Akamai Technologies Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 8, 2025
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Operator

Hello, and welcome to the Akamai Technologies First Quarter twenty twenty five Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Mark Stoutenburg, Head of Investor Relations. Please go ahead.

Mark Stoutenberg
Head of Investor Relations at Akamai

Good afternoon, everyone, and thank you for joining Akamai's first quarter twenty twenty five earnings call. Speaking today will be Tom Layton, Akamai's Chief Executive Officer and Ed McGowan, Akamai's Chief Financial Officer. Please note that today's comments include forward looking statements, including those regarding revenue and earnings guidance. These forward looking statements are based on current expectations and assumptions that are subject to certain risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied. The factors include, but are not limited to, any impact from macroeconomic trends, the integration of any acquisition, geopolitical developments, and any other risk factors identified in our filings with the SEC.

Mark Stoutenberg
Head of Investor Relations at Akamai

The statements included on today's call represent the company's views on 05/08/2025, and we assume no obligation to update any forward looking statements. As a reminder, we will be referring to certain non GAAP financial metrics during today's call. A detailed reconciliation of GAAP to non GAAP metrics can be found under the financial portion of the Investor Relations section of akamai.com. With that, I'll now hand the call off to our CEO, Doctor. Tom Layton.

Tom Leighton
Chief Executive Officer at Akamai

Thanks, Mark. I'm pleased to report that Akamai got off to a solid start on the year. First quarter revenue grew to $1,015,000,000 up 3% year over year as reported and up 4% in constant currency. Non GAAP operating margin came in above guidance at 30%. And non GAAP earnings per share came in well above the high end of our guidance range at $1.7 up 4% year over year and up 6% in constant currency.

Tom Leighton
Chief Executive Officer at Akamai

Security and compute combined to account for 69 percent of our total revenue in q one, growing 10% year over year as reported and 11% in constant currency, underscoring Akamai's ongoing transformation from a CDN pioneer into the cybersecurity and cloud computing company that powers and protects business online. Security growth in Q1 was driven in part by continued strong demand for our market leading GardaCore segmentation solution as more enterprises relied on Akamai to meet compliance requirements and to defend against malware and ransomware. The FBI's Internet Crime Report released last month called ransomware the most pervasive threat to critical infrastructure. And segmentation is the last and most important line of defense for an enterprise. Once an attack finds its way through the perimeter defenses, Guardicore is designed to spot it and proactively prevent it from spreading and causing serious harm.

Tom Leighton
Chief Executive Officer at Akamai

In q one, we achieved several large competitive takeaways for our Guardicore solution, including at a major bank in The US and at a government revenue and customs authority in Europe. Both told us that they were not getting the help they needed from their incumbent provider. They also told us that their trust and confidence in Akamai were factors in switching from the competitor to us. We beat out another segmentation competitor at a clinical research laboratory and at a major credit union, which told us that our solution was easier for them to manage while offering unified control over their on prem and hybrid environments. In addition, we expanded existing contracts for Gardacore at a well known financial analytics company in The US, a global Fortune 500 manufacturer in Europe, and a major telco in Latin America.

Tom Leighton
Chief Executive Officer at Akamai

We also continued to see strong interest in our market leading API security solution in q one. Almost everything online today leverages APIs, including attackers who know that APIs usually don't come with sufficient security and controls. Akamai's state of the Internet security report issued last month showed that API hacks now cost organizations around $87,000,000,000 a year, with shadow and zombie APIs being especially vulnerable to attack. When we do proofs of concept for our API security solution, most CSOs and CIOs are surprised to learn just how many APIs they have exposed. For example, at one of our customer events in q one, the CSO of a major Korean company told attendees about how our solution detected numerous undocumented APIs along with multiple vulnerabilities, including about 40 security issues ranging from exposure of sensitive data through unauthenticated and publicly accessible APIs to weak password policies and unencrypted passwords.

Tom Leighton
Chief Executive Officer at Akamai

In q one, we signed contracts for API security with numerous companies, including a leading US fintech provider, one of the largest banks in Canada, One of the largest pharmacy benefits managers in The US, Two large US insurance companies, a well known auto manufacturer in The UK, a global online fashion retailer in China, and a multinational investment bank in Australia. And last week at the RSA Security Conference, our API Security Solution won a global InfoSec award from Cyber Defense Magazine. Also last week at RSA, we announced our newest security offering, firewall for AI, which CISO magazine highlighted as one of the top cybersecurity products at RSA and which CRN hailed as one of the coolest new cybersecurity products at the show. Many enterprises today are deploying LLMs to provide myriad services such as chatbots, inference engines, content generation, and cataloging. Some are beginning to go further and deploy AgenTic AI, software agents with the ability to gather information, connect with other tools, reason, make decisions, and then act autonomously.

Tom Leighton
Chief Executive Officer at Akamai

In fact, Deloitte forecast that a quarter of the organizations using GenAI today will deploy AI agents this year, and half will use them by 2027. As is often the case when enterprises adopt new technologies, cybercriminals quickly learn how to attack the new technology for nefarious purposes. GenAI and the use of AI apps and agents are just the latest examples with a variety of exploits already well publicized. Akamai's firewall for AI is designed to protect AI agents, AI powered applications, LLMs, and AI driven APIs from these new threats. By securing inbound AI queries and outbound AI responses, it offers multilayered protection by detecting and blocking sensitive data leaks in AI generated responses, defending against remote code execution, model backdoors, and data poisoning attacks, filtering inappropriate content such as misinformation, hate speech, and other offensive material, and mitigating AI driven denial of service attacks by controlling excessive query usage and model overload.

Tom Leighton
Chief Executive Officer at Akamai

The new product is generating strong interest from customers. For example, a financial services firm told us, quote, Akamai's AI firewall has given us great insight into the interactions with our AI chat agent, which helps paint a picture of the threat landscape unique to LLMs. This tool will allow us to save critical systems resources for real clients rather than being consumed by bad actors, end quote. In q one, we also received accolades for our other security products. Akamai was named a leader in the Forrester Wave web application firewall report and achieved the highest possible score for 11 criteria, including detection models, layer seven DDoS protection, pricing transparency and flexibility, road map, and vision.

