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

Thank you, and welcome, everyone, to our fourth quarter 2025 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 will be archived for 1 year. Also, a replay will be available by dialing (800) 770-2030 and referencing conference ID number 754-3239 shortly after the conclusion of today's call. 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, 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 reports filed on Form 10-Q filed with the SEC and our fourth 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 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. 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 during the first quarter, we will be attending the Raymond James 47th Annual Institutional Investors Conference in Orlando on March 2. Now I'll turn the call over to Kip.

Thanks, Ferd. Hi, everyone, and thank you for joining us. When I became CEO 7 months ago, I shared a vision to accelerate our growth and drive towards profitability through disciplined execution. Thanks to our team's strong performance that vision is becoming a reality. Our exceptional Q4 results reflect this reality as we exceeded expectations across the board. We delivered our fourth consecutive quarter of revenue acceleration closing out the year with record revenue of $173 million in the fourth quarter. This represented 23% annual growth, the highest in over 3 years and exceeded the top end of our guidance. Our stronger-than-expected top line results drove strong incremental flow-through. This resulted in record gross margins of 64%, demonstrating the operating leverage and efficiency in our business. This enabled our operating margin and operating income to both reach all-time highs in absolute dollars and as a percentage of revenue, leading to our fourth straight quarter of positive free cash flow. . Our stellar Q4 results also capped off a strong 2025, marking our first profitable fiscal year. Our teams drove this success with discipline, focus and execution and we are excited to carry this momentum into 2026. In the fourth quarter, Network Services grew 19% year-over-year, outpacing market growth. This is attributable to stronger-than-expected event performance and larger customers directing traffic to our platform due to their prioritization of network stability, performance and resilience. Our go-to-market motion is operating with increased rigor and clarity. At the same time, our new product launches, especially in security, have allowed us to deliver more business outcomes for our customers, enabling us to grow faster than the market. Security revenue growth accelerated to 32% year-over-year, up from 30% in the third quarter and notching another record high. As we discussed on previous calls, we are…

Thank you, Kip, and thank you, everyone, for joining us today. Before diving into the financials, I want to say that I'm really excited to wrap up my second quarter fastly and I to build our results. We continue to accelerate our revenue growth momentum while demonstrating strong incremental revenue flow-through to drive profitability. This is driven by our strong focus on our go-to-market execution, our broader product portfolio, especially in security and our fiscal discipline. In addition, we recapitalized our balance sheet to specifically improve our liquidity and prepare us for our next phase of growth. Now on to our Q4 and year-end results. I'd like to remind you that unless otherwise stated, all financial results of my discussion are non-GAAP based. Revenue for the fourth quarter increased 23% year-over-year to $172.6 million, coming in above the high end of our guidance range of $159 million to $163 million. This result was a record high for fast and also represented the largest sequential dollar growth in the company's history. These results were driven by balanced performance across our customer mix and expanded product platform, along with continued success in our go-to-market upsell and cross-sell motions. These drivers also contributed to accelerated revenue performance throughout 2025 and we are now at an inflection point where we believe we are a strong share gainer in our markets and demonstrating consistent profit expansion of scale. Our annual revenue was $624 million, representing 15% growth over 2024. Coming in above our original guidance range of $575 million to $585 million provided 1 year ago. In the fourth quarter, Network Services revenue of $130.8 million grew 19% year-over-year. We saw healthy traffic levels in the fourth quarter due to stronger market conditions and the success of our upsell motion. Security revenue of $35.4 million…

[Operator Instructions] Your first question comes from the line of Jeffrey Van Rhee with Craig Hallum.

Congrats -- Great numbers. Just a couple of questions. First, -- maybe you talked about the. Can you just expand on that a bit? What are you seeing at the edge right now at agentic AI? I mean I don't know, put some numbers on it, but just what are you seeing so far? .

