Fastly, Inc. Class A Aktie

Okay, everybody. I want to welcome all of you. I'm Vern Essi, Vice President of Investor Relations here at Fastly.

I want to thank all of you for joining us today, those of you here at NASDAQ MarketSite and also those of you joining us on the webcast. Obviously, we appreciate your interest and time spending on our story and glad you all made here today.

A couple of quick housekeeping notes. Our Investor Day presentation is on our IR website. It was posted there about 15 minutes ago. You can go there and download it and follow along with us today. Also, we engaged corporate advisers to help us with this Investor Day, they're going to be conducting a survey. So you get an e-mail after our conference concludes. Please participate in that. We appreciate it. And we also value your input and of course, your support.

So this Investor Day is a long time in the making. Last time we did this was about 3 years ago. And I would say we definitely appreciate your commitment and patience as we've evolved over that time. We've seen a lot of changes in our ranks, and change, of course, is never easy, but I think we've had a lot of positive outcomes as a result.

Yes, we've grown in revenue and scale, but I think we've also grown as a company in ways that you can't measure financially. We're much more mature. We've been able to tackle the challenges, solve customer problems, and I think put a good foot forward with a high level of confidence. I think you're going to see that today here at our Investor Day.

And I spent the earlier part of my career on the sell side, sitting in the same seat as some of you. And I wanted to say that I really respect the equity research craft. I mean no disrespect to the buy side as well. You're all working hard there as well. But I do want to say, like, I really appreciate you all looking into companies, doing your analysis, challenging management team, certainly having differences of opinions. But I do want to say that whatever you want on your ratings, whether it's bullish or bearish, know that you can trust us to always be neutral on how we behave with you, just as neutral as our cloud strategy.

I also want to say that we do also like to say that we move fast and we play safe. And on that note, we also want to play by the rules. So safe harbor here is on the screen. For those of you who know it, we encourage you to read the disclosures and risk statements in our SEC filings. I think you all know how this works.

Let me turn to the agenda today. I'm going to start off with Kip Compton, our CEO. He's going to kick off our strategic positioning and growth opportunity and walk through that. He'll then host a fireside chat with our Founder and CTO, Artur Bergman. Our Chief Product Officer, Kelly Shortridge, is going to discuss our product platform and opportunities. We're then going to host a Q&A session and then the first half will conclude with a small break.

Our President and go-to-market, Scott Lovett will kick off the second half. He's going to talk about his go-to-market playbook as well as his commercial engine. Our CFO, Rich Wong will then provide a financial overview and target model. And then Kip is going to take the stage again to close things out, and then we're going to open up again to Q&A.

We anticipate wrapping all this up around 4:00 p.m. Eastern. For those of you here at NASDAQ, you're welcome to join us for a small reception thereafter. And as the day goes on, and this conference goes on, there'll be plenty of opportunities for you to find reasons to love Fastly. But maybe you should hear from our customers first.

[Presentation]

That's great. Okay. So I'd like to welcome Kip Compton to take the stage. Thank you.

Thanks, Vern. And we're proud of a lot of things you do it Fastly, but it's always great to hear straight from customers. So first of all, thank you for being here today or for joining us online. As Vern said, this Investor Day has been a little while in the making. We've been looking forward to today and having an opportunity to share with you where we've been, but perhaps more importantly, where we're going as a company.

Certainly, the business has evolved been really important ways over the last 3 years that we'll outline today. I think you'll also have an opportunity to meet our leadership team a bunch of the key members of our leadership team are here today. You'll be able to hear from them directly in presentations as well as Q&A. And that's one of the other big changes of Fastly is the leadership team evolution over the last 3 years.

There's a few things that you're going to hear today. One is how we win through performance with a differentiated edge cloud platform. Now when we say performance, often it is about speed. We do believe that speed matters in business. We believe it matters in the experiences that customers and users get. But sometimes performance is in terms of the efficacy of our security products or in the reliability and resilience that our distributed platform delivers.

You're going to hear about how we have one platform, one network on a global basis and how that enables us to deliver multiple product suites and enable customer outcomes in ways that are easier for our customers and, frankly, operationally and financially more efficient for Fastly.

You're going to hear about how our platform is positioned to where the market is going, about how AI and other trends are evolving in a direction where performance and latency and resiliency will become more important as they're deployed to more mission-critical applications.

And then last, but certainly not least, you're going to hear from Rich Wong, our CFO, about how we're going to convert the momentum that we've got with our platform into long-term value creation.

Before I dig in, I think I'd just share a few numbers about Fastly. We identified a TAM of $22 billion we're somewhat disciplined in the way that we approach the question of TAM. This is TAM that we have products today in these markets to participate in. We do believe that given where things are going and the quality of our platform that, over time, this TAM will grow as we address additional markets.

Obviously, given our revenue, we have relatively small market share, and we like to see this as tremendous runway for us. With the products we have today, we can grow substantially faster than the market for many years. You can see across the top here, some numbers reflecting the momentum that we've gotten in the business. But I thought I'd mention the over 5 trillion requests that we process on an average day at Fastly. That's an enormous amount of volume at scale that's being handled very efficiently and it provides us with a tremendous amount of data as we go forward.

To be honest with you, though, the number that a lot of Fastlyans are most proud of on this chart is the 97% average customer sat score. That's obviously an incredibly high number, as an average. And it's something that we take very seriously. And I think it's one of the reasons that some of the largest and most important companies in the world rely on Fastly.

So I said I'd talk a little bit about where we've been and where we're going. I want to take a moment to do that. A couple of years ago, we said that we were going to accelerate growth and profitability. We said that we were going to do it through cross-sell and upsell within our existing base. And we said that we thought that one of the absolute key things for our success was multiproduct adoption because as we drive multiple products on our platform with a given customer, a relationship with them deepens and the value that we deliver increases.

We took a bunch of actions, one is we retooled our innovation engine. We have new leadership for engineering and product, and we've accelerated the pace of innovation and product releases and are driving a much more iterative model that's much closer to our customers so that we're more assured of delivering customer value with each release.

We refocus on platform-led value. We don't sell products that much anymore. Scott will talk about it. It's really how a combination of product suites on our platform come together to the customer's problem and deliver an outcome. Of course, we've talked about our go-to-market transformation that Scott's been leading now for some time, and we've made tremendous strides there. He'll share with you where we're going. But that's been a pretty extensive program. There's been a lot of leadership change structural change, incentive change, change in what segments we focus on, change in geographical focus, all designed to make sure that we're focused where performance matters, and we have our highest win rates.

Last but not least, we focused on disciplined execution. I think you've seen that with things like margins and OpEx over the last several quarters. But my entire leadership team is committed to disciplined execution where everything that we're investing in and everything that we're working on moves our strategy forward.

And we've gotten results. We've now posted three consecutive quarters of 20% or higher year-over-year growth. We've had 5 straight quarters of improving NRR capped off at 117% last quarter. We've driven the company to profitability. Last year was the company's first year of profitability with operating margin of 15%. And we continue to drive capital efficiency with 6 straight quarters of positive free cash flow and we'll have a chance today to discuss why we think we can continue to do that with the capital efficiency of our platform.

I don't say this to say, "Oh, we're done." This is merely where we are today. and we're going to keep driving improvements in the business and keep building on the momentum that we have today. So to understand Fastly's story, you need to understand what we mean when we say edge cloud. So if you follow us, you know we keep talking about how we play at the edge and what happens at the edge. So I thought I'd just take a moment to explain what we mean by it because it's a term that's used in a lot of different contexts.

And when you hear about cloud, almost certainly what people are referring to are the hyperscalers. And this is an incredible engine, huge data centers. In fact, it's in the news, the data centers are so large recently. And the play there is to drive an enormous economy of scale, driving an enormous amount of transactions and traffic to one place where you can get enormous efficiency. And there's no doubt that those clouds are the best place to run a lot of applications. It's an incredibly efficient and incredibly flexible environment.

That said, there are some applications and some functions that are not a great match for the cloud. And they require things that are only available at the edge of the network in a more distributed system that's closer to users. Being close to the user means a few things. One is lower latency, faster response time. Another is more bandwidth. It's a shorter link to the user. And then lastly, it means that you can process requests right as they're entering the network, which can be important in terms of routing requests to the optimal place to ultimately serve them. Can it be important for security use cases where you want to or need to intercept something like a DDoS attack before it gets back to your cloud because if it makes it back to your cloud, you're already done because your cloud is overloaded by all handling all those requests.

So the edge is where we play, and we believe that there's very specific functions and capabilities there that distinguish it from traditional clouds, and we tend to work with the traditional clouds because almost all of our customers have both cloud and edge aspects to their applications and deployments.

So let's talk about what we think is important at the edge as Fastly. Now it won't surprise you to hear us say that performance and speed is incredibly important. If you think about it, it makes sense. If you're going out to the edge in a distributed system because you're getting lower latency and more throughput, what's the point in having anything less than a very performant system would blunt the whole reason you're even dealing with the edge. That's why speed and performance is so important to us at the edge.

Security is obviously critical. We deal with the tax every day attacks on our customers as well as a tax on our own infrastructure. Resiliency is important. One of the things about the edge being a distributed system is that a lot of our customers are able to use our services increase the reliability and resiliency of their services.

We'll talk a lot about unified platform today and how that has tangible benefits for our customers and also for Fastly. We'll also touch on edge compute and AI inferencing. We see this coming with new models just in the last few weeks, released that now respond in less than a second, in hundreds of milliseconds. I'm thinking of Jev, but there are many others. We see AI evolving to a place where performance is going to matter where responses are not measured in the minutes, and the edge has significant value to offer.

So I talked about what's important at the edge, what is the edge? Like physically, what are we talking about here? This is the Fastly global network. We talk about POPs. These are points of presence. One thing you'll notice is we have 166 POPs. If you look around, that's actually a small number compared with a lot of our competitors. And that's actually quite deliberate. From day 1, we've spent a lot of time thinking strategically about the balance of how many POPs we have and where we place them to get the best outcome.

If you place -- if you put too many POPs, you end up so fragmented that it's very difficult to get good asset utilization, and it's difficult to get high performance on things like cache hit rates because you just -- the POPs are too small. Obviously, if you're too few, you lose the benefits I talked about at the edge. So we've been very deliberate over the years in how we designed this network. I think if you look at any statistics, you'll see the efficiency.

Recently, I had an experience that kind of reminded me of this and brought it home for me. We have a major retailer that moved off of one of our competitors to Fastly. They -- by the way, they were a full platform win. So they came across not just with delivery, but with our security, compute, bought DDoS, everything. And they got everything configured, and most enterprises don't move all their global traffic at once. They'll move a piece at a time to make sure that, that transition is going well.

So they picked their Icelandic traffic for their initial transition. And Iceland, I assume everyone knows that, that's the little island there in the middle of the ocean south of Greenland, you'll note there is no Fastly POP in Iceland that was not one of the places that we strategically decided to place a POP.

And they cut the traffic over. Everything looked good, but the next day they called us and said, we have some things -- we have some questions for you. And we were kind of surprised because it looked good on our side. Team got on the phone with them, and they said, look, what we want to know is how are you delivering better performance to our users in Iceland than the people we moved off of given that you don't have a POP and they do have a POP in Iceland.

So I think that lands like what we've done here. I would encourage you not to measure us by the number of POPs and to realize that one of the ways that we're able to drive both the efficiency and the outcomes is with this very strategic balance of POPs around the world.

So on top of this edge cloud, we deliver product suites. And these are, if you will, the tools in the toolbox that our customers use in combination to solve business problems and get business outcomes. And this is where a lot of innovation is taking place and we've been accelerating.

The company, of course, started with network services or delivery, CDN, in a few minutes, our founder will join me on stage, and we'll have an opportunity to talk about that and how this has evolved. But we've then added quite a bit to the platform over the years, including edge compute capabilities, of course, our Next-Gen WAF, the observability bot in DDoS, which kind of completed the web application and API protection suite and has led to a lot of the growth we've seen in security recently. And then just yesterday, we announced some AI-focused products as part of Fastly for AI, and our Chief Product Officer, will be here to talk about that later today.

So as we increase the number of product suites on the platform, we add to the value that we bring to our customers. It's kind of a combinatorial thing. The vast majority of our customers use multiple of these suites.

And as we deploy more and more suites on the platform because it's one platform, it actually tends to get more and more efficient as these things are able to share resources.

And we've gotten some momentum. 30% of our large customers today use four or more of those product suites. That's roughly doubled each year for the last 2 years. 2 years ago, it was 7%. A year ago, it was 14%. Today, it's 30%. So that cross-sell is working, and that gives us deeper, stickier relationships with our customers.

Of course, we're the highest rated by Gartner for Edge Distribution Platforms. But we've also won Customers' Choice for 7 years in a row on web application and API protection. That's a security award for our security products. So we're very proud of the momentum we have both in terms of how our customers view us, how industry analysts view us as well as the business results that we've been able to drive.

Now I've talked about the customer value. of this unified platform. But I want to take a moment to talk about why it's so important to us in our actual strategy and our operations. One is, as I said, greater wallet share and the ability to just grow faster by having one platform. Because it's one platform, it's easier for Scott's team to help customers on to additional product suites because they're already on the platform. It gives us, over time, greater pricing power and more strategic relationships as we cross-sell, and we have more customers using more product suites. We believe that that's one of the key predictors and indicators of our business success.

Of course, higher retention as customers are using more services and solving more business problems and then more efficient use of our common network. I think this is something that we don't talk about perhaps as much as we should. If you look at the significant improvement in our gross margins over the last year, which I'm sure Rich will be happy to discuss. One of the key things is the fact that on Thursday night, our network might be delivering Thursday Night Football. On Black Friday, the exact same network is handling e-commerce. The next week, it might be handling a video game release. That's all the same resources, and those resources are dynamically allocated in real time to whatever the load is on a global basis. That enables us to deliver a much more efficient network outcome than a competitor, an alternative who has siloed networks for security and for compute and for delivery and so forth.

It also makes it easier for us to launch more products more quickly. There's no need when we launch new products to deploy specialized capital or have a physical deployment process, we can just launch them onto our multiproduct platform.

So I talked about how we view AI is evolving. I wish that it was going to be a straight and linear line as you see on this chart. Actually, Artur and I will chair a chart of what it really looks like in a little bit. But conceptually, we see AI evolving from things like generative AI, obviously, to agentic today, and we see a lot of agentic traffic on our network. But heading towards new applications, whether it's physical AI, where latency really matters or it's the things I mentioned earlier with Jev, where we're trying to get immediate decisions out of models. We see that as something that will create more opportunities for inference at the edge.

We're not believing that running frontier level LLM models with trillions of parameters at the edge is a great idea. It takes a lot of resources. You don't concentrate as much capacity to it. And frankly, if it's going to take a minute for the model to react, the benefit of being at the edge just isn't there and the efficiencies of the cloud win.

That said, we're seeing a bunch of use cases on our platform today. We've talked before about the fact that we see AI traffic growing 6.5x faster than human traffic. But here's some additional snapshots of things that we're seeing on our platform. We've seen -- actually, I think this first statistic is just in the last month, a 7x increase in the distribution of AI models across the platform. I think this is interesting in terms of traffic on our network, if you will. It's also interesting because it starts to suggest that these modelers are being run in more environments. And I think that's an opportunity.

So far this year, we've seen 11x growth in MCP traffic and services on our network. If you're not familiar, MCP is model context protocol. It's how models integrate with each other with agents as well as with resources like databases. We've seen a 12x growth in essentially content authenticity, so much using AI to authenticate content as, I guess, not generated by AI at some point. And we've seen the 34x code generation is incredible. So 34x growth just in the last couple of months in that use case.

I'll emphasize, these are snapshots of what we see today. We don't have a crystal ball for AI. I don't think anyone does. But we're seeing these use cases come on to the network and scale -- they start small and scale rapidly.

Now why we win? I mean we have right at the top of the slide there, performance, and there's no doubt that, that's our calling card. As our retailers in Iceland noted, it can be quite a contrast and astounding. But there are a bunch of other reasons why we win. Certainly, foundational to that is resiliency. That's something that I think has been in the news a little bit in the industry. We've architected our network as a distributed system with resiliency in mind.

Cloud neutral flexibility is important. We are not offering cloud computing services or competing with hyperscalers in that way. And that means that it's easier and more natural for a store together to get customer outcomes as almost all of our customers use the cloud as well.

Strategic engagement with enterprise customers. You heard a little bit of that in the customer video. These large customers view the Fastly team as an extension of their team, and we love that, and we think that's incredibly important to them. And then last but not least, the unified programmable edge platform. Our platform is more configurable and more customizable than our competitors, which means some of the most advanced engineering teams in the world use it to do things that they can't do anywhere else. And any one of these enables us to win, but our strongest deals are usually when multiple of these come into play.

And these are some examples of the sophisticated customers that we win with. I don't think anyone who follows Fastly would be surprised to hear that 8 of the 10 largest streaming platforms are customers. I'll leave it for you to guess which two are not. But also 6 of the 7 largest technology companies in the world rely on Fastly. So it's broader than just streaming. And of course, 6 of 10 of the largest video game providers. So we're very proud of the large customers that we serve. They're some of the most sophisticated and demanding customers in the world. And I think one of the things you'll hear about today from the team how we're going to bring the power of the Fastly platform to more customers.

We have a few clear long-term strategic priorities that you'll hear about throughout today. First of all, how we lead with the platform. And Art and I are going to have a moment to discuss that in just a few minutes. Second of all, how we're scaling outcome-driven solutions. Our Chief Product Officer, will come up right after me, Artur to discuss that. And then how we expand our market reach and our President of Go to Market will be up to discuss that. So you'll hear about each of these priorities through the day as we go forward.

Now after that, Rich is going to get up and he's going to present our plan for growth for the next 3 years, which drives our revenue well over $1 billion and has an 18% CAGR at the midpoint for the next 3 years. So we're excited about that, and Rich will share more details when he takes the stage.

Now I mentioned the team, so I wanted to introduce the team here. All of the leaders across the top are presenting here today and will be available for Q&A. Some of the leaders across the bottom are in the room as well, so you may run into them. They don't have a formal presentation role. But this is a team that's evolved quite a bit over the last year. And I'm incredibly proud of the team that we've built. And I think the results that we've begun to deliver illustrate why.

So this is how we'd like you to think about Fastly. We're a market leader with a differentiated platform. I think the growth and the gross margins that we're driving at this point are evidence that support that. We've reaccelerated the business. Three quarters in a row of 20% or higher percent growth, we now have momentum.

We've improved our product diversification and revenue diversification. I mentioned how we've, in the last 2 years, quadrupled the proportion of our customers who use four or more product suites. We have multiple pathways to drive growth above the market rate, whether that's expanding our product portfolio, upselling, cross-sell within our existing customers, new logos, geographical expansions, we have a number of ways to get there. And then last but not least, we believe the edge is going to become an increasingly important control point in AI over the next several years.

So with that, I'd like to invite our founder and CTO, Artur Bergman, up, and we're going to have a fireside chat. Thank you.

Thank you, Kip.

So I met Artur for the first time when I was considering whether or not to join Fastly as the Chief Product Officer. Spoiler alert, I did, obviously. But I met Artur at a sushi restaurant in San Francisco. I did not know -- I didn't have a particular set of expectations for the dinner. But it went on, I think, for 4 hours. In fact, it ended when they kicked us out. And we became somewhat self-conscious of the fact that we were the only people left in the restaurant.

And over that discussion, I came to believe that Fastly had a really unique platform. And there are a lot of people who have contributed to that over the years, but probably no single person has contributed to it more than Artur. And I just felt like the company had an incredible opportunity in the marketplace given the quality of the platform. So Artur played a key role in my decision to come to Fastly and has been an incredible partner ever since.

But you founded Fastly to solve a problem that there was no solution to in the marketplace. Maybe you can talk a little bit about what was different and distinctive about that approach and how it kind of flows through to today's world?

Absolutely. And it's also long and very good, and I think for Fastly, a very valuable dinner. Ends up with Kip's sitting here. I'm good to see you all. I know some of you from a long time and other new faces, but it's good to be here.

We started Fastly in 2011, and 2011 AWS had existed for a whole couple of years and had changed how developers wanted to use infrastructure. And we needed fast performance around the world. We had a very slow low time in Europe, and we knew that performance drove usage.

So I cofounded the Velocity conference, which was the first conference on SRE and performance in 2007. And all these metrics on performance, we knew. But we had a very dynamic site. And the edge providers at a time where -- maybe you could describe them as anti-cloud. Everything you want out of our cloud, you got the opposite. And so you had no visibility and no control. And we ended up building our own, we dropped our page load time from 22 seconds in the U.K. to less than 3 seconds, I think. And then we ended up starting Fastly based on that technology, because it turns out that a lot more people wanted access to this. And the only people who kind of had that power were someone who worked for hyperscaler because they already have their own networks. Otherwise, you were kind of out of luck.

That was the founding story to provide the real-time instant aspects of a platform and a modern developer-friendly edge environment.

And a lot of that platform still is in place today because you guys took an incredibly software-centric approach that -- I think one of the things that is different.

Yes. The entire founding team, the entire founding team are software engineers, not network engineers or hardware engineers or data center engineers. And so we solve problems with software. I hate spending money on dedicated hardware, and we built it from scratch up with the software on the servers, but also how we architected the networking infrastructure and networking stack, and we ended up with a very hyper-converged architecture where we control everything from the software that runs on the switches all the way back.

Now some would say that CDN is commoditized. And I'm wondering, given your long experience in that market and that technology, what your thoughts are on that?

Yes. No. There is one legacy provider that has a very large market share as we have been taking it over time. They still have it, and it's not typically a commoditized market behavior unless you have a natural monopoly, which would argue that does not fully exist here.

The reality is that there is plenty of bandwidth delivered that, I would say, is commodity. If you're downloading something in the middle of the night, does performance matter? Not really. If you're waiting for a game patch so that you can actually play the game with everyone else, the performance does matter, and that is not commoditized the same way.

There is certainly plenty of video out there that is commoditized, but World Cup live streams, not really commoditized, right? Like people pay a lot. And if you don't deliver it, you are a broadcaster in trouble.

On the API side, from day 1, Fastly was designed to handle API traffic. API traffic is not really a commodity. Some of it is, some of it is not. So CDN is a very, very wide term. And I wouldn't say it's increasingly commoditized. I think there are the buckets and those buckets have just existed. I think some of the noncommoditized buckets have actually grown over the last 10 years.

So a new class of traffic is agentic traffic. They generate a ton of activity. What are you seeing there?

Yes. I mean this is so exciting, like the entire technology space. I feel blessed. I don't -- I didn't think I would get the chance to experience another '95 to 2000. And that's what's happening, if not even more. That was a long time ago, so I don't fully remember it. And it's changing the traffic. We have been trying to answer the question, what does agentic traffic mean? And we went on and looked at -- for data around this, and we found this lovely chart.

So PyPI for people who don't know is the Python Package Index. They happen to be on Fastly, but this is a public data set that you can query is on big query. And this is all the software modules that you download, so you don't have to rewrite code.

And you can kind of see it grew 4.8% before. It's been kind of slowly, steadily growing. That is like human usage of python going up, right? So it kind of grew as more and more people started using Python and as more and more developers in the world.

Then this thing happened, Claude Code Research preview. And traffic took off. I mean if you ever watch what your agents do, the first thing an agent does is to download stuff from PyPI because for some reason, pretty good reasons, python is the preferred language of every LLM on the planet and to avoid writing code, they download things from PyPI.

That is not human behavior that is driving the increase. That is agentic behavior. And so we kind of like -- this is a great chart kind of showing what I've been calling talking to customers about the tsunami of traffic that's coming this way -- their way because once this code is written, it then has to do things. a lot of the things it does is API calls and other things on the Internet. And that means that as this continues, and as you can see, the chart -- the curve is actually accelerating still, those agents are going to talk to our customers. And so I've been calling it the tsunami of traffic. And it's super exciting.

It's -- we have disconnected infinite usage from human time, right? Like there's only so much we could code python or watch video or serve the web and buy things or do whatever. And now they -- AI doesn't sleep and they work when we do other things.

So how does this influence the importance of the edge? Or what kinds of things do you see -- how do you see the edge participating in some of this?

There's used to be a pretty strong correlation with increased visitors to your website and increased revenue, right? I'm selling things online, more people come to my website. I know my conversion rates. Now we're looking at a situation or -- if it's ad-driven similar -- now we're looking at a situation where agents can go around and shop on a lot of websites. And so you might see a significant increase in the amount of eyeballs or viewers -- eyeballs is wrong word, agent viewership for the same amount of transactions.

You can't really opt out because then you won't have any transactions eventually. So you have to drive down the cost of serving these users. And the best way of driving down costs to serving people looking at your things is caching. And doing it from the edge means less bandwidth traversing long distances and serving it from an SSD or memory is cheapest and fastest. But you still need to be able to instantly cache and validate, instantly change everything. And so all these attributes that Fastly had from day 1 and it's built into our architecture becomes even more important. It is also a lot of traffic to load balance to send to the right place. You need to secure it. So you need to run WAF, you need to run bots, you have to have great DDoS. You have to be able to personalize it somewhat -- and all of that just is what customers have been doing today but at a much greater scale, which makes it more important because otherwise, you will not handle these massive spikes.

So where do you see inference at the edge going?

At some point, technology will probably reach a point where running larger models everywhere makes somewhat sense. But today, the large models are not multi-tenant. GPUs are not multi-tenant and they take quite a while to respond.

So I think in the immediate term or next couple of years, especially given the shortage of both data center and power and so on, where we are -- the data center power is not an issue, but if we needed to put much more GPUs it would be, is small models. So you can use a large LM to train small models.

Historically, training models was very annoying because you had to have a data scientist team and you have to interact with a data scientist team. And now like LLMs are great data scientist teams like you can have them classify data and then build models. Like I just trained the model at home to tell me if the pool cover is open, and any kids are near the pool. And I think I paid less than $100 to OpenAI to train the model. And now you can tell me with very, very high confidence. At 90% confidence at 20 to 30 frames per second in a model that's less than 4 megabytes.

So those models, you can run at the edge, right? Tyler, who is my co-founder and distinguished engineer at Fastly. Last week gave a talk where he showed a 3.3 megabyte chess model. And it was kind of upset because it consistently beat him at chess. But a very small model still really powerful that was running in our compute on the edge. So if you can couple large models in a central location with small models at the edge, which kind of fits how caching has been working. If we don't have something, we go back to origin I think that is the answer of what inference at the edge actually is over the next couple of years.

That makes sense, and it's exciting. Now I had an interesting conversation with Scott, our President of Go to Market yesterday. And one of the things that came out is he said that you spend more time with customers than he does. So can you tell us a little bit about that?

Yes. We only exist because of customers, right? Like we don't have a business for some academic reason or because it's on our business. We have a business because customers buy from us and use us, and we deliver value to them. And it's super fun, right, because I get to work with customers and see what they do or what we help them do for their users, whether it is like a massive spike in traffic that they can handle or protecting them from attacks, particularly being hacked or tons of kind of cool use cases out there. Only way I learn about those is by going out and speaking of customers. And then bringing back to Fastly what we need to do to help them do more creative and more innovative things on the edge.

And so that is really like a large part of my driver. The drive for me is spending time with our customers. We're also so critical to them that we end up spending sometimes a low time with them, and it's been 15 years now. So some of them are got to know quite a lot, and I've seen them switch companies and immediately bring Fastly with them.

I kind of see -- it's kind of a personal KPI like when we help our customers get promoted, it feels really good.

Absolutely. So looking ahead in terms of tech investments and platform capabilities at Fastly. What do you see kind of on the machine for the next couple of years?

I think underlying all of it is efficiency, right, because of where we are with the hardware cycle and so on. We have to make sure that the platform stays highly efficient so that we can then deliver all these amazing things into it.

Efficiency also goes very much together with performance. In an inefficient system is rarely a performance system. Like if our WAF can filter for an attack 10x faster than our competitor. It typically means we use significantly less resources to do so. And all of that comes down to this passion and focus on performance and efficiency.

On top of that, helping customers deal with this tsunami of traffic and the complexities of this traffic. You can no longer have humans in the loop if the attackers do not have humans in the loop. If traffic is not directly human-driven. Steering it, low balancing it also needs to not have humans in the loop. It used to be pretty easy to -- easy is the wrong word, but you could predict the max usage of -- on the Internet website based on the amount of people in the country if you were launching something in your country. That's no longer true. You see it's a few bots. They're Pokemon bots now because frankly, that's the new cool thing.

But just a lot more to do that. And then we have the small model, large model, how to help people reason about that and think that and then give lots more visibility into how all these systems work together from a security delivery acceleration, resiliency, reliability point of view, to tie it all together.

And it's just super exciting. It's like these are hard problems. I spent 15 years at Fastly. I kind of had thought that some of these core Internet performance security scaling problems were sold. And it turns out there aren't and there's still a lot more room for improvement, which -- yes, that's pretty fun. And certainly, agents have helped us find and analyze and fix issues much faster and at a scale we haven't been able to do before.

That's amazing. You are an incredibly successful entrepreneur. At this point, could probably be doing anything you want. But I guess it's what you just described that keeps you at Fastly because you're just as engaged as ever.

Yes. It's -- the access to the data we have, the technologies we have would be hard to replicate anywhere else. And the same with the customers and the relationships there and the team. I feel very lucky to have those components to work with on a daily basis. And going out and hearing customer stories, you mentioned Iceland. The Iceland story. I -- there is a long-term customer defer nearly a decade, I've been trying to convince them to move all their small, high-value API traffic to us. And they moved a lot to us, but that part was like this is complicated, it's working like you should move, you should move. And I think they used some agents and then they help the move and they moved. And they're like, it's 9x faster. Our app is showing a 9x performance improvement for when users are like moving around inside the app. We should have moved 9 years ago. I don't know like I told you wish you would believe me. But I'm really happy that you finally moved.

And then I'm looking at it like we can probably make it even faster. And there's still opportunity. We could pick up -- I wonder how fast Iceland would be if we put a POP there. But yes, I mean, all of these things are just super exciting and super fun, and I get to work with amazing customers and amazing coworkers.

No, it's remarkable to have a founder and former CEO, so engaged in the business and so engaged with our customers and with the team. So I think Fastly is lucky to have you as well.

Thank you. And thanks, everyone. I'll be around here for -- if anyone was talk to me, I'm not particularly scary. So -- and yes, this is -- I mean, this chart kind of sums it up the challenge, but also the excitement on here. So absolutely. Thank you. Thank you, Kip. Thank you, everyone.

Thank you. So that was fantastic. Thank you, Artur. I'd like to bring Kelly Shortridge, our Chief Product Officer, up to talk about our product strategy. Thank you.

Thanks, Kip. I love that fireside chat illuminating our journey. There's a lot to be proud of. How we're taking it to the next phase? And also how we're going to drive differentiated growth across the whole platform?

I'm Kelly Shortridge. I've had the privilege of serving as fastly Chief Product Officer since last November. But I've been at Fastly for 5 years. and worked across both engineering and products, where I led the security business and during that tenure drove growth to 53%, including the expansion of our portfolio.

Now I'm looking to do the same thing across the entire platform, in Fastly's whole portfolio. And what I bring to this is really a resilient mindset. I think everybody at Fastly agrees how foundational resilience is to our platform to the company, just like Kip said, also bring hands-on prototyping and a relentless focus on ROI as well. And it's not just my mindset, it's the mindset of our customers. Like Artur said, there's nothing more rewarding than talking to dozens of customers every month.

And what we see is that they win by continuously adapting based on evidence based on insights, and they don't win by standing still. And customers choose Fastly because our platform unlocks that for them. It's not because the technology is covered for its own sake, just like Artur said, it's because we help them transform their business. We help make sure that their business keeps improving.

So now that you know where I'm coming from. I want to talk to you about how we're evolving the platform. Kip just walks through the platform journey, the company journey. It's my pleasure to show you how we're going to transform to tackle our biggest opportunity yet.

So first, by building a broader, more accessible portfolio that brings our industry-leading technology to a larger group of users in industries. And second, by delivering a platform that meets customers where they operate, across a variety of cloud environments, private infrastructure environments and also agnostic of which AI models that they use. And third, by advancing our platform innovation, the innovation engine Kip talked about, by using the knowledge we gain, that data that Artur talked about from across our platform, because we are that centralized service provider that's so trusted to deliver differentiated products and solutions to our clients. Then fourth by extending our reach into the always-on industries that need us most and that we haven't penetrated today. So doing this well is what gives us the right to win in these markets where we are underpenetrated today.

So with these four pillars in mind, let's talk about where this journey started. And as you heard from Kip and Artur, this has been a journey. I want to talk about how we're evolving our product portfolio, but it's important to level set on where we were. Where we started, as you heard from Artur, it was a heavy networking focus, right, differentiated architecture but a networking focus.

We only have one security product when I joined Fastly. It was sold piecemeal and really on a platform for developers who craved that raw technical power. We were a platform that was also built by developers, for developers. But where we stand today is an enterprise-ready multiproduct portfolio. It's a platform with the breadth and configurability that meet a wide variety of customer needs.

We have a security portfolio now with five products. And that includes patented differentiators as well. And it serves as an on-ramp into the platform sale, which Scott is going to talk about later too. And over the last 4 quarters, I think this is a very important point. to keep in mind is that half of our new business deals included security products. That's real proof that security is that new on-ramp. It's that new entry point into the platform sale. And it's also a value driver of our platform.

As Kip pointed out, we're increasingly complementing our delivery security solutions with other solutions as well. You saw that yesterday with the Fastly for AI announcement, I'm going to dig into it a little bit. This involves a full suite of solutions that also complements where we're going next. And that's really what excites me the most. And I know it excites everybody at Fastly the most too.

And that's we're running that same playbook that we ran for security, again, we're running it again for the whole platform. Now we're continuing to invest in technical differentiation for sure, but we're going beyond that, provide the experience-driven capabilities like reporting and insights that enterprises need. And as we do so, we're attracting the world's most complex companies to our platform, and that's because of our outcome-driven approach.

Now these are companies where downtime stops a manufacturing line, it holds to trade. It stops the revenue spike from flowing at the end of the day. Always-on businesses have to be available 24/7 regardless of what the Internet throws with them or what their AI agents do.

So we're no longer building a platform for people who love technology for its own sake. We're really building for executives, their teams and their AI agents who need the platform to just work at the end of the day. So that's where we've been. Let's talk about what that means for our customers today.

Now our customers want to unify the platform. They don't want disparate point solutions. They want a unified platform. The unified platform that we built for them is really all about enhancing the outcomes they can achieve as a business. What we hear in the market is that every enterprise in every industry, no matter the industry, they face two key questions, which is, is this technology investment paying off? And is it helping me win in my own market? That's especially true in this AI era.

What this looks like in the specific experience industry by industry, but it's the same shape, which is that enterprises want their teams to spend more time on what makes them special in their own market, less time fighting the complexity that comes from distributed software systems that they have to build to succeed. And that's where Fastly comes in. It's delivering, again, not just discrete point solutions, but it's unified and integrated platform that's intentionally built to enhance these customer outcomes. It's a platform that's reliable, that's fast, that's safe, secure that really crucially is also resilient from design all the way through the solutions that we offer.

And crucially, that it's meeting customers wherever they want to run their wherever they want their workloads to operate as well. And so when we combine that technical mastery that Artur talked about, with a set of integrated configurable solutions, the results are really powerful.

Let me give you a very specific example. So take a large retailer client. I love this example. They first added -- they were a platform customer. They first added Bot Management on top of the existing solutions leading into the holiday season. What's fantastic about the story is they literally thought there was a statistical anomaly because they saw double-digit conversion rate increases during the holiday period because they adopted our Bot Management solution.

And that's what's special about our platform is we have security solutions that are driving business outcomes. And those are the outcomes that matter to our customers. It's not security for its own sake. It's aligned to their business outcomes. And now we have the opportunity to go even deeper with this customer and all the other customers who have adopted this multi-product platform, bringing them more sophisticated solutions to meet their emerging and very complex needs.

And one key takeaway here is that this is all about expanding beyond our historical niche in delivery services to bring a broader, more configurable platform to enterprises with a more compelling value proposition as well. Then we've had this recap of what customers need.

Let's talk about our long-term priorities. And Kip did cover these, Scott is going to build on them again after the break. Lead with the platform, scale with outcomes-based solutions and crucially expand market reach. So let me show you how we're bringing it to life through investments into the product portfolio.

Let's start with the portfolio itself and how we're making it broader and more configurable as well. So a few years ago, again, one security product. That was it. When I took over that business, I realize we had a lot of work to do. We had to roll up our sleeves. We did get it done. And crucially, we've also sustained it. You saw last quarter that we had 43% growth year-over-year in the security business. And like Rich talked about, both DDoS protection and Bot Management are growing in the triple digits. That's a really powerful outcome of that portfolio expansion in the security business.

So now we're going to run that same playbook across the entire platform. It's 6 suites, each a significant product and value driver in their own rights, plus cross-platform add-ons and services that enhance that overall platform value proposition. And each of these suites is an on-ramp into the platform. It's a way that a new customer can come into Fastly, start gaining value from our platform. It's also a way that customers that are already with us can expand the value that they get from our portfolio as well.

So the way we'd like you to think about Fastly as this ever-expanding sticky portfolio of on-ramps that customers buy into and never leave. And the configurability of the platform means we have this, I think, Kip referred to it as is combinatorial value. This virtually limited combination of product suites, add-ons and services, all tailored to our customers' needs and the outcomes that matter to their business.