Tom Leighton
Chief Executive Officer at Akamai

Our WAF continues to be an industry leader and serves as the bedrock for app security used by many of the world's largest enterprises. For example, in q one, we signed multimillion dollar contracts with a global bank based in India and the world's third largest railway with over 60,000,000 daily users. As is often the case, these new WAF customers are also making use of our content delivery services to provide the best possible performance for their web applications. Turning now to delivery. I'm pleased to report that we saw better than expected results for our delivery products in q one.

Tom Leighton
Chief Executive Officer at Akamai

This was due in part to improved overall traffic growth, our continued excellent performance for both enterprise web apps and large live events, and incremental growth from new customer accounts that we acquired from Edgeo in December. '1 of those new customer accounts led to a $16,000,000 commitment over three years for Akamai to deliver a % of their traffic along with Akamai API security, app and API protector, professional services, and two solutions from our compute ISV partners. That's a great example of the opportunity and competitive advantage we have by providing world class delivery, security, and compute together on a single platform, supported by the best in managed professional services. Turning now to cloud computing. In q one, we continued our strong momentum in cloud computing, introducing new capabilities to serve customers, signing up new accounts, and expanding our go to market reach, both in house and with partners.

Tom Leighton
Chief Executive Officer at Akamai

In March, we introduced our new Akamai Cloud inference solution, which provides what we believe is a better architecture for customers to build and run AI applications and data intensive workloads closer to end users. AI inference and agentic AI apps often require high throughput networking to manage large volumes of data and return accurate results within milliseconds. By running these workloads at the edge, we can achieve better throughput, lower latency, and significant cost savings compared to other cloud providers in the market. For example, in one proof of concept, a company's artificial intelligent application achieved 30% faster response times using our new compute platform than they had with a hyperscaler. In another proof of concept, a publishing company saw two and a half times faster response times with three x higher throughput and significant cost savings compared to another hyperscaler.

Tom Leighton
Chief Executive Officer at Akamai

Customers who signed deals with us for cloud computing in q one included a global live streaming service with hundreds of millions of users, a major cybersecurity provider in The US, a European industrial products company, and a global developer of immersive video games. We also saw numerous large deals in q one come through our growing roster of ISV partners, including at one of the largest retailers in the world, one of the largest pharmacy benefits managers, a major European fashion retailer, and a leading broadcasting company in Japan. As a result of our competitive advantages, Gartner named Akamai an emerging leader for GenAI specialized infrastructure. And it's one of the reasons why VAST Data, the AI data platform company, has partnered with Akamai to make data intensive AI inferencing faster and more efficient for our joint customers. Our edge computing capabilities will be further enhanced by the introduction of our new managed container service or MCS that we announced in q one.

Tom Leighton
Chief Executive Officer at Akamai

MCS will provide support for customer containers in any of our 4,000 plus POPs around the world. That means we'll be able to run customer compute instances in over 700 cities. No other provider comes anywhere close to doing that today. Also in q one, Akamai became the first and only provider to offer video processing units or VPUs in the cloud with our new accelerated compute instances solution built on specialized processors from NetInn. A VPU architecture can offer up to 20 times greater throughput than CPU solutions, which results in greatly improved performance as well as significant savings for media companies.

Tom Leighton
Chief Executive Officer at Akamai

This gives Akamai another way to complement and cement our long standing relationships with major media companies, which include all of the top 10 media companies in the world. It's also very synergistic with the media workflow services provided by our ISV partners on Akamai Cloud. Overall, we believe that the combination of world class delivery, compute, and security available on our platform provides a low cost, high performance, and massively scalable alternative to the hyperscalers for media and entertainment companies. And unlike the hyperscalers, we don't compete with our customers. At the NAB show in Las Vegas last month and in recent visits with customers across Europe and Asia, many executives told me how they see real value in what we're doing, in part because they're tired of writing huge checks to the hyperscalers who then use the funds to compete against them.

Tom Leighton
Chief Executive Officer at Akamai

On the go to market front, the sales transformation efforts that we outlined during our last call are on track as planned. We're making good progress in rebalancing our sales team to provide greater focus on new customer acquisition while maintaining strong customer relationships. We've implemented a better sales play methodology to improve our install base penetration, especially for our fast growing security and cloud infrastructure offerings. And we're seeing good early success with changes to reward sellers and customers for longer multiyear contracts. Like all of you, we're keeping a close eye on global economic and political challenges.

Tom Leighton
Chief Executive Officer at Akamai

As we noted during our last call, we've taken steps to minimize the impact of tariffs on our business. And as of now, we anticipate that the direct impact to Akamai from tariffs in 2025 will be about $10,000,000 in CapEx, which is amortized over six years. That said, there is concern among some of our customers about a possible recession, which could impact bookings later in the year. And some of our customers outside The US have raised concerns about whether they should rely on American companies for critical infrastructure. Neither issue has impacted our business to date, and we're working to reassure customers that Akamai will continue to serve them as we always have.

Tom Leighton
Chief Executive Officer at Akamai

We're also staying very engaged with our US federal sector customers. Overall, we derive less than 5% of our revenue from The US public sector, including state and federal. Based on our current line of sight, we expect to lose a few million dollars of revenue in the back half of twenty twenty five related to federal cutbacks. There's also a possibility of increasing revenue in situations where our solutions can generate significant savings for federal agencies. Lastly, we were very pleased to see Akamai recognized last quarter as one of the most trustworthy companies in America by Newsweek magazine, which partnered with a market research firm to analyze more than 100,000 evaluations generated by customers, employees, and investors.

Tom Leighton
Chief Executive Officer at Akamai

Trust and integrity are core values at Akamai, and they really matter to customers who rely on us to be there for them. So I want to express my thanks to our employees who work so hard to help Akamai earn the trust of our customers and shareholders. Now I'll turn the call over to Ed to say more on our Q1 results and our outlook for the rest of the year. Ed?

