Akamai Technologies Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 11 speakers on the call.

Operator

Good day, and welcome to the Akamai Technologies First Quarter 2023 Earnings Conference Call. All participants are in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note today's event is being recorded. I would now like to turn the conference over to Tom Barth, Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good afternoon, everyone, and thank you for joining Akamai's Q1 2023 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 statements regarding revenue and earnings guidance. These forward looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements.

Speaker 1

The factors include any impact from macroeconomic trends, the integration of any acquisitions and any impact from geopolitical developments. Additional information concerning these factors is contained in Akamai's filings with the SEC, including our annual report on Form 10 ks and quarter reports on Form 10 Q. The forward looking statements included in this call represent the company's view on May 9, 2023. Akamai disclaims any obligation to update these statements to reflect new information, future events or circumstances, except as required by law. As a reminder, we will be referring to some non GAAP financial metrics during today's call.

Speaker 1

A detailed reconciliation of GAAP and non GAAP metrics can be found under the Financial portion of the Investor Relations section of akamai.com. And with that, let me turn the call over to Tom.

Speaker 2

Thanks, Tom, and thank you all for joining us today. I'm pleased to report that despite the challenging macroeconomic environment, Akamai delivered strong results in the Q1 with both revenue and earnings exceeding the high end of our guidance range. Revenue grew to $916,000,000 And non GAAP operating margin expanded to 29% in Q1. Non GAAP earnings per share was $1.40 In what has been a good start to the year for Akamai, we've continued to invest in the key areas that we expect to drive our future growth, while also taking actions to improve margins. As Ed will explain in his portion of the call, we remain focused on I'll now say a few words about each of our 3 main product areas, starting with security.

Speaker 2

For the first time in Akamai's 25 year history, Security represented the largest share of Akamai's revenue in Q1. This marks a significant milestone for Akamai since our expansion into While we take pride in this achievement, we're focused on accelerating our security revenue growth rate from here, both organically and through disciplined M and A. For example, this past week, we closed our acquisition of Neosec, which complements Akamai's market leading app and API security portfolio by extending our capabilities in the rapidly growing API security market. Last year saw a record number of web app and API attacks, more than double the number in 2021. The rapid rise in API attacks is becoming a critical challenge for enterprises across all verticals.

Speaker 2

With IDC and Gartner We're now projecting the API security market to exceed $1,000,000,000 by 2027. The company we acquired, Neosec, Is a powerful SaaS security platform that leverages AI based behavioral analytics, unmatched visibility and threat hunting capabilities To discover APIs, analyze their behavior, identify vulnerabilities and help customers defend against attacks. We plan to take Neosec to market immediately, while our combined teams work together on product innovation. With the majority of its engineers located in Tel Aviv, where we already have a significant security engineering presence, Neosec will be an excellent fit with our culture. And like our Gardacore acquisition, we can sell Neosec to customers that don't use our CDM.

Speaker 2

Speaking of Gardacore, our segmentation solution to protect against ransomware continued to achieve strong traction with new customers in Q1, including with 1 of the largest banking groups in Europe and 1 of the largest airlines in the UK. We're also continuing our organic investment in innovative new products to help protect major enterprises. For example, at the RSA conference 2 weeks ago, our new brand protector solution was named 1 of the 20 hottest security products by CRM. Another trade publication, CSO listed both Brand Protector and our new Prolexic Network Cloud Firewall Among the most interesting products to see at RSA this year. At RSA, we also featured In addition to our investments in new products, we're focused on accelerating security growth by winning new customers and expanding our relationships with existing customers.

Speaker 2

For example, one of the biggest security threats in the news last quarter was Killnets Coordinated series of DDoS attacks against some of the top medical centers in the U. S. In response, some very prominent health The CIO of a world famous clinic emailed us afterward, thanking Akamai for enabling him to sleep well at night. We're also making good progress on the cloud computing front. Last quarter, we acquired the cloud storage company, On Dat.

