020		2019
Supplemental disclosure of cash flow information:
Cash paid for interest	$	155	$	1,446
Cash paid for income taxes, net of refunds received	$	814	$	2
Property and equipment additions not yet paid in cash	$	5,628	$	32
Vesting of early-exercised stock options	$	146	$	155
Capital lease outstanding from current year addition	$	3,226	$	4,082
Change in other assets from change in accounting principle	$	—	$	5,727
Stock-based compensation capitalized to internal-use software	$	248	$	—

Reconciliation of cash, cash equivalents, and restricted cash as shown in the statements of cash flows
Cash and cash equivalents	$	22,501	$	21,355
Restricted cash	70,087		—
Total cash, cash equivalents, and restricted cash	$	92,588	$	21,355

The accompanying notes are an integral part of the condensed consolidated financial statements.

1. Nature of Business

Fastly, Inc. has built an edge cloud platform that can process, serve, and secure its customer’s applications as close to their end users as possible. As of March 31, 2020, our edge network spans 72 Points-of-Presence ("POPs") across 55 markets around the world. We were incorporated in Delaware in 2011 and are headquartered in San Francisco, California.

As used herein, "Fastly," "we," "our," "the Company," and similar terms include Fastly, Inc. and its subsidiaries, unless the context indicates otherwise.

Stock Split

On May 3, 2019, we implemented a 1-for-2 reverse stock split of our stock. All shares of common stock, stock-based instruments, and per-share data included in these financial statements give effect to the stock split and the changes in authorized shares have been adjusted retroactively for all periods presented.

Initial Public Offering ("IPO")

On May 21, 2019 we completed an IPO in which we sold 12,937,500 shares of our newly authorized Class A common stock, which included 1,687,500 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at the public offering price of $16.00 per share. We received net proceeds of $192.5 million, after deducting underwriting discounts and commissions, from sales of our shares in the IPO. The net proceeds include additional proceeds of $25.1 million, net of underwriters' discounts and commissions, from the exercise of the underwriters' option to purchase an additional 1,687,500 shares of our Class A common stock. Prior to the closing of the IPO, all shares of common stock then outstanding were reclassified as Class B common stock. Immediately upon the closing of the IPO, all shares of convertible preferred stock then outstanding were converted into 53,630,213 shares of Class B common stock on a one-to-one basis.

2. Summary of Significant Accounting Policies

Basis of Presentation

The interim unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP") along with instructions to Form 10-Q and Article 10 of Securities and Exchange Commission ("SEC") Regulation S-X.

Certain changes in presentation have been made to conform the prior period presentation to the current period reporting. We have made certain presentation changes to distinguish and disclose as separate line items, the sales proceeds from marketable securities and the sales proceeds from our maturities of marketable securities in the Condensed Consolidated Statements of Cash Flows. We have also made certain presentation changes to distinguish and disclose as separate line items, the cash flows from purchases of property and equipment from the cash flows associated with capitalized internal-use software in the Condensed Consolidated Statements of Cash Flows.

Principles of Consolidation

The accompanying interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Unaudited Interim Financial Statements

The accompanying interim condensed consolidated balance sheet as of March 31, 2020, the related interim condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss, and the condensed consolidated statements of convertible preferred stock and stockholders' equity (deficit) for the three months ended March 31, 2020 and 2019, the condensed consolidated statements of cash flows for the three months ended March 31, 2020 and 2019, and the related footnote disclosures are unaudited. The unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. In management’s opinion, the unaudited financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include only normal recurring adjustments necessary for the fair presentation of our financial position as of March 31, 2020. The results for the three months ended March 31, 2020 are not necessarily indicative of the results expected for the full fiscal year or any other periods.

Use of Estimates

The preparation of our condensed consolidated financial statements requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. Actual results and outcomes could differ significantly from our estimates, judgments, and assumptions. Significant estimates, judgments, and assumptions used in these financial statements include, but are not limited to, those related to revenue, accounts receivable and related reserves, useful lives and realizability of long-lived assets, income tax reserves, and accounting for stock-based compensation. Estimates are periodically reviewed in light of changes in circumstances, facts, and experience. The effects of material revisions in estimates are reflected in the condensed consolidated financial statements in the period of change and prospectively from the date of the change in estimate.The ongoing global COVID-19 pandemic has impacted many operational aspects of our business and may continue to do so in the future. We assessed the impact that COVID-19 had on our results of operations, including, but not limited to an assessment of our allowance for doubtful accounts, the carrying value of short-term and long-term investments, the carrying value of goodwill and other long-lived assets, and the impact to revenue recognition and cost of revenues. While the COVID-19 pandemic has not had a material adverse impact on our financial operations to date, the future impacts of the pandemic and any resulting economic impact are largely unknown and rapidly evolving. We will continue to actively monitor the impact that COVID-19 has on the results of our business operations, and may make decisions required by federal, state or local authorities, or that are determined to be in the best interests of our employees, customers, partners, suppliers and stockholders. As a result our estimates and judgments may change materially as new events occur or additional information becomes available to us.