Ed McGowan
CFO at Akamai

Thank you, Tom. Today, plan to review our Q1 results and then provide some color on our Q2 expectations and our updated full year 2025 guidance. As Tom mentioned, we got off to a solid start to the year with total Q1 revenue of 1,015,000,000.000 which was up 3% year over year as reported and 4% in constant currency. We continued to see strong performance within our compute and security portfolios during the first quarter. Compute revenue grew to $165,000,000, a 14 year over year increase as reported and 15% in constant currency.

Ed McGowan
CFO at Akamai

Security revenue was $531,000,000, growing 8% year over year as reported and 10% in constant currency. During Q1, we had approximately $6,000,000 of onetime license revenue compared to $4,000,000 in Q1 of last year and $12,000,000 in Q4 of twenty twenty four. For the first quarter, combined revenue from compute and security increased by 10% year over year as reported and 11% in constant currency, accounting for 69% of total revenue. Our delivery revenue was $319,000,000 down 9% year over year as reported and down 8% in constant currency. Delivery revenue was stronger than expected in q one.

Ed McGowan
CFO at Akamai

And while it's too early to call a bottom in delivery, we are encouraged by some improving trends in the delivery business to start 2025. International revenue was $486,000,000 up 2% year over year or 5% in constant currency, representing 48% of total revenue in Q1. Foreign exchange fluctuations had a negative impact on revenue of $5,000,000 on a sequential basis and a negative $14,000,000 impact on a year over year basis. Finally, it's worth noting that Edgeeo contributed approximately $23,000,000 of revenue in the quarter, which was in line with our expectations. Moving to profitability.

Ed McGowan
CFO at Akamai

In Q1, we generated non GAAP net income of $256,000,000 or $1.7 of earnings per diluted share, up 4% year over year as reported, up 6% in constant currency and well above the high end of our guidance range. Our EPS outperformance was driven by better than expected Q1 revenue, lower than expected transition services or TSA costs related to the Egio transaction, better than expected bandwidth costs, lower than expected payroll taxes primarily related to stock based compensation as a result of a lower stock price, and lower employee medical claims related to our self insured medical plan. Finally, our Q1 CapEx was $226,000,000 or 22% of revenue. Our first quarter CapEx came in slightly lower than our guidance, which was mostly due to timing as some CapEx has been pushed from Q1 into Q2. Moving to our capital allocation strategy.

Ed McGowan
CFO at Akamai

During the first quarter, we spent approximately $500,000,000 to buy back approximately 6,200,000.0 shares. We ended the first quarter with approximately $1,500,000,000 remaining on our current repurchase authorization. Our intention remains the same, to continue buying back shares to offset dilution from employee equity programs over time and to be opportunistic in both M and A and share repurchases. As of March 31, we had approximately $1,300,000,000 of cash, cash equivalents and marketable securities. It's worth noting that subsequent to the end of the first quarter and prior to today's earnings announcement, we used cash on hand and funds available under our revolving credit facility to fully repay $1,150,000,000 of our outstanding convertible senior notes that matured on May one of this year.

Ed McGowan
CFO at Akamai

Before I provide our q two and full year 2025 guidance, I want to touch on some housekeeping items. First, we have completed our migration of Edgeio customers to the Akamai platform. As a result, we will not have any additional TSA costs moving forward, and our revenue expectations from the transaction remain the same, approximately 85,000,000 to $105,000,000 in Edgeo revenue contributions for 2025. Second, we expect an increase in operating expenses for the second quarter, partly due to a weaker U. S.

Ed McGowan
CFO at Akamai

Dollar as well as higher marketing expenditures for Q2 events, our annual sales President's Club trip and the impact of our annual employee merit cycle, which went into effect on April 1. Third, we continue to expect our CapEx spending to be heavily front end loaded with significantly higher expenditures in the first half of the year compared to the second half of the year. This includes approximately $10,000,000 of CapEx pulled forward to the first half of the year to help mitigate potential tariff risks. Fourth, we expect interest income to decline in 2025 due primarily to lower cash balances resulting from stock repurchases, recent acquisitions and the retirement of our $1,150,000,000 convertible debt. Additionally, we anticipate lower investment yields as interest rates are projected to come down throughout the year.

Ed McGowan
CFO at Akamai

As a result, we expect net interest income to decrease by approximately $5,000,000 per month starting in May of twenty twenty five. Finally, we are maintaining wider forecast ranges due to the larger scale of our business and to effectively navigate increased volatility within the current economic environment, the volatility in the foreign exchange markets, and the potential impact of the pending TikTok ban. So with those factors in mind, I'll now move to our Q2 guidance. For Q2, we're projecting revenue in the range of $1.012 to $1,032,000,000 or up 3% to 5% as reported and in constant currency over Q2 twenty twenty four. At current spot rates, foreign exchange fluctuations are expected to have a positive $15,000,000 impact on Q2 revenue compared to Q1 levels and a positive $7,000,000 impact year over year.

Ed McGowan
CFO at Akamai

At these revenue levels, we expect cash gross margins of approximately 72 percent. Q2 non GAAP operating expenses are projected to be $315,000,000 to $320,000,000 This is up from Q1 levels due to the items I just mentioned. We expect Q2 EBITDA margin of approximately 41% to 42%. We expect non GAAP depreciation expense to be between 135,000,000 to $137,000,000 And we expect non GAAP operating margin of approximately 28% for Q2. Moving on to CapEx, we expect to spend approximately $226,000,000 to $236,000,000 This represents approximately 22% to 23% of our projected total revenue.

Ed McGowan
CFO at Akamai

Based on our expectations for revenue and cost, we expect Q2 non GAAP EPS in the range of $1.52 to $1.58 This EPS guidance assumes taxes of 54,000,000 to $57,000,000 based on an estimated quarterly non GAAP tax rate of approximately 19% to 20%. It also reflects a fully diluted share count of approximately 148,000,000 shares. Looking ahead to the full year, expect revenue of 4.05 to $4,200,000,000, which is up 1% to 5% as reported and in constant currency. As a reminder, we would expect to come in at the higher end of that range if we see continued weakening of the US dollar, traffic growth materially exceeds our current levels, and there is no ban in The US for our largest customer. We would expect to come in at the mid to lower end of that range.

