FASTLY, INC. You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current plans, expectations, and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" and in other parts of this Quarterly Report on Form 10-Q. Our fiscal year ends onDecember 31 . As used herein, "Fastly," "we," "our," "the Company" and similar terms includeFastly, Inc. and its subsidiaries, unless the context indicates otherwise.
Overview
Developers are reinventing the way we live, work, and play online. Yet they
repeatedly encounter innovation barriers when delivering modern digital
experiences. Expectations for digital experiences are at an all-time high; they
must be fast, secure, and highly personalized. If they aren't reliable,
end-users simply take their business elsewhere. The challenge today is enabling
developers to deliver a modern digital experience while simultaneously providing
scale, security, and performance. We built our edge cloud platform to solve this
problem.
The edge cloud is an emerging category of Infrastructure as a Service ("IaaS")
that enables developers to build, secure, and deliver digital experiences, at
the edge of the internet. This service represents the convergence of the Content
Delivery Network ("CDN") with functionality that has been traditionally
delivered by hardware-centric appliances such as Application Delivery
Controllers ("ADC"), Web Application Firewalls ("WAF"), Bot Detection, and
Distributed Denial of Service ("DDoS") solutions. It also includes the emergence
of a new, but growing, edge computing market which aims to move compute power
and logic as close to the end-user as possible. The edge cloud uses the emerging
cloud computing, serverless paradigm in which the cloud provider runs the server
and dynamically manages the allocation of machine resources. When milliseconds
matter, processing at the edge is an ideal way to handle highly dynamic and
time-sensitive data. The edge cloud complements data center, central cloud, and
hybrid solutions.
Our mission is to fuel the next modern digital experience by providing
developers with a programmable and reliable edge cloud platform that they adopt
as their own.
Organizations must keep up with complex and ever-evolving end-user requirements.
We help them surpass their end-users' expectations by powering fast, secure, and
scalable digital experiences. We built a powerful edge cloud platform, designed
from the ground up to be programmable and support agile software development. We
believe our platform gives our customers a significant competitive advantage,
whether they were born into the digital age or are just embarking on their
digital transformation journey. Our platform consists of four key components: a
programmable edge, a software-defined modern network, safety in depth, and a
philosophy of customer empowerment. Our programmable edge provides developers
with real-time visibility and control, where they can write and deploy code in a
serverless environment and to push application logic to the edge. It supports
modern application delivery processes, freeing developers to innovate without
constraints. Our software-defined modern network is built for the
software-defined future. It is powerful, efficient, and flexible, designed to
enable us to rapidly scale to meet the needs of the most demanding customers and
never be a barrier to their growth. Our 130 terabit software-centric network is
located across 58 markets as of March 31, 2021 . We define markets as unique
metropolitan areas where we have one or more Points of Presence ("POPs"). Our
safety in depth approach integrates security into multiple layers of
development: architecture, engineering, and operations. That's why we invest in
building security into the fabric of our platform, alongside performance. We
provide developers and security operations teams with a fast, safe environment
to create, build, and run modern applications.
Our platform provides developers and security operations teams with solutions
that foster innovation without impacting performance. Finally, being developers
ourselves, we empower customers to build great things while supporting their
efforts through frictionless tools and a deeply technical support team that
facilitates ongoing collaboration.
We serve both established enterprises, mid-market companies and technology-savvy
organizations. Our customers represent a diverse set of organizations across
many industries with one thing in common: they are competing by using the power
of software to build differentiation at the edge. With our edge cloud platform,
our customers are disrupting existing industries and creating new ones. For
example, several of our customers have reinvented digital publishing by
connecting readers through subscription models to indispensable content, helping
people understand the world through deeply reported
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independent journalism. Our customers' software applications use our edge cloud
platform to deliver consistently excellent experiences, such as online shopping,
fast and more secure financial transactions, and broadcast quality live
streaming on any device. The range of applications that developers build with
our edge cloud platform continues to expand rapidly.
