Fastly, Inc. (FSLY) Earnings Call Transcript

Good afternoon. My name is Corey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Vern Essi, Investor Relations at Fastly. Please go ahead.

Thank you, and welcome, everyone, to our second quarter 2026 earnings conference call. We have Fastly's CEO, Kip Compton; and CFO, Rich Wong, with us today. The webcast of this call can be accessed through our website, fastly.com, and will be archived for 1 quarter. A copy of today's earnings press release, related financial tables and supplement, all of which are furnished in our 8-K filing today, can be found in the Investor Relations portion of Fastly's website, along with the investor presentation. During this call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, product and services, sales and growth, strategy, long-term growth and overall future prospects. These statements are subject to known and unknown risks, uncertainties and assumptions that could cause actual results to differ materially from those projected or implied during the call. For further information regarding risk factors for our business, please refer to our filings with the SEC, including our most recent annual report filed on Form 10-K and quarterly reports filed on Form 10-Q filed with the SEC, and our second quarter 2026 earnings press release and supplement for a discussion of the factors that could cause our results to differ. Please refer, in particular, to the sections entitled Risk Factors. We encourage you to read these documents. Also, note that the forward-looking statements on this call are based on information available to us as of today's date. We undertake no obligation to update any forward-looking statements, except as required by law. Also, during this call, we will discuss certain non-GAAP financial measures and certain key performance indicators. Unless otherwise noted, all numbers we discuss today other than revenue will be on an adjusted non-GAAP basis. We do not provide reconciliations of forward-looking non-GAAP measures because quantitative reconciling of information for these measures is unavailable without unreasonable effort. Reconciliations to the most directly comparable GAAP financial measures are provided in the earnings release and supplement in our Investor Relations website and filed with the SEC. These non-GAAP measures are not intended to be a substitute for our GAAP results. Before we begin our prepared comments, please note that during the third quarter, we will be attending the KeyBanc Capital Markets Technology Leadership Forum in Park City on August 10; the Citi 2026 Global TMT Conference on September 9 in New York; and the Piper Sandler Growth Frontiers Conference in Nashville on September 15. And we will also be hosting our Investor Day on September 22 at the Nasdaq MarketSite in New York. Now I'll turn the call over to Kip.