And here's the number I want you to take away above all others, which is that 72% of our customers now use at least 2 product suites or more and 30% use 4 or more. And that's that 30% number is up from 7% just 2 years ago. So it means it's doubling 2 years in a row. That's really powerful, and it's a tangible proof point that this portfolio strategy has been working in practice.

So that's the clearest signal and it's not just about how much we sell any one product. It's really about how many of our 6 suites each customer adopts. It's about the overall value that each customer is getting from the platform itself. And that is a shift for us. I think many of you have seen. Our technology has always been excellent. But for years, we sold it one product at a time. Our financial results didn't compound the way that our technology really deserved. And that's what a portfolio fixes because today, when a customer is adopting a second suite, a third suite, a fourth suite fifth. That's not just growing wallet share, but it's really becoming an infrastructure that they rely on in their business, just like Artur said, they bring them to their next employer because of how much they know they can depend on us. And that's a fundamentally stickier and more durable revenue relationship with customers than any single product could deliver. And it's also how our technical excellence finally starts compounding into the financial excellence we feel we deserve too.

What we've also learned is it's not enough to just have a large portfolio of technically differentiated or even differentiated solutions, the experience we create around this portfolio and around these products also matters to enterprises.

So let's talk about usability. We're investing heavily in democratizing and simplifying the platform. Today, our platform is really powerful, but it works best for the deeply [ technical ] user and developers who already know how to drive it. We want it to work well for everyone who touches it, the executive who needs to know the exact insights right now to make some sort of decision. We wanted to work really well for the AI agents building on our platform, we need to harness the full power of what we offer on our customers' behalf.

That's core to our transformation. It's from power that works only for experts who understands the technical weeds, to power that works for however our customers actually operate. However, enterprise is actually operating practice.

So what does this mean concretely? It means simplifying the user experience, both for human users and coding agents like Claude Code, quite famously, that we see quickly growing in prevalence, also means automating expertise across the portfolio, so customers don't have to be experts. They can push a button and it just works, Fastly handles it for them. And we're building dashboards and reporting that make it easy for busy executives to get those answers right now, translating technical insights into business decisions. And we're leveraging our cross-platform insights deliver actionable business intelligence to help our customers make better decisions. We'll talk about a concrete customer case study in a second on that.

So we're investing in making every single user's experience as simple as possible. And as we do so, we're meeting a broader range of customer needs, including supporting the standards that let coding agents seamlessly inter-operate with our whole portfolio and platform. Just the same way a human would, and again, leveraging the full capabilities that we offer.

To be democratize and simplify the platform well, we're going to expand this platform into that broader customer base that Scott's going to talk about. This is how we're enhancing usability. Let's ground this in a customer story.

Making a concrete with a customer case study. Let's take a national newspaper. This national newspaper brought us an existential threat. AI crawlers that we're scraping their journalism that they monetized with no licensing agreement, and that threatened their entire business. We co-innovated with them linking arms to deliver content guard less than a year later, helping them detect, classify, allow, block, otherwise monetized and manage bots that we're engaged in that unwanted content scraping, and consuming significant bandwidth as well. Our platform really critically gave them the business intelligence that they needed to negotiate watershed licensing agreements with AI companies and gain a lucrative new enduring revenue stream that transformed their business.

This is a publisher with hundreds of thousands of digital subscribers. They have hundreds of millions in revenue. This is real scale. And we protected their intellectual property. We help them create these new monetization paths, and we gave them greater control over their own business model. And as their business grows in size and complexity as they adopt their own AI internally, we have integrated the platform capabilities to grow with them. We make sure that with our platform, customers never outgrow us. What we build for one we can now do for tens of thousands of enterprises facing this exact same challenge each in their unique way.

This is a customer case study in action. Let's talk about the architecture that makes it possible. Now architecture is cloud and model-neutral by design. Let's talk about what we mean by that. So what we see is that enterprise infrastructure today in enterprise software architecture is not this neat and tidy environment. It's only becoming more complex. One more we see our customers using a multiple kind of mix of clouds the private infrastructure and now they have AI agents, especially coding agents from multiple providers, and they all need to work in harmony. They all need to inter-operate.

And with these AI agents that are now shipping and writing code, into this messy multi-model, multi-cloud world that multiplies interconnectivity and interdependency faster than any human team can actually keep track. They need new solutions. And it's why every executive I talk to out there, that's a CIO, CTO, CISO, they describe the same feeling, which is that they feel like they've lost control and they feel like they can't keep up, they feel like they don't know what's even running in their environment anymore. I think of it like a wild west that's forming where it's not just one messy environment. It's a patchwork of clouds, private infrastructure held up by the swarm of coding agents, with no consistent way to see control or make sense of any of it. They need a partner who can help them manage their intertwined needs who can help evolve with them as they need to evolve their business across this increasingly complex environment.

And that's where we come in. Our platform is built from day 1 and also especially now to be customers wherever they are, whether it's cloud-based, whether they have private infrastructure. We're cloud neutral, so we work across every major cloud and across every type of private infrastructure that they have. And we're also AI model neutral, which is an increasingly important point here. We work with whatever AI model that customers choose which, from what we see is usually multiple AI model providers as well. It's not locking our customers into any one AI vendor's road map or pricing structure. In other words, we're helping them diverse that Wild West that they see forming by giving them the flexibility for wherever their software is operating for whatever AI models that they're choosing. And that architecture is a tremendous advantage where we see a massive opportunity going forward.

This is an important point about our cloud neutral model neutral architecture, and it leads into us talking about how we're governing AI. What we see is that AI is touching every single part of our value chain, every part of our value chain. And we see it the same way that we saw security just a couple of years ago, which is an enormous opportunity and one we know how to capture because we've done it before.

Yesterday, we -- I hope you saw the press release, we announced 3 advancements that help strengthen our role in governing AI, which is AI Runtime Control, the AI Firewall and API Enforcement. These reflect our initial steps in the forecasting, the resilience and the steering that we hear loud and clear in our customer base in the enterprise market that they need for this new world.

That's the forecasting resilience in steering they need to adopt coding agents at scale with much more to come as we build for a future where enterprises have to confront the wild west of increasingly probabilistic software which is very different than the world they've known to date.

But none of this stands alone, plugs directly into our capabilities that they already trust like the Next-Gen WAF, Bot Management, ContentCard, DDoS protection. We're applying that same playbook in security that got us those great products that took us from 1 product to 5 that took us to being present in over half of our new business deals. And just like security, where we see this longer-term massive opportunity and upside.

We're just getting started with these Fastly for AI solutions. This is step one. But here's the point to remember. Our opportunity with AI is platform-wide. It's platform-wide. It creates more interactions to accelerate. AI creates more software to secure and govern and more complexity to control. That's what enterprises have to contend with.

Now before I close with this discussion about how we're leading into this platform approach, let's talk about one area where we see significant opportunity as well, which is compute. And this relates to how we're strengthening our role in governing AI because compute and AI run time control work is a synergistic payer. We're investing more in that strategy of where products combined create more value than enterprises than both products alone. So compute handles the first efficient, fast a logic pass. So then AI runtime control only routes a workload or a query to the rare case that needs a large generative model. That's what the field calls Cascade inference, and that's core to our approach going forward.

That cascading inference, that symbiosis between compute and AI runtime control is what makes AI economically viable to adopt at scale for enterprises. Pairing AI runtime control and compute is really just step one of us marching towards this vision of collective computation and cascade inference. It's early, but the direction is clear, and also our priorities are very focused right now.

We're starting with solution enhancements, extending compute into other workload types, extending it to interoperate with our existing solution suites that we talked about and expanding also how we improve our execution.

As part of the portfolio play here, which we're playing to compute as well, we want compete to be a critical on-ramp too. We do that by finding repeatable use cases, just like we linked arms on that Bot Management case study. We'll roll out experience improvements to assist this as well with more push button solutions where it just works, faster ramp-up times as well and also recommendations that are automatically tailored to the customers needs, and we're going to deepen our value prop, especially on that front in that tailoring by leveraging that unique data we collect from our platform that Artur touched on as well. We really see data and intelligence as a differentiator here going forward that we infuse across the platform.

The point is, we feel we're truly defining this next era of edge compute solutions. We're also excited about what this is going to mean as we continue to evolve towards this portfolio and platform-driven approach.

Talked a lot about the platform, how we're expanding it, how we're creating that synergistic value here. Before I hand things back to Vern for some Q&A, I want to quickly touch on the other two pillars of our strategy.

Now the second pillar of our strategy is going about scaling outcome-driven solutions for our customers. From a product standpoint, the best example of this is how we have this customer-driven innovation group. What you're going to hear from Rich as well as this customer flywheel that we've been operating. As we've grown and matured as an organization, we've learned to leverage customer-driven innovation to power that flywheel. This doesn't happen by accident or chances, actually a result of a lot of discipline. It's a result of the disciplined approach that we're showing on the slide here, where we observe customer behaviors across the platform based on our unique vantage point, we pattern match the common challenges we see across the market and across every enterprise, no matter the industry. We codevelop solutions with customers to validate real-world demand. We productionize that capability of the platform, then we roll out and scale the new solution across our installed base.

Let me give you an example. There's a high-growth payment experience management company that partnered with us for nearly is a year as we built out multiple products, informed API discovery, API inventory and then API enforcement. Now we came out yesterday in that exact sequence. And they even handed us their API schemas to make sure that we build it right. That's real trust from a customer. And that's the magic of a design partnership. It's making sure that a product has market fit before it ships. It's making sure that we can sell it, standardize it across all enterprises to thousands of them. It creates new on-ramps into the platform, right? New entry points into the portfolio and expands the existing set of products that our customers can adopt and get more value from this well. We can do this again and again, focus on scaling these outcome-driven solutions here.

So now let's talk about how we're expanding our customer reach. Scott's going to cover this in a lot more detail in his section after the break. But I want to touch on how this really links with this multiproduct play. That's at the heart of what we're talking about here today.

First, we're protecting the core. We're deepening our relationships with our largest customers built on years of trust. While we're making our technical depth radically more usable as well. But at the same time, we're expanding into segments we barely touched. Like I said, where we're underpenetrated today, where they're hungry for a portfolio that solves [indiscernible] resilience challenges because they're 24/7 businesses.

Think of a way to illustrate this is considering the difference between an e-commerce customer and an industrial one. An e-commerce customer public Internet early. They chase speed and scale. Now if you think about industrials or financial services or pharmaceuticals, where we're underpenetrated today, they've been slower to adopt this. It's not because they're as sophisticated though. I think we all know that, it's because their stakes are different. It's not just independent shopping cart. It's again a halted trade. It's a stopped plant. These are serious consequences to their business.

And it's precisely for this reason that customers need more than just a vendor. They need a trusted and unified platform. They need an integrated solutions provider with a configurable multiproduct approach that meets their evolving needs. We feel that these 24/7 industries are exactly where we're poised to win next. And we're going to do that with innovative products that specifically target these underpenetrated industries that up level the insights they need to succeed and evolve in the AI era. And we're bringing it all together.

Recapping the Fastly opportunity. A broader, more accessible platform, meeting customers wherever they operate in the messy reality of how they operate, innovating with new outcomes driven products and solutions and extending our reach into always on industries that really need a platform just like us. They're hungry for our solutions. The number to member is the one I gave you earlier, which is more of our customers are adopting more of our portfolio. They're adopting it really fast, quarter-over-quarter. And that's the clearest evidence that this portfolio strategy is working. Again, that security playbook, I talked about that 43% growth year-over-year we saw last quarter. That's a playbook we're going to be running across the whole platform going forward. And this is how we turn technical excellence into durable compounding growth going forward.

I speak on behalf of all the Fastly, we're very energized by this platform opportunity in this multiproduct play here. We're ready to deliver it.

So with that, Vern, please come back to the stage as we prepare to take your questions. Thank you very much.

Okay. Thank you. Thank you so much. So now is our Q&A portion. For those of you on the webcast, please submit questions. We'll be rolling through there. We also have mics here in the room for those live in the audience. A couple of hands up here. Let's start with Jonathan here. All right.

Thank you, everybody. Really appreciate the presentation so far. Jonathan Ho with William Blair. One thing I wanted to start out with is on the chart that you showed with the exponential growth in AI traffic and connections, can you help us understand how that maybe translates into potential revenue opportunity? And maybe specifically, what types of product add-ons and expansion in capacity utilization that can drive over time?

I can start and then maybe Kelly can talk about the product there.

It's early. I think I don't know if Kip or Rich can talk about some of the revenues we have seen around this space, but it is early. And as a percentage of the traffic, it is not that much yet. But it is growing. I think Kip had a slide, the other slide on the -- Kip about how much faster traffic is growing in human traffic. But it's still a fairly small amount.

Yes. I mean I think of it in sort of three legs. First is just volume. I mean as there is more traffic on Fastly's platform, there is more volume, there's more opportunity and that happens sort of automatically, frankly.

The second part is things like what Kelly talked about with AI runtime control where, in addition to volume, we provide value-added products that help manage the new types of traffic. And I think that's, for example, bot and DDoS, we think are being driven in part by agentic traffic, and we're seeing the triple-digit growth rate that we've talked there. The third leg is what Artur and I talked about a little bit, for example, edge inference, but where we start actually running some of the AI functions on or in the Fastly network like edge inference for instance. So that's kind of how I think about the opportunity. We're seeing increased volume for sure, and that's what that slide -- the slide that I used was traffic and request volume, not revenue. So we're seeing that volume already. And then you could see us rolling out products that capture that. And then we -- for the reasons ate outline, we see inference and some of the other things coming down the road.

I mean it's tricky I feel like I didn't answer your question, but we don't have like a separate AI revenue bucket or we can say, well, these dollars are because of AI. But what we see is the traffic volumes being driven by AI and that in terms drives revenue.

Okay. Next question for Fatima here.

Fatima Boolani from Citi. Art, I want to go back to some of your commentary around this the period that we're in right now for Fastly, both from a technological standpoint and for your customers, is that something that you've seen since 1995 to 2000 era. And then you also characterize CDN as maybe misperceived as a broadly a commoditized arena. But you delineated that there's commoditized buckets and noncommoditized buckets. And I'm wondering if you can give us a crystal ball from your perspective on how you expect that mix to change, especially as I think about some of the revenue targets that you have, which or slightly lower than what you're realizing today, but I just kind of wanted to get some of the ingredients on how you think about the complexion of the traffic over the next 3 years, commoditized versus noncommoditized?

I think the bucket of noncommoditized or like higher value is growing faster. And part of the way you can also see that is that traffic tends to need all the security features. Like the commoditized traffic doesn't need WAF, doesn't -- it probably needs DDoS, but that's about it. And so with the WAF or the security products in general, growing faster, that tends to be highly correlated with the higher value traffic. And that's probably the best way for me to look at that.

In the media space, you kind of see something similar. The non -- the higher-value traffic needs on antipiracy protection, content protection and much higher rigor around that. And you saw there was -- a while ago, we had a joint announcement with La Liga on the privacy side. That content is much more valuable than other content. You kind of see that as well.

And on the changes, I mean, what is so exciting for me is that it's changing so fast. And I was reflecting on -- I was talking to a customer in there, it feels like Fable came out a year ago, but it was actually only 3 months ago, right, it was a big deal. And so it's very hard to predict. It's kind of -- it feels like on a weekly basis, something new or changing. And in all of it though, the complexity is going up, counterbalances with our ability to use agents to manage their complexity. And part of what we really have to do internally and help our customers is to make sure that we use all agenda abilities to manage the dramatically increased complexity that agents are adding. I look there, but -- thank you.

Yes. Thanks, thanks, team. I have a question online. This is a product question regarding our release yesterday for Kelly. How does AI runtime control and AI firewall work architecturally, specifically, how they differ from injection products that run on endpoints? With runtime control specifically, does it run from an endpoint device or cover the network as traffic is delivered?

The answer is it runs on the platform, runs on the differentiated network architecture that Artur and Kip talked about. I believe the spirit of the question is, is it similar to kind of where some of the detection response players playing. That's really the world of employee laptops. We're playing in the world that like Artur said, is the one becoming especially complex, which is a world of enterprise production software. So we're looking at prompt injection attacks coming in to the software, companies are building different their own markets, not so much the employee laptop space that you might associate with traditional info protection.

So all running on the network. It's part of that multiproduct play, where everything interoperates and customers are able to gain leverage by adopting solutions here.

Jackson.

Jackson Ader at KeyBanc Capital Markets. Did you -- does Fastly benefit directly from consumer AI use cases like news, OpenClaw, whatever might be coming? If so, how and like which products, which revenue streams?

Yes. I'm pausing because I -- we have a lot of respect for a couple of customers' confidentiality. But we do benefit from those things. And we're seeing use cases across delivery and security, including privacy capabilities for agents.

It's relatively easy. You go look at the major hyperscalers and consumer public brands, how they are implementing privacy with regard to server side, inference versus client-side inferences consumer agents and they will -- they mention us. We're a part of that. So it is. And I think the privacy aspect of this is also going to increase quite a lot over the next 5, 10 years. Both driven by consumer demand and driven by regulation in Europe and other places.

Take our next question from Peter over here.

Peter Levine with Evercore. Maybe to piggyback off of Billings question, you talked about tsunami traffic that's coming up. What does that look like? When does it happen? Obviously, we're seeing this peak now.

And then second, when you think about traffic, as MCP adoption grows, like do you expect it to create a meaningfully new layer of like traffic for you all? Or is that just mostly just in API in that type of bucket. But just curious like what that looks like in the trap.

Yes, I'll comment and then Artur can add on. I think others in the industry have noted that while the AI traffic is growing rapidly, purely on a volumetric basis in terms of bytes, agents aren't watching videos yet. So the volume of bytes is not as large as the volume of requests for instance.

What we're seeing is we launched the API schema enforcement yesterday, so what we're seeing is there are side effects of AI, like everyone is creating a lot of code with agentic coding tools, that code is calling network APIs that goes through our platform and we can apply our API products to that. So I think it is more traffic. It's also, as I said before, kind of that second leg, which is, okay, whether it's existing types of traffic like API traffic that we can earn additional revenue based on value that we deliver, or whether it's new kinds of things in terms of AI traffic, CP is a very interesting example of where we may be able to add value. We see opportunities in both those areas.

But I don't know if you have -- I can't predict when the tsunami -- I think to some degree, this tsunami is already kind of coming, but Art, I don't know if you have a view on that.

The when is hard. I mean, we just had Muse and Grok Bot show up in the last 4 weeks, I think, right? And that's probably the first real like super consumer-friendly agent environment. I mean OpenClaw is cool, but it is significantly harder for people to set up.

So I think the question on when is hard, the privacy traffic that we're seeing is new. There's a new type of traffic that I mean it started a couple of years ago, small, but that is certainly something that 5 years ago or 6 years ago, it wasn't really -- I mean, we didn't have it, it didn't exist. And it's a different type of traffic for sure.

On the API side, in MCP, depending on where you sit in the stack MCP, just another API. But it is -- there is some subtle differences that the agents tend to be chatter and they're doing the self-discovery right. They're also using more streaming API interfaces, which is quite different from how a little traditional like REST-based APIs have worked in the past. I think it puts more demand on the functionality of the platform over time. But it is also like so new and it keeps changing weekly. So it's -- the when is the hard part to predict here.

Frank Louthan with Raymond James. So where does the unified platform puts you guys relative to the competition? How much of an advantage is that? And then I had another question on your Fastly for AI platform product. What's kind of new and different about that?

Maybe I'll talk a little bit about the platform question, and then, Kelly, you can take the announcement we made yesterday. We believe it puts us at a pretty significant advantage. If you compare us with some of our competitors who are operating at larger scales than us. We're driving at this point, higher gross margins than they are, and we create that right back to the fact that we're running one network and one platform where they tend to have a platform for sometimes for each product, frankly.

The feedback we get from customers is it's a more consistent experience. So they like that. So we think it's a pretty significant advantage. I mean one thing I would note is in a time where hardware is harder to come by and more expensive, the value of that efficiency is even higher. So I think as we're going forward, and as you noticed, I think we started the year with questions about how our gross margins would withstand the more expensive hardware. I think we've basically -- nothing but raise our gross margin since then. So I think it may be a bigger advantage right now given the current economics around hardware as well.

By the way, that's another thing about our platform is when Rich talked about CapEx virtually 100% of that is going to expanding the network rather than maintenance just because of the way we built the network. But Kelly, do you want to talk about your state announcement and what's new?

Yes. Very exciting announcement yesterday with [ Fastly AI ]. I'll point back to that state going from 7% to 10% in terms of customers who adopted for more solutions for a reason because it's -- yes, there are some companies do have an AI firewall, to some extent, doing air runtime controls, some doing API enforcement. None are bringing the platform that we have. None have the complete flexibility that we have. None are able to have that elegant again cascade inference where you're able to have that efficiency of logic pass graduate to whatever models you're using in your own cloud along the way. That's really hurt the cloud neutral model metric element that we see driving again the platform adoption. So I wouldn't think of those as individual project products in isolation until they fit into the platform where customers can use them in conjunction with other products there as well.

Rudy Kessinger, D.A. Davidson. I'm curious, [indiscernible] or Artur, if you could expand on compute, it's very clear you guys aren't taking a cloud approach like some of your competitors. But like just what role do you have to play in compute for these edge applications. And what's the monetization opportunity there?

Yes, I can -- I'll talk to that. We believe, as I kind of outlined that there's a bunch of functions that belong at the edge. And as you said, we're not -- some of our competitors are offering essentially cloud compute services. We don't think we can do a better job than say, AWS offering centralized cloud compute services. So we're focused on how do we support our customers with the use cases and functionality that actually benefits from being at the edge and actually running those workloads at the edge in our high-performance network. So that's kind of a high level how we frame that.

Today, we essentially have one compute platform -- product. It's an exceptional product. We have customers who tell us that they're able to do things on it from a performance and security and resiliency perspective that they're not able to do any other way. But it's one product that addresses only one for sliver of the use cases, right? And there are a bunch of technical things, but it's essentially event-driven high-performance Wasm at the edge.

We have customers who want to run long-running processes at the edge. We actually do that for a large customer on a somewhat bespoke basis because they wanted access to the performance and resiliency and the global footprint that we can offer close to users. So what you're going to see, and I think Kelly alluded to it, is kind of what we did with the security portfolio. If you go back, we had one product. We said we needed to get to critical mass. We need to complete web API and application protection, we did that. Now you can see the growth in the more material business side coming from compute. Should anticipate the same trajectory with our compute where we're starting with one product, and we'll be adding based on what our customers want and need more compute models so that they can support all of their edge workloads on Fastly.

I think Param is there on the back.

So I really appreciate that all the AI products that you've introduced, and of course, you expanded your portfolio over the last few years. How do you think your portfolio sits today? And what are sort of missing pieces you want to address in the next year, especially in this agentic world?

Kelly?

Yes. I think -- the way we think about the agenetic opportunity again is where does our platform makes sense. Kip just touched on that from the perspective of things like edge inferencing and where that makes sense. One interesting thing that Artur touched on as well is, yes, agents at the end of day, their software programs. They also have interactions. We have our Chief Legal Officer in the back. She knows the importance of contracts very well. The agents don't create their own contracts. And that's what we mean by governance is how do we make sure that for every enterprise in this new world, like you it's expanding very rapidly, creating more complexity. We're able to help them make sense of it, able to help them enforce what they expect from that software, which is an echo of what Artur built with the delivery business to date that we plan on extending across portfolio as well.

And again, thinking about where we can expand our computing offerings, continue to invest on the security side, still thinking very much on the delivery side about what enterprises need next to grapple with in the wild west. That's the terms we hear from them. So I think you're going to see it really, again, across the whole portfolio, certainly building out, again, was just step one of Fastly for AI. But I would say probably no part of our portfolio will be untouched by helping our customers navigate this.

Yes. So we have some questions coming in on the webcast. Thank you for those of you out there. A lot of them I think we covered around traffic patterns. We'll follow up on those. I think we've got time for one more. We'll take in the back there with Vijay.

Vijay Homan from Craig-Hallum Capital Group. Just with respect to security, we've seen some transformational models like Mythos come out. It seems to be changing things a lot. Just how do you see AI transforming that security space? And do you see any role for AI in providing dynamic real-time defenses?

Absolutely. I'll comment then actually, I'm sure Artur and Kelly would have perspectives on this as well. I think it was interesting when the Mythos first came out, they're seen in this vibe that somehow people would need less security software. We didn't quite understand that. We don't think that's the case. I think what I would say is it's just the speed and the volume of exploits has shifted. And I think that's been publicly really reported. But a lot of our customers turn to things like the Next-Gen WAF because they can't or don't want to patch all of their systems. And so they can kind of front door that makes it protects it. And as long as they are able to detect the new exploits and vulnerabilities there, they're able to keep running their business without being a perpetual state of trying to patch various microservices. And like that.

In terms of real time, the AI is used for a lot of things. A lot of the systems aren't quite real time. But as I mentioned in my talk, that's where it appears to be going. I've been very interested in -- so the models that have come out even in the last few weeks that have sub-second response time. And I think that's going to be the kind of next frontier and that will be applied in real time to security, but potentially in real time to all kinds of requests and transactions network.

But I know both Artur and Kelly would have a lot to say about this.

So listen, with Mythos, I think there's been a huge focus on the vulnerability piece. But I think taking a step back, the concept of defense and depth has been common -- it's an enterprise a -- you see that in the security portfolio that we built out. We have these layers, and that's what enterprises are buying into. Hence, the triple-digit bot management DDoS growth on top of the great growth we already saw in the Next-Gen WAF.

I think we expect that to continue as enterprises need those multifaceted defenses because Mythos is strengthening attackers ability to change some parts of their operations more than the vulnerability piece. And that means, frankly, a combinatorial explosion of potential actions they can take. That's where the visibility piece, even with something like API enforcement becomes very critical, certainly, the existing security products and as we continue to invest in more, providing more flexibility as the aim with the game for enterprises.

And to Kip's point, we're certainly exploring how we can leverage models also to give them better insights because that's their own understanding of their software becomes an asymmetric advantage in the this world that we want to help all serve as the platform as well.

I can finish off with -- I spent time last week with customers, a bunch of CISOs and at our conference, we had a talk by an open source developer of a software called libcurl, which is -- it's in everyone's device, like everyone, every device has it. And the number of vulnerabilities filed has gone up dramatically as we would think. And one of the measures they tracked was how long that vulnerability had existed in the codebase and it's staying at 9 years.

He's like eventually we'll run out of the old vulns, but we'll create new vulns. All of these need patching. And one of the things that the CISOs were saying is that we can't keep up. So we need agents on our side, right? So it can't be -- the attackers now have much more time because they have agents just like we have more time because we've got agents. So you need the agent of a loop. And this is where there was a question earlier about the kind of platform advantage.

All the real-time aspects are instant aspects of our platform. The fact that the log files show up in less than a second. The fact that you can push new configuration, a new app rules very, very fast out, are all things that have been very beneficial in the past for people that operate. But in a world where attackers can change, what they're doing nonstop continuously, all those real-time like aspects that the platform has and that apply to the things we built on top of the platform becomes even more important.

Because like if it takes 10 minutes to change the config, that was annoying in the past, but better than 4 hours. But still doable, maybe I would have found it unusable, but that's me. But again, the agent world, we're on a take can tie so many things, then 10 minutes is eternity, right? And that is a big part of the platform advantage that we can build whatever we are building upon and why customers come to us as they know these core capabilities of the platforms translate to better fundamentals for all the products that we build on top. And it will just be way more important as agents get better at everything, including attacking and defending.

Thank you, Artur. So that concludes the first half of our presentation. We're going to take a 10-minute break, and we'll start back up at 2:55 Eastern. So stick around. Thank you, everyone.

[Break]

Thank you for coming back here, but we're going to continue the second half of the session. And it is my pleasure to introduce to you all, Scott Lovett, our President of Go to Market. Take good way, Scott.

Great. Thanks, everybody. I'm really excited to have this spot that everybody shares after the break. My name is Scott Lovett, I'm President of go-to-market. They told me I'm supposed to tell you a few interesting things about me. So I'm a leo. I'm not afraid to cry. I've been at Fastly 2 years. Previously, I was CRO at Imperva, Akamai and McAfee. And then before that, I was 20 years at Cisco. And you'll see some of all those companies kind of weaved into my presentation.

Really, really excited to talk to you about the transformation that we started a couple of years ago and the impact that it's having. And we always, as CROs tend to talk about growth, but I really want to focus on what sustainable durable growth for Fastly moving forward? So I'm going to start with -- you've heard performance matters. What does that really mean to my sales organization and where we focused in and how are we identifying those types of customers out there. And I'll walk you through what that looks like, not only from a feature standpoint, but also the verticals that we think it plays well in.

My team gets sick of me talking about this because I'm going to deep dive on what customer intimacy means. So what I really mean is trusted adviser status. I bring it up all the time. When I chose to join Fastly, I joined because of one reason. First of all, I'm very old. And I've been doing this a long time, and you find very few companies where the customers love the company as much as the customers that love Fastly do. And you saw that in the beginning of the tape. You've heard it from Artur, who's talked to a lot of these customers, it's really important that we leverage that relationship moving forward and get deeper and become trusted advisers, not just a vendor selling another security product into their infrastructure.

And then I'll talk about really what's the operational goal of the organization. So how do we build a high-performance commercial engine here and make it a repeatable process. This has been an evolution for the company, for the sales organization over the last couple of years.

And then lastly, how do we broaden our market presence, not only geographically, where are we looking to expand. But what are additional segments that we're going to use, what are additional types of partnerships that will expand the reach that we've got and also increase the performance that we have on the network. So this is where I'm going to spend my time today.

Winning where performance matters. So when I look at why customers love fastly and I made that comment there, it really comes down to a few key things, right? We delivered top performance when it comes to things like bot blocking rates and uptime and cache clearing right for retailers. This is critical to them. I was just over in Europe for a couple of months in Spain and Germany, the #1 issue, every single customer that I sat with brought up was data sovereignty. For every SaaS company that's based in North America, they want to talk about data sovereignty, what can you do? And so -- we're delivering by the end of the year of bifurcated control plane. And in doing that, that opens up other market segments for us like public sector in North America, right? So with FedRAMP certification and other things doing there.

And so these are kind of the on-ramps and you'll hear me use this term a lot to some key verticals where we see a lot of these, I would say, product benefits really impactful where performance does matter to them. And those are really the verticals on the right. And traditionally, where Fastly has always been.

Kip talk about how well we've done in some key critical verticals. The interesting thing about this is, I think most people tend to think that these are only your top 10 customers, they're the biggest streamers in the world, et cetera. I would remind all of you 6 years ago, OpenAI was a commercial account in a lot of places. There are a lot of emerging digitally native customers that are evolving in the commercial model where performance matters. And the reason that's so, so important is the market is essentially kind of coming to us. When I first got in, I came from the security side when I was at Cisco was enterprise and was at the security side. I went to McAfee in the endpoint game. I got brought in to Akamai because I was a security expert per se, but it was really my exposure to the CDN side of the business.

And what we saw then when I first joined, which was roughly 2018, it was still a market being really driven by what was the cost factor. I can tell you those conversations have changed drastically now with our customers. Because when you're looking at performance, cost isn't the first thing that they care about. It is the ability to clear cache quickly. It is your uptime that we've got there, and I'll walk through examples of customers who pivoted back towards us because of that. And so I bring that up saying it feels like since I got here, the market has turned to us with these high critical workloads that exist out there and looking for vendors that can deliver that on a regular basis. So that's where we're focusing our resources in.

Talking about desire for deeper partnerships. I always tell the story. So like I said, I've been doing this a long time. I'm based in Chicago, I have a lot of relationships with CISOs and CIOs for a long, long time through many companies. And there was a CISO that worked for a large hamburger distributor in Chicago. You guys can maybe figure it out who that is. I know I'm not going to use his name, but he's no longer there, but he was a really good friend. And a few years ago, I was with them, who was a CISO there. And I said, what's the #1 challenger facing. And he said, Scott, we did an audit. We had 86 discrete security appliances in our infrastructure. And every breach statistic that we look at shows that we haven't gotten any tighter with regards to the black-hats getting in.

As a matter of fact, I'm convinced because we've gone best of breed with all these different vendors out there that they're able to exploit the gaps between the products that exist. So my goal is really to get down to a few key vendors that have platform solutions that I can leverage right, moving forward. So true part of the story that I have to tell you, 6 months later, I got together with him. We were out at RSA and a head of beer, and I was with me like, how is the transformation going. He's like, "Oh, that's great". Great. We have a 123 security appliances now. We've gone the exact opposite direction, but I now have a strategy kind of moving forward. And it ultimately worked he got down to 27 vendors that he has out there. But what he really did was kind of divvy up security providers in the buckets, whether it was the edge of the network, whether it was endpoint, whether it was the traditional CDN side that we had out there, and you look for key partners that you could work with.

And again, that plays to the strength that we have with these relationships with these customers. And heard Artur and Kip and Kelly talk about the reason the stakes have changed so much is these are high-stake workloads. So deals that used to start with procurement coming to us, asking for bit pricing, now starts with the end users, right, coming to us saying, these are critical workloads that the Board care about, okay? And it allows us to gain better commitments from customers on that.

So when you're competing against -- when I first started in CDN, nobody ever wanted to give commitments on products, right, on terms or length, et cetera. We don't do commitments. Customers would say all the time. Now in this environment, if you're going to deliver performance to customers, we need to know what their traffic shapes look like. We need to know what's coming in our direction. It's super, super critical that we deliver the performance that we're expecting. In order to do that, we need to understand what that workload is going to look like and build an infrastructure that supports that. And when you walk customers through that logically, they're more than glad to invest longer term with you. We've seen that in the uptick in multiyear deals and multiproduct deals that we have out there.

So how do I get customer intimacy is really leveraging our strength, which is we started the core of the network, right, that we've got out there. It doesn't mean we don't have customers that jump on and with the security product and then shift back and look at CDN. But really, we know that that's where we've grown up, and that's our heritage that we have out there. So there's a natural motion to go to these customers, and I'll walk through a couple of examples that we have of leveraging the network space that we've got, but moved to the market adjacency that we've gotten security next to it.

They've seen the high-performance delivery that we've delivered for video on the network. Now they need that same high level on the security side with API security that we've got out there. And so it's a natural flow to walk there. And then the other thing is like we're now looking at the next wave, and I thought Artur was brilliant the way he said, we don't know when it's coming. It's here. How big it gets, how long it lasts. I don't think any of us know, but what we do know is that the customers are coming to us saying, what workloads can I move to the edge out there? I need your help in really defining and embedding Fastly in the infrastructure we're building out to support this wave of technology.

And you'll see I have a little comment on that field CTOs and specialized technical products expertise are helping customers translate this. The reason I bring this up is I went to Rich as our CFO and said, "I don't need a lot more salespeople. What I really need are people that can go out and help customers through this transition."

So you heard Kip make the joke about Artur making more sales calls than I do, which is actually 100% true because nobody ever wants to talk to the Chief Revenue Officer unless something got broke or something. They want the guy who built the network and the infrastructure to come out and talk to him about what he's seeing from customers. That translates to every level of our company. They want technical resources that have been out in the marketplace that are in specific verticals that can help them guide towards where they need to go and what they need to build in their infrastructure. And so those are the types of resources that we're embedding in the field to really build this intimacy with customers that we've got out there.

So you've seen this slide 3 times. I'm going to walk through kind of each one of what this means to sales of how we lead with the platform scale outcoming driven solutions that we got out there and what we think that expanded market reach looks like. So the first thing I got to call out is there's an obvious conflict at this slide, if you look at it, and it says, we're going to lead with the platform, but we're doubling down on best-of-breed solutions.

Now it may seem like those two things kind of conflict with each other, they don't. And bear with me for a second on this. How many people own an EGO blower? Only 3? How many own an EGO product in general? Okay. We're clearly in the city. Maybe that's a driveway, as an EGO, yes, that exists out there. The reason I bring it up is it really is a good analogy for what we're seeing kind of from our customers out there.

So like last week, I had to buy a hedge trimmer. For it's all hedge. I went to the hardware store. I have an ego blower. It's the only product that I have from EGO. I looked at all the hedge clippers, I kind of glanced at the price, they were all in a similar category. But I looked at the hedge trimmer for me go and said, "Well, I've already got a battery system that works with that. I can already charge it on that. I can already bring it in." So by the way, I spent $299 and bought the hedge trimmer. Full disclosure. I then bought the little chain saw attachment that displaces the hedge trimmer for thicker branches. I then bought the extension pole. I then bought the high-performance batteries, which once you get sucked into the EGO Hemisphere, you find out, those are $500 a piece. So my wife came back and said, "You spent $1,700 at True Value on EGO stuff?" And I said, yes, exactly because it all worked together. Now she did look at me like I was completely crazy, but she kind of understood the fact that now you can grab one battery and you can input it in any solution. And by the way, I didn't come in looking to buy a complete platform of EGO products, Nobody does. Nobody goes in and buys the power washer and everything. They come in because I had a specific need that I had to trim a hedge that I couldn't reach. But I leverage the platform that I had already invested in. So the analogy is we're seeing that with our customers a lot.

The telemetry data that's shared from the network side of the business the security products that we've got out there, that ties back to what the CISO at the hamburger distributor talked about, which is how do I find folks with key platforms that I can build upon. It doesn't mean I'm going to start buying the whole platform at once? There's going to be multiple on-ramps that we use out there.

There's a couple of examples on this slide. I just wanted to walk through of recent customer wins that we've had out there. You look at enterprise reliability, and this is probably the #1 thing we've seen over the last 6 months is we've had a number of customers both that have been customers before and new customers that have come in and said, simply network uptime makes a difference. And one of them was a large global financial institution that I had worked with and just said simply, the Board came to us and said the amount of downtime that we've seen over the last 6 months specifically has impacted us by over $100 million. So we want to come back to Fastly and we want to adopt you. By the way, they have a multi-CDN strategy there, so they really shifted just the majority of traffic over to us.