So where do we go from here? Our vision is to create a trustworthy internet,
where good thrives. We want all developers to have the ability to deliver the
next transformative digital experience on a global scale. And because big ideas
often start small, we love it when developers experiment and iterate on our edge
cloud platform, coming up with exciting new ways to solve today's complex
problems.
We generate substantially all of our revenue from charging our customers based
on their usage of our platform. Initially, customers typically choose to become
platform customers, for which we charge fees based on their committed or actual
use of our platform, as measured in gigabytes and requests. Many of our
customers generate billings in excess of their minimum commitment. We also
generate revenue from additional products as well as professional and other
services, such as implementation. We charge a flat one-time or recurring fee for
these additional products and services. In the fourth quarter of 2020, we also
began offering subscriptions to access a unified security web application and
application programming interface at a fixed rate.
We focus our direct selling efforts on medium to large organizations as well as
smaller companies that are exhibiting significant growth. We engage with and
support these customers with our field sales representatives, account managers,
and technical account managers who focus on customer satisfaction and drive
expansion of their usage of our platform and products. These teams work with
technical and business leaders to help our customers' end-users receive the best
possible digital experience, while also lowering our customers' total cost of
ownership.
We are continuing to bring new innovations to our edge cloud platform and
software-defined modern network architecture, and are seeing an increased
interest from customers in our programmable edge computing solution. The success
of these direct selling efforts is reflected by our 336 enterprise customers,
which excludes Signal Sciences enterprise customers, as of March 31, 2021 that
generated 90% of our total revenue for the trailing 12 months ended March 31,
2021 .
Our usage-based revenue grows as our customers' websites and applications
deliver, process, and protect more traffic, as they adopt more features of our
edge platform and as they more broadly adopt our platform across their
organizations. A meaningful indicator of the increased activity from our
existing customers is our Dollar-Based Net Expansion Rate ("DBNER"), Net
Retention Rate ("NRR") and Last-Twelve Months Net Retention Rate ("LTM NRR"),
metrics used in measuring the revenue growth from existing customers attributed
to increased usage of our platform and purchase of additional services.
The financial results of Signal Sciences have been consolidated into our
financial results for the three months ended March 31, 2021 . We have excluded
Signal Sciences from certain key metrics this quarter, including DBNER, NRR and
LTM NRR. We intend to begin reporting these key metrics on a consolidated basis
later on in 2021. Excluding Signal Sciences, our DBNER was 139.3% and 133.0% for
the trailing 12 months ended March 31, 2021 and 2020, respectively. Excluding
Signal Sciences, our NRR was 107.1% and 129.6% for the trailing twelve months
ended March 31, 2021 and 2020, respectively. Excluding Signal Sciences, our LTM
NRR was 133.2% and 129.3% for the trailing 12 months ended March 31, 2021 and
2020, respectively. We believe the LTM NRR is supplemental as it removes some of
the volatility inherent in a usage-based business model from the measurement of
the NRR metric.
Customers that have negotiated contracts with us generate a substantial majority
of our revenue. These customers typically purchase one or more products, for
which we charge a monthly recurring or one-time fee depending on the products
selected. Some of these customers also choose to purchase various levels of
account management and enhanced customer support for a monthly fee. Typically,
the term of these contracts is 12 months and includes a minimum monthly billing
commitment in exchange for more favorable pricing terms. Many of these customers
generate billings in excess of their minimum commitment. In addition, customers
can sign up online by providing their credit card information and agreeing to a
minimum monthly fee. Beginning in the fourth quarter of 2020, we also offer
subscriptions to access a unified security web application and application
programming interface at a fixed rate.
The timing of new revenue from our sales efforts is difficult to predict. The
length of our sales cycle, from initial evaluation to payment, can range from
several months to well over a year and can vary substantially from customer to
customer. Similarly, the onboarding and ramping process with new enterprise
customers can take several months, as well as existing enterprise customers with
new business, can take several months and can be subject to delays for
unanticipated reasons.
