Akamai Technologies Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 12 speakers on the call.

Operator

Good day, and welcome to the Akamai Technologies Second Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I'd now like to turn the call over to Mr.

Operator

Tom Park, Head of Investor Relations. Please go ahead, sir.

Speaker 1

Okay. Thank you, everyone, for your patience.

Speaker 2

I'd like to reintroduce our CEO, Doctor. Tom? Thanks, Tom, and thank you all for joining us today. I am very pleased to report that Akamai delivered strong results in the 2nd quarter, with revenue coming in near the high end of our guidance range And earnings exceeding the high end of our guidance range by $0.07 Revenue grew to $936,000,000 in Q2, up 4% year over year, both as reported and in constant currency. Non GAAP operating margin was 29% And non GAAP earnings per share was $1.49 up 10% as reported and up 11% in constant currency.

Speaker 2

As you can see, and as Ed will explain in his portion of the call, our actions to increase profitability are delivering good results. I'll now say a few words about each of our 3 main product areas, starting with security, which is our largest source of revenue. Security revenue grew to $433,000,000 in Q2, up 14% year over year, both as reported and in constant currency. The improvement in our security growth rate was driven by multiple products, with especially strong growth for our market leading segmentation solution. We entered the segmentation market with our acquisition of Gardicore in Q4 of 2021, And we're nearing an annualized revenue run rate of $100,000,000 At this scale, segmentation is having a bigger impact on our overall security growth rate.

Speaker 2

Customers are adopting our segmentation solution to help defend against ransomware and data exfiltration attacks, which have become more frequent and damaging. For example, last quarter, we signed a 3 year 8,000,000 segmentation deal with 1 of the world's largest carriers. Large carriers and banks want to protect their consumer data from losses that can damage their brands and trigger large fines from regulators. They also appreciate spending less on legacy firewalls that no longer provide adequate Protection. We also saw strong growth in Q2 for our market leading web app firewall and bot management solutions, where we continue to fare well against the competition, due in part to their challenges with reliability and performance.

Speaker 2

For example, we recently took business away from a competitor, one of the world's largest micro blocking platforms. Outages on their former provider's made the customer seek a more reliable partner. So they switched to Akamai for their global expansion plan in Europe and Asia. In another example, a leading Asian financial institution recently returned to Akamai also because of reliability challenges with this competitor's platform. As we look to the future, we're also excited about our new API security solution that we announced last week, enabled in part by our acquisition of Neosec in May.

Speaker 2

API security is rapidly emerging as a critical need for major enterprises. That's because as enterprises modernize their infrastructure to create better digital experiences, they're making increasing use of APIs to and they open up new vectors for attacks. Our new API security product leverages AI based analytics and threat hunting capabilities to discover APIs, analyze their behavior, identify vulnerabilities and help customers defend against attacks. Customers who thought they had 1,000 APIs might turn on API security and discover 100 more they never knew they had. With vulnerabilities lurking within legacy infrastructure or new applications.

Speaker 2

This is why banks are establishing API governance groups today. And it helps to explain why IDC and Gartner project that the API security market will surpass $1,000,000,000 by 2027. Like our segmentation solution, customers can buy our API security product without being an Akamai CDN customer. These security solutions are CDN agnostic, demonstrating how we can go to market as a security provider first. We also continue to make good progress on the cloud computing front.

Speaker 2

Akamai is taking a fundamentally new approach to cloud computing, making it fully distributed with many more points of presence than are available with traditional solutions. By leveraging Akamai's unique platform and capabilities, We believe that we can offer enterprises better latency, better performance, automated scalability and portability and reduce costs, especially for applications that incur high egress fees with the hyperscalers. Since our call with you in May, we've gone live with 3 new cloud computing sites in Washington DC, Chicago and Paris, and we plan to open 10 more later this year. These new sites are part of our plan to connect compute, storage, database and other services into the same platform that powers our Edge network today, A massively distributed footprint that spans more than 4,100 locations and 130 countries. Last month, we also announced a doubling of the capacity of our object storage solution, a new premium instances for large Commercial workloads that are designed to deliver consistent performance with predictable resource and cost allocation And our plan to launch in beta the Akamai global load balancer later this quarter.