Speaker 2

Storage is a key component of cloud computing and we expect that OMDAT's technology and considerable expertise will further enhance our enterprise grade storage solution for Akamai Connected Cloud. Akamai intends to offer the world's most distributed platform, Placing compute, storage, databases and other cloud services closer to end users and enterprise data centers. As a result, we believe that Akamai will be able to offer customers better performance, more points of presence and lower cost for many mission critical enterprise workloads. That's the fundamental difference in our approach compared to other providers. We already have partners working with Akamai to run globally distributed databases with very low latency for synchronization.

Speaker 2

We have partners utilizing our cloud platform to provide customers with real time visibility into telemetry from their end users around the world. We're working with customers in e commerce, travel, hospitality, software as a service, media and entertainment To improve their ability to personalize experiences, monetize content, accelerate data processing, facilitate collaboration, Simplify management, improve performance and reduce costs, in some cases by large amounts. And we're having early discussions about potentially leveraging Akamai Connected Cloud for AI inference engines. Each of these use cases plays to Akamai's advantage in terms of numbers of pops, global reach, performance and cost. Another advantage that we hear repeatedly from customers, including those I met with last month at the NAB conference is that they trust us.

Speaker 2

They value the years of highly reliable service that we provided in delivery and security and they trust us not to use their data to compete with them. I'll now say a few words about our delivery business, which experienced an encouraging uptick in traffic growth late in Q1. Akamai continues to be the market leader in delivery, providing industry leading performance and scale as we continue to support the world's top brands by delivering reliable, secure and near flawless online experiences. And we continue to see a strong synergy between our delivery business And our security and compute offerings, especially for customers in the gaming, media and commerce verticals. The synergy is both on the top line As long time delivery customers buy our security and compute products and also on the bottom line, as we realize The cost benefits of using a single infrastructure to provide security and compute services as well as delivery.

Speaker 2

We plan to pass some of the cost savings on to our customers, which is especially valuable for customers who are paying But we can also leverage existing talent as we shift resources and focus from delivery to compute. As Ed will explain shortly, We're very focused on managing costs and deploying resources where they generate the best long term returns. As one part of this effort, we plan to reduce our world Prioritize investments in the areas with the greatest potential for future growth as we strive to deliver greater value for shareholders. I'd like to take this opportunity to thank all of our employees for their hard work on behalf of our customers and shareholders. From our developers and engineers who build and operate the services that power and protect life online, to our sales services and marketing teams who helped make Akamai be such a great place to work.

Speaker 2

It really is a privilege for me to be able to work with such an outstanding group of people As we make life better for billions of people, billions of times a day. While

Speaker 3

this is

Speaker 2

a time of substantial macro new security and compute capabilities to market and as we deploy Akamai Connected Cloud. As you may know, I continued to be a personal buyer of Akamai stock under the 10b5-1 plan that I filed last year. And I'm pleased to let you know that Akamai repurchased 4,600,000 shares of Akamai stock in Q1 for a total of $349,000,000 Now I'll turn the call over to Ed for more on our Q1 results and our outlook for Q2 and the full year.

Speaker 4

Ed? Thank you, Tom. Today, I plan to review our Q1 results and provide some color on Q2 And our updated full year 2023 guidance where we increased our expectations for revenue, non GAAP operating margin In non GAAP EPS, while decreasing our planned CapEx spend for the year. We were very pleased with our strong Q1 results In light of the continued difficult macroeconomic landscape. Total revenue for the Q1 was $916,000,000 up 1% year over year and 4% in constant currency.

Speaker 4

Security revenue was $406,000,000 and is now our largest business representing 44% of Total revenue. In the Q1, security revenue grew 6% year over year and 9% in constant currency. As a reminder, last year we had roughly $7,000,000 of upfront license revenue in Q1. If you normalize for this one time impact, the security growth rate would have been approximately 11% in constant currency. Finally, I was also pleased to see we had a very strong bookings quarter in securities, specifically with our GardaCore segmentation in WAF Solutions.

