10-Q: Fastly Q2 2025: Revenue Up, Customer Metrics Mixed

Fastly reports 12% Q2 revenue growth and reduced net loss, but faces declining total customer count and net retention rate amid increased debt costs and ongoing legal challenges.

Summary

• Revenue for the three months ended June 30, 2025, increased by 12% to $148.7 million, up from $132.4 million in the prior year period.
• Net loss for the three months ended June 30, 2025, improved to $(37.5) million, compared to $(43.7) million in the same period last year.
• Gross profit for the three months ended June 30, 2025, was $81.1 million, an 11% increase from $72.9 million in the prior year, maintaining a gross margin of 55%.
• Total operating expenses decreased by 1% to $118.1 million for the three months ended June 30, 2025, down from $119.6 million in the prior year.
• Total customer count decreased to 3,097 as of June 30, 2025, from 3,295 as of June 30, 2024.
• Enterprise customer count increased to 622 as of June 30, 2025, from 601 as of June 30, 2024.
• Last-Twelve Months Net Retention Rate (LTM NRR) decreased to 104.4% for the trailing twelve months ended June 30, 2025, from 109.6% in the prior year period.
• Cash and cash equivalents decreased to $82.5 million as of June 30, 2025, from $286.2 million as of December 31, 2024, primarily due to purchases of marketable securities.
• Total cash, cash equivalents, and marketable securities increased to $321.2 million as of June 30, 2025, from $295.9 million as of December 31, 2024.
• Net cash provided by operating activities significantly increased to $43.1 million for the six months ended June 30, 2025, from $6.2 million in the prior year period.
• The company's 2026 Convertible Senior Notes, with an aggregate principal amount of $188.6 million, are classified as current debt and mature on March 15, 2026.
• The 2028 Convertible Senior Notes, with a principal amount of $150.0 million and a 7.75% interest rate, were issued in December 2024 and mature on June 1, 2028.
• A material weakness in internal control over financial reporting was identified, related to deficiencies in the revenue process due to a lack of sufficiently qualified personnel and insufficient monitoring of third-party service providers.
• The company extended the lease term for its corporate headquarters to July 2034 and will relinquish approximately 15,035 rentable square feet (Suite 320) effective December 31, 2025, receiving a landlord contribution of $4,223,100 for improvements to the remaining premises.

Sentiment

Score: 4

Explanation: The company shows revenue growth and an improved net loss, indicating some operational efficiency gains. However, the decline in total customer count and Last-Twelve Months Net Retention Rate (LTM NRR) suggests challenges in customer acquisition and retention, which are critical for long-term growth. The significant increase in interest expense due to new convertible notes adds financial pressure. Furthermore, the identified material weakness in internal controls and ongoing class-action lawsuits introduce considerable operational and legal risks. While enterprise customer growth is positive, the overall mixed performance and notable risks warrant a cautious outlook.

Positives

• Revenue increased by 12% for the three months ended June 30, 2025, and 10% for the six months ended June 30, 2025, demonstrating continued top-line growth.
• Net loss significantly improved, decreasing to $(37.5) million for the three months ended June 30, 2025, from $(43.7) million in the prior year, and to $(76.7) million for the six months ended June 30, 2025, from $(87.2) million.
• Gross margin remained stable at 55% for the three months ended June 30, 2025, indicating consistent profitability on core services.
• Operating expenses as a percentage of revenue decreased, with Sales and Marketing dropping from 40% to 34% and General and Administrative from 21% to 16% for the three months ended June 30, 2025, reflecting improved cost management.
• Enterprise customer count increased to 622, indicating success in attracting and retaining higher-value customers who contribute a majority of the company's revenue.
• Net cash provided by operating activities substantially increased to $43.1 million for the six months ended June 30, 2025, from $6.2 million in the prior year, showing improved operational cash generation.
• Total cash, cash equivalents, and marketable securities increased to $321.2 million, providing a strong liquidity position.

Negatives

• Total customer count decreased to 3,097 from 3,295, indicating a challenge in overall customer acquisition or retention.
• Last-Twelve Months Net Retention Rate (LTM NRR) declined to 104.4% from 109.6%, suggesting existing customers are expanding their usage at a slower pace.
• Interest expense significantly increased by 582% for the three months ended June 30, 2025, and 508% for the six months ended June 30, 2025, primarily due to the coupon interest of the 2028 Convertible Notes.
• The company continues to incur net losses, with a net loss of $(37.5) million for the quarter and $(76.7) million for the six-month period.
• Research and development expenses increased by 20% for the three months ended June 30, 2025, and 9% for the six months ended June 30, 2025, impacting overall profitability.
• A material weakness in internal control over financial reporting was identified, related to deficiencies in the revenue process, which could affect the reliability of financial reporting.
• The company is involved in multiple class-action and stockholder derivative lawsuits, which are costly and time-consuming, and could result in significant liabilities.

