Fastly, Inc. (FSLY) Earnings Call Transcript & Summary

Cool. We will get going here. Thank you all for being here. I'm Roger Boyd. I cover cybersecurity infrastructure here at UBS. Happy to have the team from Fastly up here. Rich Wong is the relatively brand-new CFO. And Vern Essi, many of you know is IR. So thank you, gentlemen, for being here.

Thank you.

Thank you for having us.

Yes. Awesome. I think a good way to frame the conversation kind of pointing to your kind of relative newness of the story, Rich, just -- I think you joined about a quarter ago. Maybe just talk about what attracted you to the company, the journey Fastly has been on and what excites you about kind of what you can do going forward?

Sure. So I joined Fastly in August of this year. So I've been kind of about 4 months now in the job. And I think that when I was looking at my next CFO job, this is my third time as CFO at a company. I was looking for companies that had really good technology and really good customer love and adoption of the product. I wasn't new to the CDN space, like I started my corporate jobs at Yahoo!, where we built our own like data centers, and we built our own CDN networks. And so I was a little bit exposed to that. I knew the importance that the edge platform plays on delivering Internet traffic and delivering like security and everything else at the edge. So in my research on CDN networks in general and like the edge, I just thought like the customers who use us really think that we're much more performant, we're faster, we're more reliable, resilient. We have better like configurability. And so those things just provide a lot of customer love. And I just think that like going to a company where the product is better and where customers really love and appreciate like the product is a really good place to be. And I just felt like the opportunity was there for me as a CFO because when I look at the product and how good it is relative to peers, we didn't have the market share that I thought we deserved. And so when you look at that and you're like, oh, like there are things that we could be doing better on the operational execution side. And as a CFO, I think that's where I can really come in handy and help the company along. I also got very bullish on the management team that was put in place. And so Kip had been around and joined as CEO 2 months before me, but he was the Chief Product Officer. And I saw the progress that he made on the product side, building a broader product suite and portfolio. And then I saw what the go-to-market changes had happened. And I was like, this is great, like good product, new CEO and Chief Revenue Officer who came in and as a CFO coming in and partnering with 2 seasoned executives on a company with a better technology like is a great place to be.

And then, Vern, similar but different question for you. You've seen a lot of change at Fastly over the past couple of years. What's exciting about where we're at today, where the product's at, the platform and the management team.

Sure. Yes. So I've been at Fastly for 4 years and certainly in the last year, even the last 9 months, there's been a lot of productive change. Certainly, we filled out our security offering. Going back to early 2024, we had only 1 core product, a web application firewall, or WAF, which we had acquired from a company called Signal Sciences about 5 years ago. We expanded that with 2 more offerings. We had taken a DDoS product that was basically part of our network services for our largest customers, and we sort of productized that and brought it to market as well as a bot mitigation product. So we had expanded that from one product to three in 2024 and then into 2025, expanded with two more products. So we now have a very full suite of security offerings. And then also, as Richard said, we had changed over the leadership and Kip has been a tremendous -- as new CEO and really fine-tuning the execution side and also with Scott Lovett, who was our Chief Revenue Officer, brought in mid last year, was promoted to President go-to-market, and he's effectively transforming the business and really broaden a good cross-sell motion and help grow revenue. And you see that in our third quarter results. It's been -- for me, 4 years in the waiting to some degree, but this has been a really nice ride in the last couple of quarters as we put together a good track record of the momentum.

Yes. Awesome. I want to come back to the platform because it definitely feels like that element of the story has gotten a lot stronger in the past year. But maybe to touch on the core market for delivery in CDN for a minute. I think most investors have viewed that space as somewhat volatile over the last year. You obviously had some competitors that were being fairly aggressive on price and are no longer now in business. Kind of what have you seen this year relative to last year? And do we think we're in a point of stabilization and improvement going forward?

