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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-03-01 · 253 added, 420 removed, 270 unchanged (71% of the section changed)

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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 Annual Report on Form 10-K.

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 Annual Report on Form 10-K.

Our fiscal year ends on December 31.

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and its subsidiaries, unless the context indicates otherwise.

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.

Organizations around the world are more dependent on the quality of digital experiences they provide than ever before.

At Fastly, we deliver an edge cloud platform capable of delivering fast, safe, and engaging digital experiences.

By focusing holistically on edge cloud from developer inspiration to end-user experience, we have the opportunity to differentiate with our global footprint, dynamic infrastructure, and security solution.

Performance, security, and building the most engaging applications are paramount to driving mission success for Fastly’s customers.

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.

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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 while offering flexibility and control to developers.

When milliseconds matter, processing at the edge is an ideal way to handle highly dynamic and time-sensitive data.

This has led to its acceptance and adoption by organizations who monetize or grow their user base with every millisecond saved.

Organizations that want their websites to load faster for every user can benefit from processing at the edge.

Organizations that want to improve their user experience, whether it’s faster loading websites or reduced shopping cart abandonment, can benefit from processing at the edge.

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 help them surpass their end users’ expectations by powering fast, safe, and engaging 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 granular control, where they can write and deploy code in a serverless environment and to push application logic to the edge.

It provides tooling and templates to deploy some of the most commonly used workflows and leverages modern application delivery processes, thus 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 184 terabit software-centric network is located across 71 markets as of December 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:

We believe that 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.

Developers on the Fastly platform have a high degree of flexibility with granular control and real-time visibility, where they can write and deploy code in a serverless environment and push application logic to the edge.

Our infrastructure is built for the software-defined future.

Our network is powerful, efficient, and flexible, designed to enable us to rapidly scale to meet the needs of the most demanding customers.

Our approach to scalable, secure reliability 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.

We provide developers and security operations teams with a fast and safe environment to create, build, and run modern applications.

We serve 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.

they care about delivering best in class digital experiences.

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 independent journalism.

Our customers’ software applications use our edge cloud platform to deliver consistently excellent online shopping experiences, fast and more secure financial transactions, and broadcast quality live streaming on any device.

For example, several of our customers have reinvented digital publishing by connecting readers through subscription models to indispensable content.

Fastly’s ability to dynamically manage content in real time enables readers to have instant access to the most up to date information.

Our customers’ ecommerce solutions use Fastly's edge compute functionality to deliver very low latency customer experiences, including providing better recommendations to their shoppers, converting more shopping carts into sales and executing fast and secure financial transactions.

Content streaming organizations leverage Fastly's platform to deliver content to

users around the world and those that livestream gain easy access to enormous edge compute resources for even greater reliability.

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.

Our mission is to make the Internet a better place where all experiences are fast, safe, and engaging.

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.

Beginning 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.

And because big ideas often start small, we love it when developers experiment and iterate on our platform, coming up with exciting new ways to solve today’s complex problems.

For the years ended December 31, 2022 and 2021, our revenue was $432.7 million and $354.3 million, respectively, an increase of 22%.

Our 10 largest customers generated an aggregate of 35% and 33% of our revenue in the trailing 12 months ended December 31, 2022 and 2021, respectively.

Our 5 largest customers generated an aggregate of 26% and 22% of our revenue in the trailing 12 months ended December 31, 2022 and 2021, respectively.

Affiliated customers that are business units of a single company in the streaming entertainment space generated an aggregate of 11% of our revenue in both the trailing 12 months ended December 31, 2022 and 2021.

We incurred a net loss of $190.8 million and $222.7 million in the years ended December 31, 2022 and 2021, respectively.

We focus our direct selling efforts on expanding our customer's use of our platform, which includes 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.

These direct selling efforts are reflected by our 445 enterprise customers as of December 31, 2021 that generated 88% of our total revenue for the 12 months ended December 31, 2021, up from 378 enterprise customers which generated 89% of our revenue for the 12 months ended December 31, 2020.

Enterprise customers are defined as customers with revenue in excess of $100,000 over the previous 12-month period.

These direct selling efforts are reflected by our 493 enterprise customers as of December 31, 2022.

These enterprise customers are defined as customers with revenue in excess of $100,000 over the previous 12-month period.

Our enterprise customers generated 89% of our total revenue for the trailing 12 months ended December 31, 2022, up from 445 enterprise customers which generated 88% of our revenue for the trailing 12 months ended December 31, 2021.

Our Dollar-Based Net Expansion Rate ("DBNER"), Net Retention Rate ("NRR") and Last-Twelve Months Net Retention Rate ("LTM NRR") metrics measure the revenue growth from existing customers attributable to increased usage of our platform and features, and purchase of additional products and services.

The financial results of Signal Sciences have been consolidated into our financial results and key metrics since October 1, 2020, the date of acquisition.

Our DBNER was 120.9% and 143.6% for the 12 months ended December 31, 2021, and 2020, respectively.

Our NRR was 106.6% and 116.3% for the twelve months ended December 31, 2021 and 2020, respectively.

Our LTM NRR was 117.6% and 137.4% for the 12 months ended December 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.

For additional details on our key metrics, refer to the "Key Business Metrics" section.

We believe that an annual cohort analysis of Fastly's customers, as depicted in the chart below, demonstrates the continued expansion of our customers' use of our platform.

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Customer accounts acquired in 2018, 2019, 2020, 2021 and 2022 are referred to as the 2018 Cohort, 2019 Cohort, 2020 Cohort, 2021 Cohort and 2022 Cohort, respectively.

Our 2017 Cohort increased its revenue 2.3 times after its first year and has grown at approximately a 50% CAGR over the last four years.

In 2017, we generated $5.6 million of revenue from the 2017 Cohort.

Revenue from the 2017 Cohort grew to $16.8 million in 2018, representing 200% year-over-year growth.

In 2018, we generated $11.2 million of revenue from the 2018 Cohort.

Revenue from the 2018 Cohort grew to $34.4 million in 2019, representing 207% year-over-year growth.

In 2019, we generated $9.1 million of revenue from the 2019 Cohort.

Revenue from the 2019 Cohort grew to $47.7 million in 2020,

representing 424% year-over-year growth.

Revenue from the 2020 Cohort grew to $28.9 million in 2021, representing 144% year-over-year growth.

We calculate the Compound Annual Growth Rate (“CAGR”), which represents the rate of revenue return of our revenue cohorts, over a five year history from when they were first customers.

Summary of Revenue Generated by Customer Cohorts Over Time (in millions):

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.

Our 2018 Cohort increased its revenue 3.1 times in fiscal 2019 and has grown at approximately a 60% CAGR over the next four years from fiscal 2019 to fiscal 2022.

We generate substantially all of our revenue from charging our customers based on their usage of our platform, and we generate a substantial majority of our revenue from customers that have negotiated contracts with us.

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, account management and enhanced customer support.

We charge a flat one-time or recurring monthly fee depending on the additional products and services selected.

Typically, the term of our contracts with customers is 12 months and includes a minimum monthly billing commitment in exchange for more favorable pricing terms.

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.

We also offer subscriptions to access a unified security web application and application programming interface at a fixed rate.

The majority of our revenue is usage based and changes in usage by our largest customers can create volatility in our revenue.

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.

For example, we experienced delays in the ramping of new traffic due to travel and data center restrictions in South Asia that delayed network build outs and the timing of customer code freezes, each affected in part by COVID-19-related issues.

The length of our sales cycles, 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 as well as existing enterprise customers with new business can take several months and can be subject to delays for unanticipated reasons.

The timing of new revenue from our sales efforts and changes in usage by our largest customers can make revenue difficult to predict.

For the years ended December 31, 2021 and 2020, our revenue was $354.3 million and $290.9 million, respectively.

Our 10 largest customers generated an aggregate of 33% and 38% of our revenue in the 12 months ended December 31, 2021 and 2020, respectively.

We incurred a net loss of $222.7 million and $95.9 million in the years ended December 31, 2021 and 2020, respectively.

Acquisition of Signal Sciences

On October 1 2020, we acquired Signal Sciences, for an aggregate purchase price of $759.4 million, consisting of approximately $223.0 million in cash and 6,367,709 shares of our Class A common stock, including 896,499 shares which are restricted as they are subject to revesting conditions.

The aggregate purchase price reflects the value of the net shares issued, which excludes the above mentioned shares that are restricted.