Speaker 2

This new integrated service is designed to route traffic requests to the optimal data center to minimize latency and ensure no single point of failure. We believe that the Akamai Connected Cloud will be ideally suited for applications that benefit For being closer to end users. For example, in e commerce, our customers want to tailor their online shopping experience to the individual user. They also want the better performance you get by being closer to the end user. That's because better performance translates into higher conversion rates.

Speaker 2

In video and gaming, our customers want the game engine closer to the end user to reduce latency and to tailor experiences based on the user's device type and connectivity. In AI, the basic models will be generated and trained in the core, But the inference engines, which generate alerts and responses to queries, will be more efficient to run at the edge where and when they're needed. And as cyber attackers exploit advances in AI to create more forms of malware and more dangerous bots, More security will be deployed at the edge to intercept attacks before they can reach and swamp a customer's data center in the core. In all these areas, our customers also want the ability to spin up instances to handle flash crowds on demand, something that's very hard to do with competing cloud solutions. In summary, we believe that next generation applications We'll need next generation cloud infrastructure and Akamai is charting the course for this next decade of cloud computing, when more of the compute will be done closer to the end user and where we believe our platform will have an important edge over more centralized models.

Speaker 2

Turning now to content delivery, I'm pleased to report that we continue to be the market leader, providing industry leading performance and scale as we continue to We enjoy a strong synergy between our delivery, security and cloud computing offerings as we power and protect life online. The synergy is both on the top line as long time delivery customers buy our security and cloud computing 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. Overall, I'm pleased to see that Akamai performed well in the first half of the year. Despite the macroeconomic We continue to invest in the key areas that we expect to drive our future growth, while also taking actions to improve our profitability. Now, I'll turn the call over to Ed for more on our Q2 results and our outlook for Q3 and the full year.

Speaker 2

Ed?

Speaker 3

Thank you, Tom. Today, I plan to review our Q2 results and provide some color on Q3, along with our increased Full year 2023 guidance. I'm pleased that Q2 was another strong and very profitable quarter. I'll have more to say about our double digit EPS growth in a moment. First, let's discuss revenue.

Speaker 3

Total revenue for the Q2 was $936,000,000 up 4% year over year. In the Q2, security revenue was $433,000,000 growing 14% year over year. As Tom mentioned, security revenue was driven by strong demand for our WAF, bot management and segmentation solutions. Moving to compute, Revenue was $123,000,000 growing 16% year over year as reported and 17% in constant currency. On a combined basis, our security and compute product lines represented 59% of total revenue, growing 14% year over year and 15% in constant currency.

Speaker 3

Shifting to delivery. Revenue was $380,000,000 declining 9% year over year as reported and 8 International revenue was $456,000,000 up 7% year over year and 8% in constant currency Now it represents approximately half of our total revenue. Foreign exchange fluctuations were flat on a sequential basis and negative $6,000,000 on a year over year basis. Moving now to profitability. Non GAAP net income was $228,000,000 or $1.49 of earnings per diluted share, up 10% year over year and up 11% in constant currency.

Speaker 3

These strong EPS results exceeded the high end of our guidance range by $0.07 And we're driven primarily by higher revenues, savings from the headcount actions we took earlier in the Q2 and continued progress on our cost savings initiatives. As a reminder, those cost savings initiatives include 3rd party cloud savings, rationalization of our real estate costs, 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. With respect to 3rd party cloud spend, I'm pleased to report And for as long as we attract this expense, Q2 was the 1st quarter where total third party cloud spend declined year over year. While the decline was relatively modest, it reflects disciplined vendor management as well as the beginning of savings related to the migration of our workloads onto our own cloud platform. This migration effort to move away from 3rd party clouds is in the early stages, and we are seeing promising signs.

Speaker 3

For example, our bot management solution is now running production workloads for hundreds of customers on our own cloud computing platform. As a reminder, we anticipate that the amount of savings we will be able to achieve will start to ramp through the end of 2023 and into 2024 as we bring online Moving to margins. Our cash gross margin was 73%, Adjusted EBITDA margin was 41% and our non GAAP operating margin was 29%, slightly ahead of our guidance. Moving now to cash and our use of capital. As of June 30, our cash, cash equivalents and marketable securities totaled approximately $1,000,000,000 During the Q2, we spent roughly $137,000,000 to repurchase approximately 1,600,000 shares.

