管理層發言
Good afternoon. My name is Corey, I will be your conference operator today. At this time, I would like to welcome everyone to the Fastly Second Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1 again. Please be advised today's conference is being recorded. I would now like to turn the conference over to Vernon Essi, Investor Relations at Fastly. Please go ahead.
Thank you, and welcome, everyone, to our second quarter 2026 earnings conference call. We have Fastly's CEO, Charles Compton, and CFO, Richard H. Wong with us today. The webcast of this call can be accessed through our website fastly.com, and will be archived for one quarter. A copy of today's earnings press release, related financial tables, and supplement, all of which are furnished in our Form 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 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, quarterly reports on Form 10-Q filed with the SEC, and our second quarter 2026 earnings press 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 and certain key performance indicators. Unless otherwise noted, all numbers we discuss today, other than revenue, will be on an adjusted non-GAAP basis. We do not provide reconciliations of forward-looking non-GAAP measures because quantitative reconciliations of information for these measures are unavailable without unreasonable effort. Reconciliations to the most directly comparable GAAP financial measures are provided in the earnings release and supplement in 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 third quarter, we will be attending the KeyBanc Capital Markets Technology Leadership Forum in Park City on August 10th, the Citi 2026 Global TMT Conference on September 9 in New York, and the Piper Sandler Growth Frontiers Conference in Nashville on September 15th. We will also be hosting our Investor Day on September 22nd at the NASDAQ MarketSite in New York. Now I will turn the call over to Charles.
Good afternoon, everyone, and thank you for joining us today. Fastly delivered another exceptional quarter, demonstrating the success of our platform strategy efforts. As customers continue to adopt more products on our platform, we posted our fifth consecutive quarter of improving net retention rate and our sixth consecutive quarter of positive free cash flow. Revenue reached a record $183 million, up 23% year over year, exceeding the high end of our guidance. Gross margin hit a record 65.8%, and operating income came in at $27 million, both above the high end of our guidance range. These results marked the fourth consecutive quarter of operating profit, capped by a record operating margin of 14.7%. Our Q2 results continue a clear trend: delivering growth and profitability together. These results reflect operational discipline and a continued investment in our highest-value growth opportunities. Our trailing 12-month net retention rate rose again to 117%, the highest level in over three years, as customers look to our platform to support their infrastructure needs and standardize more of their stack on Fastly. Our platform strategy is foundational to our success. We build, sell, and operate a single unified platform, which means better consistency and performance for our customers and a more efficient network for us to run. It also means that when customers face a new threat or business opportunity, they do not need to bolt on another tool. Fastly enables them to solve their problems on one flexible platform. This results in deeper customer relationships, greater wallet share, and a more durable revenue model over time. You can see that strategy working in the numbers. Security grew 43% year over year, driven by cross-sell and upsell. The demand for edge threat defense, intelligence, and governance is driving rapid adoption of our security products. Solutions like DDoS protection and bot management grew at triple-digit rates year over year. Over time, we expect our differentiated security capabilities to represent a larger portion of the business. We integrate these newer features with our capabilities and our industry-leading Next-Gen WAF, broadening the customer footprint and wallet share with Fastly. Our platform strategy in action: leveraging targeted capabilities in one product category to deepen relationships and drive overall platform expansion across categories. We continue to see AI-driven traffic as a tailwind, with our compute offering emerging as an expansion engine. As customers face increasing scale and complexity, they are buying more of our platform to handle these demands, weaving custom edge functions directly into their traffic flows alongside our industry-leading Next-Gen WAF. Additionally, as machine traffic and automated agents grow, tools that distinguish wanted traffic from unwanted traffic become essential. These trends contributed to our security and other revenue growth of 46% year-over-year on a combined basis, now at nearly $200 million annual run rate. We continued to win our network services business, which posted strong 17% year-over-year growth. This is where customers choose