Fastly Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 7, 2025
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Operator

Good afternoon. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly First Quarter twenty twenty five Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank

Operator

you.

Vernon Essi
Vernon Essi
VP of IR at Fastly

Thank you, and welcome, everyone, to our first quarter twenty twenty five earnings conference call. We have Fastly CEO, Todd Nightingale and CFO, Ron Kisling, with us today. Webcast of this call can be accessed through our website, fastly.com, and will be archived for one year. Also, a replay will be available by dialing (800) 770-2030, referencing conference ID number 700000543239, shortly after the conclusion of today's call. A copy of today's earnings press release, related financial tables and investor supplement, all of which are furnished in our eight ks filing today, can be found in the Investor Relations portion of FASI's website.

Vernon Essi
Vernon Essi
VP of IR at Fastly

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. 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 ks and quarterly report filed on Form 10 Q filed with the SEC and our first quarter twenty twenty five earnings release and supplement for a discussion of the factors that could cause our results to differ. Please refer in particular to the section entitled Risk Factors. We encourage you to read these documents.

Vernon Essi
Vernon Essi
VP of IR at Fastly

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. As discussed last quarter, we've adjusted our non GAAP treatment of gross margin to exclude the amortization of stock based compensation and our internal use software costs and cost of revenue.

Vernon Essi
Vernon Essi
VP of IR at Fastly

This treatment is reflected in our financial tables in the earnings release and the eight quarter historical trended non GAAP P and L in our investor supplement. Also, unless otherwise noted, all discussions on this call reflect this adjustment. Reconciliations to the most directly comparable GAAP financial measures are provided in the earnings release and supplement on our Investor Relations website. These non GAAP measures are not intended to be a substitute for our GAAP results. Before we begin our prepared comments, please note that we will be attending four conferences in the second quarter, the twentieth Annual Needham Technology Media and Consumer Conference virtually on May 12, the William Blair forty fifth Annual Growth Conference in Chicago on June 4, the BofA Global Technology Conference in San Francisco on June 5, and the D.

Vernon Essi
Vernon Essi
VP of IR at Fastly

A. Davidson Conference in Nashville on June 10. Now I'll turn the call over to Todd. Todd?

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Thanks, Vern. Hi, everyone, and thanks so much for joining us today. I'm excited to share with you our strong results for the quarter, beating the upper ends of both our revenue and operating loss guidance ranges. As a result, we are raising both our 2025 revenue guidance and operating loss guidance by $10,000,000 and $3,000,000 at their respective midpoints. We also generated $8,000,000 in positive free cash flow, bringing us closer to breakeven on this benchmark for the year.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

We made great progress in our go to market transformation, capitalizing on product release velocity and growing traffic share with our larger enterprise customers, which yielded upside in our results. Our Q1 revenue was $144,500,000 coming in above the high end of our 136,000,000 to $140,000,000 guidance range with a growth rate of 8% year over year, an improvement compared to the 2% in the fourth quarter of twenty twenty four. Our customer count was 3,035 and enterprise customer count was five ninety five. We brought in 19 new enterprise customers in the $100,000 annual revenue threshold in the first quarter compared to $10,000 in the fourth quarter. This comparison does not account for declines in the count due to falling below the $100,000

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

threshold or churn.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Year over year, we grew our enterprise customer count by 18 or 3% and average enterprise customer spend grew 4% quarter over quarter to $907,000 as we saw solid cross sell growth biased towards larger customers. Our platform strategy continues to yield results as now almost half of our customers leverage two or more Fast eight product lines, generating three quarters of our revenue. We are excited about our revenue progress and the team's performance in Q1 accelerating the recovery in our top customers. We drove share gains at some of our largest customers and closed new enterprise accounts. Our top 10 customers represented 33% of revenue, down from 38% in the first quarter of twenty twenty four.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Revenue outside of the top 10 grew 17% year over year, outpacing overall growth and continuing to drive revenue diversification. Last quarter, we mentioned that we expected this revenue concentration number to stabilize in the low to mid-30s, and that's exactly what we saw in Q1. We consider this a healthy level of concentration in the revenue mix, and our go to market strategy will continue to emphasize logo acquisition and growing the enterprise customer mix outside of our top 10. Gross margin for the quarter was 57.3%, slightly better than our projections. We are taking actions to improve our fixed overhead and bandwidth costs across our fleet.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

