What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-22 compared with 2023-02-27 · 194 added, 132 removed, 391 unchanged (45% of the section changed)

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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.

The edge cloud is a category of Infrastructure as a Service (“IaaS”) that enables developers to build, secure, and deliver digital experiences, at the edge of the Internet.

This service represents the convergence of the Content Delivery Network (“CDN”) with functionality that has been traditionally delivered by hardware-centric appliances such as Application Delivery Controllers (“ADC”), Web Application Firewalls (“WAF”), Bot Detection, Distributed Denial of Service (“DDoS”) and observability solutions.

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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.

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.

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Our 10 largest customers generated an aggregate of 37% and 35% of our revenue in the trailing 12 months ended December 31, 2023 and 2022, 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.

No customer accounted for more than 10% of revenue for the years ended December 31, 2023 and 2022.

Affiliated customers that are business units of a single company in the streaming entertainment space generated an aggregate of 12% and 11% of the Company ’ s revenue for the years ended December 31, 2023 and 2022, respectively.

We incurred a net loss of $133.1 million and $190.8 million in the years ended December 31, 2023 and 2022, respectively.

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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 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.

These direct selling efforts are reflected by the revenue generated from our enterprise customers.

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

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

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Winning New Customers

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.

We are focused on continuing to attract new customers, including those in diverse 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.

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

Expanding into New Vertical Markets and within Our Existing Customer Base

Expanding into New 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.

By focusing on our key differentiators, including performance and security, we have an 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.

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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 our customers mature, we assist them in expanding their use of our platform, including the use of additional offerings beyond content 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 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.

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.

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.

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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, 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.

As of both December 31, 2023 and 2022, our edge network spanned across 58 markets and 34 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.

This requires us to expand our sales and marketing capabilities outside of the United States, as well as increase the number of markets we have a presence in around the world to support our customers.

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.

This requires us to expand our sales and marketing capabilities outside of the United States, increase the number of markets we have a presence in around the world to support our customers, and manage the administrative aspects of a global organization, each of which place a strain on our business and culture.

In addition, our bandwidth costs are higher in markets outside of the United States and Europe, which may impact our gross margins.

We are closely monitoring the unfolding events of the Russian invasion of Ukraine, as well as the more recent hostilities in Israel, and their global impacts.

While the conflicts are still evolving and the outcomes remain highly uncertain, we do not believe the Russia-Ukraine or Israel-Hamas conflicts will have a material impact on our business and results of operations.

We do not have POPs or operations in Russia, Ukraine, or Israel.

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.

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 either conflict continues or worsens, leading to greater global economic disruptions and uncertainty, our business and results of operations could be materially impacted.

Our customers operating in Russia, Ukraine, and Israel represented an immaterial portion of our consolidated revenue as of December 31, 2023 and 2022, respectively.

Investing in Sales and Marketing

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Utilizing our direct sales force, we have multiple selling points within organizations to acquire new customers and increase usage from our existing customers.

We will continue to increase our discretionary marketing spend, including account-based and brand spend, to drive the effectiveness of our sales teams.

We will continue to increase our discretionary marketing spend, including account-based, targeted demand generation and brand spend, to drive the effectiveness of our sales teams.

As a result, we expect our total operating expenses to increase as we continue to expand.

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For the years ended December 31, 2023 and 2022, our research and development expenses as a percentage of revenue were 30% and 36%, respectively.

Our research and development expenses each period is impacted by the amount of software development costs that meet the criteria for capitalization.

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.

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As of December 31, 2023, 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.

In addition, there can be no assurance that we are adequately prepared for unexpected increases in bandwidth demands by our customers, particularly when customers experience cyber-attacks.

The bandwidth we have contracted to purchase may become unavailable for a variety of reasons, including service outages, payment disputes, network providers going out of business, natural disasters, networks imposing traffic limits, or governments adopting regulations that impact network operations.

As we continue to experience growth, we may face challenges managing adequate server capacity in our POPs due to potential component delays, shortages, price increases, hardware efficiencies gained through internal development, or any potential changes in server architecture, including due to technological advances or obsolescence.

We have in the past needed to, and may need to continue to, write-down or write-off server assets if we have server asset levels in excess of forecasted network capacity needs.