Concentrations of Credit Risk

Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash, cash equivalents, marketable securities, and accounts receivable. The primary focus of our investment strategy is to preserve capital and meet liquidity requirements. Our investment policy addresses the level of credit exposure by limiting the concentration in any one corporate issuer or sector and establishing a minimum allowable credit rating. To manage the risk exposure, we invest cash equivalents and marketable securities in a variety of fixed income securities, including government and investment-grade debt securities and money market funds. We place our cash primarily in checking and money market accounts with reputable financial institutions. Deposits held with these financial institutions may exceed the amount of insurance provided on such deposits, if any.

Concentrations of credit risk with respect to accounts receivable are primarily limited to certain customers to which we make substantial sales. Our customer base consists of a large number of geographically dispersed customers diversified across several industries. To reduce risk, we routinely assess the financial strength of our customers. Based on such assessments, we believe that our accounts receivable credit risk exposure is limited. One customer accounted for 10.5% of revenue for the three months ended March 31, 2020, and 14.6% of the total accounts receivable balance as of March 31, 2020. No customer accounted for more than 10% of revenue for the three months ended March 31, 2019, or more than 10% of the total accounts receivable balance as of December 31, 2019.

Significant Accounting Policies

There have been no material changes to our significant accounting policies as compared to those described in “Note 2 – Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

New Accounting Pronouncements to be Adopted

We are an emerging growth company as defined in Jumpstart Our Business Startups Act of 2012 ("JOBS Act"). For as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various public company reporting requirements, including delaying adoption of new or revised accounting standards until those standards apply to private companies. In the event that we no longer qualify as an emerging growth company, we will no longer be permitted to use these reporting exemptions.

In February 2016, the FASB issued new guidance, Accounting Standard Update No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. Accordingly, this new standard introduces a lessee model that brings most operating leases on the balance sheet and also aligns certain of the underlying principles of the new lessor model with those in the new revenue recognition standard. We are currently evaluating the appropriate transition method and impact of this guidance on our

condensed consolidated financial statements and related disclosures. We expect the the standard to be effective for our interim and annual periods beginning after December 15, 2020.

In June 2016, FASB issued new guidance, ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces a new methodology for accounting for credit losses on financial instruments, including available-for-sale debt securities. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. We are currently evaluating the impact of this guidance on our condensed consolidated financial statements and related disclosures. We expect the the standard to be effective for our interim and annual periods beginning after December 15, 2020.

In August 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (ASC 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement ("ASU 2018-15"). This guidance provides that implementation costs be evaluated for capitalization using the same criteria as that used for internal-use software development costs, with amortization expense being recorded in the same income statement expense line as the hosted service costs and over the expected term of the hosting arrangement. We are currently evaluating the impact of this guidance on our condensed consolidated financial statements and related disclosures. We expect the the standard to be effective for our interim and annual periods beginning after December 15, 2020.

On December 18, 2019, the FASB released ASU 2019-12 which affects general principles within Topic 740, Income Taxes. The amendments of ASU 2019-12 are meant to simplify and reduce the cost of accounting for income taxes. The FASB has stated that the ASU is being issued as part of its Simplification Initiative, which is meant to reduce complexity in accounting standards by improving certain areas of generally accepted accounting principles (GAAP) without compromising information provided to users of financial statements. We are currently evaluating the impact of this guidance on our condensed consolidated financial statements and related disclosures. We expect the the standard to be effective for our interim and annual periods beginning after December 15, 2020.

3. Revenue

Revenue recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which are distinct and accounted for as separate performance obligations. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic 606. Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using our estimate of the standalone selling price ("SSP") of each distinct good or service in the contract.