We have achieved significant growth in recent periods. For the three months
ended March 31, 2021 and 2020, our revenue was $84.9 million and $62.9 million ,
respectively, an increase of 35%. Our 10 largest customers generated an
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aggregate of 35% and 31% of our revenue in the trailing 12 months ended
Recent Events Senior Secured Credit Facilities Agreement OnFebruary 16, 2021 , we entered into a Senior Secured Credit Facilities Agreement ("Credit Agreement") withSilicon Valley Bank for an aggregate commitment amount of$100.0 million .
Convertible Senior Notes
InMarch 2021 , we issued approximately$948.8 million aggregate principal amount of 0% convertible senior unsecured notes due in 2026 (the "Notes") in a private placement to qualified institutional buyers pursuant to Rule144A under the Securities Act.
Please refer to Note 9 - Debt Instruments for details on our Senior Secured Credit Facilities Agreement and our Convertible Senior Notes.
Factors Affecting Our Performance Winning New Customers We are focused on continuing to attract new customers. Our customer base includes both large, established enterprises that are undergoing digital transformation and emerging companies spanning a wide array of industries and verticals. In both instances, developers within these companies often use and advocate the adoption of our platform by their companies. We also benefit from word-of-mouth promotion across the broader developer community. We will continue to invest in our developer outreach, leveraging it as a cost-efficient approach to attracting new customers. With our newly expanded security portfolio from the acquisition of Signal Sciences and our edge computing capabilities we will increase our focus on brand awareness, public relations and analyst relations in efforts to help generate awareness and demand for these offerings. We also plan to dedicate significant resources to sales and marketing programs, including various online marketing activities as well as targeted account-based advertising. This will require us to dedicate significant resources to further develop the market for our platform and differentiate our platform from competitive products and services. We will also need to expand, retain, and motivate our sales and marketing personnel in order to target our sales efforts at larger enterprises and senior management of these potential customers. Uncertainty surrounding the EU-US Privacy Shield framework, which was invalidated by theCourt of Justice of the EU inJuly 2020 , could impact customer growth and acquisition for customers and potential customers conducting business inEurope . We have encountered and may continue to encounter heightened concerns relating to privacy from customers and potential customers conducting business inEurope since the invalidation of the EU-US Privacy Shield framework. Specifically, we have received more requests relating to EU privacy requirements, impacting the sales negotiation process, and had potential customers decline to do business with us due to privacy concerns related to updated interpretations of the laws applicable to transfers of personal data tothe United States . For additional details, refer to the section titled "Risk Factors." Expanding within our Existing Customer Base We emphasize retaining our customers and expanding their usage of our platform and adoption of our other products. Customers often begin with smaller deployments of our programmable edge platform and then expand their usage over time. In addition, our programmable edge platform includes a variety of other offerings, such as load balancing, shielding, web security, and WAF. As our customers mature, we assist them in expanding their use of our platform, including the use of additional offerings beyond edge cloud delivery. As enterprises grow and experience increased traffic, their needs evolve, leading them to find additional use cases for our platform and expand their usage accordingly. In addition, given that customer acquisition costs are incurred largely for acquiring and initial onboarding, we gain operating leverage to the extent that existing customers expand their use of our platform and products. 40 -------------------------------------------------------------------------------- Our ability to retain our customers and expand their usage could be impaired for a variety of reasons, including a customer moving to another provider or reducing usage within the term of their contract to their minimum usage commitment. Even if our customers expand their usage of our platform, we cannot guarantee that they will maintain those usage levels for any meaningful period of time or that they will renew their commitments. In addition, we cannot be certain what actions theU.S. or another country's government may take with respect to certain of our customers that may adversely affect our ability to do business with our customers that operate in other countries, target those countries as a market or that have strong business ties to such countries. For example, our largest customer during the year endedDecember 31, 2020 has strong business ties toChina and significantly reduced its usage of our platform in the later part of 2020. We believe this was in response to various actions taken by theU.S. and other governments against them. Further reductions in this, or other, customer's traffic levels could have an additional negative impact on our business. For additional details, refer to the section titled "Risk Factors." International