We've been focused on software based fleet efficiency and believe there are significant gains for us to find here throughout the year. This will help us create additional capacity while mitigating supply chain dependencies and additional capital spend. These efforts, combined with our hardware investments purchased pre tariff, leave us well positioned to deal with the macro uncertainties that may unfold in 2025, and we believe with the actions we've taken, any tariff impact on our CapEx spend will be immaterial. We beat our operating loss guidance coming in at a $6,000,000 loss compared to the guidance range of 11,000,000 to $7,000,000 loss. This was due to our gross profit dollar upside on higher revenue and relative cost control on the OpEx line.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Continued cost optimizations and rigorous cash management have yielded a better than expected result and ultimately contributed to our healthy $8,000,000 of positive free cash flow in the quarter. We expect our op loss to improve through 2025 and anticipate delivering operating profit in the second half. In the first quarter, we saw a new level of rigor and momentum from our go to market teams. Our new segmented go to market efforts have created a higher touch approach with our largest accounts while continuing to drive strong enterprise and mid market customer acquisition velocity. This is driven by incentivizing cross sell, optimizing our regional sales approach and expanding our product portfolio.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

We continue to focus on the customer acquisition motion and reducing the onboarding friction at Fastly as we strive towards even more simplicity in both pricing and ease of implementation. Our packaging initiatives have been contributing towards that goal. And in the first quarter, packaging deals more than doubled year over year, and those involving new logos grew over 80%. We continue to get great feedback on how much customers love the simplicity of our packaging motion, and we continue to look for ways to improve and simplify the customer experience across the board. As part of our new high touch customer success motion, we've seen acceleration of business and also increases in revenue commits across our largest customers.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

This, combined with the success we're seeing in packaging, has yielded solid results in committed revenue, driving more stability and visibility into our revenue pipeline. You can see these results starting to show up in our RPO, which grew 33% year over year and now sits at a record high. In the first quarter, we continued our success in diversifying our logo wins and penetrating new and existing customer verticals. We are particularly seeing momentum in new logo acquisition with enterprise customers in strategic verticals such as travel and leisure, technology, financial services, and retail. These include Valaris, a leading ultra low cost airline who selected Fastly's platform for security, network services, and compute, A leading software company's professional network who chose the Fastly platform to leverage our network services offering.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

A leading credit card issuer and a separate payment processing company in The United States who both selected our platform for security and network services, and a home furnishing company who moved to Fastly's platform for network services, security, and compute. In all of these examples and many more, not only did we win where performance mattered, but also where platform completeness mattered. We are cross selling an increasing amount of our security, compute, and observability offerings in addition to our

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

best in class network services.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

This is the new FastSig platform, highly performant, positioned for the future, and ensuring best in class performance to meet our customers' needs. We're extremely excited about the progress we made in our security portfolio and the expansion of the Fasti platform that it represents. Security offers Fasti a revenue stream that is predictable, recurring, and sticky. In 2024, we expanded the security portfolio from one offering, our WAF, to three core offerings that deliver synergistic value to our customers: WAF, bot mitigation, and DDoS protection. In the first quarter of twenty twenty five, we enhanced our WAF offering with client side protection, improved our DDoS offering with enhanced visibility and alerting, and expanded our bot solution to include dynamic challenges.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

We also just recently launched AI bot detection, enhancing our bot solution to allow customers to detect and mitigate unwanted AI bots scraping their data. Today, almost half of Fastly customers now use multiple product lines, but many are just starting to bring online the full power of our security portfolio. With all of this portfolio momentum, we've refocused our go to market on the security cross sell opportunity to help us capture the revenue potential of this portfolio. We're already seeing this transformation resonate in our customer base and feel confident about our portfolio breadth and competitive advantage in building security solutions that are trusted by platform engineering teams and the software engineering teams they serve. Our security growth of 7% year over year in the first quarter does not yet reflect last year's portfolio expansion.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Given our renewed focus in this area, coupled with our go to market incentives and strategy, we believe we can outpace the market in the back half of twenty twenty five and be a share gainer. Moreover, we expect our security pipeline and motion will be a major contributor to growth looking out to 2026 and beyond. Revenue from our other segment, which includes our emerging products, saw nice gains in the quarter and grew 64% year over year. Compute represents significant differentiation for our platform in the market as more and more customers focus on differentiated, dynamic and personalized user experiences. Our outlook for 2025 continues to improve.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

And while macro uncertainties continue to persist across the market, we believe we have significantly mitigated any tariff impact to our CapEx, and we have not seen any material change in our buyer behavior or demand patterns. Regardless, we are continuing to take a cautious approach to our guidance for the rest of the year. Our second quarter guidance of 10% year over year growth and new 2025 guidance of 9% annual growth raises our prior guide. We are aiming to outperform these numbers and will continue to aggressively pursue gains in profitability and revenue growth. Please note that again, we have removed U.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

S. TikTok revenue beyond June 19 from our guidance. In summary, we are pleased with our first quarter performance and are seeing signs of progress from last year's efforts. As the Fastly team continues to build momentum across go to market and product development velocity, we expect to accelerate customer acquisition, capture more market share and drive improved financial returns to our shareholders. And now to discuss the financial details of the quarter and guidance in detail, I will turn the call over to Ron.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Ron?