We also assumed all unvested and outstanding equity awards of Signal Sciences’ continuing employees as converted into our equity awards at the conversion ratio provided in the Agreement and Plan of Reorganization (the "Merger Agreement"), which became options to purchase 251,754 shares of our Class A common stock, with a value of $20.7 million related to the assumed unvested equity awards that are subject to future service conditions.

We have included Signal Sciences in our results of operations as of the acquisition date, October 1, 2020.

For the year ended December 31, 2020, the information presented in this section includes the contribution of Signal Sciences starting from October 1, 2020.

For the year ended December 31, 2021, the results include the contribution of Signal Sciences for the full year.

As a result, comparisons to the prior-year period may not be indicative of future results or future rates of growth.

Please refer to Note 5—Business Combination for further details on the acquisition of Signal Sciences.

Adjustments subsequent to the release of earnings on February 16, 2022

Subsequent to our announcement of earnings and issuance of our press release, furnished in a Form 8-K on February 16, 2022, for the year ended December 31, 2021, we increased our Property and Equipment, net Other Current Liabilities by $6.9 million to accrue for additional assets received at year-end but not yet paid for or financed.

This increased total assets, total current liabilities, total liabilities and total liabilities and stockholders' equity by $6.9 million.

These adjustments update balances previously disclosed in our press release for the year ended December 31, 2021.

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 expanded security portfolio from the acquisition of Signal Sciences, other security products, 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 will continue to dedicate significant resources to sales and marketing programs, including various online marketing activities as well as targeted account-based advertising.

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.

We are focused on continuing to attract new customers, including those in new vertical markets, and expanding our relationship with existing customers, by enhancing our product experience, investing in technology,, and leveraging our partner ecosystem.

Our customer base includes large, established enterprises that are undergoing digital transformation and emerging companies spanning a wide array of industries and verticals.

Developers within these companies often use and advocate for the adoption of our platform by their companies and promotion across the broader developer community.

We will continue to invest in our products and features and developer outreach, leveraging it as a cost-efficient approach to attracting new customers, and our sales and marketing programs, including various online marketing activities as well as targeted account-based advertising.

We are continuing to bring a durable, consistent, and predictable pipeline of new innovations to our edge cloud platform and software-defined modern network architecture, and are seeing interest from customers in our existing product lines like Network Services and Security, and newer product lines like Compute and Observability.

We will continue to build out a single, unified platform, simplify customer onboarding and service usage, and simplify our pricing and packaging.

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.

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Many jurisdictions have enacted laws on data localization and cross-border data transfers, and the evolving enforcement and interpretation of such laws has created uncertainty regarding data stored abroad and transferred across borders, which could impact customer growth and acquisition for customers and potential customers conducting business in Europe and elsewhere outside of the United States.

We have encountered and may continue to encounter heightened concerns relating to privacy, data protection, and information security from customers and potential customers conducting business outside of the United States.

Specifically, we have received more requests relating to EU privacy requirements, impacting the sales negotiation process, and we have 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 information to the United States.

For additional details, refer to "Item 1A.—Risk Factors".

Expanding within our Existing Customer Base

For additional details, refer to the section titled "Risk Factors."

Expanding into New Vertical Markets and within Our Existing Customer Base

We aim to continue to add customers from a diverse set of industry verticals through our differentiated platform that offers a broad range of capabilities.

By focusing on performance and security, we have the opportunity to continue to add customers from a diverse set of industries.

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 one of our products and then expand their usage over time.

Our platform includes a variety of offerings, such as load balancing, shielding, web security, and WAF.

Our platform includes a variety of offerings across Network Services, Security, Compute and Observability product lines.

As our customers mature, we assist them in expanding their use of our platform, including the use of additional offerings beyond edge cloud delivery or security.

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.

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.

In addition, given that customer acquisition costs are incurred largely for acquiring and initial onboarding, we may gain operating leverage to the extent that existing customers expand their use of our platform and products.

Our ability to retain 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.

The data localization and cross-border data transfer issues described above also impact current customers' increased usage of our products and services.

The data localization and cross-border data transfer issues described above also impact current customers' usage of our products and services.

In addition, we cannot be certain what actions the United States 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 China, target China as a market or that have strong business ties to China.

For example, our largest customer during the year ended December 31, 2020 had strong business ties to China and significantly reduced its usage of our platform.

We believe this was in response to various actions taken by the United States and other governments against them.

Further reductions in this customer's traffic levels could have an additional negative impact on our business.

For additional details, refer to "Item 1A.—Risk Factors".

International Customer Growth

International Expansion

We intend to continue expanding our efforts to attract customers outside of the United States by augmenting our sales teams and strategically increasing our presence in the number of markets in select international locations.

As of December 31, 2021, our edge network spans across 51 markets and 31 countries that are outside of the United States.

As of December 31, 2020, our edge network spans across 40 markets and 25 countries that are outside of the United States.

As of December 31, 2022, our edge network spanned across 58 markets and 34 countries that are outside of the United States.

As of December 31, 2021, our edge network spanned across 51 markets and 31 countries that are outside of the United States.

Our international expansion, including our global sales efforts, continues to add increased complexity and cost to our business.

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Managing the administrative aspects of a global organization places a strain on our business and culture.

We are closely monitoring the unfolding events of the Russian invasion of Ukraine and its global impacts.

While the conflict is still evolving and the outcome remains highly uncertain, we do not believe the Russia-Ukraine conflict will have a material impact on our business and results of operation.

However, some threat actors now engage and are expected to continue to engage in cyber-attacks, including without limitation nation-state actors for geopolitical reasons and in conjunction with military conflicts and defense activities.

During times of war and other major conflicts, we, the third parties upon which we rely, and our customers may be vulnerable to a heightened risk of these attacks, including retaliatory cyber-attacks, that could materially disrupt our systems and operations, supply chain, and ability to produce, sell and distribute our goods and services.

If the Russia-Ukraine conflict continues or worsens, leading to greater global economic disruptions and uncertainty, our business

and results of operations could be materially impacted.

Our customers in Russia represented an immaterial portion of our net assets and total consolidated revenue as of December 31, 2022 and 2021.

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 will continue to expand our sales and marketing efforts, with an increased focus on sales to enterprises globally.

While we continue to leverage the self-service approach to drive adoption by developers, we will 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.

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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.

Our investments in sales and marketing teams are intended to help accelerate our sales, onboarding, and ramp cycles.

These efforts will require us to continue to invest in sales and marketing resources.

Furthermore, we believe that there is significant competition for sales personnel with the skills and technical knowledge that we require.

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We expect our revenue growth to be dependent on an expanding customer base and continued adoption of our edge cloud delivery, security, and other products and services.

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.

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.

This could result 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.

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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 years ended December 31, 2021 and 2020, our research and development expenses as a percentage of revenue was 36% and 26%, respectively.

For the years ended December 31, 2022 and 2021, our research and development expenses as a percentage of revenue were 36% and 36%, 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, on October 1, 2020, we acquired Signal Sciences, a security software company that provides protection from web, API, and mobile security threats.

For example, in May 2022, we acquired Glitch, a software company specializing in developer project management tools to bolster our existing product offerings, by making it easier to innovate at a layer in the Fastly software stack.

Developers use our platform to build custom applications and require a state-of-the-art infrastructure to test and run these applications.

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We also anticipate making investments in upgrading our technology and hardware to continue providing our customers a fast and secure platform.

Our cash additions for investments in property and equipment for the years ended December 31, 2021 and 2020 were $48.6 million and $49.0 million, respectively, representing 14% and 17% of our revenue in such periods.

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 of December 31, 2021, our network is located in 71 markets across 32 countries.

As of December 31, 2022, our global network is located in 79 markets across 35 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 own error, security breaches, third-party error, or natural disasters—we could experience lengthy interruptions in our platform as well as delays and additional expenses in arranging new facilities and services.

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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 remain uncertain.

Our results of operations could be materially below our forecasts, which could adversely affect our results of operations, disappoint analysts and investors, 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.

In addition, our suppliers have been impacted by the COVID-19 pandemic, which has reduced the availability or

resulted in delays, and may continue to reduce the availability or result in delays, of parts and components to us.

Our offices have remained temporarily closed since March 2020, and we have taken other precautionary measures, such as instituting protocols and guidelines for Fastly-related travel and shifting to hosting virtual Fastly-sponsored events in lieu of in-person events.

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 has 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.

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.

The ultimate duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately forecasted at this time.

These developments include the severity and transmission rate of the disease, the emergence of new variants, the actions of governments, businesses and individuals in response to the pandemic, the extent and effectiveness of containment actions and vaccines, the impact on economic activity and the impact of these and other factors.

