Fastly (FSLY) Q1 2026 earnings review
Security Adoption Drives Fastly to New Margins, But Sequential Growth Flattens
Fastly delivered a very strong Q1, characterized by a 20% YoY revenue jump to $173 million and a rapid margin expansion. The transformation narrative is playing out in the numbers: Security revenue is accelerating dramatically, growing 47% YoY and pushing overall Non-GAAP Gross Margins to a record 65.1%. While the year-over-year comparables look phenomenal and the full-year guidance was raised, the sequential story requires attention. The midpoint of Q2 revenue guidance ($173 million) implies zero sequential growth, suggesting the massive momentum from Q4 and Q1 might be entering a digestion phase.
🐂 Bull Case
Non-GAAP gross margins accelerated for the fifth consecutive quarter to 65.1%, proving that the shift towards higher-margin Security and Compute products is fundamentally transforming Fastly's unit economics.
RPO grew 63% YoY to $369 million. The go-to-market pivot to larger upfront commitments and packaged deals is working, reducing reliance on highly variable consumption-based network traffic.
🐻 Bear Case
Despite a massive YoY beat, Q2 revenue guidance of $170-$176 million implies 0% sequential growth at the midpoint. This breaks the momentum of recent quarters and raises questions about H2 acceleration.
Revenue from Top 10 customers grew 25% YoY (outpacing the 17% growth of the remaining base). Top 10 accounts now make up 34% of revenue, increasing dependency on a few large enterprise tech/media giants.
⚖️ Verdict: 🟢
Bullish. Fastly has successfully pivoted from a commoditized CDN to an edge cloud and security platform. The 47% security growth and corresponding margin leverage overshadow the sequentially flat Q2 guide.
Key Themes
Security as the Primary Growth Engine
Security is no longer just an add-on; it is driving the top line. Security revenue reached $38.8 million, an accelerating 47% YoY growth rate (up from 32% in 25Q4 and 30% in 25Q3). It now makes up 22.4% of total revenue. Management's strategic shift toward a 'security-led sales motion' is demonstrably landing new logos and driving cross-sells.
Long-Term Commitments Exploding
Remaining Performance Obligations (RPO) reached a record $369 million, an accelerating 63% YoY growth. This is critical for a consumption-heavy business like Fastly. It confirms that the newly revamped go-to-market strategy—packaging deals and incentivizing upfront commitments—is effectively securing stickier, long-term revenue.
Net Retention Resurgence
Last 12-month Net Retention Rate (LTM NRR) improved to 113%, accelerating from 110% in 25Q4 and a low of 100% in 25Q1. This indicates that Fastly's existing customers are dramatically expanding their usage, validating the cross-sell strategy from core Network Services into the expanded Security and Compute portfolios.
Sequentially Flat Near-Term Outlook
The Q2 2026 guidance calls for $170-$176 million in revenue. At the midpoint ($173 million), this represents a stabilizing but uninspiring 0% sequential growth over Q1's $173 million. This specifically contradicts the otherwise flawless narrative of hyper-acceleration and signals that Q1 may have captured early renewals or one-time bursts that won't immediately repeat.
Customer Concentration Creep
Top 10 customers accounted for 34% of revenue in 26Q1, up from 33% a year ago. More importantly, revenue from this top cohort grew 25% YoY, outstripping the 17% growth of the broader customer base. While Fastly added 39 large enterprise customers YoY, it remains heavily tethered to its largest digital and media accounts.
Macro / Supply Chain Infrastructure Costs
While Fastly achieved positive FCF of $4.1M, this was less than half of 25Q4's $8.6M. In prior calls, management explicitly guided that 2026 infrastructure CapEx would spike to 10-12% of revenue to battle supply chain dynamics (specifically memory cost inflation) and support new AI workloads. Monitoring CapEx drag on FCF is essential going forward.
AI Traffic and Agent Toolkits
Fastly launched the 'Fastly Agent Toolkit', allowing AI coding agents to work natively on its platform. Concurrently, they expanded 'Bot Management with Content Guard' to block unauthorized AI scrapers and protect publisher IP. Fastly is aggressively monetizing the macroeconomic AI boom from both ends: hosting AI workloads at the edge, and selling security to stop unwanted AI bots.
Other KPIs
Accelerating. Up significantly from 57.3% a year ago and 64.0% in the prior quarter. Driven by the revenue mix shift toward high-margin Security products (now 22% of revenue) and better traffic engineering leverage.
Reversing. A massive swing from a $5.8 million operating loss in 25Q1. Operating expenses grew only 14.8% YoY compared to 20% revenue growth, showing exceptional operating leverage.
Accelerating. Grew 67% YoY. While still the smallest segment (4.6% of total revenue), it is the fastest-growing part of the business, indicating early traction for edge computing workloads.
Guidance
Decelerating sequentially. The $173 million midpoint implies 16.3% YoY growth, but 0% QoQ growth. This signals a near-term leveling off in consumption after back-to-back blowout quarters.
Accelerating vs prior guide. Management raised the full-year target from the preliminary $700-720M given in Q4. The new midpoint ($717.5M) implies a healthy 15.0% YoY growth rate over FY25's $624M.
Accelerating. Raised significantly from the preliminary $50-60M target. Given Q1 delivered $19.1M, the company only needs to average ~$14.6M per quarter to hit the midpoint, which looks highly achievable.
Key Questions
Flat Q2 Expectations
The Q2 revenue guide implies flat sequential growth. What specific dynamics—seasonality, deferred renewals, or specific customer traffic moderation—are driving this plateau?
CapEx Under Memory Inflation
You previously warned about a 2026 infrastructure CapEx jump to 10-12% of revenue due to supply chain dynamics and memory inflation. Did those costs begin hitting in Q1, and how will they impact FCF for the remainder of the year?
Top 10 Concentration
Revenue from the Top 10 grew 25% YoY, substantially faster than the rest of the business. Are you seeing signs of slowing Network Services displacement outside of this elite cohort?