Fastly when performance matters. This summer, our platform strength showed up on the biggest stage in the world. Major global sporting events pushed record-breaking traffic through our infrastructure. Vast amounts of traffic were delivered reliably, at scale, and without missing a beat. But performance is only part of the story. The same platform that delivered that traffic also governed it, making real-time, stream-by-stream decisions about what should flow and what should not. LaLiga, Spain's top football league, is a good example. Illegal streaming costs its clubs an estimated $700 million a year. Working directly with LaLiga, we built an AI-driven real-time detection system that identifies and shuts down pirated streams as they happen in the moment, right in a request path. As the market evolves, the need is shifting from centralized AI platforms to real-time edge decisions. This kind of value-add for our customers alongside our market-leading performance is why so many of the world's top brands rely on the Fastly platform to deliver their mission-critical content. And you can see the power of our platform in other key customer wins this quarter. Let me share a few examples. A leading fintech platform serving more than 500,000 businesses chose Fastly following a rigorous competitive evaluation. Last year, a number of catastrophic outages put their critical partnerships at risk. The deciding factors included increased security capabilities, platform flexibility, and resilience. A global education technology customer suffered a significant data breach affecting millions of user records when their prior WAF failed to adequately mitigate attacks. They chose Fastly's Next-Gen WAF, managed security service, and network services to handle their application traffic without disrupting their large active user base. A leading UK health and beauty retailer expanded their use of Fastly's platform with a multiyear, multimillion-dollar commitment. The customer replaced a long-time incumbent security vendor as part of a broader platform modernization and consolidated all of their edge services on Fastly. And, working through a managed service partner, Fastly now powers live and on-demand streaming delivery for a national public broadcaster in Europe. I mentioned AI is a tailwind behind our fastest-growing product a moment ago, but it is showing up well beyond that—in how we think about our network, our compute platform, and where we are investing next. We shared in Q2 that AI-generated traffic is growing at roughly 6.5x the rate of human traffic. Machines do not browse the way people do. They query, scrape, or act on someone else's behalf, and that makes every request more complicated. This means every request requires an immediate decision: is this an authorized agent? Should it be cached, throttled, monetized, or blocked? That is why we see our security and compute products accelerating right alongside this machine traffic. Fastly was built to be that trusted control plane for those decisions. In an AI-powered world, our customers are moving from reactive blocking to active governance. Le Monde is a good example. They use ContentGuard, part of our bot management solution, to set the terms for how their content gets accessed, turning what used to be a scraping problem into controlled, licensed, revenue-generating relationships. A major auto shopping platform saw AI-based traffic as both an existential challenge and an opportunity. They added Fastly's bot management and DDoS protection to gain visibility and control over the automated traffic hitting their platform, giving them the governance capabilities they need to run their business. We also announced a partnership with Skyfire. Leveraging the structural shift toward authentic traffic at the edge, Skyfire uses Fastly Compute and integrates their verified agent identity and payment-backed credentials directly into our platform, transforming agent traffic from anonymous automation into accountable economic activity. I look forward to sharing more about the evolving needs of the market, how our platform meets those needs, and how that translates into momentum in our business strategy at our Investor Day in September. When I became CEO 14 months ago, I outlined our commitment to accelerating growth, driving profitability, and delivering lasting value for our shareholders. Thanks to the trust of our customers, partners, and the exceptional dedication of our team, we are delivering on those priorities as demonstrated by delivering the highest revenue growth quarter in almost four years. We remain focused on our customers and on disciplined execution. The results this quarter—record margins alongside strong growth—show that discipline is compounding. We have fine-tuned our innovation engine and are co-innovating with partners across the entire platform, driving a new level of customer value and engagement. I am proud of this team and as optimistic as ever about the future of Fastly. And now I am going to hand it over to Richard to walk us through the numbers and the quarter in detail. Richard?
