Fastly, Inc. Q1 FY2026 Earnings Call

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. I would like to turn the conference over to Vernon 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'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, products 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 MarketSite 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 and 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 platform's API and Video-on-Demand operations. By meeting rigorous availability and security standards, we mitigated downtime and data breach risk and enabled 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, improved 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 ContentGuard, 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 maximized 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 position 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 ContentGuard. Managing the exploding AI bot landscape requires more than just a simple switch. It requires continuous intelligence. We launched ContentGuard to give publishers precise control over access to their content. Leveraging Fastly's pre-cache 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 and 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 for 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 seasonality was amplified this year by a record-breaking 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 and 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 count, which represents customers with more than $100,000 in annualized revenue in the quarter was 634 customers. Our trailing 12-month net retention rate was 113%, up from 110% 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 one-time benefit from a change in accounting policy regarding server useful life 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 a 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?

Our first question 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, what role — can we get an update on what role agentic use of the Internet is playing in your 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. Just to remind you that Q4 was particularly strong. We had particular strength in network services in Q4 for two primary reasons: we had a gaming download that overperformed where we did see record traffic in Q4, and then we also had a seasonally strong e-commerce online holiday shopping period. So despite that strength in 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. In Q4, we saw a stronger-than-expected seasonality, and of course, coming off of that, you might expect a 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, 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 uplift that I think we could attribute to those trends, likewise on compute. So we see 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, the pricing environment was very similar to Q4. 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. A good reminder is that price erosion is a year-over-year metric. As customers spend more on our platform and increase volumes, they're actually unlocking additional volume discounts and cross-selling, so we'll naturally see some price erosion. There's also another reminder that this only applies to our Network Services business. That phenomenon is not present in our security or compute businesses. We continue to focus on the value we create for our customers and the pricing discipline reflects this. Regarding what others are doing and what we're doing, we feel it was the right thing to do to maintain the pricing that we negotiated with our customers, and we're honoring the contracts that we have with our customers. As they continue to unlock those volume discounts, we will continue to honor that. We think it's the right thing to do from a customer relationship perspective.

Yes, I would add two points. First, we see pricing changes when we experience renewals with our customers, not on a continuous basis. There is some lag in seeing changes in market pricing driven by when customers renew; that is when prices are negotiated or potentially change, not generally mid-contract. So if you think about actions that others may have started in April, we're monitoring them closely. We've not seen a change in the pricing environment yet, but those changes may take a few more months to filter through the market as renewals occur. Second, we believe we have a more efficient, modern platform. If you look at the capital intensity of our business compared with some competitors, it appears more efficient. That may give us a structural advantage in an environment with rising component costs. They certainly affect us, but they may affect us less than competitors, so we may not need to pass through as many cost increases 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? And second, your network is deployed largely in Equinix and similar data centers with power and connectivity. Is there a reason you could not facilitate distributed compute nodes with GPUs combined with your network delivery? 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. The best number to point you to is the current portion of RPO. We mentioned 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, so taking 75% of that it's $275 million as a next 12-month commit. That current RPO is growing 77% year-on-year.

On GPUs and the opportunity our global network presents: we are in close contact with component vendors, including in the GPU space, and are looking strategically at that market. Our network, like most peers, is highly distributed globally, and we don't concentrate as much capacity and compute power in a single location as a centralized cloud does. When training was the primary driver of GPU demand, our network was not as well positioned for training. As workloads shift from training toward optimized inference and different chip architectures for high-performance, efficient inferencing, that may open a bigger opportunity for us given how our network is built and how software-defined it is. So yes, it's something we're tracking very closely.

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

This is Charlie on for Peter Levine from Evercore. It was great to see the step-up in compute revenue this quarter. Rich, could you 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, could you walk us through some of the use cases where Fastly is seeing the strongest customer interest for edge compute today? How do you expect AI edge inference to evolve over the next 12 to 18 months?

Sure. From a compute perspective, we reported $8 million in our other bucket, a 67% year-over-year increase. We're co-innovating with our customer base on agentic and AI workloads. As the agentic market matures, those co-innovations will become real products we will go to market with. For now, through co-innovation, we're working with some of our best customers on significant opportunities, and those are unique opportunities for Fastly in that space.