Customer Growth We intend to continue expanding our efforts to attract customers outside ofthe United States by augmenting our sales teams and strategically increasing our presence in the number of markets in select international locations. Excluding Signal Sciences, as ofMarch 31, 2021 and 2020, we had 1,208 and 931 customers that were headquartered outside ofthe United States , respectively, representing 53% and 51% of our total customers as ofMarch 31, 2021 and 2020, respectively. Our international expansion, including our global sales efforts, will add increased complexity and cost to our business. This will require us to significantly expand our sales and marketing capabilities outside ofthe United States , as well as increase the number of markets we have a presence in around the world to support our customers. We have limited experience managing the administrative aspects of a global organization, and we have only recently begun to establish and operate offices in foreign countries, which could place a strain on our business and culture. Investing in Sales and Marketing Our customers have been pivotal in driving brand awareness and broadening our reach. While we continue to leverage our self-service approach to drive adoption by developers, we intend to continue to expand our sales and marketing efforts, with an increased focus on sales to enterprises globally. Utilizing our direct sales force, we have multiple selling points within organizations to acquire new customers and increase usage from our existing customers. We intend to increase our discretionary marketing spend, including account based and brand spend, to drive the effectiveness of our sales teams. As a result, we expect our total operating expenses to increase as we continue to expand. Our investments in our sales and marketing teams are intended to help accelerate our sales, onboarding, and ramp cycles. These efforts will require us to invest significantly in financial and other resources. Furthermore, we believe that there is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training, and retaining sufficient numbers of sales personnel to support our growth.Continued Investment in Our Platform and Network Infrastructure We must continue to invest in our platform and network infrastructure to maintain our position in the market. We expect our revenue growth to be dependent on an expanding customer base and continued adoption of our edge cloud platform. In anticipation of winning new customers and staying ahead of our customers' needs, we plan to continue to invest in order to expand the scale and capacity of our software-defined modern network, resulting in increased network service provider fees, which could adversely affect our gross margins if we are unable to offset these costs with revenue from new customers and increase revenue from existing customers. Our customers require constant innovation within their own organizations and expect the same from us. Therefore, we will continue to invest in resources to enhance our development capabilities and introduce new products and features on our platform. We believe that investment in research and development will contribute to our long-term growth but may also negatively impact our short-term profitability. For the three months endedMarch 31, 2021 and 2020, our research and development expenses as a percentage of revenue was 34% and 23%, respectively. We may also seek to acquire or invest in businesses, products, or technologies that we believe could complement or expand our platform, enhance our technical capabilities, or otherwise offer growth opportunities. For example, onOctober 1, 2020 , we acquired Signal Sciences, a security software company that provides protection from web, API, and mobile security threats. 41 -------------------------------------------------------------------------------- Developers use our platform to build custom applications and require a state-of-the-art infrastructure to test and run these applications. We will continue to invest in our network infrastructure by strategically increasing our POPs. We also anticipate making investments in upgrading our technology and hardware to continue providing our customers a fast and secure platform. Our total investment in property and equipment for the three months endedMarch 31, 2021 was$9.1 million representing 11% of our revenue in the period. We expect our investment in property and equipment to increase on an absolute basis and may increase as a percentage of revenue in future periods. Our gross margins and operating results are impacted by these investments. As ofMarch 31, 2021 , our network is located in 58 markets across 26 countries. In the event that there are errors in software, failures of hardware, damages to a facility or misconfigurations of any of our services-whether caused by our products, third-party error, our own error, natural disasters, or security breaches-we could experience lengthy interruptions in our platform as well as delays and additional expenses in arranging new facilities and services. In addition, there can be no assurance that we are adequately prepared for unexpected increases in bandwidth demands by our customers, particularly when customers experience cyber-attacks. The bandwidth we have contracted to purchase may become unavailable for a variety of reasons, including service outages, payment disputes, network providers going out of business, natural disasters, networks imposing traffic limits, or governments adopting regulations that impact network operations. Uncertainty