Yes. I mean I'll say that on the network services side, it's a function of both traffic growth and pricing and how we think about that. On the traffic side, in 2024, we had some headwinds where some -- 3 of our customers had decided to either do multi-CDN or build their own CDN networks. And I think that impacted the way traffic is being routed through the system. So we did see some traffic headwinds in 2024. I think the beauty is that like on the traffic side, when these customers do that, they also realize like how much more performance and how much better we are. And so like they didn't go away, like they didn't -- our traffic didn't go to 0 with these customers. And as a matter of fact, like with these customers, a lot of traffic has bounced back because either they found that our competitors can't provide the same level of performance we do or they realized how much harder it is to build their own CDN network. And so the nice thing is that the traffic has kind of rebounded from those 3 customers that we saw headwinds with. On the price erosion side, so definitely, like traffic, there's growth in the traffic side. I'm not worried about that, like Internet traffic and more traffic is happening and it needs -- the edge becomes a more important critical part of that. On the pricing origin side, we did see a competitor go out in September 2024 called Edgio. Prior to going out, they became very irrational with pricing, and I think that impacted the players in the market. And I would say that, that player is out to the market. We already lapped that period of time where the rational pricing was happening. And we're all seeing a very rational behavior. I think irrational behavior tends to happen when you have excess capacity buildup in the network. And that definitely happened post COVID when you saw tons of streaming, when you saw people working from home, when you saw like network traffic really picking up quite a bit. And so when you see that excess capacity build-up that led to some of the kind of pricing pressures and exits that happened then that made it a very challenging pricing environment. But we're seeing it -- traffic pricing actually go back to normal, right? And I think that what's also helping on the pricing environment is the expansion into security. When you are selling them not just a network services business, but you're also selling them security that actually becomes a much more valuable sale and more valuable to the customer. And so as a result, I think the pricing -- the conversation at renewal and at sales isn't as much about pricing, but it's more about like the value and the value creation. And we also have come to recognize that we win typically where performance matters, right. Performance is why we win. And so if we lean into that and not on the pricing side, then we end up doing better.

Maybe just to expand a little bit on that. I think one -- maybe one of the benefits of fewer vendors in this space or fewer rational vendors in the space has been larger delivery commitments you've got with customers. And I think part of that has also been your discipline around pricing as well. What have you seen there? I think when you look at kind of contract growth, that's been a little bit faster than revenue and how do you think about kind of the -- you mentioned security still becoming more strategic?

Yes. I think like Scott coming in like 15, 18 months ago was a big transition for us. So I think that recognizing the reason why you win and leaning into that versus pricing conversations and pricing conversations are expected with our customers because there's Moore's law with like -- but if you're going to offer price concessions or price discounts like you're going to ask for things to return, right? And I do think that's where commits. Having customers say, "okay, well, we're going to give you this price discount, right? We need commits because we want to build our capacity to serve you," I think, comes in handy because it makes our revenues more predictable. And I think it just -- if you can get the multiyear commit, then it's a pricing conversation that doesn't always have to happen, right? It's definitely a leaning into where we win and where performance matters, I think, has made a huge play and getting those commits has definitely helped.

Got it. Okay. Historically, you've had, I think, 10 customers have represented about 1/3 of the business. What's been the trajectory there? And conversely, what have you seen from the rest of the installed base, which is starting to grow pretty nicely.

Yes. I think if you go back like 12 to 18 months ago, we were like closer to 40%, and now we're at the third, like 32%, I think, last quarter, top 10 customer concentration. I would say that if you look at like the top 10 -- like last quarter, we produced 15% year-over-year growth in aggregate. If you look at the top 10, the top 10 grew 12% year-on-year. And then if you look outside the top 10, we grew 17% year-on-year. So we're definitely investing in growth in the top 10, like they're still valuable customers. They're still like profitable customers. There's customers we want to keep and maintain on our network. But I think that what's been great is like we've also been leaning into the non-top 10 customers and really working our way and getting those kind of sales. And so that's why you're seeing the non-top 10 grow at a 17% growth rate. I think that's been very healthy and very helpful on that metric.

I think there's probably a misconception out there that your top 10 customers are pure delivery customers. And I think that's probably changed a little bit. You called out 1 customer on the last earnings that has expanded into security and even in the compute, what's been that cross-sell like? And how do you think about that element of bringing a bigger platform to the most strategic customers.