If you look at the bottom line, it was almost the same story of what opened the door was the network outages. The interesting thing about the customer down there and this large commerce customers that we have in a home decor space. The really interesting thing about their play was the CISO -- the CIO actually there said to me, everybody gets a turn in the pickle barrel, so outages are going to occur. And he said, our belief in why we're moving away was not because the outage happened. It's because how is the outage handled? Who are the people behind it that you worked with?

Could we get to the engineering folks, where your engineers that were there. Cable cuts are going to occur in the Atlantic, right? It was his point, how do you respond to that? And it wasn't about the products. It was actually about the people at Fastly and their ability to respond there. So same business issue but two different reasons that they wanted to pivot back to Fastly. And then really, the one above that, the real-time control, I'd like to thank Artur for bringing up the large weather company in Atlanta that he had met with and all that story. But it's a great example of, by the way, it took 10 years of talking to that customer. And now that customer, right, moving the API traffic over and the performance that they've seen there, is now willing to talk to other customers about it. They were an existing customer on other sides of the platform. They hadn't moved API traffic to us. Now they're sitting here saying, oh, we should have done this more. We'll be glad to talk to other customers about that.

By the way, one of the individuals has recently left there and is now replicating the same story at another company. Artur brought this up, I've never seen anything occur more often in my career than people that use Fastly at a company, go to another company and bring in Fastly there. That's how trusted we are. So that's really how we're winning in this space right now.

My -- I used this chart actually with my sales organization. I do a quarterly sales call. I pulled this out because I wanted to share which is telling folks that you want to become a trusted adviser and you want to move up the executive food chain is really easy. Doing it is really complex. If you're a sales rep calling the CIO's office to say, "Hey, I just want to get in front of you. I've been meeting with your data analysts down below and the folks that are embedding products." A CIO doesn't go, "Oh, that's great. I've been waiting for your call. When can I get you in here?" They point you off to somebody else in the network that they've gotten.

So part of what I wanted to do was try and explain to the sales organization, here's where you start. We all know there's an on-ramp. The customer has a pain point. They have the hedge that needs to be trimmed, right? So they're going to come to you and ask you for a product, and they're going to come in. They're going to ask for pricing on that product. But it is so important at that point that you position the value of the platform, what they're getting access to. If you try and sell the platform upfront, good luck. Somebody is not going to swallow the elephant. You'll find customers that will go with multiproduct, but they're not buying the entire platform as it exists out there.

So find out what the Fastly products are identified to that, then look at the operational impact that occurs there, right? So go back to the folks that you've been working at, here's the operational impact that we've got and tie it to the business outcome. The glory of some of these AI tools for sales right now is for account planning, it will actually go in and do all this for you. It's amazing what it spits out. And then you have a business-relevant story that you can go into a CIO with and talk about the impact. As a matter of fact, you can give them the slides to use for their board deck on the impact it's having to the business as it exists out there. That's how you get to the end, which is really a broader relationship with the customer and expand that.

And where we get deep and wide with customers, and we've certainly seen it with our top 10, we know we get more business out there. So how do we expand that through the enterprise sales organization. And this is kind of the road map to how we do that.

Great example here of a customer that we've had for a long time. It is a top 10 customer that we have out there. Social media company has an entity in APJ, a separate entity in North America. You can see if you can figure it out on your own. But a long-time customer for us on the traditional CDN side of the business itself. So they were familiar with our ability to scale, to deliver high-performance video traffic, et cetera. The executive team there came back and they had done an analysis of their API traffic and said, the reality is we don't know where it is, and we don't know what it is.

And there were so many departments that were going out right buying connections to LLM, buying connections to third-party software vendors. They had no idea what was secure, wasn't secure. They had no idea where these connections existed out there. And so for us, it was that natural market adjacency we could go expand with. So we did that. You could see the impact it's had kind of already, but I'm projecting, and I can only give ranges now, an increase with this customer from a revenue perspective, depending on what utilization -- how many APIs move over, et cetera, our revenue increase of roughly 25% to 38% this year.

And this is a play, by the way, that's completely repeatable. We've got two other opportunities within the top 10 alone and multiple ones where we're running this API security play as we call it out there. And these are issues that customers have, business problems they're facing that we're able to get in and kind of solve them with.

This is a slide I gave to my management last week in Chicago at an offsite there. I'm really focused on segmenting our customers into key verticals where we know performance does matter, and that's where we're focusing our resources on. We've got a limited number of resources that we can leverage here effectively. How do we put them on the deals that can have the biggest impact. One of the things I think we've done poorly, that we've gotten way better at in the last year is doing what Artur does, which is how do we get executives engaged with other executives. Even giving account executives, relative information to go in and talk to a CIO, they want to talk to a peer and they want to develop those relationships.

So folks like Artur, I mean, our CFO, Rich got a big deal done for us last quarter. He doesn't get commission I gave him a pat on the back. And Kip is in front of the customers all the time. So like we're really trying to strengthen those executive level relationships.

Sales enablement, I just want to plug this, I won't do the last 2 is so critical because we're really in three different markets. And when you think about it, being a salesperson talking to three technical influencers, different technical advisers, different buying entities in different motions like network security and compute can be really, really hard. So enabling them to really understand what are the stories in each of these technical verticals that we play in, is really, really helpful. And then giving them key analytics, that's propensity of buy information. If companies have product X, they're most likely to buy product Y at what point, when do you introduce it, how do you support that? And what do you do?

We're expanding globally. The first year I was here, we added resources in France and Mexico, and you can see how this is color-coded. We coded where we added sales resources. You can see the POP activation where we've got, you can also see the planned POPs that are opening later in the year.

So in '26, India, Middle East, Thailand, Southeast Asia, Artur and I just got back from India, by the way, we spent a couple of weeks there. I'll talk about that in a second. But I see it as a huge growth market and a growth opportunity for us and a different delivery mechanism I'll talk about. And then Latin America is the one this year. We just hired a new Vice President to work down there. We're going to add resources. We're going to add three POPs. We see a significant opportunity as well.

So this is the trip Artur and I made to -- I'll start with this to India. And it was fascinating because we did two customer roundtables and we met with a large service provider there that we've got a partnership with them. We're essentially embedding our software on their service there. So it scales the infrastructure and the POPs. When we set up there, Artur got on stage and said, I think it was 7 months ago, we had 12 POPs, Artur, wasn't that in India? 5 POPs. And we now have 62 POPs. And every enterprise customer sitting in both rooms stopped, put their pencils down and started paying attention to them.

The scale of infrastructure that they could get leveraging hardware from their service provider, but our software running on top of it was super impactful. They could not wait to talk to him. Again, nobody want to talk to me, but they wanted to talk to Artur because they were so impressed with the ability to scale that. And so how we embed in these service providers, it's going to be a play with that we're going to run in Latin America and when we're already running in North America great opportunity.

The other thing we're looking for is the days of resale, I came from the hardware side of the business, obviously coming from Cisco. It's really a services-led play right now. And so what customers want from partners is very different. It's technical expertise. It's the human capital to integrate multiple diverse products from diverse vendors. So finding partners who want to play in the solution end game and we'll stitch products together from multiple vendors and provide those services because customers don't have those bodies to do that are the types of partners that we want to bring in. Partners who want to resell and fulfill demand that's already created, that market is gone. It doesn't exist anymore.

So the key things I kind of wanted to walk through today was what performance matters and how we're focusing the organization around that. And hopefully, you got a flavor of what that looks like, how we're becoming trusted advisers. And this is what I'm most proud of because this was the easiest button to activate because customers love us. So going in there and saying, "Great, how can we partner together moving forward"? What does that mean? And you've seen that in the increase from commits and the cross-sell and upsell that we've got there. You've also seen -- I feel like sometimes we have to apologize for the top 10 customers growing as quick as they are. I got news for you. I walked you through that API story. They're going to grow more. They trust us more. They're going to give us more traffic. You're going to see them grow more.

I've got to grow the rest of the business as well that we're doing there, but you should expect to see those top 10 continue to grow because they trust us more than anybody else out there. Talked about the KPIs that we want to run within the sales organization and just creating an operational cadence of pipeline review and all that stuff that we've got out there.

And then lastly, what we think the market reach looks like for us, whether it's geographical expansion or market segments that we move into. So with that, I think you understand why we're so excited to kind of get to Fastly and why I'm so excited about the opportunity that we in front of us. So I appreciate the time.

With that, I would like to -- no hold your applause. Thank you, I appreciate it, Chris. With that, I'd like to bring up my partner in crime, he's the MVP, I think joining the company. And like I said, it's great to have a CFO that talks to customers and works with them. Rich Wong.

All right. Thank you, Scott, and thank you for the go-to-market transformation that you've done. It's been an amazing story, and I love hearing those customer stories from you, and I love being a part of those -- that customer journey.

Thank you, everyone, in the audience for coming. I've been very fortunate because I've been the CFO for the last 13 months. I've had a chance to meet most of you guys. But for those of you who have not met, I'm Rich Wong, the Chief Financial Officer here at Fastly. I've spent the last 20 years in finance roles across a few Silicon Valley companies. This is my third time as CFO. And prior to being in finance for companies, I spent 8 years on the Wall Street doing both M&A and capital raising.

So I joined Fastly in August 2025. And I joined because I was a true believer in the edge platform that we've built. And I actually believe that the edge becomes an increasingly important part of the Internet going forward. I think we have a world-class team, a world-class product, a world-class platform, and we're very uniquely positioned to edge.

So I'm excited to spend maybe the next 15 minutes to walk you through the Fastly financial journey and where we are headed. I'm going to focus on five key themes that are laid out on this page. One that we have really scaled growth durably, profitably and in a free cash flow positive environment. I think that we've really laid the foundation that should sustain continued growth and profitability. Two, we're really deepening our platform. You've heard from Kelly, you've heard Artur and Kip about the unified platform that we've built and the kind of six product suites we have. Customers are buying more, and you'll see that in the multiproduct adoption metrics that you see.

Three, the network that we have built is very unique. It provides us with real structural and economic advantages, especially versus our competitors. And four, the incremental margin model that we've developed has really worked. It gives us the confidence that we need in the continuing quarters as we scale profitably and durably. And then five, as we generate free cash flow like we've been doing for the past 6 quarters, we will continue to redeploy that capital with an eye toward long-term value creation.

So let's start first on the business transformation that's really -- that we've undergone. Kip, Scott and Kelly have talked about this. I'm going to focus more on that financial journey. From my perspective, we've really reset the business and strengthened the foundation. We've consolidated into one platform with six product suites. We've streamlined the go-to-market operations and motions really brought in executive selling really deepened that customer partnership. And then we've also embedded financial discipline throughout the company. So we're on this journey, and we've made tremendous progress.

If you look at where we were a year ago and where we are now, we've accelerated revenue from 12% a year ago to 23% in the most recent quarter, we've taken gross margins from 59% a year ago to 66% in the most recent quarter. And we've turned an operating loss of negative $5 million a year ago to positive $27 million in the most recent quarter.

And then very importantly, we've done this with existing customers and new logos, but with existing customers on the last 12-month net retention rate basis, we've taken that from 104% to 117%.

Now that the foundation is laid, we've demonstrated operating momentum. We're focused on scaling for the future. And that means durable, diversified growth. We talked about the multiproduct adoption. We're focused on deepened customer relationships and continued margin expansion and financial discipline as a company.

You've heard about our platform strategy from fragmented point solutions a unified edge platform. The unified edge platform has six key products that you see here on the upper left, the network services, the Next-Gen WAF, the bot management, DDoS protection, compute, and observability in other products. We're going -- given our unified edge platform today, we're actually going to change our reporting to better reflect how our customers buy and use Fastly in how we operate internally.

So beginning in 2027. We're going to move from three revenue line reporting, which is network services, security and other, down to one. And then we're going to introduce a multi-product adoption metric. We want to show investors and be transparent and better align with that multiproduct platform that we've been speaking about today. And it really matches how we operate and how we sell and how our customers buy. So we're going to introduce a multiproduct adoption metric around the percentage of customers that buy two products or more, and the percentage of customers who buy four product suites are more.

And so to help with this transition, we're going to ease investors in. For the next two earnings release in Q3 and Q4, we're going to report under the old way with those three revenue lines, and we're going to also report on the new way. So we'll have 2 quarters where we would do them in parallel. We hope this change better shows to investors the breadth of our product suites and the breadth of our customer adoption across our product suites.

Kip mentioned a $22 billion TAM, about 3% share of the market. So there's ample room to grow. The way I've been thinking about this is that we have four pillars of long-term shareholder value creation. First is the above-market revenue growth, which is share gains with existing customers on multiproduct adoption, continued go-to-market execution and expansion into new markets and geographies. Second is the modern network economics. Our modern network architecture really result in higher capacity utilization and lower capital intensity. Third is the disciplined operating leverage, the ability to expand incremental margins through overall cost discipline and improved productivity as we scale the our platform and as we add more products and traffic without proportional overhead. And fourth would be the strong free cash flow and capital redeployment. We're going to be strategic in how we reinvest free cash flow generation into the highest return opportunities. So let's dive deeper into each of these pillars.

The first pillar I mentioned was above market revenue growth. We talked about a deepening unified edge platform the six key product suites and the percent that adopt 2 plus and 4 plus product suites. We're going to start reporting this every quarter going forward. We've made tremendous progress. As of the second quarter of this most recent quarter, 72% have adopted two plus product suites. This is up from 58% 2 years ago. And then from a product -- 4 plus product perspective, it's 30%, and that's over 4x from 7% 2 years ago. This multiproduct adoption really relates to what I call a customer flywheel. So the more that customers are buying on our product suites, the stronger retention we're seeing and the stronger the upsell and cross-sell is. It also results in stronger diversified revenue from Fastly and really greater revenue visibility. And it provides us like multiple avenues for growth, market share gains, international expansion. And Kelly mentioned the longer-term AI and compute opportunities. Our unified platform is real, and the customer flywheel we are seeing has really underpinned the past 7 quarters of continued improved execution in the company.

The second pillar of long-term value creation is leveraging economics from a modern network. Artur started fastly to solve some of the modern complexity of the Internet. Really like the demand for high-speed performance reliability, the explosion of user-generated content and shared content and the mass adoption of e-commerce and financial services transactions. Our architecture was built for that modern Internet. And so as a result, we see significant operational advantages from our network. We see higher throughput per server. We have software-defined traffic engineering and fleet-wide upgrade capabilities. And then the unified structure in single network. Unlike some of our peers, we have the same CapEx that serves all of our products and under what we call a hyperconverged architecture.

This has resulted in key results for Fastly. Non-GAAP gross margin was 66% in the most recent quarter and the ability to grow our capacity by 65% with an approximate 10% cumulative CapEx spend over that period. Prior to joining Fastly, like I knew we had infrastructure advantage. But it's amazing to see as a CFO that infrastructure efficiency and advantage really playing out as we've grown and scaled the business.

On to the third pillar of long-term value creation, disciplined operating leverage. Since our last Investor Day in 2023, we introduced the incremental margin model. We've executed on that since 2023. For this Investor Day, we're actually going to refine the long-term model. So for every dollar of incremental revenue we generate, we're going to tighten the range on gross profit. We previously said 65% to 80%. We're now tightening it to 70% to 80%. From a last 12-month perspective, we were at 96%, so we benefited tremendously from that. And then from an operating income perspective and operating income flow through, we're tightening the range. We previously said 25% to 40%, and now we're talking about tightening that range to 30% to 40%. And from a last 12-month perspective, we had 79% flow-through.

Why do we feel comfortable doing that? I think from an operations perspective, on a gross profit we've been much better about predicting our network utilization and partnering with our customers and we get better visibility now. We've also instituted better deal and pricing discipline throughout the company and we've also introduced multiple products that have higher margins. And so that really helps the flow-through perspective.

From an operating expense perspective, which is improving sales rep productivity, automating the customer workflows and just being smart about how we manage head count at the company. So overall, we put in the right operating and financial processes to really feel comfortable about achieving the tightened incremental margin model we've laid out here.

The fourth pillar of long-term value creation is a strong free cash flow and ROI-based capital deployment. We're confident in our abilities to continue to be free cash flow positive. I talked about the lower capital intensity of our network. I've talked about the efficient infrastructure investments we have. I've talked about the strong P&L execution. And then very importantly, we've also seen efficient cash conversion.

So here's the free cash flow results we've seen thus far. 6 quarters of positive non-GAAP free cash flow, $34 million in the last 12 months free cash flow and $120 million in operating cash flow. And then we get to maintain our FY '26 free cash flow guide of $40 million to $50 million.

From a capital allocation strategy, here's how we're thinking about it. Priority 1 continues to be, invest in the core delivery network, maintain the leadership position that we currently have versus our competitors. Priority 2 is continued strategic investments in growth areas like security, compute and the more nascent AI space. And then priority 3 is if available and if it makes sense, look at opportunistic potential tuck-in M&A. We believe this free cash flow strategy will expand our free cash flow generation over the next few years.

So how does this long-term shareholder value creation model I've walked through, manifest in a 2029 target. Here's what we're laying out. Revenues of $1.1 billion to $1.3 billion, that implies 14% to 21% revenue CAGR from 2026 to 2029, gross margins expanding to 67% to 71%, which is a 70% to 80% incremental gross profit flow through. Operating margins reaching 20% to 22%, which implies a 30% to 40% flow through. And then free cash flow yielding 12% to 15%, and this is based on an assumption of CapEx spend of 10% to 12% of revenues, but note that we plan to spend this level based on the growth we're seeing today that we may adjust the CapEx spend up and down. We feel good about our 2029 financial model and we've laid the foundation to achieve it.

So how do we hit the 2029 revenue target of $1.1 billion to $1.3 billion. So we have multiple vectors of growth through 2029. And the first vector is existing customer expansion. With existing customers we have, we have lots of room to grow. We currently have a 117% NRR, and we're going to continue to focus on the existing customers. The second vector is net new customer wins, competitive displacements in high-stakes verticals like fintech, media, e-commerce. Scott's talked a lot about the Go to Market transformation and how the team is set up for that. Kelly has talked about democratizing and simplifying the platform, making it more broadly available. We think those two -- and the efforts we've made give us the opportunity to win more logos. And then finally, the third vector would be new products and platform capabilities. Broadening our reach. We talked about LatAm, Canada, Middle East, and we've also talked about expanding customer use cases. This gives us the confidence we have on the 14% to 21% CAGR implied in the $1.1 billion to $1.3 billion.

And then from an operating income perspective, how do we expect to achieve 700 to 1,000 basis point improvement, taking our op margin from 12% to 13% in 2026 to 20% to 22%. I've talked about the capital efficient architecture in the one network, the one network that runs all of our products that underpin the six product suites we have today, and that allows us to continue to be using our network very efficiently. We have benefited from machine learning and AI around traffic routing and improving fleet utilization. And then we've talked about the go-to-market sales productivity, digital onboarding and AI automation across all the different costs type sales and marketing, R&D and G&A.

So I've covered a lot in the last 15 minutes, but if I had to leave you with some key messages, here's the five I hope to leave you with. We have scaled profitable growth. The strong foundation has been laid, and we've shown consistent operating profitability. Two, the deepening platform adoption is real. We are a full edge network platform with six key product suites, and we continue to deepen that platform. Three, we truly have a network advantage, especially versus our peers. I've talked about the hyper-converged architecture we have that really helps us. And four, the incremental margin model, we've embraced that and has shown those returns, and we're confident in the ability going forward. And then five, just the deployment of capital for long-term value. we will be very strategic with that. So thank you for spending time with us today.

With that, I'd like to bring Kip back up to close this out.

Thanks, Rich. I'm going to kind of recap the day real quickly, and then we're going to move to the final Q&A section. I kicked it off with kind of a framing and I told you how I thought you should think about fastly as an investment. Then you heard from Artur firsthand about the technology and the platform and the relevance to our customers as well as some of the Agentic use cases. Kelly shared with you our product plans and how we're democratizing the platform to bring the power Fastly to more customers. Scott told you about our go-to-market transformation and how we're accelerating revenue. And then Rich just took us through our plans for durable profitable growth.

So again, I would say the way we think about Fastly is a market leader with a differentiated platform. We've seen that with some of the profitability and growth that we've been able to drive. We've clearly reaccelerated the business and have significant momentum now based on 3 quarters in a row of 20% or higher gross margins -- or excuse me, growth year-over-year. We've improved the product mix. is exemplified by the 4x growth in the proportion of products or customers who are using four or more products. We have multiple ways to drive above market and Scott covered this, but geographical expansion, upsell and cross-sell, new logos, portfolio expansion are all opportunities for us in terms of growth. Then last but not least, we believe that as performance becomes more and more important in AI and agenda traffic, the strengths of our platform and our products will become more and more relevant as a control point for AI at the edge.

So with that, I'd like to bring Vern up, and I think we'll get some chairs on stage, and the whole leadership team will come up and take your questions. Thank you.

We'll kick off the Q&A session for those of you online, please input your questions. We'd be happy to take them, and we'll kick off the second round with Jackson.

Great. Thank you Jackson here at KeyBanc again. So if we think about Rich sustaining this kind of high teens, possibly 20% plus growth rate. I know that we're not going to report it. But like if you think about those 6 product suites?

And maybe under the old reporting or current reporting, breaking it out between what you think security portfolio versus compute, other and network services, what is factored into those 2029 targets across the different suites?

Thank you, Jackson, for the question. So right now, when we think about the different kind of suites that we have we assume from a growth perspective, especially going out to 2029, what we look at is we look at existing customers and where we think we can expand with those customers. And then we also kind of layer in kind of the incremental opportunity with new logos.

And so I just think that like as we think about individually at the six, like there's a lot of upsell capabilities within those, but the cross opportunities are as well. And so I think that we don't break it out between like where we think adoption will be within the six, but I do think that the opportunity is there.

I mean I would just add, if you look at the market growth rates, we think the security markets that we play in are growing mid- to high teens. The delivery business, frankly, is probably growing closer to 6% or 7%. And so I would expect us to grow faster in security than in the core business over time. And I would expect that to become a larger proportion of our revenue over time as a result.

One thing I'd highlight, it was actually a point someone made to us during this event, we were talking about -- Artur was talking about the importance of privacy with the agents. And it's like, okay, what is that? Is that security? Or is it delivery? Or what is it?

So part of the challenge is as we bring more and more products like ARC is another example that doesn't necessarily fit into one box. It can be a little bit harder to answer questions like that.

Can I add one comment to it? Yes. I think we're seeing customers too that want more flexible ability to spend. So they're willing to allocate dollars towards you, but say, "Hey, we're not sure what Agentic AI is going to bring to us. Can we spend it in this bucket versus this bucket"? So we're looking at flexibility in packages that allow them to consume the way they want because I don't think they know what that growth is going to look like. So we want to offer them that flexibility.

Okay. We have a question online from webcast. There's been a large increase in the percentage of multiproduct adoption. Can you give us a sense of the penetration of the different suites into the base today? And then secondly, on top of that, how should we think about what amount of NRR is tied to cross-sell and what's embedded in the 2029 guide in that aspect?

Rich, do you have numbers on that one?

So we are going to look at multiproduct adoption in a lot of detail. I think that right now, we're trying to balance the information that we have. And we don't talk about like the -- we have not yet talked about the adoption by product suite with our customer base. I think that for us, like there is a lot of headroom to grow. And so we're not like very focused on that.

I think what we are focused on right now, even from our suite perspective is like when we go solve customer problems, we actually don't think about like what suite solves their problems. We look at our whole product portfolio together as a group. And we think about like the problems we're trying to solve, and we bring the right product suite to the table. And I just think that we have so much headroom to grow within each of the suites. And so we have lots of like space to continue to grab that.

In terms of like upsell and cross-sell, like I think -- and even new logos, when I think about the NRR and the contribution for that, I think that when you think about like a $22 billion TAM market and you think about it like implied $739 million -- that's about a 3% share. And so within existing customers alone, lots of upsell and cross-sell opportunities, especially given the market sizing. When we think about the number of logos, we talk about large customers being 624, there's like a lot more customers to go. And so even having the new logo -- I mean, they're going to all kind of continue to drive. I do think that the opportunity within existing customers is quite high just because the opportunities there in terms of their wallet share spend.

Frankly Louthan with Raymond James. So Rich, when you look at your pace of your CAGR as we're modeling this out, how should we think about that? Is that going to be growing are you going to get to that CAGR going a lot -- seeing a lot of the higher end and then kind of taper down? Or is it going to accelerate there? And then what's kind of giving you the confidence in maintaining this level of growth that you've done and through this next few year period?

Yes. So based on the midpoint of our guide for 2026, I think we're at like an 18.4% kind of year-over-year growth rate. the 2026 period. When I think about where we're going, I think that -- we're now working on 2027 planning. And so we can't obviously give too much -- we feel -- I had my Chief Legal Officer back to -- I -- we can't give out like what 2027 guide is going to be and how that kind of shapes up. We just feel confident that like it's going to be a range. I do recognize that range is quite wide, but the range is wide purposely because we think that there's a lot of variables that go right? Like there's some macro uncertainty that's happening. We know that AI is going to take -- has the opportunity to really take off. We have compute offerings and potential new.

And so I can't say what 2026 will be, but I will say that the range is wide on purpose because there is a lot of variables that go...

I think to the question about just -- I don't think we can comment on the shape. But I think a question about what gives us confidence in providing this forward growth projection. I think when we look at the new products that we've introduced, and I'll take a Bot and DDoS because we've talked about those growth rates we've been able to introduce new products, grow them at triple digits, cross-sell them to a large number of customers and get a lot of momentum there.

So we feel like with the work we've done over the last couple of years and described today that we kind of have a foundation and a platform, not just our technical platform, but a business platform that enables us to launch new products and expand over the next several years. And so when we look at that plus the geographical expansion that Scott talked about as well as Rich has made the point, even within our current customer base, there's significant growth opportunity. That's what gives us the confidence to projection.

I'll go with Rudy here.

Rudy Kessinger, D.A. Davidson. Rich, what are your assumptions on the growth in your top 10 customers within that CAGR target? Are you assuming they grow at a similar rate to that range or slower or faster?

So I think the most recent quarter, saw a 48% kind of year-over-year growth on our top 10. I think when you hear Scott talk about his go-to-market transformation, he's focused a lot on the top customers we have and how do we continue to grow and add more value to that. It's -- we're definitely seeing continued like value creation and be able to, like serve their needs.

I think in Q3 of last year, we talked about a big security win. Since then, we've had multiple cross-sell wins with those top 10 customers. I think that the opportunity to grow with them is still quite significant. And so we still have a lot of share. I don't -- we can't tell you like what the percentage year-over-year growth will be. But I do think that the top 10 continues -- will continue to grow just because the share is quite high.

Having said that, we are -- Scott is also very focused on the non-top 10. He's also focused on the non-top 50. And I think the 12% year-over-year last quarter we saw like it's not where we want it to be. I think stocks very focused on getting that non-top 10 and even the non-top 50 growth up higher.

Jonathan is best -- fast there with the hand there, sorry.

This is the Fastly Analyst Day. So you got to have the faster hands. Jonathan Ho with William Blair. So I wanted to sort of reconcile your CapEx investment plans just given the higher cost of components and infrastructure out there as well as the ability to sort of add on some of the new capabilities that you're talking about on the edge side. Can you help us understand sort of that balance and how you're able to achieve that level of leverage?

So I think from a CapEx, we've been -- for the year, we've guided 10% to 12% of revenues on CapEx. The way we've been rolling out our products, specifically security and compute. They're using -- because we're on one unified architecture, one kind of hyper-converged architecture, we're able to roll out those new products using existing servers. And you see that through kind of a 96% incremental gross profit flow through.

I think from a CapEx perspective, that really plays to our advantages because as those new product rolls out, we're using kind of stranded CPU capacity when we were IO bound previously, right? And so we've been able to like really manage our infrastructure CapEx spend for the year.

And I think that as we go forward, unlike our peers, we still continue to operate one network. And as a result, we feel confident that, like from a CapEx efficiency perspective, we feel good with where we stand and how we're able to like spend on the CapEx relative to our peers.

Okay. I can add a little bit there on the efficiency side. I would say, spending time and money on making things more efficient, pace of more or less depending on the cost, right? And so as we saw these hardware challenges, we switched some engineering effort into making the system more efficient. And we'll continue doing so. And I think there's always room to make things more efficient.

Fatima Boolani from Citi. Rich, I was wondering if you could give us a little bit of a deeper dive to the extent you are able on the net retention rate trends from customers using 2 plus products and then you graduate on to 4 plus products. And to the extent that is giving you an underpinning some of your confidence we've seen the data and when customers do kind of see the light from going from 2 to 4, that's when we kind of see the massive accretion to the extent that's true in that retention rate.

And then just kind of as a related question, just to piggyback off of something Jackson asked earlier, as you collapse and streamline some of the reporting, right, you're not sort of artificially bifurcating how you're selling the portfolio and disclosing it. But how do you sort of manage what may end up being loss-leading behavior from network services and maybe not being able to double dip on some of the same traffic, right?

Because to your commentary and to your point, there's API traffic that you can monetize from a "network services perspective," but that maybe manifests more in the security dollars, right? And Kip just mentioned that agent privacy, I mean what bucket does that fall into right? So does that diminish your ability to maybe have 2 bites at the apple, both from a classic delivery side in our security side. I know there was a lot there, but I wanted to get that out there.

Yes. On your first question, I think we have seen a correlation, right? I talked about that customer flywheels. So the more product suites they're adopting, the higher the net retention rate and the more that they will buy from us, they're seeing more value right as a result of seeing more value, we should be seeing like higher net retention rates with them.

I think that when you go to the 4, like you're still seeing that as well. I just think that like there's diminishing returns at some point where it gets there. I think this is a learning process for us in terms of like the new revenue disclosure. We're going to do it in parallel for the next 2 quarters. And I think we want to -- the goal is to really give investors as much transparency around the type product adoption metrics, and that's why we're going to run it in parallel because as you guys are building your models, we'll work together, and we'll talk about like what makes the most sense from a disclosure perspective.

But I just think that for me at least that correlation exists and is very high. And I think that we'll kind of continue to play over the next 2 quarters around like what we talk about, especially in our earnings scripts. But what we feel really good about is this aligns with how we operate. This aligns with our one network architecture approach, right? Like it also aligns with the way our customers buy from us. They don't come to us and say, like, we want to buy this -- like they're not thinking about as distinct. That's just coming to us with problems and then our teams are coming with a solution that kind of pulls among all of our different SKUs and product suites.

So on that, I think I would just elaborate one was a good question that came in online. It was around just said, Rich, but I think it's a opportunity to double down on your answer here. But the question is, is security is such a large contributor to achieving the fiscal '29 targets, why remove the key line item and instead roll it in the total revenue? What is the thinking behind it? This hit the point maybe one more time here.

Yes. I think that with the introduction of new modules and more suites across kind of our SKUs, what we're finding is that like they don't fall cleanly into either security or delivery or compute sometimes. And I think that when we come and introduce the products, it becomes a messier like allocation process. I think some of you guys have come and asked me around even gross margins by those line items. We have one network. And being one network, we're running kind of like delivery and security, and we're kind of providing intelligence on that delivery traffic, whether that intelligence is security or compute, but it becomes a very blurred line. And I think that blur decline becomes really messy and kind of misleading sometimes. And so we just think that like because of that shifting to multiproduct adoption will be much more helpful.

I think that the multiproduct adoption, it doesn't become a suite until it becomes a sizable product, right? And so we're purposely trying to make sure that we put hygiene and scaling around like how we think about products and the product suites that we introduce.

Param.

Param Singh from Oppenheimer. This is maybe for Scott. How do you think your sales teams aligned to sell the expanded security portfolio today and what needs to happen both from a sales alignment and from a compensation perspective to maybe even cross-sell more of the security portfolio?

Yes. Great question. So it's one of the reasons I brought up enablement is such a critical thing because if folks have come from kind of the legacy CDN environment, but they're not as versed in security, how we get them up to speed to be able to talk to a CISO about the API security play the ARC challenge that potentially exists out there and what they can go after becomes critical. So training is absolutely important.

I will also tell you, like, I mentioned that I came from Imperva. We hired the ex-CISO from Imperva, who also -- he sits out here in the East Coast, work for lots of banks out here. He spends more time in front of customers because I mentioned customers are saying, what are you seeing people -- how are they responding to these challenges that they're facing with security right now? How are they researching APIs, how are they securing them. It's that expertise that they really, really want?

And then the last piece, which is really the most important piece when it comes to a sales organization is how do you compensate reps to drive the behavior that you want? And one of the things that we've kind of put together as a pyramid of value is what we've said, and we're building comp plans around this, which is what is the most valuable sale to Fastly that we've got. It's a net new logo and it's automatically new product.

Then past that, what's next for an existing customer to move into a cross-sell it opens another product line, and we know they get stickier that way. So how do we incent right multiproduct adoption? And then the other thing is spiff, how important products that we launch out there that we want to put a multiplier on, how do we weigh them so they get the focus, even though it may be a smaller market segment that may exist out there or the reps aren't as comfortable talking to influencers and technical decision makers, how do I weight that more so they're willing to go after that. So those are all components that we've built into the plan this year, and we're also expanding in the next year as well.

Vijay.

Vijay Homan from Craig-Hallum again. Just in your revenue growth bridge, you talked about net new customer wins, as one of the 3 pillars. Just if you look over the last kind of 5 years, the first 3, we saw a ton of growth, I think it was around 17% in net new customers. And then the last 2 closer to like 2%. So I'm just curious what are you underwriting there in kind of the forward model and what gives you that confidence?

Yes. So I think that I understand correctly. Yes, I think that from a model perspective, I think that I do see an opportunity with existing customers. I think we're going to continue to focus on them, and we're going to continue to drive that NRR high.

I think from a modeling perspective in terms of like net new logo wins, like I think that we -- the 624 that we have from a large customer perspective, we do make assumptions that we will continue to like get new logos and take that number up I think I've been working with Scott around like what that opportunity is like, especially as we broaden -- we talked about investments in Asia Pacific, right? We hired Nicholas, who is building out a sales organization we've talked about like expanding POPs in the right locations. And so I think that should help with new logo wins, especially internationally as we expand.

I'll add 2 things. And then I think, Scott, you can let me know if please think I'm on the right track because I have a perspective on this. Scott's talked about refocusing us on where we win, where performance matters, right? So I wouldn't assume that the customer base is static even if the number isn't changing that much. As we refocus on where we're most differentiated, and we believe we have the best long-term results, that can mean deemphasizing certain things. So I think that's an important part of our thinking there.

The other thing I would say is if you think about the go-to-market transformation that Scott's been driving, he's taken a lot of actions, a lot of positive moves. They don't all have an impact on the business in the same way at the same time. And what I would say is that the way that we've gotten better at handling or serving our top customers over the last 2 years has happened faster, as you might expect than, for example, our new logo generation.

For example, we just brought in a new Chief Marketing Officer earlier this year. So I think you should expect that go-to-market transformation to have an impact at different times on different parts of our go-to-market motion. And our top customers were the first part to feel the impact. I don't know if you would comment.

No, and I agree with everything you guys said. The only other thing I would add to this is, the work that we've done in the enterprise space, so think of past the top 70 accounts, traditional enterprise customers as they exist out there. We've seen great adoption but it starts small. And part of the reason is it's the dirty little secret in the space is that the complexity that exists of migrating off of previous providers to new vendors is designed on purpose, right? In some cases, to make it highly complex and difficult to move away.

AI has changed that. So what would take weeks before from a services organization and at certain competitors, it's 28% of their annual bill from their customers is based on service changes, et cetera, AI has changed that. We can now move configurations over in 2 days, whether it's WAF rules it's anything else. And so I'm excited now that we've got these seeds of essentially paid proof of concepts, which is how most all enterprise customers kind of start. Now we can start accelerate, and we can do it in a way where we can say we can absorb those that service dollar cost and more importantly, do it much quicker. And so we're seeing customers feel really, really comfortable with that more because it's really been a sticking point in the past.

Okay. I think our last question from Jackson here to wrap it up.

Just circling back, Kelly with you on the products. If I think about the just like the growth rebound that we've seen over the last kind of 12, 18 months, a lot of it, I think, came from the maturing of the security products, like adding DDoS bought mitigation, right? That kind of rounded out those 3 chunky security products that end up going with network services, the marginal product launches. I can they be as impactful as rounding out those core security? Are they going to be kind of more ones and twos?

I think we'll see how different products evolve. Certainly, the launches you saw yesterday, we think are very important as part of that Fastly for AI story. I think as everybody on stage as said, it's still very early days for that part of the market.

With that said, I would say, behind the scenes, once we launch Bot Management, DDoS protection, we have continued to launch other features products on top of those, which is part of that co-innovation with customers. So that's part of the platform stories. They know when they buy into us, we're going to keep delivering value even for the solutions they've adopted, and it gives them confidence to adopt more, and that's part of the reason why you saw that quadrupling the or customers with 4 plus modules.

So I think when we talk about the compounding value, think of it as, yes, especially in partnership with Joan just come on forward, you will see more of these bundled launches together, but there's a lot of releasing happening all the time co-innovation happening all the time. And all of that leads us to be that platform like the -- what was it? Hedge trimmer you talked about? The customers know once they're bought in, they can tap into our innovation in a variety of ways to get value.