of the Coronavirus (COVID-19) Pandemic The ongoing global COVID-19 pandemic has adversely impacted, and may continue to adversely impact, many aspects of our business. As certain of our customers or potential customers experience downturns or uncertainty in their own business operations and revenue resulting from the spread of COVID-19, they have and may continue to decrease or delay their technology spending, request pricing concessions or payment extensions, or seek renegotiation of their contracts. In addition, a portion of our revenue is related to usage of our platform in connection with live events, such as sporting events, that have continued to be impacted. Usage of our platform fluctuated following the implementation of preventative measures to contain or mitigate the outbreak of COVID-19, and we cannot predict how usage levels will continue to be impacted by these preventative measures. There is no assurance that customers will continue to use our platform, or to the same extent, as the COVID-19 pandemic begins to taper off or when it has ended. As a result, it has been difficult to accurately forecast our revenues or financial results, especially given that the near and long term impacts of the pandemic remains uncertain. Our results of operations could be materially above or below our forecasts, which could adversely affect our results of operations, disappoint analysts and investors, and/or cause our stock price to decline. In response to the COVID-19 pandemic, many state, local, and foreign governments have put in place restrictions in order to control the spread of the disease. Such restrictions, or the perception that further restrictions could occur, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions, and cancellation or postponement of events, among other effects that impacted productivity and disrupted our operations and those of our partners and customers. For example, we experienced delays in the ramping of new traffic due to travel and data center restrictions inSouth Asia that delayed network build outs and the timing of customer code freezes, each affected in part due to COVID-19-related issues. InMarch 2020 , we closed all of our offices, suspended non-essential travel, cancelled or postponed Fastly-sponsored in-person events, and we are not permitting in-person employee attendance at industry events or work-related meetings. We have instead shifted to hosting virtual events, including Altitude, our signature Fastly event. We may take further actions that alter our operations as may be required by federal, state, or local authorities, or which we determine are in our best interests. While much of our operations can be performed remotely, certain activities such as expanding and maintaining our network of POPs around the world often require personnel to be on-site, and our ability to carry out these activities have been, and may continue to be negatively impacted if our employees or local data center personnel are not able to travel. In addition, travel restrictions have affected our ability to conduct audits of our data centers and facilities, requiring us to use alternative procedures to the standard on-site visit. Any inability to complete these audits could affect our compliance certifications and cause customers to reduce or cease using our services. In addition, for activities that may be conducted remotely, there is no guarantee that we will be as effective while working remotely because our team is dispersed and many employees and their families have been negatively affected, mentally or physically, by the COVID-19 pandemic. Decreased effectiveness and availability of our team could adversely affect our results due to slow-downs in our sales cycles and our customer ramping and onboarding process, delays in recruiting and onboarding efforts, delays in our entry into customer contracts, delays in addressing performance issues, delays in product development, delays and inefficiencies among various operational aspects of our business, including our financial organization, or other decreases in productivity that could seriously harm our business. Moreover, our finance organization's ability to ensure that we comply with the requirements of Section 404 may be impaired in the future, including the ability of our registered public accounting firm to issue an attestation report on management's assessment of our internal control over financial reporting. Furthermore, we may decide to postpone or cancel planned investments in our business in response to changes in our business as a result of the spread of COVID-19, which may impact our ability to attract and retain customers and our rate of innovation, either of which could harm our business. 42 -------------------------------------------------------------------------------- In addition, while the potential impact and duration of the COVID-19 pandemic on the global economy and our business in particular may be difficult to assess or predict, the pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, and may reduce our ability to access additional capital, which could negatively affect our liquidity in the future. We do not yet know the full extent of potential delays or impacts on our business, operations, or the global economy as a whole. While the spread of COVID-19 may eventually be contained or mitigated, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur, or that the global economy will recover, either of which could harm our business.
For additional details, refer to the section titled "Risk Factors."