Yes. I would say that on the security side -- I would say right now, what we've talked about on our earnings call is that about half customers buy more than 2 products or buy 2 products or more. And so we definitely have that metric going for us. Within the top 10, I mean we do have a more complete product suite across security, which enables us to have these conversations with our top 10 customers around buying products, right? Like I think that 12, 15 months ago, when you only have one security product with the WAF, the web application firewall, like you're actually like eliminated from the RFP process because these bigger customers want to make sure that if we're going to invest in security with you, Fastly, like you need to have that broader portfolio suites that we can expand the security offering. So now when we have these conversations, and we can say, yes, we have a WAF, we have DDoS. We have bot management. We have API security. We have client site protection. That actually enables us to have these really good conversations. And so what you saw in Q3 shouldn't be a won and done. Like we won this customer. We have the opportunity to win with more top 10 customers and deeper penetration. And even like within that 1 customer we won, we won the WAF deal, but we have more security products that we can sell into them. So I do think I'm personally excited about the growth opportunity I see in security and having that broader product portfolio. Security revenues grew 30% year-on-year last quarter. And so I'm excited to kind of see that momentum there.

And you can see it in net retention as well. I think a 2-point increase this last quarter to the 106% range. Can you talk through the puts and takes there? Like is there a way to split that between what you've seen on the network services side versus the 30% growth in security. Like what's been working well to that number? And how do you think about that kind of accelerating? I know we're also lapping a little bit of an easier period as well.

Yes. So the 106% has gone up over time. I do think that it's a trailing 12-month like -- in our number. And so as a result, like you've seen that re-acceleration. And so I'm pretty hopeful that the 106% continues to improve just because we've had some really good quarters where we've seen that accelerating momentum. I would say it's a combination of both upsell and cross-sell for sure. Like on the upsell side, like our network services business, we grew that 11% year-on-year. We are having a lot of upsell conversations with our customers with bigger commits, but I'm actually -- cross-sell is a great area. It's still -- security is only 21% of our total revenues today, but it's the 30% growth driver, right? And I do think that that's going to be a bigger play and contributor to NRR going forward. But right now, because it's only 21%, the contribution of security and cross-sell is like you can kind of do the math, but it's going to be a contribution of both upsell and cross-sell for now.

Yes. On the other side of the business, the long tail of smaller customers, the growth there has been impressive. But I think you would both admit that it's still pretty early days for really engaging that installed base. What excites you about that coming from a viewpoint, I'm trying to drive more operational excellence. And you mentioned a new CRO coming in. What's kind of the playbook from here on out about how to engage that installed base?

I would say that like Scott's brought in a really good motion and deep expertise around how to build go-to-market teams that go after not just the biggest, highest performance customers that we have, right? And so we have a very good, like non-top 10, non-top, even, 20 customer base that we go after on a go-to-market perspective. And I think we've put in some pretty good incentive plans to really go after that customer base. And so you see the -- the non-top 10 growing faster than the top 10. And I think that some of the fruits of that is there. I think from a go-to-market perspective, we're definitely investing in that. And I think that even from an R&D perspective, like I do think that we have a higher performing product, much more configurable for our users, but being more configurable also means it's a little bit harder to use. And so we've also invested on the product side to make it easier for like the smaller customers that longer tail to adopt our product. And I think that's going to be a very key critical aspect because it can't just be a go-to-market sales process, it has to be both.

Yes. And to add to that, on the go-to-market side, we've definitely gotten much better muscle and motion around verticals. So we've had a few verticals where we would land and expand travel and leisure fintech. We've talked about these in past earnings calls, and I think Scott and his team has done a great job executing to that. And then we also have an international expansion motion on the sales side. So we've taken our global sales operations and basically was run under one individual in the United Kingdom. We've now split that into an EMEA sort of region under his watch. And then we hired a very talented individual to cover the Asia-Pacific region, who's going to be based in Singapore. We just made that move in the last quarter, and we're already seeing some nice results from that. So that will help round out that like non-top 10 growth as well.

Excellent. I wanted to peel back the onion a little bit on the security business. It's been growing 30%. And I remember years ago when you bought Signal Sciences, it was a completely different market for web app firewall. I think you mentioned it today, but just having that product in the right place is helping you get into more deals. What's -- when you look at that sort of security portfolio, which has been growing, what are the areas of strength? I think today, it's probably still mostly web app firewall, but with a lot of interest around bot manager and DDoS and other products. How do you think about kind of that trajectory?