Judgment is required to determine the SSP for each distinct performance obligation. We analyze separate sales of our products and services as a basis for estimating the SSP of our products and services. We then use that SSP as the basis for allocating the transaction price when our product and services are sold together in a contract with multiple performance obligations. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information, such geographic region and distribution channel, in determining the SSP.

The transaction price in a contract is typically equal to the minimum commit price in the contract less any discounts provided. Because our typical contracts represent distinct services delivered over time with the same pattern of transfer to the customer, usage-based consideration primarily related to actual consumption over the minimum commit levels is allocated to the period to which it relates. The amount of consideration recognized for usage above the minimum commit price is limited to the amount we expect to be entitled to receive in exchange for providing services. We have elected to apply the practical

expedient for estimating and disclosing the variable consideration when variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation from our remaining performance obligations under these contracts.

Performance obligations represent stand-ready obligations that are satisfied over time as the customer simultaneously receives and consumes the benefits provided by us. These obligations can be content delivery, security, professional services, support, edge cloud platform services, and others. Accordingly, our revenue is recognized over time, consistent with the pattern of benefit provided to the customer over the term of the agreement.

At times, customers may request changes that either amend, replace, or cancel existing contracts. Judgment is required to determine whether the specific facts and circumstances within the contracts should be accounted for as a separate contract or as a modification.

Nature of products and services

We primarily derive revenue from the sale of services to customers executing contracts in which the standard contract term is one year, although terms may vary by contract. Most of our contracts are non-cancelable over the contractual term. These contracts commit the customer to a minimum monthly level of usage and specify the rate at which the customer must pay for actual usage above the monthly minimum.

Revenue by geography is based on the billing address of the customer. The following table presents our net revenue by geographic region:



	Three months ended March 31,
	2020		2019
	(in thousands)
United States	$	41,008	$	33,422
All other countries	21,916		12,134
Total revenue	$	62,924	$	45,556

The majority of our revenue is derived from enterprise customers, which are defined as customers with revenue in excess of $100,000 over the previous 12-month period. The following table presents our net revenue for enterprise and non-enterprise customers:



	Three months ended March 31,
	2020		2019
	(in thousands)
Enterprise customers	$	55,806	$	39,044
Non-enterprise customers	7,118		6,512
Total revenue	$	62,924	$	45,556

Contract balances

The timing of revenue recognition may differ from the timing of invoicing to customers. We have an unconditional right to consideration when we invoice our customers and record a receivable. We record a contract asset when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue is recognized subsequent to invoicing.

Deferred revenue includes amounts billed to customers for which revenue has not been recognized and consists of the unearned portions of edge cloud platform usage. Our payment terms and conditions vary by contract type, but our standard terms are that payments are due within 15 days from the date of invoice.

The following tables present our contract assets, contract liabilities, and certain information related to these balances as of and for the three months ended March 31, 2020, as of December 31, 2019, and for the three months ended March 31, 2019:



	As of March 31, 2020		As of December 31, 2019
	(in thousands)
Contract assets	$	305	$	271
Contract liabilities	$	852	$	317



	Three months ended March 31,
	2020		2019
	(in thousands)
Revenue recognized in the period from:
Amounts included in contract liability at the beginning of the period	$	178	$	936

Remaining performance obligations

As of March 31, 2020, we had $71.0 million of remaining performance obligations, which includes deferred revenue and amounts that will be invoiced and recognized in future periods. We apply the practical expedient of ASC 606, which gives us the optional exemption from disclosing certain information about our remaining performance obligations for our service contracts for which the original contract duration is one year or less, such as the aggregate transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period. The typical contract term is one year, although terms may vary by contract. We expect to recognize 88% of this balance over the next 12 months and the remainder within the following year.

Costs to obtain a contract

We capitalize incremental costs associated with obtaining customer contracts, specifically for sales commissions. These costs are deferred on our Condensed Consolidated Balance Sheets and amortized over the expected period of benefit on a straight-line basis. Based on the nature of our unique technology and services, the rate at which we continually enhance and update our technology, and our historical customer retention, the expected period of benefit is determined to be approximately five years. Amortization is recorded within the sales and marketing line item on the accompanying Condensed Consolidated Statements of Operations. The incremental costs associated with obtaining customer contracts, the majority of which are deferred commissions, are included in other assets on the accompanying Condensed Consolidated Balance Sheets.

