Fastly, Inc. Q2 FY2025 earnings call

• Leadership Changes: Ron Kisling is stepping down as CFO; Richard Wong joins as new CFO effective August 11; Scott Lovett becomes President, go-to-market, expanding responsibilities to include revenue and marketing functions.
• Q2 Results: Revenue of $148.7M, 12% YOY growth; gross margin 59%, 170 basis points higher quarter-over-quarter; operating loss $4.6M, better than guidance midpoint; cash flow from operations $25.8M.
• Growth Pillars:
  • Target performance-focused customers, including expanding into new intelligent features like adaptive security and observability analytics, with wins in financial services, health care, and omnichannel retail.
  • Cross-sell and upsell within installed base: Almost 50% of customers used 2 or more products, generating over 75% of revenue; cross-sell/upsell efforts driving wallet share growth.
  • Geographic expansion: Created new leadership roles for APJ and Southern Europe to drive international revenue, with targeted impact in 2026.
• Other Highlights: Packages sold increased over 50% YOY, package renewals over 130% YOY; high-touch customer success motion helped top 10 cohort return to YOY growth; RPO at record high.

In the second quarter, Fastly's revenue was $148.7 million, with a 12% year-over-year growth. Network Services revenue was $114.9 million. Security revenue reached a record high of $29.3 million, accounting for 20% of total revenue and showing 15% year-over-year growth. Other products revenue was $4.5 million, with a 60% year-over-year growth. The trailing 12-month net retention rate (NRR) increased to 104% from 100% in the first quarter. RPO grew 41% year-over-year to a record high of $315 million. The top 10 customers represented 31% of revenue, down from 33% in the first quarter, and revenue outside the top 10 grew 17% year-over-year.

• Q3 Revenue: Expected range of $149M to $153M, representing 10% annual growth at midpoint; gross margins expected to improve 50 basis points to 59.5% plus or minus 50 basis points; operating loss expected to be $1M to $3M non-GAAP.
• 2025 Guidance: Raised revenue guidance to $594M to $602M, reflecting 10% midpoint growth; gross margins expected to be approximately flat relative to 2024; operating loss reduced to $9M to $3M non-GAAP; free cash flow expected to be breakeven to positive $10M.

Q: Congratulations on the strong results. Clearly, there's been significant change at the management level. It seems in many of the key leadership positions, should we view this as a new chapter in the Fastly story? And if it isn't maybe too early, what does that opportunity set maybe look like as you look a little bit longer term, I know you've outlined some of the strategic and tactical opportunities here. But how should we think about the opportunity to unlock that faster growth for Fastly?

A: Yes, thanks for the question. I think new chapter is probably right. I feel like we have an opportunity to build on what we have achieved including Ron's mini contributions. We've established a strategy that's beginning to show results. And I think this quarter exemplifies that. Of course, we're looking forward to more results to come. But we have an opportunity, I think, to lean into where we've established momentum, particularly in go-to-market and product velocity and really just overall increase our focus and speed in executing our strategy and accelerate results and accelerate towards profitability as soon as possible. And I think longer term, that strategy will open up significant opportunities for us, obviously, in security and compute. And we'll have more to say about that in future calls.

Q: And just as a quick follow-up, can you talk a little bit about the pricing environment? And what's maybe giving you the optimism that this can hold? Any additional color would be valuable.

A: Yes. I'll comment, and I'm sure Ron will have a perspective on this as well. I think that we've seen -- we talked about an improving pricing environment I think, for a couple of quarters now. I think one thing that started to kick in for us is the increased discipline and focus that Scott and his leadership team on the go-to-market side have brought where we're being very thoughtful about how we're negotiating discounts with our customers as well as how we're negotiating commitments, committed revenue from those customers. And then that's very important. And I think you can see that in our record RPO.

Q: I did want to dive into the cross-sell initiative for the '25 comp plan. Anything you guys can share beyond the greater than 50% and greater than 130% metric wise on how this cross-sell, upsell is going, what I'm backing into on the in-period NRR, it looked actually exceptionally strong. So anything else you guys can share? How is productivity of the new security specialists, things like that?