Key Business Metrics
We regularly review a number of metrics, including the key metrics presented in
the table below, to evaluate our business, measure our performance, identify
trends affecting our business, prepare financial projections, and make strategic
decisions. The calculation of the key metrics and other measures discussed below
may differ from other similarly titled metrics used by other companies,
securities analysts, or investors.
2021 2020
Number of customers (as of end of period) (excludes Signal Sciences)
2,207 1,837
Number of enterprise customers (as of end of period) (excludes Signal Sciences)
336 297
Number of customers (as of end of period) (Signal Sciences) 293 -
Number of enterprise customers (as of end of period) (Signal Sciences)
86 -
Dollar-Based Net Expansion Rate ("DBNER") (trailing 12 months) (excludes Signal Sciences)
139.3 % 133.0 %
NRR (as of end of period) (excludes Signal Sciences) 107.1 % 129.6 %
LTM NRR (trailing 12 months) (excludes Signal Sciences) 133.2 % 129.3 %
Number of Customers
We believe that the number of customers is an important indicator of the
adoption of our platform. Our definition of a customer consists of identifiable
operating entities with which we have a billing relationship in good standing,
from which we recognized revenue during the period, and are active as of the end
of the period. In addition to our paying customers, we also have trial,
developer, nonprofit and open source program, and other non-paying accounts that
are excluded from our customer count metric. Excluding Signal Sciences, as of
March 31, 2021 and 2020, we had 2,207 and 1,837 customers, respectively. As of
March 31, 2021 , Signal Sciences had 293 total customers, some of which overlap
with existing Fastly customers.
Number of Enterprise Customers
Historically our revenue has been driven primarily by a subset of customers who
have leveraged our platform substantially from a usage standpoint. These
enterprise customers are defined as customers with revenue in excess of $100,000
over the previous 12-month period. Excluding Signal Sciences, as of March 31,
2021 , we had 336 enterprise customers which generated 90% of our revenue for the
trailing 12 months ended March 31, 2021 . As of March 31, 2020 , we had 297
enterprise customers which generated 88% of our revenue for the trailing 12
months ended March 31, 2020 . We believe the recruitment and cultivation of
enterprise customers is critical to our long-term success. As of March 31, 2021 ,
Signal Sciences had 86 enterprise customers, some of which overlap with existing
Fastly enterprise customers. Signal Sciences enterprise customers are defined as
customers that spend $100,000 or more on an annualized basis, in other words,
spending $8,333.34 or more per month as of March 31, 2021 .
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Dollar Based Net Expansion Rate ("DBNER") (Excludes Signal Sciences)
Our ability to generate and increase our revenue is dependent upon our ability
to increase the number of new customers and usage of our platform and increase
the purchase of additional products by our existing customers. We track our
growth, in part, by measuring our DBNER. Our DBNER increases when customers
increase their usage of our platform or purchase additional products, and
declines when they reduce their usage, benefit from lower pricing on their
existing usage, or curtail their purchases of additional products. We believe
DBNER is a key metric in measuring the long-term value of our customer
relationships and our ability to grow our revenue through increased usage of our
platform and purchase of additional products by our existing customers. However,
our calculation of DBNER indicates only expansion among continuing customers and
does not indicate any decrease in revenue attributable to former customers,
which may differ from similar metrics of other companies.
We calculate DBNER by dividing the revenue for a given period from customers who
remained customers as of the last day of the given period ("current period") by
the revenue from the same customers for the same period measured one year prior
("base period"). The revenue included in the current period excludes revenue
from (i) customers that churned after the end of the base period and (ii) new
customers that entered into a customer agreement after the end of the base
period. For example, to calculate our DBNER for the trailing 12 months ended
March 31, 2021 , we divide (i) revenue, for the trailing 12 months ended
March 31, 2021 , from customers that entered into a customer agreement on or
before March 31, 2020 , and that remained customers as of March 31, 2021 , by
(ii) revenue, for the trailing 12 months ended March 31, 2020 , from the same set
of customers.