Well, and I think -- I mean there'll always be products that have a bigger or smaller impact. But I just point out the compute portfolio might be a [ pot ] where security was when it had one product. And our opportunity to round that out and have some significant impact on, frankly, a market that could be even bigger for us than security if we get it right, are examples of where we may have outsized impact.

So a given product launch might have outsized impact, it might be more fine-tuning or finishing off something in a more fine grain way. But we're quite confident given our market share and given opportunities like compute that there are many high-impact products for us to launch.

All right. Well, thank you, everybody. Everybody here at NASDAQ MarketSite as well as those of you online, great questions, and we're going to wrap it up. For those of you here at NASDAQ, we're going to have a reception that's kicking off in just a minute. Thank you.

Awesome. Well, thanks for joining us, everybody. Jim Fish with Piper Sandler. I know we've got lunch coming up here shortly, but I have the privilege of chatting with Rich and Vernon of Fastly ahead of this little Analyst Day. So we'll just do all the Analyst Day presentation right now, if you don't mind. But thanks for joining us. I've got a bunch of questions to run through, and I'll open it up if we've got some time at the end, if anyone in the audience has one.

Rich, it's been a year at Fastly. This was the first conference you had when you first joined. So I appreciate you being back. One of the things that we're asking across companies this week is just how does the IT spending landscape look like across your installed base? What's going on in terms of the impact of AI on budgets, whether it's from the delivery and networking side of things or even the security side for you guys?

Sure. I think overall, I think we continue to see strong healthy demand for our spend -- the spend that our customers are spending. We did 23% year-over-year growth, $183 million last quarter, and it was broad-based. It was actually across the 3 different product lines or revenue lines that we do, right? So delivery services grew 17% year-over-year. We had security growing 43% year-over-year, and we have other, which is primarily our compute.

I think that like from a demand perspective, we see it broad-based across all 3 areas. And we're also seeing, especially given the component shortages that are happening, customers making more -- willing to make more commitments. And so we see that kind of transpire in kind of the RPO and the cRPO.

So like you'll see that the RPO grew 38% last quarter on a year-over-year basis. And then our current portion of RPO grew 44%. So I would just say continued strong demand and pretty consistently across all the products and within even the willingness to do commits.

Got it. And I always think about sort of delivery business as 2 subsegments really, one being sort of the media use case that Fastly historically was known for, whether it's streaming or gaming. Obviously, some excitement with that this year in terms of some of the periodic events.

Episodic.

Episodic, sorry. And then the web delivery and acceleration side. Is there a way to think about the mix in terms of the bytes or the revenue or the business just generally in terms of that split?

Yes. Actually, a really good question. Historically, we've been very strong on the kind of live events streaming side of it because it's just more complex, like customers really depend on reliability. They rely on like being consistently there, having the network built. And we tend to win where performance matters. And so as a result, like we've always historically been strong there just because it's been really good.

I would say that the portfolio has really built out, to your point, which is now the delivery has that side, and then we have what we call the full-site delivery. And like on the full-site delivery side, like those are like the e-commerce sites, the hospitality, like the different market segments that we sell into.

I would say that like growth and the demand continues to be strong in both. I think that on the first side, we continue to still be better than our competitors on like reliability, fewer outages, like we just consistently show up for our customers there.

I would say that like with the complexity of the traffic that's happening, like we're seeing a lot of demand on full-site delivery. And when I say complexity of the traffic, there's just more machine traffic now with bots and like DDoS attacks getting more complicated. And so you see like full-site delivery customers who really want like a broader suite and being able to protect the traffic that they protect them and thinking traffic is the front door to a lot of that.

And then I think that more and more with agentic, like there's a lot of demand even for compute. And so you see that kind of play out with that other side. So I'd say like broad-based strength on both sides of the market.

So maybe on that point, I guess, what are you seeing on the impact of agentic on overall traffic at this point? How is Fastly capturing that opportunity?

So the way I look at agentic and the way even AI traffic is, it's -- there's a difference on the traffic side from a gigabytes transferred and the number of requests that come in, right? And I would say that we published articles that talked about machine traffic being 6.5x as fast as human traffic. And on top of that -- and that's measured on a request basis, right?

So the number of requests from machine to machine, right, it's really high and it's growing faster, and it's almost like half of the kind of total request traffic that we see overall. But it's still a very small portion of gigabytes transferred, right? It's hard to compare when you're doing like 4K video or live, on-demand video like on high definition. Those are just like big gigabytes of transferred -- data that's being transferred. And so I think that there's a difference between the 2.

I would say the way like AI and agentic playing out for us, like the nearest-term beneficiary and the tailwind we see is in security side. With the proliferation of like machine traffic, there's just more customer demand for like, hey, is that good traffic or bad traffic? How do you block that when it comes out?

So we see the benefits in DDoS, and then we see the benefit in bot management, like monetization models are getting altered and impacted, right? And so our customers are demanding those 2. So I think the nearest-term impact is security and specifically, with bot management and DDoS products.

I would say that longer term, like the beneficiary tailwind from AI would probably be in the compute side. I just think that like the edge has a bigger role to play with AI. Like right now, the edge is relatively small for like frontier models because they sit all in the central cloud. They don't sit at the edge. But as more agentic machine-to-machine, agents-to-agents working together, a lot of that should be happening at the edge. And so I do think that like over time, AI and agentic will end up having a bigger play of the edge.

And then I think that like network services, I think that model is still different depending on the mix between like live events and video and how it's priced on a gig basis. And then if you're doing more full-site delivery and more traffic there and you get more requests, you'll start seeing that in network service, too, but that's probably going to be slower just because like the majority of our revenues still are going to be on the gigs transferred.

Got it. Maybe before getting the security and the other business to round out the discussion around delivery, obviously, we've seen a little bit of an exit in the space. Edgio used to be part of this, and Akamai bought a lot of those contracts. I think Fastly, from what we can tell on our CDN tracker, still benefits off of some of the mix shift between some of those, especially larger customers out there.

What have you guys done in terms of helping along that mix shift and being able to gain either the wallet share of some of those very large customers that are out there or actually just land net new from that -- those prior installed bases?

So the Edgio like headwinds that happened in 2024, so we've already lapped it in 2025, which has been great, right? I think that even prior to that being like Edgio going out of business, there was a lot of already customer like awareness that there was financial difficulties at the company. And so I think we had done a lot of like takeouts and growing share faster than the market overall, even before Edgio was going out of business.

We continue to do that today. Nothing's changed from our point of view. I do think that in 2026, we've already lapped all that data. And so we continue to invest in like competitive takeouts. And I think we continue to be very successful. And I think the success is, one, we have a better product. And I think that customers realize that and is willing to invest in making that change.

But I think, two, having the full product suite really helps a lot, like having the full -- like having going from 1 security products to 5 full security products helps with the competitive takeouts because I think more and more customers are seeing the intertwined play between CDN and delivery, and then on the security side. And so just having that full suite helps us a lot on the takeouts.

So I think security has been kind of the surprising piece here for a lot of us on the sell side or on the investor side of things. We get a lot of questions as to why are we seeing such strength at this point? Is it -- how much of it is that we have the full suite versus kind of better execution versus this renaissance resurgence we're seeing across sort of the application security side of things?

That's actually really tough to piece out just because I think like 2024 headwinds that we saw really made us really focused on execution. And I think execution played out in 2 main areas, right? Execution played out with a new Head of Sales that started mid-2024, Scott Lovett came on board, and he really like changed the execution engine around go-to-market.

And we -- he brought basically a selling discipline that didn't completely exist, and then he also brought in security selling expertise that didn't exist. Scott himself came from Akamai, but he also spent time at Imperva. And so he came from like a security selling background. He brought in sales leaders who knew how to sell security.

But that alone wouldn't be good if we didn't have the full product suite, right? And then while that was going on, Kip was also brought in mid-2024. Kip is now our CEO, but he was Chief Product Officer. And under him, he went from one security product with a web application firewall to the full suite, the 5 main products that we have today.

And that really opens the doors. And I say that the 2 of them go hand in hand, like it's hard to be like, hey, I can fix execution, but if you don't have the product suite, it wouldn't be there. If you have the product suite, but you don't have the execution. So it's like hard to say why is security taking off. I would say it's a function of both. And I think both needed to happen when it happened.

And I would say that like having a better security suite and the full suite, combined with that go-to-market execution with Scott really helped to transform and get us to where we are today. Our security revenues grew 43% year-on-year in the last quarter. And I'm very, very proud of like what we've done. We continue to invest in security because we think that's a growth engine for the company.

So probably stealing a little bit of thunder from next week maybe, but you guys talk about security penetration being about 50%-plus have 1 product or more, right, I think is the disclosure, roughly. I guess what prevents -- especially now that we have 5 full products, what prevents us from getting that to 2 or 3? Like what's been the sort of the friction point? And can you just talk through some of the traction with each of those 5 products?

I'm sorry, just to clarify, 2 or 3 meaning like...

Security products.

Adoption of 2 or 3?

Adoption, yes. Assuming most of it is WAF. I don't think we're saying 2 or 3 adoption isn't happening. To be rhetorical, sorry.

Yes. I mean I would say that -- the way we think I see the products, our product suite, is very complementary and synergistic for our customers, right? I think customers are more and more incented to kind of adopt the fuller product suite that we have. And right now, we do have customers who adopt more than 2 products.

We do have customers who adopt more than 3 products, right? I think what we see is that customer adoption has picked up over the last 2 years. As a matter of fact, I mean, I don't want to give away too much, but I think at the Investor Day, we're going to talk about multiproduct adoption a lot more and share some adoption rates from a multiproduct perspective, right?

I think that the way we currently just talk about revenues, it just -- it's very confining because security shows up as one line, but we actually have 5 security products. And so it doesn't do it justice. And I think that in Investor Day next week, we're going to talk about the multiproduct adoption and how that's played out over the last 2 years, and we're going to share some statistics.

And specifically within security, too, I think it's worth noting bot management has been just a really strong product for us. I mean we developed it in-house and have really gone against one of our largest competitors, as a viable solution. It's been around for quite a while now. We feel like we're very successful against them.

We've also rolled out another feature on top of that called ContentGuard, which, as Rich was talking about earlier, is really very useful to help mitigate scraping of websites, but also setting up monetization streams around that. We talked a little bit about this on our last call with a publisher that co-innovated with us on that, and it turned out to be a very successful product for them, and we're seeing a lot of interest in that product from other companies.

So feeling really good about the bot management side as well, which I think you're going to hear more about in the next year or so from Fastly.

I think on the earnings call, we talked about like bot management and DDoS growing triple digits on a year-over-year growth basis. Our WAF continues to be like our strongest security product and it continues to -- continue to like grow that business pretty nicely, too. So I think overall, we're feeling really good about the full product suite, like those 3 products, in particular, are driving a lot of security growth.

How is the team feeling about -- obviously, we're up to 5 security products at this point. How is the team feeling about the potential expansion of that product family, be it across the application security stack? Or do we start talking about network?

Yes. I think for us, I mean, we are definitely focused on the edge, like we want to like stay on the edge from a security perspective. I would say that the security product team is constantly looking at other kind of like what's next, right? And they want to make the existing 5 continue to be better. And so there's a lot of investments on making the 5 better, but then there's also like other ideas that they have.

Obviously, they don't want to talk about -- like preannounce anything, but like the team has worked hard at work. So Kelly Shortridge, who is our Chief Product Officer, ran security product under Kip, when Kip was Chief Product Officer. So Kip became promoted into the CEO role and then his replacement was Kelly, who ran security products and is now the Chief Product Officer.

Both Kip and Kelly will be at our Investor Day next week. And so it's a good opportunity to hear directly from Kelly around the product portfolio that she thinks about and how she's seeing the product evolution.

Makes sense. You guys put up a really good net retention rate here, really, in the first 2 quarters of the year. Can you just walk us through what are the primary levers or really what's causing the uptick? Is it traffic? Is it just a better pricing environment? Is it cross-sell? Help us on that.

Yes. I mean what you're calling out is absolutely right. We produced 117% NRR last quarter. I think that's a 4-year high for us. So like we've done extremely well in getting that up. I think when Scott came in, in 2024, one of his big focus areas was like how do you really continue to make sure that existing customers are very happy with our product and loving the product. And then I think Kip broadening that portfolio really helped out a lot as well.

And so I think if you had to dissect the NRR, it's actually hard to break out, is it upsell of the existing like delivery services products, because we see a lot of upsell. I mean network services growing 17% year-on-year, right, which tends -- it actually happens to match the 117% NRR that we have.

But I would say that, that alone is not enough to like drive that 117%. It's really the cross-sell opportunities. And I think that security now is almost -- it's like a $44 million a quarter revenue business. If you add in like our other compute, that's almost like a $50 million quarter business, a $200 million run rate, and just having that additional product SKUs really helps with the cross-selling.

And so I would say it's a combination of the 2, like really the customer focus. Artur Bergman, who's our founder, is still actively involved in the business. He's actively involved with existing customers. Some of these customers have been with us a long time, and he's still very involved. And I just think that maniacal focus on customers has kind of been what's helpful in driving that 117%.

So speaking of your compute business, Compute@Edge is more of a CPU serverless-based architecture. Why is this the right approach to take? I get asked a lot, why doesn't Fastly get into the sort of GPU inferencing game? Help us on that.

Yes. I mean we do get asked the same question quite a lot. Two major things to point out here. One of our peers, our competitors has been approached by some LLMs to build out a large scalable capacity with their sort of central compute approach. We see that as a scenario that we wouldn't find a lot of value prop in what we do at Fastly.

We believe our intellectual property is centered around the software that we run on this unified scalable network. And it's basically built pretty much with off-the-shelf hardware, for lack of better words, but it's completely software programmable. And it can accommodate many other needs for our customers.

One thing we see happening is the way it's positioned is around a multi-cloud approach with open models around any sort of adventure a customer wants to take. We have the sandbox, if you will, that can cater to all these different possibilities.

One of the issues when you go the route that Jim was describing is you're basically building sort of a capacity slug for a specific purpose-built customer applications. Sometimes you give up that opportunity to be positioned in this unique spot that we're at the edge to be multi-cloud, be more open model and you are very limited with how that scales.

For us, we see the value prop around that software is being that. And we will see probably over time, more customers turn to us to run their workloads around agentic orchestration layers because we have that unique positioning.

The other side of that, too, is I think from, basically, just a financial perspective, it's very costly. The return on invested capital remains to be seen. We would obviously probably look at opportunities like that. But for the time being right now, we don't see there being a good return on the investment versus also just the value prop we bring with our technology stack.

So how has Fastly been packaging Compute@Edge at this point for AI developers? And what is the margin profile of this business relative to the rest?

Yes. I mean I think from that perspective, too, and it should be elaborated more on the last point there, is we have a lot of toolkits around how to develop on our compute layer. We also, as I said, adhere to more open standards, MCP server, things like Really Simple Licensing. These are technologies or standards, if you will, that are incorporated already in our stack, and we're open to that.

Our competitors tend to take some more proprietary flavors around some of these things. But that's the way to entice developers to come to our platform, is that we continue to be sort of cloud neutral, model neutral and open for this development opportunity. That's the ethos that we're sort of built on, and we continue to drive forward with.

And then the second part of your question was around like the margin profile on compute. I would say that because we're leveraging the same existing network, the same existing infrastructure, we have the ability to be able to use excess stranded CPU capacity, right? So when you're selling delivery services, our delivery services was historically more like I/O bound.

And when we work with our customers and we're selling compute and those compute resources end up using CPUs, the CPUs are basically there sitting idle, and we're able to like really leverage and more effectively use the assets that we have. And so as a result, what you see is like in the last 12-month basis, like our gross margin flow-through was 96%, meaning for every incremental dollar of revenue that we generated in the last 12 months, 96% of it went back to gross profit.

And so you can kind of see the interplay of like as we kind of diversify and broaden our security portfolio, and we're broadening our compute portfolio without having to do incremental, like building a whole new network. We're using the same exact network, that gross margin ends up like just accruing the benefits of using stranded capacity that was there.

Got it. We're just under 5 minutes left. Any questions from the audience? Otherwise, I got plenty to talk Vernon and Rich about. No. Well, I know Vernon is really excited for GTA 6 coming out. And so I guess, how are you guys thinking about this upcoming release? What is Fastly's exposure to gaming? And how do you guys view the online gaming opportunity even just longer term?

Yes. It's actually interesting because you watch and hear what investors or even analysts are saying about like GTA, it will be like record-breaking downloads. And we do have -- and we do partner with customers on the gaming side, like gaming downloads is a portion of our revenues. We had a really big Q4 beat last year. And with that big Q4 beat, we had attributed some of it to like record gaming downloads that we saw in Q4 of last year.

What we do when we enter a quarter, like when we guided our kind of full year at the last earnings piece, we knew some was episodic, some was durable. We kind of factored in the durable beat and we raised the guidance for Q3 and Q4. And then what we do is we layer in some of the episodic events that we think will happen in the second half of the year.

And so the episodic -- the unknown episodic events are going to be the GTA 6 launch. And then I think the other big unknown that could be like very different is going to be the midterm elections. Elections happen every 2 years roughly, and the midterm elections are not as big as the presidential elections, but I think there's a lot of interest that tends to happen.

A lot of the big news providers end up using our delivery services business because we have like instant purge. We have capabilities that our competitors don't have, where like they need high configurability. They need high control over like articles that get refreshed. We have this ability where like our customers can just push a button and be like -- purge everything that's out there and replace it with this updated article, and then all the users end up seeing the same article. And so like these big midterm elections end up helping us out a lot.

So those 2 bigger unknowns, we look at historical norms and kind of factor in what we think that traffic pattern will be like. And we remain prudent, right? Like you're never going to want to build a revenue forecast that's at the peak that everyone is expecting it to be. And so when we guide, we guide with -- like close to the pin, with some upside potential. We wouldn't want to factor all that in.

The other 2 episodic events happen every year, which is going to be holiday shopping and NFL, right? And so those are 2 other kind of episodic events that tend to happen in kind of Q4 time frame. And so we factor those in. Those are a little bit more known to us because those 2 happen every single year. I think the 2 kind of bigger question marks are going to be GTA plus midterm elections.

Well, I tell Vernon every year, he can join the Bills Mafia. It's okay. [indiscernible] Cleveland Browns fan. Just with a minute to go, obviously, Analyst Day next week, and any kind of thoughts around -- or puts and takes around fiscal '27? I know you're not going to guide here necessarily, but -- and also how we should think about infrastructure spending going forward given what's going on in the environment?

So Investor Day is going to be next Tuesday in New York City, Nasdaq MarketSite. I encourage you guys all to go because you're going to get to see Artur Bergman, who's our CTO and Founder; Kelly Shortridge, who's our Chief Product Officer. You'll hear from Scott about the transformation that he's done and where he's focusing his attention. I think it's exciting.

We won't -- we won't do guidance on 2027, but I think what we will do is give some more visibility in terms of like a longer-term model that we think would be appropriate. I think it's going to be very -- like a good opportunity to get in front of investors and talk about where we see the next 3 years kind of playing out and what kind of flow-throughs that we expect.

And I think I also talked about the idea of like multiproduct adoption. I think that's pretty exciting for me to talk about as well. So I encourage you all to go if you have time, New York Nasdaq MarketSite.

Perfect. Well, that's a perfect spot to end it. Thank you guys for joining us and look forward to hearing from you guys next week.

All right. Perfect.

Thanks, guys.

Thank you. Keep up whatever you're doing.

Boolani. I jointly head up our software equity research franchise here at Citi. And I'm very excited to kick off day 2 of Citi's TMT Conference with Fastly. So on stage with me is CFO, Rich Wong; and also Head of Investor Relations, Vernon Essi. Thank you so much for being here.

Thank you for having us.

Excellent. Well, I'm looking forward to a very productive discussion. So maybe just to kind of get the conversation flowing and started, Rich, happy 13 months...

Yes.

in the job...

Thank you for remembering.

So a whirlwind year for you at the company. So I think a good place to start would be 13 months in review, right? The most important structural changes to the business that you've witnessed in the last 12 months and also the changes you've effected in the last 12, 13 months.

Well, thank you for remembering my 13 months. It has been a whirlwind. It's been a lot of fun. For those of you who don't know Fastly, I can just start with a real quick introduction on what Fastly is and what we do. We are an edge cloud provider. We break our revenues down into 3 main revenue lines where we do delivery services, which is really accelerating the Internet. Really, we have 166 points of presence around the world that helps cache and speed up data flow throughout the world.

We also have a security business. Our security business is multiproduct and security really is making sure that as we deliver the traffic around the world, we secure it. We make it very safe for users. We help -- we have a web application firewall. We have a DDoS product. We also do bot management. So we have a number of security products that support that. And then we have another business, which is kind of our growing kind of business and that consists of a lot of observability and compute. And as the world transitions and the Internet transitions, this is becoming a bigger portion of our business.

Yes, I joined 13 months ago because I believe that the Internet infrastructure business is really changing rapidly. And I just think that Fastly is very well positioned. We are kind of a technical powerhouse here. We -- our products are faster, better, more programmable and easier to use. I would say over the last 13 months since I've joined, we've really hit a reset of the business, a lot of transformation. We've accelerated revenue growth. So in our most recent quarter, we had $183 million of revenues, growing at 23.3% year-over-year. All 3 lines of businesses are growing pretty fast. So we have our delivery business growing 17%. We have our security business growing 43%, and we have our other business growing 69% year-on-year.

We've also done a really good job managing the business from a financial profile perspective. We hit record gross margins. So our gross margins are 65.8% in the most recent quarter. We've had 4 quarters consecutively of profitability with the most recent quarter, about 15% operating margins. And then we've also had 6 consecutive quarters of free cash flow positivity. So we've really shifted the business from a growth rate perspective. We've shifted it from a gross margin perspective, and we've also hit profitability and free cash flow positive. So a lot of trajectory.

I think you asked me like what kind of impact have I made on the business in those 13 months. I would say it's been a very fun job because you get to wear the CFO hat and as a CFO, you get to get involved in all aspects of the business. And so really getting involved with the sales organization, helping them think about how to structure deals, how to -- we have a lot of the biggest customers that you know and getting involved in deal desk, deal pricing, deal strategy is a lot of fun. Working with our product engineering organizations, thinking about like product strategy and direction, that's a lot of fun. I think just building the robustness around how do we partner with the business and how do we enable the business to move faster, but at the same time, making sure that like the resources that we deploy have the right capital ROI.

Related to that, Rich, it seems that as though you have introduced some process changes that would necessarily have an impact in the way you guide, you set expectations. So anything to shed light on in terms of guidance framework and philosophy that you've evolved or tweaked? And then just as a related matter, alongside you, there have been additional changes in the executive suite. So how have those changes in the C-suite writ large impacted the way you collectively are managing the business towards some of these metrics and the acceleration you've been able to realize in both growth and profitability expansion?

Great question. I would say that for me, partnering with the business has been one of the most fun parts of the job, really like getting in there, working with the leaders. And that really helps a lot when you start doing guidance and expectations, right? The closer you are to the business and the closer you are to the deals you have a better sense of what's happening in the business. And I think that the most important thing when you actually do guidance is actually, like how strongly -- how much do you feel that you're going to hit the numbers that you're going to say you're going to hit. And I think that always starts with partnering with the business to really understand that.

I would say that we are a consumption-based business on the delivery services side. And so it's always hard to predict where consumption is going to be and where Internet trends are going to be. But you do a lot of modeling from multiple angles, right? You'll do tops down, bottoms up. We do a lot of customer-by-customer modeling, looking at specific deals. And so like the more comfortable you are with that, the better you can be with your guidance. From a philosophy perspective, I like to make sure that I feel confident with my forecast. I give a number where like it's closest to the pin, but there's some upside potential because you want to make sure that you have a number that you feel really good about. And so I think forecasting -- and I mean, guidance always starts with like the best forecast possible.

I would say that we've also built a very strong discipline around even OpEx management and headcount management. I think that like partnering with the business, you have to like really be in there and understand like what heads are coming in and how it translates into operating income. And yes, we have had a number of management changes. I actually have been -- part of the reason why I joined was because of the management changes. I joined 13 months ago. Kip was our new CEO. He was actually running Chief Product Officer before that at Fastly. And I just felt like he and I were very aligned with the way we want to run the business and the way we think about things.

We had Scott Lovett, who joined 2.5, 3 years ago now as our Chief Revenue Officer, and now he's President, Go-to-Market, and he's been amazing, like working with a really good sales leader who like is very experienced, who knows this space and also knows security very well. That was a really good piece of it. We promoted internally our Kip's replacement, who is our new Chief Product Officer, Kelly Shortridge. And we also internally promoted our Head of Engineering with Hossein. So like we had a number of management changes. Some are internal, some are external. But I just think that the report that we have and the way we work together has just been amazing.

I appreciate that. Maybe shifting a layer deeper into the business with respect to the revenue mix in the segments in which you operate, right? So network services, security and compute and observability sort of the catch-all bucket where I would characterize there's some moonshot activity in there with very high upside potential, and we can certainly get into that. But maybe you can give us just a quick refresher on the relative sizes of those pillars underneath the hood at Fastly and the growth profile. I think security, 43%, that's been trending very well. But just to kind of set the ingredients on the table, and we can sort of unpack some of the drivers of each constituent piece.

Perfect. So $183 million of revenues in the most recent quarter, 73% of which came from network services. That's our delivery business. This is -- the delivery business is growing 17% year-on-year. And I think that here, we are a market share taker, and so we should continue to grow faster than the market in this space. I think that if you look at our products relative to our peers, we have a higher performing product and performance is measured by speed, security, configurability, usability, developer friendliness, like it's a very strong product relative to our peers, and it's growing fast at 17%, so faster than the market.

Our security revenues are about 23% of revenues, and that's growing 43%. That business is actually doing extremely well. I think it's the past few quarters, it's been growing north of 40%. And the reason it's growing well is because we've expanded that product suite. We started with one security product 2 years ago with a web application firewall. And over the last 2 years, under Kip's regime as like Chief Product Officer, we've really expanded the security product. And so we now have the full suite. And so we introduced kind of DDoS, bot management, API security, client-side protection. And with those introductions, we actually have the full suite of security products that enable us to really win RFPs now. Like when we are going out there and we're selling both delivery services and security together, like customers are looking at us and saying, wow, these products are really good and you have the full suite to support us.

And so that's been a really good business driver for us, and that should be continuing to grow also faster than the market. And so 43% year-over-year in the last quarter. And then others our catchall. I wouldn't necessarily say it's a moonshot. I would say it's a great business. I would say that, that's primarily compute right now. So with the world of speeding up the Internet and a lot of personalization and a lot of like even agentic AI and AI, like compute is becoming a bigger and bigger piece of it. And so the compute is the biggest portion of our other business. And I think that that's growing 69% year-over-year. That will continue to grow pretty fast as well, and we should definitely be growing faster than the market given, one, the size of this business itself. But two, kind of the Internet trends that we're seeing, right? I think that we are seeing more and more customers deploying and using compute and trying to explore how to live in this new world of like AI. And so I think those 3 together are the core of our business. If you just take security and other, that's almost -- we're almost at a $50 million run rate, and that's growing north of 50% for that business. And so pretty proud that we've grown kind of outside of the delivery business to almost a $50 million kind of -- I think it was $49.4 million for the last quarter.

Rich, I think you're foreshadowing something interesting in that 3/4 of the business is still your core competence around delivery and delivery services and network delivery. But as you think about your near-term and medium-term range planning, are there high-level contours on how you think about the mix of this business changing? And I think as a public service announcement, I know there's an Analyst Day coming up in a not-too-distant future. So I don't want you to give me the steak, but maybe a little bit of the sizzle to the extent you can sort of talk about how the mix of business could potentially evolve in the near and medium term?

Sure. So Investor Day is coming up in 2 weeks. We'll be here in New York City. So hopefully, we can have you guys join us in New York City. We'll be at the Nasdaq MarketSite.

22, by the way.

June 22 on Tuesday.

Yes, Tuesday.

September?

September, yes.

I said June. Oh my gosh. And I copied you.

I'm here to keep you in check.

Thank you.

So I would say that given the growth rate profile of the businesses, like security continues to always grow -- has been historically growing faster than our delivery business and our other business, especially compute, has been growing faster than security. I just think that naturally evolves the business quite a bit. I would say that compute is a very nascent business still. I think we were about $7 million in the last quarter. It's the fastest growing, but it's also the one that customers are most excited by, just like -- they're doing co-inventing with us. So really trying to figure out how to use compute in this new world of AI. I think everyone is trying to figure it out and try to figure out like what's the best use case to speed up the Internet, make it safer and more secure.

And I just am very there's a lot of opportunity there to make that a much bigger business. And I just think that as the world continues to evolve, I think that we're evolving with our customers on what they need. So the mix will gradually continue to shift away towards compute and security as a business. I think delivery will still continue to grow. We're still going to invest in that business. It's a very good business for us. And in our recent quarter, we grew 17% year-on-year. And so we'll continue to invest in all 3. I think from a like foreshadowing of like Investor Day, I mean, I think that what's interesting with us is that we have really full product suites within each of these businesses, right? Delivery services, there's actually a product suite that supports what customers need. Security, I mentioned going from 1 product to 5 products. That whole security suite is a bigger suite now, right? And I think that the way we break out our revenues, it's very like assuming that we have 3 products, but technically, at Fastly, we have a lot more products that support our customers. And so we are thinking about like the way we talk about even multiproduct and how we want to kind of share multiproduct metrics going forward.

Great. On the topic of -- maybe there's an artificial delineation between these arenas.

Yes.

Fastly. But at the end of the day, that is what sort of lands with the investor community, right, to just sort of itemize the type of momentum you're seeing in those distinct businesses. So I can appreciate that to some extent, that's more of an artificial sort of exercise. However, I'm curious if there is a way we can internalize the relative gross margin and/or operating margin profile. I know some disclosure that you've most recently shared is just incremental gross profit, incremental operating income at the business level. So curious if you can just give us a rehash of some of that because the momentum in the last 12 months has been pretty remarkable. And then as a related matter, is it the momentum and the upshot in security that's been the principal driver of this operating leverage that you're really squeezing out of the business?

Yes. I mean we do look at kind of flow-through on gross margin and operating margin. I think our last 12-month gross margin flow-through has been like 96%. I mean, so for every dollar that we have like generated, we've kind of flown through 96% back to gross profit. So you can see a lot of like operating leverage as we've kind of grown the business and expanded and done cross-sells into other areas. When you think about gross margin by business line, it gets a little bit harder and trickier because really like Fastly has one network, right? We have one network that supports all the products. And so whether a customer is using delivery, whether a customer is buying security product or even they're doing compute, they're using the same 166 points of presence that we have around the world.

And because of that -- and they're using different resources, right? So delivery may be using some bandwidth and some potential like I/O. And then on security side, you may be using some -- a different kind of part of the server. And then when you're using compute, you might be using CPU capacity. And so -- but it's all the same servers, all the same network gear and supporting all 3 businesses. And so as a result, we don't do gross margins by business. I would say that having all the businesses together is highly complementary. So like if you use the compute as an example, our constraint was never kind of the CPU side on our business. It was more the I/O side. And so when you launch a compute business, you're using kind of stranded resources that were not being utilized effectively, right? And so when now you start selling compute into the business, now you're using a different side of the servers that were not being used, but it's all free, right? Because the servers were there, the CPU capacity was there. And so what you're seeing is you're seeing our mix shift changing and you see security and compute a bigger portion of revenues, a lot of that is like incrementally like higher margins just because like they were just stranded reserves that were not being utilized effectively.

We're very much -- some of our peers actually have to support multiple networks. And so I think that for them, it's a little bit different where they may be able to break out -- but for us, we're 100% on the same network. All the servers run all the businesses, whether it's bot management or DDoS, it's still the same servers running and powering our delivery business.

I wanted to spend some time back on the flagship business, the bread and butter, the network services, 3/4 of the business. Zooming out, the Internet is growing, traffic is growing. machine and AI and bot traffic as a proportion of the Internet is growing. I think you have your own internal research that's also come out saying we've had a 6x increase in at least the traffic you're seeing flowing through your network. So back to the basics on the network security business, you just put up 17%. You had a very strong back half and first half of this year in that classic core side of the business.

Can you walk through some puts and takes and assumptions because the 2 variables here are Q, traffic growth, P, pricing, which I think you've been very transparent about. So help us walk through how some of those -- or those 2 particular variables have played out in the first half of the year and how you're thinking about them certainly for the back half of the year? And then as a general matter, I mean, Q is really up.

Yes.

Yes. So I think just to talk about pricing since it's a topic I think we get asked about a lot. It has been a very relatively stable market for the last, say, 3 to 4 quarters for us, probably 3 to be precise. And if you go back and look at this industry, the content delivery network industry, there were a couple of point players that unfortunately went out of business about 2 years ago, and they introduced what we would characterize as like an irrational pricing environment. So there were some rough moments that the whole industry went through. That's been totally absorbed into everyone's models that's still remaining for well over a year now. And so we've had this environment where pricing has been relatively stable.

When we say stable, it's still declining sort of mid- to high single digits year-over-year, but we also get commensurate gigabit traffic on top of that. So it goes through sort of a Moore's Law dynamic where we're seeing more traffic as a result as the environment is growing, as Fatima pointed out. In terms of the Q side of it, the quantity, I think where we've been very successful, and Rich was alluding to this earlier, is we have many more opportunities and on-ramps with our largest customers in cross-selling and upselling different pieces of our overall platform, specifically in security.

So we are seeing dynamics where we may close a new piece of security with an existing customer. And then when we go back to do a renewal, we're at the table, they will give us more traffic as a result of that longer term. So they'll commit to that. And so that's sort of feeding a lot of the growth that we're seeing. I think in the market overall, there has been a shift towards higher performance delivery for both static websites as well as where we do very well in live entertainment and streaming type media. And we've continued to be probably a share gainer across most of those markets. And certainly, if there's any large live sporting event, there's a good chance that Fastly is behind the scenes powering that.

And Vern, just to double-click on that, thinking about the composition or, call it, the complexion of that traffic, how do you expect that? I mean, based on the data that you're seeing in your network, how is the complexion of that traffic changing between live events, between corporate traffic, between episodic events, which I suppose would be more live event-centric and AI traffic and bot traffic and machine-generated traffic?

The machine-generated traffic without question, is where we're seeing probably the most growth. I mean, again, it's still very early innings and it's still very small, but relates to our platform itself, that's having an outsized impact. We have a product called ContentGuard that we rolled out, which is specifically designed to help, and a great example of this is a publisher where they have agents and bots coming in and scraping content off of their website being delivered through a Frontier LLM to an end user, and that publisher does not get compensated for that. So they now have full control to see who's accessing their content. They can set up licensing arrangements around that and actually set up a monetization stream around it. So it's been a very successful product. We have a lot of excitement around that one, and we recently rolled that out in the last 12 months.

But we're seeing more use cases around those types of applications in the security realm and don't want to take any sizzle from Investor Day, but stay tuned. There are some interesting things there. And then also on the delivery side, yes, the requests are definitely going up machine to machine-wise. And we do see that in some of the programs that we're involved in. I mean if you look at where we're positioned, this could range from us being sort of a middle orchestration layer for inference and agentic AI and communicating with the frontier LLMs. And I think where we're at is a very unique position because we are one of the few cloud-neutral systems that are out there or architectures that are out there, whereas a lot of these other ones that are sort of quasi peers of ours, I won't name names, but they're building massive GPU farms and things like that. They're actually building more closer to centralized clusters around these activities.

And so if you're someone that wants to put in a multi-cloud strategy around that and you want to have the flexibility over time, you'll wind up probably engaging with an architecture similar to ours. So that's sort of the positioning. So we think there's a lot of growth there potentially. Admittedly, we're not seeing it like today in terms of its proportion of the overall traffic, but it is picking up a lot behind the scenes, as you said, 6x for that traffic level.

Vern or Rich, so what I'm gathering from you is actually counterintuitively, even though your traffic levels are going parabolic on the network, from a monetization standpoint, from a P&L geography standpoint, you're actually seeing that sooner in the security business, right? So if current trends persist in the way they are, we should, as investors, see that manifestation within your security business. Is that a fair distillation?

Yes. I think like the nearest-term impact because of AI would probably be security and some compute. I would say that when we think about like AI and the way it's impacting our businesses, specifically even delivery, when we talk about traffic, you typically think about traffic as measured by gigabits delivered. AI traffic is very small bits of data, right? And so it's not like streaming where you're doing high-definition bandwidth transmission. And then I think that it's -- when we talk about like growing 6x on a traffic basis, that's from a request perspective, which is very, very tiny bits, but the number of pings that happens on the Internet is quite high.

And so when you think about our products and the way we price, our security and our compute products are priced based on a request per second basis, whereas a lot of our delivery business is still on a per gig basis. And so it's very -- when you add up all those little bits from machine traffic, it's not still the same as a transmission. And so I think delivery will take time to kind of change over time. But I think right now, based on the way things are priced.

On the pricing side of the equation for the delivery business, I know I'm sort of jumping back and forth, but I think it's an important point to hash out. You talked about just more rational behavior in the marketplace, right? I'm wondering how much of that pricing rationality is maybe transcending into pricing power because you have had some of your peers actually raise pricing, right? And so has that been an advantageous opportunity for you to command more market share from a unit perspective? Or is the strategy that, hey, the market can bear a higher price, so there is an opportunity for you to realize better price on the average delivery contracts versus the historical cadence of general degradation in that market. Any thoughts there?

Yes. I mean I would say that from a pricing perspective, our competitors and us, we're very rational players now. We're going to like talk about the value that we create for our customers, those an -- a lot of those little ones have gone out of business, and so that pricing rationality is not there anymore. I do think that the edge cloud is growing in significance with like security and compute. And because of that, we're adding more value. And so a lot of conversations go into value and like how do we support our customers and how do we price our products across the board.