Ed McGowan
CFO at Akamai

If we see significant strengthening of the US dollar, a significant downturn in the economy in the back half of the year, traffic growth materially slows from current levels, and our largest customer is banned in The US. Moving on to security. We continue to expect security revenue growth of approximately 10% in constant currency for 2025, And we continue to expect the combined ARR from our Zero Trust enterprise and API security solutions to increase by 30 to 35% year over year in constant currency for 2025. For compute, we continue to expect revenue growth to be approximately 15% in constant currency. And as a reminder, included within our compute, we continue to expect cloud infrastructure services ARR year over year growth in the range of 40% to 45% in constant currency for 2025.

Ed McGowan
CFO at Akamai

At current spot rates, our guidance assumes foreign exchange will have a positive $8,000,000 impact to revenue in 2025 on a year over year basis. Moving on to operating margins. For 2025, we are estimating non GAAP operating margin of approximately 28% as measured in today's FX rates. We anticipate that our full year capital expenditures will be approximately 19% to 20% of total revenue. Moving to EPS.

Ed McGowan
CFO at Akamai

For the full year 2025, we expect non GAAP earnings per diluted share in the range of $6.1 to $6.4 This non GAAP earnings guidance is based on a non GAAP effective tax rate of approximately 19% to 20% a fully diluted share count of approximately 150,000,000 shares. In summary, although we anticipate heightened economic volatility, we believe that Akamai is in a strong position to continue delivering revenue growth and maintaining healthy margins. This is supported by our newer security and cloud computing products, a moderation in our content delivery revenue declines, and ongoing commitment to disciplined cost management. With that, I'll wrap things up, and Tom and I are happy to take your questions. Operator?

Operator

Thank you. We will now begin the question and answer session. To withdraw Today's first question comes from Amit Daryanani with Evercore. Please go ahead.

Amit Daryanani
Senior Managing Director - Equity Research at Evercore

Good afternoon. Thanks for taking my question. I guess maybe just to start on delivery side. Can you just talk about what really drove the upside for you folks in the quarter? Was it more pricing or traffic driven?

Amit Daryanani
Senior Managing Director - Equity Research at Evercore

And then what's refraining you from saying this can sustain into the out quarter? Just kind of love to understand what drove the upside and why the hesitation about the sustaining?

Ed McGowan
CFO at Akamai

Hey, Amit. This is Ed. Thanks for the question. Yeah. So I'd say what what drove it was really traffic.

Ed McGowan
CFO at Akamai

You know, pricing, typically, unless you have large renewals, doesn't have a huge impact in a any given quarter, and we didn't have any significant concentration of renewals. So it was all about traffic growth. And it was pretty strong across pretty much every subvertical. So we saw strong video traffic, strong gaming traffic, strong software downloads, and even across commerce and some of the other sub verticals. So it's just a a better and improved environment.

Ed McGowan
CFO at Akamai

And, you know, we're just being cautious in terms of calling a bottom. This is, you know, the third quarter in a row here where revenue's kind of been flattish sequentially, which is better than what it's been, which has been declining. But we're seeing decent trends here in April, and we're just being a bit more cautious and don't want to call a bottom quite yet.

Amit Daryanani
Senior Managing Director - Equity Research at Evercore

Got it. That's totally fair. And if I just follow-up, on the security side, would love to hear how you would characterize your performance in the March. It looks a little bit lower, think, like not $25,000,000 from what the Street was modeling perhaps. Love to understand how did that end up versus your own internal expectations?

Amit Daryanani
Senior Managing Director - Equity Research at Evercore

And then as you think about this acceleration from 8% to call it 10% in security, what enables that for the year? Thank you.

Ed McGowan
CFO at Akamai

Yes, good question. So I would say it came in line with what we had expected for the quarter. And as you heard a few minutes ago, I reiterated our guidance for 10% constant currency. And we did deliver 10% constant currency this quarter. There's a little bit of noise in there with license revenue.

Ed McGowan
CFO at Akamai

I called that out for you. We had about 12,000,000 of license revenue last quarter, about 6,000,000 less this quarter. So that can sometimes sometimes folks don't quite get the model right going from q four to q one. And also with some of the bundles, q four tends to have a little bit of volumetric revenue associated with some of our commerce customers and things like that that you don't see repeat at such a level in q one. So I would say it came in in line with what we expected.

Ed McGowan
CFO at Akamai

The big drivers for growth is exactly what we had thought in terms of the bookings. We're seeing a very strong API security growth and very strong Guardicore growth as we expected. And things are playing out exactly how we had thought.

Amit Daryanani
Senior Managing Director - Equity Research at Evercore

Perfect. Thank you.

Operator

The next question is from Jonathan Ho with William Blair. Please go ahead.

Jonathan Ho
Research Analyst at William Blair

Hi, good afternoon and congrats on the strong quarter. Can you provide a little bit more detail on the role you can play with AgenTeq AI with your AI firewall? And perhaps help us understand how you could potentially benefit as GenaAI utilization in the enterprise really begins to expand?

Tom Leighton
Chief Executive Officer at Akamai

Yeah. There's a whole lot of attacks now, that have, you know, been published, against AI apps of all kinds, including AgenTik AI. You know, attacks where the adversary is able to trick the agent, the AI agent, into giving up sensitive data, code, PII, able to trick the agent into saying things that it shouldn't. Could be offensive content, could be deals, you know, prices for things that aren't right. You know?

Tom Leighton
Chief Executive Officer at Akamai

And so you gotta protect the app, particularly if it's an agent making decisions and doing things. You gotta protect it from the attackers that cause it to do bad things. Also, you gotta protect it from ingesting bad information. You know, a lot of these apps are learning as they go along, And the adversaries have have figured out how to, you know, submit information to it that causes it to learn bad things, which can cause problems in the future. You know, AI is a brand new attack surface and being rapidly deployed.

