Fastly (FSLY) Q3 2026 earnings review
Fastly's profit margin hits a record, but backlog shrinks again
Fastly, which runs a global network that speeds up and protects websites, turned much more of its sales into cash and profit even as its contracted backlog shrank. Revenue grew 20%, while operating profit excluding one-offs nearly tripled to $31 million because management kept operating costs flat. Chief executive Kip Compton raised the full-year profit outlook by $17 million, and lower server buying allowed free cash flow to reach $25 million.
| Revenue | $190.2M +20% from a year ago |
|---|---|
| Operating margin, excluding one-offs | 16.4% +9.1 percentage points from a year ago |
| Top ten customers' share of revenue | 39% 32% a year ago |
| Full-year operating profit outlook | Raised $17M middle of the range: $109M |
⚖️ Verdict: 🟢 Bullish
The story got better because the profit jump held up in the fourth-quarter plan, disproving fears that second-half hiring would eat up the margin gains. Existing customers also expanded their spending at the fastest pace in four years. One caution: the ten biggest accounts now supply 39% of revenue, so by our math growth outside the top ten slowed below 8%, and the contracted order book fell for a second straight quarter.
The question now is whether the shrinking order book and top-ten concentration mean broad customer demand is weakening, or just reflect lumpy renewal timing while giant accounts buy more security tools. Fourth-quarter contract renewals — seasonally the largest of the year — and the top-ten revenue share will settle it.
🐂 Bull Case
Restrained Operating Costs Lifted the Profit Margin
Fastly, which runs a global network that speeds up and protects websites and apps, is turning more of its sales into profit. Operating margin excluding one-offs reached 16.4%, up 9.1 percentage points from a year ago and well above the 12% middle of its own target range. Gross margin excluding one-offs matched last quarter's record of 65.8%, up 3.0 percentage points from a year ago.
- Research and development (cost of building software): down 2.3 percentage points of revenue from a year ago, to 16.1%, excluding one-offs
- Sales and marketing (cost of winning customers): down 1.9 percentage points of revenue, to 22.8%, excluding one-offs
- General and administrative (overhead): down 1.8 percentage points of revenue, to 10.5%, excluding one-offs
- Full-year operating profit outlook, excluding one-offs: raised $17 million at the middle of the range, to $107–111 million
This matters because the edge cloud provider kept operating expenses almost flat from last quarter while adding $6.9 million in sales. That restraint disproved last quarter's warning that delayed hiring would squeeze second-half margins, so the new fourth-quarter plan keeps the operating margin near 16% by our math.
What to watch: fourth-quarter operating expenses excluding one-offs when Fastly reports full-year results. Another quarter of small cost increases would show the business can keep a mid-teens profit margin into 2027.
Existing Customers Spent More Across Multiple Products
“Our record third quarter results reflect strong execution as customers continued to adopt more of our products and deepen their use of our platform,” chief executive Kip Compton said. Fastly tracks this expansion with its last-twelve-month net retention rate (LTM NRR), which measures what existing customers spent over the past year compared with the year before.
That retention rate climbed to 119% from 117% last quarter, its sixth straight increase and the highest reading since 2022. Among large customers — those spending at least $100,000 a year — 34% now use four or more product suites, up 15 percentage points from a year ago. Security sales rose 32% from a year ago to $44.7 million, and Other revenue (edge compute and monitoring tools) grew 37% to $7.4 million.
Cross-selling matters because security and compute products carry fixed subscription fees rather than volatile bandwidth charges, and together they now bring in 27% of total revenue. What to watch: the net retention rate in the fourth quarter, when the twelve-month calculation laps last year's strong year-end finish. A reading near 119% would show that multi-product expansion is durable.
Lower Equipment Spending Lifted Free Cash Flow
Fastly bought heavily in the first half of 2026 to expand its server network ahead of memory-chip price increases, which held first-half free cash flow down to $7.7 million. This quarter, purchases of property and equipment dropped to $11.0 million, or 5.8% of revenue, down from $31.6 million in the second quarter. Total capital expenditures, which also include internal software development, fell to 7.8% of revenue.