And so we actually less and less think about like pricing on a delivery services side, it's more like, hey, what is your problem that you're trying to solve? And what are the product suites that we can bring to the table to do that. And yes, I think that given the environment we're in today, I think there's definitely more of a partnership approach to pricing as opposed to like a, hey, we are going to like be the lowest cost provider. Like it's much more about that partnership and the value creation, which I think is a much better position to be in. I think customers are more and more wanting to partner with us. They're wanting to make commitments. You see that in our RPO growth, and you're seeing that in our CRPO growth where RPO grew 38% year-over-year. Our current RPO is growing 44% year-over-year.

And so I just think that partnership overall is definitely there. I can't speak specifically about like what our competitors are doing with price increases. I think they announced it, whether that's actually happening or not, like that's for them to discuss. But it's the approach that we've taken at Fastly is much more about the partnership with our customers, the problems they're trying to solve and like how do we price our products portfolio and the suite for them.

Rich, just staying on the pricing topic, but maybe taking a different angle to it. You've been able to deliver a lot of value and value-based selling to your installed base, right? And talking about, okay, let's not apportion a conversation around delivery services. It's not a portion of conversation around security. So generally speaking, has the incremental momentum in security come from better and more assiduously farming the installed base, right? And then relatedly, you do have about 1/3 of your revenue coming from your top 10 customers, right? So a little bit of a double-edged sword in that, okay, there is concentration here, but these are very immediate important customers. So how do you balance some of that ongoing wallet capture penetration opportunity with the fact that, hey, you maybe do need to continue to diversify the rest of the business. So it's not as weighty of a performance from the top 10. So how do you kind of juggle those very -- it's a tenuous dynamic. How do you juggle that?

So I would say that our product suite comes from both sides, right? Like with the fuller security suite, we're able to do very effective cross-selling with existing customers. But we also can land with new customers just with our security product. A lot of times, they come in having a security problem, and we can actually -- it could be an inroad in terms of how we sell to customers. And so I would say having that fuller product breadth allows us to kind of really do both, cross-sell existing customers plus land new logos. I would say that when we think about like the products and the suite we have, I mean, I think that it's -- our top 10 customers are adopting the multiproduct. And so you'll see the strength of that business. I think our top 10 kind of -- it was 37% of revenues in the most recent quarter. Like does that concern me? I would say these are actually very good customers with really good margin profile, as you can see with like the 65.8% gross margin, record gross margins, even with that higher concentration.

What makes me feel really good about these customers is it's not -- the growth isn't coming just from delivery services where they can just shift and move businesses. Like if you look 3 years ago, 5 years ago, like that's risky, right? Because when you're only selling one delivery services product. But the reality is these customers are now buying security. They're buying our suite. They're doing compute. That makes them a lot stickier. And so we actually have internal studies that have shown that when customers buy multiple products, like they just become much more sticky. So am I concerned about the 37% -- not really because they're really good customer contracts. They're much stickier than they have been historically. I do think that when you look at the outside the top 10, outside of the top 10, it's still growing double digits on a year-over-year basis. I think the most recent was 12% year-over-year growth. We need to do a better job with that. I acknowledge that. But I do think that like we are not going to -- the best way to really diversify is to really grow that non-top 10. And even outside of that, I think we had 624 large customers. So just continue to grow that portion of the business as well. But I wouldn't do it at the sake of cutting back the support that we give to the top 10. Our top 10 is a very good set of customers.

Rich, I know you disclosed net retention rate at the company level. I'm wondering if there is a meaningful distinction or delta between the net retention rates of your top 10 customers versus the rest of the base. Even any directional contouring would be helpful here, just so most of us can appreciate that the top 10 are indeed all in on the Fastly platform, and there is a lot of attractive LTV kind of latent in there. Anything you can sort of -- any color you can give us around that?

Yes, I'll give you 2 data points on that. One is that -- so our NRR is 117% in the most recent quarter. I think that's like a 3- or 4-year high for the company. And so we've definitely been very proud of that like NRR kind of increase. I would say that given that top 10 is now 37%, you can kind of imply that like NRR for the top 10 is actually higher than the 117%. And so we feel really good about that because it just means they're just embracing and adopting more products at a bigger scale, right?

And I think it's a really kind of good data point to have. I think the other data point is that if you look outside the top 10 or even outside the top 50, it's still very healthy NRR, right? And we're not like at an NRR where it's like dropping to like 105% or even 100%. So I think that like our NRR even among the different cohorts are very strong and very good, and I feel really good about where we're at.

On the -- so we talked a ton about network services. We talked a ton about security. In the other bucket, again, a lot of option value in that bucket. A lot of your peers and the industry at large, we are going through a generational capital expenditure cycle, right? So what behooves you to invest or not invest in scaling out your CapEx and infrastructure footprint? You've been more judicious. But what's holding you back? Maybe what do folks in the investor community not understand about your network topology or architecture that precludes you from having to take similarly aggressive steps as some of your direct peers, some of your orthogonal peers who are, again, undertaking a generational CapEx investment because ultimately, you're paying the price on component price inflation, which I think you've managed around. So just generally commentary on are you -- do you want to get into the race? Is it too late? Does it matter? What are your thoughts there and then why?

Yes. So our most recent earnings quarter, we talked about 10% to 12% of revenues invested back in CapEx. It actually is an increase. I think it's almost like a 40%, 45% year-over-year increase on CapEx spend. So we are making the right investments we need to do. I think when we think about it, like the beauty -- and we have a much more network efficient architecture, right? Like we're running one network supporting all of our products. That enables us to have a lower percentage in CapEx as a percentage of revenues, which is very helpful. So when you compare us with us versus our peers, even at our size and scale, we're making the investments we need to support the revenues that we expect, and we're doing that in a much more efficient way.

I would say that like orthogonally, the peers are doing a lot of GPUs, which like when we look at it, it doesn't make sense for us to put GPUs in, like we can service our compute business with existing CPU. And so I just think that like for us, we're going to be continuing to invest in CPUs and our business. And when we see the opportunity for GPUs, we may consider it. But for now, like I just think that we can be much more efficient the way we are.

Last question for you.

Sure.

If you had your magic wand, to wave away any one glaring investor misunderstanding or misconception, what would that be? And I know you'll have Analyst Day to expand on it, but...

So I can give my one wish. I just think that this business on being on the edge cloud is much broader than just a CDN business. I just think that there's a lot of misconceptions around this being a CDN commodity business, like there's a lot of intelligence in the edge now, right? And this intelligence is making the product suite that we have much more important around security, bot management, DDoS. It's not about just pushing bits of traffic across the Internet and speeding it up. It's actually a lot more secure dynamic, more e-commerce traffic is happening, more hospitality, like just there's so much happening on the Internet today. And I just think that people still have this mindset on like commodity CDN business, and that's not what we do.

I appreciate that. I look forward to getting some more details in a few weeks.

All right.

Thank you very much...

Thank you guys a lot who can join us.

Thank you.

All right. Good morning, everybody. My name is Jackson Ader, Enterprise software analyst here at KeyBanc Capital Markets. Welcome to the Technology Leadership Forum 2026 Edition, second year in Park City or Deer Valley, whichever you prefer, I guess.

But we are thrilled to have Fastly to kick off our post keynote, right, the fireside chat portion of the conference. We've got Rich and Vern here, CFO and Head of IR from Fastly.

Just a quick reminder for everybody in the room. We're going to run through -- I have a bunch of questions for these guys. But if you have questions, feel free to raise your hand, but I will do my best to kind of ping people throughout so that it doesn't get -- you hear me and these over and over again. Do you guys just mind introducing yourselves and introducing the company, and then we'll get into it.

Sure. So Rich Wong here, the Chief Financial Officer at Fastly. I've been here for about a year. So this month is actually my 1-year anniversary since joining Fastly.

My background, this is my third time as a CFO. And so a great place to be, and I joined because I believe in the space we play in. For those who don't know us, we are an edge cloud company. Edge cloud, meaning that we basically provide edge services, which is around content delivery, security and compute observability to our users, where we really partner with the central cloud and customers to speed up the Internet and make it faster and more reliable and safe.

I'm Vernon Essi. I run the IR practice at Fastly. My background, I started my career on the sell side, equity research analyst, very similar to Jackson here, not as successful, but certainly...

You escaped.

And joined -- went to the corporate side to run corp dev and IR functions across a couple of companies in the semiconductor industry for about a decade, maybe a little less, then joined Fastly about 5 years ago and have seen it go through a lot of changes and certainly I'm excited about what's happened over the last 12 months as we've gotten, I think, a really good team in place and starting to see some good momentum around our fundamentals and our strategy.

Can we actually start with Rich, you mentioned it's been a year, but there's been kind of a reset in the leadership of late.

And I think that, that has been really not to disparage, but it's been really beneficial to the company and to the stock. do you guys mind just running through kind of laying the foundation, who's new, where they came from and why it's been helpful to the strategy?

Sure. And maybe I'll even step back a little bit. And I chose to join Fastly because I believe in the product that we have and having the right edge products at the right time, right? There's a huge transition that's happening on the Internet and what's happening and the need for an edge provider that has fastest capabilities, like we are known to have the better technology.

And so when you're looking for faster, safer or more reliable Internet, like Fastly has the better product among our competitors. Having that better product is great. And then I think that when I think about the market share that we should be having versus what we do have, a lot of it was around execution.

And so what happened was when I got recruited, Kip Compton was our new CEO. He had been around for about 18 months before that, where he was Chief Product Officer. Under his leadership, you see the breadth of products getting launched.

When he joined, we had a single security product, which was our web application firewall, our WAF. And by the time he got promoted to CEO, we had the full suite of security products. We went from one product to five key products, which kind of filled out the WAF portfolio.

It's probably important also, I'm sorry to interrupt, is that the WAF product came from an acquisition...

Right?

It's the internal development of additional products has been a revelation in terms of huge.

So we did Signal Sciences acquisition in 2020, and it took us like 3, 4 years to really like bring that onto our network.

What we do is we operate one network for all of our products, right? And once we were able to get the Signal Sciences acquisition, the WAF that we acquired into our products, into our network, we were able to leverage that and then build a DDoS product, a bot management product, an API security product, client site protection product.

Just having that full suite enabled us to really be a true security player versus just a single kind of security product. So I was a believer in our new CEO, Kip Compton, who's now kind of been on board for 3 years, the last year as a CEO, 2 years prior as a Chief Product Officer.

I was also very bullish with Scott Lovett. Scott Lovett joined about I want to say at the same time mid-2024. And in mid-2024, he really elevated the go-to-market function.

Our go-to-market function because we only had one security product was purely a CDM kind of sales organization, didn't have a lot of experience selling security, didn't have a lot of experience around cross-selling.

And what Scott did was he really up-leveled the team, brought in experienced sellers who had to sell security. Scott himself came from both -- he had previously worked at Akamai, where he did content delivery, but he was at Imperva, where he did security sales.

So he really knew how to do the cross-selling and security. And so you see the kind of traction that he's done up-leveling the team and bringing in the right leaders who had to do that. He changed comp plans. He just revamped the whole organization where like if you look at what he did when he joined all of 2024, we had a sales and marketing expense. When he ended 2025, he had smaller sales and marketing expense but he delivered incrementally $80 million to $90 million more of revenue on a year-over-year basis.

And so very impressive to have a go-to-market leader who I truly believed in. And so for me, looking at that transformation that he's done like -- and the leadership team that Kip's has brought in as the leaders, like I was just very bullish and just believed in kind of that leadership evolution.

I think -- and I promise, I do not consider myself a promotional analyst. But the other thing that I think is worth noting on the positive side is that -- the -- in this market, you can't necessarily separate the content delivery on the edge and the security.

There are things that when you talk to customers, you talk to analysts, you talk to vendors, there are some security products that are kind of table stakes. You -- there will be RFPs for -- on the content side that if you don't have a mature DDoS WAF and bot management solution, you're not in that 100% content RFP. So it's like there is some synergistic effects of building out the security that can also help that we've seen actually play out on the content delivery side.

Absolutely. I mean what you're saying completely resonates. If you look at like where we were like 18 months ago, I mean, we basically have had accelerating revenues.

That synergies just are really playing out, right? Like when we're talking to customers, we're not talking about just a CDN product. We're talking about the whole portfolio that we have and how do we bring that portfolio to our customer base.

So you'll see that with kind of rising growth rates where the last quarter, we did 23.3% year-over-year growth. And I think the last 3 quarters, we've been north of 20%, right? So like it's basically a very synergistic product. And the synergies play out not just on the top line. Like if you see what we're doing, we basically reported 65.8% gross margins. And so like the synergies are there, this is record gross margins for Fastly, and you see record operating leverage, right?

We had $27 million of operating profit. That was our fourth consecutive quarter of operating profits. We've had 6 consecutive quarters of free cash flow generation. And so you really see the transformation with leadership, you see the transformation and full product build-out really play out and just make us a real credible like strong player in the space, kind of the execution is beginning to match the product quality that we have.

Vern, anything -- the last foundational question. Anything to add on the most recent quarter, what investors have been asking about, maybe sources of kudos or pushback from the second quarter before we move on?

Yes. I think on the kudos side, certainly, what you've been discussing. I mean, clearly, I think a lot of people are impressed with what's been happening in our revenue diversity in terms of diversification around security.

So that's been definitely one of the bigger highlights. Also just the momentum on the top line, which I think a lot of people are really excited about. So we've seen a lot of attention there. I think where we've been getting a little bit of pushback is on our customer concentration, which our top 10 is like 26% of revenue. We're really proud of the fact that we're able to grow with some of the leading enterprises that use our delivering security.

However, it is sort of getting up to a level where we're starting to notice a little bit of more concern among the Street. But we're still feeling very comfortable and confident that we can grow that cohort as well as the other and continue to move forward.

I think we also have a lot of praise around the ability to continue to drive the go-to-market function around the cross-selling within these different cohorts. And certainly, our compute revenue is -- it grew 70% year-over-year or other is what we call it, and that's also generated some excitement in the street.

The customer concentration, I mean, you're kind of damned if you do, damned if you don't. If that number starts going down, you're going to hear about it. And when it goes up, you kind of hear about it, too. And it was something that I remember talking to Kip about this. It's like, look, we can't just -- let's put our arms around these guys and actually really truly engage with our largest customers, keep them around, keep them happy rather than try and actively not dedicate as much resource.

So it's been an intentional thing where it's like you would like to have better relations and growth with the top 10. So it's like -- but you know it's like -- it's a double-edge sword every time.

Okay. One other thing to add, too, and I apologize, so I slipped on this was net retention. We actually had an NRR on a trailing 12-month basis of 117%, which for us was, I believe, a 4-year high, another huge example of how we've been able to garner a lot of retention and recurring revenue with our customers. So it's exciting.

So let's switch to AI. What are all the different ways in which artificial intelligence impacts the business, positive, negative or otherwise?

Yes. So on the AI front, we've obviously seen a lot of inbound interest from our customers on what we call co-innovating on our compute platform, which we put in our other revenue category. What's happened is I think there's just been an influx of projects around trying to work with LLMs to run agentic workloads through an orchestration layer. We've been involved with conversations along those lines with some customers. We're also seeing a lot of one-off instances of where we're working in conjunction with someone running an LLM to, in some instances, use our storage product to sort out.

I think even last year, we talked about the images with shutterstock, things along those lines where we've had interesting programs that have come into play. Where we're seeing the biggest vector of near-term growth in AI right now has been in what we call like bot management.

We have a product called ContentGuard wrapped around that. On our prepared comments on the call, we talked about one of our wins we can talk about publicly, which was with a French media organization, Le Monde. They're running basically a -- this product called ContentGuard, which basically can detect when agents come in to scrape their network or it's perhaps an agent working on behalf of a benevolent organization around where they already have a relationship.

They can use this product to basically filter whether or not they want to reject the agent or take it in and also have a monetization motion around that. So it's sort of a new era of, if you will, with agents coming in and instead of them being mostly harmful, you can start to get a monetization pathway around that. We're excited about that program. We're seeing a lot more interest around those sort of developments on the bot side with agentic traffic in our customer base.

So security is probably the most near-term vector. Of course, we see a little bit of that happening in just plan of delivery, where we're seeing agentic traffic come into our network. And then lastly, on the compute side, as I said, there are a lot of discussions around running compute workloads that are agentic. We are seeing some business there, but it's a little early to tell where there's real momentum and like where we'll be in, say, a year from now. It's still very early innings.

In the long run, do you think that there is -- because I totally appreciate the fact that a lot of what we would call, I guess, like agentic use of the Internet, right, where an agent visits 4,000 sites instead of 4, right, for a human, that traffic, though, is not necessarily what customers would consider high-quality traffic that they are willing to pay for.

So I'm just curious whether there's been any customer feedback on that, only on the content side, bot management and ContentGuard, I completely understand. But anything on the delivery side where customers are seeing an influx in traffic and saying, this isn't exactly what I'd like to be paying for.

Like so it's interesting because the way our delivery products work, we charge a lot of customers based on gigabytes delivered plus requests that comes in.

AI traffic just has a lot of requests because it comes in quite often. It usually tends to be lower like gigabytes of traffic delivered. Our customers, I think they're working on their strategies because I think even the AI traffic may not be like the ones that convert right away, but it is still like visibility traffic for them.

And so they haven't pushed back too much on like the AI traffic that's happening. I think what they're trying to really spend time working through is some of the products that we have that helps them figure out like what is the good AI traffic versus the bad AI traffic.

And that's where bot management comes into play, like the content guard, trying to really work with them to like say, okay, let's allow all the good AI traffic because they do know that AI traffic is not all bad traffic. And so they want exposure. AI is now like the new SEO, right? And so to get that visibility and like that brand recognition, I think they know that they have to like have an AI strategy that allows them to really get like top of funnel for with AI traffic.

AI is the new SEO. That is something that other people in my coverage know all too well. Okay. So a little technical, that's right. Rich, we'll ask you a question while we get this figured out with Vern.

I think it's probably worth just touching on the incremental revenue growth and the incremental margin that you're seeing. What impacts do the different segments of the revenue structure are contributing more to the incremental margin? And as one segment might outgrow the other in the next year or 2, what should we expect for incremental margin?

Sure. So what Jackson is referring to is the way we've guided around how we think about like the additional operating leverage we should get as a company.

And so what we've talked about is a 65% to 80% target for gross margin flow-through, which means for every incremental dollar of revenue we get, we should be flowing through 65% to 80% on the gross profit side. And then on the operating leverage side, we talked about 25% to 40%.

On a last 12-month basis, like we far surpassed that, right? So last 12 months for gross profit flow-through, we've had 96%, which is far ahead of the 65% to 80%. And then on the operating leverage side, I think we were in 79% operating leverage flow-through versus the 25% to 40%. I would say the product mix and the synergies that we see having complementary products is very helpful.

But I also say that a lot of the flow-through is also on the upside that we see in the business, right? We build our plans with Q2 results, we had a $10.4 million beat relative to the midpoint of our guide. And having that big of a beat allowed us to really flow through a lot.

If you look at the last few quarters, we just had pretty good beats around like how we've done. And so those beats actually give us a lot of additional operating leverage that surpasses the guide that we've kind of given from the 25% to 40%. But I would say that like having synergistic products, having one sales organization that go to customers and bring the full suite of products really makes us much more efficient and effective as a company.

We operate one network. And so when we operate one network, like a few of -- our peers may have multiple networks they have to support. They may have a network for delivery services, and they may have a different network for security.

And in some cases, they may have like 3 networks for delivery services. With Fastly, we have one network, and that one network supports all our products. I mentioned Signal Sciences acquisition. They are running on our network.

And like they are on our infrastructure, like the same servers that are providing delivery services are also providing the web application firewall from the Signal Sciences acquisition. That just makes us very efficient and very capital -- less capital intensive than our peers, right? Like if you look at our capital guide from an infrastructure perspective, our capital guide is below what our peers are, and we're supporting a lot of traffic relatively speaking, and we have a much more efficient network.

So I would say that it's a combination of like the upside, kind of the synergistic products, but also having a very like single network that kind of provides everything, all the products.

One more question, and then I will come to the audience, so be thinking about it, Vernon. You guys are decidedly not in the GPU game at this point. Do you want to tell us why?

Yes. So I think for Jack's question, some of our competitors have built out big slots of GPU capacity and have contracts in place with some of the [indiscernible] on the behalf of doing that.

We are not in the business of what we would describe as building sort of a neocloud. We still believe our best positioning and our best value prop to our customers is to be at the very edge of the cloud.

Having a very open standard, open cloud platform that can cater to all different levels of innovation. We continue to drive on that philosophy. And I think just not to pick on our competitors, but I think if you peel the onion a little bit on the investment that's required to do that and the return on that investment, it's a tougher business model, I think, than what we at Fastly would want to tackle. I'll speak for Rich here a little bit on that.

But I don't know if he would want to sign off on these either. But we do see, in our view, enough business on what we're doing right now to have a nice foothold and strategic presence in sort of this new AI landscape without having to go out and deploy a lot of capital to build like a GPU neocloud to do that.

And then if you think about like our compute product, and we talked about compute being the majority of our other -- our other was about $8 million last quarter.

And the compute resources that are needed, we actually can service those with CPUs. So if you think about our network and what we have, I think previously, we were much more I/O bound and not CPU bound.

And so when we work with our customers on their compute needs, a lot of times, we come with our whole platform infrastructure viewpoint and say like, hey, what are you guys trying to do? What can -- how we can help? And what we find is that our existing CPUs in the edge cloud can do what they need.

And so for us, it's like much more efficient, cost-effective, ROI positive from a capital perspective to leverage the existing network we have where we might have stranded CPU capacity. And we can leverage that then go into like the GPU side.

Okay. Aaron, go ahead.

Yes. Just specifically on the CapEx refresh for the new AI and agentic workloads in terms of network router, storage, memory, hardware upgrades, what's going to be necessary? And you've got thousands of servers out there. What's the average life? And what do you see the big refresh coming and how will that affect the CapEx?

I'll just summarize the question. We're talking about CapEx refreshes. What are going to be the impacts of those refreshes maybe in the coming years? And then any impact from pricing that we've seen on components?

Good question, Aaron. Thank you for that question. I would say that from a -- I talked about operating one network. I think operating one network actually helps us quite a bit.

And our one network that we have is a very software configured network, right? Like it's -- we give -- it's -- we're using a lot of like powerful off-the-shelf products that tend to like really be powered by the software we have on hand that makes us much more efficient from a network perspective.

I think just earlier this year, we went from a kind of a 5-year CapEx depreciation cycle to 6 years because we do see that the equipment that we have in place actually have been lasting longer and actually gets us closer to our peers around how they depreciate servers on that front.

I would say that our -- because of our capital efficiency, like we've been able to use our servers much more efficiently and effectively around a utilization perspective, which is why you see our gross margins being where they are, like 66% kind of at the last quarter.

I think from a refresh cycle, like I think that we look at it every single -- I mean, we're looking at it constantly our infrastructure and making sure that it can support our customer needs, and we build enough capacity in there to really make sure that we can support upside on the revenue.

And so most of our infrastructure CapEx that we're spending this year, we're launching new PoPs. I think we've talked about in Latin America. We've talked about some in kind of Southeast Asia around getting more international support in regions that we haven't been as strong from a POP perspective.

But I think for us, we're much more efficient from a maintenance CapEx perspective, like because we're using more off-the-shelf servers that are powerful. And so they've been lasting longer. In terms of like Jackson, you added on to the question around like the component shortages we're seeing and what does that mean? I think the beauty here is that we watch it pretty constantly.

I think for all of 2026, we placed our order in the end of 2025. We were able to get a lot of those component purchases in the first half of the year. So what you'll see with our capital spend is that we are front-end loaded because we wanted to -- we saw that component shortage happening early, and we just basically placed the full order in place. And so we're generally pretty good. We already started placing orders for 2027, but we feel good with the guide that we provided, which is 10% to 12% infrastructure CapEx as a percentage of revenue. And I think that's below what our peers are spending on infrastructure CapEx.

I have a quick follow-up. You mentioned right off of that, this is your third time as a CFO. Your prior CFO experience immediately, I think before Fastly, very SaaS-like seat-based, right? Like it's very predictable.

This is your first foray into a consumption model. You're year in. How is it going? How should we be thinking about sources of upside in the quarters or in the years in a very different model as CFO is where you came from?

No. I mean it's completely right. My last 2 -- actually, my last company, we were very SaaS-based. So I had revenue predictability that was so easy because before I started the quarter, I knew where it was going to be.

I would say that we've changed a lot over the last 12 to 18 months. I think one of the beauties with having Scott here, Scott was also really big and instrumental on getting commits up.

And so if you look at like our RPO growth, our RPO growth is up 38% year-on-year. Our current RPO is up 44% year-on-year. That additional commit gives us a lot more visibility in shifting from a consumption-based business into like a little bit more predictability, like I would love to have commits more, but we're still continuing to build that.

I would say that for me, over the last 12 months being here, like I'm so like excited about the momentum that we're building as a company. I would say the momentum around the product velocity, like seeing like the number of launches that we've had and being able to build out that product portfolio on the security side, some of the stuff that we're doing on the compute side, we have a lot of other kind of projects going on in the company that I'm pretty excited about that I don't want to -- we can't talk about yet.

But I would say that we have a number of initiatives we're really excited about. I would say that like bringing in seasoned leaders have been really good. We talked about the top 10 growing pretty fast, like we're very excited about that.

We brought in Joan Jenkins, who's our Chief Marketing Officer. She started about 4-5 months ago.

And I think being able to build out that brand and being able to like attract new logos beyond like that top 50 or top 100 customers that require performance is really key, too.

All right. Great. We are out of time. Rich, Vern, thank you very much. Great start to the conference. Thank you. Thank you, everybody.

Thank you.

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.

Our next call comes from the line of James Fish of Piper Sandler.

I'm just getting asked here in terms of, obviously, you guys did a phenomenal job at the World Cup. I wish our U.S. team would have done a little bit better. But can you walk us through what the impact of World Cup was to Q2 and on the Q3 guide, just kind of given its split as well as that we had that seasonality shift of Prime Day into Q2 here. Just can you walk us through some of those events that you saw that really helped traffic?

Yes. Jim, thank you for asking that question. I would say that for Q2, with our prepared remarks, we had a $10 million upside to the guide midpoint that we had. I think a little less than half was given to -- driven by the episodic nature of the business, episodic meaning partly World Cup. We also had a few -- another live event on the White House lawn. We also had a few other customers have onetime activities. And so think of that as a little bit less than half as driving the episodic activity.

I would say that our -- if you strip that out and you say, look at the Q3 guide, and the Q3 guide being up sequentially, and you take that into account. I think it's back to kind of normal seasonality between Q2 and Q3. The only other thing to note is that when you look at World Cup, 75% of the games happened in Q2 and only 25% will happen in Q3. And so that kind of goes into the forecast that we have. And then on the viewership perspective, about 2/3 of the games are viewed in Q2 and about 1/3 in Q3.

Perfect. Thanks for that extra detail there, Rich. And maybe just as we think about security penetration, you guys have done a good job here in terms of the packaging. But any update as to how we should think about penetration on security with more than 1 product as well as north of 2 products as it seems like you guys are benefiting off consolidation.

Thanks, Jim. Yes, I mean security is still -- you can tell with the numbers, it's a $42 million Q2 number. We still have room to grow given that $42 million. We will continue to be market share takers. Our WAF has, I think, been updated over the last 2 years. And I think with the launch of DDoS and bot management, I think that we're going to continue to be big market share takers in security. I think the multi-product disclosure question is a very interesting one. And I think that without saying too much, stay tuned for our Investor Day coming up in September.

Our next question comes from the line of Param Singh of Oppenheimer.

So first, really good to see the strength in security. I wanted to understand how much of your installed base already uses your DDoS and bot management? And if you could quantify that in terms of innings and how much upside you see just from cross-sell versus selling into new opportunities? And then I have a follow-up.

Great questions. DDoS and bot are newer products for us. So I would say, maybe second inning -- in terms of the penetration there, we're seeing -- I think I mentioned in my prepared remarks, we're seeing triple-digit growth in those 2 products right now. So we're excited about the increasing penetration of those, and our customers are finding them directly responsive to some of the AI traffic opportunities and challenges that they're finding.

That's great. And a second question, I want to understand way to think about Agentic AI traffic, right? I mean, it benefits you across the entire platform. There's compute, there's different security modules, including API security, obviously, network traffic also benefits. Is there a way to quantify or think about how much upside we could see per unit traffic on Agentic AI versus, let's say, your traditional bot traffic or human traffic?

Yes. I mean it's hard to say. I wish I had a quantitative answer for you there. What we're seeing is probably a bigger impact in the Compute and Security businesses, the Network Services business at the moment. That is partially driven, I think, by the fact that the -- while the request per second or volume of requests can be extremely high. We talked about the growing 6.5x faster than the human traffic. The bandwidth, which network services tends to have as a billing component, is a little bit lower than streaming events. And so we're seeing greater effects in Security and Compute, although we are absolutely also seeing effects in network services. And just given the growth rate of that traffic, we believe that over time, it becomes significant for the business.

Our next question comes from the line of Rudy Kessinger of D.A. Davidson.

The top 10 customers as a percentage of revenue increased 3 points versus Q1. I know, obviously, some of the World Cup live events contributed to that, but they were 87% of your quarter-over-quarter revenue growth, while at the same time, the growth in your all other customers' revenue decelled about 6 points year-over-year versus Q1.

So I guess I'm interested on both fronts. Just as you look to the second half of the year, what kind of concentration are you expecting from the top 10 customers in Q3 and Q4? And then on the flip side, the growth in all other customers, are you expecting that to bounce back up in the second half or what's your expectation there?

No, it's a good observation. I mean I think we clearly had -- we're really pleased with the growth overall this quarter with 23%, the fastest in 4 years. And we think that shows the go-to-market transformation that Scott Lovett and his team have been driving and that we've been talking about for a bunch of quarters now is making progress.

That said, there's more work to be done there. We're not done with our go-to-market. And you saw us bring on, for instance, the new Chief Marketing Officer about a quarter ago. And Scott and his leadership team continue to make changes and improvements in various parts of the organization and the process and how we're structuring our go-to-market investments. And I think it's fair to say that we'd like to see more new logos and more growth outside of those top customers to complement the robust growth that we're seeing with the top customers.

The last thing I'll say is sometimes there's some confusion about the large customers and economics. I think our record gross margins this quarter shows that we're able to serve all of our customers very profitably.

Rudy, I think the second part of your question was around where do we see it going in the second half of the year. I would say that 37% in this current quarter, I think the impact that Joan and Scott, that transformation is still going on. And we do think that it will take a little bit of time. I wouldn't be surprised, given the strength of our top 10 customers and even the top 20 customers who really love the performance that we've been giving them. I wouldn't be surprised if the 37% kind of stays there or maybe it ticks up a point or 2.

Okay. Got it. Super helpful. And then just on AI traffic. I mean, look, you guys are obviously tracking it. You said it's growing 6.5x faster than all other traffic. So I mean, what percent of the traffic on your network today is coming from AI traffic?

Yes, we don't have -- I mean, we track the growth of it. I don't have a breakout that I can share with you at this time. We do believe it's relatively modest in a lot of parts of our business, but rapidly growing.

Our next question comes from the line of Fatima Boolani of Citi.

Kip or Rich, jump ball for either one of you. You've talked about the pricing vector and the volume vector in a pretty explicit detail for the last several quarters. So I was hoping to revisit what you're seeing from a traffic, so non-AI traffic growth perspective and also the realization from a pricing perspective. A lot of your peers have either dissipated and/or are raising prices. So I wanted to understand what your response to that externality is? Are you raising prices as well? Has that been a contributing factor to the gross profit accretion?

I'd love to get maybe more of a granular update on how you're thinking about those 2 vectors and how to internalize that in that acceleration you saw in the Network Services business, understanding that, about half of that was more episodic. But would love to get a little bit more detail on kind of the structural inputs there. And then I have a follow-up, please.

Sure. So pricing in Q2, I'd say it was very consistent with Q1 and even the prior year Q4. We are in a very kind of rational pricing environment with really rational players since the exits. Price erosion, I would say, would still be in the kind of the mid-single digits, consistent with last quarter. And I think our traffic growth continues to be in the low like 20% range. I just want to also remind you that like when we talk about price erosion, this is network services divided by the total traffic served. And what tends to happen with that is because it's an aggregate number, it's kind of like it depends on the customer mix and how it's going. The price erosion that you see is kind of based on also volume discounts that we get as long as these customers continue to add volume to our network, they actually might hit the next pricing tier discount that we give them.

So even though we're saying there's a mid-single-digit price erosion, a lot of it's due to hitting the next volume tier. In terms of like what we're doing about pricing, given what our competitors are doing or what Akamai had announced that they were doing, we feel like it's really important to continue to honor the commitments that we have. We have no plans to do kind of surcharge pricing on that. When we look at renewals and when the renewals come up, we don't make unilateral rules around it. We actually look at the customer value that we provide to them as well as what they're buying from us with the goal of really just unlocking more value and getting -- and doing that on a case-by-case basis. So the conversations tend to be more about how we help our customers using the full suite of our products and less about like unilateral rules that we set around where the prices go.

And just a follow-up on net retention rate. Obviously, very strong in the quarter. I'm curious to get your thoughts on the trends from here. Is this a high watermark? Can we push the envelope and see a better yield on this continuing to expand, especially as you lap some very strong revenue performance from last year and appreciating the net retention rate metric is a trailing 12 plus month metric. So how should we think about this watermark continuing to increase, if at all?

Yes. Thank you for that. Yes, this is our fifth consecutive quarter of increasing NRR. So we're really proud of the progress we've made here. I think Scott -- and the go-to-market transformation that Kip mentioned that Scott is doing in this organization has really helped, and it's helped not just with kind of the metrics, but also the customer love that they're showing us.

We don't necessarily guide where NRR is going to be, but I will say that our customers continue to grow with us, and we're really pleased with the improvement that we're seeing. You're absolutely right to call out that coming up Q4, it will be a harder comp given the strength of our Q4 2025. And so it's definitely something to kind of factor in as you think about building your model out. But I would say that customers continue to grow with us because they're happy with what we are providing them.

[Operator Instructions] Our next question comes from Jeff Van Rhee of Craig-Hallum Capital Group.

This is Daniel on for Jeff. Just on the hiring that you mentioned, Rich, that it slipped from Q2 into Q3 and maybe some other expenses there. Maybe if you could just expand a little bit on what those functions, what those investments are that you're planning on making?

Yes. From a hiring perspective, the areas that we've highlighted in the past on our earnings call have been around the APAC go-to-market. I think a year ago, we were serving a lot of our APAC customers from San Francisco and our office in London. And so the time zones were just way off. I think that we want to really improve that quality of the relationship with our customers and have more on the ground there. And so we announced that we hired Nicola, who kind of leads up our APAC function.

I think that we're also talking about more recent investments this year around our marketing efforts with Joan and bringing on CMO. With Joan and the CMO, I think the focus on our go-to-market transformation has been how do we maximize the value we create for some of our largest customers. And what you're going to see with the shift with Joan is kind of like how do we continue to add more logos and how do we continue to go down and create value for that next set of customers. And so I would say those are the 2 kind of big areas of investment that we're making.

That's helpful, Rich. And then Kip, on the top customers and some traffic share shifting towards you. Just any thoughts on what's driving that? If to Fatima's question that has to do with pricing or any other factors that have to do with traffic gain, specifically share gain?

Yes. Thanks for the question. I think there's a few things. The 2 that come up most frequently are reliability or resilience. We certainly have incidents where we've picked up business because incumbent solution had issues in terms of an outage or other reliability issues. The other area is performance. So we consistently hear from our customers who are adding traffic that our performance is better than our competitors.

I would say that with respect to pricing, obviously, that's a factor. You have to be market competitive in terms of pricing, but it's not generally the way that we're picking up traffic by discounting or lowering prices. We believe that the effectiveness of our security products and the performance and resiliency of our overall platform is the dominant thing driving people to switch.

At this time, I am showing no further questions. And I would like to turn it back to Kip Compton for closing remarks.

Thank you for your questions and your interest in Fastly. We're looking forward to seeing you at our Investor Day on September 22 at the Nasdaq MarketSite in New York. I want to thank our Fastly employees for all their contributions, our customers for their trust and partnership and our investors for their continued support. Thank you.

Thank you for your participation in today's conference. This does conclude our program. You may now disconnect.

Welcome to today's session with Fastly. My name is Jonathan Ho, and I'm the Cybersecurity Analyst for William Blair. Our speaker today is Rich Wong, who's the CFO of the company.

Before we begin, I'm required to inform you that a complete list of research disclosures or conflicts of interest is available at our website at www.williamblair.com.

As a reminder, the breakout session will be held in this room following the presentation. And so yes, with that, I'll hand it over to Rich to do a brief overview of the company, and then we'll follow up with a brief fireside chat. Thank you.

Great. Thank you for coming. I really appreciate it. I think we're at the last presentation for the day. So really appreciate you sitting through this. As mentioned, Rich Wong, the Chief Financial Officer. I've been with Fastly since August of last year. Very excited to be here. I had spent my career in tech and so had been a 2-time CFO before this and then had done some time across like Wall Street and investment banking and a number of other companies.

Before we open, I do have kind of the forward-looking statements disclosure. I'm not going to read this here, but I just want to make sure that it's available and you guys take the time to read it at your leisure, if you want to fall asleep.