Risks

• The potential loss or significant reduction in usage by one or more major customers, such as TikTok, due to legislative actions or business restructuring, could result in lower revenues.
• Component delays, shortages, or price increases could interrupt the ability to construct servers to meet customer usage needs, materially harming operating results.
• Reliance on highly skilled personnel, including senior management and other key employees, means the loss or transition of such personnel could harm the business.
• Involvement in class-action lawsuits and other litigation matters is expensive and time-consuming, and if resolved adversely, could seriously harm the business.
• If estimates or judgments relating to critical accounting estimates, particularly goodwill impairment, prove to be incorrect, results of operations could be adversely affected, potentially leading to significant write-offs.
• Failure to effectively develop and expand marketing and sales capabilities could harm the ability to increase the customer base and achieve broader market acceptance of the platform.
• Unfavorable conditions in the industry or global economy, rising inflation, or reductions in information technology spending could harm the business.
• Failure to comply with United States and foreign governmental laws and regulations, including data localization and cross-border data transfer issues, could lead to direct liability, content blocking, or regulatory investigations and actions.
• The company is subject to stringent and evolving U.S. and foreign laws, governmental regulations, and rules related to privacy, infrastructure, and data security, with non-compliance potentially leading to significant fines and business disruptions.
• Activities of customers or the content on their websites may violate applicable laws or terms of service, potentially subjecting the company to lawsuits, regulatory enforcement actions, and liability in various jurisdictions.
• The company's pricing models may make it difficult to derive sufficient value from customers, and there is insufficient history to accurately predict optimal pricing, potentially leading to reduced revenue or profitability.
• The sales and onboarding cycles with customers can be long and unpredictable, requiring considerable time and expense without guaranteed revenue generation.
• The company's ability to use its net operating losses (NOLs) to offset future taxable income may be subject to limitations due to their limited duration or restrictions under U.S. tax law, including Section 382 of the Code.

Future Outlook

The company expects to continue incurring operating losses in the foreseeable future due to ongoing investments in growth initiatives, including platform development, infrastructure expansion, sales and marketing, and international operations. Future capital requirements are uncertain and depend on growth rate, operating cash flow, market acceptance, and economic conditions. The company may need additional funds and may use cash to buy back outstanding debt or for future equity issuances. The full impact of the potential TikTok ban in the United States remains unknown but could lead to a reduction in TikTok's U.S. traffic levels, negatively impacting the business. The company is evaluating the impact of the recently enacted One Big Beautiful Bill Act (OBBBA) on its financial condition and results of operations.

Management Comments

• Our mission is to make the Internet a better place where all experiences are fast, safe, and engaging.
• We want all developers to have the ability to deliver the next transformative digital experience on a global scale.
• We believe that our platform gives our customers a significant competitive advantage, whether they were born into the digital age or are just embarking on their digital transformation journey.
• We are continuing to bring a durable, consistent, and predictable pipeline of new innovations to our edge cloud platform and software-defined modern network architecture.
• We are seeing interest from customers in our existing product lines like Network Services, Security, and Other product lines, including Compute and Observability.
• We will continue to build out a single, unified platform, simplify customer onboarding and service usage, and simplify our pricing and packaging.
• We believe that the recruitment and cultivation of enterprise customers is critical to our long-term success.
• We do not knowingly allow our platform to be used to deliver content from groups that promote violence or hate, and that conflict with our values like strong ethical principles of integrity and trustworthiness, among others.

Industry Context

Fastly operates in the highly competitive and rapidly evolving edge cloud platform market, which converges Content Delivery Networks (CDN) with traditional hardware-centric functionalities like Web Application Firewalls (WAF) and Distributed Denial of Service (DDoS) solutions, alongside emerging edge computing. The company differentiates itself through its programmable platform, global footprint, and integrated security. It faces intense competition from legacy CDNs (Akamai), cloud providers (AWS, Google Cloud, Microsoft Azure), and specialized security vendors (Cloudflare, F5). The industry is also grappling with evolving data localization laws, cross-border data transfer restrictions, and the nascent regulatory landscape for AI, which could impact customer growth and operational costs. The potential ban of TikTok in the U.S. highlights the geopolitical risks affecting major customers in the streaming entertainment space, a significant industry vertical for Fastly.