As of March 31, 2020 and December 31, 2019, our costs to obtain contracts were as follows:



	As of March 31, 2020		As of December 31, 2019
	(in thousands)
Deferred commissions	$	7,944	$	6,804

During the three months ended March 31, 2020 and 2019, we recognized $0.7 million and $0.5 million of amortization related to deferred commissions. These costs are recorded within the sales and marketing line item on the accompanying Condensed Consolidated Statements of Operations.

4. Investments and Fair Value Measurements

Our total cash, cash equivalents and marketable securities consisted of the following:



	As of March 31,		As of December 31,
	2020		2019
	(in thousands)
Cash and cash equivalents:
Cash	$	8,503	$	11,623
Money market funds	13,998		2,020
Commercial paper	—		2,499
Total cash and cash equivalents	$	22,501	$	16,142
Marketable securities:
Corporate notes and bonds	$	9,024	$	17,470
Commercial paper	2,498		5,481
U.S. Treasury securities	68,713		78,160
Asset-backed securities	13,849		13,856
Total marketable securities	$	94,084	$	114,967

Available-for-Sale Investments

The following table summarizes adjusted cost, gross unrealized gains and losses, and fair value related to available-for-sale securities classified as marketable securities on the accompanying Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019:



	As of March 31, 2020
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
	(in thousands)
Corporate notes and bonds	$	9,051	$	—	$	(27	)	$	9,024
Commercial paper	2,498		—		—			2,498
U.S. Treasury securities	68,106		607		—			68,713
Asset-backed securities	13,854		—		(5		)	13,849
Total available-for-sale investments	$	93,509	$	607	$	(32	)	$	94,084

	As of December 31, 2019
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
	(in thousands)
Corporate notes and bonds	$	17,462	$	9	$	(1	)	$	17,470
Commercial paper	5,481		—		—			5,481
U.S. Treasury securities	78,075		85		—			78,160
Asset-backed securities	13,852		4		—			13,856
Total available-for-sale investments	$	114,870	$	98	$	(1	)	$	114,967

The majority of our securities classified as available-for-sale as of March 31, 2020 have contractual maturities of one year or less. Certain securities held and classified as available-for-sale as of March 31, 2020 have contractual maturities greater than one year; however, we do not intend to hold these securities to maturity. Consistent with our intentions to hold the securities for less than 12 months we classify all securities as short-term. As of December 31, 2019, all securities classified as available-for-sale had contractual maturities of one year or less. There were no securities in a continuous loss position for 12

months or longer as of March 31, 2020 and December 31, 2019. Investments are reviewed periodically to identify possible other-than-temporary impairments. No impairment loss has been recorded on the securities included in the tables above, as we believe that the decrease in fair value of these securities is temporary.

Fair Value of Financial Instruments

For certain of our financial instruments, including cash held in banks, accounts receivable, and accounts payable, the carrying amounts approximate fair value due to their short maturities, and are therefore excluded from the fair value tables below.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There is a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1—Observable inputs such as quoted prices in active markets for identical assets or liabilities;

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3—Unobservable inputs that are supported by little or no market activity, which require management judgment or estimation.

We measure our cash equivalents, marketable securities, and restricted cash at fair value. We classify our cash equivalents, marketable securities and restricted cash within Level 1 or Level 2 because we value these investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs. The fair value of our Level 1 financial assets is based on quoted market prices of the identical underlying security. The fair value of our Level 2 financial assets is based on inputs that are directly or indirectly observable in the market, including the readily available pricing sources for the identical underlying security that may not be actively traded.

Financial assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following types of instruments:



	As of March 31, 2020
	Level 1		Level 2		Level 3		Total
	(in thousands)
Cash equivalents:
Money market funds	$	13,998	$	—	$	—	$	13,998
Total cash equivalents	13,998		—		—		13,998
Marketable securities:
Corporate notes and bonds	—		9,024		—		9,024
Commercial paper	—		2,498		—		2,498
U.S. Treasury securities	—		68,713		—		68,713
Asset-backed securities	—		13,849		—		13,849
Total marketable securities	—		94,084		—		94,084
Restricted cash:
Money market funds	70,087		—		—		70,087
Total restricted cash	70,087		—		—		70,087
Total financial assets	$	84,085	$	94,084	$	—	$	178,169