Ron Kisling
Ron Kisling
CFO at Fastly

Thank you, Todd, and thanks, everyone, for joining us today. I'll discuss our financial results and business metrics before turning to our forward guidance. Note, unless otherwise stated, all financial results in my discussion are non GAAP based. Revenue for the first quarter increased 8% year over year to $144,500,000 coming in above the high end of our guidance range of 136,000,000 to $140,000,000 There were no unusual true up payments in the first quarter. Network services revenue was $113,200,000 and grew 7% year over year.

Ron Kisling
Ron Kisling
CFO at Fastly

Security revenue of $26,400,000 also grew 7% year over year, and our other products contributed 4,800,000 to revenue, growing 64% year over year, driven primarily by our compute products. Traditionally, our first quarter experience is seasonally flat to modest sequential revenue decline over the fourth quarter. However, in our first quarter of twenty twenty five, we saw better than expected seasonal traffic demand and share gains, which contributed to the 3% sequential revenue growth. Consistent with what we shared on our year end earnings call, we anticipate the revenue contribution of our top 10 customers will remain in the low to mid-thirty percent range throughout 2025. We consider this a healthy level of concentration in our revenue mix.

Ron Kisling
Ron Kisling
CFO at Fastly

Also, as was the case for every quarter in 2024, no customer accounted for more than 10% of revenue in the first quarter. Our trailing twelve month net retention rate was 100%, down from 102% in the prior quarter and down from 114% in the year ago quarter. Decline is primarily due to the revenue declines with a few of our largest customers in prior quarters and closely follows our overall revenue growth rate trend. We anticipate our LTM net retention rate will remain flattish near term followed by expansion in the second half of twenty twenty five as we begin to see the benefit of revenue growth from customers acquired in 2024. We exited the first quarter with an RPO of $3.00 $3,000,000 growing 33% year over year.

Ron Kisling
Ron Kisling
CFO at Fastly

This growth is a result of increasing number of our customers with revenue commitments and higher commitments at our largest customers coupled with the success of our packaging strategy. I will now turn to the rest of our financial results for the first quarter. As Vern mentioned earlier, we adjusted our non GAAP treatment of gross margins to exclude the amortization of stock based compensation and our capitalized internal use software. This treatment is reflected in our financial tables and in my prepared comments for all prior period comparisons and forward guidance. Our gross margin was 57.3% in the first quarter, coming in 50 basis points above our implied guidance and down two thirty basis points from 59.6% in Q1 twenty twenty four.

Ron Kisling
Ron Kisling
CFO at Fastly

The upside to guidance was due to the efficiency improvements Todd mentioned, better network utilization and continued cost control. The year over year decline was primarily due to the pricing dynamics we saw in 2024, where we experienced price per gigabit declines in the low 20s percent relative to our usual high teens percent decline trend. We see these pricing dynamics stabilizing back to the high teens across the remainder of 2025. Operating expenses were $88,700,000 in the first quarter coming in as expected relative to our revenue upside and reflecting 6% sequential growth due to the seasonal impact of payroll taxes, while coming in flat on a year over year basis compared to Q1 twenty twenty four. Operating expense discipline, combined with better than expected gross profit, resulted in an operating loss of $5,800,000 in the first quarter, coming in ahead of the lower end of our operating loss guidance range of 11,000,000 to $7,000,000 In the first quarter, we reported a net loss of $6,600,000 or a $05 loss per basic and diluted share compared to a net loss of $5,300,000 or $04 loss per basic and diluted share in Q1 twenty twenty four.

Ron Kisling
Ron Kisling
CFO at Fastly

Our adjusted EBITDA increased to $7,800,000 in the first quarter compared to $4,900,000 in Q1 twenty twenty four. Turning to the balance sheet. We ended the quarter with approximately $3.00 $7,000,000 in cash, cash equivalents, marketable securities and investments, including those classified as long term. This is a sequential increase of $11,000,000 from our fourth quarter. Our March '60 coupon convertible notes became current in the first quarter and are now reflected in our current liability.