Thanks. We're seeing a lot with respect to AI on our platform, and it really breaks into a number of categories. First of all, just we're seeing an increase in traffic related to agents. I think in the past, the saving called machine to machine. And as you -- if you've used AI tools, I think you would appreciate that they often check a lot more websites, for instance, than you might. And that's more traffic and all of that traffic is processed through the Fastly network for our Fastly customers. So we're seeing decreased activity there. And a quarter or 2 ago, we actually published a report outlining the statistics on that and actually going into which models we're seeing the most traffic from an interesting report on our website with lots of numbers. . We're also seeing AI workloads on our platform, and that can take a number of different forms. We've talked in the past about a use case starting an extremely large training data set. We also have customers using our compute edge for inference and other AI-related tasks. And then maybe a third example of where we're seeing AI as a tailwind for our business is AI specific offers. So I'm thinking of our AI bot mitigation. As we're processing all of that traffic for our customers, it's creating opportunities for us to help manage crawlers and other AI bots to ensure that the right ones get through because our customers want to be relevant in the AI world, but block the ones that are harmful. So we're seeing across the board in a number of different ways. AI inflating the business in a very positive way, and we think the edge will be very important for AI going forward.

And on the traffic routing, I think you called out you saw some very strong traffic flows as customers optimized or are optimizing their traffic and selected you based on performance. Just what drove the widening of the gap in respect of performance between you and the peers to attract more traffic this quarter versus maybe in the past?

Yes, it's a great question. I mean, we've maintained a performance edge. It's the namesake of our company. It's something our teams take very seriously. I think recent events in the industry that is called more attention to the value of resiliency in an edge platform. And we're very serious about that and have taken a number of architectural steps that we think enable us to deliver a more resilient platform. And I think some customers have directed traffic our way because of that.

Last 1 for me, and I'll let somebody else jump on. The just obviously exclusive. I think last quarter, you called out an 8-figure customer. But I'm just curious, if I look at the 12-month RPOs, to what degree is that concentrated? So if I looked at the absolute dollars of 12-month ARPU increase, from Q3 to Q4, how much of that is driven by, say, maybe your 3 largest customers that were signed or expanded in the quarter? .

Yes. With RPO, it's kind of broad-based across a number of our customers. What we do, do is we do focus on the variety of customers, our largest enterprise, of course, historically, had not wanted to make some commitments on to us. And I think that what you're seeing here is a change in mentality and a change in shift. So now the RPO that you see is kind of broad-based across our entire customer is much kind of smaller.

Yes. I'll just add, it's been a very deliberate and intentional part of our market strategy and in the way that we framed negotiations with all of our customers and the way that we thought about pricing and discounting across our entire customer base to encourage more revenue commitments to us. To help manage or mitigate the volatility that comes from a purely utility-based pricing model. Of course, we also, in the security side, have a lot of subscription revenue, which helps with that as well. But the driving RPO growth and really just committed revenue overall is a major part of our strategy in terms of managing and mitigating volatility on the top line.

I mean, great, you can capture that increased commit. I appreciate it. .

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

Can you give us an idea of what's giving you the confidence with the nice increase in the guidance there. Is it a combination of some new customers or just some better commitments from them? And what kind of gives you the confidence in the guide going into next year?

Sure. I mean, I'll comment and then Rich has obviously put a tremendous amount of detailed thought into the guidance. You may have some additional things. I mean I think if we look at the momentum that we've established in 2025, and the customer contracts and relationships that we've established and obviously, the RPO number that we just discussed as well as the overall market trends and what we're seeing coming into the new year. we're very confident in terms of how we're positioned. And so we were able to issue guidance that reflects growth substantially above the market growth. As we continue to take more share -- the caution, and I think Rich mentioned this, and I alluded to it, too, in my commentary was we are in an era of what I would consider elevated geopolitical and macroeconomic dynamics. And there could be, for example, situations with our international customers around the world where their purchasing patterns are affected by that. . And we're also very wary of supply chain dynamics, although as we believe we have a very capital-efficient infrastructure, it's too early to tell, but that could play out in our favor. So we try to take a balanced approach on that guidance, but we were able to get to those numbers, and Rich can provide more detail.