Good afternoon, everyone, and thank you for joining us today. Fastly delivered another exceptional quarter, demonstrating the success of our platform strategy efforts. As customers continue to adopt more products on our platform, we posted our fifth consecutive quarter of improving net retention rate and our sixth consecutive quarter of positive free cash flow. Revenue reached a record $183 million, up 23% year-over-year, exceeding the high end of our guidance. Gross margin hit a record 65.8%, and operating income came in at $27 million, both above the high end of our guidance range. These results marked the fourth consecutive quarter of operating profit capped by a record operating margin of 14.7%. Our Q2 results continue a clear trend, delivering growth and profitability together. These results reflect operational discipline and a continued investment in our highest value growth opportunities. Our trailing 12-month net retention rate rose again to 117%, the highest level in over 3 years, as customers look to our platform to support their infrastructure needs and standardize more of their stack on Fastly. Our platform strategy is foundational to our success. We build, sell and operate a single unified platform, which means better consistency and performance for our customers and a more efficient network for us to run. It also means that when customers face a new threat or business opportunity, they don't need to bolt on another tool. Fastly enables them to solve their problems on one flexible platform. This results in deeper customer relationships, greater wallet share and a more durable revenue model over time. You can see that strategy working in the numbers. Security grew 43% year-over-year, driven by cross-sell and upsell. The demand for edge threat defense, intelligence and governance is driving rapid adoption of our security products. Solutions like DDoS protection and bot management grew at triple-digit rates year-over-year. Over time, we expect our differentiated security capabilities to represent a larger portion of the business. We integrate these newer features with our core capabilities and industry-leading NG WAF, broadening the customer footprint and wallet share with Fastly. That's our platform strategy in action, leveraging targeted capabilities in one product category to deepen relationships and drive overall platform expansion across categories. We continue to see AI-driven traffic as a tailwind with our compute offering emerging as an expansion engine. As customers face increasing scale and complexity, they are buying more of our platform to handle these demands, weaving custom edge functions directly into their traffic flows alongside our industry-leading NG WAF. Additionally, as machine traffic and automated agents grow, tools that distinguish wanted traffic from unwanted traffic become essential. These trends contributed to our security and other revenue growth of 46% year-over-year on a combined basis, now at nearly $200 million annual run rate. We continue to win in our Network Services business, which posted strong 17% year-over-year growth. This is where customers choose Fastly when performance matters. This summer, our platform strength showed up on the biggest stage in the world. Major global sporting events pushed record-breaking traffic through our infrastructure. Fastly delivered reliably at scale and without missing a beat. But performance is only part of the story. The same platform that delivered that traffic also governed it, making real-time stream-by-stream decisions about what should flow and what shouldn't. LALIGA, Spain's top football league, is a good example. Illegal streaming costs its clubs an estimated $700 million a year. Working directly with LALIGA, we built an AI-driven real-time detection system that identifies and shuts down pirated streams as they happen in the moment right in a request path. As the market evolves, the need is shifting from centralized AI platforms to real-time edge decisions. This kind of value add for our customers, alongside our market-leading performance is why so many of the world's top brands rely on the Fastly platform to deliver their mission-critical content. And you can see the power of our platform and other key customer wins this quarter. Let me share a few examples. A leading fintech platform serving more than 0.5 million businesses chose Fastly following a rigorous competitive evaluation. Last year, a number of catastrophic outages put their critical partnerships at risk. The deciding factors included increased security capabilities, platform flexibility and resilience. A global education technology customer suffered a significant data breach, affecting millions of user records when their prior WAF failed to adequately mitigate attacks. They chose Fastly's NG WAF, managed security service and network services to handle their application traffic without disrupting their large active user base. A leading U.K. health and beauty retailer expanded their use of Fastly's platform with a multiyear, multimillion-dollar commitment. The customer replaced a long-time incumbent security vendor as part of a broader platform modernization and consolidated all of their edge services on Fastly. And working through a managed service partner, Fastly now powers live and on-demand streaming delivery for a national public broadcaster in Europe. I mentioned AI as a tailwind behind our fastest-growing products a moment ago. But it's showing up well beyond that and how we think about our network, our compute platform and where we're investing next. We shared in Q2 that AI-generated traffic is growing at roughly 6.5x the rate of human traffic. Machines don't browse the way people do. They query, scrape or act on someone else's behalf, and that makes every request more complicated. This means every request requires an immediate decision. Is this an authorized agent, should it be cached, throttled, monetized and/or blocked? That's why we see our security and compute products accelerating right alongside this machine traffic. Fastly was built to be that trusted control plane for those decisions. In an AI-powered world, our customers are moving from reactive blocking to active governance. Le Monde is a good example. They use ContentGuard, part of our bot management solution, to set the terms for how their content gets accessed, turning what used to be a scraping problem into controlled, licensed, revenue-generating relationships. A major auto shopping platform saw AI-based traffic as both an existential challenge and an opportunity for their business. They added Fastly's bot management and DDoS protection to gain visibility and control over the automated traffic hitting their platform, giving them the governance capabilities they need to run their business. We also announced a partnership with Skyfire. Leveraging the structural shift towards agentic traffic at the edge, Skyfire uses Fastly compute and integrate their verified agent identity and payment-backed credentials directly into our platform, transforming agent traffic from anonymous automation into accountable economic activity. I look forward to sharing more about the evolving needs of the market, how our platform meets those needs and how that translates into momentum in our business strategy at our Investor Day in September. When I became CEO 14 months ago, I outlined our commitment to accelerating growth, driving profitability and delivering lasting value for our shareholders. Thanks to the trust of our customers, partners and the exceptional dedication of our team, we are delivering on those priorities as demonstrated by our delivering the highest revenue growth quarter in almost 4 years. We remain focused on our customers and on disciplined execution. The results this quarter, record margins alongside strong growth show that discipline compounding. We have fine-tuned our innovation engine and are co-innovating with partners across the entire platform, driving a new level of customer value and engagement. I'm proud of this team and as optimistic as ever about the future of Fastly. And now I'm going to hand it over to Rich to walk us through the numbers in the quarter in detail. Rich?