For example, in the year ended December 31, 2023, we recognized computer and networking equipment related write-off charges of $4.3 million.

Conversely, if we underestimate network capacity needs, we may in future periods be unable to meet demand and be required to incur higher costs to secure necessary parts and components of our servers.

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 availability as well as delays and additional expenses in arranging new facilities and services.

In addition, there can be no assurance that we are adequately prepared for unexpected increases in bandwidth demands by our customers, particularly when we or our customers experience cyber-attacks.

The bandwidth we have contracted to purchase may become unavailable for a variety of reasons, including service outages, payment disputes, network providers

going out of business, natural disasters, networks imposing traffic limits, or governments adopting regulations that impact network operations.

Key Business Metrics

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.

The calculation of these key metrics below may differ from other similarly titled metrics used by other companies, analysts, or investors.

In the first quarter of 2023, we updated the methodology (“new methodology”) by which we calculate our customer count metrics, including Total Customer Count, Enterprise Customer Count and associated metrics.

We believe that the new methodology more accurately reflects the trends in our business, gives management more insight into these trends, including customer usage of our platform and the seasonality we experience, and reduces lagging indicators inherent in our previous methodology (“prior methodology”).

In conjunction with this update, for comparability purposes we will continue to report our customer count metrics using both the prior and new methodology, for the current and comparative periods presented in our Annual Reports on Form 10-K through the end of the fiscal year ended December 31, 2023.

We will no longer report our customer count metrics using the prior methodology beginning with our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024.

As of December 31,

Number of customers (as of end of period) 2,958 2,804

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%

NRR (as of end of period) 110.7% 106.6%

LTM NRR 119.1% 117.6%

Number of Customers

We believe that the number of customers is an important indicator of the adoption of our platform.

Our definition of a customer consists of identifiable operating entities with which we have a billing relationship in good standing, from which we recognized revenue during the period.

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.

Customer metrics (prior methodology):

Total Customer Count (based on last month revenue) 3,097 2,958

Enterprise Customer Count (based on trailing 12-month revenue) 532 493

Average Enterprise Customer Spend (based on trailing 12-month revenue;

in thousands)

Annual Revenue Retention (“ARR”) Rate

99.1 % 99.2 %

Customer metrics (new methodology):

Total Customer Count (based on current quarter revenue) 3,243 3,062

Enterprise Customer Count (based on annualized revenue) 578 533

Average Enterprise Customer Spend (based on annualized current quarter revenues;

in thousands)

Annual Revenue Retention Rate

99.2 % 98.9 %

Other key metrics:

Dollar-Based Net Expansion Rate (“DBNER”) 119.0 % 122.7 %

Net Retention Rate (“NRR”) 110.1 % 110.7 %

Last-twelve Months Net Retention Rate (“LTM NRR”) 113.4 % 119.1 %

Due to the revisions reflected in the above methodology, the customer count metrics included above calculated using our new methodology are not comparable to the historical customer count metrics included in our previously filed Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Form S-1 and Form S-3 Registration Statements, outside of the data included in the table above.

Total Customer Count

We believe that our total number of customers is an important indicator of the adoption of our platform.

Our definition of a customer consists of identifiable operating entities with which we have a billing relationship in good standing and which we have recognized revenue from.

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 sales 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.

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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.

Our prior methodology by which we calculate total customer count, includes identifiable operating entities with which we have a billing relationship in good standing, from which we recognized revenue during the last month of the quarter.

As of December 31, 2023 and 2022, we had 3,097 and 2,958 customers, respectively.

Our new methodology by which we calculate total customer count, includes identifiable operating entities with which we have a billing relationship in good standing, from which we recognized revenue during the quarter.

As of December 31, 2023 and 2022, we had 3,243 and 3,062 customers, respectively.

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.

Number of Enterprise Customers

Historically our revenue has been driven primarily by a subset of customers who have leveraged our platform substantially from a usage standpoint.

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

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.

Enterprise Customer Count

Historically our revenue has been driven primarily by a subset of our customers, our enterprise customers, who have leveraged our platform substantially from a usage standpoint.