We do not yet know how businesses, customers, or our partners will operate in a post COVID-19 environment.

There may be additional costs or impacts to our business and operations, including when we are able to return to our offices and resume in-person activities, travel, and events.

In addition, 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 our risk factors included in Part I.

of this Annual Report on Form 10-K.

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.

Certain of our key metrics and financial results were favorably impacted by increases in traffic driven by the COVID-19 pandemic and our largest customer in 2020.

In 2021, we saw some return to normal seasonal patterns of traffic and growth and an impact to our revenue from an outage in June 2021.

included Signal Sciences in our results of operations as of the acquisition date, October 1, 2020.

For the year ended December 31, 2021, the results include the contribution of Signal Sciences for the full year.

We use the following 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 these key metrics below may differ from other similarly titled metrics used by other companies, securities analysts, or investors.

As of December 31,

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Number of enterprise customers (as of end of period) 493 445

Average enterprise customer spend (in thousands) $ 782 $ 704

Dollar-Based Net Expansion Rate ("DBNER") (12 months) 122.7% 120.9%

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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.

An identifiable operating entity is defined as a company, a government entity, or a distinct business unit of a larger company that has a relationship with Fastly through direct sale or through one of our reseller partners where charges are identified on an end-customer basis.

In cases where charges are identified through a reseller partner rather than on an end-customer basis, we record a single customer record for the reseller partner.

Our customer groupings may be impacted by changes to our customers’ business, including any impact from merger and acquisition activities, internal business reorganizations leading to operational and decision making changes, and corporate structure changes such as subsidiary consolidation and reorganization that may arise in the future.

An identifiable operating entity is defined as a company, a government entity, or a distinct business unit of a larger company that has a relationship with us through direct sale or through one of our reseller partners where charges are identified on an end-customer basis.

We may treat separate subsidiaries, segments, divisions, or business units of a single organization that use our platform as unique customers where they have distinct account identifiers.

In cases where charges are identified through a reseller partner rather than on an end-customer basis, we would count the reseller as a single customer in our customer count.

Our customer groupings may be impacted by changes to our customers’ business, including any impact from acquisition activities, internal business reorganizations leading to operational and decision making changes, and corporate structure changes such as subsidiary consolidation and reorganization that may arise in the future.

In addition to our paying customers, we also have trial, developer, nonprofit and open source programs, and other non-paying accounts that are excluded from our customer count metric.

We operate globally and as a result, the success of our ability to retain our customers is also affected by general economic and market conditions around the world.

As of December 31, 2022 and 2021, we had 2,958 and 2,804 customers, respectively.

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These enterprise customers are defined as customers with revenue in excess of $100,000 over the previous 12-month period.

As of December 31, 2021, we had 445 enterprise customers which generated 88% of our revenue for the 12 months ended December 31, 2021.

As of December 31, 2020, we had 378 enterprise customers which generated 89% of our revenue for the 12 months ended December 31, 2020.

We believe the recruitment and cultivation of enterprise customers is critical to our long-term success.

As of December 31, 2022, we had 493 enterprise customers which generated 89% of our revenue for the trailing 12 months ended December 31, 2022.

As of December 31, 2021, we had 445 enterprise customers which generated 88% of our revenue for the trailing 12 months ended December 31, 2021.

We believe that the recruitment and cultivation of enterprise customers is critical to our long-term success.

Average Enterprise Customer Spend

Our enterprise customers continue to leverage our platform, increasing their spend on our platform and driving our revenue growth year over year.

Average enterprise customer spend is calculated by taking the sum of the trailing 12-month revenue contributed by enterprise customers existing as of December 31, 2022, and dividing that by the number of enterprise customers as of December 31, 2022.

As of December 31, 2022, our average enterprise customer spend was $782 thousand, as compared to $704 thousand as of December 31, 2021.

The continued retention and growth of our enterprise customer spend is key to our long-term growth strategy.

Dollar-Based Net Expansion Rate ("DBNER")

Our ability to generate and increase our revenue is dependent upon our ability to increase the number of new customers and usage of our edge cloud delivery platform, security, and other products and services by our existing customers.

We track our growth, in part, by measuring DBNER.

our growth, in part, by measuring 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 edge cloud delivery platform, security, and purchase of additional products and services by our existing customers.

We believe that 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 edge cloud delivery platform, security, and purchase of additional products and services 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.

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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 12 months ended December 31, 2021, we divide (i) revenue for the 12 months ended December 31, 2021, from customers that entered into a customer agreement prior to January 1, 2020, and that remained customers as of December 31, 2021, by (ii) revenue for the 12 months ended December 31, 2020 from the same set of customers.

For the 12 months ended December 31, 2021 and 2020 our DBNER was 120.9% and 143.6%, respectively.

We believe that an annual cohort analysis of our customers demonstrates 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 2019, 2020, and 2021 are referred to as the 2019 Cohort, 2020 Cohort, and 2021 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 2019 Cohort was 580.8% for the year ended December 31, 2020.

However, the DBNER for the 2019 Cohort was 150.8% for the year ended December 31, 2021, which generally represents their third year as a customer, depending on when they entered into a customer agreement.

For example, to calculate our DBNER for the trailing 12 months ended December 31, 2022, we divide (i) revenue, for the trailing 12 months ended December 31, 2022, from customers that entered into a customer agreement on or before December 31, 2022, and that remained customers as of December 31, 2022, by (ii) revenue for the trailing 12 months ended December 31, 2021 from the same set of customers.

For the trailing 12 months ended December 31, 2022 and 2021 our DBNER was 122.7% and 120.9%, respectively.

DBNER may fluctuate from quarter to quarter based on, among other things, the timing associated with new customer accounts.

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By comparing this amount to actual revenue for the period, we are able to assess our ability to replace terminated revenue by generating revenue from new and continuing customers.

Our annual revenue retention rate for the years ended December 31, 2021 and 2020 was 99.2% and 99.3%, respectively.

Our annual revenue retention rate for both of the years ended December 31, 2022 and 2021 was 99.2%.

Net Retention Rate ("NRR") and Last-Twelve Months Net Retention Rate ("LTM NRR")

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For the last month of the years ended December 31, 2022 and 2021 our NRR was 110.7% and 106.6%, 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.

Our LTM NRR removes some of the volatility that is inherent in a usage-based business model from the measurement of the NRR metric.

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 years ended December 31, 2021 and 2020 our LTM NRR was 117.6% and 137.4%, respectively.

For the trailing twelve months ended December 31, 2022 and 2021 our LTM NRR was 119.1% and 117.6%, respectively.

Key Components of Statement of Operations

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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, depreciation of our network equipment and amortization of our intangible assets.

Cost of revenue consists primarily of fees paid to network providers for bandwidth and to third-party network data centers for housing servers, also known as colocation costs.

Cost of revenue also includes employee costs for network operation, build-out and support and services delivery, network storage costs, cost of managed services and software-as-a-service, depreciation of network equipment used to deliver services, and amortization of network-related internal-use software.

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.

Our gross margin has been and will continue to be affected by a number of factors, including utilization of our network, the timing of investments in the expansion of our network, which can increase depreciation and colocation costs in advance of expected demand, our ability to manage our network service providers and cloud infrastructure-related fees, the timing of amortization of capitalized software development costs, changes in personnel costs to provide customer support and operate the network, and customer pricing.

Over the long term we expect cost of revenue to decrease as a percentage of revenue as we continue to drive efficiencies in our operations.

However, our cost of revenue may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

Our gross margin has been and will continue to be affected by a number of factors, including utilization of our network, the timing of our investments in the expansion of our network, which can increase depreciation and colocation costs in advance of expected demand, our ability to manage our network service providers and cloud infrastructure-related fees, the timing of amortization of capitalized software development costs, changes in personnel costs to provide customer support and operate the network, and customer pricing.

Over the long term we expect gross margin to increase as we continue to drive efficiencies in our operations.

However, our gross margin may fluctuate from period to period.

Research and Development

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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 customer conferences, including our Altitude conference, professional services fees, amortization of our 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.

Sales and marketing expenses also include expenditures related to advertising, marketing, our brand awareness activities, bandwidth and co-location costs for free trial users, costs related to our customer conferences, including our Altitude conference, professional services fees and amortization of our intangible assets, and an allocation of our general overhead expenses.

We focus our sales and marketing efforts on generating awareness of our platform and products, creating sales leads, and establishing and promoting our brand, both domestically and internationally.

Over the long term, we expect our sales and marketing expenses to decrease as a percentage of our revenue.

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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, an allocation of our general overhead expenses, credit loss expense and acquisition-related costs.