Speaker 4

Moving on to compute. Revenue was $116,000,000 growing 49% year over year as reported and 51% in constant currency. On a combined basis, our security and compute product lines represented 57% of total revenue, growing 13% year over year and 16% in constant currency. Now on to delivery. Revenue was $394,000,000 which and generate strong cash flows.

Speaker 4

I'm optimistic about improving traffic volumes over the past 2 months To a lesser extent, the slightly better pricing dynamics we've recently seen in the market. International revenue was $442,000,000 up 5% year over year and 9% in constant currency, representing 48% of total revenue in Q1. Foreign exchange fluctuations had a positive impact on revenue of $11,000,000 on a sequential basis and a negative 21,000,000 up 1% year over year and 4% in constant currency and $0.06 above the high end of our guidance range. Turning now to margins. Our non GAAP operating margin in Q1 was 29%.

Speaker 4

This was During the Q1, we recorded a $45,000,000 restructuring charge, primarily related to severance costs, along with facility related charges as we continue to reduce our real estate footprint. The impact of these charges has been incorporated into our Q2 and full year 2023 guidance. In addition to these specific actions, we also continue to be very focused on cost savings initiatives I described last quarter, which include 3rd party cloud savings, Continued real estate rationalization, depreciation expense and other operating costs associated with lower CapEx related to our delivery business, Disciplined spending with vendors and tighter travel and expense policy management. I'm pleased with our progress on these initiatives, which helped drive improvements As of March 31, our cash, cash equivalents and marketable securities totaled approximately $1,100,000,000 During the Q1, we spent approximately $349,000,000 to repurchase approximately 4,600,000 shares. We now have just under $850,000,000 remaining on our previously announced buyback authorization.

Speaker 4

In addition to being aggressive with our buyback program, we have made 2 acquisitions since our last earnings call that will help drive revenue growth with ONDAT in the Q1 and Neosik in the Q2. We believe this demonstrates our continued balanced approach to capital allocation, Opportunistically buying back shares to offset dilution from employee equity programs over time, while maintaining sufficient capital to deploy Before I provide our Q2 and full year 2023 guidance, I want to touch on some housekeeping items. Regarding our 2 acquisitions, while neither was material to revenue, both are expected to be dilutive to non GAAP EPS in 2023, With on debt dilutive by $0.02 to $0.04 and Neosec dilutive by $0.04 to $0.06 Finally, as you build out your models, So with those factors in mind, turning to our Q2 guidance. We are now projecting revenue in the range of $923,000,000 to $937,000,000 up 2% to 4% as reported and 3% to 4% in constant currency over Q2 2022. At current spot rates, foreign exchange fluctuations are expected to have a positive $2,000,000 impact on Q2 revenue compared to Q1 levels and a negative $3,000,000 impact year over year.

Speaker 4

At these revenue levels, we expect cash gross margins of approximately 73%. Q2 non GAAP operating expenses are projected to be $300,000,000 to $305,000,000 We expect Q2 EBITDA margins of approximately 41%. We expect non GAAP depreciation expense to be between $116,000,000 to $118,000,000 And we expect non GAAP operating margin of approximately 28.5% for Q2. Moving on to CapEx, we expect to spend approximately $195,000,000 to $202,000,000 excluding equity compensation and capitalized interest in the Q2. This represents approximately 21% to 22% of our projected total revenue.