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

Under our prior methodology, our enterprise customer count is defined as customers with revenue in excess of $100,000 over the trailing 12-month period.

As of December 31, 2023, we had 532 of such enterprise customers, which generated 90% of our revenue for the trailing 12 months ended December 31, 2023.

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

Under our new methodology, our enterprise customer count is defined as customers with annualized current quarter revenue in excess of $100,000.

This is calculated by taking the revenue we recognized for each customer in the current quarter and multiplying it by four.

As of December 31, 2023, we had 578 of such enterprise customers which generated 92% of the total annualized current quarter revenue for our total customers for the period ended December 31, 2023.

As of December 31, 2022, we had 533 of such enterprise customers which generated 92% of the total annualized current quarter revenue for our total customers for the period ended December 31, 2022.

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.

Under the prior methodology, our average enterprise customer spend is calculated by taking the sum of the trailing 12-month revenue contributed by enterprise customers, as defined under our prior methodology as customers with revenue in excess of $100,000 over the trailing 12-month period, existing as of December 31, 2023, and dividing that by that same number

of enterprise customers as of December 31, 2023.

As of December 31, 2023, our average enterprise customer spend under the prior methodology was $859 thousand, as compared to $782 thousand as of December 31, 2022.

Under the new methodology, our average enterprise customer spend is calculated by taking the annualized current quarter revenue contributed by enterprise customers, as defined under our new methodology as customers with annualized current quarter revenue in excess of $100,000, existing as of December 31, 2023, and dividing that by that same number of enterprise customers as of December 31, 2023.

As of December 31, 2023, our average enterprise customer spend under the new methodology was $880 thousand, as compared to $822 thousand as of December 31, 2022.

Annual Revenue Retention Rate (“ARR”)

We separately monitor customer retention and churn on an annual basis by measuring our annual revenue retention rate, which we calculate by first multiplying the final full month of revenue from a customer that terminated its contract with us (a “ Churned Customer ” ) by the number of months remaining in the same calendar year to get our “ Annual Revenue Churn ” .

The quotient of the Annual Revenue Churn from all of our Churned Customers divided by our annual revenue of the same calendar year is then subtracted from 100% to determine our annual revenue retention rate.

We believe this calculation is helpful in that it is based on the amount of revenue that we would expect to have received in the remaining portion of a particular period had a customer not terminated its contract with us.

It is not indicative of the actual revenue contribution from churned customers in past periods.

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.

Under the prior methodology, our ARR rate is calculated by subtracting the quotient of the Annual Revenue Churn from all of our Churned Customers from which we recognized revenue during the last month of the prior year divided by our annual revenue of the same calendar year from 100%.

For the years ended December 31, 2023 and 2022 the ARR was 99.1% and 99.2%, respectively.

Under the new methodology, our ARR rate is calculated by subtracting the quotient of the Annual Revenue Churn from all of our Churned Customers from which we recognized revenue during the last quarter of the prior year divided by our annual revenue of the same calendar year from 100%.

For the years ended December 31, 2023 and 2022 the ARR was 99.2% and 98.9%, respectively.

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.

our growth, in part, by measuring DBNER.

Our ability to generate and increase our revenue depends on 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 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.

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We expect our DBNER for individual cohorts to decrease once customers in that cohort have used our platform for more than two years and become a larger portion of both our overall customer base and the revenue that we use to calculate DBNER.

We separately monitor customer retention and churn on an annual basis by measuring our annual revenue retention rate, which we calculate by multiplying the final full month of revenue from a customer that terminated its contract with us (a "Churned Customer") by the number of months remaining in the same calendar year ("Annual Revenue Churn").

It is not indicative of the actual revenue contribution from churned customers in past periods.

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 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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In addition to measuring expansion using DBNER, NRR and LTM NRR also allow us to track customer retention which demonstrates the stickiness of our edge cloud platform.

Our NRR measures the net change in monthly revenue from existing customers in the last month of the period (the “current" period month) compared to the last month of the same period one year prior (the “prior" period month) and includes revenue contraction due to billing decreases or customer churn, revenue expansion due to billing increases, but excludes revenue from new customers.