We expect that we will incur costs associated with supporting the growth of our business, our operation 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.

General and administrative expenses consist primarily of personnel costs, including salaries, benefits, bonuses, and stock-based compensation for our administrative support personnel.

General and administrative expenses also include costs related to legal and other professional services fees, SaaS costs, an allocation of our general overhead expenses, credit losses and acquisition-related costs.

Our general and administrative expenses also include sales and other tax expenses to which we are subject to 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.

In the near term, we expect to continue to incur costs associated with supporting the growth of our business, including international expansion, but expect these costs to decrease as a percentage of our revenue over the long term as we continue to drive efficiencies in our operations.

However, our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

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.

In 2020, our income tax benefit was primarily the result of a reduction in the valuation allowance recorded against our net deferred tax assets.

In connection with the acquisition of Signal Science in 2020, we recorded a net deferred tax liability which provides an additional source of taxable income to support the realization of the pre-existing deferred tax assets.

We have a valuation allowance for deferred tax assets, including net operating loss carryforwards.

We expect to maintain this valuation allowance for the foreseeable future.

Net Gain on Extinguishment of Debt

Our net gain on extinguishment of debt relates to the partial repurchase of our outstanding senior convertible notes at a discount in May 2022.

Other Income and Expenses

Our interest income consists primarily of interest earned on our cash, cash equivalents and investments.

Our interest expense consists primarily of the interest expense on our finance leases and amortization of discount and debt issuance costs associated with our debt obligations.

Our other income (expense), net, consists primarily of foreign currency transaction gains and losses.

Results of Operations

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For a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021.

Certain of our key metrics and financial results were favorably impacted by increases in traffic driven by the COVID-19 pandemic and our largest customer in 2020.

In 2021, we saw some return to normal seasonal patterns of traffic and growth and an impact to our revenues from an outage in June 2021.

We have included Signal Sciences in our results of operations as of the acquisition date, October 1, 2020.

For the year ended December 31, 2020, the information presented in this section includes the contribution of Signal Sciences starting from October 1, 2020.

For the year ended December 31, 2021, the results include the contribution of Signal Sciences for the full year.

As a result, comparisons to the prior-year period may not be indicative of future results or future rates of growth.

Year ended December 31,

(in thousands)

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Loss from operations (246,199) (219,021)

Net gain on extinguishment of debt 54,391 —

Interest income

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Net loss attributable to common stockholders $ (190,774) $ (222,697)

(1) Includes stock-based compensation expense as follows:

Year ended December 31,

(in thousands)

Cost of revenue $ 7,227 $ 3,889

Research and development 47,019 17,112

Sales and marketing 31,159 17,028

General and administrative 55,083 26,404

Total $ 140,488 $ 64,433

Year ended December 31,

Consolidated Statements of Operations, as a percentage of revenue:*

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Loss from operations (57) (62)

Net gain on extinguishment of debt 13 —

Interest income 2 —

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* Columns may not add up to 100% due to rounding.

Year ended December 31,

2021 2020 2020 to 2021 Change

Year ended December 31, Change

2022 2021 $ Change % Change

(in thousands)

Revenue $ 432,725 $ 354,330 $ 78,395 22 %

2021 compared to 2020

Revenue was $432.7 million for the year ended December 31, 2022 compared to $354.3 million for the year ended December 31, 2021, an increase of $78.4 million, or 22%.

Revenue growth was driven by impact of a full year of revenue generated from products acquired from the acquisition of Signal Sciences, which increased by $31.7 million before considering the effect of purchase accounting adjustments, and the further adoption of our modern edge platform and products.

Revenue growth was offset by a $4.2 million impact of purchase price accounting adjustments, which represents a $2.2 million increase from 2020.

Revenue growth was driven by the further adoption of our edge platform and products as well as a $17.4 million increase in revenue related to security products acquired from the acquisition of Signal Sciences.

We had 2,958 customers and 493 enterprise customers as of December 31, 2022.

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Approximately 94% of our revenue in the year ended December 31, 2022 was driven by usage on our platform, primarily from existing customers, as revenue from new customers contributed less than 10% of our revenue.

The proportion of the revenue contribution between new and existing customers is consistent with typical customer behavior as customers tend to contribute more revenue over time as their use of the platform increases.

The remainder of our revenue was generated by our other products and services, including support and professional services.

United States revenue was $260.4 million and 73% of revenue for the year ended December 31, 2021, and $196.5 million and 68% of revenue for the year ended December 31, 2020.

The proportion of the revenue contribution between new and existing customers is consistent with prior periods and typical customer behavior as customers tend to contribute more revenue over time as their use of the platform increases.

The remainder of our revenue was generated by other products and services.

revenue was $316.1 million and 73% of revenue for the year ended December 31, 2022, and $260.4 million and 73% of revenue for the year ended December 31, 2021.

This represents an increase of $55.8 million, or 21%.

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This represents an increase of $22.6 million, or 24%.

We had 2,111 domestic customers and 691 international customers as of December 31, 2021.

We had 2,074 domestic customers and 884 international customers as of December 31, 2022, and 2,111 domestic customers and 691 international customer as of December 31, 2021.

There was a decrease in domestic customers of 37, or 2%, and an increase in international customers of 193, or 28%, compared to December 31, 2021.

Cost of Revenue

Year ended December 31,

2021 2020 2020 to 2021 Change

Year ended December 31, Change

2022 2021 $ Change % Change

(in thousands)

Cost of revenue $ 222,944 $ 167,002 $ 55,942 33 %

2021 compared to 2020

Cost of revenue was $222.9 million for the year ended December 31, 2022 compared to $167.0 million for the year ended December 31, 2021, an increase of $55.9 million, or 33%.

This is primarily due to an increase in bandwidth costs of $11.1 million, an increase in colocation costs of $6.4 million, and an increase in other network costs of $5.4 million to support the increased traffic on our platform.

There was an increase in depreciation and amortization expense of $17.0 million as we continue to invest in our platform, which includes a $7.5 million increase in amortization of intangible assets acquired from the Signal Sciences acquisition.

There was also a $7.9 million increase in personnel related costs, such as salaries, benefits, bonuses, and stock-based compensation, due to the increased headcount to support the growth of our business.

The increase in cost of revenue is a result of an increase in bandwidth costs of $17.4 million, colocation costs of $8.5 million, hosting services of $4.9 million and other network costs of $2.0 million.

Depreciation and amortization expense increased by $10.8 million as a result of increased investments in our platform.

There was also a $8.9 million increase in personnel related costs due to an increase in headcount and equity awards granted to employees supporting the growth of our business.

There was also a one-time charge of $2.0 million related to cancellation of a commitment.

Lastly, there was a $0.6 million increase in employee travel expenses due to the increase in work-related travel with the easing of travel-related restrictions associated with the COVID-19 pandemic.

Gross Profit and Gross Margin

Year ended December 31,

2021 2020 2020 to 2021 Change

Year ended December 31, Change

2022 2021 $ Change % Change

(in thousands)

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Gross margin 48 % 53 % (4) %

2021 compared to 2020

Gross profit was $209.8 million for the year ended December 31, 2022 compared to $187.3 million for the year ended December 31, 2021, an increase of $22.5 million, or 12%.

Gross margin was 53% for the year ended December 31, 2021 compared to 59% for the year ended December 31, 2020, an decrease of 6%.

The decrease in gross margin reflects a decrease in network utilization in 2021 compared to 2020 related to increased traffic in 2020 driven by the COVID-19 pandemic and the company's largest customer in 2020 and the impact of an increase in investment in infrastructure and capacity made in advance of expected demand.

The decline in gross margin also reflects the impact of an increase of $2.2 million of revenue reductions for purchase accounting adjustments and additional $7.5 million of amortization of intangible assets related to our acquisition of Signal Sciences.

The impact of these adjustments was a reduction in gross margin of 2.7%.

Gross margin was 48% for the year ended December 31, 2022 compared to 53% for the year ended December 31, 2021, a decrease of 4%.

The decrease in gross margin was driven by increases in bandwidth, colocation, hosting services and other network costs, an increase in depreciation expense associated with our network equipment and an increase in travel and personnel-related costs, as part of our continued investment in infrastructure and capacity to build out our platform to support future customer traffic.

Operating Expenses

Year ended December 31,

2021 2020 2020 to 2021 Change

Year ended December 31, Change

2022 2021 $ Change % Change

(in thousands)

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General and administrative 28 % 36 % (8) %

Research and development—2021 compared to 2020

Research and development

Research and development expenses were $155.3 million for the year ended December 31, 2022 compared to $126.9 million for the year ended December 31, 2021, an increase of $28.4 million, or 22%.

