Fastly, Inc. (FSLY) Q3 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call highlights strong financial performance with impressive revenue growth across all sectors, especially in security. The company raised full-year revenue guidance and improved cash flow, indicating operational efficiency. Despite slightly cautious Q4 guidance, the optimistic outlook on international expansion, particularly in APJ, and strong cross-sell strategies suggest growth potential. The market cap indicates moderate volatility, leading to a positive stock price movement prediction over the next two weeks.

Key Financial Performance

Revenue $158.2 million, a 15% year-over-year increase. This growth was driven by successful cross-sell motions, competitive share gains, and greater upsells with existing network services customers.

Gross Margin 62.8%, an improvement of 410 basis points year-over-year. This was due to revenue upside, pricing declines moderating, and a $1.6 million nonrecurring cost of revenue tailwind.

Operating Income $11.6 million, significantly above the $1 million guidance midpoint. This reflects strong operating leverage and disciplined cost management.

Free Cash Flow $18.1 million, a $25.2 million increase from negative $7.1 million in Q3 2024. This improvement was driven by strong financial performance and disciplined spending.

Security Revenue $34 million, a 30% year-over-year increase. This growth was attributed to the expansion of the security portfolio and successful cross-sell strategies.

Network Services Revenue $118.8 million, an 11% year-over-year increase. This was supported by healthy traffic levels and successful upsell motions.

Other Products Revenue $5.4 million, a 51% year-over-year increase. This growth was primarily driven by sales of compute products.

Net Retention Rate 106%, up from 104% in the prior quarter and 105% in the year-ago quarter. This increase was due to revenue growth from a few of the largest customers.

Cash Flow from Operations $28.9 million, compared to $5 million in Q3 2024. This reflects improved operational efficiency and financial performance.

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Operating Highlights

Revenue growth: Achieved record revenue of $158.2 million in Q3, exceeding guidance. Security revenue grew 30% year-over-year, and other products revenue grew 51% year-over-year.

Product innovation: Introduced API discovery for API resiliency, deception capabilities in next-gen WAF, and AI integration with Fastly MCP server.

Geographic expansion: Focused on international expansion, particularly in APJ, with new customer wins in the region.

Customer acquisition: Secured major wins with a LatAm retailer, an APJ specialty retailer, and an American streaming leader, showcasing platform consolidation and operational efficiency.

Operational efficiency: Achieved record free cash flow of $18 million and improved gross margin to 62.8%. Operating expenses grew at a slower rate (10%) compared to revenue growth (15%).

Cost management: Implemented rigorous budgeting and ROI-focused spending discipline, contributing to profitability.

Platform strategy: Focused on expanding Edge security capabilities, enhancing developer experience with AI, and driving cross-sell and upsell opportunities.

Leadership changes: Appointed Rich Wong as CFO, emphasizing financial discipline and scaling the business.

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Risk or Challenges

Market Conditions: Potential impact of the Trump administration's executive order on TikTok's operations in the U.S., which could affect Fastly's revenue. ByteDance's U.S. traffic represented less than 2% of revenue in Q3, but the situation introduces uncertainty.

Competitive Pressures: Fastly is experiencing competitive pressures, as evidenced by the need to highlight competitive takeouts and customer wins over competitors.

Regulatory Hurdles: The executive order regarding TikTok introduces regulatory uncertainty, which could impact Fastly's business if enforcement actions change.

Economic Uncertainties: Revenue model based on customer consumption introduces variability and potential unpredictability in quarterly results.

Strategic Execution Risks: The company is undergoing a transformation with a focus on disciplined investment and operational rigor, which carries execution risks. Additionally, the implementation of a rigorous budgeting process and ROI discipline could face challenges.

Supply Chain Disruptions: No explicit mention of supply chain disruptions in the transcript.

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Guidance & Outlook

Revenue Guidance for Q4 2025: Expected revenue in the range of $159 million to $163 million, representing 15% annual growth at the midpoint.

Gross Margin Guidance for Q4 2025: Anticipated gross margins for the fourth quarter will be 61.5% plus or minus 50 basis points.

Operating Profit Guidance for Q4 2025: Expected non-GAAP operating profit of $8 million to $12 million.