Our NRR measures the net change in monthly revenue from existing customers in the last month of the period (the “current” period month) compared to the last month of the same period one year prior (the “prior” period month) and includes revenue contraction due to billing decreases or customer churn and revenue expansion due to billing increases, but excludes revenue from new customers.

We calculate Net Retention Rate by dividing the revenue from the current period month by the revenue in the prior period month.

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For the trailing twelve months ended December 31, 2023 and 2022 our LTM NRR was 113.4% and 119.1%, respectively.

Remaining Performance Obligations (“RPO”)

RPO represent future committed revenue for periods within current contracts with customers, as well as deferred revenue arising from consideration invoiced for which the related performance obligations have not been satisfied.

As of December 31, 2023, the aggregate amount of the transaction price in our contracts allocated to RPO that were unsatisfied or partially unsatisfied was $ 235.7 million.

Subsequent to December 31, 2023, we entered into a modification of an existing contract with a total commitment of $9.5 million, which contributed to additional RPO.

Key Components of Statement of Operations

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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.

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

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

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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, 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.

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, 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.

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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.

Our general and administrative expenses also include sales and other tax expenses to which we are subject to based on the manner in which 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.

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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.

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.

Impairment expense

Our impairment expense relates to write-off of excess computer and networking equipment including software that we do not expect to use.

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.

Our net gain on extinguishment of debt relates to the partial repurchases of our outstanding senior convertible notes in May 2022, May 2023, November 2023, and December 2023.

Other Income and Expenses

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

Our income tax expense (benefit) consists primarily of income taxes in certain foreign jurisdictions where we conduct business.

The Company currently maintains a full valuation allowance on the Company’s U.S.

Federal and state net deferred tax assets.

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

Results of Operations

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Cost of revenue 239,660 222,944

222,944 167,002

Gross profit 266,328 209,781

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Research and development 152,190 155,308

155,308 126,859

Sales and marketing 191,773 179,869

179,869 152,645

General and administrative 116,077 120,803

120,803 126,845

Impairment expense 4,316 —

Total operating expenses 464,356 455,980

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Interest expense (4,051) (5,887)

(5,887) (5,245)

Other income (expense), net (29) 356

Loss before income tax expense (benefit) (190,680) (222,628)

Other expense, net

Loss before income tax expense (133,309) (190,680)

Income tax expense (benefit) (221) 94

Net loss attributable to common stockholders $ (133,088) $ (190,774)

The following tables set forth our results of operations for the period presented as a percentage of our revenue:

Year ended December 31,

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General and administrative 23 28

Impairment expense 1 —

Total operating expenses 92 105

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Other income (expense), net — —

Loss before income taxes (43) (63)

Loss before income tax expense (26) (43)

Income tax expense (benefit) — —

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Revenue was $506.0 million for the year ended December 31, 2023 compared to $432.7 million for the year ended December 31, 2022, an increase of $73.3 million, or 17%.

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.

We had 2,804 customers and 445 enterprise customers as of December 31, 2021.

This represents an increase of 154, or 5%, in customers and 48, or 11%, in enterprise customers from December 31, 2021.

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.

Revenue growth was driven by a $58.1 million increase in revenue related to further adoption of our modern edge platform and products, as well as a $14.7 million increase in revenue related to products acquired from the acquisition of Signal Sciences.

For the years ended December 31, 2023 and 2022, approximately 95% and 94% of our revenue was driven by usage on our platform, respectively.

Revenue was 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 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.

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

Under the prior methodology, as defined earlier in the ‘Key Business Metrics’ section, we had 3,097 customers and 532 enterprise customers as of December 31, 2023, compared to 2,958 customers and 493 enterprise customers as of December 31, 2022.

This represents an increase of 139, or 5%, in customers and 39, or 8%, in enterprise customers from December 31, 2022.

Under the new methodology, as defined earlier in the ‘Key Business Metrics’ section, we had 3,243 customers and 578 enterprise customers as of December 31, 2023, compared to 3,062 customers and 533 enterprise customers as of December 31, 2022.

This represents an increase of 181, or 6% in customers and 45, or 8%, in enterprise customers from December 31, 2022.

revenue was $370.4 million and 73% of revenue for the year ended December 31, 2023, and $316.1 million and 73% of revenue for the year ended December 31, 2022.