Speaker 3

We now have about $700,000,000 remaining in our previously announced share buyback authorization. Our approach to capital allocation remains the same To opportunistically buy back shares to offset dilution from employee equity programs over time, while maintaining sufficient capital to deploy when strategic M and A presents itself. Finally, I'm pleased to announce that Akamai has obtained investment grade credit ratings from Moody's and S and P. These ratings are part of a broader financial policy to further reinforce our business and financial strength, not only with investors, but also with customers, Vendors and other parties that we engage with from a commercial perspective. The credit rating also broadens our financial toolkit, allowing us to evaluate all available financing instruments to determine what's best suited for our financial goals.

Speaker 3

Finally, as a reminder, Akamai currently has 2 convertible debt instruments outstanding, dollars 1,150,000,000 due in May 2025 and $1,150,000,000 due in September 2027. Before I provide our Q3 and full year 2023 guidance, I want to touch on some housekeeping items. First, our annual merit based wage increases became effective July 1. This will result in an additional net operating costs of approximately $12,000,000 per quarter. 2nd, in late July, the IRS released a notice that granted temporary relief for determining eligibility of foreign tax credits.

Speaker 3

This will result in a lower than expected non GAAP effective tax rate in Q3 and for the full year. And finally, the guidance I will provide So with those factors in mind, I'll turn to our Q3 guidance. We are now projecting revenue in the range of $937,000,000 to $952,000,000 or up 6% to 8% as reported and 5% to 7% in constant currency over Q3 2022. The current spot rates or exchange fluctuations are At these revenue levels, we expect cash gross margins of approximately 74%. Q3 non GAAP operating expenses are projected to be $297,000,000 to $302,000,000 We expect Q3 EBITDA margin of approximately 42%.

Speaker 3

We expect non GAAP depreciation expense to be between $121,000,000 to $123,000,000 and we expect non GAAP operating margin of Approximately 29% for Q3. Moving on to CapEx, we expect to spend approximately $162,000,000 to $170,000,000 Excluding equity compensation and capitalized interest in the Q3, this represents approximately 17% to 18% of our projected total revenue for the Q3. Based on our expectations for revenue and cost, we expect Q3 non GAAP EPS to be $1.48 to $1.52 The CPS guidance assumes taxes of $42,000,000 to $45,000,000 based on an estimated quarterly non GAAP tax rate of approximately 16%. It also reflects a fully diluted share count of approximately 155,000,000 shares. Looking ahead to the full year, we have increased Revenue to a range of $3,765,000,000 to $3,795,000,000 which is up 4% to 5% year over year as reported and in constant currency.

Speaker 3

At current spot rates, our guidance assumes foreign exchange will have a negative $4,000,000 impact to revenue for 2023 on a year over year basis. We are also raising our security revenue growth expectations to 12% to 14% for the full year 2023, And we continue to expect to achieve approximately $500,000,000 in revenue from compute in 2023. And despite a significant year of investments, we are estimating non GAAP operating margin of approximately 29%. With all that in mind, we have raised our estimated non GAAP Earnings per diluted share to a range of $5.87 to $5.95 Our non GAAP earnings guidance Based on a non GAAP effective tax rate of approximately 17% and a fully diluted share count of approximately 155,000,000 shares. Finally, our full year CapEx is expected to be approximately 19% of total revenue.

Speaker 3

In closing, we are very pleased with our financial achievements for the first half of the year in our ability to increase our overall revenue, security revenue and non GAAP EPS guidance for the full year. We believe that Akamai is a special class of businesses that have the ability and discipline to invest in future revenue growth, while continuing to be extremely profitable and generate significant cash flows. With that, we now look forward to your questions. Operator?

Operator

Thank you. This time, we'll pause momentarily to assemble the roster. First question will be from James Fish, Piper Sandler. Please go ahead.

Speaker 4

Hey, guys. Congrats on the quarter and the security re excels. And speaking of security, how should we think about the bookings Heading into Q3 for this segment or the bookings related to Lush and really the crux of my question is just trying to understand the Sustainability here and understanding we're raising by 2 points for the full year, just trying to give some Color around the confidence for the year is really what I'm asking.

Speaker 3

Yes. Hey, Jim, thanks for the question. This is Ed. I'll take that one. So I would say we had 2 back to back Very strong quarters of bookings.

