Good afternoon. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Vern Essi, Investor Relations at Fastly. Please go ahead.

Thank you, and welcome, everyone, to our Third Quarter 2025 Earnings Conference Call. We have Fastly's CEO, Kip Compton, and CFO, Rich Wong, with us today. Webcast of this call can be accessed through our website, fastly.com and will be archived for 1 year. Also, a replay will be available by dialing (800) 770-2030 and referencing conference ID number 7543239, shortly after the conclusion of today's call. A copy of today's earnings press release, related financial tables and investor supplement all of which are furnished in our 8-K filing today can be found in the Investor Relations portion of Fastly's website. During this call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, product sales, 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 report filed on Form 10-Q filed with the SEC and our third quarter 2025 earnings release and supplement for a discussion of the factors that could cause our results to differ. Please refer, in particular, to the section 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. These non-GAAP measures are not intended to be a substitute for our GAAP results. Before we begin our prepared comments, please note that we will be attending 4 conferences in the fourth quarter. The RBC 2025 TMT Conference on November 19 in New York; the Sixth Annual Needham Tech Week on November 20 in New York, UBS Global Technology and AI Conference in Scottsdale on December 3, and the Raymond James 2025 TMT and Consumer Conference in New York on December 8. Now I'll turn the call over to Kip.

Thanks, Vern. Hi, everyone, and thank you for joining us today. We had an outstanding third quarter, and I'm pleased to share our results. These results reflect our disciplined execution, exceeding the high end of our guidance on revenue and operating profit as well as achieving record free cash flow. This momentum drove record results across all 3 of our product lines. When I became CEO, I laid out a clear mandate to accelerate our growth and drive to profitability. This quarter marks the next step in Fastly's transformation, accelerating growth and innovation with operational rigor and discipline. As a result, we are raising our full year guidance for revenue, profitability and free cash flow. We believe our Q3 performance demonstrates that the strategic initiatives we put in place earlier this year are translating into results. Now turning to highlights from Q3. Our third quarter revenue was $158.2 million above the top end of our guidance and a record high. Our gross margin of 62.8% also exceeded the top end of our guidance. This was an improvement of 380 basis points sequentially as we delivered healthy margin leverage on our revenue upside. We posted record operating income of $11.6 million, significantly above our $1 million guidance midpoint. Similar to Q2, we achieved strong operating leverage in the third quarter with OpEx up 10% year-over-year compared to 15% year-over-year revenue growth. This strong financial performance drove record quarterly free cash flow of $18 million. Our financial performance this quarter demonstrates strong rigor in our go-to-market motion with revenue growth accelerating to 15% compared to 12% in the second quarter. Our platform expansion and cross-sell strategies were major contributors driving our security revenue growth to 30% year-over-year. These results reflect operating leverage in our business and our continued focus on spend discipline.…

Thank you, Kip, and thank you, everyone, for joining us today. I would like to start by saying that I'm very excited to be here and about the opportunity that lies ahead. I chose to join Fastly because I was excited by its leading technology and superior performance among Edge cloud platform companies. Customers love our technology, our products and our best-in-class support. I truly believe that we are positioned at the right place, the Edge Cloud at the right time as we see workloads shift to the Edge to complement central cloud. I also saw an opportunity to unlock value for our customers and shareholders. Since coming on board, I have seen many opportunities in finance where we can influence better outcomes with our customers as well as our financial performance with our investors. For example, as we move into year-end 2025 and looking ahead to 2026, we are implementing a rigorous budgeting process across the company, and we are building more discipline around the ROI of our spend with a focus towards growth and scale. I've added staff to the finance functions to support this effort, and I've also brought in a new Chief Accounting Officer. Before I dive into our Q3 results, I would like to say I am very proud of our financial performance this quarter. Having achieved our third consecutive quarter of accelerating revenues. We've also achieved near record gross margins, record profitability and record free cash flow. We continue to launch product enhancements that our customers love. I'm excited to be here and partner with Kip and the team to help Fastly scale to the next level. Now on to our Q3 results. I'd like to remind you that unless otherwise stated, all financial results in my discussion are non-GAAP based. Revenue for the…

[Operator Instructions] Your first question comes from the line of James Fish with Piper Sandler.