This represents an increase of $54.3 million, or 17%.

International revenue was $116.6 million and 27% of revenue for the year ended December 31, 2022, and $93.9 million and 27% of revenue for the year ended December 31, 2021.

International revenue was $135.6 million and 27% of revenue for the year ended December 31, 2023, compared to $116.6 million and 27% of revenue for the year ended December 31, 2022.

This represents an increase of $19.0 million, or 16%.

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.

Under the prior methodology, we had 2,028 domestic customers and 1,069 international customers as of December 31, 2023, and 2,074 domestic customers and 884 international customers as of December 31, 2022.

There was a decrease in domestic customers of 46, or 2%, and an increase in international customers of 185, or 21%, compared to December 31, 2022.

Under the new methodology, we had 2,117 domestic customers and 1,126 international customers as of December 31, 2023, and 2,145 domestic customers and 917 international customers as of December 31, 2022.

There was a decrease in domestic customers of 28, or 1%, and an increase in international customers of 209, or 23%, compared to December 31, 2022.

Cost of Revenue

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Cost of revenue was $239.7 million for the year ended December 31, 2023 compared to $222.9 million for the year ended December 31, 2022, an increase of $16.7 million, or 7%.

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.

The increase in cost of revenue is a result of an increase in bandwidth costs of $10.1 million, $7.9 million increase in depreciation expense as a result of increased investments in our platform as well as an increase in repair and maintenance cost of $1.2 million.

There was also a $1.3 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.

This increase was partially offset by a decrease of $2.0 million in software and network costs, a $1.1 million decrease in colocation costs as well as a $0.6 million decrease in loss on disposals of fixed assets.

Gross Profit and Gross Margin

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Gross profit was $266.3 million for the year ended December 31, 2023 compared to $209.8 million for the year ended December 31, 2022, an increase of $56.5 million, or 27%.

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.

Gross margin was 53% for the year ended December 31, 2023 compared to 48% for the year ended December 31, 2022, an increase of 5%.

The increase in gross margin was driven by revenue related to further adoption of our modern edge platform and products, as well as an increase in revenue related to products acquired from the acquisition of Signal Sciences.

Our revenue growth during the year ended December 31, 2023 outpaced the increases in the costs incurred to support the growth of our network.

Operating Expenses

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General and administrative 116,077 120,803 $ (4,726) (4) %

Impairment expense

4,316 — $ 4,316 100 %

Total operating expenses $ 464,356 $ 455,980 $ 8,376 2 %

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General and administrative 23 % 28 % (5) %

Impairment expense 1 % — % 1 %

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 $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.

Research and development expenses were $152.2 million for the year ended December 31, 2023 compared to $155.3 million for the year ended December 31, 2022, a decrease of $3.1 million, or 2%.

This decrease was primarily due to a decrease of $12.9 million in stock-based compensation expense primarily related to restricted stock awards that fully vested in 2022.

The decrease was also due to a $3.1 million increase in capitalized software from headcount growth as well as a $1.6 million decrease in professional fees related to temporary agency costs.

This decrease was partially offset by an increase of $10.4 million of personnel-related costs, such as salaries and benefits due to an increase in headcount as well as a $2.8 million increase in costs associated with the transition and separation of a former executive.

Sales and marketing

Sales and marketing expenses were $191.8 million for the year ended December 31, 2023 compared to $179.9 million for the year ended December 31, 2022, an increase of $11.9 million, or 7%.

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.

This increase was primarily due to a $15.0 million increase in personnel related costs, such as salaries, sales commissions, and benefits.

The increase was also due to a $4.4 million increase in marketing spend associated with brand campaign and advertising, as well as $1.0 million increase in travel and entertainment expenses.

The increase was partially offset by a $5.4 million decrease in stock-based compensation expenses primarily due to restricted stock awards that fully vested in 2022.

There was also a $1.0 million decrease in corporate expenses, $0.9 million decrease in professional fees, $0.9 million decrease in amortization expense as well as a $0.6 million decrease of capitalized software.