Ron Kisling
Ron Kisling
CFO at Fastly

We have adequate liquidity to cover our working capital operating requirement and pay this balance when the notes become due. Cash from operations grew 55% year over year to $17,300,000 in the first quarter from $11,100,000 in Q1 twenty twenty four. Our free cash flow for the first quarter was $8,200,000 turning positive for the first time in eight quarters and representing a $10,400,000 increase from negative $2,200,000 in Q1 twenty twenty four. This increase was primarily driven by improved cash from operations, lower purchases of property and equipment, lower capitalization of internal use software and lower repayment on finance lease liability. Our cash capital expenditures were approximately 8% in the first quarter, coming in below our 2025 annual guidance of 9% to 10% of revenue we shared on our Q4 call.

Ron Kisling
Ron Kisling
CFO at Fastly

As a reminder, our cash capital expenditures include capitalized internal use software. For 2025, we anticipate our cash CapEx will again be in a range of 9% to 10% of revenue, with our medium to long term cash CapEx declining to six to 8% of revenue. I will now discuss our outlook for the second quarter and full year 2025. I'd like to remind everyone again that the following statements are based on current expectations as of today and include forward looking statements. Actual results may differ materially, and we undertake no obligation to update these forward looking statements in the future, except as required by law.

Ron Kisling
Ron Kisling
CFO at Fastly

Our revenue guidance reflects the dynamics in our business and is based on the visibility that we have today. I'd like to note that TikTok, one of our largest customers, continues to be the subject of much scrutiny given the current June 19 deadline with respect to their U. S. Operations. Globally, ByteDance, the parent company of TikTok, represented less than 10% of our revenue in the first quarter of twenty twenty five, and The United States traffic represented less than 2% of revenue in the same period.

Ron Kisling
Ron Kisling
CFO at Fastly

We do not know the full outcome of The U. S. Policy on TikTok. So as a prudent measure, our 2025 guidance excludes revenue from their U. S.

Ron Kisling
Ron Kisling
CFO at Fastly

Traffic after June 19. Due to improving revenue at some of our largest customers and incremental traffic ramps coming from our new customers, we expect to see modest upside to our typical flattish sequential seasonal growth in the second quarter. As a result, for the second quarter, we expect revenue in the range of 143,000,000 to $147,000,000 representing 10% annual growth at the midpoint. Given our recent efforts to lower our network costs and drive overall cost of revenue improvement, for the second quarter, we anticipate our gross margins will increase approximately 50 basis points relative to the first quarter, plus or minus 50 basis points. Guidance for our second quarter operating results reflects the impact of the sequential increase in gross profit and the impact of the increase in operating expenses I described.

Ron Kisling
Ron Kisling
CFO at Fastly

As we shared previously, we experienced higher wage costs due to seasonally higher payroll taxes and sales and marketing events in the first half of the year. As a result, for the second quarter, we expect a non GAAP operating loss of 8,000,000 to $4,000,000 and a non GAAP net loss of $08 to $04 per share. For calendar year 2025, we are raising our revenue guidance to the range of $585,000,000 to $595,000,000 reflecting annual growth of 9% at the midpoint. We anticipate our 2025 gross margins will be approximately 58% plus or minus 50 basis points. As a result, we expect our non GAAP operating loss to be in the range of $12,000,000 to $6,000,000 reflecting an operating margin of negative 2% at the midpoint, an improvement of approximately 59% in dollar terms over twenty twenty four's operating loss margin of 4%.

Ron Kisling
Ron Kisling
CFO at Fastly

Additionally, we anticipate to achieve operating profit for the second half of twenty twenty five. As mentioned earlier, given the seasonally heavier OpEx spend in the first half of the year, we anticipate our operating expenses to be lower in the second half. For modeling purposes, this implies 2025 operating expenses are roughly $350,000,000 We expect our non GAAP net loss per share to be in the range of $0.13 to $07 and we expect our free cash flow to be in the range of negative $10,000,000 to breakeven compared to negative $36,000,000 in 2024. Before we open the line for questions, we would like to thank you for your interest and your support in Fastly. Operator?

Operator

And your first question comes from the line of Param Singh with Oppenheimer.

Param Singh
Executive Director at Oppenheimer & Co. Inc.

Hi. Thank you for taking my question. Really good job on the quarter. I wanted to firstly dive into your network side and the drivers for the upside. What's really driving incremental customer demand?

Param Singh
Executive Director at Oppenheimer & Co. Inc.