Speaker 4

Based on our expectations for revenue and cost, we expect Q2 non GAAP EPS in the range of $1.38 to $1.42 This EPS guidance assumes taxes of $45,000,000 to $47,000,000 based on an estimated quarterly non GAAP Tax rate of approximately 17.5% to 18%. It also reflects a fully diluted share count of approximately 153,000,000 shares. Looking ahead to the full year, we now expect revenue of $3,740,000,000 to 3 $785,000,000 which is up 3% to 5% year over year as reported and in constant currency. At current spot rates, our guidance assumes foreign exchange fluctuations will have a positive $3,000,000 impact on revenue in 2023 on a year over year basis. We continue to expect security revenue growth to be in the low double digits for the full year 2023 and we continue to approximately 28% to 29% and we now estimate non GAAP earnings per diluted share of $5.69 to Our non GAAP earnings guidance is based on a non GAAP effective tax rate of approximately 17.5% to 18% A fully diluted share count of approximately 153,000,000 shares.

Speaker 4

Finally, our updated full year CapEx is expected to be approximately 18.5% to 19% of total revenue. This CapEx is lower than our original expectations outlined last quarter due to Strong pricing negotiations resulting in better than anticipated server pricing along with improved efficiencies integrating Linode with Akamai's existing supply Earlier than expected. In closing, we are very pleased with the strong start to 2023 and we look forward to your questions. Operator?

Operator

Thank you. We will now begin the question and answer session. Today's first question comes from Keith Weiss with Morgan Stanley. Please go ahead. Excellent.

Speaker 5

Thank you guys for taking the question and nice quarter. Maybe one top line, one bottom line question. On the top line side of the equation, you talked to strong bookings Performance in the quarter, particularly with Gardicore. Is that a broader security kind of commentary and maybe part of what's Sustained kind of your confidence in the double digit growth throughout the year. Perhaps maybe even sort of could we see some acceleration on a go forward Based upon that booking, so one is kind of like a perspective on real time what's going on in security.

Speaker 5

And then on the better operating margins on a go forward basis, Can you give us some sense of where the headcount reductions are coming from in that 3% headcount reduction? And when we think about the Better margins that you guys are projecting. How much of that comes from this recent round of headcount reductions? How much is just Better OpEx controls that you guys exhibited thus far in the year? Thank you.

Speaker 2

Great. I'll take a first pass at these then turn it over to Ed and he'll get into more of the details. Yes, we saw strong bookings in security across the board. It is a challenging environment out there for sure, Especially with commits on larger deals. On the other hand, we do see a little bit of a silver lining, especially in the financial vertical, which is large for us.

Speaker 2

With everything that's gone on in the banking sector, there is more concern than ever around security and reliability. And I think the last thing a major financial institution wants to see is some kind of problem now, an outage or some kind of hack be successful. And I think that helps us. Akamai is widely recognized as the best when it comes to reliability and in terms of security. And so I think that is also helping us, especially vis a vis the competition.

Speaker 2

We're also pretty excited about Neosec, A lot of very positive conversations early on with customers on top of Gardacore and of course the whole suite of security products. In terms of margins, the focus of the reduction in force on the go to market side It was really in the management layers and so that we can actually get more feet on the street in services, we can get more people Helping customers, particularly in the areas of expertise with security and compute, and in some cases, in geographies that we feel are untapped and that We can get more leverage. And with I think probably I'll turn it over to Ed now in terms of How this shapes up with all the other things we're doing to improve operational efficiency. Ed?

Speaker 4

Yes. Hey, Keith. So, we talked about taking a restructuring charge, about half of that was severance related, so that the headcount savings and then the other half was roughly half was related to real estate. In terms of thinking about the headcount savings, our payroll is a little over $1,000,000,000 We've reduced a little less than 3%. So on an annualized basis, think of that as kind of in the $40,000,000 range give or take.

Speaker 4

We'll get about 3 quarters of the benefit of that this year. In terms of the real estate, we probably saved about 25% to 30% of our current spend, more to go there. I expect we can Reduce that probably by a similar amount next year. The big savings to come is going to be in 3rd party cloud. We did see a reduction this quarter, which was nice.

Speaker 4

We reduced our spend as we start to optimize and start to move some things over. But that's That's a big one. That's about $100,000,000 in total spend or a little bit more. And we'll start to see that benefit next year, A little bit more this year, but mostly into next year and into 2025. Team is doing a great job with vendor management, including Being able to engineer out certain functions that we may be using a third party for.