Thank you, Charles, and thank you everyone for joining us today. This month is my one-year anniversary since joining Fastly in August 2025. Reflecting upon my first year, I am very proud of the progress we have made as a company. One year ago, I chose to join Fastly because I was excited by our leading technology and superior performance, with the belief that we are positioned at the right place—the edge cloud—at the right time as we see workloads shifting to the edge to complement central clouds. I also saw an opportunity to unlock value for our customers and shareholders by mobilizing the finance team to be true strategic partners to the business. There is no doubt that our position has improved over the last year as we continue to partner with our large customer base and expand our platform. I have deepened the executive strength of our finance team, bringing on a new head of strategic finance and a new chief accounting officer. They in turn have filled up their talent bench, resulting in many improvements to the business, from accelerated close times to providing greater financial and strategic insights to our business. These provide cross-functional financial discipline and leverage to Fastly's performance, enabling investment and optimizing the return to our shareholders. This has been reflected in our results over the last year. We have reaccelerated growth to north of 20%, have generated $79 million in positive EBIT over the last four quarters, and have maintained six straight quarters of positive free cash flow. Now on to our Q2 results. I would like to remind you that unless otherwise stated, financial results in my discussion are non-GAAP based. Revenue for the second quarter increased 23% year over year, to $183.3 million, exceeding the high end of our guidance range of $170 million to $176 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, as we see customers adopt more products within our platform. In the second quarter, network services revenue of $103.9 million grew 17% year over year, an acceleration from the prior quarter. Security revenue was $41.7 million, which represented growth of 43% year over year and 8% sequentially. Security now represents 23% of revenue compared to 20% in the year-ago quarter. This increased mix supports our long-term objective of building a diversified, higher-value business. Our other products revenue of $7.7 million grew 69% year over year driven primarily by sales of our compute products supporting new customer requirements in AI and related areas. Our revenue upside in the quarter was driven by increased traffic at our largest customers and, to a lesser extent, a couple of live sporting events that were episodic in nature. In the second quarter, our Top 10 customers represented 37% of revenue. Revenues from our top 10 grew 48% year over year. Revenue from customers outside our top 10 grew 12% year over year. Also, no single entity accounted for 10% or more of revenue in the second quarter. A group of entities under common control of a single customer accounted for 11% of the company's revenue for the quarter. Our large customer count, which represents customers with more than $100,000 in annualized revenue in the quarter, increased by 24 customers. Our trailing 12-month net retention rate was 117%, up from 113% in the prior quarter and up from 104% in the year-ago quarter. The quarter-over-quarter and year-over-year increases were due to revenue increases across a broader range of customers as they expand their use of our platform. We exited the second quarter with RPO of $341 million, growing 38% year over year. The current portion of RPO was 79% of total RPO, and grew 44% 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 second quarter. Our gross margin was 65.8% in the second quarter, a record high for Fastly. Gross margin was 180 basis points above our guidance midpoint of 64%, and up 680 basis points from 59% in Q2 2025. The upside in our gross margin was driven by higher revenue relative to our infrastructure costs. Combined with our continued financial discipline in our cost of revenue, we believe our gross margins are sustainable at these levels. This is further substantiated by our incremental gross margin on a trailing 12-month basis, increasing to 96% in the second quarter, up from 47% a year ago. Operating expenses were $93.7 million in the second quarter, coming in better than anticipated due to disciplined expense management, less than anticipated benefits and discretionary spend, as well as the timing of new hires being biased towards the third quarter, which I will touch upon later in the call. We had operating income of $27 million in the second quarter, exceeding the high end of our operating income guidance range of $12 million to $16 million. As mentioned, this upside was a combination of higher revenue and resulting gross margin flow-through as well as lower-than-anticipated operating expenses. This reflects inherent operating leverage in our business model. This is demonstrated by our operating margin expanding from -3% to +15% in the second quarter—an expansion of approximately 1,800 basis points year over year. This is underscored by our incremental operating margin flow-through of 79% of revenue on a trailing 12-month basis, significantly above our long-term target of 25% to 40%. In the second quarter, we reported a net profit of $26.2 million, or $0.05 per diluted share, compared to a net loss of $5 million, or ($0.03) per diluted