And then I had a follow-up on the security. Thank you.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Yeah. It's a great question. We're we're pretty happy with the results across the board. We saw strong customer acquisition in in some of the strategic verticals we mentioned. And I think that the sales team's ability to execute not just the the customer acquisition, but the cross sell has been enhanced, for sure on under Scott's leadership and under a new incentive plan there.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

And and we've also certainly accelerated our recovery in the largest, in our largest media accounts. And by doing so, posted better than expected results, in that in that top 10 cohort as well.

Param Singh
Executive Director at Oppenheimer & Co. Inc.

Got it. No. Thanks so much for the insight. And then moving to security, you know, what what percentage would you say of your installed base or customers are using WAF? And then how would you categorize both, DDoS and and bot mitigation in terms

Param Singh
Executive Director at Oppenheimer & Co. Inc.

of the adoption and where it could go to by the end of the year?

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Yeah. We don't disclose exactly the last number, but we mentioned about half or almost half of our customers are using more than one product line. It's a smaller number than that that's using security, WAF is going be smaller than that. So I think there's an enormous amount of opportunity we have to penetrate with to penetrate our existing network service customers with WAF. It's still very early days on reactive DDoS and bot.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

And the percent penetration there is gonna be single digits percent for sure. There's tons and tons of opportunity. And that's why I mentioned, you know, enriching the security portfolio, now having three, like, fully fledged, kind of flagship products gives us enormous opportunity to drive, real momentum in the Security business, especially in the back half of the year.

Operator

Your next question comes from the line of Jonathan Ho with William Blair.

Jonathan Ho
Research Analyst at William Blair

Hi, good afternoon and congratulations on the strong results. I wanted to start out with your compute and observability business just given the 64% growth there. Can you give us some additional detail into maybe what products drove that and what the demand drivers were and how we should think about that business growth for the rest of the year?

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Yeah. Absolutely. The biggest chunk of that growth is in compute for sure. And it's interesting. We're seeing a lot more of those strategic expansion verticals really focusing on that dynamic user experience.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

And so they're using serverless edge compute to be able to give real time experiences, like we mentioned with airlines or travel companies that real time engagement, in the web experience is so important. We're seeing expansion there. And we've had some interesting launches specifically on the storage side, allowing some really creative use cases and and, really the ability to take compute and leverage it everywhere across our network, and and drive some real innovation. So it's both in the storage, kind of innovative storage side of the house and that dynamic user experience.

Jonathan Ho
Research Analyst at William Blair

Got it. And then just in terms of what you're seeing from a macro perspective, you know, can you give us a sense of, I think you mentioned there was some additional conservatism in the guidance. Can you talk about what you're seeing from customers? Is there any sort of extensions or elongation of deals? Just want to understand what that's looking like.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Yes. It's interesting. We haven't seen a change in the demand pattern or the buyer behavior yet, and I think that's a good sign. Generally, we tried to take a lot, a lot of precaution to make sure that we were set up on the CapEx side regarding any kind of tariff impact. But as far as the demand side goes, we haven't seen anything yet, but we're still taking a fairly conservative view in the outlook for the rest of

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

the year just to hedge there.

Jonathan Ho
Research Analyst at William Blair

Thank you.

Operator

Your next question comes from the line of Sanjit Singh with Morgan Stanley.

Sanjit Singh
Sanjit Singh
Executive Director at Morgan Stanley

Yes, hi. Thank you for taking the questions. I wanted to ask about the sequential increase in RPO this quarter. It's like the largest in some I mean, if you sort of unpack the drivers there, whether it was sort of the packaging motion and is there any sort of additional sales incentives to the salespeople to sign up these larger commitment contracts? Just want to understand the dynamics behind the strong RPO growth this quarter.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Yes. And I think you mentioned a lot of the drivers there. So there's really three drivers. We had strategic renewals at large accounts, which is great, helps us maintain the predictability of that large customer cohort for the long term. We have an incentive program that is driving our sales team to negotiate for better and better commits, and that's across our entire sales force, and that's certainly helping us drive that number.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

And the packaging solution, which is becoming more and more kind of the default motion that we're using in the mid market and commercial accounts, that drives RPO by its very nature. And all of those all three of those are contributing factors, I'm certain that that's why we saw a record number on the RPO side of the house and why we're seeing good growth year over year. Anything you'd add?

Ron Kisling
Ron Kisling
CFO at Fastly

The only thing I would add, I think last year, we put in an effort to just improve our engagement at more senior levels across our largest accounts. And I think we've also seen some benefit from that engagement in driving larger commits as a percent of their traffic when we see renewals. So I think that's an additional impact that's driving some of success we're seeing in RPO.