This is primarily due to an increase of $56.1 million of personnel-related costs, such as salaries, benefits, bonuses, and stock-based compensation due to an increase in headcount and new equity awards granted to employees.

The increase in personnel-related costs was primarily driven by the impact of a full year of Signal Sciences expenses.

There was also an increase of $3.6 million in hosted data service and other SaaS costs as we continue to continue to develop new products and features for our next-generation edge computing solutions.

These increases are partially offset by a $9.6 million increase in capitalization of costs related to the development of internal-use software.

Sales and marketing—2021 compared to 2020

This is primarily due to an increase of $21.1 million of personnel-related costs, such as salaries, benefits, bonuses, and stock-based compensation due to an increase in headcount and equity awards granted to employees supporting our research and development efforts.

There was also an increase of $2.4 million in hosting services and $1.7 million in SaaS costs as we continue to develop new products and features for our next-generation edge computing solutions.

There was also a $1.4 million increase in employee travel expenses due to the increase in work-related travel with the easing of travel-related restrictions associated with the COVID-19 pandemic.

There was also an increase in professional fees of $0.9 million primarily related to temporary agency costs to support our internal development efforts.

Sales and marketing

Sales and marketing expenses were $179.9 million for the year ended December 31, 2022 compared to $152.6 million for the year ended December 31, 2021, an increase of $27.2 million, or 18%.

This is primarily due to a $33.1 million increase in personnel related costs, such as salaries, sales commissions, benefits, and stock-based compensation, due to an increase in headcount and new equity awards granted to employees.

The increase in personnel-related costs was primarily driven by the impact of a full year of Signal Sciences expenses.

We also had an increase of $8.4 million in external marketing spend primarily related to various marketing campaigns and an increase of $8.3 million in amortization expense related to certain intangible assets acquired in connection with the Signal Sciences acquisition.

General and administrative —2021 compared to 2020

General and administrative costs were $126.8 million for the year ended December 31, 2021 compared to $102.1 million for the year ended December 31, 2020, an increase of $24.8 million, or 24%.

This is primarily due to an increase of $36.1 million in personnel related costs, such as salaries, benefits, and stock-based compensation due to an increase in headcount and new equity awards granted to employees, increases of $1.6 million in software licenses, and $1.3 million in business insurance costs.

These increases are partially offset by a $13.4 million decrease in professional services spending primarily driven by a decrease in acquisition-related expenses of $16.9 million, and a $1.5 million decrease in expense for credit losses.

This is primarily due to a $15.6 million increase in personnel related costs, such as salaries, sales commissions, benefits, and stock-based compensation, due to an increase in headcount and equity awards granted to employees supporting our sales and marketing efforts.

There was also an increase of $5.9 million related to employee travel expenses due to increase in work-related travel with the easing of travel-related restrictions associated with the COVID-19 pandemic.

There was also a $2.7 million increase in marketing spend associated with brand campaign and advertising and an increase of $2.3 million in spending related to the software and hosting services costs used in our sales generation efforts.

General and administrative

General and administrative costs were $120.8 million for the year ended December 31, 2022 compared to $126.8 million for the year ended December 31, 2021, a decrease of $6.0 million, or 5%.

The net decrease is primarily due to a $18.9 million decrease in stock-based compensation expenses attributed to the function, offset by increases of $4.4 million in personnel related costs, such as salaries and benefits.

The decrease was partially offset by an increase of $2.9 million in professional services such as legal and accounting services, an increase of $2.2 million in increase in the allowance for credit losses due the increase in revenue in the period, an increase of $2.1 million due to impairment of leased assets and a $1.3 million increase in SaaS costs to support the growth of our operations.

Net Gain on Extinguishment of Debt

Year ended December 31, Change

2022 2021 $ Change % Change

(in thousands)

Net gain on extinguishment of debt $ 54,391 $ — $ 54,391 100 %

We recognized a net gain on debt extinguishment of $54.4 million for the year ended December 31, 2022 relating to our repurchase at a discount in May 2022 of approximately $235 million aggregate principal amount of our outstanding 0% convertible senior unsecured notes due in 2026.

Other Income and Expense

Interest Income

Year ended December 31,

2021 2020 2020 to 2021 Change

Year ended December 31, Change

2022 2021 $ Change % Change

(in thousands)

Interest income $ 7,044 $ 1,282 $ 5,762 449 %

2021 compared to 2020

Interest income was $1.3 million for the year ended December 31, 2021 compared to $1.6 million for the year ended December 31, 2020, a decrease of $0.3 million, or 21%.

This decrease is due to a reduction in interest rates on our cash balances and investments portfolio.

Interest income was $7.0 million for the year ended December 31, 2022 compared to $1.3 million for the year ended December 31, 2021, an increase of $5.8 million, or 449%.

This increase is due to an increase in interest rates on our cash balances and investments portfolio.

Interest Expense

Year ended December 31,

2021 2020 2020 to 2021 Change

Year ended December 31, Change

2022 2021 $ Change % Change

(in thousands)

Interest expense $ (5,887) $ (5,245) $ (642) 12 %

2021 compared to 2020

Interest expense was $5.9 million for the year ended December 31, 2022 compared to $5.2 million for the year ended December 31, 2021, an increase of $0.6 million, or 12%.

This increase is primarily due the amortization of debt issuance costs related to the convertible debt and revolving credit facility.

This increase is primarily due to the amortization of debt issuance costs related to the convertible debt and revolving credit facility.

Other income(expense), net

Year ended December 31,

2021 2020 2020 to 2021 Change

Year ended December 31, Change

2022 2021 $ Change % Change

(in thousands)

Other income (expense), net $ (29) $ 356 $ (385) (108) %

2021 compared to 2020

Other income, net was $0.4 million for the year ended December 31, 2021 compared to other expense, net, of $0.3 million for the year ended December 31, 2020, a change of $0.6 million, or 228%.

Other expense, net was $0.0 million for the year ended December 31, 2022 compared to other income, net, of $0.4 million for the year ended December 31, 2021, a decrease of $0.4 million, or (108)%.

The increase is mainly driven by our foreign currency transaction gains and losses between the periods.

Income Tax Expense (Benefit)

Year ended December 31,

2021 2020 2020 to 2021 Change

Income Tax Expense

Year ended December 31, Change

2022 2021 $ Change % Change

(in thousands)

Income tax expense (benefit) $ 69 $ (11,480) (101) %

2021 compared to 2020

Income tax expense was 0.1 million for the year ended December 31, 2021 compared to income tax benefit of for the year ended December 31, 2020, a decrease of $11.6 million or 101% decrease is primarily due to a one-time tax benefit from the reduction in our valuation allowance recorded against our net deferred tax assets.

In connection with the acquisition of Signal Science, we recorded a net deferred tax liability which provides an additional source of taxable income to support the realization of the pre-existing deferred tax assets.

As a result a portion of our valuation allowance was released and we recorded a $13.0 million tax benefit in the year ended December 31, 2020.

Income tax expense $ 94 $ 69 $ 25 36 %

Income tax expense was $0.1 million both for the year ended December 31, 2022 and for the year ended December 31, 2021.

The Company continues to maintain a full valuation allowance and the tax expense for the periods were primarily due to foreign tax expense.

Liquidity and Capital Resources

As of December 31, 2021, we had cash, cash equivalents, and marketable securities totaling $1,056.8 million.

Our cash, cash equivalents, and marketable securities primarily consisted of bank deposits and money market funds held at major financial institutions and investment-grade commercial paper and corporate debt securities.

As of December 31, 2021, we had $528.9 million of marketable securities classified as long term investments.

On May 21, 2019, upon the completion of our IPO, we received net proceeds of $192.5 million, after deducting underwriting discounts and commissions, from sales of 12,937,500 shares of our Class A common stock 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.

On May 26, 2020, we completed a follow-on public offering in which we sold 6,900,000 shares of Class A common stock, which included 900,000 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at the public offering price of $41.50 per share.

We received net proceeds of $274.9 million, after deducting underwriting discounts and commissions, from sales of our shares in the public offering.

In March 2021, we entered into a purchase agreement for the sale of an aggregate of $948.8 million principal amount of our 0% convertible senior notes due 2026 (the “Notes”).

The Notes mature on March 25, 2026, unless earlier converted, redeemed or repurchased.

The net proceeds from the issuance of the Notes were approximately $930.0 million after deducting the initial purchasers’ discounts and transaction costs.