Yes. So I think when we bought Signal Sciences, it was -- interestingly, we didn't fully integrate that solution into our platform. So it was actually sort of a swivel chair dynamic with our customers using 2 different products. Only in the last 2 years that we really tuck that into the overall Fastly platform. And then with -- as I said earlier, Kip's joining, we wound up really adding to the security side. So as you said, like DDoS and bot mitigation were 2 products you rolled out in 2024. And it's not so much that we sort of have the product. I mean that helps us with as Richard said, go into -- get into the door with RFPs, but we've been expanding the feature set around those as time rolls on. So we might just, for instance, roll out a product that add a feature set to it later. A good example of that is even in web apps firewall, we recently announced a deception capability that's basically sucks an attacker in. They spend a lot of time trying to hack into our -- into the user's website and they wind up wasting a lot of time, and it becomes very costly for them. It's sort of a new angle in the WAF market. And we're doing other similar developments in both DDoS, bot mitigation, API as well as the client site. So on the DDoS side, we've probably had this technology, which we always thought was very leading edge. Embedded in our network services. We did bring that out to a broader base. I would say we're now catching up at parity with our competitors there. Bot mitigation, also the same thing where we started out very small. We developed that in-house as well and are now kind of at parity to some of our competitors and possibly even with some of the newer features we've rolled out showing a lot more promise. And we've seen some good uptake of that in the last quarter. It's still a little bit earlier on the API side and also client side protection. But as you had asked earlier about some of our larger customers, you'd think in a media dynamic sort of oriented customer, it would be hard to understand why they want some of the security products and think of all the users on the client side that have apps that need to be protected. And there's a lot of opportunity, I think, there for us to execute. But in 2026, you'll see a lot more features rolled out on the security side, and we'll go after those markets.

Super exciting. Yes. Just to round out the cross-sell narrative. I want to talk about other products. On a relatively smaller base, but I think you talked about 50% growth last quarter, and that includes both compute and observability. I guess specifically on compute, I know very kind of early days, but what have you seen from some of your key customers there? And what's kind of the longer-term opportunity for that element of the edge network?

Yes. So the compute product for us is still what we kind of characterize as an incubation area. We offer a developer-friendly framework for our customers to use it in any way they see fit. We do have a lot of interesting standards that we put on our compute platform like MCP server for AI-based applications and other related sort of open source products. In the past, we've had some success with unique solutions around fintech, ad tech where you're running compute in conjunction with the delivery mechanism on a website, if you've ever been in a shopping card situation and had a recommendation at the last second, chances are we're probably running that workload behind the scenes. We've also had a lot of luck in the observability space for an observability customer, New Relic, where we've supported all of their compute framework on -- from a colo onto our network in a very win-win situation for us and for them. Going forward, we've seen some unique cases as AI has developed for compute. It's still a little too early in our view to say that we have a lot of critical mass around a certain product that hit the ground running. One instance which we've mentioned in the past is Shutterstock came to us, and we used our object store to move and catalog for them through -- on their end, large language models, a massive amount, petabytes worth of data and help them queue and cache those up and inference them on the edge, so they could catalog their images faster. It was a use case that, frankly, we weren't thinking of so they came to us with that. So in a weird way, we're not really in a very strong push model right now with our compute offering. And we're working on that to see where we can see some critical mass in 2026 and how we might orient that.

A lot of cool stuff to look out. I hear the other element of that was the work you've done with the really simple licensing, RSL, initiative. Can you talk about what that is and the role that you could potentially play as an edge provider in kind of an online content licensing role?

Yes. So sure. The traditional model for advertising on the web is you create content on your website, someone goes in to look at your content and you get ads on there. And as the content creator you get paid for those ads and the click-throughs, if any of you have ever used an AI search engine, you get a lot of queries back even Google now does this where you don't really have to land on the site to experience the content. We have solutions that help the content creators with bot scrapers and whatnot, which is more on the bot side to help mitigate that from happening. But in an AI world, there's a very strong belief that these content creators are not going to get paid anymore, so we have to find a way to monetize that. What RSL is, is basically an open source concept for people to get paid through these agentic AI-style searches. And we've been a big adopter of that. We've worked with our customers and industry pundits to come up with a good framework that's equitable and also open source. We would contrast that to 1 of our competitors who we respect very much who has a framework they put together that's more of a closed system, and we'll see where that market winds up, but we feel like we have a very comparable dynamic with them, but ours is more open source and probably more friendly for the industry.