Speaker 4

So I would say it's a combination of things, but just to sort of put it in perspective that headcount savings is, call it roughly a little over a point of margin on an annualized basis. That also gives you giving you that sort of kind of Run rate payroll number will give you the math necessary to build your models to factor in that annual increase that we give Every year in Q3. Also as you talk about

Speaker 2

in terms of the reductions, obviously, we're directing a lot of resources that were On the delivery side of the house into compute and that in many cases is the same person changing what they're doing, But also in this reduction that we're taking, you'll see that effect as well.

Speaker 4

Got it. And just

Speaker 5

to be clear, the lower CapEx intensity, it sounds like More efficient sourcing, not any change in the scope of build out that you guys are expecting for the cloud side of the business?

Speaker 4

Yes. So the way to think about that Keith is 2 things. 1, we were able to benefit pretty significantly actually With pricing reductions in the server pricing, my understanding is that's somewhat of an industry phenomenon, but also just given our buying power, A big chunk of that decline in CapEx was related to that. The other thing that I find pretty exciting is We envisioned when we sort of built the models that we'd be able to integrate with our supply chain to be really tight with our Demand and build, meaning not having to overbuild for demand. We've been able to knock down the time that it takes for us to deploy.

Speaker 4

So the initial builds that we're building out would be a little bit smaller than we originally anticipated because we expected a longer lead time with our Supply chain, so now that we've been able to shrink that down, we can tighten that up a bit. So those are really the main factors, a little bit of push in terms of a couple of sites that we push into 'twenty four, but those Two factors were pretty significant and we're very happy that we're able to deliver that this quickly.

Speaker 5

Excellent. That's super helpful guys. Thank you.

Operator

Thank you. And our next question today comes from James Fish at Piper Sandler. Please go ahead.

Speaker 6

Hey, guys. Thanks for the question here. I'm wanting to build off of Keith a little bit here. Now that you rolled out your objectives for 2023 here, How are you thinking about not just the CapEx intensity for this year as you're starting to kind of get the savings greater than you Is this the right way to think about next year's capital spending? And I think Tom, you actually have alluded to Getting to that long term 30%, is there an update on the timeframe there?

Speaker 3

Yes, let me take

Speaker 2

a first pass at this. This year is when we're doing the initial build out For compute and obviously very substantial. And future years will depend on how fast we Sell the capacity that we're building out now. And so if we're able to sell that quickly, then there would be more CapEx spend next year. If it takes us longer to fill that capacity, then you would see CapEx be much less next year.

Speaker 2

So it really depends on how rapidly we get uptake On the initial build out that we're doing. And on the 30%, we're not issuing a specific timeline there. But obviously, we're having, I think, really good success in our efficiency and we're taking actions to improve margins. And so we'd like to get back to 30 and beyond just as quickly as we can, subject to making the investments for future growth. I'm very optimistic about our ability to do that.

Speaker 2

Ed, was there something you'd like to add there?

Speaker 4

No, I think that covered it, Tom.

Speaker 6

Great. And just a follow-up on the security side as well. It sounds like you guys are pointing to this being the kind of trough in Growth. But as you think about network security offerings in particular, including the 0 Trust overall portfolio, not just Guardicorp, How do you feel about your go to market how your go to market is aligned with selling these types of solutions that tend to go through indirect sources that really aren't You guys have historically been lined up with. Thanks guys.

Speaker 2

Yes, I do think we should see improvement in security growth from here. And particularly now that we're adding API security into the mix, I think the channel is really important for us and it's something we're putting a lot of effort into it, especially on the enterprise security side. For example, Guardicore is all through the channel, very successful

Operator

Thank you. And our next question today comes from Jonathan Ho with William Blair. Please go ahead.