General and administrative

General and administrative costs were $116.1 million for the year ended December 31, 2023 compared to $120.8 million for the year ended December 31, 2022, a decrease of $4.7 million, or 4%.

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.

The decrease was primarily due to a $6.7 million decrease in professional fees related to temporary agency costs, as well as a $4.1 million decrease due to sales tax refund and changes in sales tax reserve.

The decrease was also due to a $1.9 million decrease in acquisition-related costs, a $1.4 million decrease in impairment of right of use assets, $1.1 million decrease in insurance.

This decrease was partially offset by a $6.9 million increase in stock-based compensation expenses primarily due to new awards granted, a $3.1 million increase in personnel related costs, as well as a $1.1 million increase in travel and entertainment expenses.

Impairment expense

During the year ended December 31, 2023, the Company recognized an impairment charge of $4.3 million, of which $3.0 million related to property and equipment, net and $1.3 million related to advance payments for the purchase of property and equipment.

The write-off was primarily related to excess computer and networking equipment including software we expect to not be used.

There were no such impairment charges recognized during the year ended December 31, 2022.

Net Gain on Extinguishment of Debt

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Net gain on extinguishment of debt $ 52,416 $ 54,391 $ (1,975) (4) %

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.

Net gain on extinguishment of debt was $52.4 million for the year ended December 31, 2023 compared to $54.4 million for the year ended December 31, 2022, a decrease of $2.0 million, or 4%.

The decrease was primarily due to a lower repurchase price we paid for the transaction during the year ended December 31, 2022 as compared to the repurchase transactions during the year ended December 31, 2023.

Other Income and Expense

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Interest income was $18.2 million for the year ended December 31, 2023 compared to $7.0 million for the year ended December 31, 2022, an increase of $11.1 million, or 158%.

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

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

Interest expense

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Interest expense $ (4,051) $ (5,887) $ 1,836 (31) %

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 to the amortization of debt issuance costs related to the convertible debt and revolving credit facility.

Interest expense was $4.1 million for the year ended December 31, 2023 compared to $5.9 million for the year ended December 31, 2022, a decrease of $1.8 million, or 31%.

This decrease was primarily due to the repurchases that occurred during the years ended December 31, 2022 and December 31, 2023 which reduced the principal amount of our notes.

Other income (expense), net

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(in thousands)

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

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

Other expense, net

$ (1,832) $ (29) $ (1,803) 6,217 %

Other expense, net was $1.8 million for the year ended December 31, 2023 compared to other expense, net, of less than $0.1 million for the year ended December 31, 2022, a decrease of $1.8 million, or 6217%.

The decrease was mainly driven by our foreign currency transaction gains between the periods.

Year ended December 31, Change

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(in thousands)

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.

Income tax expense (benefit)

$ (221) $ 94 $ (315) (335) %

Income tax benefit was $0.2 million for the year ended December 31, 2023 and income tax expense of $0.1 million for the year ended December 31, 2022.

The Company continues to maintain a full valuation allowance in the U.S.

and the tax expense (benefit) for the periods were primarily due to foreign tax expense.

Liquidity and Capital Resources

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

As of December 31, 2023, we had cash, cash equivalents, and marketable securities totaling $328.8 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.

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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.

On February 16, 2021, we entered into a Senior Secured Credit Facilities Agreement (“Credit Agreement”) with the lenders from time to time party thereto (the “Lenders”) and Silicon Valley Bank, as a lender and as administrative agent and collateral agent for the Lenders for an aggregate commitment amount of $100.0 million, with a maturity date of February 16, 2024.

The Credit Agreement originally bore 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.

On June 28, 2023, we entered into the First Amendment to Credit Agreement with the Lenders and First-Citizens Bank & Trust Company (successor by purchase to the Federal Deposit Insurance Corporation as Receiver for Silicon Valley Bridge Bank, N.A.

(as successor to Silicon Valley Bank)), as a lender and as administrative agent and collateral agent for the Lenders, which, among other things, amended the interest rate provisions of the Credit Agreement to replace LIBOR with the Secured Overnight Finance Rate (“SOFR”) as the interest rate benchmark.