Nice quarter, and thanks for the questions here. Look, I understand security cross-sell did well and NRR was up 2 points sequentially on a trailing 12-month basis, but I'm backing into that the implied period is a little bit lower. And so security really accelerated. It kind of raises the question as to what's going on with the delivery business expansion. So can you just walk us through the dynamics there as to why -- what's going on with delivery expansion versus kind of what you reported here for overall?

Yes, Jim, this is Rich. Thank you for the question. I would say that from a net revenue retention perspective, we look at it in aggregate, across all 3 business lines. I would guide you, if you're looking at Network Services, just look at the year-over-year growth rate with Network Services. For the quarter, we've delivered about 11% year-over-year growth on the Network Services side, and that was our third quarter of accelerating Network Services revenue.

Fair enough. And then competitively, obviously, you guys, over the last few quarters have had a bit of a tailwind on Edgio, but there's discussions around Quill now. I guess how much of an opportunity with them seemingly winding down here, could that be given some customers were trying to use them a bit for somewhat of a DIY approach.

Yes. Jim, we've not been running into Quill very often. I think any opportunity with Quill would obviously be significantly smaller than the Edgio tailwinds that you referenced. But of course, we see an opportunity and we expect there may be some benefit.

Your next question comes from the line of Frank Louthan with Raymond James.

Great. Just wanted to see if there is anything onetime or anything in the quarter that we should know about? Or is this sort of a good jumping off point going into Q4? And then can you update us on the seasonal trends you're seeing in the delivery business in Q4. How are they trending so far this fall, maybe relative to last year?

Yes, I'll take your first question around any onetime items on the quarter. I think the quarter just had a confluence of a number of activities. I would say at first, we just had a very good cross-sell quarter where I think Kip mentioned in his script, we had a top 10 customer by all 3 products. And so that was number one. I think the second one was that in that quarter, we also had very strong bookings linearity. And so in that quarter, we had almost half of our bookings in the quarter, book in the first month, which is not typical for us. And so that booking linearity really helped the Q3 results. I think when we look at Q4 guidance, we are being prudent based on what we see today. And I think that we feel really good about the guide. I think the traffic, to the second part of your question, around where are we seeing traffic. We do see pretty good traffic for Q3. We're seeing it continue in Q4, which is why we felt really good about raising the guidance from where consensus is by about $6.8 million.

Yes. And specifically to your question about seasonality in the Network Services business, right now, we're not seeing anything out of the ordinary on that front.

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

Congratulations on the strong quarter. I just wanted to maybe start out with your security portfolio. Where are you seeing the most strength in terms of your new offerings and sort of demand generation on that side?

Great question. It's actually fairly broad-based. As you know, we've launched a number of products over the last 12 months or so, and we've been enhancing those products as follow-on releases. So I'm referring to things like bots, the AI bots management, the DDoS capabilities. And we've all seen those received very well and in many cases, implemented together in combination for customers. And so our award-winning leading Next-Gen WAF continues to do well, but the new products are helping us with growth there.

Got it. And in terms of that large competitor displacement, I was wondering if you could give us a little bit more color in terms of why specifically did they choose you? What is it about maybe the product portfolio that drove these supporters to sort of standardize on Fastly. And what does that opportunity look like going forward?

Well, I think you're referring to the example I shared about folks who had worked with Fastly at a prior employer and rallied for the adoption of it at their new company. And I think the -- we have a lot of customers who've used our product and see the -- really, I think, the performance and the support are 2 things that I hear a lot in those stories, in general. And I think that was a notable win, but it's an actually surprisingly common occurrence for us to see that we were winning an account due champions who had used our product at prior employers.

Your next question comes from the line of Fatima Boolani with Citi.

This is Joel on for Fatima. So just thinking of international as a key area of investment, Kip, I think you mentioned some positive traction in APJ specifically, could you get into detail on some of the returns that you're seeing internationally? And then also comment on what sales capacity looks like, how much more heavy lifting is there to do? Just what you're seeing so far? And what's down the road for international in the near term?

