Executive Summary / Key Takeaways

• Strategic Pivot Yields Results: Fastly is undergoing a significant transformation, moving from past revenue concentration challenges to a diversified growth strategy, evidenced by accelerating revenue and strong performance outside its top 10 customers.
• Technological Leadership at the Edge: The company's unified edge cloud platform, with recent innovations in AI Accelerator, Object Storage, and a comprehensive security portfolio (WAF, Bot, DDoS), provides a critical competitive moat, driving performance and cost efficiencies for customers.
• Clear Path to Profitability: Fastly achieved positive free cash flow in Q1 2025 for the first time in eight quarters, and with continued operating expense discipline and gross margin expansion, management projects operating profit in the second half of 2025 and positive free cash flow for the full year.
• Go-to-Market Transformation: Under new leadership, Fastly is sharpening its sales execution with a focus on new enterprise customer acquisition, cross-selling its expanding product lines, and strategic international expansion, aiming to accelerate market share gains.
• Managing Macro and Geopolitical Headwinds: While macroeconomic uncertainties and specific customer risks (like TikTok's U.S. operations) persist, Fastly's cautious guidance and proactive risk mitigation strategies position it for more predictable and sustainable growth.

The Edge Cloud Imperative: Fastly's Vision in a Dynamic Digital Landscape

Fastly, Inc. (NYSE:FSLY), founded in 2011, has carved a niche as a developer-centric edge cloud platform, processing, serving, and securing customer applications as close to end-users as possible. This "edge cloud" represents a critical evolution in Infrastructure-as-a-Service (IaaS), merging Content Delivery Network (CDN) capabilities with advanced functionalities traditionally handled by hardware appliances, such as Web Application Firewalls (WAF), Bot Detection, and Distributed Denial of Service (DDoS) protection. In an era where milliseconds dictate user experience and business outcomes, Fastly's mission is to make the Internet faster, safer, and more engaging for all.

The industry landscape is highly competitive and rapidly evolving, characterized by the convergence of CDN, security, and compute functionalities. Fastly operates amidst giants like Akamai Technologies (AKAM), Cloudflare (NET), Amazon Web Services (AWS) (AMZN), and Microsoft Azure (MSFT). While these larger players boast immense scale and integrated ecosystems, Fastly differentiates itself through a highly programmable, real-time platform designed for agile software development. This focus on developer control and performance-critical workloads has been a foundational strength, enabling Fastly to serve established enterprises undergoing digital transformation and emerging digitally native companies across diverse sectors including digital publishing, media, technology, e-commerce, travel, hospitality, and financial services.

Technological Edge: Fueling Performance and Security

Fastly's core competitive advantage lies in its software-defined edge cloud platform, built from the ground up for programmability, speed, and security. This architecture allows developers to deploy application logic directly at the edge, offering granular control and real-time visibility. The company's recent product innovations underscore its commitment to this technological differentiation.

The AI Accelerator, generally available by the end of 2024, is a semantic caching solution specifically designed to address the performance and cost challenges of Large Language Model (LLM) and generative AI applications. By caching common queries on Fastly's edge network, it delivers up to a 9x faster response time, offering substantial cost savings for customers. This technology supports leading platforms like OpenAI's ChatGPT, Google (GOOGL) Gemini, and Microsoft Azure Foundry, positioning Fastly to capitalize on the burgeoning AI infrastructure market. Furthermore, Fastly is integrating AI into its security offerings, such as AI scraper bot mitigation and reactive DDoS products, enhancing threat detection and response.

In its security portfolio, Fastly has expanded from its Next-Gen WAF to a comprehensive suite that includes bot mitigation and DDoS protection. The bot mitigation solution, developed in-house, attracts customers with its simple onboarding and ease of use, offering dynamic challenges to detect unwanted AI bots. The adaptive DDoS protection provides automatic Layer 7 and application-level defense with frictionless, one-click onboarding and proprietary auto-adaptive response intelligence. These security products are "a cut above" in efficacy, allowing users to run them in full blocking mode and consolidate multiple vendors onto Fastly's unified platform for a simpler, higher-performance experience.

Additionally, the Object Storage solution, unveiled in Q4 2024, allows direct access to customer data at the edge with zero egress fees, designed to reduce origin costs and improve performance. This suite of technologies—from high-speed AI caching to advanced edge security and cost-efficient storage—collectively strengthens Fastly's competitive moat, enabling it to offer superior performance, enhanced security, and significant cost savings, which are critical for attracting and retaining performance-sensitive enterprise customers.

Competitive Arena: Fastly's Position in a Dynamic Market

The market for edge computing platforms is intensely competitive, with Fastly vying for market share against a diverse array of players. Direct competitors include established CDN and security providers like Akamai and Cloudflare, as well as the formidable cloud hyperscalers, AWS and Microsoft Azure, which increasingly offer their own CDN and WAF capabilities.