Before I begin, I thought maybe I'd start with a high level about Fastly and what we do. So Fastly, we are an edge cloud platform company. We serve from the edge. Our mission is to really make the Internet a better place where all experiences for users are fast, safe and engaging. I just think that like the edge plays a very unique spot in terms of delivering Internet traffic across the world, and we play this -- in this role at the edge.

Some of the stats about us, we have last 12-month revenue of $653 million, with the most recent quarter growing revenues at 20% year-on-year. And this revenue growth and this revenue number is across 3 different business product lines that we disclose. We have a delivery services revenue, we have security revenue, and then we also call other, which is a combination of our compute plus observability. We play in a very large TAM. And so we talk about a $22 billion TAM in 2026 for those 3 business lines. We also have over 600-plus customers that we define as large customers. Large customers is defined as customers with over $100,000 annualized revenue in the quarter.

And then we have a pretty global employee base of 1,100 employees around the world and then a last 12-month NRR of 113%. We're very proud of the last box on the bottom. This is kind of some of the customer stats around what we do for our customers. We do it with a 95% plus CSAT score, processing over $5 trillion average daily requested -- request served. And then we -- if you look at performance from a business perspective, we outperform our competitors with a 32% faster time -- average time to first bite than other CDN providers.

We play in, as I mentioned, the $22 billion market. We believe it's a large and growing addressable market. And we have a unified platform. So whether we're serving delivery traffic or we're doing security on our network or we're doing compute on our network, it's one network that we support. And we think that having that unified platform makes us better from a technology perspective. It makes our customers have a much better customer experience.

And then we're seeing some pretty good tailwinds with Internet traffic and especially with AI trends that are happening in the industry. I think that the combination of continued traffic growth, more moving like live streaming, streaming events as well as more transactions processed on the Internet as well as kind of the AI tailwinds that we're seeing out there provides a unique opportunity for the edge. We are mission-critical to a lot of our customers. We are very vital for what they do on a day-to-day basis, whether it's their monetization strategy, whether it's their consumer experience or enterprise experience, we are mission-critical to our customers.

And then I think what's really important is that we have multiple levers for continued growth in our business. And then if you look at us versus our competitors, we are a clear market leader with a differentiated technology. We win where performance matters. Our customers choose us because of performance requirements. And so definitely something that we're very proud of. I think I mentioned on the kind of tailwinds that are supporting us. I think we started first with the first box here where there is more traffic growing on the Internet today, greater coverage, a lot of like service affordability out there, 4K TV dominance. And so you start seeing a lot of more access and more pixels kind of going across the Internet.

And then you combine it with like what we see around like peak events, downloads, right? Like you see like big gaming platforms doing downloads that are big massive files, a lot more live events. And then more and more the market and traffic is transitioning from like what we've seen in the past to more like AI-generated content, AI queries, et cetera. And so we think this growth plays in our favor. We think that 2026 -- 2025 traffic growth was in the order of 15.4% year-over-year and we reached almost like 33 exabytes per day. So definitely good tailwinds on the traffic growth and the reasons why traffic is growing on the Internet.

For those who are not as familiar with the story, this will help kind of position with the edge cloud. I mentioned that we are an edge cloud platform company. You see us playing in the middle between the central cloud and the end users. So think of the central cloud as where the hyperscalers play, right? They have big massive data centers. Those big massive data centers are in remote locations where power is cheap and space is cheap. And -- but they're not close to the end users. And so for people to hit the Internet and hit those hyperscaler data centers, they leverage technology that us edge cloud providers provide.

So we started first with edge -- the content delivery network where we cache big files on the edge. And then more and more, you see security moving to the edge where we're the first points of entry to the traffic, and we can block and provide more intelligence to that traffic, right? And so security plays a big role in that. And then more and more compute will happen. So if you look at the central cloud and edge cloud, we're kind of synergistic, like we partner with the central cloud players, the big hyperscalers because those are far remote locations and the customers need a better user experience.

We also help lower cost for our customers, right? Because those customers save on egress traffic that goes to the central cloud. If the central clouds are far away, there's a lot of bandwidth costs that end up happening. And if we're caching the content or we're providing more security and blocking that traffic to even entering the central cloud, we're saving our customers lots of money. So the edge cloud plays this unique role that helps improve the user experience from an end user experience and then it also kind of saves the customer a lot of money from egress traffic.

If you think about what's better done at the edge, now that you see how the edge plays with the central cloud, the first use case of the edge cloud was the content delivery network, right, content and application delivery. That was kind of the first use case that was where a lot of time was spent. Years later, they've realized that, hey, all the traffic is going through the edge cloud. If we can layer in intelligence, and provide security at the edge, that's an even better value proposition. And so more and more companies have moved from just purely content delivery into security. And then I think that with agentic and where things are moving towards, compute will also be done at the edge. And so I do think that it's still very nascent and very early, but it is a good tailwind and another better use of the edge cloud.

And then because you're managing traffic as it comes into the Internet, there's a lot of observability tools that can be used as well. So I think that from a use case perspective, these are the 4 big use cases of the edge. This is how we divide up our business. And then when we disclose our revenues, we disclose it as delivery services, security and then we put compute and observability as other.

The reason why these are really strong use cases for the edge is because speed matters a lot. Customers do not have the patience to wait to load pages, and they don't want to make transactions or make purchases where speed is slow. I think what else matters is that in this world of like real live news updates, think like New York Times and election nights, right? You need very fast like purging technology, which allows more personalized dynamic content being displayed. So these content delivery networks like us, you need really good technology because the content is very dynamic.

In the world of social media, in the world of personalized content across the web, you're going on a shopping site, you're going to get recommendations on what else to buy. And so everyone needs personalized experiences. Having an edge provider who can provide configurability is really important. And then I think that the reason the edge is being used is because of resiliency and mission control. When you have a central cloud that houses all your data center information back there, like if you're under a DDoS attack or you're under like a different event, having multiple POPs at the edge and blocking traffic and providing more resiliency because you're distributing your content across multiple POPs is a much better experience. And so people choose the edge for resiliency and mission control.

And then I talked about enforcement and security, like if you can enforce security at the edge, even better, right? It's a much better experience, you're blocking information or you're letting in the right players. And then I also talked about lower cost. Being at the edge allows a lot of the customers that we have save them from egress traffic. Our footprint today, we have 167 POPs throughout the world, delivering 578 terabits per second. If you compare us versus our competitors, what you will notice is that we have fewer POPs, but much more powerful POPs. And the powerful POPs enables us to have better performance. And it's -- our POPs are very software configurable and very programmable using off-the-shelf products.

And so it is a very much more capital efficient and better way to run the network versus our competitors. We were formed 15 years ago based on a very modern architecture. I think we were founded by a Chief Technology Officer, Artur Bergman, came as the CTO of Wikia. He has always been very focused on the customer experience and on being technology first. As a result of that, we are recognized by analysts and investors as -- our customers as one of the better products out there, right? And so we are constantly listed as a leader in the spaces we play in. We've won Customers' Choice Award 7 years in a row. And so across a different number of categories, we tend to win awards because we do have a higher performance and better product out there. So we are recognized by industry analysts and experts.

When you think about like the -- the revenues that we have, it cuts across the 3 kind of circles that you see here, where network services is 73% of our revenue. That's the content delivery side of the business. That's growing 11% year-over-year. Our security has been kind of the bright spot, 22% of our total revenues. That's growing 47% year-on-year. That's also the fifth consecutive quarter of accelerating revenues in our business. 18 to 24 months ago, we had 1 security product, and now you see the 5 security products we have today. So that's really evolved and definitely helped see continued acceleration across our security products.

And then other is a little bit more nascent. I mentioned compute and observability. That's about 5% of our business, and that's growing the fastest at 67% year-over-year. That continues to also grow on a year-over-year basis. And so we're definitely, for me, continue to invest in our core business, which is network services, but we have growth drivers across security. And then we have kind of areas that we're playing with because in the future, we do think that compute will play a bigger part.

I mentioned some of our growth drivers, but being a platform play is definitely very helpful and nice, like I think starting with content delivery, but then layering in having 5 security products has helped us gain momentum across our business where we are delivering 20% year-over-year growth again. We have accelerated our R&D momentum. I mentioned 18 to 24 months ago, having 1 security product with Al. We now have kind of the full suite of 5 edge security products, launching DDoS, bot management, API security and client site protection. You see across our businesses, we're growing faster than the market in all 3 of our businesses. And you see that because we are doing competitive takeouts with our customers. And so we are winning where performance matters, and we have a better go-to-market sales execution motion than we've had in the past.

And then I think with the other area that we're investing is international markets. I think that if you look at what we've been doing, especially in 2026, we've invested a lot in our APAC region. We have a new leader who's in Singapore. Prior to her joining, we were supporting Asia from our London office, right? And so you can imagine that experience being not as where it should be. And so now having more feet on the ground in the Asia Pacific region, I think that is a definite opportunity to see that. We're investing in POPs internationally. And so in that slide around our POPs, you've seen some purple circles where we're investing in, for example, Latin America this year because World Cup is going on, right? And so like we are continuing to invest internationally.

I went through some of the financial highlights. Here, you see the same numbers kind of repeated. I would say that if you focus on the bottom box because the first 3 we've talked about, our record gross margin last quarter was 65%. And so we had record margins in gross margins there. If you look at what we've done on a last 12-month basis, we've actually had incremental flow-through on a gross margin perspective of 89%. So every dollar of incremental revenue that we've generated, we've flown 89% through to gross margins.

We're working really hard to increase customer commitments. Yes, delivery services is a consumption-based business, but it doesn't mean that we can't have RPO. And so you'll see our RPO growing 63% year-on-year, last quarter at $369 million. And then I think the last one is we had $42 million of last 12-month cash flow positive. If you look at the last 5 quarters, we've really turned a corner. We've had now 5 consecutive quarters of free cash flow generation. Very proud of that. If you look at full year 2025, we have had record gross margins and operating income. So going to this page here, you'll see our gross margins at 61%, really picking up. And then I mentioned last quarter in Q1, we had 65.1% gross margins.

And so definitely very proud of the momentum, not only on the revenue growth that we're seeing, but also on the gross margin flow-through and the gross margin contribution that we are having. And then if you look at the OpEx leverage over time, we're definitely doing that by making sure that we are judicious. We're investing in R&D, we talked about R&D velocity, but yet we were able to still reduce costs and still deliver continued product innovation around security products. We were able to deliver incremental sales with lower sales and marketing expense in 2025. And so very proud of the operating expense leverage we had.

And as a result of this, what you're seeing is the blue and dark blue boxes moving positive, right? We've had a full year in 2025 of operating profits, and we had a full year of free cash flow positivity. And if you look at like the quarterly box, it's 5 consecutive quarters of free cash flow generation, and we have continued kind of operating income momentum across the board. So very proud of what we've done as a company and really like excited about what's to come going forward, especially in the opportunities around traffic, traffic growth, the agentic opportunity, the compute opportunity and the security opportunity in front of us. So with that...

Let's go into the fireside chat. Rich, thank you for giving us that overview in quite a bit of depth. One thing I think that investors really want to understand is just the strength that you've seen within the security business. What's maybe driving that? And what capabilities have you added to allow Fastly to achieve that stronger security growth?

Yes. I would say that security growth would probably be a few factors, right? One is that we talked -- I talked about the product velocity, right? Once you start going from one single security product, which is the web application firewall and going to launch the full suite at 5, right, and getting to parity with your competitors, I think that R&D velocity opens up doors. When you only have one product, you get shut out of RFPs because customers will say, like can I scale with you? And if you only have one product, it's hard to scale with you. So having the 5 products was very key because across like the edge security, now we are at parity with our peers. I think that's number one.

I would say number two is that we really revamped our go-to-market execution, right? Scott Lovett had joined mid-2024. And prior to Scott, we didn't really have a security selling motion. Scott came from Akamai, but he also spent time at Imperva, where he was doing security sales. So he brought in sales leaders who knew how to sell security. Selling security is a very different kind of like motion than selling content delivery. And so having the know-how and then changing comp plans to be able to like do cross-sell opportunities and kickers is really key.

So I think that if you couple product velocity with go-to-market changes, that's kind of the 2 biggest drivers. I would say the other big driver is like the proliferation of like the complexity of traffic over the Internet, right? The complexity is happening, more DDoS attacks, more bot management, like more bots scraping the traffic. And then -- so I think just being -- having the right products at the right time with the right kind of like products is definitely a good tailwind in our favor. So I would say 2 executional one and then a market dynamic has been helpful.

Excellent. Excellent. I mean, in terms of AI, I mean, this has clearly been a top of mind discussion area. Where does Fastly potentially benefit from Agentic AI traffic? And where does that maybe show up in the P&L? Like which business units do you typically see that in?

Yes. I mean I'd start first at the highest level, which is like how does agentic impact traffic flows across the Internet across the edge. I would say agentic use cases are still early, but I do think that it's going to increase traffic on the Internet in general. It won't increase on a gigabyte basis because AI traffic is going to probably be small bits compared to like streaming or video. But on a request per second basis, on a like number of times it's getting pinging the Internet, it's going to be massive. The growth is going to be so much faster.

And I think that, that's going to be a big. Now how does that impact our revenue lines? Starting first with security, that's where we're seeing the majority of the impact from AI right now. With the proliferation of AI, like you're seeing more DDoS attacks, more bot management. Like if you're a customer and you're creating content, so let's say you're in New York Times, if AI traffic is scraping your content, like you're losing eyeballs, which means less ad revenues or less subscription revenues. So your monetization model is kind of at risk.

So there's definitely a need for like bot management, like what are good bots? What are bad bots? Fastly, help me block the bad bots who are scraping my content, but not paying me for it. So with Fastly, we've adopted what we call -- it's the RSL, the real simple licensing standard, and we're actually helping drive a lot of that, too. And so I think we're seeing the initial kind of on the security side, definitely more of the like AI traffic and how it kind of provides tailwinds.

I do think that compute is very early days. I think that right now, a lot of the AI is more inference. Inference is going back to the central cloud. Like the hyperscalers are building big massive GPU data centers. And a lot of that is actually more about information gathering and information gathering does not require as much workload from the edge. But as you move to agentic, you get -- go away from information gathering and you go towards execution. And when you go through execution, there's going to be orchestration that is required, right? Like you're going to need to have like perhaps 10 agents or 5 agents working on your behalf. These agents will sit in different hyperscalers in different locations. And orchestrating that work has to be done in a location.

And I think the edge is perfectly situated to really orchestrate that work across agentic, right? It's still early days, like how many companies really have agentic apps out there, right? But I do think that when you start saying, "hey, tell me what to do in New York for 2 days" and you're doing information gathering, that's not orchestration. That's just information gathering, that's the language learning models, the frontier models. But when you get to like, "hey, work with a United agent to book my ticket", "I work with an Uber agent to pick me up", like there's going to be agents working on your behalf and doing execution. Well, that orchestration needs to happen somewhere. And I believe that it should happen at the edge. I think the edge is kind of the right place to kind of do it because you need to be efficient about how traffic is kind of moving around the Internet.

And then I think on the last piece, we have network services, like how does agentic impact our network services revenue. I think that right now, like a lot of us in the space, we price on a per gig basis. And I do think that there's opportunities to think through how we think about pricing and how we think about like the impacts there. Is it more on a request per second basis? Is it -- how do we kind of do that? I think overall, network traffic is going to increase because of agentic, but how do we take advantage of the opportunity? And I think that's still kind of -- we're not there yet.

That makes a ton of sense. I mean, I think around the AI topic, the other major concern here is what's going to happen with Mythos in particular. And there seems to be a lot of talk about significant increases in known vulnerabilities that are going to be out there. Not all of those vulnerabilities can be patched. And so what role can your WAF products play in maybe that opportunity?

Yes. So I think that we are big believers on like even like AI and how we can use AI to identify vulnerabilities. I do think that we've been very good about making sure that we have internal technology to like identify correlation and traffic flows and figure out like, which ones are bad. But I think that there's opportunity to continue to leverage AI in that front. And so like Mythos would be a great example of like how do we leverage AI to really identify vulnerabilities ahead of time.

But you have to kind of couple with like the know-how that we also have in seeing traffic flows. I think that because we sit at the edge and we see a lot of traffic before it even hits like other places. We're in a very good position to combine our know-how with kind of like the AI and learning models to really identify those vulnerabilities for our customers. And that's part of the reason why our security products continue to win awards, because we're kind of taking the best of both, like we're seeing the traffic upfront, and we're combining our know-how with kind of the tools that are out there.

Excellent. Excellent. Just one last one. So do you need to make more incremental investments in compute or infrastructure, particularly on the GPU capability side? And are there opportunities to partner with some of the larger frontier models that are out there?

Good question. I think we get this a lot. In terms of like how are we doing compute today, right? Compute is still a pretty nascent market for us. It's still -- I think it's like I showed you the compute -- our other number. We are doing a lot of that compute with our existing CPUs, right? So we have a bunch of servers that are sitting in our POPs. They have CPU capacity, and we're able to process it through the CPUs that we have.

I think that we are continuing to co-innovate with our customers. So that co-innovation means like what do you need from a customer perspective? Like how do we solve that problem? And so we're working with them on like how do we solve that best. And we find that right now, we continue to solve their problems through existing compute resources. We are ready to do GPUs if our customers need it, but we're not in a position to like want to put GPUs in the edge if there's no need for it, right? Because once you start deploying it, one, they depreciate pretty quickly, especially with the iterations that are kind of launching. But if they sit idle, like that's a gross margin impact. And so I think that co-innovation with our customers is actually really key because that co-innovation allows us to have leading views on that.

Now the second part of your question is like, are there opportunities to kind of partner with the frontier models? And I think absolutely, right? I think that we welcome and we work with the different players out there. And depending on the use cases that they see, we're always working with a lot of players out there across all different types, including the frontier models.

Excellent. Excellent. We can take one question from the audience, and then we'll break for the breakout session. Let's -- go ahead.

Yes. So the question in the room was that there was an 11% growth rate for delivery services revenue. As we see the orchestration layer happening on agentic AI, like where should we see that? Would we see it on the 11% pickup on delivery services?

I think the orchestration layer ends up happening across a number of areas. I do think that like we should see it on the compute side, right? On the compute side, we're going to need to like be able to orchestrate and do computations around like, hey, this person is asking me these things. These are the 3 criteria. I need to work with like 10 different agents to go out there, but you need kind of like that compute to happen so they can send out instructions. Now I think that every compute needs to have some storage and some caching information. And so there might be some pickup in the delivery services as well. I do think that having multiple lines of businesses enables us to play together in that orchestration layer that needs to happen. But it's still early days, I don't want to get people too excited about it, but I do think that from agentic world, it's going to change the way the edge plays, and we need to be ready for that.

Perfect. Perfect. We're going to take a quick 5-minute recess and then we'll continue the discussion.

Good afternoon. My name is Carmen, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fastly First Quarter 2026 Earnings Conference Call. [Operator Instructions] Thank you.

And I would like to turn the conference over to Vern Essi, Investor Relations at Fastly. Please go ahead.

Thank you, and welcome, everyone, to our first 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 supplements all of which are furnished in our 8-K filing today can be found in the Investor Relations portion of Fastly 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 first quarter 2026 earnings 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. 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 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 second quarter, we will be attending the William Blair 46th Annual Growth Stock Conference in Chicago on June 2 and the D.A. Davidson 2026 Technology and Consumer Conference in Nashville on June 11, and also mark your calendars for our Investor Day, taking place on September 23 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. We had a great start to the year at Fastly. In Q1, we delivered $173 million in revenue, up 20% year-over-year and near the high end of our guidance range. Fastly's value proposition is resonating with our customers, driving strong performance in growth in security and compute. Our focus on traffic engineering and platform efficiency continues to deliver results with another quarter of record gross margins.

Security growth accelerated to 47% year-over-year and represented 22% of our total revenue. Our industry-leading WAF continues to perform well, and we are also seeing increasing momentum across our portfolio. In fact, among instances of security products sold to new customers in the quarter, almost half were of our newer products, DDoS protection, Bot Management and API Discovery and inventory. We believe these are clear signals that our broader security suite is opening opportunities for wallet share expansion with existing customers while attracting new customers to the Fastly platform.

Increased demand for our Compute offering drove the other category up 67% year-over-year, marking our largest quarter-on-quarter revenue step-up ever in this category. We expect continued momentum in compute as customers address increasingly demanding edge workloads and prove out high-value AI use cases.

On a combined basis, security and other saw impressive growth of 50% year-over-year, and we anticipate these product lines will exceed the $200 million annual run rate milestone by late 2026. In Network Services, our platform's superior performance, reliability and value are driving continued share gains and delivered 11% year-over-year growth in the quarter, roughly double the market growth rate. We believe the Fastly platform's appeal is fueling momentum across the portfolio as customers increasingly prioritize secure, reliable and innovative solutions where performance matters.

Our go-to-market execution continues to deliver strong results, including growth in new customers across key verticals in Q1. At the same time, our continued expansion within our existing base remains robust and drove LTM NRR to 113%, as Rich will discuss later in the call. We also saw broad-based strength year-over-year across all geographies. We are continuing our investment in APJ, highlighted by the recent opening of our new office in Singapore. Following key leadership hires in Q1, we remain committed to scaling our regional presence with additional strategic talent this year.

To further accelerate the momentum of our go-to-market transformation, we hired Joan Jenkins as our new Chief Marketing Officer. Joan brings over 2 decades of experience leading global marketing organizations at world-class companies, including Informatica, Druva, Oracle and Cisco. Joan has a proven track record of building high-performing teams, driving category leadership and importantly, strengthening the AI narrative to drive growth. Joan will be instrumental in bringing the Fastly platform story to a global audience and we are excited to have her on the leadership team.

Turning to AI. We see the rise of autonomous agents as a long-term growth driver. The edge has become critical for scaling and securing AI across multi-cloud environments. Fastly's flexible programmable platform is built for this moment. For our customers, traffic generally passes through the Fastly platform regardless of where agents are hosted. We are co-innovating with them to secure and scale their AI use cases and helping them manage and optimize a massive new wave of automated traffic. AI Bot Management is an early example of this. Most importantly, this strategy is working. It is actively building our pipeline. As a result, we believe AI is a tailwind for our business.

Now let me shift gears and provide details on some outstanding customer wins in Q1, including several 7-figure deals. We closed a multimillion-dollar ARR full platform win to support a large social media platforms API and Video-on-Demand operations. By meeting rigorous availability and security standards, we mitigated downtime and data breach risk and enable 24/7 continuity for millions of users. To enhance user trust, a privacy-first browser customer leveraged our platform to power a native in-browser VPN. The Fastly platform enabled them to fulfill their core privacy promise critical to their brand at global scale and support long-term user retention.

A global social media corporation chose fastly in a critical cross-sell security win. After a high-profile industry outage, the customer turned to Fastly an established and reliable partner to help secure its global API traffic. By adding Fastly, the customer reduced their infrastructure risk, improve reliability and supported uninterrupted platform availability. Lastly, a multinational tech company chose Fastly for our network, security and privacy offerings to accelerate and secure their critical workloads.

We are also seeing momentum in AI Bot Management wins in conjunction with our leading NG WAF offering, including an enterprise cloud storage provider replaced a fragmented legacy setup by consolidating app security and delivery on the Fastly platform. deploying our Next-Gen WAF and advanced bot management provided robust, scalable security compliance without sacrificing performance. Facing daily malicious AI bot traffic, a long-standing media customer added Content Guard, a new product in the Fastly security portfolio introduced this quarter to protect their intellectual property without compromising the reader experience.

A leading digital payment conglomerate expanded its Fastly footprint by adding 10 new products and services on our platform. With this expansion, they maximize network availability, safeguarded revenue and enabled 24/7 availability against cyber incidents. We were especially pleased to see a partner-enabled deal with a Japanese financial services provider, working through a regional partner, offering 24/7 local support, this customer chose the Fastly platform to enable and secure a critical international expansion. Through the adoption of Fastly's Security and Network Services offerings, the customer was able to build a highly reliable, compliant infrastructure for its regulated business-critical payment systems. This is an example of our international go-to-market expansion at work.

As these wins illustrate, our flexible platform and continuous innovation uniquely positioned Fastly to capture growing AI demand, and our expanded security portfolio directly drives customer wins and growth. Highlights of our expanding security portfolio from Q1 include Content Guard managing the exploding AI bot landscape requires more than just a simple switch. It requires continuous intelligence. We launched Content Guard to give publishers precise control over access to their content. Leveraging Fastly's pre-cash inspection, customers can stop unauthorized AI agents without sacrificing the speed or performance of their authorized traffic. This unmatched visibility provides the critical data our customers need to secure and monetize their intellectual property.

API Security, as AI accelerates code delivery, it creates security blind spots through shadow APIs. We have addressed this customer need by enriching our web application and API protection portfolio enabling enhanced API Discovery and inventory tools, automated API cataloging gives enterprises continuous at-scale visibility to secure their ecosystems without slowing developer velocity.

Fastly Agent Toolkit. We released a toolkit that equips AI coding agents with Fastly specific skills. This toolkit accelerates the customer development life cycle, enabling customers to build, deploy and secure edge services faster and with expert level precision, ultimately driving quicker time to value on the Fastly platform.

We also enhanced our Compute & Security offerings by adding support for additional programming languages. This completes the core suite of languages requested by our enterprise customers, extending our premium security layer to a wider set of edge applications.

Given these highlights, we are proud that Fastly was named one of only 2 leaders in The Forrester Wave: Edge Development Platforms. Fastly also earned a perfect score for innovation and was the only vendor to receive a top 5 out of 5 rating for workload and network isolation as well as observability. This recognition underscores our platform's differentiated strength, built-in resilience and the observable actionable insights we deliver to customers. Additionally, Fastly was the only company to receive a halo designation, highlighting superior customer feedback and our continued commitment to delivering business value for our customers.

Next month marks my first year as CEO of Fastly, and I'm incredibly proud of what we have accomplished. We have a leadership team in place that is deeply committed to our core mission, making the Internet a better place where all experiences are fast, safe and engaging. We believe our platform is the gold standard for flexibility and resilience without compromising performance. We see our story resonating with the market, and we are delivering tangible value through our expanded portfolio and relentless customer-centric approach. As we scale, Fastly is positioned to drive better business outcomes for our customers and long-term value for our shareholders.

Rich will now walk through our Q1 financial results and guidance in more detail. Rich, over to you.

Thank you, Kip, and thank you, everyone, for joining us today. I'd like to remind you that unless otherwise stated, all financial results in my discussion are non-GAAP based. Revenue for the first quarter increased 20% year-over-year to $173 million coming in at the high end of our guidance range of $168 million to $174 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 with our expanded product platform, highlighted by strong security momentum.

In the first quarter, Network Services revenue of $126.2 million grew 11% year-over-year. Our typically flat Q1 revenue tonality was amplified this year by a record break in Q4. Despite the seasonality and strong Q4 results, we delivered quarter-over-quarter sequential revenue improvement in Q1. Security represented 22% of revenue or $38.8 million, both record levels. This represented growth of 47% year-over-year, our fourth consecutive quarter of accelerating security revenues and 9% sequentially. This was due to the expansion of our security product portfolio, which has resulted in larger 7-figure wins in the first quarter. Additionally, we are seeing new security wins expanding beyond our WAF product and into DDoS protection, Bot Management and API Discovery inventory. This sets us up very well for the long-term growth opportunities with new and existing customers.

Our other products revenue of $8 million grew 67% year-over-year, driven primarily by sales of our compute products. As Kip mentioned, other revenue grew a record [ $1.6 million ] quarter-over-quarter as we are seeing momentum in our compute revenue driven by new customer requirements in AI and related areas. In the first quarter, our top 10 customers represented 34% of revenue and grew 25% year-over-year. Revenue from customers outside our top 10 grew 17% year-over-year. Also, no single customer accounted for more than 10% of revenue in the first quarter. No affiliated customers that are business units of a single company generated more than 10% of the company's revenue for the quarter.

As we mentioned in our previous earnings call, we have made changes to our customer metrics. Given that typically over 90% of our revenue has historically been generated by our large customers, formerly referred to as enterprise customers in prior reporting periods, we believe it is a more meaningful metric to track our customer acquisition compared to total customers. Thus, as previously mentioned, starting this quarter, we will no longer disclose our total customer count on a go-forward basis. Our large customer account, which represents customers with more than $100,000 in annualized revenue in the quarter of 634 customers.

Our trailing 12-month net retention rate was 113%, up from 10% in the prior quarter and up from 100% 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. Note that the LTM NRR is shifting from primarily being driven by our largest customers to now extending into our mid-market customers. We exited the first quarter with record RPO of $369 million, growing 63% year-over-year. This is our fourth consecutive quarter of accelerating RPO. The current portion of RPO was 75% of total RPO and grew 77% 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 first quarter. Our gross margin was 65.1% in the first quarter, a record high for Fastly. Gross margin was 110 basis points above our guidance midpoint of 64% and up 780 basis points from 57.3% in Q1 of 2025. This outperformance was primarily due to a 190 basis point onetime benefit from a change in accounting policy regarding server useful device to align with industry standards. Our incremental gross margin flow through on a trailing 12-month basis increased to 89% in the first quarter, up from 54% a year ago.

Operating expenses were $93.5 million in the first quarter. OpEx was in line with our expectations for increased expense levels as we encounter a seasonal payroll impact in the first half of the calendar year. We continue to execute with OpEx spend discipline while balancing our growth investments in headcount. We had operating income of $19.1 million in the first quarter, coming in above our operating income guidance range of $14 million to $18 million. We intend to continue to drive leverage in our operating results as we scale our revenue. This is demonstrated by our operating margin expanding from negative 4% to positive 11% in the first quarter, an expansion of approximately 1,500 basis points year-over-year. This is underscored by our incremental operating margin flow through of 68% of revenue on a trailing 12-month basis, significantly above our long-term target of 25% to 40%.

In the first quarter, we reported net profit of $22.9 million or $0.13 per diluted share compared to a net loss of $6.6 million or negative $0.05 per diluted share in Q1 of 2025. Our adjusted EBITDA was $29.5 million or 17% of revenues in the first quarter compared to $7.8 million or 5% of revenues in the first quarter of 2025.

Turning to the balance sheet. We ended the quarter with approximately $330 million in cash, cash equivalents, marketable securities and investments, including those classified as a long term, a sequential decrease of $31 million over Q4 2025. This was primarily driven by the retirement of our current portion of the long-term debt totaling $39 million that became due in March 2026.

Our cash flow from operations was positive $28.9 million in the first quarter compared to positive $17.3 million in Q1 2025. Our free cash flow for the first quarter was positive $4.1 million, representing a $4.1 million decrease from $8.2 million in the Q1 2025 quarter. This was primarily due to a year-over-year increase in infrastructure spend of $18.4 million offsetting an operating cash flow increase of $11.6 million.

Moving to our CapEx plans and strategy. Last quarter, we shared that we will focus only on infrastructure capital expenditures and remove capitalized internal use software which is not a meaningful indicator of our capital spend. We believe this change more accurately represents the inherent capital costs to growing our business and more aligns reporting to our peers. Our infrastructure capital expenditures were approximately 12% of revenues in the first quarter. As we highlighted in our last earnings call, approximately $10 million in CapEx was pushed to 2026. This delay in CapEx resulted in our Q1 infrastructure CapEx spend coming in at the high end of our 10% to 12% full year expectation. Normalizing this timing impact, infrastructure CapEx would have been 6% of revenue in the first quarter.

I will now discuss our outlook for the second 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, we saw revenue strength from successful upsell and cross-sell motions highlighted by new customer velocity in our bookings across the platform. Additionally, our newer security features are proving to be strong vectors into existing and new customer wallet share, supported by Compute and Network Services growth.

In the second quarter, we expect revenue in the range of $170 million to $176 million, representing 16% annual growth at the midpoint. We anticipate our gross margins for the second quarter will be 64%, plus or minus 50 basis points. As a reminder, our gross margin performance is dependent upon incremental revenue increases or declines as demonstrated by our improving gross margin through 2025 on accelerating revenue growth. It is also dependent on our infrastructure levels, which will serve as a modest headwind in 2026 as we invest in our platform capacity.

For the second quarter, we expect a non-GAAP operating profit of $12 million to $16 million, reflecting an operating margin of 8% at the midpoint. We expect non-GAAP net earnings per diluted share of $0.05 to $0.08.

For calendar year 2026, we are raising our revenue guidance to a range of $710 million to $725 million, reflecting annual growth of 15% at the midpoint. We anticipate our 2026 gross margins will be 64%, plus or minus, 50 basis points. We are increasing our non-GAAP operating profit expectations to a range of $58 million to $68 million, reflecting an operating margin of 9% 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 $0.27 to $0.33.

We are closely monitoring 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 providers. 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 our capacity to meet our growth objectives. As demonstrated in Q1, we believe the spend will be front loaded to ensure we have adequate equipment given recent supply chain constraints. We are actively monitoring our capacity plans relative to demand in this dynamic environment and may increase our capital infrastructure spend in the back half of 2026. As a result, we maintain our 2026 free cash flow guidance in the range of $40 million to $50 million.

Before we open the line for questions, we would like to thank you for your interest and your support in Fastly. Operator?

[Operator Instructions] It comes from Jackson Ader with KeyBanc Capital Markets.

First one is on Network Services. It came in kind of light of our, and I think consensus expectations. So just curious what was the driver there to the pretty big material slowdown in the year-over-year growth? And then also, like what role -- can we get an update on what role agentic use of the Internet is playing in your kind of core Network Services and maybe even the attach rates for security? And then I have a quick follow-up.

I'll take the first question, then Kip can answer the second part of it. Remind that Q4 was particularly strong. We had particular strength in network services in Q4 for two primary reasons, we had a gaming download that was overperformance where we did see record traffic in Q4. And then we also have a seasonally strong e-commerce online holiday shopping. And so despite that strength of Q4, we did see a little bit of a dip, but it's not related to pricing. It's really just the seasonality that we would normally see in the business.

Yes. I would just add, we've not seen a material change in the pricing environment. And I think in Q4, we mentioned that we saw a stronger-than-expected seasonality. And of course, coming off of that, you might expect a little bit more of a drop out of that seasonality because after all the seasons do change.

On agentic, we are seeing tailwinds across different parts of our business. Certainly, in Network Services, there's a volume component that we believe is being driven by agentic traffic. In terms of security attach, frankly, it may be more pronounced in the security part of our business as we have customers looking to protect AI workloads and provide privacy capabilities to agentic workloads and AI cloud compute use cases that require privacy. So we are seeing significant security there, security uplift that I think we could attribute to those trends, likewise on compute, so we see kind of an increase in volume over time on Network Services, but more specific attach in some of those other businesses.

Okay. Okay. Cool. And then you guys mentioned pricing a couple of times. I know that some competitors in the Network Services market are explicitly raising prices because of the memory component prices that are impacting you and others. I'm just curious, what is your current strategy on maybe passing some of those component pricing on to your customers or whether you're taking this as an opportunity to be a little strategic on price?

Sure, Jackson. From a Q1 perspective, pricing [ erosion ] was very similar to Q4. I think in the last earnings call, I mentioned the Q4 kind of price erosion in the mid-single digits. We did see a very similar mid-single digits in Q1. I think a good reminder is that price erosion is a year-over-year metric. And as customers spend more on our platform and as they increase the volumes, they're actually unlocking additional volume discounts and even the cross-selling. So we're actually going to naturally see some of the price erosion.

There's also another reminder is that this only applies to our Network Services business. That phenomenon is not on our security or our compute business. And so we continue to focus on the value we create for our customers and the pricing discipline reflects this.

With regard to what Akamai is doing and then what we're doing, we feel it was the right thing to do was to maintain the pricing that we negotiated with our customers, and we're honoring the contracts that we have with our customers. And as they continue to unlock those volume discounts, we are going to continue to honor that. We think it's the right thing to do from a customer relationship perspective.

Yes, I would just add maybe two things. First of all, of course, we see pricing changes when we experience renewals with our customers, not on a continuous basis. So there is some lag in seeing changes in market pricing just driven by when customers renew, and that is the time when prices are negotiated or potentially change, not generally mid-contract. So if you think about actions that others have said they're taking in the market starting in April, we're very closely monitoring that. We've not seen a change in the pricing environment yet. But it's conceivable that those changes are simply going to take a few more months to filter through the market as others have renewals and as our customers' renewals come up as well.

The other thing I'll add, we said and I'll say again that we believe that we have a more efficient platform. It's a more modern platform. And I think if you look at the capital intensity of our business compared with some of the other similar platforms out there, you can see that it is more efficient. That does, in our view, give us a potential sort of structural advantage in an environment with rising component costs. They certainly affect us, but it appears likely that may affect us less than our competitors. And so we may not have as many cost increases that we need to pass through to customers.

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

Great. Two quick ones. What is the percentage of your revenue that has revenue commitments with it now? Is the first question. And the second one, your network is deployed largely in [indiscernible] and DLR data centers or something similar with power and connectivity. Is there a reason that you could not facilitate distributed compute nodes to GPUs, combined with your network delivery out of those? And is that something you're pursuing? And what would it take to have a product like that?

Yes, Frank, I'll take the first one, and I'll let Kip take the second one. In terms of the kind of revenue commitment, I think the best number to really point you to is the current portion of RPO. So we mentioned on the earnings call that we had RPO of $369 million, which grew 63% year-on-year. The current portion represents the next 12-month component of that. That was 75% of the total that was -- so taking 75% of that, it's $275 million as a next 12-month commit. And that actually, if you look at current RPO on a year-over-year basis, our current RPO is growing 77% year-on-year.