Speaker 3

So that was very encouraging. And we also saw strength. And if I look at my sequential growth quarter over quarter, we actually saw All three major product lines accelerate. So we saw growth in API and App Protection. Segmentation was very strong.

Speaker 3

Gardicore was extremely strong in the quarter. And even the infrastructure business still had some hangover effect from the Killnet The tax we saw earlier on, so all those product lines grew sequentially quarter over quarter. In terms of the Customer penetration, if I go back to Q4 and look at where we are now, we saw about a 2.5% increase in customers buying a security product up to about 75.5%. We're seeing great penetration in the installed base. And just one other sound bite for you, we now have about 700 customers who are buying 4 or more products in security.

Speaker 3

So We're seeing really good strength with new customer additions, bookings across all products product lines. And then just another thing on segmentation, When we're seeing renewals with segmentation, we're seeing those renew very favorably and generally with expansion orders included.

Speaker 4

Helpful. And then, Tom, maybe for you on the compute side, how are you guys looking to invest behind the GPU as a service side of Linode, is this something your customers, particularly your large media customers are looking to deploy with you? Or you see that as more for the hyperscalers and so you're going to be more focused on that AI inference opportunity. Thanks guys.

Speaker 2

Yes, we do support GPUs today. It's not our primary focus and that's just a financial decision. Would say gaming is more where you'd see that with our big media customers doing video and media workflow, I think over time probably that migrates at least in terms of the inference engines migrates to CPU as well. And I think that over time as we talked about probably something you want to be doing at the edge. But we're fully capable of supporting GPUs.

Speaker 2

We do that some today, really based on

Operator

Thank you. Next question will be from Keith Weiss, Morgan Stanley. Please go ahead.

Speaker 5

I wanted to follow-up on the security question and the security business. We got a reacceleration this quarter and I just want to understand like some of the drivers behind that, whether you're seeing a better spend environment, Sounded like the bookings were pretty solid. Is it sort of sales execution? Were you seeing sort of like newer offerings like Bartacore sort of reach material scale to drive Sort of dollar growth on a year over year basis. Just wondering if you could sort of unpack the strength in security and what it could portend for future quarters?

Speaker 2

Yes. Ed talked to that somewhat. Let me just give some additional color there. It's still a challenging spend environment in general. So that I wouldn't say that's changed a lot.

Speaker 2

We are getting strong sales execution and security is really important. And as we've Talked about before, in this environment, financial institutions, they just can't afford to have a glitch. And this is where our reliability really helps and stands out against the competition. They can't afford to get hacked. And again, we stand out there because we have the market leading solutions for Web App Firewall and for bot management.

Speaker 2

And with Gardacore really seeing strong growth, as Ed talked about. And I think what we're seeing in the marketplace is there's good tailwinds there. Particularly now you have Gen AI Already the tools are out there, the variance of that to produce more malignant bots to morph malware. So it's harder to detect. You can train the bots pretty easily to get around a lot of the firewall defenses.

Speaker 2

And so I think what you're going to see is even more penetrations of the Traditional defenses. And at this point at that point, what you really need is Gardicore to identify when you are penetrated and where and to proactively block They block the spread. So I think you're going to see more demand for segmentation is really the critical defense going forward. So strong as Ed talked about, strong execution and performance across all three pillars.

Speaker 5

And then you look to

Speaker 2

the future, API security is going to be, I think, a very important market for us, very early days, But I think really critical. So it's really pleasing to see the momentum that we've been building in the first half of the year with security and that can I think

Speaker 5

I appreciate the thoughts, Tom? And just as a follow-up, sort of toggling to the delivery business, Just want to get an update and you guys have talked about this before, but just want to get an update on sort of the operating principles and the operating philosophy Around the delivery business with respect to sort of managing for sort of revenue share versus harvesting for profit to fund investments In the compute business, given the ambitious roadmap you have there, what sort of the right way we think that you guys are going to strike that balance

Speaker 2

Yes, it really comes down to price and profitability. And as we've talked about, we have turned down business It's very spiky and we don't get what we think is paid enough to do it. And so we've left that to others to take, and meanwhile growing the highly profitable delivery business, the core business there. And I think we are starting to see some positive signs there. Traffic growth is not where it was before The pandemic, but getting better.

