Fastly, Inc.

I would like to welcome everyone to the FASLI third quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Vern Essie, Investor Relations at Fastly. Please go ahead.

Thank you, and welcome, everyone, to our third quarter 2025 earnings conference call. We have Fastly CEO Kip Compton and CFO Rich Wong with us today. Webcasts of this call can be accessed through our website, Fastly.com, and will be archived for one year. Also, a replay will be available by dialing 800-770-2030 and referencing conference ID number 754-3239 shortly after the conclusion of today's call. A copy of today's earnings press release, related financial tables, and investor supplement, all of which are furnished in our 8K filing today, can be found in the investor relations portion of FASI's website. During this call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, product sales, 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 findings with the SEC, including our most recent annual report filed on Form 10-K, a quarterly report filed on Form 10-Q filed with the SEC, and our third quarter 2025 earnings release and supplement for a discussion of the factors that could cause our results to differ. Please refer in particular to the section 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. Unless otherwise noted, all numbers we discuss today, other than revenue, will be on an adjusted non-GAAP basis. Reconciliations to the most directly comparable GAAP financial measures are provided in the earnings release and supplement on our investor relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Before we begin our prepared comments, please note that we will be attending four conferences in the fourth quarter, the RBC 2025 TMT Conference on November 19th in New York, the sixth annual Needham Tech Week on November 20th in New York, the UBS Global Technology and AI Conference in Scottsdale on December 3rd, and the Raymond James 2025 TMT and Consumer Conference in New York on December 8th. Now I'll turn the call over to Kip. Thanks, Vern. Hi, everyone, and thank you for joining us today. We had an outstanding third quarter, and I'm pleased to share our results. These results reflect our disciplined execution, exceeding the high end of our guidance on revenue and operating profit, as well as achieving record free cash flow. This momentum drove record results across all three of our product lines. When I became CEO, I laid out a clear mandate to accelerate our growth and drive to profitability. This quarter marks the next step in Fastleaf's transformation, accelerating growth and innovation with operational rigor and discipline. As a result, we are raising our full year guidance for revenue, profitability, and free cash flow. We believe our Q3 performance demonstrates that the strategic initiatives we put in place earlier this year are translating into results. Now, turning to highlights from Q3. Our third quarter revenue was $158.2 million above the top end of our guidance and a record high. Our gross margin of 62.8% also exceeded the top end of our guidance. This was an improvement of 380 basis points sequentially as we delivered healthy margin leverage on our revenue upside. We posted record operating income of $11.6 million, significantly above our $1 million guidance midpoint. Similar to Q2, we achieved strong operating leverage in the third quarter, with OPEX up 10% year-over-year compared to 15% year-over-year revenue growth. This strong financial performance drove record quarterly free cash flow of $18 million. Our financial performance this quarter demonstrated strong rigor in our go-to-market motion, with revenue growth accelerating to 15% compared to 12% in the second quarter. Our platform expansion and cross-sell strategies were major contributors, driving our security revenue growth to 30% year over year. These results reflect operating leverage in our business and our continued focus on spend discipline. Our cross-sell motion accelerated this quarter, highlighted by a major multi-product win with a top 10 strategic account. This customer is now using products across all three of our product lines, positioning us for continued growth. We believe this win, enabled by our expanding security portfolio, highlights the tangible value our customers experience from consolidating onto the Fastly platform. Our innovation engine is firing on all cylinders. Our teams are developing advanced security capabilities that address our customers' most pressing needs. In Q3, we introduced additional security and AI enhancements on the Fastly platform, including API discovery, the first step in our comprehensive API resiliency strategy, helping customers continuously identify and protect their APIs as traffic flows through the Fastly platform. We launched industry-first deception capabilities in our next-gen WAF. This feature is designed to actively mislead attackers and bots, disrupting their ability to adapt while giving our customer security teams the decisive upper hand. Additionally, we introduced AI integration with the Fastly MCP server, making it easier for our customers to better understand and manage their Fastly services using AI. Since being named our president of go-to-market last quarter, Scott Lovett and his team have continued to drive gains with our go-to-market transformation. This effort, based on our platform strategy, is catalyzing greater upsell and cross-sell, as well as new customer acquisition. We believe our success in the third quarter illustrates why customers turn to Fastly. Performance, flexibility, programmability, and industry-leading support. Let me share a few examples from the third quarter. A major retailer in the LATAM region wanted to streamline its operations with a single vendor. They chose the Fastly platform to unify their edge security, delivery, and bot management. This strategic win demonstrates the turnkey nature of our platform, providing exceptional performance, security, and operational efficiency. A leading APJ-based specialty retailer wanted to consolidate vendors and unify their edge cloud strategies. They chose the Fastly platform for our superior performance and our end time zone customer support to resolve critical security and delivery issues quickly. An American streaming leader needed a solution that would integrate seamlessly with their existing workflows. They chose our WAF over a competitor's and consolidate their delivery, security and image optimization needs with Fastly. By moving to the Fastly platform, they drove operational efficiencies while enhancing their technology stack. A prominent weekly news magazine needed to relaunch their app on a tight timeline. This was an example of our customer advocacy flywheel. Three internal champions who loved Fastly at prior companies successfully advocated for its adoption at their new employer, replacing a competitor with our delivery and security solutions. All of these wins are powered by our platform strategy. Our focus is squarely on execution and disciplined investment to drive growth. This is concentrated in our platform strategy and includes goals of continuing to expand our platform, especially through edge security capabilities. Increasing the value customers get from our entire platform by driving simplification and a superior developer experience through AI. Sustaining and growing the stronger market execution demonstrated this quarter. We're focused on new customer acquisition and significant cross-sell and up-sell opportunities. and continuing to invest in our international expansion, particularly in APJ, where we are seeing early results with new customer wins. We are excited about the significant opportunity ahead. We are confident in our team's ability to execute, and we're pleased to raise our financial targets. Now I want to introduce our new CFO, Rich Wong. We are incredibly excited to have Rich on the leadership team. He has hit the ground running, focusing on scaling the business and maintaining strong cost discipline. leadership is already making a difference in the business, as you can see in our Q3 results. We will now walk you through our financial results and updated guidance in more detail. Rich, over to you.