Really interesting. I wanted to finish with some traditional financial questions. But the gross margin story has been pretty impressive, and I think it was 4 points of improvement last quarter. Can you just unpack the levers there? I think certainly, pricing has been part of that, the cross-sell opportunity has been part of that. But what are the further leverage you have there to continue to drive some of that gross margin improvement.

Sure. So in the last quarter, we reported 62.8% gross margins. That was a pretty big improvement. If you take out the onetime like tailwinds we saw in the quarter, I think even normalizing for that, we're at 61.8%, which is a really good improvement and ahead of where we were expecting. I think for me, if you look at like break it down into like what are the reasons why. I would say that there is a lot of really good traffic engineering work that our traffic engineering team has done to make our network more efficient. They're leveraging like AI, machine learning to kind of figure out like how to like do the traffic routing and all that. So the network efficiency is probably like a real good component of it. I think number two is probably just the general scale. Like last quarter, we saw a $10 million quarter-over-quarter pickup in revenues. And just when you see that level of scale tick-up, that naturally drives up margins quite a bit. I do think that we're also much better on a pricing discipline. We talked about like go-to-market approach and how we sell, and I think that having Scott there and leading into like selling based on where performance matters and where we win, where performance counts, and not on the pricing side. And so when you have that pricing discipline, that automatically also helps the gross margins a bit. We've also been working with like vendors and making sure that we have the right price points for the scale of traffic that we have. As we scale up, we expect to get better pricing on the bandwidth side of the business. So it's a combination of all that. I would say it's not like one singular thing that happened. I think as I look forward into like Q4, we did guide to another strong gross margin quarter. I think we guided not as good as that, but I think we guided at 61.5% at the midpoint, where we're saying plus or minus 50 bps. And so we do see that momentum continuing in the Q4 period. I think as we think about next year, what we're thinking about is that we're going to see gross margin leverage continuing, but thinking about it on a full year basis because I think that we did increase our CapEx spend in Q4 because we see the increasing revenue and that automatically will take down some of the gross margins. And so on a year-over-year basis, we're going to see gross margin improvement from '25 to '26, but it's -- we will -- we'll give a guide when we do a full year guide, but I think that what you're seeing in Q3 and Q4 is particularly strong.

And then maybe just on the operating margin line. What's kind of your rough framework for how to continue to drive profitable growth. You're obviously investing behind a growing platform in security and compute. What's kind of the leverage you can pull there?

Yes. I think we're much more disciplined around how we think about the investments we're making, right? I think that like when we think about like investments we need to make, we still need to invest in network services because that's a growing business, you grew 11%. We still need to invest in security that's growing at 30%, and we do have some incubation businesses with like compute and observability. So I think we watch pretty carefully how we think about incremental investments, and we're using like an incremental margin model to think through -- as we think about 2026, how do we ensure that the profitability that we see -- this 2025 will be the first year where we are non-GAAP profitable, right? And I want to make sure that we continue that momentum into 2026. And so what we internally do is we look at the incremental margin model and say incremental revenues, how much do we generate and how much can we spend so that we can still flow through roughly anywhere between 25% to 40% incremental operating margins into the business. And I think that's been working very well. I do think that having more commits also helps build more confidence into the revenue model we have. And so -- but we do still have a big consumption business. And so we've also looked at head count and said like, what head count are we going to prove right away and which ones are we in a gate until we start seeing that performance so that incremental to margin model works.

Yes. Cool. Maybe to round things out and a lot of exciting developments in the company and the platform. If you had to pick one for both of you, what's the one thing you're most excited about for 2026.

I think for 2026, we have the right pieces. We talked about like the product portfolio expansion, and we talked about the go-to-market transformation we've done. And so I just feel really excited about the fact that like the challenges that we've had in the past have been around execution. And just like we've built the building blocks, I feel like we have the right management team. So for me, I'm really excited about like the executional like rhythm that we're building in the business because we have the right pieces in place to go after that opportunity.

It's like you read my mind because I wanted to go back and make this point. I'm actually excited about Rich. I didn't have a chance to really -- he talked about his background, but I would say definitely, we haven't seen the full impact of what Rich can add to the Fastly equation. So I think in 2026, we're going to see a lot of good productive measures coming out of the finance team and operations, and I'm excited to see where we can take it.

Sure. Well, that was great. Thank you both for the conversation and for being here. Thank you all for joining.

Thank you for having us.