Tom Leighton
Chief Executive Officer at Akamai

In fact, you know, a lot of enterprises are you know, they're forming rules inside the enterprise about what they can and can't do with AI. But on the other hand, they can't even keep track of all the AI applications that they are using and have exposed. So another aspect of what we're doing, same as we do for API security, the first thing is letting our customers know what AI apps do they have exposed, and then making sure that they're protected. And and I imagine this is gonna be really a war of escalation. So the first attacks are are, you know, being seen out there.

Tom Leighton
Chief Executive Officer at Akamai

We have the first line of defenses now with the OWASP top 10 and additional capabilities tailored to particular customer use cases. And I think there'll be, you know, some back and forth there that more attacks will be figured out, and our job is to stay ahead of that and keep our customers safe.

Jonathan Ho
Research Analyst at William Blair

Excellent. And you mentioned some customers expressing worry over whether they could rely on U. S.-based services. Is there potential for diversification or multisourcing pressure from some of your customers internationally? Just wondering.

Tom Leighton
Chief Executive Officer at Akamai

Yeah. Today, I I don't think there's good alternatives, you know, especially when it comes to security. You know, pretty much all the world's major banks, most of the major commerce companies rely on Akamai for their security because we're really the best and, you know, in terms of protecting them. So there's not good alternatives for them today. You know, I think over the long haul, you know, our job is to make sure that they understand that they continue to rely on Akamai no matter what happens, you know, with the the geopolitics and and the rhetoric.

Tom Leighton
Chief Executive Officer at Akamai

You know? But it's a it's a topic that's come up in some accounts. And so, you know, we we're being careful that they understand that Akamai is here for them over the long haul and that we're not going away and that they can continue to rely on us.

Jonathan Ho
Research Analyst at William Blair

Great. Thank you.

Operator

The next question is from Will Power with Baird. Please go ahead.

William Power
Senior Research Analyst at Baird

Okay. Great. Thanks. Tom, maybe to come back to the the security segment. You called out, you know, a number of competitive takeaways for the segmentation product. I guess it would just be helpful if you can kind of just help distill down what's really setting you apart in that market, allowing you to take share. And then secondly, would be great to get any update on progress trends within within the, you know, the kind of the rest of the broader zero trust, you know, portfolio and and where go to market sits there.

Tom Leighton
Chief Executive Officer at Akamai

Yeah. I I think scale sets us apart so the larger enterprises could have hundreds of thousands of applications and devices they need to protect, and we're unique in being able to do that. Ease of use has come up in several accounts, and particularly with our our new AI enabled interface that can make the integration be a lot faster and simpler. You know, our new engine suggests the initial firewall rules that they should be set up for all the the various devices inside the enterprise, actually tells our customer and their operator what, you know, the various devices are, notifies them if firewall rules are out of date or not the most, you know, recent, you know, set of rules that they need to have. So ease of use is really important.

Tom Leighton
Chief Executive Officer at Akamai

Because if you think about installing, you know, hundreds of thousands of agents, you need really good automation to do that effectively. And trust, you know, I think is is really important. And we've been told that by our customers because, you know, these agents are running inside, the company. And it's really important that they be reliable, and Akamai has a great, you know, track record there. We're not the lowest cost provider.

Tom Leighton
Chief Executive Officer at Akamai

You know, there's others out there with with lower, you know, cost solutions. But when it comes to protecting critical infrastructure from, you know, the devastation of ransomware or data exfiltration with software that's running, you know, really in the inside on the most important applications, Akamai is pretty unique in being able to do that and being trusted for that. In terms of zero trust, you know, Guardicore is our flagship solution. It's sort of the the anchor point, and we do have other capabilities. You know, we've combined north, south, east, west protections built around Guardicore and our enterprise, application access solution, so that, you know, we can provide really a comprehensive set of solutions to protect the enterprise applications and data.

William Power
Senior Research Analyst at Baird

Okay. Great. No. That's helpful. And maybe just Ed, quickly for you.

William Power
Senior Research Analyst at Baird

Nice to see the better margins in the quarter. Mean, sounds like you expect them to dip back down in Q2. So I guess I'm just trying to sort out what proportion of that upside in the quarter could be more sustainable versus some conservatism going forward.

Ed McGowan
CFO at Akamai

Yes. Well, I think for this quarter in particular, I'd say you'd have to see some revenue upside to drive higher margins. We obviously have very good leverage. If you think about, as I broke out in the prepared remarks, the items that drove the upside both in Q1 and then in q two, what's driving the higher cost. Some of it's event driven, but there is the we did pull our merit cycle in a little bit earlier this year.

Ed McGowan
CFO at Akamai

We typically do it, you know, in the middle of the year, so we just brought it to April. So that has a recurring cost. We're also doing some hiring, so that has an impact as well. But we think over time, as the business grows, we'll improve our margins. And maybe in the back half, there's potential if we hit the upside to expand margins a bit as well. The

Operator

next question comes from Frank Louthan with Raymond James. This

Analyst

is Rob on for Frank. So can you talk about the recent sales changes? Where are you as far as the new folks you need to hire, moving people around within their different roles between the hunters and farmers? And then what are some other drivers of margin improvement that you see taking shape the rest of this year and into next year?

Tom Leighton
Chief Executive Officer at Akamai

I'll start with that and then hand it off to Ed on the margin question. I'd say we're about, you know, a third of the way there. We've made a lot of changes, seeing some, you know, very good progress, shifting, more of the force towards hunting now that we have products that a lot of new to Akamai customers need. You know, for example, API security, segmentation, cloud computing, and they're gonna need, you know, firewall for AI as well. Also, hiring more of the specialists that have a lot of expertise that can help facilitate those sales.