So to your question on GPUs and the opportunity that our global network presents there. We're seeing a very close contact with component vendors, including in the GPU space and looking strategically at that market. The observation I'd make is our network, most of our peers' networks is highly distributed around the world. And we don't concentrate as much capacity and compute power in a single location is, for example, a centralized [ cloud ] does. And when training was the primary driver of GPU demand, that meant that with training being extremely large scale, that meant that our network was not well positioned to drive training and therefore, GPU-based demand.

As we are seeing, and I think many in the industry are seeing the workloads and the focus shift from training to optimal inference and how different chip architectures can help with a very high performance and highly efficient inferencing, that may very well open up a bigger opportunity for us given the way our network is built and given how software defined it is. So that is yes, absolutely something that we're tracking very closely.

Our next question comes from the line of Charlie Zhou with Evercore.

This is Charlie from Peter Levine from Evercore. It was great to see the step-up in compute revenue this quarter. Rich, could you maybe help us frame how we should best think about the trajectory of that business from here? Particularly what needs to happen for compute to become a more meaningful contributor to overall growth? And Kip, maybe could you walk us through some of the use cases very fastly is seeing the strongest customer interest for computer today? How do you expect AI edge inference to evolve over the, let's say, next 12 to 18 months?

Sure. Thank you for the question. I think from a compute perspective, we did report $8 million in our other bucket, which was a nice kind of 67% year-over-year growth in our other business. I think when we think about compute, that's a good business to -- and then we're co-innovating with our customer base right now on agentic and AI and what we're doing there. I do think that as the agentic kind of market really starts taking off and maturing. Those co-innovations that we're doing become like much better and real products that we will go out to market with. So I think for now, from a co-innovation perspective, we are working with some of our best customers on the biggest and hardest opportunities and problems. And I think those are really unique opportunities for Fastly in that space.

Yes. I would add just to echo Rich's comment, I mean we've definitely seen an uptick in customers' interest in additional optimizations and features in our compute platform, specifically related to [ interbility ] with LLM so that they can drive some of those workloads from the edge. And as Rich described, we're actively working with them to optimize and continue to enhance the platform. So I think the edge compute opportunity is a large opportunity overall and one that we're certainly well positioned to garner a good share of.

Our next question comes from the line of James Fish with Piper Sandler.

Just curious what you guys are seeing at this point from some of the competitor exits the Edgio side of things. in terms of traffic and how that's kind of rolling through? And is it still that roughly 90% of the time you guys are replacing some of those legacy CDN providers more incumbents like Akamai.

Yes, James, thanks for the question. I think that we have lapped go probably for about 2 to 3 quarters now in terms of that opportunity. We are -- what we are doing on the network services, I think, as Kip mentioned on the earnings call, we are growing almost 2x the market. And the way we're doing that is increasing share with existing customers. So we continue to really support them and increase volumes with our existing customers. But we also do have takeout campaigns. And we've been pretty good about doing that where we go out there, sell the value, which is we win where performance matters, where customers care really about speed, reliability, security in their network. And so that's probably more the last 2, 3 quarters in terms of being able to kind of beat the growth rate of the market is doing those takeouts versus our competitors versus the ones that went out the business, which we lacked 2 to 3 quarters ago.

Yes. I mean at the end of the day, those guys are seeing renewals that kind of shift over and mix shift anyways. But my follow-up question was more around the emergence of entropic methos? And how do you see the value of your portfolio in security changing with some of the advancements there.

No, it's a great question. We believe that the threat environment is only becoming more dynamic and more challenging for our customers. As these technologies come out, they could be quite disruptive on the security landscape. So we're seeing actually more interest in our security products, not -- to be clear, not less. I think there's an interesting market reaction when Mythos was first announced. We actively use AI technologies in our security work. So we believe that we have a modern approach there that's well equipped to respond to these evolving threats. And we see more and more customers seeing value in products like web application firewall because as the velocity of threats increases, they can't patch all of their systems in time.

So having something like web application firewall that can be patched quickly and that can be managed by a company like Fastly, who sees the global threat landscape in real time is very attractive in terms of reducing their time to protect their workloads. So we think it's an evolution of the security space that makes perhaps platforms like ours even more important.

Our next question comes from the line of Rudy Kessinger with D.A. Davidson.

It's been a lot of noise and better questions around traffic. Could you help us just maybe break it down a bit further or provide more color. When you look at the year-over-year growth and the traffic on your network in Q1, what percent of that was driven by AI chatbots and agentic traffic?

I don't know that I have a robust number on exactly how to break that traffic out for you. I mean what we have seen is that, that traffic is growing faster than human browsing traffic. So we see it becoming a greater share of traffic over time. But I'm looking at -- I don't think Rich or I have like a percentage or a number that we could share on this call.

Okay. Fair enough. And then on security, really another really strong step-up in the revenue on a quarter-over-quarter basis and the year-over-year growth acceleration. Were there any large deals in that in Q1 that contributed to that, that we should be mindful of, similar to Q3 last year, I believe it was? Or was that pretty broad based?

Yes. Security this quarter was more broad-based. I would say that we did not highlight it because it's multiple customers that we won security. I would say that compared to Q3, where we mentioned we had one kind of big customer deal. Here, I think we mentioned multiple 7-figure deals that we closed in the quarter that involve security. Beyond just those three, we also had a number of smaller ones that are also using security. I think as we see a genetic traffic increase, our customers are getting more focused on the use of security and the use of compute on our platform. And so it's for us, we're seeing it much more broad-based than we did see in Q3.

I mean, the one thing I'll mention before we move on to the questions. Another characteristic, and I think we talked about this a little bit in the earnings script is we're seeing broader interest across our expanded security portfolio. So there are different ways to quantify it. But our newer products are starting to perform very well alongside the Next-Gen WAF, which obviously continues to perform well. So from a revenue concentration perspective, we saw a lot of different sized deals during the quarter. I would say, from a product diversification perspective, we saw broader interest and adoption across our portfolio, which is exactly our strategy.

It comes from the line of Jonathan Ho with William Blair.

I wanted to maybe start out with the hiring of June and the potential opportunity that you see in terms of the CMO role and maybe what the biggest opportunity could be for the business to accelerate just given the hiring there?

No, absolutely. We see a big opportunity there. We're proud of the efforts that we've made in marketing, but really look forward to, Joan, helping us take those to the next level, especially as we reach more markets around the world. I think there's a significant opportunity to better position the value of our platform and of our services with specific buyers and specific verticals. And I think there's also an opportunity to build awareness and particularly APJ, but other markets where we believe that we're underpenetrated from a market perspective.

And I just obviously very impressed with Joan's background, and she has a very systematic and scalable and repeatable approach to marketing. And I think that's going to serve us well, especially as we work to expand our brand recognition to include, but be a lot more than our world-class network service and delivery products, but really is a first-class security and edge compute brand.

I think the one thing I would add to that is that I think we were founded by technologists. We've always been [indiscernible] technology first company, and I think our brand really resonates really well with a lot of technologists who are so deep in the Edge platform. I think bringing Joan brings this level of, hey, how do we speak about the performance that we have and the technological capabilities we have beyond just a technologist organization. And I think that's pretty exciting to me because being able to appeal to a broader audience beyond just technologies is very important.

Got it. Got it. And just in terms of a follow-up, I mean, just given the strength in your security business this quarter, and what's -- can you help us understand what's maybe driven the strong uptake and what inning we're in, particularly given how early agentic rollout is around some of these use cases that you mentioned?

Yes. I mean, a great question what inning we're in. I'm not sure I know how to quantify that. But what I can say is we've had a few different things come together to drive that growth higher. As Rich mentioned, one was new deals and some significant new deals in the quarter. We've also had continued robust expansion of some of the deals we've won in the last several quarters. And so we continue to see growing volume and growing adoption.

As I mentioned earlier, another thing that's happening is over the last 5 or 6 quarters, we've dramatically expanded our security portfolio, essentially from what was really one product, a phenomenal product in our Next-Gen WAF, but nonetheless, one product to include 5 or 6 very solid products that solve important business problems for our customers. So I think another thing that's sort of compounding into that growth is us being able to land more customers with that broader portfolio and having existing customers adopt more of the portfolio.

I think it's hard to quantify, but AI, I think, is a driver here. We have seen increased interest in our privacy products that are part of our security portfolio and also in our API governance products, which includes our API Discovery and [ schema ] enforcement products. and that appears in many cases, to be driven by AI use cases. And so we'll continue to monitor that. But as I said earlier, we see some significant relevance with aspects of our security product and important AI use cases.

Yes. The one quantification area I would make try to chime in with is that if you think about the midpoint of our guide for the full year 2026, look at $93.5 million increase on the incremental revenue perspective, if you look at where that incremental revenue is coming from based on the growth rates of the various businesses, more than half of our incremental revenues will actually come from security and other, which I'm very positive and bullish on, right? I think that those are areas that we're investing in, those are areas that we think create the biggest opportunities for Fast way, and you can see that reflected in our growth rate, and you'll see that reflected in incremental revenue year-on-year for 2026.

It comes from the line of Jeff Van Rhee with Craig-Hallum Capital Group.

A few for me. First, on the network side, I think you said last quarter bit growth was in the mid-20s. Just wanted to confirm it's sort of still in that range. And then what are the assumptions implicit in the annual outlook?

Yes. So Network Services, we've talked about traffic growth kind of being in the mid-20s. And then we talked about kind of the mid-single-digit kind of price compression. Nothing right now is really changing that. I think that from a prudence perspective, we are seeing kind of still mid-double-digit kind of traffic growth rates and then that's offset by price kind of erosion that we see in the mid-single digits. When we see the contracts coming up for renewal from a prudence perspective, we do still layer in expectations of both volume discounts that our customers start unlocking plus some price discounting that we do give. And so from a modeling perspective, we are still kind of doing the low double-digit kind of renewal assumption, which is again prudent thing to do, the environment we're in.

Yes, agreed. And that's helpful. And on the CapEx side, just like-for-like on hardware, what is the assumption in terms of increased prices on the hardware built into your CapEx outlook?

Yes. So basically, from a hardware perspective, we guided 10% to 12% of revenues. That implies roughly a $70 million to $80 million infrastructure CapEx spend for the full year, we are front-loading that spend. So the majority of that infrastructure CapEx will come in Q1 and Q2. We have placed all the server orders already from an ordering perspective for the year. And as a matter of fact, the server orders we've already received it in Q1. One of the things you may notice in our financial statements is that you'll see a big pickup in [ AP ]. The orders that we placed arrived in Q1, and we have not yet made payment. They arrived over the last kind of 2, 3 weeks in the quarter. And so that's a normal thing. And those prices have been locked in, we've already received the equipment. And so we're good to go on the hardware side. We did see the price increase, I mean, in some of the areas we did see increases the next 2 to 3x, especially when it comes to memory pricing.

Yes. Okay. And then just last, in terms of the high-level revenue guide, can you help us just in terms of what you're thinking network versus security, what's implicit in that annual -- terms of growth rates for those subsegments? And if you don't want to get too precise, even just some ranges would be helpful.

Yes. From a business-by-business outlook, we think Network Services is probably like 6% -- 5% to 6% market grower. For us, I think that from a growth rate perspective, we could be anywhere between 9% to 11% kind of year-on-year growth in Network Services. I think from a Security perspective, we should continue to see growth in this area. I think that it wouldn't be unheard of to be in the kind of 25% to 30% kind of year-on-year growth perspective, especially after delivering a 47% quarter in Q1. And then the other is just kind of the delta between what we've guided for the full year unless those two growth rates.

It comes from Paramveer Singh with Oppenheimer.

I actually had a couple. First, I really appreciate the insight you've shared so far on the agentic AI side and some of the products that you're bringing on the security side. Now in that vein, when you talk to your customer base, what do they feel is missing so far either from a security or a compute perspective, that should help them deploy and manage the agentic AI platform. And how would you price [indiscernible] these incremental products versus how you're pricing the current platform to the customer base? And then I have a follow-up.

That's a great question. A question I think a lot of people in the industry have. What we're seeing is with enterprises, it's relatively early days in terms of agentic adoption. Many of them are seriously looking at how their processes evolve to embrace genetic AI and get the full capabilities out of it. We've certainly seen interest, as I said before, in the security area. If they have agentic coding tools, writing code and executing it, how can they perhaps use API Discovery and scheme enforcement to make sure that they're comfortable with what that code is doing to other systems. I mentioned the privacy aspect. We've had a lot of interest in that.

But I would characterize our work with customers is relatively early for the majority of enterprises. And that's why we talked about the design partner program where we're working very closely with those customers to make sure that we meet their needs. In terms of specific products and pricing, it's probably premature to comment on it, certainly not in this forum at this time as we continue to develop those products and work with our customers and assess the value creation potential.

Understood. That's really helpful. Maybe one for Rich. If I'm not mistaken, you still have some converts at 7.75%, that's a pretty high interest rate. How are you thinking about kind of rejiggering your financial structure is pointing advantage of the market and your stock price?

Yes. So the 7.75% convert we have outstanding. It's not due until June 1, 2028. And so we have a little bit a ways to do it. It is high interest rate relative to the interest rate environment we are in. These bonds are trading at a significant premium to where they are. So a refinance opportunity is quite expensive given the trading values they're at. Right now, we're focused on just what we have. And I think that from a liquidity perspective, I think that we're sufficiently have the liquidity, and we feel good about the kind of maturity in 2028 and 2030, that they're a ways out to have to focus on that and focus on growing the business and really operating the business the way we've been doing.

And Rich, do you feel you're sufficiently capitalized to fund the CapEx to -- tend to all this growth opportunity you have in front of you?

Absolutely. I think we guided free cash flow for the year, even after the CapEx spend of $40 million to $50 million. And so we feel very good about how we're operating the liquidity we have with $330 million in cash and still generating cash flow.

[Operator Instructions] Our next question is from Max Persico with RBC Capital Markets.

Great. I've got two for you. And I'll just give you right away. On the security side, as we think about kind of the broadening portfolio and the traction you're seeing with the products outside of the core WAF solution, can you just help me understand like are you seeing customers and maybe net new customers actually land with the newer solutions? Or is it still predominantly a cross-sell upsell motion?

And then separately, on the Network Services side, as we think about kind of -- I think what would be fair to describe as like a fluid macro environment with ongoing conflicts in the Middle East and higher energy prices, supply chain disruptions, et cetera, and the impact that, that could have on like consumer budgets, particularly at the low end. Could you just remind me like how much of that business is impacted by e-commerce traffic? And like how are those contracts structured? Like really, the question is like could that could slower traffic show its head, or show its face in the numbers over the near term? Or are you somewhat insulated from those kind of macro trends that may or may not show up?

Sure. Thanks. I'll take the first question, maybe a comment on the second question, but Rich may be able to offer a more quantitative lens on that.

In terms of security and the newer products, we absolutely have customers starting on our platform with multiple of our security products at the same time, including, obviously, the newer products like Bot Management, DDoS and API Security. So absolutely, at this point, we see customers starting their journey with us with multiple security products, often also including WAF, to be clear. But starting with more than just the WAF and with those other products. So we're definitely seeing the attractiveness of those.

I think that's something that we've talked about in the past is that we felt like as we completed the web application and API protection portfolio, as some of the analysts call it, which I think with the API releases we have, we expected to see some pickup on the security business as we were able to fully meet some, for example, RFP requirements of enterprises. And in those scenarios, they do adopt a bunch of products upfront at once. And so that is absolutely what we're seeing. We're very proud of our Next-Gen WAF, but there's sort of an opportunity for these other products as they come into their own in our portfolio.

On the macro environment, I would not describe us as insulated from macro environment or geopolitical risk, for sure. But I think if you think about our business, it's to me, complex to predict exactly how it will have an impact. I have experience in past lives in industries where, for example, when the economy was not strong, people retained cable subscriptions and things like that because they were not going to be going out as much. So it's not as clear at the consumer level exactly how it affects the different lines of business that our customers are in that we support. So I don't know if I can draw a direct line but, Rich, may have some numbers or some further thoughts. I'm not sure.

No, I think, Kip, you answered it really well. I think that, that comment around like what people do in a recessionary environment is completely accurate. I think the other part of your question was around like how much exposure on e-commerce in terms of a recessionary downturn. I do think that we -- in our Network Services business, we win where performance matters and e-commerce is certainly one of those areas where performance is required and performance matters, but we are also very important to a lot of other verticals as well. And so one, the exposure to e-commerce is not like magnified huge. But I think, two, we have seen in the past in a recessionary environment, there is a little bit slightly more resilient demand than what we see with in other areas. And so we are monitoring and we are watching because, of course, we care about this. But we are a little bit more resilient on the e-commerce front.

And as I see no further questions in the queue, I will conclude the Q&A session and pass it back to Kip Compton for closing comments.

Thank you, everyone, for joining and for your interest in Fastly. We look forward to you -- seeing you at our Investor Day in September, which Vern mentioned earlier, and we'll be sharing more about as it approaches at the NASDAQ market site in New York. Lastly, I want to thank our Fastly employees for all of their contributions, our customers for their trust and partnership and our investors for their continued support. Thank you.

This concludes our conference. Thank you for participating, and you may now disconnect.

Good afternoon. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Vern Essi, Investor Relations at Basle. Please go ahead.

Thank you, and welcome, everyone, to our fourth quarter 2025 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 will be archived for 1 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 supplements, 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 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 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 fourth 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 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. 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 during the first quarter, we will be attending the Raymond James 47th Annual Institutional Investors Conference in Orlando on March 2.

Now I'll turn the call over to Kip.

Thanks, Ferd. Hi, everyone, and thank you for joining us. When I became CEO 7 months ago, I shared a vision to accelerate our growth and drive towards profitability through disciplined execution. Thanks to our team's strong performance that vision is becoming a reality. Our exceptional Q4 results reflect this reality as we exceeded expectations across the board. We delivered our fourth consecutive quarter of revenue acceleration closing out the year with record revenue of $173 million in the fourth quarter. This represented 23% annual growth, the highest in over 3 years and exceeded the top end of our guidance. Our stronger-than-expected top line results drove strong incremental flow-through. This resulted in record gross margins of 64%, demonstrating the operating leverage and efficiency in our business. This enabled our operating margin and operating income to both reach all-time highs in absolute dollars and as a percentage of revenue, leading to our fourth straight quarter of positive free cash flow. .

Our stellar Q4 results also capped off a strong 2025, marking our first profitable fiscal year. Our teams drove this success with discipline, focus and execution and we are excited to carry this momentum into 2026. In the fourth quarter, Network Services grew 19% year-over-year, outpacing market growth. This is attributable to stronger-than-expected event performance and larger customers directing traffic to our platform due to their prioritization of network stability, performance and resilience. Our go-to-market motion is operating with increased rigor and clarity. At the same time, our new product launches, especially in security, have allowed us to deliver more business outcomes for our customers, enabling us to grow faster than the market.

Security revenue growth accelerated to 32% year-over-year, up from 30% in the third quarter and notching another record high. As we discussed on previous calls, we are focused on building a more comprehensive ever-growing suite of security products aligned with customer requirements. This enables a stronger security-led sales motion supplementing our well-established differentiation and performance and better positing Fastly to engage with customers on their critical security needs, all while providing an additional entry point into high-value, long-term customer relationships.

In Q4, we continued investment in our platform strategy to drive multiproduct adoption and build upon our cross-sell momentum. We're investing heavily in security and resilience with the latter becoming top of mind for customers in recent months. These efforts drove meaningful feature launch momentum highlighted by several fourth quarter releases, including API inventory, enabling customers to review catalog and manage APIs to identify ownership prioritize proactive optimization and accelerate incident response.

API inventory builds upon API discovery launched in Q3 of 2025 to expand Fastly's API security and management offerings. We're proud of the remarkable progress in building out our API suite. And in the fourth quarter, Gartner Peer Insights recognized fastly with a 2025 Customer's Choice Award for cloud web application and API protection. We are the only company to have earned this recognition 7 straight years. Also now available are custom dashboards and alerts, all customers across the Firstly platform can tailor at-a-glance insights that they need for intelligent execution and access the actual alerts that they need to accelerate incident response.

We also launched AI assistant in beta this context to where in console agentic feature accelerates faster platform adoption by enterprise software engineering teams with step-by-step guidance and personalized recommendations. Our go-to-market team has focused on customers and verticals best aligned to our platform strength, particularly performance and resiliency. These efforts were reflected in balanced revenue growth across product lines, geographic regions and customer segments in 2025, positioning us to drive continued growth in 2026.

Given this momentum, our go-to-market teams are focused on accelerating customer acquisition to further support our future growth. Our go-to-market focus also enabled us to accelerate upsell and cross-sell engagement, maximizing value with our largest customers. This is evidenced by several recent expansions and new customers where the Fastly platform address mission-critical performance and security requirements for our customers. For example, a Fortune 500 restaurant chain recently selected the Fastly platform to secure and deliver their application traffic by displacing a legacy provider, they simplified their architecture and reduced management overhead.

This is also a case where performance mattered. After switching to Fastly, the customer experienced their best Digital Day on record. A Fortune 500 home retailer expanded their use of the Fastly platform, displacing their security incumbent after a rigorous review of our next-gen WAF and managed security service. In addition to a stronger security posture, because were offloaded complex traffic control management to Fastly platform, freeing their teams to focus on innovation. -- a leading cloud observability and security provider expanded their use of the Fastly platform to include fast compute as well as fast security portfolio.

Our platform enables them to execute complex workloads and rapid product iterations while maintaining granular data protection. A leading print on-demand marketplace recently expanded its use of the Fastly platform to include fastly bought management and fastly compute. They required the high granularity visibility and control that our platform provides to manage complex traffic and security requirements. As the Internet moves into the age of a agentic AI, it's clear that the edge will play a pivotal role. Our infrastructure is designed to power this edge intelligent layer optimizing authorized AI agents and blocking abuse.

As one of the leading edge cloud providers, Fastly is well positioned to capitalize on this transition. We see AI increasingly as a tailwind for our business with increasing agentic AI traffic, AI bot management opportunities and AI workloads running on our platform. As we look to our 2026 guidance, we are leaning into our momentum and see continued upside in the business. Our first quarter and 2026 revenue growth guidance of 18% and 14%, respectively, reflect confidence that our business will outpace market growth while maintaining a prudent approach to longer-term visibility, especially amid greater macroeconomic and geopolitical uncertainty.

Rich will now walk through our financial results and 2026 guidance in more detail. Rich, over to you.

Thank you, Kip, and thank you, everyone, for joining us today. Before diving into the financials, I want to say that I'm really excited to wrap up my second quarter fastly and I to build our results. We continue to accelerate our revenue growth momentum while demonstrating strong incremental revenue flow-through to drive profitability. This is driven by our strong focus on our go-to-market execution, our broader product portfolio, especially in security and our fiscal discipline. In addition, we recapitalized our balance sheet to specifically improve our liquidity and prepare us for our next phase of growth.

Now on to our Q4 and year-end results. I'd like to remind you that unless otherwise stated, all financial results of my discussion are non-GAAP based. Revenue for the fourth quarter increased 23% year-over-year to $172.6 million, coming in above the high end of our guidance range of $159 million to $163 million. This result was a record high for fast and also represented the largest sequential dollar growth in the company's history. These results were driven by balanced performance across our customer mix and expanded product platform, along with continued success in our go-to-market upsell and cross-sell motions.

These drivers also contributed to accelerated revenue performance throughout 2025 and we are now at an inflection point where we believe we are a strong share gainer in our markets and demonstrating consistent profit expansion of scale. Our annual revenue was $624 million, representing 15% growth over 2024. Coming in above our original guidance range of $575 million to $585 million provided 1 year ago. In the fourth quarter, Network Services revenue of $130.8 million grew 19% year-over-year. We saw healthy traffic levels in the fourth quarter due to stronger market conditions and the success of our upsell motion.

Security revenue of $35.4 million grew 32% year-over-year, comprising 21% of our total revenue. This was due to the expansion of our security portfolio over the past year, coupled with the success of our cross-sell motion. Our other products revenue of $6.4 million grew 78% year-over-year, driven primarily by sales of our compute products. In the fourth quarter, our top 10 customers represented 34% of revenue, a modest increase from 32% in the prior quarter. Revenue from customers outside of 10 grew 20% year-over-year, an acceleration from 17% annual growth from our prior quarter.

We were pleased to see that both cohorts accelerated their annual growth compared to the third quarter, providing balanced outperformance in the quarter. Also, no single customer accounted for more than 10% of revenue in the fourth quarter. Affiliated customers that are business units of a single company generated an aggregate of 11% in the company's revenue for the quarter. Our fourth quarter total customer count was 3,092 customers. Our enterprise customer count, which represents customers with more than $100,000 in annualized revenue in the quarter with customers.

Given that typically over 90% of our revenue has historically been generated by our enterprise customers we believe it is a much more meaningful metric to track our customer acquisition. For this revamp, start next quarter when we begin reporting our Ban26 results, we will no longer disclose our total customer count metric on a go-forward basis. Our trailing 12-month net retention rate was 110%, up from 106% in the prior quarter and up from 102% in the year ago quarter.

The quarter-over-quarter and year-over-year increases were primarily due to revenue increases from our larger customers in prior quarters. Our last 12-month NRR closely follows our overall revenue growth rate trend. Our annual revenue retention rate, which we reported at fiscal year-end was 98.7% for 2025, a slight decline from 99.0% in 2024. We believe this metric is not as meanful as an indicator to the health of our business as LTM NRR, and it's once a year disclosure limits its value. As such, we will no longer report this annual revenue retention rate metric on a go-forward basis.

We exited the fourth quarter with record RPO $353.8 million, growing 55% year-over-year. The current portion of RPO was 70% of total RPO and and that balance grew 37% year-over-year. Our improved RPO is benefiting 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 fourth quarter. Our gross margin was 64% in the fourth quarter, a record high for Fastly, gross margin was 250 basis points above our guidance midpoint of 61.5% and up 650 basis points from 57.5% in Q4 2024.

This outperformance was primarily due to gross margin flow-through on higher revenue due to a stronger balanced traffic mix with customers in delivery and security. Underscoring this impact, our incremental gross margin on a trailing basis calculation increased to 76% in the fourth quarter, up from 58% in the third quarter. Our gross margin for the 2025 full year was 60.9%, up from 58.8% in 2024 and also coming in 210 basis points above our original 2025 implied gross margin guidance of flat to 2024.

This increase was due to better cost discipline and strategy and our cost of revenue, coupled with gross margin flow-through on higher revenue levels. Operating expenses were $89.2 million in the fourth quarter, coming in line with our guidance expectations. We are continuing our sharp focus on managing our OpEx spend while balancing our growth investments. We had an operating income of $21.2 million in the fourth quarter, coming in better than the $10 million midpoint of our operating guidance range of $8 million to $12 million. We intend to continue to drive greater leverage in our operating results as we scale our revenue. This is demonstrated by our operating margin expanding 500 basis points sequentially from 7.3% in the third quarter to 12.3% in the fourth quarter.

In the fourth quarter, we reported a net profit of $20.1 million or $0.12 per diluted share compared to a net loss of $2.4 million or $0.02 per diluted share in Q4 2024. For the full year 2025, we reported a net profit of $19.7 million or $0.13 per diluted share compared to a net loss of $12.1 million or $0.09 per basic and diluted share in 2024. Our adjusted EBITDA was $35 million in the fourth quarter compared to $11.1 million in the fourth quarter of 2024. For the full year 2025, adjusted EBITDA was $77.4 million compared to $32.6 million in 2024.

Turning to the balance sheet. We ended the quarter with approximately $362 million in cash, cash equivalents, marketable securities and investments, including those classified as long term. A sequential increase of $19 million over Q3 2025. In the fourth quarter, we raised $180 million in 0% notes due in 2030 that carry a 32.5% conversion premium. We also privately negotiated cap call transactions totaling $18 million, which represent a 100% conversion premium or a share price of $23.4. We believe these capital strategy measure significantly improve our liquidity and offers greater flexibility to manage our growth and bolster companies in our customers and shareholders. Our cash flow from operations was positive $22.4 million in the fourth quarter compared to positive $5.2 million in Q4 2024.

Our free cash flow for the fourth quarter was positive $8.6 million representing a $16.5 million increase from negative $7.9 million in the Q4 2024 quarter. For full year 2025, cash flow from operations was $94.4 million compared to $16.4 million in 2024. Our free cash flow in 2025 was positive $45.8 million compared to negative $35.7 million in 2024. Coming in materially higher than our original guidance midpoint of negative $15 million established 1 year ago. Also, this represents an $81.6 million increase in free cash flow in 2025 underscoring our revenue outperformance and cost discipline, expanding our bottom line.

As 1 of the world's leading distributed edge platforms, we continue to scale our global network to support Fastly growth. We are closely monitoring 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 Golar capital requirements for expansion of legacy providers -- this structural efficiency underpins our expanding gross margins, positioning us to stay ahead of global traffic trends while maintaining strict capital discipline.

Our cash capital expenditures were approximately 8% of revenue in the fourth quarter and 9% for full year 2025. This annual spend was below our 10% to 11% expectation due to the timing of approximately $10 million in CapEx anticipated in the fourth quarter, which will now incur in 2026. Let me take a moment to update you on our CapEx plans and strategy. For starters, 2 quick housekeeping points. First, in the fourth quarter, we did not deploy any prepaid capital equipment as we work down the remaining balance. Also, our repayment and financial leases for equipment have terminated we anticipate no further payments will occur for either these categories for the foreseeable future.

As a result, we wrapped up 2025 with a cleaner simplified CapEx profile. Second, -- as a reminder, our cash capital expenditures include capitalized internal use software. To recap 2025, we spent 9% of revenue on cash CapEx, which represented approximately 3% in capitalized internally used software purchases of infrastructure capital equipment and 1% was in prepaid to plans. Going forward, we will post only on the infrastructure capital expenditures with investors and removed capitalized internal use software, which is not a meaningful indicator of our capital spend. We believe this change will more accurately represent the inherent capital costs in growing our business and more aligns reporting to our peers.

Note that our infrastructure CapEx is reported in our free cash flow bridge in our press release and supplement as property and equipment. For 2026, we anticipate our infrastructure capital spend will be in the range of 10% to 12% of revenue compared to 5% in 2025. As I said a moment ago, approximately $10 million of infrastructure CapEx will now incur in 2026 instead of the fourth quarter 2025. And which equates to roughly 1.5% of annual revenue, impacting 2026 instead of 2025. Normalizing this timing impact, we anticipate our 2026 infrastructure CapEx will be increasing approximately 65% over 2025 as we run our capacity to meet our growth objectives and perform upgrades to our fleet.

This spend will be friend voted to ensure we have adequate equipment given recent supply chain constraints. I will now discuss our outlook for the first 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. Note that in January, finalized the deal to restructure its U.S. business, the platform can continue operating in the United States. Our guidance going forward will incorporate by Dam's revenue unless specified otherwise. As Kip discussed, we saw revenue strength from successful upsell motions and share gains broadly across our customer base. A portion of this business was also driven by traffic strength that came in stronger than anticipated, and we are not anticipating seasonal strength in the first quarter.

As a result, we expect revenue in the range of $168 million to $174 million in the first quarter, representing 18% annual growth at the midpoint. We anticipate our gross margins for the first quarter will be 64%, plus or minus 50 basis points. As a reminder, our gross margin performance is dependent upon incremental revenue increases or declines as demonstrated by our improving gross margin through 2025 on accelerating revenue growth. For the first quarter, we expect a non-GAAP operating profit of $14 million to $18 million. We expect a non-GAAP net earnings per diluted share of $0.07 to $0.10. Note that for the first quarter, fully diluted share count for positive EPS and will be approximately 175 million shares.

As Kip mentioned, our 2026 guidance reflects confidence that our business will outpace market growth while maintaining prudence on our longer-term visibility amid greater macroeconomic and geopolitical uncertainty. For calendar year 2026, we expect our revenue to be in the range of $700 million to $720 million reflecting annual growth of 14% at the midpoint. We anticipate our 2026 gross margins will be 63%, plus or minus 50 basis points. We expect our non-GAAP operating profit to be in the range of $50 million to $60 million, reflecting an operating margin of 8% at the midpoint, a doubling in our 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 $0.23 to $0.29, and we expect free cash flow to be in the range of $40 million to $50 million. And finally, as I mentioned earlier, we anticipate our infrastructure CapEx to be in the range of 10% to 12% of revenue for the full year. Before we open the line for questions, we would like to thank you for your interest in this morning Fastly. Operator?

[Operator Instructions] Your first question comes from the line of Jeffrey Van Rhee with Craig Hallum.

Congrats -- Great numbers. Just a couple of questions. First, -- maybe you talked about the. Can you just expand on that a bit? What are you seeing at the edge right now at agentic AI? I mean I don't know, put some numbers on it, but just what are you seeing so far? .

Thanks. We're seeing a lot with respect to AI on our platform, and it really breaks into a number of categories. First of all, just we're seeing an increase in traffic related to agents. I think in the past, the saving called machine to machine. And as you -- if you've used AI tools, I think you would appreciate that they often check a lot more websites, for instance, than you might. And that's more traffic and all of that traffic is processed through the Fastly network for our Fastly customers. So we're seeing decreased activity there. And a quarter or 2 ago, we actually published a report outlining the statistics on that and actually going into which models we're seeing the most traffic from an interesting report on our website with lots of numbers. .

We're also seeing AI workloads on our platform, and that can take a number of different forms. We've talked in the past about a use case starting an extremely large training data set. We also have customers using our compute edge for inference and other AI-related tasks. And then maybe a third example of where we're seeing AI as a tailwind for our business is AI specific offers. So I'm thinking of our AI bot mitigation.

As we're processing all of that traffic for our customers, it's creating opportunities for us to help manage crawlers and other AI bots to ensure that the right ones get through because our customers want to be relevant in the AI world, but block the ones that are harmful. So we're seeing across the board in a number of different ways. AI inflating the business in a very positive way, and we think the edge will be very important for AI going forward.

And on the traffic routing, I think you called out you saw some very strong traffic flows as customers optimized or are optimizing their traffic and selected you based on performance. Just what drove the widening of the gap in respect of performance between you and the peers to attract more traffic this quarter versus maybe in the past?

Yes, it's a great question. I mean, we've maintained a performance edge. It's the namesake of our company. It's something our teams take very seriously. I think recent events in the industry that is called more attention to the value of resiliency in an edge platform. And we're very serious about that and have taken a number of architectural steps that we think enable us to deliver a more resilient platform. And I think some customers have directed traffic our way because of that.

Last 1 for me, and I'll let somebody else jump on. The just obviously exclusive. I think last quarter, you called out an 8-figure customer. But I'm just curious, if I look at the 12-month RPOs, to what degree is that concentrated? So if I looked at the absolute dollars of 12-month ARPU increase, from Q3 to Q4, how much of that is driven by, say, maybe your 3 largest customers that were signed or expanded in the quarter? .

Yes. With RPO, it's kind of broad-based across a number of our customers. What we do, do is we do focus on the variety of customers, our largest enterprise, of course, historically, had not wanted to make some commitments on to us. And I think that what you're seeing here is a change in mentality and a change in shift. So now the RPO that you see is kind of broad-based across our entire customer is much kind of smaller.

Yes. I'll just add, it's been a very deliberate and intentional part of our market strategy and in the way that we framed negotiations with all of our customers and the way that we thought about pricing and discounting across our entire customer base to encourage more revenue commitments to us. To help manage or mitigate the volatility that comes from a purely utility-based pricing model. Of course, we also, in the security side, have a lot of subscription revenue, which helps with that as well. But the driving RPO growth and really just committed revenue overall is a major part of our strategy in terms of managing and mitigating volatility on the top line.

I mean, great, you can capture that increased commit. I appreciate it. .

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

Can you give us an idea of what's giving you the confidence with the nice increase in the guidance there. Is it a combination of some new customers or just some better commitments from them? And what kind of gives you the confidence in the guide going into next year?

Sure. I mean, I'll comment and then Rich has obviously put a tremendous amount of detailed thought into the guidance. You may have some additional things. I mean I think if we look at the momentum that we've established in 2025, and the customer contracts and relationships that we've established and obviously, the RPO number that we just discussed as well as the overall market trends and what we're seeing coming into the new year. we're very confident in terms of how we're positioned. And so we were able to issue guidance that reflects growth substantially above the market growth. As we continue to take more share -- the caution, and I think Rich mentioned this, and I alluded to it, too, in my commentary was we are in an era of what I would consider elevated geopolitical and macroeconomic dynamics. And there could be, for example, situations with our international customers around the world where their purchasing patterns are affected by that. .

And we're also very wary of supply chain dynamics, although as we believe we have a very capital-efficient infrastructure, it's too early to tell, but that could play out in our favor. So we try to take a balanced approach on that guidance, but we were able to get to those numbers, and Rich can provide more detail.

Yes, Frank. It's a really good question just because if you look at the midpoint of our guidance, That's a year-over-year increase of $86 million at the midpoint, and that would be the largest kind of year-over-year increase that we would ever have. The reason we feel more comfortable and confident in the guidance is because we -- as you know, we went through a go-to-market transformation over the past kind of 12 to 18 months. Part of that go-to-market transformation has been around getting to know our customers better, really aligning our sales team to the customer accounts and really being more diligent in watching kind of the traffic and what they're buying and what they're doing. So I think it's really the closeness of the -- with the customers and that go-to-market transformation that gives us that confidence.

Is there anything about the mix of that traffic that's maybe shifted a bit maybe away from traditional media and towards AI type traffic or something like that? How should we think about that? .