To date, we have financed our operations primarily through equity issuances, payments received from customers, the net proceeds we received through sales of equity and debt securities and borrowings under our credit facilities.

Our principal uses of cash in recent periods have been funding our operations and capital expenditures.

We also enter into finance leases to finance our infrastructure assets in co-location facilities that we directly lease and operate.

As of December 31, 2022, we had cash, cash equivalents, and marketable securities and restricted cash totaling $683.1 million.

Our cash, cash equivalents, and marketable securities primarily consisted of bank deposits, money market funds, investment-grade commercial paper, corporate notes and bonds, U.S.

treasury securities, municipal securities, foreign government and supranational securities and asset-backed securities held at major financial institutions.

As of December 31, 2022, our marketable securities balance includes $165.1 million of marketable securities that were classified as non-current.

To date, we have financed our operations primarily through equity issuances, payments received from customers, the net proceeds we received through sales of our debt securities, and proceeds from our convertible notes.

Our principal uses of cash in the near term have primarily been around funding our operations, our capital expenditures, business acquisitions, investments and fulfilling our debt and contractual commitments.

We have also entered into longer term commitments to support our operations, including arrangements to directly lease and operate our infrastructure assets and colocation facilities.

We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

We believe that our cash, cash equivalents balances, marketable securities, and our credit facilities, and the cash flows generated by our operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

We have generated losses from operations in the past and expect to continue to incur operating losses for the foreseeable future due to the investments we intend to make and may require additional capital resources to execute strategic initiatives to grow our business.

We believe we will meet longer-term expected future cash requirements and obligations, through a combination of cash flows from operating activities, available balances of cash, cash equivalents and marketable securities and available credit under our credit facilities.

In addition, we may engage in equity or debt financings to secure additional funds.

As noted above, our Notes mature on March 25, 2026, and if we are required to repay the Notes or if we are unable to generate sufficient cash flow to service our debt, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive.

As of December 31, 2021, we had $55.4 million of commitments for capital expenditures which will primarily be financed through finance leases under our existing under our existing agreements.

Cash Collateralized Revolving Credit Agreement

We have a finance lease agreement with an equipment provider that provides financing for up to $90 million in network equipment.

Individual leases have average an interest rate of 4.8% and terms of three years.

The agreement provides for bargain purchase prices at the end of the terms.

The amortization of leased assets is included in depreciation and amortization expense.

On February 16, 2021, we entered into a Senior Secured Credit Facilities Agreement ("Credit Agreement") with Silicon Valley Bank for an aggregate commitment amount of $100.0 million.

The Credit Agreement bears interest at a rate per annum equal to the sum of LIBOR for the applicable interest period plus 1.75% - 2.00%, depending on the average daily outstanding balance of all loans and letters of credit under the Credit Agreement.

We believe that our cash and cash equivalents balances, and available borrowing capacity under our credit facility, and the cash flows generated by our operations, net of the cash outflows used in our operations, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

We have generated losses from operations in the past and expect to continue to incur operating losses for the foreseeable future due to the investments and strategic initiatives we intend to make to grow our business.

Our uses of cash beyond the next 12 months will depend on many factors, including the general economic environment in which we operate and our ability to generate cash flow from operations, which are uncertain.

We may also use our cash to buy back any outstanding debt on our convertible notes or on any future equity issuances.

Senior Secured Credit Facilities Agreement

On February 16, 2021, we entered into a Senior Secured Credit Facilities Agreement ("Credit Agreement") with Silicon Valley Bank for an aggregate commitment amount of $100.0 million, with a maturity date of February 16, 2024.

The Credit Agreement bears interest at a rate per annum equal to the sum of LIBOR for the applicable interest period plus 1.75% to 2.00%, depending on the average daily outstanding balance of all loans and letters of credit under the Credit Agreement.

Interest payments on outstanding borrowings are due on the last day of each interest period.

The Credit Agreement has a commitment fee on the unused portion of the borrowing commitment, which is payable on the last day of each calendar quarter at a rate per annum of 0.20% - 0.25% depending on the average daily outstanding balance of all loans and letters of credit under the Credit Agreement.

The agreement allows for use of an alternative interest rate.

In addition, our Credit Agreement contains a financial covenant that requires us to maintain a consolidated adjusted quick ratio of at least 1:25 to 1:00 tested on a quarterly basis as well as a springing revenue growth covenant for certain periods if our consolidated adjusted quick ratio falls below 1.75 to 1:00 on the last day of any fiscal quarte r.

The Credit Agreement has a commitment fee on the unused portion of the borrowing commitment, which is payable on the last day of each calendar quarter at a rate per annum of 0.20% to 0.25% depending on the average daily outstanding balance of all loans and letters of credit under the Credit Agreement.

The agreement allows for an alternative interest rate to be used.

The Credit Agreement contains a financial covenant that requires us to maintain a consolidated adjusted quick ratio of at least 1:25 to 1:00 tested on a quarterly basis as well as a springing revenue growth covenant for certain periods if our consolidated adjusted quick ratio falls below 1.75 to 1:00 on the last day of any fiscal quarter.

As of December 31, 2022, we were in compliance with the covenant and we expect to continue to be in compliance for at least the next 12 months.

During the year ended December 31, 2022and 2021, no amounts were drawn down on the Credit Agreement.

Convertible Senior Notes

In March 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.

On May 25, 2022, we entered into separate, privately negotiated transactions with certain holders of the Notes to repurchase (the "Repurchases") approximately $235.0 million aggregate outstanding principal amount of the Notes for an aggregate cash repurchase price of approximately $176.4 million.

The Repurchases closed on May 31, 2022.

The remaining Notes will mature on March 15, 2026, unless earlier converted, redeemed or repurchased.

The following table summarizes our cash flows for the period indicated:

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Cash used in operating activities $ (69,632) $ (38,482) $ (19,916)

Cash used in investing activities (794,511) (275,023) (87,678)

Cash provided by financing activities 936,551 272,739 168,148

Cash provided by (used in) investing activities 235,751 (794,511) (275,023)

Cash provided by (used in) financing activities (189,149) 936,551 272,739

Cash Flows from Operating Activities

For the year ended December 31, 2021, cash used in operating activities consisted primarily of our net loss of $222.7 million adjusted for non-cash items, including $28.8 million of depreciation and amortization, $21.2 million of amortization related to acquired intangibles, $140.5 million of stock-based compensation expense, $26.9 million of lease amortization expense, amortization of deferred contract costs of $6.3 million and amortization of debt issuance costs of $3.2 million.

For the year ended December 31, 2022, cash used in operating activities consisted primarily of our net loss of $190.8 million, adjusted for non-cash items of $207.3 million, and net cash flows used in operating assets and liabilities of $86.2 million.

The main drivers of the changes in operating assets and liabilities were an increase in other assets of $35.4 million related to deferred contract costs, an increase in accounts receivable of $27.4 million, primarily due to an increase in revenue and the timing of cash receipts from certain of our larger customers and an increase of $6.8 million in prepaid expenses and other assets due to pre-payments for hosting services and software licenses.

We also had $27.0 million of operating lease payments.

There were also increases of $8.3 million in accrued expenses and $2.1 million in accounts payable and other liabilities due to timing of payments.

For the year ended December 31, 2021, cash used in operating activities consisted primarily of our net loss of $222.7 million adjusted for non-cash items of $227.3 million.

With respect to changes in operating assets and liabilities, there was an increase in accounts receivable of $14.6 million, primarily due to an increase in revenue and the timing of cash receipts from certain of our larger customers and an increase of $15.2 million in prepaid expenses and other assets due to pre-payments for software licenses.

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This was partially offset by increases of $4.3 million in accrued expenses and $8.9 million in other liabilities due to timing of payments.

For the year ended December 31, 2020, cash used in operating activities consisted primarily of our net loss of $95.9 million adjusted for non-cash items, including $20.0 million of depreciation and amortization, $5.1 million of amortization related to acquired intangibles, $64.4 million of stock-based compensation expense, $21.8 million of lease amortization expense, amortization of deferred contract costs of $3.5 million and allowance for credit losses of $1.7 million.

This was partially offset by $13.0 million in tax benefits related to release of valuation allowance related to deferred taxes associated with the Signal Sciences acquisition.

For the year ended December 31, 2020, cash used in operating activities consisted primarily of our net loss of $95.9 million adjusted for non-cash items of $104.3 million.

With respect to changes in operating assets and liabilities, there was a decrease in accounts receivable of $9.3 million, primarily due to increased collections due to the growth of our business and the timing of cash receipts from certain of our larger customers, and $22.7 million in prepaid expenses and other assets due to pre-payments for software licenses.