I'll echo Rich. We've seen an uptick in customer interest in additional optimizations and features in our compute platform, specifically related to interoperability with large language models so they can drive those workloads from the edge. We're actively working with customers to optimize and enhance the platform. The edge compute opportunity is large overall, and we are well positioned to capture a meaningful share.

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, like the Edgio side of things, in terms of traffic and how that's 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?

James, we lapped Edgio probably 2 to 3 quarters ago in terms of that opportunity. On Network Services, we are growing almost 2x the market. We're increasing share with existing customers and also running takeout campaigns where we sell the value — performance, speed, reliability, security — and we win where performance matters. The outperformance over the last 2 to 3 quarters has been driven by those takeouts versus competitors, including those that went out of business a couple of quarters ago.

At the end of the day, renewals shift over and mix shifts anyway. My follow-up is more around the emergence of Anthropic's Mythos. How do you see the value of your portfolio in security changing with some of the advancements there?

Great question. We believe the threat environment is becoming more dynamic and challenging for customers as these technologies evolve. We are seeing more interest in our security products, not less. We actively use AI technologies in our security work and believe our modern approach is well equipped to respond to evolving threats. Products like web application firewall are attractive because, as the velocity of threats increases, customers can't patch all systems in time. A managed WAF that can be updated quickly and that leverages real-time global threat visibility is valuable for reducing time to protect workloads. We see the evolution in security making 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 bigger questions around AI traffic. Could you help us break it down a bit further? 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 have a robust number to break that traffic out for you. We have seen that agentic traffic is growing faster than human browsing traffic and becoming a greater share of traffic over time. But Rich and I don't have a percentage or specific number to share on this call.

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

Security this quarter was more broad-based. Compared to Q3, where we highlighted one large customer deal, this quarter involved multiple 7-figure deals and a number of smaller ones using security. As agentic traffic increases, customers are focusing more on security and compute on our platform, and we see adoption much more broad-based than in Q3.

Another characteristic is the broader interest across our expanded security portfolio. Our newer products are performing well alongside Next-Gen WAF, which continues to perform strongly. From a revenue perspective, we saw different sized deals during the quarter. From a product diversification perspective, we saw broader interest and adoption across our portfolio, which matches our strategy.

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

I wanted to start with the hiring of Joan Jenkins and the potential opportunity you see from the CMO role. What is the biggest opportunity for the business to accelerate given that hiring?

We see a big opportunity. We've made good progress in marketing, but Joan will help take it to the next level, especially as we reach more markets globally. There's an opportunity to better position the value of our platform and services with specific buyers and verticals, and to build awareness in markets like APJ where we are underpenetrated. Joan has a systematic, scalable approach to marketing, which will serve us well as we expand our brand recognition beyond our world-class network delivery products into first-class security and edge compute branding.

I'd add that Fastly was founded by technologists and our brand resonates strongly with technologists. Bringing Joan helps us speak beyond a pure technologist audience about the performance and capabilities of our platform, which is important as we appeal to a broader audience.

Got it. And as a follow-up, given the strength in your security business this quarter, can you help us understand what's driven the strong uptake and what inning we're in, particularly given how early agentic rollout is?

It's hard to quantify what inning we're in. Several things have come together: new significant deals in the quarter, robust expansion of deals won in prior quarters, and over the last several quarters we've expanded our security portfolio from one product to five or six products that solve important problems for our customers. That enables us to land more customers with a broader portfolio and have existing customers adopt more of the portfolio. AI is a driver as well; we've seen increased interest in privacy products and API governance tied to AI use cases, which are very relevant to our security portfolio.

On a quantification note, if you think about the midpoint of our full-year 2026 guide, that's a $93.5 million increase in incremental revenue. Based on growth rates of the various businesses, more than half of our incremental revenues will come from security and other, which we view very positively. Those are areas we're investing in and see as creating the biggest opportunities for Fastly.