Yes, Frank. It's a really good question just because if you look at the midpoint of our guidance, That's a year-over-year increase of $86 million at the midpoint, and that would be the largest kind of year-over-year increase that we would ever have. The reason we feel more comfortable and confident in the guidance is because we -- as you know, we went through a go-to-market transformation over the past kind of 12 to 18 months. Part of that go-to-market transformation has been around getting to know our customers better, really aligning our sales team to the customer accounts and really being more diligent in watching kind of the traffic and what they're buying and what they're doing. So I think it's really the closeness of the -- with the customers and that go-to-market transformation that gives us that confidence.

Is there anything about the mix of that traffic that's maybe shifted a bit maybe away from traditional media and towards AI type traffic or something like that? How should we think about that? .

I think 1 development that I would point to that we discussed at some length on our last quarter call is we have seen material cross-sell activity in our large accounts. And that cross-sell activity brings in portfolios like security and compute. And that starts to transform the relationship in many ways, we believe, with those customers to one that's more strategic for them and covering more use cases. And that does give us some confidence. So we see different mixes of growth and there's a seasonal factor there as well. I think you appreciate in terms of media versus non-media. But I think one bigger trend is an increasing consumption of multiple services from us by those large customers. .

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

Let me congratulate you on quite an impressive quarter. Just wanted to maybe just build on sort of the AI question again. Can you help us understand -- and just given how early we are in a agentic adoption, like what are some of the indications that you're getting from your customers in terms of that rate of growth and what that could look like in 2026.

Sure. Appreciate the question. We can see the rate of growth in the telemetry coming off of our infrastructure. And we can tell generally speaking, when it's in a agentic request versus a traditional user on a browser, for instance. So we can see that traffic growing each quarter. And that is driving volume on our platform. We can also see it in the conversations we have with our customers, particularly with our media customers. We have some of the most sophisticated media companies in the world as our customers. And this is a very top of mind topic for them. . And what I can share is that discussion has shifted from perhaps last summer, how do you block it to a much more nuanced and sophisticated conversation now about how do you optimize for it. We want to be relevant, but we want to manage how this works. We want to be able to enforce agreements with people that the media companies have agreed with -- so we've adapted our approach there, and we have, as I mentioned earlier, our AI bot mitigation technology, but we also have the -- we were the first in the industry to support a new protocol called RSL a really simple licensing that was an industry developed protocol to essentially enforce content rights agreements related to AI models. And so we're taking an industry-wide approach with our largest customers to manage this complex problem. And I appreciate your point that it's very early. We see it that way as well. And we're staying close to our customers and understanding how we can solve their problems in many cases, working with them as what we call as we call design partners for our new products in this area.

And then just in terms of the CapEx, I appreciate the additional disclosure and sort of the alignment with other industry players as well. when you talked a little bit about sort of higher cost and potentially shortages in terms of supply, can you help us understand how much of that increase in CapEx is maybe going to be eaten up by higher component costs as opposed to just pure capacity addition? .

Yes. I would say the increase in CapEx is going to be both of it, right? It's going to be -- we do need CapEx because of the growth that we're seeing. We saw this in Q4. And so at the last Q3 earnings call, we did talk about raising our CapEx spend to 10% to 11%. What you're seeing here is a function of both component prices going up. And so in some cases, especially with memory, we're seeing potentially 25% to 75% increases year-on-year on that pricing. But -- so you take the price increase and you take the additional upside in revenue that we're putting here, and it drives the CapEx increase year-on-year.

I would the 25% to 75%, Rich, you can correct me if I'm wrong, is on the memory component itself . Not the overall unit cost of infrastructure for us, for instance.

That's right.

