Fastly Highlights Accelerating Growth, Record Margins and AI-Driven Compute Demand

Key Points

• Fastly reported accelerating growth and stronger profitability: Quarterly revenue rose 23.3% year over year to $183 million, gross margin reached a record 65.8%, and the company recorded its fourth consecutive profitable quarter and sixth straight quarter of positive free cash flow.
• Security and compute are outpacing the core delivery business. Security revenue grew 43% and compute-related “other” revenue increased 69%, with management expecting the mix to shift gradually toward these higher-growth products as customers explore AI-related use cases.
• AI traffic is creating new demand for Fastly’s edge services. Machine-generated requests have increased sixfold, potentially benefiting request-based security and compute offerings, while customer commitments, net retention and planned capital spending also continue to rise.

Fastly NASDAQ: FSLY CFO Rich Wong said the edge cloud provider has accelerated revenue growth, expanded margins and generated positive free cash flow as management reshaped operating processes during his first 13 months at the company.

Speaking at Citi’s TMT Conference, Wong said Fastly reported $183 million in revenue in its most recent quarter, up 23.3% year over year. He said delivery revenue grew 17%, security revenue increased 43%, and the company’s “other” segment, which includes compute and observability, rose 69%.

“We’ve really hit a reset on the business, a lot of transformation,” Wong said. “We’ve accelerated revenue growth.”

Fastly reported record gross margin of 65.8% in the quarter, Wong said, along with about 15% operating margin. The company has posted four consecutive profitable quarters and six straight quarters of positive free cash flow, according to Wong.

Revenue mix and product expansion

Network services, Fastly’s delivery business, represented 73% of quarterly revenue and grew 17% year over year. Security accounted for about 23% of revenue, while the remainder came from the other category.

Wong said Fastly’s security growth has been supported by an expanded product lineup. The company began with a web application firewall and has since added distributed denial-of-service protection, bot management, API security and client-side protection.

That broader suite has enabled Fastly to compete for more requests for proposals and to sell delivery and security offerings together, Wong said. Security and other revenue combined were nearly $50 million in the most recent quarter, including approximately $49.4 million cited by Wong, and grew more than 50% year over year.

Compute was about $7 million during the quarter and remains the company’s fastest-growing product area, Wong said. He described the business as early-stage but said customers are working with Fastly to explore compute use cases tied to artificial intelligence.

Management expects the revenue mix to gradually shift toward security and compute as those businesses continue to outgrow delivery, while maintaining investment in the delivery operation.

Pricing, customer commitments and traffic trends

Vernon Essi, Fastly’s head of investor relations, said pricing in the content delivery network market has been relatively stable for roughly the past three quarters after a period of what he described as irrational pricing from smaller competitors that later exited the market.

Even in the more stable environment, delivery pricing continues to decline in the mid- to high-single-digit percentage range year over year, Essi said. Fastly has been offsetting that trend with growing traffic volumes and broader customer adoption of its platform.

Wong said the company has focused less on standalone delivery pricing and more on selling a portfolio of services based on customer needs. He said customers increasingly seek partnership-based arrangements rather than simply choosing the lowest-cost provider.

Fastly’s remaining performance obligations grew 38% year over year, while current remaining performance obligations rose 44%, Wong said.

Essi said machine-generated traffic is showing the strongest growth on Fastly’s network, though it remains a small portion of total traffic. The company has seen a sixfold increase in this type of traffic based on requests, he said, rather than on gigabits delivered.

Fastly recently introduced ContentGuard, a product designed to help publishers identify bots and agents accessing and scraping their content. Essi said publishers can use the offering to gain visibility into content access and potentially establish licensing or monetization arrangements.

Wong said AI-related demand may have a nearer-term financial impact on security and compute because those services are priced on a requests-per-second basis. In contrast, much of the delivery business is priced per gigabit, and AI traffic often consists of many small requests rather than high-bandwidth video streams.

Margins, customer concentration and capital spending

Wong said Fastly generated approximately 96% gross-margin flow-through over the past 12 months, meaning it converted 96 cents of each incremental revenue dollar into gross profit. The company does not disclose gross margins by segment because its single network and 166 global points of presence support delivery, security and compute products together.

He said compute can utilize CPU capacity that was previously underused within Fastly’s existing infrastructure, while delivery and security consume different resources across the same network.

Fastly’s top 10 customers represented 37% of revenue in the most recent quarter. Wong said the concentration does not concern him because those customers are adopting multiple products, including security and compute, which he said makes relationships more durable. Revenue outside the top 10 customers grew 12% year over year, he added, while the company had 624 large customers.

Net retention rate was 117% in the most recent quarter, which Wong said was a three- or four-year high. He indicated that retention among the top 10 customers was above the companywide figure.

On infrastructure investment, Wong said Fastly expects capital expenditures equal to 10% to 12% of revenue, representing an approximately 40% to 45% year-over-year increase in spending. He said the company’s single-network architecture allows it to invest efficiently and that Fastly currently can support its compute business using CPUs rather than deploying GPUs.

Wong said he believes investors should view Fastly as more than a commodity CDN provider, pointing to the company’s expanding edge-cloud capabilities in security, bot management, DDoS protection and compute.

About Fastly (NASDAQ:FSLY)

Fastly, Inc is a cloud computing company that provides an edge cloud platform for delivering, securing and accelerating digital experiences. Its platform processes and serves applications, websites, APIs, streaming media and other internet content closer to end users, helping organizations improve performance, reliability and control.

Fastly's product portfolio includes content delivery and application performance services, application programming interface (API) security, web application and bot protection, distributed denial-of-service (DDoS) mitigation, and edge compute capabilities.

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