	As of December 31, 2019
	Level 1		Level 2		Level 3		Total
	(in thousands)
Cash equivalents:
Money market funds	$	2,020	$	—	$	—	$	2,020
U.S. Treasury securities	—		2,499		—		2,499
Total cash equivalents	2,020		2,499		—		4,519
Marketable securities:
Corporate notes and bonds	—		17,470		—		17,470
Commercial paper	—		5,481		—		5,481
U.S. Treasury securities	—		78,160		—		78,160
Asset-backed securities	—		13,856		—		13,856
Total marketable securities	—		114,967		—		114,967
Restricted cash:
Money market funds	70,087		—		—		70,087
Total restricted cash	70,087		—		—		70,087
Total financial assets	$	72,107	$	117,466	$	—	$	189,573

There were no transfers of assets and liabilities measured at fair value between Level 1 and Level 2, or between Level 2 and Level 3, during the three months ended March 31, 2020 and 2019.

5. Balance Sheet Information

Property and equipment, net

Property and equipment, net consisted of the following:



	As of March 31,			As of December 31,
	2020			2019
	(in thousands)
Computer and networking equipment	$	101,593		$	89,830
Leasehold improvements	3,278			3,285
Furniture and fixtures	679			681
Office equipment	616			579
Internal-use software	15,586			13,901
Property and equipment, gross	$	121,752		$	108,276
Accumulated depreciation and amortization	(52,683		)	(48,239		)
Property and equipment, net	$	69,069		$	60,037

Depreciation and amortization expense on property and equipment for the three months ended March 31, 2020 and 2019 was approximately $4.7 million and $3.7 million, respectively. Included in these amounts was amortization expense for capitalized internal-use software costs of approximately $0.6 million and $0.8 million for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020 and December 31, 2019, the unamortized balance of capitalized internal-use software costs on our Condensed Consolidated Balance Sheets was approximately $9.6 million and $8.5 million, respectively.

Accrued expenses

Accrued expenses consisted of the following:



	As of March 31,		As of December 31,
	2020		2019
	(in thousands)
Accrued compensation and related benefits	$	9,666	$	8,734
Sales and use tax payable	4,500		3,938
Accrued colocation and bandwidth costs	2,519		3,237
Other accrued liabilities	3,533		3,969
Total accrued expenses	$	20,218	$	19,878

Other Current Liabilities

Other current liabilities consisted of the following:



	As of March 31,		As of December 31,
	2020		2019
	(in thousands)
Liability for early-exercised stock options (see Note 11)	$	385	$	467
Deferred revenue	852		317
Accrued computer and networking equipment	3,896		7,060
Other current liabilities	297		325
Total other current liabilities	$	5,430	$	8,169

Other Long-Term Liabilities

Other long-term liabilities consisted of the following:



	As of March 31,		As of December 31,
	2020		2019
	(in thousands)
Deferred rent	$	1,016	$	634
Other long-term liabilities	341		404
Total other long-term liabilities	$	1,357	$	1,038

6. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2020 are as follows:



	Three months ended March 31, 2020
	(in thousands)
Balance as of December 31, 2019	$	372
Foreign currency translation	(24		)
Balance as of March 31, 2020	$	348

Intangible assets are comprised of internet protocol address costs and domain name costs that are subject to amortization. We did not purchase additional internet protocol addresses and domain names during the three months ended March 31, 2020 and 2019.

As of March 31, 2020 and December 31, 2019, our intangible assets consisted of the following:

Price	21.63	EPS	-0
Shares	93	P/E	-73
MCap	2,017	P/FCF	-160
Net Debt	-26	EBIT	-24
TEV	1,991	TEV/EBIT	-83
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-03-31	Filed 2020-05-08
10-K	2019-12-31	Filed 2020-03-04
10-Q	2019-09-30	Filed 2019-11-08
10-Q	2019-06-30	Filed 2019-08-09
S-1	2019-04-19	Public Filing

8-K	2020-05-06	Earnings, Exhibits
8-K	2020-02-20	Earnings, Exhibits
8-K	2020-02-18	Leave Agreement, Officers, Exhibits
8-K	2019-11-07	Earnings, Exhibits
8-K	2019-08-08	Earnings, Exhibits
8-K	2019-08-05	Officers
8-K	2019-05-21	Amend Bylaw, Exhibits

EX-31.1	fsly-33120x10qexhibit311.htm
EX-31.2	fsly-33120x10qexhibit312.htm
EX-32.1	fsly-33120x10qexhibit321.htm
EX-32.2	fsly-33120x10qexhibit322.htm

FSLY 10Q Quarterly Report

Fastly Earnings 2020-03-31