Speaker 3

Hi, there. I just wanted to understand a little bit better about maybe your confidence level around the macro environment, what you're seeing out there And why you're not potentially taking a more conservative stance? I think you said that you expected macro to remain consistent.

Speaker 2

Well, I think our guidance does reflect the current situation and our view. We're not Assuming that the macro environment will improve, and so I do think we Are taking a reasonably conservative view going forward, we are very happy with the strong start to the year on several fronts as we Ed, would you like to say a little bit more about that?

Speaker 4

Yes, sure. I mean, in terms of some of the negatives that we're seeing, obviously, sales cycles are a little bit longer. We are seeing difficulty with adding new customers with the exception of Gardicore. Tom alluded to the fact that ProductCore brought a pretty good channel organization with them and we're seeing pretty good new logo acquisition there. So that's probably the exception to that rule.

Speaker 4

We're seeing some pricing pressure from some verticals. We are seeing, I mentioned better pricing environment for some of the higher media delivery business. Inflation obviously causes some challenges. We've seen some bankruptcies in the retail space and a couple in the financial services, None that's overly material. And as I said, we're not anticipating things to get worse.

Speaker 4

If things did get worse, potentially we'd see a little bit more of that. On the pro side, We are seeing lower turnover of employees, faster time to hire, which isn't much of a surprise. With rates going up and we have cash interest rates Better for us from a reinvestment perspective, the dollar is slightly weaker that may as the dollar gets weaker that helps our benefits. And then also just from the vendor side, just continued focus on pushing vendors for better pricing and things like that. So It's a mixed environment, obviously a challenging environment.

Speaker 4

I think we're navigating through it pretty well. And we've Built in what we thought we could achieve based on what we see today.

Speaker 2

On the silver lining side, As we get our compute offering prepared to take on major mission critical enterprise workloads, There is the potential that because we can do it less expensively, particularly For applications involving large amounts of data and delivery of data that that could be a net benefit for us competitively In a time when companies are looking to cut costs and it's something a lot of our customers have told us, particularly customers with large volumes of data That they need to cut the cloud expense, and I think we'll be in a position to help them do that. And as I mentioned earlier, At a time like this when there's a lot of concern in the financial sector, Akamai's reliability and security, it really becomes paramount. And that's helpful to help mitigate the impacts of a difficult macroeconomic environment.

Speaker 3

Excellent. And then just as a quick follow-up, in terms of the delivery business, I think you talked about some favorable trends around the traffic side. Can you talk about what you're seeing in terms of those improvements and maybe the sustainability of that as we think about, again, the delivery traffic? Thank you.

Speaker 2

Yes. About March really of last year is when we really saw traffic growth take a hit, Part because of the economy as a whole, part because of the war in Ukraine And now we're lapping that. And so when you look at the year over year rates, indeed, they did start improving in March. And so we're optimistic about that and hope to see that be more sustainable just because you have a more reasonable compare. And Ed, did you want to add more color on that?

Speaker 4

Yes. The only thing I would add, I did touch a little bit on just slightly better pricing environment, which makes sense given The volumes, they're still not back to pre pandemic levels better than what we saw last year. Also we've seen in some accounts and larger accounts, some Vendor consolidation and we've been a benefactor of that, which makes sense. Some customers will have 4 or 5 CDNs Get to be pretty expensive. Sometimes they build up teams, they have technology they use for load balancing and things like that.

Speaker 4

So as they consolidate vendors and a lot of us have volume based Tiered pricing, so you can take advantage of lower unit economics as you consolidate to 1 or 2 vendors. So That's been a positive trend for us. It's another reason why we've seen a little bit of an uptick in traffic.

Speaker 5

Thank you.

Operator

Thank you. And our next question comes from Frank Welton with Raymond James. Please go ahead.

Speaker 7

Hey guys, this is Rob on for Frank. So who do you run into in the marketplace now for compute specifically? And how would you guys Evaluate the outlook for that business in particular going forward and what's driving that outlook primarily?