A: Yes, again, I'll comment, and I'm sure Ron will have a perspective. And I'll just comment maybe qualitatively. I spend a lot of time with customers, and I can kind of share with you what I've seen from customers. Our platform strategy is really starting to have a meaningful impact on the way that they think about us as a partner and as a vendor. And we see more and more situations where our existing customers pick up new products for the -- to enhance the use cases or even to go into new use cases that Fastly wasn't previously involved in. And a lot of the feedback we get is that they're very happy with the performance and the support or opted to call-outs. And they're looking for more opportunities to leverage Fastly. And as we've launched particularly the additional security products over the last year, that's been a little bit of a recurring theme, some of our existing customers expanding into new use cases with us. But Ron may have some other more quantitative thought.

Q: I was on the higher revenue commitments from the top 10, it looks like it drove a decent acceleration here on the RPO side of things. So how should we think about some of the bookings from them this quarter? And any vertical strength you saw within those top 10, 4 looking at those in commitments. Is it -- I'm trying to understand how much of it is really just the Edgio benefit here of then kind of exiting the market that it's kind of onetime bookings kind of higher commitments there versus you guys seeing more durable tailwinds outside of Edgio.

A: Yes. I mean I think there's a couple of drivers here, like a lot of things. I think one, certainly, the exit of Edgio does improve kind of the traffic allocation and improve the commitment levels. I think our performance differentiation and a number of customers has sort of solidified our position in terms of traffic allocation where customers are willing to make that commitment. On the heels of, I think, us taking a very position that if you want the bigger discount, you've got to sign up for a bigger commit. And we're seeing success from that.

Q: Maybe walk us through sort of how you're viewing the company coming in and maybe some broader strategic things you think that you needed to change reach more better growth and profitability? And do you think you have the team you need in place now? Or do we expect some more management changes going forward?

A: Appreciated. Great question. And while I'm new to the CEO role, of course, I'm not new to Fastly, been here for a little while as previously as the Chief Product Officer, and worked very closely with the executive team and the Board on our strategy and other matters across the company. I think the team will continue to evolve. I think as our business changes and grows, we'll expect changes in our leadership teams. And I'm not here to forecast any additional imminent change. But I would just say I view it as a healthy part of the evolution of the company and change always brings an opportunity and so we look at it that way, and I'm focused on building a world-class team that's oriented around executing our strategy. In terms of sort of what's next. I mean I was here to help formulate the strategy, and I believe the results this quarter show elements of the strategy working, I think it's really a matter of leaning in and accelerating the results there. There's an opportunity with the momentum that Scott is building for us to get more results on go-to-market. And I'm working with the leadership team to just increase our focus and velocity as we execute on these things. I think we are making some progress on security. You saw the record revenue there. We certainly have big aspirations going forward. So we'll be continuing to drive that. And I think compute is somewhat partially tapped or even untapped opportunity for the company. And we've got some ideas of how we can grow that business that we'll be able to talk about more in the future. So I'm excited about where the company is at. I played a role in positioning us prior to becoming CEO. And frankly, I've really enjoyed the support I've received from the Board and from our leadership team and our employees as I stepped into the role.

Q: On securities revenue, the growth rate has been rather volatile. Last year, it decelerated from 16% Q1 to 4% in Q4. Now, it's accelerated back to 15% over the last 2 quarters. Just any color on what's driving the volatility there? And in particular, what drove the acceleration in Q2 and how should we be modeling or thinking about security growth in the second half of this year and into 2026?

A: Yes. I think one of the ways to understand the revenue volatility, I think, really has to do with kind of the history of what we saw in 2024. We had -- we went into the year with very high revenue concentration. We saw some big dislocations from what our historical trends were with just a handful of customers that had an outside impact that had a significant adverse impact on 2024. I mean if you kind of look at the breakout that we've shared top 10 versus everyone else, you can really see the impact that, that had while customers outside of the top 10 continue to grow in the mid- to high teens. And so that created a lot of the 2024 volatility. I think what you're seeing this year is a recovery and more stability in the top 10 from some of the efforts we've put in place to engage with those top 10 customers, some of the commitments that we've been able to achieve with those top 10 customers. and the success of the efforts of the go-to-market efforts that Scott's brought into in terms of accelerating new customer acquisition. As you can see that we saw a big acceleration kind of the largest acceleration we've seen in 2023 in new customers. And while it's not going to be a straight line, we expect to continue to see increasing new customers and that will build on our revenue growth rates going forward. So I think that's really kind of the lens that we're looking at. I think when you look at our outlook for the second half with the raise, we brought that number up to where at the midpoint, we're at 10%, grow better than the midpoint. But I think we are starting to see some stability after 2024.