share in Q2 2025. Our adjusted EBITDA was $38.1 million, or 21% of revenues in the second quarter, compared to $8.9 million, or 6% of revenues in the second quarter of 2025. Turning to the balance sheet, we ended the quarter with approximately $337 million in cash, cash equivalents, marketable securities and investments, including those classified as long term, a sequential increase of $7 million over Q1 2026. We also ended the quarter with a positive net cash balance of $14 million. Our cash flow from operations was positive $39.3 million in the second quarter, compared to positive $25.8 million in Q2 2025. Our free cash flow for the second quarter was $3.6 million representing our sixth consecutive quarter of positive free cash flow. Our infrastructure capital expenditures were approximately 17% of revenue in the second quarter. As we discussed in prior quarters, we front-loaded our 2026 CapEx to ensure we had adequate equipment given supply chain constraints. We anticipate our CapEx spend will moderate in the back half of 2026 as I will discuss in a moment. In summary, the first half of the year demonstrates that disciplined execution and platform adoption continue to strengthen our financial model and give us higher conviction on our 2026 guidance. I will now discuss our outlook for the third quarter and full year 2026. I would 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 Charles discussed, our platform strategy is foundational to our success, enabling customers to solve their problems on one flexible platform. This results in deeper customer relationships, greater wallet share, and a more durable revenue model over time. The strategy is working and providing stronger assurance in our value proposition and growth opportunities with customers. In the third quarter, we expect revenue in the range of $184 million to $190 million, representing 18% annual growth at the midpoint. We anticipate our gross margins for the third quarter will be 65% plus or minus 50 basis points. As a reminder, our gross margin performance is highly dependent upon incremental revenue increases or declines relative to infrastructure costs. For the third quarter, we expect a non-GAAP operating profit of $20 million to $24 million, reflecting an operating margin of 12% at midpoint. As I mentioned earlier, we expect headcount additions along with discretionary spend to bring OpEx back to normalized growth levels in the third and fourth quarters. We expect a non-GAAP net earnings per diluted share of $0.11 to $0.13. For calendar year 2026, we are raising our revenue guidance to a range of $732 million to $746 million, reflecting annual growth of 18% at the midpoint. We anticipate our 2026 gross margins will be 65% plus or minus 50 basis points. We are increasing our non-GAAP operating profit expectations to a range of $88 million to $96 million, reflecting an operating margin of 12% 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 $0.50 to $0.54. We continue to closely monitor 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 competitors. 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 up capacity to meet our growth objectives. As discussed, this 2026 spend is front-loaded in the first half to ensure we have adequate equipment given recent supply chain constraints. We have a rigorous planning process to ensure that our capital investments align with demand. As a result, we will maintain our 2026 free cash flow guidance in the range of $40 million to $50 million. To recap, we are seeing continued evidence that disciplined execution, growing platform adoption, and a richer mix of security and compute are translating into stronger financial performance. Our refined strategy to focus on the power of our platform is working, and we are evaluating ways to better align our financial disclosures to our success. I look forward to sharing more at our Investor Day in September. Before we open the line for questions, we would like to thank you for your interest and your support in Fastly. Operator?
分析師問答
Thank you very much. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you will need to press star 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 again. Please standby while we compile the Q&A roster. Our first question comes from the line of Jackson Ader of KeyBanc Capital Markets. Jackson, your line is open.
Hey. This is Ader Daniels on for Jackson. Thanks for taking my question. On the network services jump in the quarter, we'd love to dig a little deeper here. Q2 seasonally has not been the best quarter in the past for CDN revenues. You mentioned some increased traffic from the largest customers. Was there a positive impact from agentic traffic driving this outperformance? And then did you experience any share gains from competitors? And just a follow-up — one moment, please.
Hey. Keep going—sorry. I am sorry. We were interrupted there. In terms of agentic traffic, we do not necessarily break that out. However, we have seen signs of traffic driven by AI tool usage among some of our fastest-growing accounts, and we do believe that AI remains a tailwind for the business and is showing up most predominantly in security and compute, but also in network services. And then just wanted to follow up on your NRR expansion. I am sorry. Can we— I think we might have a technical difficulty. Did you hear the whole answer to that question? Maybe we could, yeah, start from the beginning. I think we had a lapse there.
Thank you. Charles.