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This was partially offset by an increase of $22.0 million in accounts payable, accrued expenses, and other liabilities due to timing of payments.

For the year ended December 31, 2019, cash used in operating activities consisted primarily of our net loss of $51.6 million adjusted for non-cash items, including $16.6 million of depreciation and amortization, $12.1 million of stock-based compensation expense, $2.3 million of amortization of deferred contract costs, $0.7 million of amortization of deferred rent, an increase in the fair value of our common stock warrants of $2.4 million, and amortization of debt issuance costs of $1.9 million.

With respect to changes in operating assets and liabilities, there was an increase in accounts receivable of $12.8 million, primarily due to the growth of our business and the timing of cash receipts from certain of our larger customers, an increase in other long-term assets of $3.9 million due to the adoption of Accounting Standards Update No.

2014-09, Revenue from Contracts with Customers, and an increase of $2.7 million in prepaid expenses and other assets due to pre-payments for software licenses.

Cash Flows from Investing Activities

For the year ended December 31, 2021, cash used in investing activities was $794.5 million, primarily consisting of $928.2 million in purchases of marketable securities, $34.8 million of payments related to purchases of property and equipment to expand our network, $13.5 million of additions to capitalized internal-use software.

This was offset by $184.6 million of maturities and sales of marketable securities.

For the year ended December 31, 2022, cash provided by investing activities was $235.8 million, primarily consisting of $697.0 million of maturities and sales of marketable securities.

This was offset by $355.5 million in purchases of marketable securities, $42.2 million of advanced payments and $20.0 million of payments related to purchases of property and equipment to expand our network, $26.0 million related to business acquisitions and $18.1 million of additions to capitalized internal-use software.

to expand our network, and $13.5 million of additions to capitalized internal-use software.

This was partially offset by $184.6 million of maturities and sales of marketable securities.

For the year ended December 31, 2020, cash used in investing activities was $275.0 million, primarily consisting of $269.1 million in purchases of marketable securities, $201.0 million of business acquisitions, net of cash acquired, $29.6 million of payments related to purchases of property and equipment to expand our network, $6.1 million of additions to capitalized internal-use software, and $1.8 million of purchases of intangible assets.

This was offset by $232.0 million of maturities and sales of marketable securities.

For the year ended December 31, 2019, cash used in investing activities was $87.7 million, primarily consisting of $191.0 million in purchases of marketable securities, $14.6 million of payments related to purchases of property and equipment to expand our network, and $4.9 million of additions to capitalized internal-use software.

This was offset by $123.4 million of maturities of marketable securities.

Cash Flows from Financing Activities

For the year ended December 31, 2022, cash used in financing activities was $189.1 million, primarily consisting of $177.1 million used for the partial repurchase of our convertible debt and $22.5 million of finance lease liabilities repayments.

This was partially offset by $4.8 million in proceeds from the employee stock purchase plan ("ESPP") and $5.7 million in proceeds from stock option exercises by our employees and directors.

For the year ended December 31, 2021, cash provided by financing activities was $936.6 million, primarily consisting of $930.8 million of proceeds from the issuance of the Notes, net of issuance costs, $8.1 million in proceeds from the employee stock purchase plan ("ESPP") and $12.6 million in proceeds from stock option exercises by our employees and directors.

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This was partially offset by $20.3 million of debt repayments, $5.8 million of finance lease liabilities repayments, and $0.7 million of payments of costs related to our follow-on public offering.

For the year ended December 31, 2019, cash provided by financing activities was $168.1 million, primarily consisting of $192.5 million in proceeds from our IPO, net of underwriting fees, $5.4 million in proceeds from the ESPP, $6.1 million in proceeds from stock option exercises by our employees and directors.

This was partially offset by $29.1 million of net debt repayments, $5.5 million of payments of costs related to our IPO, and $1.4 million of finance lease liabilities repayments.

Contractual Obligations and Other Commitments

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Total $ 121,961 $ 81,688 $ 740,957 $ 2,942 $ 947,548

(1) Purchase obligations-non equipment represent total future minimum payments under contracts with our cloud infrastructure provider, network service providers, and other vendors.

(1) Purchase obligations-non equipment represent total future minimum payments under contracts with our cloud infrastructure providers, network service providers, and other vendors.

Purchase obligations exclude agreements that are cancellable without penalty.

Our purchase obligations exclude our operating lease commitments associated with our colocation arrangements which have been separately disclosed under our operating lease commitments.

(2) Purchase obligations-equipment represent total future minimum payments under contracts for capital expenditures which will primarily be financed through finance leases under our existing agreements.

Our purchase obligations exclude our operating lease commitments associated with our colocation arrangements which have been separately disclosed under our operating lease obligations.

(2) Purchase obligations-equipment represent total future minimum payments under contracts for capital expenditures.

(3) Operating lease obligations represent total future minimum rent payments under non-cancelable operating lease agreements, such as our facilities and colocation (i.e.

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(5) Debt obligation aggregate principal amount of our 0% convertible senior notes due on March 15, 2026.

These commitments will be generally be settled with existing cash on hand and cash generated from operations.

Purchase obligations for capital equipment will be primarily settled by additional finance lease borrowings.

Critical Accounting Policies and Estimates

These commitments will generally be settled with existing cash on hand, cash generated from operations and our current or any future financing arrangements.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with U.S.

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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 recognize revenue in accordance with ASC 606, where 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.

The processing and recording of certain revenue requires a manual process, which uses a complex set of procedures to generate complete and accurate data to record these revenue transactions.

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.

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.

Our performance obligations generally 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 network services, security, compute, professional services, support, and other edge cloud platform services.

For contracts with multiple performance obligations that are delivered over different time periods, we allocate the contract transaction price to each performance obligation using the estimated 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 the 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 analyze separate sales of our products and services or the discounted list price per our approved price list as a basis for estimating the SSP of these products and services.

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 as geographic region and distribution channel, in determining the SSP.

The transaction price in a contract for usage-based services is typically equal to the minimum commit price in the contract less any discounts provided.

The transaction price in a contract that does not contain usage-based services is equal to the total contract value.

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, subscription services, 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.

In contracts where there are timing differences between when we transfer a promised good or service to the customer and when the customer pays for that good or service, we have determined our contracts do not include a significant financing component.

We have also elected the practical expedient to not measure financing components for any contract where the timing difference is less than one year.

Stock-Based Compensation

We account for stock-based employee compensation plans under the fair value recognition and measurement provisions, which require all stock-based payments, including grants of stock options, restricted stock units ("RSUs"), restricted stock awards ("RSAs"), performance stock awards ("PSUs") and shares issued under our Employee Stock Purchase Plan ("ESPP") to be measured based on the grant-date fair value of the award and recognized as expense over the requisite service period, which is generally the vesting period of the respective award.

We account for forfeitures as they occur.

The fair value of RSUs and RSAs granted to our employees and directors is based on the grant date fair value.

The fair value of PSUs granted to our employees is based on the fair value determined when the performance metrics were set.

The fair value of stock options granted to our employees and directors, and of the shares to be issued under our ESPP are based on the Black-Scholes option-pricing model.

The determination of the fair value of a stock-based award is affected by the deemed fair value of the underlying stock price on the grant date, as well as assumptions regarding a number of other complex and subjective variables.

These variables include the fair value of our common stock, the expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates, and expected dividends:

These assumptions and estimates are as follows:

• Fair Value of Common Stock.

We use the market closing price of our Class A common stock, as reported on the New York Stock Exchange, for the fair value.

Prior to our IPO, our board of directors considered numerous objective and subjective factors to determine the fair value of our common stock at each meeting at which awards are approved.

These factors included, but were not limited to (i) contemporaneous third-party valuations of Common Stock;

(ii) the rights and preferences of Series Preferred relative to Common Stock;

(iii) the lack of marketability of Common Stock;

(iv) developments in the business;

and (v) the likelihood of achieving a liquidity event, such as an IPO or sale of the Company, given prevailing market conditions.

• Expected Term.

The expected term represents the period that our stock-based awards are expected to be outstanding.

The expected term assumptions were determined based on the vesting terms, exercise terms, and contractual lives of the options.

The expected term was estimated using the simplified method allowed under Securities and Exchange Commission (SEC) guidance.

• Volatility.

The expected volatility is derived from an average of the historical stock volatilities of the common stock of the Company.

In prior years the expected volatility calculation also included the historical stock volatilities of comparable companies as we did not have a long enough trading history of our common stock .