Speaker 2

Yes, the hyperscalers and also do it yourself. And I think the outlook for us is positive. We're not trying to take 30% market share. It's $100,000,000,000 $200,000,000,000 market. But we do think we can be very competitive Certain kinds of applications, particularly in the verticals where we do a lot of business, the media vertical, entertainment, obviously, Video, gaming, commerce and that's because those customers, they know us, they like us, they use us For the delivery and security, and I think we're in a position to offer them a very compelling capability in terms of better performance And a lower price point.

Speaker 2

So we'll see, but so far, I think we're very Pleased with what we've been hearing from customers, making good progress getting our connected cloud platform built out,

Speaker 7

Great. Thank you.

Operator

Thank you. And our next question today comes from Rudy Kessinger with D. A. Davidson. Please go ahead.

Speaker 7

Hey, great. Thanks for taking my questions, guys. Just want to double quick maybe on security. You said Gardacord $7,000,000 of license revenue Q1 last year, was there any license revenue for Garticore in this Q1 this year?

Speaker 4

Yes. No, nothing material. No.

Speaker 7

Yes. Okay. Got it. And then maybe just a follow-up on delivery, certainly stronger revenue performance than we expected. Is there I guess, was there anything in the quarter you talked about maybe some customers consolidating from 4 or 5 vendors, maybe 3?

Speaker 7

Anything in particular in the quarter that would give you hopes that delivery maybe you could potentially turn that back to, I don't know, say a flat or maybe only a 3%, 5% decline in business as opposed to a 10% -ish decline in business as we've seen over the last few quarters?

Speaker 4

Yes. It's obviously continued traffic growth. I think if we get back to kind of pre pandemic levels, that's certainly going to help. We've done a pretty good job on pricing, especially The larger customers in the old web verticals, especially commerce, we're still seeing some pricing pressure there. So really it's a combination, but I'd say that the stronger traffic growth is going to be the main thing.

Speaker 4

As we get into Q3 and Q2 and Q3, we've got Slightly easy to recall last year we had significant renewals in our top ten. We have renewals all the time, but that was an unusual Year for that. So, the double digit declines, I wouldn't expect that certainly next quarter or the quarter after that. And in Q4 is always toughest quarter to call, but things will get should get a little bit better from a year over year compare standpoint. But in terms of getting to Sort of flat or even plus or minus a point, you're going to need to see stronger traffic growth than what we're seeing now.

Speaker 7

Got it. Fair enough. Thank you.

Operator

Thank you. And our next question today comes from Ray McDonough with Guggenheim. Please go ahead.

Speaker 8

Great. Thanks for taking the questions. Tom, maybe first for you, another question around security go to market. I know you touched on the focus On the channel, but you did mention you were also redeploying go to market resources within the Security Group as well. Can you talk more specifically to the changes made in that organization?

Speaker 8

And is there any early results to point to from those changes That gives you confidence that you will be able to reaccelerate growth here in the rest of 2023?

Speaker 2

Well, we're just taking the actions as we speak. So To see directly from that yet, I would say there is one is less Management and more in say feet on the street. The next would be more Focus on security and compute and getting the right expertise in front of the customer and that would be both in Pre sales and also in services. And then the third is a shift in resources to Some of the, I would say, under tapped geographies, where we think there's the potential for a lot of growth. So I think all three Are very helpful.

Speaker 2

And then of course channels, particularly for our enterprise security solutions, where that's I think a much A better way of doing it. For our established Web App Firewall, we do have a significant channels presence, but also a significant direct presence. And we expect to start seeing the benefits here towards the end of the year as we hire the new resources In these areas.

Speaker 8

Good. That makes sense. And Ed, maybe just a follow-up for you on Linode. I believe you've kind of outlined An expansion of 14 core data centers by the end of the year and 50 distributed sites, I believe. Is that still the case?