Sure, no, I appreciate the question, and I'll I make the point because I don't think your question reflects this. But in the past, there's been some concern about the impact on, for example, CapEx in our international expansion strategy. And I think as your question framed it very well, our international expansion strategy is around sales coverage and going after opportunities that are based in those areas. Obviously, we already operate the global network that delivers traffic just about everywhere in the world already. And so it really is, as you rightly framed it, a sales and opportunity-driven strategy. The genesis of it is we're underindexed against the opportunities outside the United States. It's not an unusual situation for a company based in the United States, and we're seeing those markets, particularly in Asia Pacific grow very quickly. And so we've been -- Scott Lovett, our President of Go-To-Market has been making investments on his team. I think we mentioned in our last quarterly call that we hired a new leader for the overall APJ region, he had previously just been part of a single international region that also covered Europe with the leader in Europe. And this move has allowed us to increase our focus in Europe because that leader now can focus, frankly, on a smaller number of time zones. And obviously, having a new leader overall for Asia Pacific has been an incredible benefit for the team, and they're already seeing her leadership. I mentioned, I think, in my examples in the prepared comments of wins of several from the APJ region. And so as we're increasing our sales coverage there, and we certainly plan to continue that through the rest of this year and into next year. We're just getting exposed to more opportunities and able to position our platform the benefit of more of those customers. In terms of results, I mentioned we're seeing early results now, and I think those are reflected in my comments. We think this is something that could be more significant as we get into next year. So it should not be -- it's not an immediate benefit, but given the nature of it as a sales coverage and go-to-market type of investment, the returns should come relatively quickly.

Your next question comes from the line of Rudy Kessinger with D.A. Davidson.

On the security revenue in the quarter, $34 million, I don't -- it doesn't sound like there's anything onetime, but could you quantify maybe that large cross-sell or across other deals like upfront rev rec that maybe doesn't repeat in Q4. I'm just trying to get a sense of that $34 million in new baseline. Should we expect that to grow sequentially in Q4 and into next year? Or if there's any kind of upfront rev rec that won't repeat in Q4.

Yes. Thanks. I think I -- we mentioned earlier, there was bookings linearity early in the quarter. And I think this one was a bookings linearity where we did see the benefit of security that end up benefiting all 3 months. I do think that there is still opportunity here as we continue to push for cross-sell across the sales organization that this $34 million and a 30% year-over-year growth rate, we will continue to make sure that we focus on this and sustain those numbers. But this is -- that one benefit from that one quarter and that big deal really helped the big sequential jump that you see.

Yes. And we really saw a significant increase in our security revenue run rate early in the quarter as we had a number of opportunities, certainly led by the large one that Rich mentioned, ramped very quickly and very early in the quarter. And so while there's no onetime rev rec or anything like that, I would just guide that we probably got a full quarter of benefit from that increase. Obviously, that business, we expect it to continue in this quarter and beyond. But it's not one of those situations where we got a partial quarter benefit and then enjoy another leg of growth on that particular piece of business with a full quarter benefit in the following quarter.

Okay. Just to double quick on that, then I actually do have a separate kind of follow-up. So that -- I mean, the revenue you got from that, those deals you secured in Q3. That's fully ratable revenue that will repeat again in Q4 for a full quarter?

Correct.

Yes. It's just aligned with the rest of our, if you will, recurring revenue, it doesn't constitute like onetime service and implementation or other things like that. So we expect that revenue to continue.

Okay. Got it. Very helpful. If I look at the, obviously, very stable growth, 17% in the non-top 10 customers. If we look at the top 10, quarter-over-quarter, they accounted for close to half the revenue growth. It sounds like a lot of that is probably from that top 10 customer that expanded into security. Could you just talk about maybe the rest of the top 10 and the trends that you saw quarter-over-quarter on the delivery side and what you're expecting from that cohort in Q4 into next year?

Sure. I mean I think I would say we've not seen anything notable or out of the ordinary with that cohort outside of the significant security cross-sell that we mentioned. We expect that business, I mentioned earlier, seasonality so far looks normal for that business. I guess one comment would be that we were excited with the ability to cross-sell in that top 10 segment, especially our security portfolio and we're looking and believe there may be additional upside there over time. So I think the ability to apply our platform strategy even with our largest customers is something we're very excited about.