Comparable companies consist of public companies in our industry, which are similar in size, stage of life cycle, and financial leverage.

• Risk-free Interest Rate.

The risk-free interest rate used in the Black-Scholes option pricing model is the implied yield available on U.S.

Treasury zero-coupon issues with a remaining term equivalent to that of the options for each expected term.

• Dividend Yield.

The expected dividend assumption is based on our current expectations of our anticipated dividend policy.

We have no history of paying any dividends and therefore used an expected dividend yield of zero.

Valuation of Goodwill and Other Acquired Intangible Assets in Business Combination

Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed.

We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets.

Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include but are not limited to future expected cash flows from acquired developed technologies;

the acquired company’s trade name, existing customer relationships and backlog.

These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made.

Additionally, unanticipated events and circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results.

The authoritative guidance allows a measurement period of up to one year from the date of acquisition to make adjustments to the preliminary allocation of the purchase price.

As a result, during the measurement period we may record adjustments to the fair values of assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation.

Upon conclusion of the measurement period or final determination of the values of the assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments will be recorded to the Consolidated Statement of Operations.

Impairment of Goodwill, Intangible Assets and Other Long-Lived Assets

Goodwill is the amount by which the cost of acquired net assets in a business combination exceeds the fair value of the net identifiable assets on the date of purchase and is carried at its historical cost.

We test goodwill for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the asset might be impaired.

We determined that we operate as one reporting unit and we perform our annual impairment test of goodwill as of October 31 and whenever events or circumstances indicate that the asset might be impaired.

Long-lived assets, including property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances, such as service discontinuance, technological obsolescence, significant decreases in our market capitalization, facility closures, or work-force reductions indicate that the carrying amount of the long-lived asset or asset group may not be recoverable.

When such events occur, we compare the carrying amount of the asset or asset group to the undiscounted expected future cash flows related to the asset or asset group.

If this comparison indicates that an impairment is present, the amount of the impairment is calculated as the difference between the carrying amount and the fair value of the asset or asset group.

We lease office space and data centers ("Colocation leases") under non-cancelable operating leases with various expiration dates through 2027.

We also lease server equipment under non-cancelable operating finance leases with various expiration dates through 2024.

We determine if an arrangement contains a lease at inception.

Operating lease right-of-use assets and lease liabilities are recognized at the present value of the future lease payments at commencement date.

The interest rate implicit in our operating leases is not readily determinable, and therefore an incremental borrowing rate is estimated to determine the present value of future payments.

The estimated incremental borrowing rate factors in a hypothetical interest rate on a collateralized basis with similar terms, payments, and economic environments.

Operating lease right-of-use assets also include any prepaid lease payments and lease incentives.

Certain of the operating lease agreements contain rent concession, rent escalation, and option to renew provisions.

Rent concession and rent escalation provisions are considered in determining the single lease cost to be recorded over the lease term.

Single lease cost is recognized on a straight-line basis over the lease term commencing on the date we have the right to use the leased property.

The lease terms may include options to extend or terminate the lease.

We generally use the base, non-cancelable, lease term when recognizing the lease assets and liabilities, unless it is reasonably certain that the option will be exercised.

Our lease agreements may contain variable costs such as common area maintenance, operating expenses or other costs.

Variable lease costs are expensed as incurred on the consolidated statements of operations.

Our lease agreements generally do not contain any residual value guarantees or restrictive covenants.

We lease networking equipment from a third party, through equipment finance leases.

These leases include a bargain purchase option, resulting in a full transfer of ownership at the completion of the lease term.

Operating leases are reflected in operating lease right-of-use assets, operating lease liabilities, and operating lease liabilities, non-current on our consolidated balance sheets.

Finance leases are included in property and equipment, net, finance lease liabilities, and finance lease liabilities, non-current on our consolidated balance sheets.

Internal-Use Software Development Costs

Labor and related costs associated with internal-use software during the application development stage are capitalized.

Capitalization of costs begins when the preliminary project stage is completed, management has committed to funding the project, and it is probable that the project will be completed and the software will be used to perform the function intended.

Capitalization ceases at the point when the project is fully tested and substantially complete and is ready for its intended purpose.

The capitalized amounts are included in property and equipment, net on the Consolidated Balance Sheets.

We amortize such costs over the estimated useful life of the software;

completed internal-use software that is used on our network is amortized to cost of revenue over its estimated useful life.

Costs incurred during the planning, training, and post-implementation stages of the software development life-cycle are expensed as incurred.

Legal and Other Contingencies

From time to time, we have been and will continue to be subject to legal proceedings and claims.

Periodically, we evaluate the status of each legal matter and assess our potential financial exposure.

If the potential loss from any legal proceeding or litigation is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss.

Significant judgment is required to determine the probability of a loss and whether the amount of the loss is reasonably estimable.

The outcome of any proceeding is not determinable in advance.

As a result, the assessment of a potential liability and the amount of accruals recorded are based only on the information available to us at the time.

As additional information becomes available, we reassess the potential liability related to the legal proceeding or litigation, and may revise our estimates.

Any revisions could have a material effect on our results of operations.

Please refer to Note 10—Commitments and Contingencies for discussion around our legal proceedings.

We conduct operations in many tax jurisdictions throughout the United States.

In many of these jurisdictions, non-income-based taxes, such as sales and use and telecommunications taxes are assessed on our operations.

We are subject to indirect taxes, and may be subject to certain other taxes, in some of these jurisdictions.

Historically, we have not billed or collected these taxes and, in accordance with U.S.

GAAP, we have recorded a provision for our tax exposure in these jurisdictions when it is both probable that a liability has been incurred and the amount of the exposure can be reasonably estimated.

As a result, we have recorded a liability of $7.5 million as of December 31, 2021.

These estimates are based on

several key assumptions, including the taxability of our products, the jurisdictions in which we believe we have nexus and the sourcing of revenues to those jurisdictions.

In the event these jurisdictions challenge our assumptions and analysis, our actual exposure could differ materially from our current estimates.

Stock-based Compensation Fair Value determination

We recognize compensation expense related to stock options based on the fair value of stock-based awards on the date of grant.

We determine the grant date fair value of the awards using the Black-Scholes option-pricing model.

The related stock-based compensation expense is recognized on a straight-line basis over the period in which an employee is required to provide service in exchange for the stock-based award, which is generally four years.

Our stock price volatility and expected option life involve management's best estimates, both of which impact the fair value of the option calculated under the Black-Scholes option pricing model and, ultimately, the expense that will be recognized over the life of the option.

We recognize stock-based compensation expense related to market-based performance stock awards based on the grant-date fair value of the awards.

We determine the grant date fair value of the awards using the Monte Carlo simulation valuation model.

The related stock-based compensation expense is recognized on an accelerated attribution method over the derived service period.

The expected volatility was a blended volatility rate which incorporated both our observed equity volatility and the relevant guideline company volatility.

The derived service period and the expected volatility involve management's best estimates, both of which impact the fair value of the option calculated under the Monte Carlo simulation valuation model and, ultimately, the expense that will be recognized over the life of the option.

Valuation of Goodwill and Other Acquired Intangible Assets in Business Combinations

We account for our acquisitions using the acquisition method of accounting, which requires, among other things, allocation of the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed at their estimated fair values on the acquisition date.

The excess of the fair value of purchase consideration over the values of these identifiable assets and liabilities is recorded as goodwill.

Determining the fair value of assets acquired and liabilities assumed requires significant judgment and estimates including the selection of valuation methodologies, future expected cash flows, discount rates, and useful lives.

Our estimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and, as a result, actual results may

differ from estimates.

During the measurement period, not to exceed one year from the date of acquisition, we may record adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill to reflect new information obtained about facts and circumstances that existed as of the acquisition date.

At the conclusion of the measurement period, or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are reflected in the consolidated statements of operations.

Goodwill Impairment

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net tangible and identifiable intangible assets acquired.

The carrying amount of goodwill is reviewed for impairment at least annually, in the fourth quarter, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

We have a single operating segment and reporting unit structure for all of the periods presented.

To test for goodwill impairment, we compare the carrying value of our reporting unit with its fair value.

If the carrying value of the goodwill is considered impaired, a loss is measured as the excess of the reporting unit’s carrying value over the fair value.

As of October 31, 2022, our annual goodwill impairment assessment date, the estimated fair value of our one single reporting unit has substantially exceeded its carrying value.

Recent Accounting Pronouncements

1 unchanged sentence

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What changed 10-K

Item 7. Management’s Discussion and Analysis