Alright. Can you hear us now? Alright. Yep. All good. Great. So I think there are two parts to the question: was whether or not we thought we are gaining share in the network services segment, and second was whether we were seeing signs of AI or agentic traffic helping drive that growth. On the first question, yes, we do believe that we are gaining share, particularly—as we like to say—where performance matters. And I think there was some third-party research that has come out in the last few months that agreed with that assessment. On the AI agentic question, we do not necessarily break that out as a distinct set of traffic. It drives demand in our existing products and across our platform. However, looking at the traffic patterns among our customers, we have identified a number of customers where AI tools and use of AI seem to be the catalyst behind traffic growth. So we continue to see AI agentic traffic as a tailwind for the business across our existing products, as well as products like bot management and DDoS that help mitigate that, and some additional products that we will announce in the coming months.
Thanks, Charles. Good to hear both parts. I appreciate the repeat. And then just following up on the NRR expansion — I know it is up to 117%. You mentioned customers standardizing more of their full stack on Fastly. Could you unpack maybe a little more of what is driving the most expansion there? Is it security and compute cross-sell into existing accounts? Better renewal pricing on CDN? Or anything else maybe to highlight there? Thanks, guys.
Yeah. When we think about our products, Ader, it's a broad portfolio that cuts across multiple products in network services as well as multiple products in security. I would say that cross-sells and upsells tend to be significant drivers. Our WAF—the web application firewall—continues to gain share and continues to grow faster than the market. I would say that is a pretty big driver. It's also the newer products we have launched, like DDoS and bot management. Those two are picking up a lot of traction. So I would say security is doing a lot of the heavy lifting. On the compute side, there is some traction, but it is still early days. We are doing a lot of co-innovation with our customers on compute at the edge.
Our next question comes from the line of Frank Louthan of Raymond James. Frank, your line is open.
Great. Thank you. So as far as some of the AI-related traffic, what is the nature of the workflows that you are having success with there? And do you think you are taking share in that market? Or are you just seeing sort of an overall lift in demand? And then similarly for security, what are some of the things that are driving that success in security? Thanks.
Hey, Frank. I do not know if I can comment on whether we are taking share specifically with respect to AI traffic, because the data on the size of that market and the competitive dynamics is somewhat thin. But we do see that traffic is growing in the markets that we participate in, and we certainly believe that we are taking share in those markets. In terms of workloads, there is a variety across our platform. We've seen increases in traffic related to the use of AI tools for software development. We have also seen increases in our privacy suite of products related to agentic workloads. So it's really across the board. We're seeing increasing adoption of bot and DDoS products as our customers look to manage agentic and bot traffic. I will let Richard comment on the second part of your question about security drivers.
I think what is driving security is the increasing complexity of traffic and the prevalence of threat actors. We have strong products that leverage our global network to do advanced detection and mitigation. Our features allow customers to block or rate-limit traffic, and they use AI to help detect whether traffic is good or bad. AI is helping accelerate security adoption, but there's also simply more malicious activity and more complicated traffic patterns that require better solutions.
I'll add that we are seeing customers look to simplify and consolidate. Many customers are very happy with the performance and resilience they get from Fastly, and they evaluate the effectiveness of our WAF products. Several customers switched to Fastly because they were not satisfied with the effectiveness of their existing security solutions and chose to consolidate on Fastly for performance, resiliency, and security effectiveness. That is a clear trend.
If we look at the breakdown of your Top 10 customers, is it generally representative of your breakdown between network services and security? Or are they more over- or under-weighted to those? Is there some opportunity there? Thanks.
If you look at the top 10, about 73% of our revenues today come from network services, so the top 10 is generally close to that mix—maybe slightly higher. The top 10 do buy multiple products, and we've done a good job landing cross-sell opportunities into security with some of our top customers.
Our next question comes from the line of Peter Levine of Evercore. Peter, your line is open.
Great. Thank you, gentlemen, for taking my call. Maybe I want to follow up on the prior question regarding your commentary around co-innovation on the edge or within the other revenue line item. Can you walk us through what that entails? What are customers coming to you and asking for? What does that co-innovation look like and when might we see products come to market?