Tom Leighton
Chief Executive Officer at Akamai

We've made shifts to, you know, incent both our sellers and customers to longer term contracts, starting to see some impact there, which is good, and overall, over time, growing the overall presence, you know, in the marketplace. So I'd say we're about a a third of the way there and making good progress. And, Ed, do you wanna talk about the the margins?

Ed McGowan
CFO at Akamai

Yeah. Sure. So I I'd say there's probably three main drivers. The first one would be just as we scale up our compute business. So right now, we're subscale.

Ed McGowan
CFO at Akamai

So as if we look at some of the facilities as we start to sell those out and get to a bit of scale inside of some of the different deployments, we are seeing very attractive margins in line with what we talked about. But we do have a long way to go in terms of reaching scale. So as we start to grow in compute, I do expect our margins to expand obviously there. And then as security continues to grow, it's a higher margin product for us. You know, API security is a very high margin product for us.

Ed McGowan
CFO at Akamai

Much lower CapEx associated with your security business, so that's gonna help. And then as as delivery stops being such a big drain, that also helps as well. So if we get back to kinda low single digit or even flat CDN growth, that obviously has a big help on margins. As far as other operating areas, we're always looking at efficiencies. We've rung out a lot of costs.

Ed McGowan
CFO at Akamai

There's a little bit more room potentially in real estate. We can find, you know, sublease some of our unused space. And then with compute, in terms of our own use of compute, we've migrated a lot of our stuff to Lenovo, look to do some more, but it's really gonna come from scaling up of the business and as the as the mix shifts over time.

Operator

The next question comes from Jeff Van Rhee with Craig Hallum. Please go ahead.

Jeff Van Rhee
Partner & Senior Analyst - Equity Research at Craig-Hallum Capital Group LLC

Great. Thanks for taking the questions. Just a couple. Maybe on the security front, just high level, if I look at the organics and try to back up the acquisitions, it looks like it's fallen off fairly quickly from 15% to 10% to maybe now mid single digits going maybe sequentially. Last quarter was 10% year over year and this quarter looks like mid single digits.

Jeff Van Rhee
Partner & Senior Analyst - Equity Research at Craig-Hallum Capital Group LLC

Just talk to me a little bit, I know you touched on it last quarter, but I want to make sure I fully understand what's played out there on the security. And I think you had pointed to WAF, but maybe if you could just start there.

Ed McGowan
CFO at Akamai

Yes, sure. So yes, there's a little bit of inorganic in the number, but it's not a significant portion of revenue for us. In terms of if you break out the business those different sub segments, we are seeing WAF slowdown naturally a little bit. It's still growing, but it's not growing nearly as fast as it was, very high penetration, which is expected. You know, obviously, API security is growing incredibly fast, and we think can be, you know, a very, very significant grower for us over time.

Ed McGowan
CFO at Akamai

You know, our infrastructure security business is a low single digit growing business, and it is kind of in in that range. Rolexic is growing in kind of in its normal range. We haven't had a lot of, you know, big attacks or anything like that that tend to be kind of more, you know, call it episodic that drive, you know, spikes in demand there. So we haven't seen that in a while, so that's also slowing a bit. And then our services revenue has been consistent in that sort of high single digit, low single digit or sorry, low double digit growth area.

Ed McGowan
CFO at Akamai

So it's really just a mix shift right now as we talked about exactly what we're expecting with some of the products that have been in market for a while just naturally slowing down and then the newer products like Garticore and API taking off, but just not at the scale yet to offset the slower growth in the other

Jeff Van Rhee
Partner & Senior Analyst - Equity Research at Craig-Hallum Capital Group LLC

Got it. That's helpful. Thanks, Ed. And on Compute, you had commented last quarter around some exiting of some legacy revenue streams around video, I think transcoding, image management and some other things in there. How much how was the headwind from that this quarter in compute compared to what you were expecting when you gave the guide?

Ed McGowan
CFO at Akamai

Yes. I'd say it's playing out exactly how we expected, and we're still seeing very strong growth in our CIS, you know, the compute infrastructure services business. And I reiterated our guidance there for very strong 40 to 45% growth in ARR. So everything's playing out exactly as we expected. You know, we said it would take a a while to for some of this to play out, probably about two years or something like that. But it came in exactly as we had thought.

Jeff Van Rhee
Partner & Senior Analyst - Equity Research at Craig-Hallum Capital Group LLC

Okay. And then just one last on the to revisit the prior question on sales and the changes you're making in sales. It sounds like a little more focused on hunters. In terms of the metrics we'll see, where do you think the impact of these sales changes will show up first? And presumably, if you're focused on hunters, maybe a new customer metric might be the place we would look for that.

Jeff Van Rhee
Partner & Senior Analyst - Equity Research at Craig-Hallum Capital Group LLC

But just tell me kind of how we're going to see this play out in terms of the results and metrics that we might be able to observe.

Ed McGowan
CFO at Akamai

Yes. So we haven't really provided any metrics in terms of sales productivity, but it's something that we'll consider providing you some metrics in terms of, you know, how the number one, how the investments are going, where are what stage are we in in terms of adding the capacity. And it's both with hunters as well as some specialists for both compute and for security. But I think you just see it manifest itself in in stronger revenue growth, but we'll consider breaking out some metrics that'll be helpful. It's just sometimes a booking metric doesn't always translate to revenue cleanly, so it's not the most help helpful thing to give, but we'll give it some consideration and try to give you some metrics that might be helpful.

Jeff Van Rhee
Partner & Senior Analyst - Equity Research at Craig-Hallum Capital Group LLC

Understood. Thank you, Ed.

Operator

The next question comes from Patrick Kovel with Scotiabank. Please go ahead.

Josh Yeager
Software Equity Research at Scotiabank

Hello. This is Josh Yeager on for Patrick Colville. Thank you for taking my question. Wanted to better understand the nondelivery opportunity to cross sell Edgeo into the existing base and what you're seeing within that segment specifically. Thank you.

Ed McGowan
CFO at Akamai

Yeah. Hey. How are doing? This is this is Ed again. Yeah.