Speaker 2

We're seeing some acceleration there, which is good. Price declines, I'd say, softening a little bit here. I'd say softening a little bit here. And so I'm optimistic that over the next 1 to 2 years, we should see more of a stabilization of that business. So Still price pressure, but I'm pleased with the progress we're making there and strong cash generation.

Speaker 6

Thank you

Speaker 5

for the details, Tom. Appreciate it.

Operator

Thank you. Next question will be from Ray McDonough of Guggenheim Securities. Please go ahead. Great.

Speaker 7

Thanks for taking the questions. Tom, maybe just to stay on the security side of things. Last quarter, you mentioned actions you were taking on the go to market side in security, And you mentioned execution as part of the driver of security reacceleration. But I'm wondering if you could provide more color on the sort of go to market changes that might be working here. And we've been hearing that Akamai has been more successful engaging traditional security resellers recently.

Speaker 7

Has that helped Drive an acceleration in growth here at all or is that still too early and maybe a contributor into the future?

Speaker 2

No, our partners are very important for security sales. In fact, some of our products are partner only, for example, segmentation. And very pleased to just Recently announced a partnership with WWT, that will be bundling in our solutions for segmentation and API Security, and that kind of partnership is obviously very helpful for us in driving a lot of the improved execution. We also have dedicated resources For some of the newer and more advanced security services like segmentation, and I think that helps with sales. And we're seeing customers new customers to Akamai, which is great, and also upselling our solutions into the And as Ed noted, now 700 customers buying 4 different security solutions.

Speaker 2

And Ed, do you want to add anything to that?

Speaker 3

No, I think you covered it. We've made a lot of the investments already, so there's not a big investment needed in the sales overlay functions. Very happy with that. As a matter of fact, a lot of the new customer acquisition is coming from Gardicore, and they're actually getting penetration in Some verticals that aren't traditionally strong, like this quarter, we saw some wins in education, state and local government, Manufacturing and pharmaceutical places that typically aren't very big web properties that are typical CDN customers. I think we're seeing really good execution across all the parts of security direct sales, the overlay teams in the channel.

Speaker 7

Great. That makes sense. Maybe as a follow-up, Ed, I know Gardicore and some of your other businesses, there could be some upfront license Deals that could contribute in any given quarter. Was there anything to call out from an upfront license recognition in the quarter in security in particular that might not be Repeatable that we should just know about. And is there any renewals that might be coming up in the back half of the year that we should be aware of?

Speaker 3

Yes. So nothing material this quarter, a couple of $1,000,000 but nothing material. It's over a couple of points I call it out. So nothing there to call out. One thing I will say though with the licensing we do with Garticore in particular, it's term licenses.

Speaker 3

So it's generally 2 to 3 years typically. And those license deals renew and one of the comments I made earlier is that we are seeing very strong renewals. So when those license deals come up, we are seeing renewals Typically with expansion orders, which is really encouraging. So you have somebody who's renewing and then adding on more protection across

Operator

Thank you. Next question will be from Brent Loutham, Raymond James. Please go ahead.

Speaker 8

Great. Thank you. On the Delivery business, can you talk to us about any impact you think you might see from the rider strike? You think is that factoring any of that in the decline? And then just Comment on the sort of the sequential change in the business there.

Speaker 8

What sort of the outlook there for the rest of the year? Thanks.

Speaker 3

Yes. Hey, Frank, this is Ed. From the rider strike, I wouldn't anticipate any major impacts from that. Certainly not hearing anything from our customers there. Obviously, that would potentially impact new releases, which it could take a couple of years to get out, But not seeing anything there.

Speaker 3

And in terms of the second part of the question, what are some of the fundamentals of what we're seeing? Tom talked about we are seeing traffic growth rates Improve, it's going up a couple of points a quarter. Pricing is still a bit challenging and some of the old web performance verticals in commerce and We'll have been in travel as well, but we are seeing with the larger customers, the big media, traditional media customers, pricing starting to abate a bit there, still Pricing declines were not nearly as steep. So I think as traffic continues to improve and we obviously have Q4 coming up In a few months, we'll be in Q4, and that always tends to be a generally strong quarter for the Internet as kids go back to school and new gaming Consoles are sold and connected devices and all that stuff. It also tends to be pretty popular with new TV series and sports and whatnot that We're optimistic that traffic should continue to improve.