Sanjit Singh
Sanjit Singh
Executive Director at Morgan Stanley

Understood. And then talking back to the Network Services business, you guys mentioned in your script about signs of market share gains. Is that in terms of what's driving that, is that edgio conversions? Is it just a lot more favorable pricing environment so that FAST can more effectively compete on just the performance advantage you have? Just sort of the drivers of the market share gains that you guys expect to continue going forward.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Yeah. I think the as far as market share gains go, we are seeing some, SEO customers coming to the Vasted platform, and we're seeing some of the traffic from existing accounts that were on Edge, increasing their traffic share. Those are both nice to see. But I do think that the, ability of the team to expand into new logos is fueling this as well. And there's no doubt that that is delivering a healthy result.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

It's why we're seeing 17% growth outside of those top 10 accounts. And as more and more as we start to index on that larger tail of customers, we're going to start to see the growth rate index closer to that 17%.

Operator

Your next question comes from the line of Rajeet Luria with RBC.

Rishi Jaluria
Rishi Jaluria
Managing Director at RBC Capital Markets

Wonderful. Thanks so much for taking my questions, and nice to see continued progress and acceleration here. Maybe I wanted to start with TikTok. So appreciate the conservatism in not including U. S.

Rishi Jaluria
Rishi Jaluria
Managing Director at RBC Capital Markets

TikTok revenue kind of after the deadline. Maybe can you walk us through the non US piece and, you know, maybe how we should be benchmarking the potential, geopolitical risk that TikTok may try to bring kind of all of it in house or to, you know, Chinese carriers given, obviously, all the trade tensions between The US and China. Just how are we thinking about that? And and and maybe alongside that, is there an ability to offset some of the, loss potential loss of US traffic with other products, including compute and security? And then I've got a quick follow-up.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Yeah. It it's a good question, and I wanna make sure not to overshare too much about a a single about a single customer and that engagement. But it's been a very strong relationship. It continues to grow. We have a lot of optimism that we're going to be able to continue to operate in The US, but more importantly, that overall account globally because we've had such a strong partnership there.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

And and as you said, that includes not only more use cases within network services but across the portfolio.

Rishi Jaluria
Rishi Jaluria
Managing Director at RBC Capital Markets

Got it. No. Thanks. That was helpful. And then maybe just to piggyback on on Sensi's question.

Rishi Jaluria
Rishi Jaluria
Managing Director at RBC Capital Markets

With as you are out of the market and a few others kind of having exited the space, what are you seeing in terms of the pricing environment as you work through renewals? How should we think about that going forward? Is there some level of maybe not pricing stability, but at least maybe more favorable pricing or less severe pricing declines than we've been seeing over the past couple of years? And where is there your opportunity to kind of use that to your advantage?

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Yes.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Ron can give good color here for sure because we are seeing that pricing environment getting better, which I think is definitely giving us optimism for the next few quarters and even two years on how healthy this part of the market is going to be. But we largely, our strategy is based around acquiring new customers and driving market share gains. And I think the biggest upside we have is accelerating that motion across the board. But there's no doubt that the pricing environment can be tailwind in the near and mid term.

Ron Kisling
Ron Kisling
CFO at Fastly

Yes. Only thing I would add, I think what we saw last year, particularly amongst our largest customers, was an acceleration in kind of the price downs to kind of the low 20s above kind of what we've seen that longer term trend be kind of in the high teens. What we've seen this year is kind of a return to kind of that normal trend line. We from what we've seen, expect that trend line to stabilize kind of back into the high teens with the changes we've seen in the macro market.

Operator

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

James Fish
James Fish
MD & Senior Research Analyst at Piper Sandler Companies

Hey, guys. Wanted to circle back on shockingly edgy. Was surprised it took that long to talk about it. Congrats on the LinkedIn win. But can you just parse through how much of the tailwinds you're seeing today between new accounts to Fastly versus the existing overlapping accounts and and any color there?

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

I'd say the I'd say the first thing I would mention is that we're not done. The commits that were part of the SEO platform are still active, and they still haven't all settled out. So we're still in the middle, probably halfway through this motion, and we're pushing hard to make sure we're acquiring as much business as possible. As far as accounts that are new to Fastly and traffic upside, I'd say there's more opportunity, and there's been more business in terms of traffic increases than new logos, but it's been healthy on both sides for sure.

James Fish
James Fish
MD & Senior Research Analyst at Piper Sandler Companies

Got it. And how are you guys thinking about the opportunity with AI Accelerator and why Fastly perhaps the right to win that workload or if there is required more caching at the edge for inferencing?