Thank you, Kip, and thank you, everyone, for joining us today. I would like to start by saying that I'm very excited to be here and about the opportunity that lies ahead. I chose to join Fastly because I was excited by its leading technology and superior performance among edge cloud platform companies. Customers love our technology, our products, and our best-in-class support. I truly believe that we are positioned at the right place, the edge cloud, at the right time as we see workloads shift to the edge to complement central clouds. I also saw an opportunity to unlock value for our customers and shareholders. Since coming on board, I've seen many opportunities in finance where we can influence better outcomes with our customers, as well as our financial performance with our investors. For example, as we move into year end 2025 and looking ahead to 2026, we are implementing a rigorous budgeting process across the company and we are building more discipline around the ROI of our spend with a focus towards growth and scale. I've added staff to the finance function to support this effort, and I've also brought in a new chief accounting officer. Before I dive into our Q3 results, I would like to say I am very proud of our financial performance this quarter, having achieved our third consecutive quarter of accelerating revenues. We've also achieved near record gross margins, record profitability, and record free cash flow. We continue to launch product enhancements that our customers love. I'm excited to be here and partner with Kip and the team to help Fastly scale to the next level. Now onto our Q3 results. I'd like to remind you that unless otherwise stated, all financial results in my discussion are non-GAAP based. Revenue for the third quarter increased 15% year-over-year to $158.2 million. coming in above the high end of our guidance range of $149 to $153 million. This revenue upside was driven by three key factors. First, successful cross-sell motion where we find a big multi-product win with one of our top 10 strategic customers and made inroads on security sales with other customers. Second, competitive share gains through new customer acquisition. And finally, greater upsells with existing network services customers. TOGETHER, THESE THREE FACTORS PROVIDED A STRONG TAIL WIND FROM THE QUARTER AND LED TO AN OUTSTANDING TOP LINE PERFORMANCE. NETWORK SERVICES REVENUE OF $118.8 MILLION CREWED 11% YEAR-OVER-YEAR. WE SAW HEALTHY TRAFFIC LEVELS IN THE THIRD QUARTER DUE TO STRONGER MARKET CONDITIONS AND THE SUCCESS OF UP SELL MOTION. SECURITY REVENUE OF $34 MILLION CREWED 30% YEAR-OVER-YEAR COMPRISING A RECORD 21% OF OUR TOTAL REVENUE. This was due to the expansion of our security portfolio over this past year, coupled with the success of our cross-sell motion. Our other products revenue of $5.4 million grew 51% year-over-year, driven primarily by sales of our compute products. In the third quarter, our top 10 customers represented 32% of revenue. We continue to see strength in our broader customer base, with revenue from customers outside our top 10 growing 17% year-over-year and 5% sequentially. Also, no single customer accounted for more than 10% of revenue in the third quarter. Affiliated customers that are business units of a single company generated an aggregate of 10% of the company's revenue for the quarter. Our 12-month net retention rate was 106%, up from 104% in the prior quarter and up from 105% in the year-ago quarter. The quarter-over-quarter and year-over-year increases were primarily due to revenue increases from a few of our largest customers in prior quarters, OUR LAST 12 MONTHS NET RETENTION RATE CLOSELY FOLLOWS OUR OVERALL REVENUE GROWTH RATE TREND. WE EXITED THE THIRD QUARTER WITH RPO OF $268 MILLION GROWING 16% YEAR OVER YEAR. DURING THE THIRD QUARTER OF 2025 WE DISCOVERED AN ERROR IN HOW WE HISTORICALLY CALCULATED RPO AROUND OUR TREATMENT OF TERMINATION FOR CONVENIENCE RIGHTS. AS A RESULT WE RECAST OUR HISTORICAL RPO BOUND IN THE INVESTOR SUPPLEMENT. We want to emphasize that this change will not impact our continued focus on increasing the number of customers with revenue commitments, but also driving them towards higher commitment levels. I will now turn to the rest of our financial results for the third quarter. Our gross margin was 62.8% in the third quarter, coming in 330 basis points above our guidance bid point at 59.5%, and up 410 basis points from 58.6% in Q3 2024. We experienced $1.6 million in a non-recurring cost of revenue tailwind, primarily due to accrual reversals. Accounting for this, our gross margin would have performed at approximately 62%, well above our guidance expectations. During the quarter, we experienced gross margin leverage on a revenue upside, and small pricing declines moderate to the favorable