For the trailing 12 months ended March 31, 2021 and 2020 our DBNER was 139.3%
and 133.0%, respectively. We believe that an annual cohort analysis of our
customers demonstrates our success in customer expansion. Once a customer begins
to generate revenue for us, they tend to increase their usage of our platform,
in particular in their second year. Customer accounts acquired in 2018, 2019,
and 2020 are referred to as the 2018 Cohort, 2019 Cohort, and 2020 Cohort
respectively. As described above, our customers tend to increase their usage of
our platform in their second year, which is typically followed by more modest
increases in usage, if any, in ensuing years. For example, the DBNER for the
2018 Cohort was 310.6% for the year ended December 31, 2019 . However, the DBNER
for the 2018 Cohort was 163.2% for the year ended December 31, 2020 , which
generally represents their third year as a customer, depending on when they
entered into a customer agreement. While DBNER may fluctuate from quarter to
quarter based on, among other things, the timing associated with new customer
accounts, we expect our DBNER to decrease as customers that have used our
platform for more than two years become a larger portion of both our overall
customer base and the revenue that we use to calculate DBNER.
Net Retention Rate ("NRR") and Last-Twelve Months Net Retention Rate ("LTM NRR")
(Excludes Signal Sciences)
Our ability to generate and increase our revenue is also dependent upon our
ability to retain our existing customers. In addition to measuring expansion
using DBNER, NRR and LTM NRR also allow us to track customer retention which
demonstrates the stickiness of our edge cloud platform.
Our NRR measures the net change in monthly revenue from existing customers in
the last month of the period (the "current" period month) compared to the last
month of the same period one year prior (the "prior" period month), and includes
revenue contraction due to billing decreases or customer churn, revenue
expansion due to billing increases, but excludes revenue from new customers. We
believe the LTM NRR is supplemental as it removes some of the volatility
inherent in a usage-based business model from the measurement of the NRR metric.
We calculate Net Retention Rate by dividing the revenue from the current period
month by the revenue in the prior period month. For the last month of the
quarters ended March 31, 2021 and 2020 our NRR was 107.1% and 129.6%,
respectively.
Our LTM NRR is intended to be supplemental to our NRR as we believe that it
removes some of the volatility that is inherent in a usage-based business model.
We calculate LTM NRR by dividing the total customer revenue for the prior
twelve-month period ("prior 12-month period") ending at the beginning of the
last twelve-month period ("LTM period") minus revenue contraction due to billing
decreases or customer churn, plus revenue expansion due to billing increases
during the LTM period from the same customers by the total prior 12-month period
revenue. For the last month of the quarters ended March 31, 2021 and 2020 our
LTM NRR was 133.2% and 129.3%, respectively.
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Key Components of Statement of Operations
Revenue
We derive our revenue primarily from usage-based fees earned from customers
using our platform. We also earn fixed-rate recurring revenue from certain
products, services and subscriptions, including revenue from Signal Sciences
customers.
Our usage-based fees earned from customers are generally billed in arrears. Our
security products are primarily annual subscriptions that are billed in advance.
Many customers have tiered usage pricing which reflects discounted rates as
usage increases. For most contracts, usage charges are determined on a monthly
basis based on actual usage within the month and do not impact usage charges
within any other month. Our larger customers often enter into contracts that
contain minimum billing commitments and reflect discounted pricing associated
with such usage levels.
We define U.S. revenue as revenue from customers that have a billing address in
the United States , and we define international revenue as revenue from customers
that have a billing address outside of the United States . Our revenue has been
and will continue to be impacted by new and existing customers' usage of our
products, international expansion, and the success of our sales efforts.
Cost of Revenue and Gross Margin
Cost of revenue consists primarily of fees paid for bandwidth, peering, and
colocation. Cost of revenue also includes personnel costs, such as salaries,
benefits, bonuses, and stock-based compensation for our customer support and
infrastructure employees, and non-personnel costs, such as amortization of
capitalized internal-use software development costs and depreciation of our
network equipment and amortization of certain intangible assets. Our
arrangements with network service providers require us to pay fees based on
bandwidth use, in some cases subject to minimum commitments, which may be
underutilized. We expect our cost of revenue to continue to increase on an
absolute basis and may increase as a percentage of revenue, including as a
result of depreciation and amortization associated with capital expenditures as
well as amortization of any acquired intangibles and technology in future
periods.