Co-innovation takes a lot of forms. It's been the foundation of our product development process: working with innovative customers on their business problems and building sustainable solutions that can become market-leading products. LaLiga is a good example, where we co-innovated to address piracy using AI technologies to detect and stop illicit streams in real time. That antipiracy technology is of great interest to many customers. We're also engaged in a number of co-innovation projects with different customers around AI and agentic traffic. We'll say more about that in the coming months. We think we're at our best when working shoulder-to-shoulder with customers on business problems and applying platform capabilities to solve them, then taking those solutions to market.
If you think about where we've won in the past, it's where performance matters. Our technology makes us a very good co-innovation partner for complex technical customers who need significant support and innovation. Those are the opportunities we see in the future.
And maybe, Richard, a follow-up: you think about some of your CDN competitors and the investments they are making around infrastructure—help us understand if we look out over the next one to three years how you envision the edge compute business, what it looks like, and how much investment you need to make to keep up with demand you see in the pipeline today?
I'll start with the trajectory of the compute business and then Rich can comment on investment needs. We are focused on a true edge compute business. We're not building regional data centers or spending large amounts of capital outside our high-performance global edge network. We're focused on use cases where processing at the edge makes a difference. We also run a single network—everything on a consolidated global platform—which allows us to use compute resources more efficiently across network, compute, and security workloads. That is one reason we're relatively capital efficient. That said, we are committed to driving growth and will make investments where needed. You saw our CapEx tick up this quarter as part of a front-loaded approach for 2026, but we'll make investments necessary to drive growth.
Thank you very much. Our next call comes from the line of James Fish of Piper Sandler. James, your line is open.
Hey, guys. James Fish here. In terms of the World Cup, can you walk us through the impact of the World Cup on Q2 and on the Q3 guide, given its split, as well as seasonality shifts like Prime Day into Q2? Can you walk us through the events that helped traffic?
Yes, James, thanks for asking. In Q2, our prepared remarks noted about $10 million of upside to the guidance midpoint. A little less than half of that was driven by episodic activity—partly the World Cup, but also a few other live events and some one-time customer activities. If you strip that out and look at the Q3 guide being up sequentially, that reflects normal seasonality between Q2 and Q3. When you look at the World Cup specifically, about 75% of the games occurred in Q2 and 25% occurred in Q3; in viewership terms, roughly two-thirds of games were viewed in Q2 and about one-third in Q3. That informed our forecast.
Maybe just as we think about security penetration: you've done a good job packaging. Any update on how to think about penetration with more than one product and more than two products as you benefit from consolidation?
Security is still relatively modest in absolute dollars—$42 million in Q2—so there is room to grow. We expect to continue taking share with our WAF and with new products like DDoS and bot management. Regarding multi-product customers, that's an area where you'll see more disclosure over time—stay tuned for our Investor Day in September.
Our next question comes from the line of Paramveer Singh of Oppenheimer. Param, your line is open.
Hi. Thanks for taking my questions. First, great to see the strength in security. I wanted to understand how much of your installed base already uses DDoS and bot management, and if you could quantify that in terms of innings and how much upside you see from cross-sell versus selling into new opportunities. Then I have a follow-up.
Great questions. DDoS and bot are newer products for us, so I would say we're maybe in the second inning of penetration. We are seeing triple-digit growth in those two products and are excited about increasing penetration. Customers are finding them directly responsive to AI traffic opportunities and challenges.
Second, is there a way to think about how much upside per unit traffic we could see on agentic AI versus traditional bot traffic or human traffic?
It's hard to give a precise quantitative answer. We are seeing a bigger impact in compute and security than in network services at the moment. Agentic traffic grows much faster—about 6.5x human traffic—and each request can be more complex. Bandwidth billing for network services is less sensitive to request volume than streaming events, so the effect is stronger in security and compute. Given the growth rate of agentic traffic, over time it becomes an important part of the business.
Our next question comes from the line of Rudy Kessinger of D.A. Davidson. Rudy, your line is open.
Hey, guys. Thanks for taking my questions. The Top 10 customers increased three points versus Q1 and they were 87% of your quarter-over-quarter revenue growth, while growth in all other customers decelerated about six points year-over-year versus Q1. As you look to the second half, what kind of concentration are you expecting from Top 10 customers in Q3 and Q4? And on the flip side, do you expect growth in all other customers to bounce back in the second half?