Because equipment spending cooled while operating cash flow reached $40.0 million, free cash flow jumped to $25.2 million, or 13.2% of sales. That puts nine-month free cash flow at $32.9 million, so the business needs only $7.1 million in the fourth quarter to reach the bottom of the $40–50 million full-year target it set earlier this year.
What to watch: fourth-quarter purchases of property and equipment in the full-year cash flow statement. Staying near $11 million would keep full-year infrastructure spending inside the 10–12% of revenue target and confirm the heavy buying cycle is over.
🐻 Bear Case
Ten Largest Customers Drove Most of the Growth
Compton credited broad customer adoption for the quarter's record sales, and the number of large accounts did recover by 10 from last quarter to 634. Yet the company's ten largest customers accounted for 39% of revenue, up from 37% in the second quarter and 32% a year ago.
- Revenue from top ten customers: $74.2 million, up 46.5% from a year ago by our math
- Revenue outside the top ten: $116.0 million, up 7.9% from a year ago by our math
- Non-top-ten growth trajectory: slowed from 17% a year ago to 12% last quarter, and 7.9% this quarter
- Large customer count: 634, up only 7 accounts (or 1.1%) from 627 a year ago
This concentration matters because Fastly spent 2024 and 2025 trying to reduce its reliance on a handful of giant media and tech accounts after traffic swings hurt its results. Now almost four-fifths of the company's $32.0 million year-over-year revenue gain came from just ten accounts by our math, while growth across the rest of the customer base has nearly stalled.
What to watch: the top ten customer revenue share in the fourth quarter. A rise to 40% or more would show that Fastly's growth depends ever more on a few giant buyers rather than broad enterprise demand.
The Contracted Order Book Shrank Again
Fastly has pushed customers to sign upfront spending commitments so its revenue is more predictable. It tracks these deals through remaining performance obligations (RPO), the total value of signed contracts not yet recognised as revenue. After dropping by $27.8 million in the second quarter, RPO fell another $7.4 million this quarter to $333.5 million.
Compared with a year ago, RPO is still up 24%, and the share due within the next twelve months rose to 81% from 79% last quarter. Even so, a second straight quarterly drop — alongside a 2.8% quarterly dip in current deferred revenue (cash collected for future service) to $33.3 million — shows that customers are working through existing multi-year contracts faster than Fastly is signing new ones.
Meanwhile, the fourth-quarter outlook calls for $198–202 million in revenue, which slows year-over-year growth to 15.9% at the middle of the range from 20.2% this quarter as the company laps last year's strong finish. What to watch: fourth-quarter RPO, which is seasonally the biggest quarter for contract renewals. A failure to pass the first-quarter peak of $368.7 million would show that contract signings have lost momentum.
Stock Pay Keeps Fastly Unprofitable and Dilutes Shareholders
While profit excluding one-offs hit a record $31.6 million, Fastly still lost $11.3 million under standard accounting rules (GAAP). The gap comes almost entirely from stock-based compensation, which cost $34.9 million this quarter, or 18.4% of revenue. Starting in 2026, Fastly also excludes the employer payroll taxes on those stock awards ($2.4 million this quarter) from its preferred profit figures.
Because the company pays staff heavily in stock and does not buy back shares, the diluted share count used for profit per share excluding one-offs rose 12.8% from a year ago to 181.9 million. That dilution ate up part of the operating profit gain, and the fourth-quarter outlook assumes the share count will climb again to 184.1 million.
What to watch: the diluted share count assumption for 2027 when Fastly issues its full-year outlook next quarter. Continued double-digit share growth would keep per-share profit growing much slower than operating income.
Risks this quarter didn't answer
Six standing concerns could not be tested from the earnings release and investor supplement alone, or got no new disclosure.
- AI traffic share and unit economics: still unquantified in the release; any disclosed share of traffic or revenue per request on the conference call would test whether AI traffic helps or hurts bandwidth billing.
- Security multi-product attach rate: management previously pointed to the September Investor Day for aligned disclosures, but the Q3 supplement kept the same metrics; a security-specific attach figure would show whether new tools are scaling beyond web firewalls.
- Server depreciation accounting benefit: extending server useful lives reduced depreciation earlier this year; Note 2 of the upcoming 10-Q filing will show how much of Q3's 65.8% gross margin came from lower depreciation.