I think 1 development that I would point to that we discussed at some length on our last quarter call is we have seen material cross-sell activity in our large accounts. And that cross-sell activity brings in portfolios like security and compute. And that starts to transform the relationship in many ways, we believe, with those customers to one that's more strategic for them and covering more use cases. And that does give us some confidence. So we see different mixes of growth and there's a seasonal factor there as well. I think you appreciate in terms of media versus non-media. But I think one bigger trend is an increasing consumption of multiple services from us by those large customers. .

Your next question comes from the line of Jonathan Ho with William Blair.

Let me congratulate you on quite an impressive quarter. Just wanted to maybe just build on sort of the AI question again. Can you help us understand -- and just given how early we are in a agentic adoption, like what are some of the indications that you're getting from your customers in terms of that rate of growth and what that could look like in 2026.

Sure. Appreciate the question. We can see the rate of growth in the telemetry coming off of our infrastructure. And we can tell generally speaking, when it's in a agentic request versus a traditional user on a browser, for instance. So we can see that traffic growing each quarter. And that is driving volume on our platform. We can also see it in the conversations we have with our customers, particularly with our media customers. We have some of the most sophisticated media companies in the world as our customers. And this is a very top of mind topic for them. .

And what I can share is that discussion has shifted from perhaps last summer, how do you block it to a much more nuanced and sophisticated conversation now about how do you optimize for it. We want to be relevant, but we want to manage how this works. We want to be able to enforce agreements with people that the media companies have agreed with -- so we've adapted our approach there, and we have, as I mentioned earlier, our AI bot mitigation technology, but we also have the -- we were the first in the industry to support a new protocol called RSL a really simple licensing that was an industry developed protocol to essentially enforce content rights agreements related to AI models.

And so we're taking an industry-wide approach with our largest customers to manage this complex problem. And I appreciate your point that it's very early. We see it that way as well. And we're staying close to our customers and understanding how we can solve their problems in many cases, working with them as what we call as we call design partners for our new products in this area.

And then just in terms of the CapEx, I appreciate the additional disclosure and sort of the alignment with other industry players as well. when you talked a little bit about sort of higher cost and potentially shortages in terms of supply, can you help us understand how much of that increase in CapEx is maybe going to be eaten up by higher component costs as opposed to just pure capacity addition? .

Yes. I would say the increase in CapEx is going to be both of it, right? It's going to be -- we do need CapEx because of the growth that we're seeing. We saw this in Q4. And so at the last Q3 earnings call, we did talk about raising our CapEx spend to 10% to 11%. What you're seeing here is a function of both component prices going up. And so in some cases, especially with memory, we're seeing potentially 25% to 75% increases year-on-year on that pricing. But -- so you take the price increase and you take the additional upside in revenue that we're putting here, and it drives the CapEx increase year-on-year.

I would the 25% to 75%, Rich, you can correct me if I'm wrong, is on the memory component itself . Not the overall unit cost of infrastructure for us, for instance.

That's right.

Your next question comes from the line of Fatima Boolani with Citi.

Super Rich, for both of you, actually. I wanted to zero in on the network services strength you called out that is quarter of acceleration in that business. You've identified a lot of quantity and volume level input. I wanted to understand and have you help us with what are some of the more durable inputs to traffic growth and then also relatedly, on the pricing front, I mean, all of this incremental growth is coming in very incrementally impressive margins and unit economics. So what is a little bit around the pricing side of the equation that allowing -- that is allowing you to deliver a lot more of this traffic a lot more profitable. .

Yes. So I think when we look at traffic trends and what we're seeing for the year, we are still -- for Q4, we're still seeing kind of in the mid-20s in terms of traffic growth. I think the traffic growth is kind of spread across the different types. And so it's not any 1 particular to call out. In terms of the price erosion, what we've seen is actually a very nice contraction on price erosion. We have historically talked about like mid-teens price erosion. For the quarter, I think we've been very focused on great discipline around maintain price, really selling where its performance really matters and where we really win. Our price erosion in kind of Q4 was in the mid-single digits this quarter. So definitely seeing less price erosion in the space. .

I'm sorry. I would note -- I would just add to Richard's comments. But in terms of the -- as you put it, very impressive profitability, we believe we have a very efficient infrastructure. And the #1 thing that drives our margins up is volume as we're able to get more economies of scale. So you're asking about things that are durable. We certainly think that's durable. .

Yes. And Tami, just for clarification, it's hard to hear the first part of your question. Did we answer both parts of your question, and we may limit .

Yes. So it was very clear. It was very clear -- and just a follow-up for you on the Surety business, nice to continue to see that acceleration there. And it does appear that these are the fruits of your own labor with respect to seeing the yield on the cross-sell motion and the rigor that you've introduced and matured into the organization. But I was hoping you could maybe opine on how much of that momentum in the security services franchise kind of riding on the coattails of the network services business having accelerated. So is there a little bit of a coupling happening whereby if we do see maybe a deceleration on the network services side, we should expect to see maybe a little bit more of a drop off on the security services side. I'd love to kind of understand the interplay and the coupling and the couple.

Sure. I mean we do -- we have a lot of customers who consume both Network Services and security from us. So at that level, there's probably some coupling. If those customers have less demand, we might see less demand across both. I will note though that I think the primary driver has been the expansion of our security portfolio over the last year and we are now landing customers who are essentially security first customers onto the platform and then expanding them into Network Services, in some cases, for instance. So I think there is some coupling as there is when you have a platform strategy and you have customers consuming multiple product lines, but we're seeing our security portfolio come into its own as a demand driver for us.

Your next question comes from the line of Jackson Ader with KeyBanc Capital Markets.

The first 1 is on the outlook for 2026. Just curious about maybe the balance of given kind of the upside to consensus or just how you're feeling about momentum into this coming year? The balance between security strength versus network strength and understanding the team as questions about coupling. But just give us a sense of which one of those line items really is going to be the lion's share of the growth next year.

Yes. I think when we look at kind of the guidance that we provided, we do believe that in all of our businesses, we should be growing faster than the market. And so when we think about Network Services, I think the market that we see is about 6% to 7% year-over-year growth. We -- our expectation fully is that we would be north of that. I would say that it's going to -- from an increased perspective, you're going to see increases in both Network Services and Security. I wouldn't say that 1 drives it more than the other. I would say it's going to be broad-based across Security and Network Security.

We say 12% to 13% year-over-year growth. I mean we're going to -- we will be growing north of that as well.

Rich, given that this is kind of your first full year guide for -- on the Fastly platform. Do you mind just giving us a sense for your kind of process, maybe your philosophy? Are you looking at a pipeline coverage ratio as you kind of look out? Just any sense in terms of what your initial guidance philosophy might look like?

Yes. So I think we do a very robust kind of planning process when we kind of plan for 2026. And when we do do that, we're looking at multiple angles. We have byproduct views. We also have perspectives around the different pods that our sales teams sell under we look at on a customer-by-customer basis. And so we know from a customer-by-customer basis, what our contracts are like, and we do a lot of traffic and kind of pricing and when pricing is up for renewal. So we really build a robust model. We do look at it and say, okay, what kind of macro environment are we in? And what kind of commitments do we have from an RPO perspective -- and then we layer in that kind of existing customer base with our expectations around new customer lands to kind of really build our model.

And then we kind of stress test it around the macro environment around like what are the risks and opportunities that we potentially have I think my goal on the kind of guide is to hit the numbers that we say we're going to hit, right? I don't -- the expectation is that for me, I'd like to just be fully transparent. This is what we think and what we will do. And so we really go for what do we think is going to be risk adjusted for the macro environment that we're in?

Look, I mean that's a great answer from Rich, but I'll tell you it's been great working with him on this guy 1 point, I think you had 18 different calibrations from his team, and we're lining them up. So I mean I'm extremely comfortable that Rich has taken a very thorough approach here. nobody has a crystal ball, but I'm very confident in the quality of work that went into our guide. .

Was going to say go to customer by customer. It's -- you're getting into the weeds. .

We take it very seriously in terms of what we project into the financial community. But frankly, it's also something that helps us run the business, obviously. So it's for this audience and the investors, obviously, but frankly, we view it as core to how we plan and build the business into the future. So it's a core part of what Richard's team does. .

That's right. I mean, literally, as we build a plan, we're looking week-by-week also just on traffic patterns, and we just have updated views throughout the kind of process. And so I just think that being close to the customer is so important to Fastly. The work that they do is so important to us. And so for us, the best thing we can do for them is to actually do the right forecast, make sure the capacity is there and make sure that the quality of service that we provide is high.

Your next question comes from the line of Param Singh with Oppenheimer.

I think I really wanted to focus on the security side. Obviously, you talked about good attach rates here. Maybe you could give me some color on the current penetration of the newer products in DDoS and bot management. And maybe also talk about your API capabilities here. I know you expanded that. What's the adoption rate of API? And what are some of the technical capabilities you'd like to add on the API side, especially as you talk about an evolving traffic landscape with agentic AI?

Sure. From a Security perspective, we're really proud because we do have kind of the 5 products. Our WAF product is kind of the 1 that we started with and that we had I would say that a large portion of our security revenues is still kind of WAF. We are very happy with the kind of traction that we are seeing with bot management and API security. We haven't broken it out yet in terms of like specifically between the security products where it is, but I would say that the majority of our security revenues are still our world-class lab product. .

Yes. I would just add that some of our largest new deals are on API use cases. So we've got -- in the security business, certainly, the core business is the WAF, which is a phenomenal product. It continues to grow well. But we're seeing strong interest and demand on the API side of the equation. And we're excited about that because we're still, as we mentioned, building out the portfolio there. And so there's more to come.

I mean I really wanted to maybe drive a little bit more. I know you talked about your API discovery that you expanded with. So from a technical standpoint, where do you feel you stand now as a larger API platform that could help as you cross board not just with security, but even on the delivery side? And I guess it should be more important in agentic world. And please correct me if I'm wrong.

Yes, absolutely. I mean our approach to our security portfolio has been 1 that has agentic in mind. The features that we're building generally work, for example, for regular APIs as well as APIs. And that's based on some of the work we've been doing with our customers in this area, where they don't want a separate AI capability. They want a single edge platform that addresses all of their API needs across agenetic AI and traditional workloads as well. And so I think AI bot management is an area where we made a distinction there. There are some other features. But our security portfolio is designed with AI workloads in mind, and we are seeing those workloads on the platform. In terms of where we are, I feel like we may be about halfway through the journey. We are covering a lot of use cases, and we're seeing traction that we're very pleased with on API security and API use cases more broadly on the platform. And we're actually excited about the momentum we're seeing because -- as I mentioned earlier, we're planning to bring additional capabilities in the portfolio into this space that we think will expand the addressable TAM for us further. .

And then maybe just 1 last one, if I could. Just looking at your CapEx, I understand the incremental $10 million, but really if you could help me parse through what is maintenance CapEx in that level or posted especially in this higher memory environment versus what were expanding new POPs or adding more compute capabilities around accelerated servers. If you could just big that out and help me understand how you are thinking about your CapEx longer term. I'd really appreciate it. .

Yes. So the infrastructure CapEx, we talked about, which was 10% to 12% of 2026 revenue, I would say the majority of that CapEx is going to be for growth CapEx and not for the maintenance and replacement side. I would say that we are continuing to invest. I think 1 of the areas that we are investing is going to be kind of in the APJ area. And so we are opening up additional tops out there to support the business. And so I would say the vast majority of that infrastructure CapEx is not necessarily for the maintenance side but more for the kind of growth those.

Your next question comes from the line of Rudy Kitzinger with D.A. Davison. .

Congrats on the Verizon results. As we look to the 2026 guidance, top 10 customer as a percentage of revenue where is that estimated to fall for the year within that revenue guide? .

Yes. Right now, just as a background for those who are on the call. Right now, our top 10 customers is 34% of revenues. It was up from 32%. And -- the good news here is that we have been investing in our top 10 as well as outside of our top 10. So the top 10 customers grew their revenues by 30% year-over-year with the non-top 10 grew 20%. Both of those were acceleration. And so we're still making big investments on both cores to make sure that we are looking at all of our customers in aggregate. I would say that as we go further, we are doing a few things on our go-to-market transformation. One is that we're focusing our efforts on customers that really get the value that we want from our platform.

And some of that happens to be the top 10. And I could see top 10 staying at 34%. I can see it going up just because they are. But I would say that the non-top 10 growth is still going to be high and should be continuing to grow as well. So it's hard for me to say it's going to be 34% 323 -- but I would say that we are very happy with the performance and additional 2 percentage points in the top 10 just because those top 10 customers are still super valuable to us and very profitable to us.

Yes. I would just add 2 things. And I mean, Rich hit 1 at the very end there. But if you see that we grew last quarter, our top 10 faster than our non-top 10, you saw the behavior of the business in terms of profitability, gross margin, et cetera, you can see that those top 10 customers are profitable business for us. We recognize the revenue concentration risk that they represent, but they are profitable -- a significant part of our business. I think the second thing I'd add is we've historically talked about that percentage of top 10 being in the low 30s to mid-30s and thinking that, that was likely to remain the case for some period of time. we don't provide that formally as part of our guidance, but I don't think our view on that has changed at this time. And as I mentioned earlier, we're excited about the cross-sell opportunities as well as the contribution to RPO that those top 10 customers can make. So we continue to drive profitable, higher quality revenue in that cohort.

And then on gross margins, obviously, a very impressive trend here over the last year, getting up to 64%. But 6% to 4% in Q1, you've got the guide at 63% for the year. I understand that with some of this CapEx coming online and some that pushed out from last year. But just how should that trend seasonally? I mean should we see like a big step down in Q2? And then recovery throughout the year? Or just how should that trend on a quarter-to-quarter basis? .

Yes, Rudy, actually, really good call out. I do think that we did give the guide for Q1 gross margins to be up about 6% we will see kind of a drop into Q2 and Q3 as we have additional cost POPs kind of coming online. And then we would again see a bump up again in Q4. And so kind of that's the trend where Q1 and Q4 will be a bit higher in Q2 and Q3 should be a little bit of a drop.

That concludes our question-and-answer session. I will now turn the call back over to Chief Executive Officer, Kip Compton, for closing remarks.

Thank you. We believe this quarter demonstrates tangible progress in our ongoing transformation. We are committed to building the world's most powerful and flexible edge platform. We're pleased with the strong momentum we saw this quarter and are focused on building sustainable, profitable growth. I want to thank our Fastly employees for all their contributions, our customers for their trust and partnership and investors for their continued support. Thank you for your interest in Pasley, and thank you for joining us today.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

All right. Good morning. Thanks, everybody, for being here. Thanks, everybody, on the webcast. My name is Frank Louthan I'm the senior telecom analyst here at Raymond James. We're very pleased to have Fastly Rich Wong and Vern Essi here from the company.

So maybe we just start out, Rich, give us a couple of highlights from the quarter and a couple of things that you want folks to focus on and then maybe give us some -- you're new in the seat, give us some of your vision of how you're going to approach the job as CFO.

Sure. Our most recent quarter was Q3, which was September 30. We had a really good quarter. We had $158 million of revenue, which was 15% year-over-year growth. That was actually our third sequential consecutive quarter of reaccelerating growth, which was a great position to be in. We also, in the quarter, announced record profitability and record free cash flow and guided for free cash flow positive for the year. I've been in the job for about 4 months, so I started in August of the year. I think it's a great time to be at Fastly.

I really was drawn to Fastly from the product that we have the technology that we have and how good we are with our customers. I think for the CFO role, given how good our product is, I just feel like the market share should be greater. And so I was really excited to join because when I see the product and how good it is, it's about execution. And I think that my role as CFO is really going to come in and help take advantage of the products we have and really execute well across the company. So I'm really excited. Kip Compton, who's our CEO, he joined about 18 months ago or 20 months ago, but he's new to the CEO role where he was promoted 2 months before I joined. So pretty excited about the management team we have in place.

All right. Great. So like you said, good quarter. Talk to us about the guide. So what does it take to kind of hit the higher end of the range for that for the year? Talk to us about how you're seeing things so far.

Yes. So we provided guidance in our last earnings call. From a guidance perspective, I think we are -- network services is 75% of our business. And so to hit that guide, we have to feel really good about the traffic that we're getting on the site and the pricing environment that we're in Q4, we're very in a similar situation from Q3, where we're seeing a lot of strong traffic growth. And I think the pricing environment stays very positive for us as well. We also, in Q3, had a real strong cross-sell opportunity, and we had strong cross-sells overall. And so security grew 30% year-on-year last quarter, and that was the cross-sell momentum that was put in place over the past few quarters.

For Q4 guidance to hit, like we have to continue and assume that those cross-sell opportunities are there and that we will continue to achieve those. And so I feel really good about the motions we put in place as a company to take advantage of those cross-sell Security grew 30%. That was a third quarter of reacceleration in the quarter. And even without that one big customer win, the revenues in security continue to accelerate. So I feel good about the momentum that we have across cross-sell and how we are in the quarter.

So let's talk about the cross-sell opportunity there. So you talked about that in the quarter that's interesting. Tell us kind of what went right with that and how we can -- how you're going to be able to replicate that going forward or what you're trying to do to drive that?

Sure. I think to understand that, we have to go back further in time. So Scott Lovett, who is our go-to-market President. He was hired probably about 18, 20 months ago. And really, prior to that, we had a very strong go-to-market motion around network services. Scott spent a lot of time at Akamai, but he actually was at Imperva as well. And so having that security selling background was really key. And so you take what Scott had done and then Scott also brought in leaders across his management team that ended up having security selling backgrounds as well. So having security selling on the go-to-market side was really important.

And then you couple that with some of the work that was done on the product side. So 15 months ago, we had 1 security product with our web application firewall or WAF. And then now we have 5 security products. And so if you couple like the go-to-market motion that was put in place, plus the product innovation and velocity that was there over the past 18, 24 months, that led to really good cross-sell. So in Q3, specifically, we announced a top 10 customer who was buying network services from us and how we end up having a big -- we had a contract signed in a cross-sell where they adopted our WAF, our web application firewall. And that provided a lot of real good tailwinds into the quarter where you saw security revenues grow $5 million quarter-over-quarter sequentially, which was really nice.

And then even if you exclude that one big customer, our security revenue growth would have reaccelerated. So it kind of shows me that the cross-sell momentum that was there wasn't just a onetime one and done. It was actually across multiple customer bases, which was definitely really nice. I think as I look at Q4, the things that he put in place on the go-to-market plus product still exists. And so I'm very excited about going into Q4 and even 2026, having that momentum behind us where we're just going to continue to go after those opportunities because we, one, know we can win in top 10 customers. We also know that beyond that, it's also applicable, and we can win there too.

So when you look at the combination of those things that kind of result in that success, how much of it is just having the right product set or more products in the market? And how much of it is how you've changed how you've approached the business? What's sort of the operational change versus just having the products that's driving that? How should we think about that?

Yes. I think it's interesting because it's -- if you take both in combination, it totally makes sense that we're accelerating. If you take them in isolation, it'd probably be a little bit harder just because having just the full product suite, having that there was almost game stakes like table stakes to having a seat at the table with RFPs. So if you go to an RFP with an existing customer or even a new customer and they ask you about your suite of security products, if you don't have that full suite, like you're not even going to have an invitation into that RFP or you get eliminated in the first round because you don't have that full suite. So having that was like table stakes.

Having that alone isn't helpful because you don't have salespeople who are trained, that becomes really hard as well. And so what's really nice is Scott and his leadership team that he brought in has that security background and they have an understanding when you're selling security, it depends on where in the chain you're selling to the customer base. But if you're selling at the very end, I mean, it's the CISO and selling to a CISO is very different than when you're going into network services and selling into a DevOps person or an SRE within a company or a network engineer. So it's kind of 2 buying agents. They ultimately roll out up to potentially a CTO or an SVP of Engineering. So it depends on like where in the chain that you're selling the products. But I would say that you need both. I would say having that product suite provides us the table stakes to be able to play in that game and have those opportunities.

Okay. So I think you said you added 5 new products. Is that enough? Where are we in the life cycle with the security products? And how should we think about continuing to develop those and get more of those in the market?

Yes, sure. So on the security side, as Richard said, we started out with a web application firewall about 5 years ago, we bought from Signal Sciences -- we added to that in 2025 with -- excuse me, 2024 with Kips arrival, we augmented that with DDoS, which we productized out of our network services. It was a technology we had already provided to our customers. We then also rolled out a bot mitigation solution as well. At the end of 2024, we had 3 products and then in 2025, also introduced API discovery on the API side as well as client site protection, which is more on the end user side as well.

Now we have 5 products, Richard had said we grew from 1 to 5, and we enter into this year basically now in a situation where we have to augment those with future rollouts. I think from a security perspective, we won't be, I think, having big new initiatives that are going to be at that pace for new sort of product categories in 2025, but we will be adding more features around these products.

One that we talk about a lot is in the web application firewall space. We rolled out a deception capability, which basically tells attackers that they're being successful attacking your website when in reality, they're stuck in sort of a [indiscernible], if you will, of false prompts and what have you that occupies their time, cost them a lot of money and basically makes it very painful for them to hack websites that have this sort of technology. It's very innovative. And we have a very good successful track record with our security products, especially in the WAF. We've got like a 7-year running award out of Gartner's like best-of-breed product there. We're really proud of it.

So what's the next step there? Is it going back to existing customers and try and offering these additional products, your traditional WAF and DDoS customers and selling them more? Is that the bigger opportunity? Or is it just starting with a whole new marketing plan.

No, I mean, absolutely. It's just continuing that motion, as Richard said, like we go into these RFPs and now like we actually have enough to get in the door and have more opportunities to cross-sell. And some of these products do play off each other in that dynamic. I mean some customers don't need all of them. Some of them definitely do. And so it just depends on what customers are looking for, what need. But again, for those that aren't well versed on security, we do not participate in sort of what you call like the endpoint or Zero Trust sort of markets. We are focused on the area that's basically where you're running your websites. We call it the web application API protection. And that's sort of our wheelhouse. And it's a bit of a smaller space, but still a very large market. For us, we're very underpenetrated, and there's a lot of growth opportunities there.

Yes. Okay. And Rich, we sat down a few weeks ago in your office and talking about -- a few things. One of the things you mentioned some operational changes you guys have implemented. It's a little bit better control, some new systems, things like that. Walk us through what are some of those operational changes that you and Kip have put in as you started out? And how is that benefiting the company versus what we've seen in the last few years?

Yes. I would say that it's been great to have Kip there as a partner. He's been truly, truly like thinking through how do we execute better and how do we do better given the products that we have on our hands. I think the areas that Kip is really focused on is making sure we have faster and better decision-making. And so just like execution and being able to like move faster and having clarity on who the decision-makers are and how do we not get stalled on things. And so I think that's been really helpful, just empowering his next leaders to really drive initiatives across the company and really drive things to completion.

I think it's also -- one of the other things he's focused on is and simplification of the metrics really like within the company, what are the 5 or 6 key metrics in the company that we're focused on, like explaining to the employees that every employee has a role to play in those metrics and having more accountability and driving forward. So as employees think about like initiatives they want to drive, what impacts or what metrics do those impact and having more transparency and clarity on that has been really good. And then I think the last one in order to drive real and clarity is a session that he leads, which kind of -- we call it behind the numbers, where we really provide employees context around the numbers we report, what roles employees have to do behind it. What does it mean?

And how does it drive like behavior and actions. And so he's trying to help educate and provide context around decisions we make and what metrics matter and like how does it drive those metrics forward. And so having that like transparency and clarity provides ownership within the company. And I just feel like that is a really, really good kind of initiative that he's been driving where employees feel more empowered, they feel more excited because their actions translate to behaviors and metrics. And so I think that's the really good part.

On the kind of like CFO front, the ones that I'm focused on would be a lot of like operational and fiscal discipline, thinking through decisions on how we make as a company and how that translates into financials. And with that, going forward around -- like Scott has been pushing on pricing discipline, trying to make sure that gross margins are high, like things like that and just making sure that as people are requesting headcount, how do they think about that? How does it speed up the company with and behaviors and how does that translate to metrics and just being able to be a like fiscally operationally driver to the company. We also talk a lot about incremental margin model within the company.

And so instituting fiscal controls and OpEx discipline, but you combine it with an incremental margin model, which is like, hey, as you have additional million of revenues, like how much additional OpEx can we have and how much additional investments can we have. So having them feel some ownership around if they drive certain behaviors, we can start spending more, but not necessarily like starting the year with a bunch of headcount that has been approved for the year, but really watching those metrics as we go and being more flexible with how we operate the business so that we have incremental margins that we think that we're going to hit.

Yes. I mean it's a really interesting aspect because I'm not an operator. I've run a business and a lot of investors have not either. So tell us a little bit on that, like you're trying to empower the customer -- the employee base and things they haven't heard or seen before. You mentioned headcount or whatever. How has some of these budgeting things -- how -- what has been the reaction from the employees? And how should we see -- how can we see that turn into operating leverage now that they have maybe a deeper understanding versus in the past, maybe operate a little bit more as a start-up kind of mentality?

Yes. I think like -- prior to being a CFO, I ran FP&A for about 12 years. And one of the big pain points in FP&A all the time is setting the annual planning -- and so what's the annual number that you want to hit? What's the incremental like headcount that gets opened up for the whole year. And so you're making like full year long decisions almost like 14 months in advance, right? And you're approving headcount recs throughout. It's really painful because you need a flexible model that you can adjust as you see things go through the year. And so we're not stopping the annual planning process. People are still planning.

But one of the things that we want to do is make sure that people know, hey, these are the P1 recs that are priority 1 for the company, and we want to open those regardless. But these P2s, let's gate them and let's see how we perform for the year and start opening those reps as we see that performance through the year. And it makes it a lot easier and more seamless. Like you're not saying no to reps. You're not like having this like headcount discussion where you're making decisions yes or no, 14 months in advance, you're literally saying, "Hey, these are important recs, but let's see how the performance goes through the year.

And I think it makes it a lot more collaborative and iterative and then a lot more ownership because as you go through the year, as people start seeing these numbers, they're like, okay, we're going to start releasing with these recs. And so there's ownership where like there's real action. On the FP&A side, if you open a plan and you open up all the headcount, if things don't hit for the year, you end up pulling back recs, which feels like you're taking things away, which actually becomes very painful.

Yes. Okay. Great. So maybe talk to us a little bit about the delivery part of the business. It's been a pretty good year for delivery, I think, kind of across the board. That tends to kind of go in some cycles. But how are you feeling about that? And particularly as we move into sort of the fall season with more video viewing and so forth, how do you think about that?

Sure. So on the delivery side, I think about -- I mean, let's break it out into 2, right? There's the traffic growth and there's also the pricing environment. I would say on the traffic side, I think we are continuing to see good traffic growth. I think that as the Internet becomes more complex, more dynamic data, real big files, like lots of streaming. We're continuing to see traffic growth and traffic growth in the range of 25% to 30% year-over-year growth, which is very, very healthy, like we just hit another record with the Fortnite downloads where we just had record traffic on our website just for that one event. And so it shows the resiliency of our network relative to those traffic loads that come on.

So we're seeing very strong traffic patterns, very healthy. On the pricing side, I think the pricing environment, as we mentioned in Q3, is a very rational pricing environment. We're, for the most part, well beyond the headwinds that we saw in 2024 when we talked about the Edgio going out of business. They got a little bit irrational with pricing. They had excess capacity. And so I think the whole industry was hit based on what we saw there. That was we're like over a year past that now. And so we're seeing continued resiliency and rational behavior on the pricing side. And so definitely, we're in a very good spot for the network services side.

And I'd also add to that, I know, Frank, you going to ask about seasonality, but we get this question a lot from investors. And the business on the delivery side hasn't been as seasonal as it has in prior years. I think we're scaling and growing out of like what we used to have more seasonal aberrations from live events or sporting seasons and what have you without getting into details. But the bottom line here is, as Rich was saying, there's a lot more downloads and other larger events taking place that are offsetting what was our typical seasonality. I mean we will still have a little bit of it. But I think as we grow and scale, it's become less relevant, certainly from the calculus of an investment quarter-to-quarter growth and what have [indiscernible].

So talk to us a little bit about that because some of this is just human nature. You get less daylight hours and less people -- weather change, people indoors more to have historically seen some of that. So is that -- you're not seeing that seasonality. Is that from new businesses that you're pursuing that maybe download type activity that's maybe less affected by those type of things. Is it a purposeful thing for you guys? Or is it something broader that you're seeing in just the overall traffic market that's muting that seasonality?

I mean I would say it's definitely a little bit on a deliberate by Fastly as well to try to find new businesses, but that's also just because we're trying to take share. So I think what's happened is we've taken share at the expense of some of our competitors, and we've had newer programs and customers that are just naturally offsetting what we used to have. So we were very concentrated, I think, in more sporting events type traffic which had a very strong third quarter sort of seasonal effect.

That seems to be a situation that we're outgrowing as we've taken on a lot of different downloads. It doesn't be gaming, even like operating system downloads and things like that, where we're taking on traffic and it's helping offset that. And we've been very smart about trying to find programs that fit or customer traffic patterns that fit into a healthy overlap in the diurnal traffic of the day. So obviously, when you're doing a lot of streaming that like prime time North American hours are going to be very peaky. If you can find programs where -- or customers -- I keep saying programs, but customer opportunities where the traffic comes in, say, 4 in the morning, Eastern or something like that, we're all over that kind of business. So we've been very proactive in trying to find that and create a healthier traffic flow within our revenue.

And so how much staying power do you think this has? We've seen this in the past where things get a little better and the pricing and then the customers tighten the belt. I mean we're -- how should we think about that versus what we've seen in the past?

Yes. I mean I would say pricing power like -- well, pricing is a function of like capacity, right? I think that right now, it feels like a very rational set of players who are not building excess capacity for what we saw. I think there were the 2 big excess capacity issues that we had. I think we had one in COVID where there was like this big buildup because everyone was working from home, everyone was Zooming, everyone was streaming. And so we had some excess capacity there. And then I think when you start seeing like Edgio bankruptcies and everyone -- people going out of bankruptcy, then you start seeing excess capacity with irrational behavior. Barring a COVID-like environment where everyone is working from home and streaming like crazy or barring like another player going out of business, I think the pricing is pretty -- environment should stay pretty stable, right?

Like the existing players who are there are quite smart about the capacity build-outs with you. So for example, for us, to do a capacity build-out in an existing POP, it could be 1 to 2 quarters, right? Like why should we be investing 3 or 6 quarters in advance. And so I think given that, I think that the players that are in the space don't need to build like years and years in advance, like we're literally building 1 to 2 quarters in advance, and that actually helps maintain a rational capacity for a pricing environment.

All right. Well, that gets segments to another topic about capital intensity and so forth. So you guys priced a deal last week. Talk to us about that. Where does that put you guys from a balance sheet perspective and capital?

So from a Q3 perspective, we had $343 million of cash. We had about $338 million of debt on the balance sheet, which consisted of 2 convertibles. We had a convertible that was coming due in March of 2026. So it comes due in like 4 months. As a CFO, as I think about like the capital structure and what we have, it just felt really right the capital structure we had. But with the pending maturity, it just made sense to refinance the existing convertible. So about $188 million of that convertible was coming due in March. So what I did was we launched a convertible offering. We are cash flow positive for the year.

Given that, I didn't need to raise the full amount. So we went out with a convertible offering of $125 million with a $25 million green shoe. It was a very strong convertible market. We had lots of interest. We were oversubscribed on that. We priced at the tight end of the marketing range. And so we ended up pricing at 0% coupon convertible up 32.5%. And then we coupled it with a call spread. So a cap call purchase, which like extends the dilution for the future stock price. We end up upsizing given the strong demand.

And so we went out with $125 million plus $25 million overallotment, and we end up pricing at $160 million with a $20 million overallotment. So it was basically a 28% kind of upsize on the convertible offering given where the pricing environment was at. I think that puts us in a very good position because with this refinance, we end up buying back early the $150 million of the $188 million outstanding, and we bought it below par. So that kind of should be reflected in our Q financials, but we proactively bought that back. And so from a capitalization perspective, I feel really good with where we'll be at, roughly the same cash position, but our maturities are now going to be '28 and '30 as opposed to '26 and '28.

All right. Great. So you talked about the capital needs, making changing how you're making some of the decisions. What's the right capital intensity of the business now going forward? You've got some new products and so forth. You're being more mindful about capacity and needs in the network. What's the right capital intensity?

Yes. I mean it's -- for us, we've been running roughly around 10% to 11% -- like at Q4, we announced that we would have capital spend about 10% to 11% of revenues. And that was actually a raise because we were historically at 10% of revenues on CapEx. Given how well we did in Q3, given our guide in Q4, we thought we should go ahead and build a little bit more. And so we raised our capital spend last quarter just as we see the strength of the business. And so for us, I think longer term, it should always -- it should still stay in the 10 -- maybe 10% to 11%, depending on where you're running because you're always building 1 to 2 quarters in advance.

I would say that, that's inclusive of capitalized labor, [ IOS ]. And so if you strip that out, really the capital intensity of the business is roughly around 7% to 8% of revenues is what we're targeting because the infrastructure CapEx to me is like the critical core portion. The [ IOS ] and capitalized labor is kind of a function of like what are the projects our R&D folks are working on and what portions get capitalized through the year. So I would say that going into next year, as we think about guidance about CapEx, we'll probably start shifting to more infrastructure CapEx guidance and say what it should be as a percentage.

Okay. And so -- and that infrastructure CapEx is -- that's more the 7% kind of a range.

7% to 8%, yes.

So total capital CapEx is probably in the low double digit.

Yes, yes. It's 10% to 11% for total, inclusive of IOS, exclusive of that, just pure infrastructure, what we have for our POPs, our point of presence, servers that go there, that's the 7% to 8%.

And with that, so what sort of a free cash flow outlook for the next 12 months with that?

Yes. So we don't -- obviously, we'll guide 2026 free cash flow at the next earnings release. For 2025, we guided to $25 million to $35 million free cash flow for the year. And so that's including the CapEx spend, so $25 million to $35 million of free cash flow. Given the incremental margin model that we expect to flow through, we do expect to continue to show leverage every single year going forward. That goal is to be -- continue to be profitable and free cash flow positive. And so think of like the incremental margin model as flowing through 25% to 40% of incremental revenues into incremental operating profit.

Okay. So -- and then another question and maybe take a few questions from the audience if folks have some, but maybe talk to us a little bit about that operational leverage and how you're going to get that flow through.

Yes. I mean it's -- using the incremental margin model and even like educating our employee base around what it is, I just feel really good about it because I feel like that context and that education has really empowered the employees to really think about investments that they make. And so if operating profit this year, we're going to be operating profitable. It's -- we're going to continue to do 25% to 40% flow-through next year. And you keep CapEx at 10% to 11% of revenues, like that should just naturally flow through to the business. And so this year is a pivotal year where we hit those record -- we shifted to profitability and shifted to free cash flow positive, and we're just going to keep on maintaining it.

And these are operational changes that have hit those numbers. It's not something onetime in event or anything. Okay.

Yes.

All right. yes, go ahead.

In the world where data center [indiscernible].

Yes. So the question is in a world of high demand for power and data centers and so forth, how are you guys thinking about that clearly being different than a large AI large language model type data center demand, but how are you thinking about that?

Yes, it's a good question. I think the -- just to be fair, we run a lot of our POPs off of a very small proportion of basically other colo data centers. So in other words, we would partner with a household name like Equinix to basically run our POPs. So we feel like we have adequate capacity with those partners. We're not building massive data centers behind the scenes to do what we do. We have a pretty much more, I would say, flexible model around that, that can adapt to those dynamics.

And also, I just would clarify that like our POPs are located in a lot of metro areas to be close to our users. So we call those like the edge cloud, where the goal is to have multiple PoPs spread throughout the world, and those are going to be closer to our user and more likely metro areas. The big like LM models or AI models, data centers, those are like massive central cloud data centers. And those are going to probably be focused in low-power, low-cost areas. And so think like in Washington State because there's a river that kind of you can produce cheaper energy or Buffalo, New York. And so those are like the massive, massive data centers we're talking about, where there's scarcity of power and land and value. I think ours are going to just be in the partnership with the colo spaces in metro areas.

Can you characterize your incremental demand in terms of megawatts every year?

So we don't actually do that in megawatts. I mean I think our focus has been what's -- how many POPs.

I say it's low single-digit megawatts that you need on an annual basis of incremental capacity or...

Yes. We don't characterize it in megawatts. I mean, because we have -- we have 112 POPs throughout the world. Like we're very focused on how many POPs do we have and how much terabits per second do we -- capacity do we have on our network. And so those are the 2 functions that are really critical to us. I think if we think about like the future, right, the future with potentially compute at edge, that might be more data center intensive where you may need more servers and more POPs, and we may start thinking about that. But for now, we're focused on not so much of that side.

I do want to land one point here. It's not so much the hardware that we run. It's the software stack that makes our solution so unique. I mean we run basically off-the-shelf hardware CPU and programmable switches. We're not doing exotic hardware, custom GPU type tasks. I think...

Real quick.

With that said, I mean, memory [indiscernible].

I'll take that. Yes. So the question is memory is scarce. Presumably, we would think we'd have a lot of memory usage. The truth is our memory is not as intensely a part of the solution as you're implying. So it isn't as -- it is relevant, and we're obviously monitoring that, but we're not in a situation where we feel that memory pricing is going to impact our procurement or our ability to expand capacity. .

All right. Great. Guys, thank you very much for being here. Really appreciate it. So good luck with the rest of conference. Thanks, everybody.

Thanks, everyone.

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.

Welcome back everyone. For those who don't know me, Rishi Jaluria. I cover software here at RBC. I'm delighted to have with me from Fastly, Klip Compton, who's the CEO; and Richard Wong, who's the CFO, both relatively new team members here.