Speaker 8

And maybe Following up on one of your comments earlier, can you talk about how much smaller the compute footprints are this year, if it's a magnitude of size How comfortable you feel in terms of the lead times to add capacity if the macro environment or demand turns more quickly than you expect?

Speaker 4

Yes. I want to start with the last part first. So in terms of the timing, I think we've got it down to probably 60 to 90 days. We think we can add capacity pretty We're building up working with our suppliers. We've had long term relationships structuring deals with them to be able to Very quickly get our hands on equipment and building up some inventory and that sort of thing.

Speaker 4

So we feel pretty good about that. So I think and also these sales cycles are not immediate, Right. So there's usually a trial period and that sort of thing. You're starting the conversations now. So it's not like CDN where You can shift overnight and just move traffic within a day or 2.

Speaker 4

So we will have good lead times there. In terms of the actual size, I just say they're small. I don't have a specific number to throw out. We're on track to deliver all of our Core sites, there's a couple coming online in Q2 and a bunch coming on the line in Q3, no change there. As far as the distributed sites, We will be building out a bunch of those.

Speaker 4

I don't have an updated figure for you. Some of them may push. Those are much smaller in terms of CapEx. So that really doesn't have a major impact on CapEx. Each one of those sites are relatively smallish, so it's not going to have a material impact.

Speaker 4

But in terms of we're seeing with the supply chain, we feel pretty good. We've done a lot of work. Great hats off to the team. They've done a fantastic job working with our suppliers To be able to really tighten things up and you can see that in the updated guidance.

Speaker 8

Great. Appreciate the color.

Operator

Our next question today comes from Amit Daryajani with Evercore. Please go ahead.

Speaker 3

Hi, this is Lauren on for Amit. So just to kind of double click into buybacks and how you guys are thinking about The second half of the year after a fairly aggressive Q1, that'd be great.

Speaker 2

Yes, our policy and strategy really hasn't changed. And That includes there's times when we do buyback more shares that are needed to offset dilution from Employee Equity Programs, and those are opportunistic. And in Q1, we felt there was a substantial opportunity to buyback more than The usual allotment. And of course, we have a programmatic buyback that buys back more when the stock price is lower and buys back Sam, as you know, the stock price was lower through a lot of Q1. So there's really no fundamental change in strategy.

Speaker 2

Prior to this year, over the last 10 years, we bought back an extra percent a year over and above the equity program dilution offset. Obviously, Q1 was more than that. But so there's not a specific change in strategy that would Say we're going to buy back what we did in Q1 every quarter. So no change in strategy.

Speaker 3

Got it. Thank you.

Operator

Thank you. And our next question today comes from Mark Murphy at JPMorgan. Please go ahead.

Speaker 9

Hi, this is Cameron Toler on for Mark Murphy. Thanks for taking the call and congrats on the quarter. Maybe just on compute, I think in the past you've mentioned that the node hasn't faced the same optimization headwinds that the hyperscalers have. I'm curious if anything's changed on that front?

Speaker 2

As in face what headwinds?

Speaker 9

Sorry, the same optimization headwinds that the hyperscalers have been calling out the last few quarters?

Speaker 2

Yes, I think Linode is really in a very Major enterprises, at least the customers that we talk to, are very worried about their rapidly growing cloud costs. And that's something that I think we're in a position to help them with as we get our infrastructure built out and get it ready to take on mission critical Workloads.

Speaker 9

Great. Thank you so much for that additional color. I'll leave it there and pass back to the operator.

Operator

Thank you. And ladies and gentlemen, we have no further questions at this time.

Speaker 2

Okay. Well, thank you, operator, and thank you, everyone.

Speaker 10

In closing, we will be presenting at several investor conferences and roadshows throughout the rest of the second quarter. Details of these can be found in the Investor Relations section of akamai.com. Thank you for joining us and all of us here at Akamai wish continued good health to you and yours.

Speaker 5

Have a nice evening.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference call and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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Earnings Conference Call
Akamai Technologies Q1 2023
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