Q: You guys had called out in the prepared remarks, maybe some competitive displacements on the DDoS with the new DDoS and bot mitigation product. Could you expand on that? Maybe what vendors did you displace? Would be the typical vendors we would think of? Or any more color you can share there?

A: Yes. I probably won't get into specific deals or competitors, but I think we're seeing 2 patterns and perhaps this is a helpful sort of detail. Often, a customer is using a third-party stand-alone, if you will, bot mitigation vendor. And as we've launched those capabilities on our platform, they've often done a proof of concept and consolidate that into their Fastly relationship. And that gives them a simpler experience and better performance of doing all that processing in one platform at the edge. The other example that I've seen a bunch of times is the presence of our bot capabilities opening up opportunities for us to sell a broader set of the platform capabilities, where perhaps we weren't able to position ourselves before. So in some cases, customers have that as a requirement. And that new product has unlocked broader opportunities for us. So those are 2 patterns we're seeing.

Q: Maybe just opening a question for Kip on your strategic priorities here coming in. You mentioned velocity and product velocity a few times on this call. Maybe you could just expand a little bit on that, what that means to you at Fastly and then I think in the Q&A, you also mentioned accelerating the path towards profitability and OpEx did get guided to be down the back half, your free cash flow was revised up. So seeing some nice movement on profitability already. Maybe just any thoughts on if that changes that were you're already making? Just your thoughts on priorities and with regards to the profitability as well?

A: Absolutely. No. As the former Chief Product Officer, the product velocity is dear to my heart and one thing we've heard from a lot of our customers, is they like more products and more feature releases from us so that they can do more and take advantage of those. And that's what I'm referring to. And we've had a notable increase particularly over the last 12 months versus the prior periods. In the number of new products and features that we've shipped. In fact, I think today, we launched a new feature in our WAF for account takeover using our deception technology, which a number of customers are pretty excited about. So both in terms of new products and enhancing our current products, we're focused on picking up the pace there and our engineering and product teams are doing a great job and are also focused on how they can find additional ways to get more value to our customers faster. And of course, that is ultimately value that we can capture as a company. In terms of the profitability and just the trajectory we're on longer term. I think we are in a good place. I mean, we have -- we're forecasting lower OpEx. I think there's some seasonal effects there, but we have been -- I think as Todd spoke about and Champion of making our company more efficient and making sure that we're investing where we need to, to grow, but that the investments we're making are ones that do drive growth and a good ROI. And I think that's a journey of continuous improvement. We can always look for ways to be more efficient. But the mindset is kind of almost as an investor, not necessarily minimizing spend, but investing where it's going to make a difference for the company and making sure that, that's done efficiently. We saw improved cash collection. We saw improved gross margins. So I think that our path to profitability is clear that it's been in a long time, certainly since I joined at the beginning of 2024. And I think the team -- the leadership team is very excited about that. That's a major priority of the goal for us. And it's excited, frankly, a lot of excitement at the progress we're making, and we're going to double down on that. And I believe that we can drive to that goal without sacrificing key investments to enable our growth.

Q: And then you guys had called out in the prepared remarks, maybe some competitive displacements on the DDoS with the new DDoS and bot mitigation product. Could you expand on that? Maybe what vendors did you displace? Would be the typical vendors we would think of? Or any more color you can share there?

A: Yes. I probably won't get into specific deals or competitors, but I think we're seeing 2 patterns and perhaps this is a helpful sort of detail. Often, a customer is using a third-party stand-alone, if you will, bot mitigation vendor. And as we've launched those capabilities on our platform, they've often done a proof of concept and consolidate that into their Fastly relationship. And that gives them a simpler experience and better performance of doing all that processing in one platform at the edge. The other example that I've seen a bunch of times is the presence of our bot capabilities opening up opportunities for us to sell a broader set of the platform capabilities, where perhaps we weren't able to position ourselves before. So in some cases, customers have that as a requirement. And that new product has unlocked broader opportunities for us. So those are 2 patterns we're seeing.