- Price erosion in network delivery: not mentioned in the release; the call and 10-Q will show if per-unit bandwidth price declines held in the mid-single digits.
- Scale gap against larger rivals: Security and Other reached a $208 million annualised run rate, still a fraction of Cloudflare and Akamai; relative market share awaits peer reports.
- Shareholder litigation and convertible notes: Fastly booked $222,000 in shareholder litigation costs this quarter; the 10-Q legal and debt notes will update the class action and any conversions on the $180 million 2030 notes.
👓 Other Themes
Fastly Launched AI Security Tools and a Comcast Deal
Compton wants to “help customers achieve critical business outcomes and build for AI scale.” This quarter Fastly launched AI Runtime Control, AI Firewall, and new API Security tools so companies can “govern, secure, and scale AI applications and agent interactions”. It also signed a deal to “integrate Fastly’s software into Comcast’s nationwide network” for local streaming and edge AI, and partnered with distributor Ingram Micro in Singapore, though neither release gave financial terms.
💲 Other KPIs
Rose 16.2% from a year ago and 3.1% from last quarter, making up 72.6% of total sales. Network Services — which speeds up websites, apps, and streaming video — has grown between 12% and 19% over the past four quarters, providing steady cash generation while Security grows faster.
Increased 1.0% from last quarter and 5.6% from a year ago, while revenue grew 20.2% over the same year. Accounts receivable — money billed to customers that has not yet been collected — has stayed between $109 million and $130 million over the last four quarters, helping lift operating cash flow to $40.0 million.
Grew by $27.7 million from last quarter as strong free cash flow stayed on the balance sheet. Against $324.3 million of long-term debt, the edge cloud company now holds $40.9 million in net cash by our math, up from $13.5 million at the end of June.
🔮 Guidance
Raised against the prior implied range. The plan calls for 15.9% growth from a year ago at the $200.0 million middle of the range, down from 20.2% in Q3 as Fastly laps a strong Q4 2025. The middle sits $4.3 million above what the prior full-year plan implied by our math; if the four-quarter average beat of 4.0% holds, Q4 sales would reach $208.0 million.
Raised. The middle of the range moved up $7.0 million to $746.0 million, or 19.6% growth for the year. It is the third raise this year: +$7.5 million in Q1, +$21.5 million in Q2, and +$7.0 million in Q3.
New. At the $32.0 million middle of the range, operating profit excluding one-offs grows 50.7% from a year ago and 2.6% from Q3. By our math, that puts the Q4 operating margin at 16.0%, holding almost all of Q3's 16.4% record.
Raised. The middle of the range jumped $17.0 million to $109.0 million, almost five times last year's $22.4 million by our math. This is the third raise of the year: +$8.0 million in Q1, +$29.0 million in Q2, and +$17.0 million in Q3.
New. The $0.17 middle of the range matches Q3 and is up from $0.12 a year ago. An assumed rise in diluted shares from 181.9 million to 184.1 million keeps per-share profit flat from Q3 even though operating profit is set to rise.
Raised. The middle of the range rose $0.10 to $0.62, up from $0.13 in 2025, assuming 180.7 million diluted shares. It is the third raise this year: +$0.04 in Q1, +$0.22 in Q2, and +$0.10 in Q3.
❓ Key Questions
Why did the contracted order book shrink again?
Remaining performance obligations fell $7.4 million from last quarter after dropping $27.8 million in Q2. Investors need to know if customers are signing shorter contracts or simply burning through last year's commitments without renewing at the same size.
Why has revenue growth outside the top ten slowed?
By our math, sales to the ten largest accounts grew 47% from a year ago while the rest of the customer base grew less than 8%. Management has not explained why smaller enterprise accounts are growing so slowly.
How much traffic and revenue come from AI today?
Fastly released AI Firewall and AI Runtime Control this quarter, but has not shared what percentage of network traffic comes from AI agents or whether that traffic pays more or less per request than human users.
What are the financial terms of the Comcast partnership?
Integrating software into Comcast's nationwide network sounds promising for local streaming and edge AI, but the release gave no details on whether Comcast pays a software licence fee, shares revenue, or reduces Fastly's capital spending.