Fastly, Inc. (FSLY) Earnings

Management highlights

• **Platform Strategy and Customer Momentum** - Fastly delivered its fifth consecutive quarter of improving net retention rate (NRR) and sixth consecutive quarter of positive free cash flow, with the highest revenue growth rate in almost four years. - Trailing 12-month NRR reached 117%, the highest level in over three years, driven by broad-based customer expansion as more customers standardize their full edge stack on the Fastly platform. - The top 10 customers accounted for 37% of total revenue, with revenue from this group growing 48% year-over-year; one group of commonly controlled entities accounted for 11% of total revenue, with no single entity representing 10% or more of revenue. Large customers (with >$100,000 annualized revenue) totaled 624 at quarter end. - Fastly won multiple new and expanded customer deals across fintech, edtech, retail, and public broadcasting, driven by incumbent outages, security failures, and customer demand for consolidated edge services. • **AI-Related Growth Tailwind** - AI-generated traffic is growing 6.5x faster than human-generated traffic, creating demand across the platform: increased network traffic volume, demand for security tools to govern authorized vs. unwanted bot/agent traffic, and demand for edge compute to run real-time decisioning. - Fastly announced a new partnership with Skyfire to integrate verified agent identity and payment credentials directly into the Fastly edge platform, turning anonymous automated traffic into accountable economic activity. • **Operational and Financial Discipline** - Record non-GAAP gross margin of 65.8% (up 680 basis points year-over-year) and record non-GAAP operating margin of 14.7%, marking the fourth consecutive quarter of non-GAAP operating profit. - Non-GAAP operating income was $27 million, non-GAAP adjusted EBITDA was $38.1 million, and net profit was $26.2 million ($0.15 per diluted share), compared to a net loss of $5 million (-$0.03 per diluted share) in Q2 2025. - Ended the quarter with $337 million in cash/cash equivalents/marketable securities, positive net cash balance of $14 million, and positive free cash flow of $36 million. Remaining performance obligations (RPO) grew 38% year-over-year to $341 million, with 79% classified as current. - CFO Rich Wong marked his one-year anniversary at Fastly, noting the finance team has been restructured to drive cross-functional financial discipline and improved business insights.

Guidance

• **Third Quarter 2026 Guidance**: - Revenue is expected in the range of $184 million to $190 million, representing 18% year-over-year growth at the midpoint. - Gross margin is expected to be 65% ± 50 basis points. - Non-GAAP operating profit is expected between $20 million and $24 million, representing a 12% operating margin at the midpoint. - Non-GAAP diluted net earnings per share is expected between $0.11 and $0.13. • **Full Year 2026 Guidance**: - Revenue guidance is raised to a range of $732 million to $746 million, representing 18% year-over-year growth at the midpoint, from prior lower guidance ranges. - Gross margin is expected to be 65% ± 50 basis points. - Non-GAAP operating profit guidance is increased to a range of $88 million to $96 million, representing a 12% operating margin at the midpoint, up from 4% operating margin in 2025. - Non-GAAP diluted net earnings per share is expected between $0.50 and $0.54. - Infrastructure capital expenditure is expected to remain in the range of 10% to 12% of revenue for the full year, with spend front-loaded in the first half to mitigate supply chain constraints, and moderating in the second half. - Full year 2026 free cash flow guidance is maintained at $40 million to $50 million.

Segment performance

Fastly reported total Q2 2026 revenue of $183.3 million, a 23% year-over-year increase. The three segments performed as follows: 1. **Network Services**: Revenue of $133.9 million, up 17% year-over-year. This segment contributed 73% of total revenue. 2. **Security**: Revenue of $41.7 million, up 43% year-over-year and 8% sequentially. This segment contributed 23% of total revenue, up from 20% in the year-ago quarter. DDoS protection and bot management grew at triple-digit year-over-year rates. 3. **Other Products**: Revenue of $7.7 million, up 69% year-over-year, driven primarily by growth in compute products supporting AI customer requirements. Combined security and other revenue grew 46% year-over-year, reaching an annual run rate of nearly $200 million.

Risks & headwinds

• Forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from projections, including risks outlined in Fastly's SEC filings (Form 10-K, Form 10-Q). • Revenue is primarily based on customer consumption, which can lead to variability in quarterly results. • Supply chain constraints for memory components remain a monitored risk, though Fastly has taken strategic actions to mitigate potential impacts. • Achieving broader growth outside of the top 10/top 20 customers requires continued go-to-market transformation, which is still in progress and will take time to deliver full results. • NRR will face a more difficult year-over-year comparison in Q4 2026 due to the strong revenue growth in Q4 2025.

Analyst Q&A

• Q: What is driving network services outperformance this quarter? Is AI/agentic traffic a contributor, and is Fastly gaining share in this segment? /

  A: Fastly confirms it is gaining share in network services, particularly in use cases where performance is a priority, consistent with recent third-party research. While AI/agentic traffic is not broken out as a separate segment, it has been a visible catalyst for traffic growth across the platform, including network services, in addition to the faster growth it drives in security and compute. Episodic events like the 2026 FIFA World Cup contributed a small portion of the Q2 upside, with less than half of the $10 million upside to guidance coming from one-time events.

• Q: What is driving the consistent expansion in net retention rate, and which products contribute the most to cross-sell/upsell growth? /

  A: The biggest driver of NRR expansion is cross-sell of security products to the existing customer base. Fastly's core next-gen WAF continues to outperform the market and gain share. Newer security products DDoS protection and bot management are also seeing rapid triple-digit growth and increasing traction with existing customers. Edge compute is seeing early traction and co-innovation with customers, but is not yet a major contributor to NRR expansion.

• Q: How is agentic AI traffic different from traditional traffic, and what is the upside impact for Fastly? /

  A: Agentic AI traffic generates a much higher volume of requests per interaction than traditional human traffic, but lower bandwidth than large streaming events. The biggest impact is in security and compute, rather than core network services: customers need additional security tools to distinguish authorized agent traffic from unwanted scraping or attacks, and edge compute to run real-time traffic governance decisions. While AI traffic is still a relatively modest share of total traffic today, its 6.5x faster growth rate means it will become a significant contributor to business over time.

• Q: How is Fastly approaching pricing amid competitor price increases, and what is the current pricing trend for network services? /

  A: Pricing in Q2 2026 remained consistent with prior quarters, with mid-single digit price erosion for network services, most of which comes from volume discount tiers for customers adding more traffic, rather than broad discounting. Fastly will honor existing customer pricing commitments and has no plans to implement broad surcharges. For renewals, pricing is adjusted on a case-by-case basis based on customer value and product adoption, rather than unilateral price increases, with a focus on expanding product adoption rather than just price changes.