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

Super Rich, for both of you, actually. I wanted to zero in on the network services strength you called out that is quarter of acceleration in that business. You've identified a lot of quantity and volume level input. I wanted to understand and have you help us with what are some of the more durable inputs to traffic growth and then also relatedly, on the pricing front, I mean, all of this incremental growth is coming in very incrementally impressive margins and unit economics. So what is a little bit around the pricing side of the equation that allowing -- that is allowing you to deliver a lot more of this traffic a lot more profitable. .

Yes. So I think when we look at traffic trends and what we're seeing for the year, we are still -- for Q4, we're still seeing kind of in the mid-20s in terms of traffic growth. I think the traffic growth is kind of spread across the different types. And so it's not any 1 particular to call out. In terms of the price erosion, what we've seen is actually a very nice contraction on price erosion. We have historically talked about like mid-teens price erosion. For the quarter, I think we've been very focused on great discipline around maintain price, really selling where its performance really matters and where we really win. Our price erosion in kind of Q4 was in the mid-single digits this quarter. So definitely seeing less price erosion in the space. .

I'm sorry. I would note -- I would just add to Richard's comments. But in terms of the -- as you put it, very impressive profitability, we believe we have a very efficient infrastructure. And the #1 thing that drives our margins up is volume as we're able to get more economies of scale. So you're asking about things that are durable. We certainly think that's durable. .

Yes. And Tami, just for clarification, it's hard to hear the first part of your question. Did we answer both parts of your question, and we may limit .

Yes. So it was very clear. It was very clear -- and just a follow-up for you on the Surety business, nice to continue to see that acceleration there. And it does appear that these are the fruits of your own labor with respect to seeing the yield on the cross-sell motion and the rigor that you've introduced and matured into the organization. But I was hoping you could maybe opine on how much of that momentum in the security services franchise kind of riding on the coattails of the network services business having accelerated. So is there a little bit of a coupling happening whereby if we do see maybe a deceleration on the network services side, we should expect to see maybe a little bit more of a drop off on the security services side. I'd love to kind of understand the interplay and the coupling and the couple.

Sure. I mean we do -- we have a lot of customers who consume both Network Services and security from us. So at that level, there's probably some coupling. If those customers have less demand, we might see less demand across both. I will note though that I think the primary driver has been the expansion of our security portfolio over the last year and we are now landing customers who are essentially security first customers onto the platform and then expanding them into Network Services, in some cases, for instance. So I think there is some coupling as there is when you have a platform strategy and you have customers consuming multiple product lines, but we're seeing our security portfolio come into its own as a demand driver for us.

Your next question comes from the line of Jackson Ader with KeyBanc Capital Markets.

The first 1 is on the outlook for 2026. Just curious about maybe the balance of given kind of the upside to consensus or just how you're feeling about momentum into this coming year? The balance between security strength versus network strength and understanding the team as questions about coupling. But just give us a sense of which one of those line items really is going to be the lion's share of the growth next year.

Yes. I think when we look at kind of the guidance that we provided, we do believe that in all of our businesses, we should be growing faster than the market. And so when we think about Network Services, I think the market that we see is about 6% to 7% year-over-year growth. We -- our expectation fully is that we would be north of that. I would say that it's going to -- from an increased perspective, you're going to see increases in both Network Services and Security. I wouldn't say that 1 drives it more than the other. I would say it's going to be broad-based across Security and Network Security. We say 12% to 13% year-over-year growth. I mean we're going to -- we will be growing north of that as well.

Rich, given that this is kind of your first full year guide for -- on the Fastly platform. Do you mind just giving us a sense for your kind of process, maybe your philosophy? Are you looking at a pipeline coverage ratio as you kind of look out? Just any sense in terms of what your initial guidance philosophy might look like?