Our gross margin has been and will continue to be affected by a number of
factors, including the timing and extent of our investments in our operations,
our ability to manage our network service providers and cloud
infrastructure-related fees, the timing of amortization of capitalized software
development costs, depreciation of our network equipment, and the extent to
which we periodically choose to pass on our cost savings from network
optimization efforts to our customers in the form of lower usage rates.
Research and Development
Research and development expenses consist primarily of personnel costs,
including salaries, benefits, bonuses, and stock-based compensation. Research
and development expenses also include cloud infrastructure fees for development
and testing, and an allocation of our general overhead expenses. We capitalize
the portion of our software development costs that meet the criteria for
capitalization.
We continue to focus our research and development efforts on adding new features
and products including new use cases, improving the efficiency and performance
of our network, and increasing the functionality of our existing products. Over
the long term we expect our research and development expenses to decrease as a
percentage of our revenue. However, our research and development expenses may
fluctuate as a percentage of our revenue from period to period due to the timing
and extent of these expenses and the impact of any acquisitions.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel costs, including
commissions for our sales employees, salaries, benefits, bonuses, and
stock-based compensation. Sales and marketing expenses also include expenditures
related to advertising, marketing, our brand awareness activities, costs related
to our Altitude conferences, professional services fees, amortization of certain
intangible assets, and an allocation of our general overhead expenses.
We focus our sales and marketing efforts on generating awareness of our company,
platform and products, creating sales leads, and establishing and promoting our
brand, both domestically and internationally. We plan to increase our investment
in sales and marketing by hiring additional sales and marketing personnel,
expanding our sales channels, driving our go-to-market strategies, building our
brand awareness, and sponsoring additional marketing events. Over the long term,
we expect our sales
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and marketing expenses to decrease as a percentage of our revenue. However, our
sales and marketing expenses may fluctuate as a percentage of our revenue from
period to period due to the timing and extent of these expenses and the impact
of any acquisitions.
General and Administrative
General and administrative expenses consist primarily of personnel costs,
including salaries, benefits bonuses, and stock-based compensation for our
accounting, finance, legal, trust, human resources and administrative support
personnel, and executives. General and administrative expenses also include
costs related to legal and other professional services fees, sales and other
taxes, depreciation and amortization, an allocation of our general overhead
expenses, and bad debt expense and acquisition-related costs. We expect that we
will incur costs associated with supporting the growth of our business,
including future acquisitions. Additionally we expect that we will incur ongoing
costs to support our operations as a public company and to meet the increased
compliance requirements associated with our international expansion.
Our general and administrative expenses include a significant amount of sales
and other taxes to which we are subject based on the manner we sell and deliver
our products. Historically, we have not collected such taxes from our customers
and have therefore recorded such taxes as general and administrative expenses.
We expect that these expenses will decline in future years as we continue to
implement our sales tax collection mechanisms and start collecting these taxes
from our customers.
Overall, we expect our general and administrative expenses to continue to
increase on an absolute basis and may increase as a percentage of revenue in
future periods. Over the long term, we expect our general and administrative
expenses to decrease as a percentage of our revenue.
Income Taxes
Our income tax expense consists primarily of income taxes in certain foreign
jurisdictions where we conduct business and state minimum income taxes in the
United States . We have a full valuation allowance on our U.S. Federal and state
deferred tax assets, including net operating loss carryforwards. We expect to
maintain this valuation allowance for the foreseeable future.
Other Income and Expense, net
Our interest income consists primarily of interest earned on our cash, cash
equivalents and investments. Our interest expense consists primarily of
contractual interest expense, amortization of discount and debt issuance costs
associated with our debt obligations. Our other income (expense), net, consists
primarily of our foreign currency transaction gains and losses.
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