Thank you, Kip, and thank you, everyone, for joining us today. This month is my 1-year anniversary since joining Fastly in August 2025. Reflecting upon my first year, I'm very proud of the progress we have made as a company. One year ago, I chose to join Fastly because I was excited by our leading technology and superior performance with the belief that we are positioned at the right place in the edge cloud at the right time as we see workloads shifting to the edge to complement central clouds. I also saw an opportunity to unlock value for our customers and shareholders by mobilizing the finance team to be true strategic partners to the business. There is no doubt that our position has improved over the last year as we continue to partner with our large customer base and expand our platform. I've deepened the executive strength of our finance team, bringing on a new Head of Strategic Finance and a new Chief Accounting Officer. They, in turn, have filled out their talent bench, resulting in many improvements to the business from accelerated close times to providing greater financial and strategic insights to our business. These provide cross-functional financial discipline and leverage to Fastly's performance, enabling investment and optimizing the return to our shareholders. This has been reflected in our results over the last year. We have reaccelerated growth to north of 20%, have generated $79 million in positive EBIT over the last 4 quarters and have maintained 6 straight quarters of positive free cash flow. Now on to our Q2 results. I'd like to remind you that unless otherwise stated, all financial results in my discussion are non-GAAP based. Revenue for the second quarter increased 23% year-over-year to $183.3 million, exceeding the high end of our guidance range of $170 million to $176 million. This result was a record high for Fastly and was driven by continued success in our go-to-market upsell and cross-sell motions as we see customers adopt more products within our platform. In the second quarter, Network Services revenue of $133.9 million grew 17% year-over-year, an acceleration from the prior quarter. Security revenue was $41.7 million, which represented growth of 43% year-over-year and 8% sequentially. Security now represents 23% of revenue compared to 20% in the year-ago quarter. This increased mix supports our long-term objective of building a diversified, higher-value business. Our other products revenue of $7.7 million grew 69% year-over-year, driven primarily by sales of our compute products, supporting new customer requirements in AI and related areas. Our revenue upside in the quarter was driven by increased traffic at our largest customers and, to a lesser extent, a couple of live sporting events that were episodic in nature. In the second quarter, our top 10 customers represented 37% of revenue. Revenues from our top 10 grew 48% year-over-year. Revenue from customers outside our top 10 grew 12% year-over-year. Also, no single entity accounted for 10% or more of revenue in the second quarter. A group of entities under common control of a single customer accounted for 11% of the company's revenue for the quarter. Our large customer count, which represents customers with more than $100,000 in annualized revenue in the quarter was 624 customers. Our trailing 12-month net retention rate was 117%, up from 113% in the prior quarter and up from 104% in the year-ago quarter. The quarter-over-quarter and year-over-year increases were due to revenue increases across a broad range of customers as they expand their use of our platform. We exited the second quarter with RPO of $341 million, growing 38% year-over-year. The current portion of RPO was 79% of total RPO and grew 44% year-over-year. Our improved RPO continues to benefit from improved go-to-market discipline with our customer onboarding, which resulted in larger upfront commitments. I will now turn to the rest of our financial results for the second quarter. Our gross margin was 65.8% in the second quarter, a record high for Fastly. Gross margin was 180 basis points above our guidance midpoint of 64% and up 680 basis points from 59% in Q2 2025. The upside in our gross margin was driven by higher revenue relative to our infrastructure costs. Combined with our continued financial discipline in our cost of revenue, we believe our gross margins are sustainable at these levels. This is further substantiated by our incremental gross margin flow-through on a trailing 12-month basis, increasing to 96% in the second quarter, up from 47% a year ago. Operating expenses were $93.7 million in the second quarter, coming in better than anticipated due to disciplined expense management and less-than-anticipated benefits in discretionary spend as well as the timing of new hires being biased towards the third quarter, which I will touch upon later in the call. We had operating income of $27 million in the second quarter, exceeding the high end of our operating income guidance range of $12 million to $16 million. As mentioned, this upside was a combination of higher revenue and resulting gross margin flow-through as well as less-than-anticipated operating expenses. This reflects the inherent operating leverage in our business model. This is demonstrated by our operating margin expanding from negative 3% to positive 15% in the second quarter, an expansion of approximately 1,800 basis points year-over-year. This is underscored by our incremental operating