Yes. So I think we do a very robust kind of planning process when we kind of plan for 2026. And when we do do that, we're looking at multiple angles. We have byproduct views. We also have perspectives around the different pods that our sales teams sell under we look at on a customer-by-customer basis. And so we know from a customer-by-customer basis, what our contracts are like, and we do a lot of traffic and kind of pricing and when pricing is up for renewal. So we really build a robust model. We do look at it and say, okay, what kind of macro environment are we in? And what kind of commitments do we have from an RPO perspective -- and then we layer in that kind of existing customer base with our expectations around new customer lands to kind of really build our model. And then we kind of stress test it around the macro environment around like what are the risks and opportunities that we potentially have I think my goal on the kind of guide is to hit the numbers that we say we're going to hit, right? I don't -- the expectation is that for me, I'd like to just be fully transparent. This is what we think and what we will do. And so we really go for what do we think is going to be risk adjusted for the macro environment that we're in?

Look, I mean that's a great answer from Rich, but I'll tell you it's been great working with him on this guy 1 point, I think you had 18 different calibrations from his team, and we're lining them up. So I mean I'm extremely comfortable that Rich has taken a very thorough approach here. nobody has a crystal ball, but I'm very confident in the quality of work that went into our guide. .

Was going to say go to customer by customer. It's -- you're getting into the weeds. .

We take it very seriously in terms of what we project into the financial community. But frankly, it's also something that helps us run the business, obviously. So it's for this audience and the investors, obviously, but frankly, we view it as core to how we plan and build the business into the future. So it's a core part of what Richard's team does. .

That's right. I mean, literally, as we build a plan, we're looking week-by-week also just on traffic patterns, and we just have updated views throughout the kind of process. And so I just think that being close to the customer is so important to Fastly. The work that they do is so important to us. And so for us, the best thing we can do for them is to actually do the right forecast, make sure the capacity is there and make sure that the quality of service that we provide is high.

Your next question comes from the line of Param Singh with Oppenheimer.

I think I really wanted to focus on the security side. Obviously, you talked about good attach rates here. Maybe you could give me some color on the current penetration of the newer products in DDoS and bot management. And maybe also talk about your API capabilities here. I know you expanded that. What's the adoption rate of API? And what are some of the technical capabilities you'd like to add on the API side, especially as you talk about an evolving traffic landscape with agentic AI?

Sure. From a Security perspective, we're really proud because we do have kind of the 5 products. Our WAF product is kind of the 1 that we started with and that we had I would say that a large portion of our security revenues is still kind of WAF. We are very happy with the kind of traction that we are seeing with bot management and API security. We haven't broken it out yet in terms of like specifically between the security products where it is, but I would say that the majority of our security revenues are still our world-class lab product. .

Yes. I would just add that some of our largest new deals are on API use cases. So we've got -- in the security business, certainly, the core business is the WAF, which is a phenomenal product. It continues to grow well. But we're seeing strong interest and demand on the API side of the equation. And we're excited about that because we're still, as we mentioned, building out the portfolio there. And so there's more to come.

I mean I really wanted to maybe drive a little bit more. I know you talked about your API discovery that you expanded with. So from a technical standpoint, where do you feel you stand now as a larger API platform that could help as you cross board not just with security, but even on the delivery side? And I guess it should be more important in agentic world. And please correct me if I'm wrong.

Yes, absolutely. I mean our approach to our security portfolio has been 1 that has agentic in mind. The features that we're building generally work, for example, for regular APIs as well as APIs. And that's based on some of the work we've been doing with our customers in this area, where they don't want a separate AI capability. They want a single edge platform that addresses all of their API needs across agenetic AI and traditional workloads as well. And so I think AI bot management is an area where we made a distinction there. There are some other features. But our security portfolio is designed with AI workloads in mind, and we are seeing those workloads on the platform. In terms of where we are, I feel like we may be about halfway through the journey. We are covering a lot of use cases, and we're seeing traction that we're very pleased with on API security and API use cases more broadly on the platform. And we're actually excited about the momentum we're seeing because -- as I mentioned earlier, we're planning to bring additional capabilities in the portfolio into this space that we think will expand the addressable TAM for us further. .