On February 16, 2024, we entered into the Second Amendment to Credit Agreement with the Lenders and Silicon Valley Bank, a division of First-Citizens Bank & Trust Company, as a lender and as administrative agent and collateral agent for the Lenders, which, among other things, extended the maturity date of the loans under the Credit Agreement to June 14, 2024.

As amended, the revolving loans bear interest, at the Company’s election, at an annual rate based on SOFR or a base rate.

Loans based on SOFR bear interest at a rate per annum equal to SOFR, plus an adjustment of 0.10%, plus 1.75% to 2.00%, depending on the average daily outstanding balance of all loans and letters of credit under the Credit Agreement.

Loans based on the base rate bear interest at a rate per annual equal to the base rate plus 0.75% to 1.00%, 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% 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.

As of December 31, 2023, we were in compliance with these covenants and we expect to continue to be in compliance for at least the next 12 months.

During the year ended December 31, 2023 and 2022, 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.

In March 2021, we issued $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.

During the year ended December 31, 2023, we entered into several separate, privately negotiated transactions with certain holders of the Notes to repurchase $367.3 million aggregate principal amount of the Notes for an aggregate repurchase price of $309.1 million and aggregate transaction costs of $2.0 million.

The Repurchases were accounted for as a debt extinguishment that resulted in a net gain of $52.4 million, which was recorded as non-operating income on our consolidated statement of operations for the year ended December 31, 2023.

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

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(in thousands)

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

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

Net cash (used in) provided by operating activities $ 362 $ (69,632) $ (38,482)

Net cash (used in) provided by investing activities 294,940 235,751 (794,511)

Net cash (used in) provided by financing activities (331,380) (189,149) 936,551

Cash Flows from Operating Activities

For the year ended December 31, 2023, cash provided by operating activities consisted primarily of our net loss of $133.1 million, adjusted for non-cash items of $203.3 million, and net cash flows used in operating assets and liabilities of $69.9 million.

The main drivers of the changes in operating assets and liabilities were an increase in accounts receivable of $32.9 million, primarily due to an increase in revenue and the timing of cash receipts, an increase in other assets of $23.1 million related to deferred contract costs as well as $22.1 million of operating lease payments.

This was partially offset by decreases of $8.7 million in prepaid expenses.

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.

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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 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.

We also had $18.3 million of operating lease payments.

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

Cash Flows from Investing Activities

For the year ended December 31, 2023, cash provided by investing activities was $294.9 million, primarily consisting of $459.4 million of maturities and sales of marketable securities.

This was offset by $132.2 million in purchases of marketable securities, $21.3 million of additions to capitalized internal-use software, and $11.0 million of payments related to purchases of property and equipment to expand our network.

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.

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, 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.

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.

For the year ended December 31, 2023, cash used in financing activities was $331.4 million, primarily consisting of $310.5 million used for the partial repurchase of our convertible debt, $27.2 million of finance lease liabilities repayments and $4.4 million in payments for deferred consideration for business acquisitions.

This was partially offset by $8.6 million in proceeds from the employee stock purchase plan ( “ ESPP”) and $2.2 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.

This was partially offset by $4.8 million in proceeds from the 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 ESPP and $12.6 million in proceeds from stock option exercises by our employees and directors.

This was partially offset by $13.6 million of finance lease liabilities repayments.

For the year ended December 31, 2020, cash provided by financing activities was $272.7 million, primarily consisting of $274.9 million in proceeds from our follow-on public offering, net of underwriting fees, $9.3 million in proceeds from the ESPP, and $15.3 million in proceeds from stock option exercises by our employees and directors.

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.

Contractual Obligations and Other Commitments

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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 expected volatility was a blended volatility rate which incorporated both our observed equity volatility and our relevant guideline companies’ volatilities.

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.

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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.

Long-lived Assets Impairment

Long-lived assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances, such as service discontinuance, technological obsolescence, facility closures, planned use of the assets 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.

The estimates required to apply this accounting policy include forecasted usage of the long-lived assets, the useful lives of these assets and expected future cash flows.

Goodwill Impairment

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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.

As of December 31, 2023, we believe the estimated fair value of our one single reporting unit has substantially exceeded its carrying value.

Recent Accounting Pronouncements

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis