Fastly, Inc. Class A Common Stock 2026 Q2 Earnings Call

Please go ahead. Thank you, and welcome everyone to our second quarter 2026 earnings conference call.

We have Fastly 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 one 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 in Form 10-K and quarterly reports filed in Form 10-Q filed with the SEC in 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 of 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 10th, the Citi 2026 Global TMT Conference on September 9th in New York, and the Piper Sandler Growth Frontiers Conference in Nashville on September 15th. We'll also be hosting our Investor Day on September 22nd at the Nasdaq market site 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 three 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 Next-Gen 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 Next-Gen WAF. 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 continued 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. 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. You can see the power of our platform in other key customer wins this quarter. Let me share a few examples.

A leading fintech platform serving more than half a 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 multi-year, multi-million 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.

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. It's showing up well beyond that in 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 six and a half times 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 Content Guard, 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 integrates 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 four years. We remain focused on our customers and on disciplined execution.