Fastly's competitive strategy centers on its developer-first approach and the superior performance of its programmable edge. While Akamai (AKAM) boasts an extensive global network and a strong enterprise focus, Fastly often provides more agile and customizable solutions for modern web applications. Akamai's TTM gross profit margin of 59% and operating profit margin of 13% reflect its scale and maturity, contrasting with Fastly's TTM gross profit margin of 53.05% and operating loss. Cloudflare (NET) also targets developers with its edge platform, but Fastly differentiates with its emphasis on high-performance, real-time features, offering potentially more advanced capabilities for complex applications. Cloudflare's TTM gross profit margin of 77% and negative operating margin indicate a focus on rapid growth and market penetration, often at lower price points.

Against the hyperscalers, AWS and Microsoft Azure, Fastly offers a specialized edge platform that prioritizes performance for specific use cases, such as content acceleration and advanced security, potentially providing greater efficiency in edge-specific tasks compared to their broader cloud suites. AWS's TTM gross profit margin of 49% and operating profit margin of 11% highlight its massive scale and profitability, while Microsoft Azure's TTM gross profit margin of 69% and operating profit margin of 46% demonstrate its strong position in enterprise cloud. Fastly's smaller scale, however, can lead to higher operational costs relative to these giants, making it challenging to compete solely on price.

The recent bankruptcy of Edgio (EGIO), a point CDN player, has created a "super interesting" market with potential upside for Fastly, particularly in 2025. This industry consolidation is contributing to a more stable pricing environment, with price per gigabit declines moderating from the low 20% range in 2024 back to the high teens. Fastly is actively pursuing competitive takeouts and leveraging its platform completeness to transition Edgio customers, aiming to capture significant traffic share. This shift, combined with Fastly's increased discipline in negotiating customer commitments, as reflected in its record Remaining Performance Obligations (RPO), is expected to be a tailwind for revenue and margins.

Strategic Transformation: Diversification and Go-to-Market Evolution

Fastly's journey from historical operating losses and significant customer concentration has culminated in a strategic transformation aimed at driving diversified, predictable growth and accelerated profitability. The company faced unexpected revenue headwinds in 2024, particularly from a few of its largest customers, which prompted a strategic realignment and a workforce reduction. This period of introspection and adjustment has set the stage for a "new chapter" under new leadership.

In August 2025, Kip Compton assumed the role of CEO, bringing his experience as Chief Product Officer to lead Fastly's renewed focus on execution. He is joined by Richard Wong as the new CFO, who brings three decades of financial leadership from platform and SaaS companies. Scott Lovett's role has also expanded to President, Go-to-Market, consolidating all revenue functions and marketing under his leadership. This leadership team is tasked with accelerating growth and driving to profitability in the near term.

The go-to-market strategy is built on three pillars of expansion:

1. Targeting Performance-Sensitive Customers: Fastly is aggressively pursuing new enterprise customers, particularly Fortune 1000 and digitally native organizations that prioritize performance and security, often at the expense of slower-evolving incumbents.
2. Cross-selling and Upselling: A high priority is placed on expanding wallet share within the existing customer base. Almost 50% of Fastly's customers now leverage two or more product lines, generating over 75% of its revenue, indicating strong platform stickiness and significant cross-sell potential, particularly for the expanded security and compute offerings.
3. Geographic Expansion: Recognizing its under-exposure to international revenue, Fastly is investing in new leadership positions, such as a Head of APJ (Asia Pacific Japan) and a regional VP for Southern Europe, to unlock incremental revenue opportunities in these markets, with targeted impact expected in 2026.

Underpinning these efforts is a focus on simplicity and packaging, designed to reduce customer onboarding friction. Package sales increased over 50% year-over-year in Q2 2025, with renewals growing over 130% year-over-year, demonstrating the effectiveness of this approach. The company is also seeing strong momentum in its channel partnerships, with 2024 deal registrations growing 28% year-over-year and year-to-date bookings up 46% year-over-year in Q3 2024.

Financial Performance: A Turn Towards Profitability

Fastly's financial performance in the first half of 2025 signals a significant turning point, reflecting the impact of its strategic transformation and operational discipline.

For the second quarter of 2025, Fastly reported revenue of $148.7 million, an increase of 12% year-over-year, surpassing the high end of its guidance range. This acceleration from Q1 2025's 8% year-over-year growth was driven by new customer acquisition, share gains from competitive takeouts, and a favorable pricing environment. Network Services revenue grew 10% year-over-year to $114.9 million, while Security revenue reached a record high of $29.3 million, growing 15% year-over-year and comprising 20% of total revenue. The "Other" products segment, primarily driven by Compute solutions, continued its strong trajectory, growing 60% year-over-year to $4.6 million.

Crucially, Fastly demonstrated notable operating leverage. The gross margin improved to 59% in Q2 2025, a 170 basis point gain quarter-over-quarter, benefiting from margin leverage on higher revenue, improved network efficiency through technology enhancements, and optimized networking. The non-GAAP operating loss of $4.6 million outperformed guidance, with operating expenses increasing by only 2% year-over-year compared to 12% revenue growth. This discipline, coupled with improved cash collection management, contributed to a healthy cash flow from operations of $25.8 million in Q2 2025, a substantial improvement from negative $4.9 million in Q2 2024.