Ed McGowan
CFO at Akamai

So we added, you know, several hundred customers from Edgeo, and there's a good opportunity there where Edgeo did not have very many security products at all, actually, and they they didn't offer compute, certainly not the robust compute solutions that we have. So right now, there's not a lot to report in terms of upsell. The first thing you wanna do is just make sure the customers are migrated over. They understand who their rep is, get familiar with the services and, you know, working with Akamai, and then we'll start to build campaigns. So I'd expect that to take, you know, your normal six to nine months to start to build a pipeline, and then we should start to see some, potential upsell into that base of additional customers over time.

Operator

The next question comes from Madeline Brooks with Bank of America. Please go ahead.

Analyst

Yes. Thank you. This is, Kevin Urprum on for Madeline Brooks with Bank of America. I want to talk to you about the, compute trends. You've noted, over time that you expect compute to be kind of a long term 20% growth driver or growth, grower.

Analyst

What is contributing to this current growth rate that we saw this quarter, and what needs to happen, to bring it back up into the twenties?

Tom Leighton
Chief Executive Officer at Akamai

Yeah. So the real driver there is our cloud infrastructure services. And as we've talked about and as Ed Ed said, we expect the ARR there to grow 40 to 45% this year. And that means and as that number gets a lot bigger, that drives the overall compute number. So that's the number to watch.

Tom Leighton
Chief Executive Officer at Akamai

We'll, you know, highlight that as we go forward. And, you know, that will be driving the bigger compute number. Ultimately, that becomes the large majority of the compute number.

Analyst

Great. Sounds good. And then just as a follow-up on the security side. You know, if I look over the last three years or so, you've grown annually to 15 to 16% rate in the segment, and then you just kind of listed some guidance for 10% for the year. And you've you're you've already given color as to why that is.

Analyst

But, two questions. One, what gives you confidence in this 10%? And two, do you see any upside to this 10%, and what could drive that upside?

Tom Leighton
Chief Executive Officer at Akamai

Yeah. I'll I'll start with that. The confidence is driven by the large interest, big potential market, and very strong growth for our segmentation in API security solutions. And as we talked about, we think the ARR of those solutions year grows 30 to 35%. Lot of demand for that.

Tom Leighton
Chief Executive Officer at Akamai

We have the market leading solutions. And now we are, you know, adding in, you know, firewall for AI just starting, but a lot of customer interest there. And I think that'll be a product that has, you know, a long runway ahead even though no revenue to speak of yet. Just signing the first customers now. So I think having leading solutions in large potential markets that, today, you know, fairly small revenue, but growing at a very good clip, that gives us confidence that we can be growing the larger security number, you know, in the 10% range.

Tom Leighton
Chief Executive Officer at Akamai

Upsides would be in part based on new products, how fast they get going, and if we can beat the thirty third thirty to 35% on, you know, these these products. Ed, do you wanna add anything to that?

Ed McGowan
CFO at Akamai

Yeah. The other thing I would say is that, you know, the the business is a a very highly recurring, mostly subscription based business. You know, I do break out from time to time if we have some license revenue. So you do have pretty good visibility in terms of the base. There's not much price pressure in your security business.

Ed McGowan
CFO at Akamai

It's a very sticky product. You don't tend to have a lot of churn. So have a lot of confidence in sort of the underlying business that you have, and it really just comes down to the pace at which you're adding, you know, existing customers buying more product and cut and new you know, acquiring new logos. But, if I look at the size of the sales force, what we produced over the years, we certainly have the capacity to add the type of revenue that we need. And obviously, as we add and get more reps up to speed, we'll have more capacity to sell even more.

Analyst

Great. Thank you so much.

Operator

The next question is from Rudy Kessinger with D. A. Davidson. Please go ahead.

Josh Yeager
Software Equity Research at Scotiabank

Great. Thanks for taking

Rudy Kessinger
Managing Director - Senior Equity Research Analyst at D.A. Davidson

my questions. Ed, could you just on the compute side, could you maybe quantify just what what would compute growth have been if not for some of the legacy compute stuff you shifted to partners relative to the, you know, 25% at constant currency in q four?

Ed McGowan
CFO at Akamai

Yeah. Sure. Good question. So if you remember last time, broke out the sub number. So this the cloud infrastructure service and the what we call the our other computer, our legacy compute.

Ed McGowan
CFO at Akamai

There's, like, four or five different things that were in there, some legacy storage, some of the first customers that we had done some custom builds for, some video optimization, image optimization, that sort of stuff. That business had grown about 20% last year, and the cloud infrastructure service grew at over 30%. So I'd say we're seeing very similar growth rates in the cloud infrastructure service, and where the slowdown is coming as expected is in that other legacy stuff where you've got a combination of some of the custom deals we did. We did a couple of big custom deals that have largely run their course, and they're not growing anymore. Any new applications would go into cloud infrastructure service.

Ed McGowan
CFO at Akamai

Our legacy storage business is starting to decline. We've migrated a little bit of business to partners. So that's playing out exactly as we expected. So, really, the decline from fifth from 20 to 15 or 25 to 15 is really all in that bucket as we had called out to you. But the Calcutta infrastructure service is going really, really fast.

Rudy Kessinger
Managing Director - Senior Equity Research Analyst at D.A. Davidson

Okay. And on the delivery front, what are you seeing from a pricing standpoint? And in particular, you know, since the Egio bankruptcy, have you started to see pricing improve on renewals? And and do you think, you know, six, twelve months from now, we might get to a point where pricing price compression could be better than it has been historically just given that several low cost providers that you could face the last few years?

Ed McGowan
CFO at Akamai

Yeah. Good question. So we're we're seeing kind of a mixed bag as you would expect. I'd say we're seeing some somewhat encouraging signs of some of our larger media customers where the price declines aren't nearly what they used to be, but you don't also have the same type of volume growth that we used to. So that sort of makes sense.

