8-K: Fastly Reports Record Non-GAAP Income and Adjusted EBITDA in Q3 2024

Fastly announced its Q3 2024 financial results, highlighting record non-GAAP income and adjusted EBITDA, driven by strong customer performance and restructuring efforts.

Summary

• Fastly's Q3 2024 results show a total revenue of $137.2 million, a 7% increase year-over-year.
• Network services revenue reached $107.4 million, growing 5% year-over-year, while security revenue was $26.2 million, a 12% increase year-over-year.
• Other revenue, including Compute and Observability solutions, grew significantly by 85% year-over-year to $3.6 million.
• The company reported a GAAP gross margin of 54.5%, up from 51.7% in Q3 2023, and a non-GAAP gross margin of 57.7%, up from 55.9% in the same period.
• Fastly achieved a GAAP net loss of $38.0 million, an improvement from the $54.3 million loss in Q3 2023, and a non-GAAP net income of $2.4 million, compared to a non-GAAP net loss of $8.0 million in the prior year.
• Adjusted EBITDA reached a record $13.3 million.
• The company's top ten customers accounted for 33% of revenue, down from 40% in Q3 2023, with revenue from these customers declining 11% year-over-year.
• Revenue from customers outside the top ten grew by 20% year-over-year.
• The last twelve-month net retention rate (LTM NRR) decreased to 105% from 110% in the previous quarter.
• Remaining performance obligations (RPO) increased to $235 million, up 6% from the previous quarter.
• Fastly's enterprise customer count decreased by 25 to 576, while total customer count increased by 343 to 3,638.
• For Q4 2024, Fastly projects total revenue between $136.0 million and $140.0 million, and a non-GAAP operating loss between $5.0 million and $1.0 million.
• Full year 2024 revenue is projected to be between $539.0 million and $543.0 million, with a non-GAAP operating loss between $28.0 million and $24.0 million.

Sentiment

Score: 7

Explanation: The sentiment is positive due to record non-GAAP income and adjusted EBITDA, along with revenue diversification. However, the decrease in enterprise customers and LTM NRR tempers the overall positive outlook.

Positives

• Fastly's non-GAAP net income turned positive at $2.4 million, a significant improvement from a loss of $8.0 million in the same quarter last year.
• Adjusted EBITDA reached a record high of $13.3 million.
• Revenue diversification is progressing well, with revenue outside the top ten customers growing by 20% year-over-year.
• The company's security revenue grew by 12% year-over-year, showing strength in this segment.
• Other revenue, including Compute and Observability solutions, grew by 85% year-over-year, indicating strong growth in newer product areas.
• GAAP gross margin improved to 54.5% from 51.7% in the same quarter last year.
• The company's GAAP net loss decreased to $38.0 million from $54.3 million in the same quarter last year.
• Product package deals more than doubled year-over-year, and new logo packages tripled, representing 43% of packages sold compared to 16% in the third quarter of 2023.
• New deal registrations grew 33% year-over-year in the third quarter, and year-to-date bookings grew 46% year-over-year.

Negatives

• The enterprise customer count decreased by 25 from the previous quarter to 576.
• The last twelve-month net retention rate (LTM NRR) decreased to 105% from 110% in the previous quarter.
• Revenue from the top ten customers declined by 11% year-over-year.

Risks

• The decrease in enterprise customer count could indicate challenges in retaining larger clients.
• The decline in LTM NRR suggests potential issues with customer churn or reduced spending by existing customers.
• The reliance on a smaller number of large customers could pose a risk if those customers reduce their spending or churn.
• The company faces risks related to attracting and retaining customers, maintaining platform performance, and adapting to evolving market demands.
• Fastly's limited operating history makes it difficult to evaluate its prospects and future operating results.
• The company is subject to risks related to competition and its ability to manage growth effectively.

Future Outlook

Fastly projects Q4 2024 total revenue between $136.0 million and $140.0 million, and a non-GAAP operating loss between $5.0 million and $1.0 million. Full year 2024 revenue is projected to be between $539.0 million and $543.0 million, with a non-GAAP operating loss between $28.0 million and $24.0 million.

Management Comments

• Todd Nightingale, CEO of Fastly, stated that the company delivered significant upside on revenue guidance in Q3 along with record non-GAAP net income and adjusted EBITDA.
• Nightingale also noted that the transformation initiatives are helping the company focus on the broader market, with revenue outside of the ten largest customers growing 20% year-over-year.
• He added that this diversification of the revenue base will drive more reliable, predictable long-term growth, enabling the company to invest in continued edge cloud innovation and go-to-market reach.

Industry Context

Fastly's results reflect a broader trend in the edge cloud and cybersecurity industries, where companies are focusing on diversifying their revenue streams and enhancing their security offerings. The increased focus on bot management and WAF solutions aligns with the growing need for robust security measures in the face of rising cyber threats.

Comparison to Industry Standards

• Fastly's revenue growth of 7% year-over-year is moderate compared to some high-growth cloud companies, but the 20% growth outside the top 10 customers is a positive sign.
• Companies like Cloudflare have shown higher revenue growth rates, but Fastly's focus on profitability and adjusted EBITDA is a different strategic approach.
• Akamai, a major competitor in the CDN space, has a larger market share but Fastly is focusing on innovation and product diversification.
• The decrease in LTM NRR to 105% is a concern as it is below the industry average for successful SaaS companies, which typically aim for 110% or higher.
• Fastly's adjusted EBITDA of $13.3 million is a positive sign of improved profitability, but it is still relatively low compared to more established players in the industry.

Stakeholder Impact

• Shareholders will likely react positively to the improved financial results, particularly the record non-GAAP income and adjusted EBITDA.
• Employees may feel more secure due to the company's improved financial performance and restructuring efforts.
• Customers will benefit from the enhanced product offerings and improved support.
• Suppliers and creditors may view the company as a more stable and reliable partner due to the improved financial health.

Next Steps

• Fastly will host an investor conference call on November 6, 2024, to discuss the results.
• The company will continue to focus on product innovation and go-to-market strategies.
• Fastly will work to improve customer retention and expand its customer base.

Key Dates

Keywords

edge cloud, CDN, security, WAF, bot management, revenue, EBITDA, non-GAAP, net income, customer retention, cybersecurity, network services