margin flow-through of 79% of revenue on a trailing 12-month basis, significantly above our long-term target of 25% to 40%. In the second quarter, we reported a net profit of $26.2 million or $0.15 per diluted share compared to a net loss of $5 million or negative $0.03 per diluted share in Q2 2025. Our adjusted EBITDA was $38.1 million or 21% of revenues in the second quarter compared to $8.9 million or 6% of revenues in the second quarter of 2025. Turning to the balance sheet. We ended the quarter with approximately $337 million in cash, cash equivalents, marketable securities and investments, including those classified as long term, a sequential increase of $7 million over Q1 2026. We also ended the quarter with a positive net cash balance of $14 million. Our cash flow from operations was positive $39.3 million in the second quarter compared to positive $25.8 million in Q2 2025. Our free cash flow for the second quarter was $3.6 million, representing our sixth consecutive quarter of positive free cash flow. Our infrastructure capital expenditures were approximately 17% of revenue in the second quarter. As we discussed in prior quarters, we frontloaded our 2026 CapEx to ensure we had adequate equipment given supply chain constraints. We anticipate our CapEx spend will moderate in the back half of 2026, as I will discuss in a moment. In summary, the first half of the year demonstrates that disciplined execution and platform adoption continue to strengthen our financial model and give us higher conviction on our 2026 guidance. I will now discuss our outlook in the third quarter and full year 2026. I'd like to remind everyone again that the following statements are based on current expectations as of today and include forward-looking statements. Actual results may differ materially, and we undertake no obligation to update these forward-looking statements in the future, except as required by law. Our revenue model is primarily based on customer consumption, which can lead to variability in our quarterly results. Our revenue guidance reflects these dynamics in our business and is based on the visibility that we have today. As Kip discussed, our platform strategy is foundational to our success, enabling customers to solve their problems on one flexible platform. This results in deeper customer relationships, greater wallet share and a more durable revenue model over time. The strategy is working and providing a stronger assurance in our value proposition and growth opportunities with customers. In the third quarter, we expect revenue in the range of $184 million to $190 million, representing 18% annual growth at the midpoint. We anticipate our gross margins for the third quarter will be 65%, plus or minus 50 basis points. As a reminder, our gross margin performance is highly dependent upon incremental revenue increases or declines relative to our infrastructure costs. For the third quarter, we expect a non-GAAP operating profit of $20 million to $24 million, reflecting an operating margin of 12% at the midpoint. As I mentioned earlier, we expect head count additions along with discretionary spend to bring OpEx back to normalized growth levels for the third and fourth quarter. We expect a non-GAAP net earnings per diluted share of $0.11 to $0.13. For calendar year 2026, we are raising our revenue guidance to a range of $732 million to $746 million, reflecting annual growth of 18% at the midpoint. We anticipate our 2026 gross margins will be 65%, plus or minus 50 basis points. We are increasing our non-GAAP operating profit expectations to a range of $88 million to $96 million, reflecting an operating margin of 12% at the midpoint and highlighting our improved profitability compared to 2025's operating margin of 4%. We expect our non-GAAP net earnings per diluted share to be in the range of $0.50 to $0.54. We continue to closely monitor supply chain dynamics, particularly regarding memory components and have taken strategic actions to mitigate potential impact. Our software-defined infrastructure is continuously improving, typically with lower capital requirements for expansion than legacy competitors. We are also implementing server component upgrades in our fleet to efficiently expand our capacity. This structural efficiency underpins our expanding gross margins, positioning us to stay ahead of global traffic trends while maintaining strict capital discipline. For 2026, we continue to anticipate our infrastructure capital spend will be in the range of 10% to 12% of revenue compared to 5% in 2025 as we ramp up capacity to meet our growth objectives. As discussed, this 2026 spend is front loaded in the first half to ensure we have adequate equipment given recent supply chain constraints. We have a rigorous planning process to ensure that our capital investments align with demand. As a result, we will maintain our 2026 free cash flow guidance in the range of $40 million to $50 million. To recap, we're seeing continued evidence that disciplined execution, growing platform adoption and a richer mix of security and compute are translating into stronger financial performance. Our refined strategy to focus on the power of our platform is working, and we are evaluating ways to better align our financial disclosures to our success. I look forward to sharing more at our Investor Day in September. Before we open the line for questions, we would like to thank you for your interest and your support in Fastly. Operator?