Ed McGowan
CFO at Akamai

But also there's like you pointed out, fewer fewer options there. You know, across some of the other the the rest of the base or, you know, delivery, it's a mixed bag. It depends. Sometimes you can have a little bit more price pressure in commerce if there's, you know, pressure with the economy and that sort of thing. But, yeah, I think over time, it's possible we'll see a moderation.

Ed McGowan
CFO at Akamai

We are seeing it. It's definitely improved a bit over over the last year or so, and, you know, there's still room to go there. But, you know, this business has always had some element of, you know, unit economics of higher volumes, lower unit prices. I expect that to continue. But that's certainly one of the drivers to getting this business back to flat and maybe to low single digit growth or decline over time.

Operator

The next question comes from John DiFucci with Guggenheim Securities. Please go ahead.

John DiFucci
Senior Managing Director at Guggenheim Partners

Thank you for taking my question. I guess, I think this question is for Ed. As you focus on the faster growing parts of security, specifically API security with no name and NeoSec and GuardCore, which I would think are largely channel focused, but different channels than are the traditional Akamai channels and probably sold through the channels like other traditional security products are sold. I mean, are you taking steps to really ramp that up to drive growth with new channel partners? And if so, because we do a lot of checks and we're trying to hear more, we'd like to hear more about Akamai in those checks.

John DiFucci
Senior Managing Director at Guggenheim Partners

Can this new path to market or more fork focused path, if that's the case, also be used to sell more of your infrastructure and app security products?

Ed McGowan
CFO at Akamai

Yeah. I'll start, John.

Tom Leighton
Chief Executive Officer at Akamai

Yeah. I can start with with some of the the channel partners. You're absolutely right.

Tom Leighton
Chief Executive Officer at Akamai

You know, they are different than the traditional Akamai, channel partners. And in fact, most of our guard large majority of our GardaCore sales, API security sales, and new customers to Akamai come through those channels. You know, examples of partners would be Presidio, WWT, Optive, GuidePoint, DefenseX, IBM and Deloitte, Magnica, OCD, Accenture, Carisoft. So a variety of partners that are different than the, by and large, carrier partners we had in the in the CDN days for from, you know, before. Ed, do you wanna add to that?

Ed McGowan
CFO at Akamai

Yeah. I would say, John, you know, the talking with PJ, know, 80 to 90% of our new logo acquisition does come through the channel. You know, I would expect with some of our, you know, install base where we have a strong direct relationship, I I would imagine a lot of the API security sales and a and Gartner core sales will be led by our our traditional reps. But, you know, about a third of a little over a third of our business in general comes through the channel, and a little over half of it comes in security comes to the channel. I expect that to increase over time.

Ed McGowan
CFO at Akamai

And as we acquired some of these companies, both Neosec and Guardicore did come with some new channel relationships that we've obviously continued to grow and block them as a result. So I do expect a lot of our growth going forward to come through the channel.

John DiFucci
Senior Managing Director at Guggenheim Partners

And, Ed, and and Tom, the sorry for my voice. But but is is this an opportunity to through those new channel partners to also sell like your the slower growing parts of security, but they're still needed like DDoS protection and WAF? Because others other partner or other of your competitors that sell those products are making a a big push in the channel. So there's they're getting sort of used to selling that or they're at least they're starting to talk about it.

Tom Leighton
Chief Executive Officer at Akamai

Yeah. And and we do that. You know, often, you know, it'll be the new customer sales would be led with Guardicore or API security, but you're absolutely right. The whole platform, the whole security platform, you know, can be then included with that or grown to that. And those partners are are very good at it.

Tom Leighton
Chief Executive Officer at Akamai

So I think you're absolutely right, and and we're seeing that.

John DiFucci
Senior Managing Director at Guggenheim Partners

Okay. Okay. Thanks. Thanks, Tom.

Operator

We have time for one last question. It will come from James Fish with Piper Sandler.

Caden Dahl
Caden Dahl
Equity Research Analyst at Piper Sandler Companies

This is Caden on for Fish. So just one on the secure for the security weakness, was that more on the new side of the was that more on the new side or the expansion side with existing customers? Thanks.

Ed McGowan
CFO at Akamai

Yeah. Well, I wouldn't refer to it as weakness. It came in as we expected it. So we're not viewing it as weakness. So it's pretty much right in line.

Ed McGowan
CFO at Akamai

But in terms of the impact within a quarter, you got to remember a lot of the business is recurring. The bulk of the revenue is already spoken for with existing customers. Most of the growth, as I said, comes from the in terms of the newer sales is coming from API security and Guardicore as we expected. That doesn't have a huge revenue contribution in the quarter in which you sell it because it does take maybe a month or so to get it up and running and revenue generating. So like I said, I think things turned out just as we expected, and the normal mix of new customer versus upsell into the base was pretty similar to what we see in a typical quarter.

Caden Dahl
Caden Dahl
Equity Research Analyst at Piper Sandler Companies

Got you. Thank you so much.

Operator

Thank you. That concludes our question and answer session. I would now like to turn the call back over to Mark Stoutenburg for closing remarks.

Analysts
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Key Takeaways

  • Solid Q1 financial performance: Revenue rose to $1.015 billion (↑3% YoY; 4% constant currency), non-GAAP operating margin beat guidance at 30%, and EPS of $1.70 topped the high end of the range.
  • Security & compute driving growth: These segments made up 69% of Q1 revenue, growing 10% YoY (11% CC), led by large competitive wins in Guardicore segmentation and robust demand for API security solutions.
  • New AI security offering: Introduced Firewall for AI to protect LLMs and AI agents from threats like data leaks, backdoor attacks, and AI-driven DDoS, drawing early customer interest.
  • Improved content delivery trends: Delivery revenue decline narrowed to 9% YoY due to traffic growth across video, gaming, and downloads, plus incremental gains from the Edgeo acquisition.
  • Cloud computing momentum: Launched edge inference solution and managed container service across 4,000+ POPs, delivering faster response times and cost savings versus hyperscalers, and rolled out cloud VPUs for media workloads.
AI Generated. May Contain Errors.
Earnings Conference Call
Akamai Technologies Q1 2025
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