And then maybe just 1 last one, if I could. Just looking at your CapEx, I understand the incremental $10 million, but really if you could help me parse through what is maintenance CapEx in that level or posted especially in this higher memory environment versus what were expanding new POPs or adding more compute capabilities around accelerated servers. If you could just big that out and help me understand how you are thinking about your CapEx longer term. I'd really appreciate it. .

Yes. So the infrastructure CapEx, we talked about, which was 10% to 12% of 2026 revenue, I would say the majority of that CapEx is going to be for growth CapEx and not for the maintenance and replacement side. I would say that we are continuing to invest. I think 1 of the areas that we are investing is going to be kind of in the APJ area. And so we are opening up additional tops out there to support the business. And so I would say the vast majority of that infrastructure CapEx is not necessarily for the maintenance side but more for the kind of growth those.

Your next question comes from the line of Rudy Kitzinger with D.A. Davison. .

Congrats on the Verizon results. As we look to the 2026 guidance, top 10 customer as a percentage of revenue where is that estimated to fall for the year within that revenue guide? .

Yes. Right now, just as a background for those who are on the call. Right now, our top 10 customers is 34% of revenues. It was up from 32%. And -- the good news here is that we have been investing in our top 10 as well as outside of our top 10. So the top 10 customers grew their revenues by 30% year-over-year with the non-top 10 grew 20%. Both of those were acceleration. And so we're still making big investments on both cores to make sure that we are looking at all of our customers in aggregate. I would say that as we go further, we are doing a few things on our go-to-market transformation. One is that we're focusing our efforts on customers that really get the value that we want from our platform. And some of that happens to be the top 10. And I could see top 10 staying at 34%. I can see it going up just because they are. But I would say that the non-top 10 growth is still going to be high and should be continuing to grow as well. So it's hard for me to say it's going to be 34% 323 -- but I would say that we are very happy with the performance and additional 2 percentage points in the top 10 just because those top 10 customers are still super valuable to us and very profitable to us.

Yes. I would just add 2 things. And I mean, Rich hit 1 at the very end there. But if you see that we grew last quarter, our top 10 faster than our non-top 10, you saw the behavior of the business in terms of profitability, gross margin, et cetera, you can see that those top 10 customers are profitable business for us. We recognize the revenue concentration risk that they represent, but they are profitable -- a significant part of our business. I think the second thing I'd add is we've historically talked about that percentage of top 10 being in the low 30s to mid-30s and thinking that, that was likely to remain the case for some period of time. we don't provide that formally as part of our guidance, but I don't think our view on that has changed at this time. And as I mentioned earlier, we're excited about the cross-sell opportunities as well as the contribution to RPO that those top 10 customers can make. So we continue to drive profitable, higher quality revenue in that cohort.

And then on gross margins, obviously, a very impressive trend here over the last year, getting up to 64%. But 6% to 4% in Q1, you've got the guide at 63% for the year. I understand that with some of this CapEx coming online and some that pushed out from last year. But just how should that trend seasonally? I mean should we see like a big step down in Q2? And then recovery throughout the year? Or just how should that trend on a quarter-to-quarter basis? .

Yes, Rudy, actually, really good call out. I do think that we did give the guide for Q1 gross margins to be up about 6% we will see kind of a drop into Q2 and Q3 as we have additional cost POPs kind of coming online. And then we would again see a bump up again in Q4. And so kind of that's the trend where Q1 and Q4 will be a bit higher in Q2 and Q3 should be a little bit of a drop.

That concludes our question-and-answer session. I will now turn the call back over to Chief Executive Officer, Kip Compton, for closing remarks.

Thank you. We believe this quarter demonstrates tangible progress in our ongoing transformation. We are committed to building the world's most powerful and flexible edge platform. We're 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 their contributions, our customers for their trust and partnership and investors for their continued support. Thank you for your interest in Pasley, and thank you for joining us today.

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