Your next question comes from the line of Jeff Van Rhee with Craig Hallum.

This is Daniel Hibshman on for Jeff Van Rhee. Kip, Rich, congrats on the quarter. Just one for me. Going back to the seasonality questions that have been already asked and sort of expecting some regular seasonality this quarter. When I look at historically, of course, Q4 is the seasonally strongest quarter, you see often upper single-digit, even double-digit sequential uplift in Q4. This quarter, midpoint of the guide kind of points to 2% sequential. So actually the small sequential increase from Q3 to Q4 that we've seen so far this year. Now typically, we see a big uplift there. Just anything to call out in terms of that in terms of just conservatism? Are you expecting a different pattern going into Q4? On a sequential basis, how you're thinking about that?

Good question, Daniel, and thanks for the question. I think when we look at the Q4 guidance, I mean, we do typically see usually a slower Q3 and a bigger Q4. I think this quarter, just we had a confluence of events where Q3 was a bit higher. So if you look at sequential growth in Network Services for the quarter, we were about $4 million up, and so I think for us, we saw some special pickups in both Network Services. And we've also obviously benefited from the security from the security. So we think that based on what we see today on traffic patterns, in Q3 and Q4, we do think the sequential guide, we think, is pretty reasonable.

Okay. That's helpful. And then just on the gross margins, I mean, I called out the one time I think you said ex that one time, a 62% underlying non-GAAP gross margins is the strongest, I think we've seen in several years. Just anything else you can call out in terms of from a hardware network perspective, walking us through what's changing there that -- obviously, you mentioned scale, but the company has been scaling for a long time. So something different there driving those higher? Just kind of talk us through the underlying dynamics.

Yes. Q3 was a really good quarter for us. If you exclude that $1.6 million tailwind we mentioned on the earnings script, the gross margins would have been 61.8%. For the quarter specifically, I think we attribute it to 2 main reasons. One is the scale that we talked about as a platform, especially when you see the sequential kind of rise in Q3. But I think second is that engineering -- our traffic -- our engineering team have made a lot of investments around truck engineering, making the network much more efficient. And I think that we're seeing some of the benefits from that. I think when you look at the Q4 guide, we're guiding to kind of roughly flat versus Q3, continuing that advantage that we built in with the traffic engineering that we've been doing.

[Operator Instructions] And your next question comes from the line of Tomer Zilberman with Bank of America.

Maybe to continue on the line of questioning around security. I know you've called out before potential for some volatility in that segment as you're building out your go-to-market muscle. So if I ex out that onetime deal that you spoke about, what do you -- are you seeing stabilization of that volatility? Or do you think we can still expect to see some different trends as you're building out these new product motions and go to market?

Great question. What I can share is that in our internal analysis when we excluded that one large deal, we still had accelerating growth in security. So it's certainly, we're very excited and proud of that one deal, but that wasn't the only thing driving good growth this quarter in security.

Got it. And maybe as a follow-up, pivoting a little bit away. If we look at the net retention rate, we've seen some improvement over the last couple of quarters versus kind of the declines we saw last year. Where do we think that net retention rate goes forward as we look out maybe the next 2, 3 years, can we return to that kind of peak of 120% you had a couple of years ago? Or do you think it stabilizes at this kind of 106% rate?

Yes. I think that we're very happy and proud of the NRR we achieved this quarter. I think it really goes to show the investments that Scott and his team have made around cross-sells and upsells and they're really beginning to pay off. We do think that there is room going forward on this metric. We do think it's going to increase next quarter. I just want to remind you that like when we think about this metric, it is a last 12-month metric, and we are beginning to lap some of the headwinds we saw in 2024. And so for Q4, we do think this metric has room to improve. We don't give guidance on this. And so I can't say the 120% or where it will be, but I do think that from where we are today, Q4 should be up.

[Operator Instructions] And at this time, there are no further questions. I would now turn the call back over to Kip Compton for closing remarks.

Thanks, Rebecca. We believe this quarter demonstrated tangible progress in our ongoing transformation. We are committed to building the world's most powerful and flexible Edge platform. We're placing -- we are pleased with the strong momentum we saw this quarter and are focused on building sustainable, profitable growth. 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.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.