[Operator Instructions] Our first question comes from the line of Jackson Ader of KeyBanc Capital Markets.

This is Aidan Daniels on for Jackson. On the Network Services jump in the quarter, I would love to just dig a little deeper here. 2Q seasonally hasn't been the best quarter in the past for CDN revenues. I know you mentioned some increased traffic from the largest customers. Was there a positive impact from agentic traffic driving this outperformance? And then did you experience any share gains from competitors? And just a follow-up.

One moment, please. [Technical Difficulty]

I'm sorry, we were interrupted there. In terms of agentic traffic, we don't necessarily break that out. However, we have seen signs of traffic driven by AI tool usage among some of our fastest-growing accounts. And so we do believe that AI remains a tailwind for the business and is showing up most predominantly in Security and Compute, but also in Network Services.

And then I just wanted to follow up on your NRR expansion.

I'm sorry. Can we just -- I think we might have a technical difficulty. Did you hear the whole answer to that question?

Maybe if we could start from the beginning. I think we had a little. I'm not sure.

Can you hear us now all right?

Yes, all good.

Great. So I think there are 2 parts to the question. One was whether or not we thought we were gaining share in the Network Services segment. And the second was whether we were seeing signs of AI or agentic traffic helping drive that growth. On the first question, yes, we do believe that we're gaining share, particularly as we like to say, where performance matters. And I think there were some third-party research that's come out in the last few months that agreed with that assessment. On the AI and agentic question, we don't necessarily break that out as a distinct set of traffic. It drives demand in our existing products and across our platform. However, in looking at the traffic patterns among our customers, we've identified a number of customers where AI tools and use of AI seem to be the catalyst behind traffic growth. So we continue to see AI and agentic traffic as a tailwind for the business across our existing products as well as products like bot management and DDoS that help mitigate that as well as some additional products that we'll announce in the coming months.

Kip, good to hear both parts. I appreciate the repeat. And then just following up on the NRR expansion, and I saw up to 117%. You mentioned customers standardizing more of their full stack on Fastly. Could you unpack maybe a little more of what's driving the most expansion there? Is it Security and Compute cross-sell into existing accounts? Better renewal pricing on CDN or anything else maybe to highlight there?

Yes. When we think about our products, Jackson, it's kind of a broad portfolio that goes -- cuts across multiple products in Network Services as well as multiple products in Security. I would say that the cross-sells and upsells tend to be -- I think that we've had a WAF, web application firewall, and that's been doing really well. Our WAF continues to gain share and continue to grow faster than the market. And so I think that's a pretty big driver. It's also the new products that we've launched. I think I wouldn't say new, but newer with the DDoS and bot management. I think those 2 are also picking up a lot of traction. And so I would say Security is doing a lot. I think that -- on the compute side, there is some traction there, but it's still early days. I think Kip had mentioned on the call that we're doing a lot of co-innovation with our customers on Compute and Compute@Edge.

Our next question comes from the line of Frank Louthan of Raymond James.

So as far as some of the AI-related traffic, what is sort of the nature of the workloads that you're having success there? And do you think you're taking share in that market? Or are you just seeing sort of an overall lift in demand? And then similarly for Security, what are some of the things that are driving that success in Security?

Frank, I don't know if I can comment on whether we're taking share or not specifically with respect to AI traffic because I think the data on the size of that market and the composition of it is somewhat thin. But we do see that traffic is growing the markets that we participate in, and we certainly believe that we're taking share in those markets. In terms of workloads, there's really a variety of things across our platform. We've seen some increase in traffic related to the use of AI tools for software development. We've also seen increase in our privacy suite of products related to agentic workloads. And so it's really across the board. So of course, we've seen increasing adoption of bot and DDoS as our customers look to manage the agentic and bot traffic as well. So it's really across the board. I'll let Rich comment on the second part of your question.