Our next question 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 if it's still in that range and what assumptions are implicit in the annual outlook?

Network services traffic growth has been in the mid-20s, with mid-single-digit price compression. From a modeling perspective, we assume low double-digit renewal assumptions, which is prudent given the environment. We continue to expect mid-double-digit traffic growth offset by mid-single-digit price erosion, given volume discounts and price dynamics.

On the CapEx side, like-for-like on hardware, what is the assumption in terms of increased prices on the hardware built into your CapEx outlook?

We guided 10% to 12% of revenues for infrastructure CapEx, implying roughly $70 million to $80 million for the full year. We're front-loading that spend with the majority in Q1 and Q2. We have placed all server orders for the year and have already received the server orders in Q1. You'll see a pickup in accounts payable where the orders arrived but payment has not yet been made. Those prices have been locked in. We did see price increases in some areas, notably memory pricing, where we saw increases of 2 to 3x in some cases.

Just last, in terms of the high-level revenue guide, can you help us in terms of what you're thinking for network versus security growth rates implicit in that annual guidance? Some ranges would be helpful.

From a business-by-business outlook, we think Network Services could be anywhere between 9% to 11% year-over-year growth for us, while the market grows closer to 5% to 6%. For Security, we anticipate continued strong growth; being in the range of 25% to 30% year-over-year growth would not be unheard of, especially after delivering 47% growth in Q1. The remainder of the revenue delta aligns to other product growth consistent with the full-year guidance.

Our next question comes from Paramveer Singh with Oppenheimer.

Thanks. When you talk to your customer base about agentic AI, what do they feel is missing so far either from a security or compute perspective that should help them deploy and manage agentic AI platforms? How would you price incremental products versus the current platform?

Enterprises are in relatively early days of agentic adoption. Many are assessing how their processes must evolve to embrace agentic AI. We've seen interest in security areas like API Discovery and schema enforcement to ensure coding agents don't create unexpected behavior, and in privacy capabilities. Much of our work is through design partner programs where we co-develop with customers to meet their needs. It's premature to comment specifically on pricing for these incremental products as we continue to develop them and work with customers to assess value creation.

Understood. One for Rich: you still have some convertible notes at 7.75%, which is a high rate. How are you thinking about adjusting your financial structure given the market and your stock price?

The 7.75% convert remains outstanding and isn't due until June 1, 2028. It's trading at a significant premium, so a refinance opportunity is expensive given trading values. Right now, we're focused on operating the business and growing. From a liquidity perspective, we feel comfortable given our cash position and maturities in 2028 and 2030.

Do you feel sufficiently capitalized to fund the CapEx to extend to the growth opportunity?

Absolutely. We guided free cash flow for the year after CapEx in the $40 million to $50 million range. We feel very good about our liquidity with approximately $330 million in cash and generating positive operating cash flow.

Our next question comes from Max Persico with RBC Capital Markets.

On security, are you seeing customers and net new customers actually land with the newer solutions, or is it still predominantly a cross-sell/upsell motion? And on Network Services, given macro uncertainties like conflicts, energy prices, and supply chain issues, how much of your business is impacted by e-commerce traffic and could slower traffic appear in the near term?

We do see customers starting their journey with us using multiple security products, including the newer products like Bot Management, DDoS, and API Security, often alongside WAF. Completing our web application and API protection portfolio has allowed us to meet RFP requirements and win customers who adopt several products upfront. On macro impact, I wouldn't describe us as insulated from geopolitical or macro risk, but the effect is complex and varies by customer vertical. In past slowdowns, some consumer behaviors are resilient. It's not clear-cut how it will translate across our customers' businesses, so we monitor it closely.

To add, e-commerce is one of the verticals where performance matters and where we win, but we also serve many other verticals. Our exposure to e-commerce is not disproportionately large, and historically, demand has been relatively resilient in downturns. We are monitoring the environment, but we believe we have a degree of resilience.

There are 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 seeing you at our Investor Day in September, which Vernon mentioned earlier, and we'll be sharing more as it approaches at the Nasdaq MarketSite 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.