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Yeah. I think AI accelerator and and more and more, we're looking at the opportunity to expand that into more sophisticated use cases. I think that they absolutely have the right to win. The the core usage, the core value is delivering a more human a a more, you know, lower latency experience for LLM interaction, and we absolutely have the performance leader in this space and our caching technology and in this case, the Symantec matching caching technology is really best in class. I think we absolutely have the right to win there.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

And we've also seen some real traction in deploying AI solutions in other parts of our business, especially security. We just launched the AI scraper bot mitigation, which has gotten a ton of interest, especially at RSA last week, And we're leveraging AI in our reactive DOS in our reactive DDoS product as well now and and and really delivering, I think, a pretty differentiated solution here. So I think there's opportunity on the AI side across the portfolio. And for sure, I think we have the right to win.

Operator

Your next question comes from the line of Madeline Brooks with Bank of America.

Madeline Brooks
Madeline Brooks
Analyst at Bank of America

Hi, team. Thanks so much for taking my question. Just one broader one, I guess, kind of a multi part one though. But if I think about the comparing your comments on one being a little bit more conservative for the year just in general with the macro backdrop in geopolitical. But then I look at the guide being raised by I think from my calculation roughly $3,000,000 more than the beat and your strong commentary on expectations for second half.

Madeline Brooks
Madeline Brooks
Analyst at Bank of America

I just want to know how we kind of marry those two things just because if I also look at some, of course, trailing metrics, but still NRR doesn't give a lot of cushion right now where we are for any further deceleration or contraction. So it just seems like second half, there's a lot of optimism behind it. And I just would like to know kind of where that's coming from and if there's any early signs you've seen that could kind of help us get comfortable with your level of optimism?

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

We've got pretty good visibility into the pipeline right now. And beyond, I do think we're being fairly conservative on that guide. There's opportunity for us to see a policy adjustment on TikTok again that would drive revenue into the projection. And we've got, I think, an opportunity to get up side on the Edge O traffic transformation here, which again would deliver upside to the to our projection. There's you can see that with 17% growth outside the top 10, our top 10 is still in negative growth.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

We've got an opportunity to turn that around. Really, I think turning that around faster and driving a better result sooner gives us an opportunity not just to get to that, to the new raise guide, to beat that as well.

Operator

And your next question comes from the line of Rob Pelcino with Raymond James.

Robert Palmisano
Robert Palmisano
Senior Equity Research Associate at Raymond James Financial

Hey, guys. Congratulations on the quarter. So sticking with the elevated full year guide, do you expect to be EBITDA positive for the rest of this year? And was also wondering just in terms of what you're seeing with respect to the pace of new deals that are coming in and whether you're seeing any improvement in your sales cycles? Yes.

Robert Palmisano
Robert Palmisano
Senior Equity Research Associate at Raymond James Financial

I think with respect to adjusted EBITDA, we would expect to continue to see positive EBITDA for the year and across the year. And particularly, as we talked about, in the second half as a whole, we would see operating profit given the trajectory in our revenue outlook and OpEx

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

for the year. As far as the sales cycles go, I mentioned we haven't seen a change in the buyer behavior. What we have seen, I think, is a change in the rigor, in the operational rigor that our sales team is operating with Scott and his new leadership. And because of that, our pipeline conversion is getting better and our ability to project and predict those deals has been cleaner. I think we're seeing some efficiency gains on the go to market side, and we've got we've got opportunity to to double down on that efficiency as well.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

So I I I see I see improved execution for sure. No doubt about it.

Operator

And your final question comes from the line of Rudy Kessinger with D. A. Davidson.

Rudy Kessinger
Managing Director - Senior Equity Research Analyst at D.A. Davidson

Hey, great. Thanks for taking my questions. Todd or Ron, I guess, on security, just why is the growth so slow? You know, it's been single digits last few quarters. Should we think of the WAF, you know, market just being a single digit growth market from here and out?

Rudy Kessinger
Managing Director - Senior Equity Research Analyst at D.A. Davidson

And then secondly, you know, when should we start to see some acceleration from bot and DDoS? I think the bot management product was launched about a year ago now. And so could you just talk about, you know, how the pipeline is shaping up for those products and where maybe security growth could be, you know, by year end?

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Yeah. We we don't we don't publish the projection by product line or or or individual product, but I will say I don't think we're yet seeing the impact of bot or reactive DDoS in those numbers. I believe that security know, as you mentioned, I believe the security growth number can be much higher, and we can get to that mid teens growth rate, where that where the security space is and and being a market share gainer actually beat that. And and that's gonna be our target. How quickly we get there, I think, will remain to be seen.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

But as far as bot and DDoS, we are, I think, really right at the beginning of the growth curve there.