Net Earnings Guidance for Q4 2025: Expected non-GAAP net earnings per diluted share of $0.04 to $0.08.

Revenue Guidance for Full Year 2025: Raising revenue guidance to a range of $610 million to $614 million, reflecting annual growth of 13% at the midpoint.

Gross Margin Guidance for Full Year 2025: Anticipated gross margins will be between 60% and 61%.

Operating Profit Guidance for Full Year 2025: Increasing non-GAAP operating profit expectations to a range of $9 million to $13 million, reflecting an operating margin of 2% at the midpoint.

Net Earnings Guidance for Full Year 2025: Expected non-GAAP net earnings per diluted share to be in the range of $0.03 to $0.07.

Free Cash Flow Guidance for Full Year 2025: Expected free cash flow to be in the range of $25 million to $35 million, an improvement of $66 million year-over-year at the midpoint.

Capital Expenditures Guidance for Full Year 2025: Expected cash CapEx to be in the range of 10% to 11% of revenue for the full year.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:What is the reason behind the dynamics in delivery business expansion versus the reported overall performance?

A:Richard Wong explained that from a net revenue retention perspective, they look at it in aggregate across all three business lines. He highlighted that Network Services delivered about 11% year-over-year growth for the quarter, marking the third consecutive quarter of accelerating Network Services revenue.

Q:What is the opportunity with Quill winding down, given its DIY approach?

A:Kip Compton stated that they have not been running into Quill often and any opportunity with Quill would be significantly smaller than the Edgio tailwinds. However, they see some potential benefit.

Q:Were there any one-time items in the quarter, and what are the seasonal trends in the delivery business for Q4?

A:Richard Wong mentioned that the quarter had a confluence of activities, including a strong cross-sell quarter and strong bookings linearity, with almost half of bookings in the first month. For Q4, they are being prudent with guidance and see good traffic trends continuing. Kip Compton added that there is no unusual seasonality in the Network Services business.

Q:Where is the most strength in the security portfolio, and what drove a large competitor displacement?

A:Kip Compton highlighted broad-based strength in the security portfolio, with new products like AI bots management and DDoS capabilities performing well. Regarding competitor displacement, he noted that performance and support were key factors, with many customers advocating for Fastly due to prior positive experiences.

Q:What are the returns and sales capacity in international markets, particularly in APJ?

A:Kip Compton explained that their international expansion strategy focuses on sales coverage rather than CapEx. They are underindexed in opportunities outside the U.S., particularly in Asia Pacific, which is growing quickly. Investments in leadership and sales coverage are yielding early results, with more significant benefits expected next year.

Q:Can the $34 million security revenue in the quarter be considered a new baseline, and will it grow sequentially?

A:Richard Wong clarified that the $34 million security revenue benefited from strong bookings linearity early in the quarter. While the large deal helped the sequential jump, the revenue is recurring and expected to continue. Kip Compton added that the revenue aligns with their recurring revenue model.

Q:What trends are observed in the top 10 customers, and what is expected for Q4 and next year?

A:Kip Compton noted no notable changes outside the significant security cross-sell. Seasonality appears normal, and there is potential for additional upside in cross-selling within the top 10 customers.

Q:Why is the Q4 sequential growth guide lower than historical patterns, and what is driving gross margin improvements?

A:Richard Wong attributed the lower Q4 sequential growth guide to a higher Q3 due to a confluence of events, including strong Network Services and security performance. Gross margin improvements are driven by platform scale and traffic engineering investments, with Q3 gross margins at 61.8% excluding a $1.6 million tailwind.

Q:Is there stabilization in security revenue volatility, and what is the outlook for net retention rate (NRR)?

A:Kip Compton stated that even excluding the large deal, security revenue showed accelerating growth, indicating stabilization. Richard Wong mentioned that NRR is expected to improve in Q4 due to cross-sell and upsell investments, but no specific long-term guidance was provided.

Q:Review of Unclear Management Responses

A:Management avoided providing specific guidance on the long-term net retention rate (NRR) and whether it could return to the peak of 120%. They also did not provide detailed insights into the exact impact of international expansion on CapEx or the precise timeline for realizing significant benefits from these investments.

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Earnings Word Cloud

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