The first quarter of 2025 marked a significant milestone, with Fastly generating $8 million in positive free cash flow, its first positive free cash flow in eight quarters. This was driven by improved cash from operations, lower capital expenditures, and reduced finance lease repayments. The Last-Twelve Months Net Retention Rate (LTM NRR) increased to 104% in Q2 2025 from 100% in Q1 2025, reflecting recovery momentum from existing customers. Remaining Performance Obligations (RPO) reached a record high of $315.1 million, growing 41% year-over-year, indicating increasing customer commitments and a growing share of predictable revenue.

Fastly's liquidity remains adequate, with $321.2 million in cash, cash equivalents, and marketable securities as of June 30, 2025. The company is managing its convertible debt, with $188.6 million of 0% notes due in March 2026 now classified as current, alongside $150 million of 7.75% notes due in 2028. Management believes its current liquidity and operating cash flows are sufficient to meet anticipated needs for at least the next twelve months, including the repayment of the 2026 notes.

Outlook and Guidance: Charting a Profitable Course

Fastly's management is increasingly optimistic about its future, translating recent momentum into a raised outlook for the remainder of 2025. For the third quarter of 2025, Fastly expects revenue in the range of $149 million to $153 million, representing 10% annual growth at the midpoint. Non-GAAP gross margin is anticipated to improve by 50 basis points sequentially to 59.5% +/- 50 basis points, driven by network efficiency improvements and moderation in price declines. The company projects a non-GAAP operating result ranging from a $1 million loss to a $3 million profit, with a non-GAAP net loss/profit per share between -$0.02 and +$0.02.

For the full year 2025, Fastly has raised its revenue guidance to a range of $594 million to $602 million, reflecting 10% annual growth at the midpoint, an $8 million increase from previous guidance. Non-GAAP operating loss expectations have been reduced to a range of $9 million to $3 million, implying an operating margin of negative 1% at the midpoint, a significant improvement over 2024. Management explicitly anticipates delivering operating profit during the second half of 2025.

A critical highlight of the revised guidance is the expectation for positive free cash flow for the full year 2025, projected to be between breakeven and $10 million, a substantial $41 million improvement year-over-year at the midpoint compared to negative $36 million in 2024. This is predicated on continued moderation in price declines, network efficiencies, and a projected decline in operating expenses in the second half due to seasonal factors and ongoing cost discipline. Cash capital expenditures are expected to be in the range of 9% to 10% of revenue for 2025, with a medium-to-long-term target of 6% to 8%.

Key Risks and Challenges

Despite the positive momentum, Fastly faces several risks. The ongoing scrutiny and policy uncertainty surrounding TikTok's U.S. operations remain a concern; Fastly's guidance prudently excludes U.S. TikTok revenue beyond September 17, 2025, given that ByteDance (TikTok's parent) represented less than 10% of Q2 2025 revenue globally, with U.S. traffic under 2%.

Operational challenges include reliance on a limited number of suppliers for server components, exposing the company to component delays, shortages, or price increases, which could impact network capacity and gross margins. The company also identified a material weakness in its internal control over financial reporting related to deficiencies in the revenue process, which, while being remediated, poses a risk until fully resolved.

Furthermore, the highly competitive nature of the edge cloud market, coupled with evolving data localization and cross-border data transfer laws (especially in Europe), could impact customer growth and increase compliance costs. Fastly's stock price has historically been volatile, and broader market fluctuations or company-specific events could cause further declines. The need to repay or refinance its convertible notes, particularly the $188.6 million due in March 2026, also presents a liquidity management challenge, though management expresses confidence in its ability to meet these obligations.

Conclusion

Fastly is embarking on a compelling new chapter, marked by a strategic resurgence driven by technological innovation, a refined go-to-market approach, and a clear commitment to financial discipline. The company's edge cloud platform, with its differentiated security and AI-acceleration capabilities, positions it as a critical enabler for modern digital experiences. Recent financial results, including accelerating revenue growth, expanding gross margins, and the achievement of positive free cash flow, underscore the effectiveness of its strategic pivot towards diversification and profitability.

While the competitive landscape remains intense and macroeconomic uncertainties persist, Fastly's leadership is demonstrating a focused execution strategy. The emphasis on new enterprise customer acquisition, cross-selling its expanding product portfolio, and targeted international growth, all built on a foundation of simplified customer experience, is designed to capture increasing market share. Investors should closely monitor the continued expansion of its security and compute offerings, the sustained improvement in its LTM NRR, and its ability to consistently deliver on its positive free cash flow and operating profit targets in the coming quarters, as these will be key indicators of Fastly's long-term success in solidifying its position at the forefront of the edge cloud revolution.