Yes, I think the second part is what's driving security? I would say what's driving security really is just the complexity and the complications of the traffic. As traffic gets harder and more complex, there are more and more threat actors that come along. We do have some really good products leveraging our total network to really do amazing things with it. I think that we have a lot of different features that allow our customers to be like either block the traffic or rate limit the traffic as well as kind of even like use AI to detect whether the traffic is good or bad. So I think I would say that AI is helping accelerate some of the security adoption, but I would also say just the prevalence of more threat actors out there.

Yes. And I'll comment. I mean I mentioned it in a couple of the customer examples in my prepared remarks. But we are seeing customers looking to simplify and consolidate. And in -- there's a lot of cases, they are very happy with the performance and the resiliency that they get from Fastly, and they look at the effectiveness of our WAF products. And as I think you heard in my comments in a number of cases, we picked up significant business from customers who were not happy with the effectiveness of their existing security solutions and decided to consolidate onto Fastly for the performance and resiliency and then the effectiveness of those security solutions. So that's certainly a trend as well.

And if we look at the breakdown of your top 10 customers, is it generally representative of your -- the breakdown between the network services and security? Or are they more over underweight to those? Is there some opportunity there?

Yes. I mean if you look at the top 10, I mean 73% of our revenues today come from Network Services. And so I would say that it's pretty close to that, maybe slightly a little bit higher, but it is a -- top 10 does buy multiple products. I think we've mentioned in prior earnings calls that we've done a good job landing cross-sell opportunities into security with some of our top 10 customers as well.

Our next question comes from the line of Peter Levine of Evercore.

Maybe I want to follow-up with the prior question that was asked, your commentary around co-innovation on the edge or within the other revenue line item. But maybe, can you maybe just walk us through like what does that entail? Like what are customers coming to you and asking for? What does that co-innovation look like? And when could we see products come to market?

Sure. I mean I think that co-innovation takes a lot of forms, and it's something that we have sort of the foundation of our product development process is working with some of our more innovative customers on their business problems and building sustainable solutions that we believe, have the potential to then become market-leading products. I mentioned, I think, a couple of examples during my prepared remarks. LALIGA perhaps is a good example where we co-innovated with them on a way of dealing with some pretty thorny piracy problems, using AI technologies. And the tricky situations where pirates are going to great lengths to hide their streams and deliver content illegally through our platform, and using some AI technologies, we were able to identify and stop those. And that antipiracy type technology, as you can imagine, is of great interest to many of our customers. We're also engaged in a number of co-innovation projects with different customers around AI and agentic traffic. We'll say more about that in the coming months. But suffice to say that we really think that we're our best when we're working shoulder to shoulder with our customers on business problems and applying the capabilities of our platform to solve them and then taking those to market.

Yes. The only thing I'd add on that is that I think if you think about where we've won in the past, we've always won where performance matters. Our technology, given where it's at, we're a very good co-innovation partner to these customers because these are the more complex technical customers who need massive amounts of support and innovation with them. And so I think those are the opportunities that are really in the future.

And maybe, Rich, a follow-up there. If you think about some of your CDN competitors and the investments they're making around their infrastructure, maybe help us understand. If we look out over the next 1, 2, 3 years, how do you envision the edge compute business? What does it look like? And what -- how much of an investment do you guys need to put forth to kind of maybe keep up with some of this demand that potentially you see on the pipeline today?

Yes, I'll start and comment a little bit about on the trajectory of the compute business, and Rich can comment on how we're thinking about the investment needs there. We're focused on a, what I'll call, a true edge compute business. We're not building regional data centers or spending a lot of money on capital outside of our world-class high-performance global edge network. And we're really focused on the use cases where being able to process that information and run that workload at the edge really makes a difference. So I think that's one of the things you see as maybe a difference between us and some of our competitors. We also run a single network. So Rich does not have in its spreadsheet a separate line for the capital for compute. We run everything on a consolidated platform on a global basis. And that means that we're able to use compute resources, for instance, that may not be fully utilized by network services or compute workloads -- or excuse me, security workloads to drive compute workloads. And so I think that's one of the reasons why we've been able to be a little bit more capital efficient. That said, we're committed to driving growth in the business. And where we need to make investments, we will. And I think you saw our CapEx tick up this quarter as we said it would for our front-loaded approach to capital this year, but we will make the investments we need to, to drive growth in the business.