Comparison to Industry Standards

• Fastly's LTM NRR of 104.4% is a decline from the prior year's 109.6%, which may indicate a slower expansion of existing customer usage compared to some industry leaders in the SaaS/cloud space that often target NRRs above 110-120%.
• The increase in enterprise customer count (622 from 601) is positive, aligning with industry trends of focusing on higher-value customers, similar to strategies employed by competitors like Akamai and Cloudflare who also target large enterprises.
• The company's gross margin of 55% is competitive within the CDN and edge computing sector, though some more mature or specialized players might achieve higher margins through greater scale or proprietary hardware efficiencies.
• The significant increase in interest expense due to convertible notes reflects a common financing strategy in the tech industry for growth-stage companies, but the magnitude of the increase (508% to 582%) suggests a higher cost of capital or increased debt burden compared to some more financially stable peers.
• The ongoing material weakness in internal controls is a notable concern, as leading industry players typically maintain robust internal control frameworks to ensure financial reporting accuracy and operational efficiency, a standard Fastly is actively working to meet.

Management Changes

Corporate Governance

Legal Proceedings

• A purported securities class action lawsuit, Ken Kula v. Fastly, Inc., et al., was filed on May 24, 2024, alleging violations of Section 10(b) and 20(a) of the Exchange Act on behalf of Fastly securities purchasers between November 15, 2023, and August 7, 2024. A motion to dismiss was filed on January 15, 2025.
• Multiple stockholder derivative actions (Roy v. Nightingale, et al., Steffens v. Nightingale et al., Mark Sweitzer v. Nightingale, et al., Bushansky v. Nightingale, et al.) were filed against certain officers and directors, based on substantially similar allegations as the securities class action. These derivative actions have been consolidated and stayed pending the resolution of the motion to dismiss in the securities class action.
• The company has not recorded any significant accruals for loss contingencies associated with these lawsuits as of June 30, 2025, as it does not believe an outcome resulting in a loss is probable.
• The company is also party to various routine disputes incidental to its business, which management does not expect to have a material effect on its business, results of operations, financial conditions, or cash flows.

Stakeholder Impact

• Shareholders: Potential dilution from future equity issuances, volatility in stock price due to mixed financial results and ongoing legal proceedings, and potential impact from the TikTok ban risk.
• Employees: New 2025 Employment Inducement Incentive Plan offers equity awards to new hires, potentially enhancing recruitment. Changes in senior management roles (CEO, CFO) may affect organizational direction and stability. The material weakness in internal controls related to personnel turnover highlights challenges in staffing and training.
• Customers: Continued investment in platform and network infrastructure aims to improve service quality and expand offerings (Network Services, Security, Compute). However, declining total customer count and LTM NRR suggest challenges in broader customer acquisition and retention. The potential TikTok ban could impact a major customer's usage.
• Creditors: The classification of $188.6 million in 2026 Convertible Notes as current debt and the significant increase in interest expense from the 2028 Convertible Notes indicate increased short-term and long-term financial obligations. Compliance with debt covenants is crucial.
• Suppliers: Component delays, shortages, or price increases could affect the company's ability to construct servers, impacting relationships with hardware and network providers.

Next Steps

• Continue to invest in products and features and developer outreach to attract new customers.
• Expand sales and marketing programs, including online marketing activities and targeted account-based marketing.
• Build out a single, unified platform, simplify customer onboarding and service usage, and simplify pricing and packaging.
• Continue to expand efforts to attract customers outside of the United States by augmenting sales teams and strategically increasing presence in international locations.
• Continue to invest in the platform and network infrastructure to maintain market position and expand scale and capacity.
• Remediate the identified material weakness in internal control over financial reporting by hiring and training qualified personnel, enhancing controls, and improving monitoring of third-party service providers.
• Monitor the impact of the potential TikTok ban legislation and ByteDance's restructuring on U.S. traffic levels.
• Evaluate the impact of the recently enacted One Big Beautiful Bill Act (OBBBA) on financial condition and results of operations.
• Ronald W. Kisling will remain employed in an advisory capacity through September 15, 2025, to provide transition assistance for the CFO role.

Key Dates

Recommendation

The company shows revenue growth and an improved net loss, indicating some operational efficiency gains. However, the decline in total customer count and Last-Twelve Months Net Retention Rate (LTM NRR) suggests challenges in customer acquisition and retention, which are critical for long-term growth. The significant increase in interest expense due to new convertible notes adds financial pressure. Furthermore, the identified material weakness in internal controls and ongoing class-action lawsuits introduce considerable operational and legal risks. While enterprise customer growth is positive, the overall mixed performance and notable risks warrant a cautious 'Hold' recommendation for existing investors, awaiting clearer signs of sustained improvement in core customer metrics and resolution of internal control issues.

Keywords

Edge Cloud Platform, Content Delivery Network, CDN, Security Solutions, WAF, DDoS, Compute Solutions, Observability, Enterprise Customers, Net Retention Rate, Convertible Notes, Stock-based Compensation, SEC Filings, Financial Performance, Corporate Governance, Risk Management, Litigation, Internal Controls