end of our typical high-teens year-over-year declines. Operating expenses were $87.7 million in the third quarter, coming in slightly better than expected due to lower discretionary spend and a more rigorous cost management process. We are continuing our focus on our operating expenses and driving greater leverage in our operating results as we scale the business. We had an operating income of $11.6 million in the third quarter, coming in better than the $1 million midpoint of our operating guidance range of $1 million loss to $3 million profit. In the third quarter, we reported a net profit of $11.1 million, or $0.07 per diluted share, compared to a net profit of $3.8 million, or $0.03 per diluted share in Q3 2024. Our adjusted EBITDA was $25.7 million in the third quarter compared to $14.6 million in the third quarter of 2024. Turning to the balance sheet, we ended the quarter with approximately $343 million in cash equivalents, marketable securities, and investments, including those classified as long-term, a sequential increase of $22 million over Q2 of 2025. As a reminder, our March 2026 0% coupon convertible notes balance of $188 million became current in the first quarter and continues to be reflected in our current liabilities. We have adequate liquidity to cover our working capital operating requirements and to pay the March 2026 convertible notes when they become due. Our cash flow from operations was positive $28.9 million in the third quarter, compared to positive $5 million in Q3 2024. Our free cash flow for the third quarter was $18.1 million, representing a $25.2 million increase from negative $7.1 million in the Q3 2024 quarter. Our cash capital expenditures were approximately 9% of revenue in the third quarter. As a reminder, our cash capital expenditures included capitalized internal use software. I will now discuss our outlook for the fourth quarter and full year of 2025. 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. In September 2025, the Trump administration issued an executive order establishing a framework that lets TikTok continue operating in the U.S. if it completes a qualified divestiture to a new U.S. majority-owned joint venture. The administration also paused enforcement of the disaster ban law until January 23rd, 2026, while the transaction of national security safeguards are finalized. For perspective, the United States traffic of ByteDance, the parent company of TikTok, represented less than 2% of our revenue in the third quarter. We perceive the losses of business due to these actions as less likely than in prior periods, and for our Q4 guidance, we will once again incorporate all sources of ByteDance revenue into our forward guidance. As Kit discussed, we saw revenue strength from successful cross-sell and upsell motions and share gains due to competitive takeouts and anticipate this momentum to continue in the fourth quarter. As such, we expect revenue in the range of $159 to $163 million in the fourth quarter, representing 15 percent annual growth at the midpoint. We anticipate our margin leverage on higher revenue levels to continue to favorably impact gross margins. We anticipate our gross margins for the fourth quarter will be 61.5% plus or minus 50 basis points. For comparison purposes, recall that we experienced $1.6 million of favorable cost of revenue tailwinds in the third quarter. Guidance for our fourth quarter operating results reflects the impact of a sequential increase in revenue, an expected sequential decrease in gross margin, and an expected modest sequential increase in operating expenses. As a result, for the fourth quarter, we expect a non-GAAP operating profit of $8 million to $12 million. We expect a non-GAAP net earnings per diluted share of $0.04 to $0.08. Note that for the fourth quarter, fully diluted share count for positive EPS will be approximately 168 million shares. For calendar year 2025, we are raising our revenue guidance to a range of $610 to $614 million, reflecting annual growth of 13% at the midpoint. We anticipate our 2025 gross margins will be between 60 and 61%. We are increasing our non-GAAP operating profit expectations to a range of $9 to $13 million, reflecting an operating margin of 2% at the midpoint and highlighting our profitability compared to 2024's operating loss margin of 4%. We expect our non-GAAP net earnings per dividend share to be in the range of $0.03 to $0.07, and we expect free cash flow to be in the range of $25 to $35 million, compared to negative $36 million in 2024, an improvement of $66 million year-over-year at the midpoint. And finally, we expect our cash capex to be in the range of 10% to 11% of revenue for the full year. Before we open the line for questions, we would like to thank you for your interest and your support in FAFSI.