Good observation. We're pleased with the quarter—23% growth, the fastest in four years—which reflects the go-to-market transformation our team has been driving. There's more work to do. We want to see more new logos and growth outside the largest customers to complement the robust growth among top customers. We recently added a new chief marketing officer and continue to make changes in how we structure go-to-market investments. Our record gross margins show we can serve all customers profitably.
I would say that 37% concentration in this quarter reflects that go-to-market transformation which is still in progress. Given the strength of our top customers, I would not be surprised if the Top 10 percentage stays around this level or picks up a point or two.
Okay, great. And on AI traffic—you said it's growing 6.5x faster than all other traffic—what percent of traffic on your network today is coming from AI traffic?
We track the growth but do not provide a precise breakout at this time. In many parts of the business it is relatively modest today but rapidly growing.
Our next question comes from the line of Fatima Boolani of Citi. Fatima, your line is open.
Good afternoon. Thanks for taking my questions. You've talked about the pricing vector and the volume vector in detail over the last several quarters. I'd like to revisit what you're seeing from a non-AI traffic growth perspective and also realization from pricing. Some peers have raised prices; are you raising prices as well? Has pricing been a contributing factor to the gross profit accretion? I'd love more granularity on how you think about those two vectors and how to internalize that in the acceleration you saw in network services, understanding half was episodic. Then I have a follow-up.
Pricing in Q2 was consistent with Q1 and Q4. We're in a rational pricing environment. Price erosion remains in the mid-single digits, consistent with last quarter. Traffic growth is in the low-20% range. Price erosion is an aggregate measure driven by customer mix and volume discounts; as customers add volume they may hit the next pricing tier and receive discounts. In response to competitors' actions or announcements, we focus on honoring commitments and handling renewals on a case-by-case basis, focusing conversations on the value we provide and how customers can use the full suite of our products rather than implementing unilateral surcharges.
Thank you. Follow-up on net retention rate: it's strong this quarter. Is this a high watermark? Can NRR continue to expand, especially given the trailing 12-month nature and the comps coming up? How should we think about NRR moving forward?
This is our fifth consecutive quarter of improvement and we're proud of the progress. The go-to-market transformation has helped significantly. We do not guide NRR specifically, but customers continue to grow with us. Note that Q4 will be a harder comp given our strong Q4 2025 results, which is something to factor into modeling. Overall, customers remain happy with our offerings and continue to expand usage.
Thank you very much. Our next question comes from Jeff Van Rhee of Craig-Hallum Capital Group. Jeff, your line is open.
Hey, guys. This is Daniel on for Jeff. Just one on the hiring you mentioned, Richard, that slipped from Q2 into Q3. Maybe expand a bit on which functions and what investments you are planning to make.
From a hiring perspective, we've highlighted investments in APAC go-to-market. A year ago, many APAC customers were served from San Francisco and London and the time zones were suboptimal. We hired leadership to improve our on-the-ground presence in APAC. We've also invested in marketing—hiring a CMO—and the focus has been on maximizing value for our largest customers while also adding more logos and going deeper into the next set of customers. Those are the main areas where hiring moved into Q3.
That is helpful. And then Charles, on top customers and share shifting toward you, any thoughts on what's driving that—pricing or other factors?
A few things. The two most frequent drivers are reliability/resilience and performance. We've picked up business where incumbents had outages or reliability issues. Customers also consistently cite better performance with Fastly. Pricing matters—we need to be market competitive—but switching isn't generally driven by discounting. Effectiveness of our security products and the performance and resilience of our overall platform are the dominant drivers of why customers switch to Fastly.
Thank you. At this time, I am showing no further questions, and I would like to turn it back to Charles Compton for closing remarks.
Thank you for your questions and your interest in Fastly. Looking forward to seeing you at our Investor Day on September 22 at the Nasdaq MarketSite in New York. I want to thank our Fastly employees for all their contributions, our customers for their trust and partnership, and our investors for their continued support. Thank you.
Thank you for your participation in today's conference. This does conclude our program. You may now disconnect.