Rudy Kessinger
Managing Director - Senior Equity Research Analyst at D.A. Davidson

Okay. And then if I look, kinda at the feet on the quarter, you know, it looks like about 70% of the quarter over quarter revenue growth in dollars was from the top 10 customers.

Rudy Kessinger
Managing Director - Senior Equity Research Analyst at D.A. Davidson

How much of that you talked

Rudy Kessinger
Managing Director - Senior Equity Research Analyst at D.A. Davidson

about share gains. Last couple of years, you have gains, you have losses, it kinda ebbs and flows. How much of that feels like permanent share gains or at least semipermanent share gains versus, you know, were there any kind of onetime events that surprised you or temporary traffic shifts with those customers that benefited Q1?

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Know, those top 10 media customers, there's a lot of seasonality, but, no onetime events I can think of. And I think, to be honest, the share gains here are continuing to increase with the effect of the Edge O change, and I think some a lot better execution with what what we've now deployed, a much higher touch customer success and customer engagement model for our top media accounts. But, again, like, revenue diversification is important to us. We saw 17 growth outside that top 10, and we are going to continue to aggressively pursue not just growth in the top 10, but across the customer base to continue to diversify our revenue and sort of strengthen the portfolio growth outside of networks and outside network services as well. Nelson, Rudy?

Rudy Kessinger
Managing Director - Senior Equity Research Analyst at D.A. Davidson

Yes. Yeah. All good. Thanks, guys.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Thank you.

Operator

And at this time, there are no further questions. I will now turn the call back over to Todd for closing remarks.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Excuse excuse me. I'm sorry.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

It looks like we do have one more, Rebecca.

Operator

And we do have a question that has come into queue. It is Param Singh with Oppenheimer.

Param Singh
Executive Director at Oppenheimer & Co. Inc.

Yeah. Hi. Thank you. Thought I'd ask a follow-up question here. What do you think, you know, is needed in the market to to rationalize pricing here?

Param Singh
Executive Director at Oppenheimer & Co. Inc.

You know, obviously, you know, getting to high teens from 20% decline is definitely an incremental improvement. But the idea was that once some of the the bad actors in the market go away, you could probably get down to maybe low double digits price decline and hopefully, you know, improve from there on. So what's really missing in the market? What's really needed to you know, for the customers to actually accept a better pricing environment? Thank you.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

I think strong sales execution is a part of that from our team, and we are starting to see that. But I I think this be like, a healthy market here looks like mid teens. And we're gonna be we're gonna be pushing hard, at least to do our part, to drive the the the market towards that direction. And I do think that with the current competitors in the space, the market for sure, supports that. And that would be a nice tailwind to the business, both on the gross margin and the top line side for the next few years.

Param Singh
Executive Director at Oppenheimer & Co. Inc.

Got it. Thank you so much. Appreciate it.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Thanks. Thank you.

Operator

And I will now turn it back over to Todd for closing remarks.

Todd Nightingale
Todd Nightingale
CEO and Director at Fastly

Thanks so much. I want to thank our employees, customers, partners and investors. We remain focused on execution, bringing lasting growth to our business and delivering value to all of our shareholders. Thank you so much for your time today.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Key Takeaways

  • Fastly beat Q1 revenue guidance with $144.5 million in revenue (8% YoY growth) and raised its full-year 2025 revenue outlook to $585–595 million, while narrowing the operating loss range and aiming for operating profit in H2.
  • Enterprise momentum accelerated with 19 new ≥$100K ACV customers in Q1 (vs. 10 in Q4), 3% YoY growth in enterprise count, and a 4% QoQ increase in average enterprise spend to $907K, with multi-product customers (50% of the base) now generating 75% of revenue.
  • Security revenue grew 7% YoY to $26.4 million as Fastly expanded from one to three core offerings (WAF, bot mitigation, DDoS), added client-side WAF protection, AI-driven bot detection and enhanced DDoS visibility, and is targeting mid-teens growth and share gains in H2.
  • Compute and other emerging products delivered 64% YoY growth to $4.8 million, driven by serverless edge compute and innovative storage capabilities that support dynamic, personalized user experiences across strategic verticals.
  • Fastly generated positive free cash flow of $8.2 million (first FCF-positive quarter in eight), with $17.3 million cash from operations (+55% YoY), and expects full-year 2025 FCF between –$10 million and breakeven versus –$36 million in 2024.
AI Generated. May Contain Errors.
Earnings Conference Call
Fastly Q1 2025
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