Fastly Third Quarter 2026 Earnings Call - FASTLY INC

Explicit Guidance:

• Q4 2026 Revenue: $198 million to $202 million (midpoint implies 16% year-over-year growth).
• Q4 2026 Gross Margin: 65.5% ± 50 basis points.
• Q4 2026 Operating Profit: $30 million to $34 million (implies ~16% operating margin midpoint); excludes a non-recurring tax benefit.
• Q4 2026 Non-GAAP Net EPS: $0.16 to $0.18.
• Q4 2026 OPEX: Expected to increase mid-single-digit millions sequentially due to GTM incentives, seasonal marketing, and IT spend.
• FY 2026 Revenue (Raised): $744 million to $748 million (midpoint implies 20% year-over-year growth).
• FY 2026 Gross Margin: 65.5% ± 50 basis points.
• FY 2026 Non-GAAP Operating Profit (Raised): $107 million to $111 million (implies ~15% operating margin midpoint, up from 4% in 2025).
• FY 2026 Non-GAAP Net EPS: $0.61 to $0.63.
• FY 2026 Capital Expenditures: Approximately 10% of revenue (lower than prior 10–12% guidance; front-loaded capacity expansion is concluding).
• FY 2026 Free Cash Flow (Raised): $50 million to $60 million.
• Reporting Change: Starting in 2027, revenue lines will consolidate from three (Network, Security, Other) to one unified line; "Multi-product adoption" metric will be introduced.

Business-Segment Outlook:

• Multi-Product Adoption: Targeting increased adoption across customer cohorts; currently 74% of large customers use 2+ suites and 34% use 4+ suites. Growth strategy relies on expanding this adoption to drive retention and revenue.
• Security Portfolio: Expected to continue outpacing growth; recent triple-digit growth in Bot and DDoS products anticipated to sustain cross-sell momentum. New products (AI Runtime Control, AI Firewall, expanded API Security) created additional cross-sell avenues.
• Customer Cohorts: Strategy shifting to broaden growth from top 10 customers (who saw 46% YoY growth) to the "non-top 10" segment via international expansion (APJ, LATAM) and marketing transformation; improvements in this segment expected over time as investments mature.
• Revenue Mix: Security revenue is projected to grow beyond the 24% of total revenue seen in Q3 2026.

Market and Competitive Outlook:

• AI Traffic: Agentic traffic is expected to accelerate; while text-based traffic volume impact on delivery revenue is modest, security consumption (bot detection, runtime control) offers significant upside.
• Competitive Wins: Continued success in unseating legacy security and delivery incumbents (e.g., restaurant chain, global marketplace, Japanese retailers).
• Platform Strategy: Shift from "experimentation" to "business-critical production" of AI; demand driven by customers needing to govern AI agents, protect AI applications, and ensure content authenticity.
• Gaming/Episodic Demand: Q4 2026 guidance includes assumptions for major episodic traffic events (GTA VI launch, holidays, NFL), modeled based on download size, patches, and share of wallet; GTA VI assumed to generate significantly more traffic than prior events like Fortnite.

Macro / Industry Outlook:

• Supply Chain: Mitigated memory component constraints via software-defined infrastructure and selective component upgrades; no significant future CapEx headwinds anticipated from supply chain.
• Cybersecurity Threats: Emerging vulnerabilities (e.g., PHP To Shell) expected to increase demand for edge-based WAF and next-gen security, reinforcing the value of the platform.
• AI Impact on Business Models: Management notes AI agents may help consumers manage subscriptions (impacting some consumer business models), but views this as a traffic opportunity for Fastly rather than a threat to its subscription model.

Strategic Initiatives:

• GTM Leadership Transition: President of Go-to-Market (Scott Lovett) to retire in 2026; search for new Chief Revenue Officer underway with both internal and external candidates; transition expected to conclude within the year with continuity maintained.
• Partnerships: Expanding "routes to market" via managed service providers and deep network integrations (e.g., Comcast integration launching Q3, with more planned); aim to add capacity closer to end users for latency-sensitive apps (gaming, AI).
• Geographic Expansion: Increased investments in APJ and LATAM regions to diversify revenue beyond top-tier US customers.
• Product Velocity: Continued rollout of AI-specific security tools and platform expansion to drive multi-product adoption.
• Infrastructure: Capital discipline maintained; 70% of 2026 CapEx front-loaded; future capacity expansion driven by component upgrades and software efficiency rather than wholesale server replacements.

Risks and Headwinds to Outlook:

• Leadership Transition: Potential disruption to go-to-market momentum during the CRO search; guidance incorporates management's view of this risk.
• Revenue Variability: Consumption-based model leads to quarterly fluctuations in traffic volumes (e.g., episodic gaming or holiday spikes).
• Supply Chain: Continued monitoring of memory component availability, though mitigated by software-defined efficiency.
• RPO Fluctuations: Retained Order (RPO) guidance notes quarter-to-quarter variability due to the timing of large renewals.
• Competitive Landscape: Need to successfully expand penetration in non-top 10 segments against incumbents.

Management Tone on the Future:

• Confidence: High confidence in "durable" growth and profitability, citing four consecutive quarters of >20% revenue growth and expanding operating margins.
• Strategic Validation: Management views the platform strategy and GTM transformation as "working," evidenced by record margins and NRR expansion to 119%.
• Guidance Adjustments: Willingness to raise guidance (Revenue, Operating Profit, CapEx, FCF) reflects conviction in the underlying business model.
• Long-Term View: Focus remains on aligning financial reporting (2027+) with the unified platform strategy and maintaining disciplined capital allocation.

Miscellaneous:

• Conference Appearances: Attendees scheduled for RBC Global TMT (Nov 17), UBS Global TMT/AI (Dec 2), and Wells Fargo TMT Summit (Dec 8), all in 2026.
• Reporting Changes: Final reporting of three-line revenue breakdowns will occur in Q4 2026 before switching to a single consolidated revenue line in 2027.
• Non-GAAP Disclosure: Forward-looking non-GAAP measures are not reconciled due to lack of quantitative data without unreasonable effort; reconciliations available in the 8-K filing.