Speaker 3

And as Saum talked about, hopefully, we get this business back to stable in the next year or so.

Speaker 8

Great. Are you seeing any more vendor consolidation like we saw earlier this year with some of the larger media companies?

Speaker 3

There was one probably real notable one that went from 5 vendors down to 2, and we were the leading provider there and did pick up some additional shares. So we're one of The ones who won there, but nothing really notable this quarter. That happened, I think, at the end of last quarter.

Speaker 8

Okay, great. Thank you.

Operator

Thank you. Next question will be from Mark Murphy, JPMorgan. Please go ahead.

Speaker 9

Hi, this is Artie on for Mark Murphy. Thanks for taking the question and congrats on the quarter. To start off, you mentioned earlier that you expect Stabilization in the delivery market over the next couple of years. Can you just describe what trends you're seeing that kind of lead you to think that?

Speaker 3

Yes, sure. I'll take this, Tom, and if you want to add something. So I think it's really in the delivery business, it comes down to pricing and Traffic growth rates. Now we're starting to see traffic growth rates improve and also comps become a little bit easier. The other thing is we talked about Moving away from some of the peak of your business, what that will do is improve the profitability.

Speaker 3

So the delivery business to us is a really strategic asset for us, right? It enables us to get really great economics, which will help our cloud business delivery function of cloud in a lot of ways. Also for our security business, it enables us to get the reach and the scale and the data for security. So it's Obviously, a very strategic business. But in terms of like the stabilization, I would say, we're seeing pricing moderate, especially With the larger customers, which is a good sign, traffic improving a bit, and if that continues, we should be back to Hopefully, a stable plus or minus a couple of points would be great.

Speaker 3

But I think one thing that the macroeconomic environment is causing a little bit of Churn, if you will, or challenges in some of the traditional web verticals like commerce. So that's going to have to work itself out as well. So that may take A year or so, but that's all to work its way out. But I think as we see traffic growth and pricing stabilize a bit more, we should be in pretty good shape.

Speaker 2

Yes. The only thing I'd add is that in this environment with higher interest rates and money is harder to get, there's a little less enthusiasm for investment and the lots of CDNs out there that are losing money. And as Ed noted, Akamai is a unique position that we generate a lot of cash from delivery business, we're the market leader. We do it better than anybody. And the smaller companies that were okay losing money before, well, that's not so easy to do now.

Speaker 2

And so I think that does help maybe the overall environment a little bit and we'll see how that plays out over the next year or 2.

Speaker 9

That's very insightful. Thank you. And then with regards to Gardacore, it seems like you

Speaker 6

guys are having a bit

Speaker 9

of momentum on that front. Any changes in the competitive landscape, win rates, anything along those lines?

Speaker 2

Yes, it's gotten more favorable for us. Our lead over the competition has widened as we've made a lot of investments in Cardicore to improve its capabilities. And so now we're recognized by the analyst community as the market leader by a wide margin. And that's very good timing because That capability is an increasing need with major institutions. So I think the competitive environment has become more favorable for us because of the work we've done to make it a great product.

Speaker 9

Got it. Thank you. I'll step back in the queue.

Speaker 3

Thank you.

Operator

Next question will be coming from Rishi Jaluria of RBC. Please go ahead.

Speaker 10

Wonderful. Thanks so much for taking my questions guys. Nice to see the security reacceleration this quarter. I had a 2 part question I wanted to ask about the compute business. First, can you talk a little bit about how some of your product investment In terms of getting Linode to be enterprise scale and to be truly competitive with the likes of AWS And Azure, Hootigrap features and functionality like Kubernetes, for example, how those efforts are going and maybe what learnings you've had as you've been Migrating your own cloud spend on to that platform.

Speaker 10

And the second part, and Tom, you kind of hinted a little bit at this earlier, right? But Let me look at what the hyperscale cloud vendors are saying. They are seeing a big uptick in demand right now as a result of generative AI workloads. And how do you think about your ability to capture some of those generative AI workloads as Companies are thinking increasingly about adopting their GenAI strategy and maybe other additional investments we need to make in Linode to be able to for some share of this. Thank

Speaker 2

you. Yes, great questions. And we are making really good progress with Linode Kubernetes. And really it's about scale and we talked about that. The build out will be up to a couple dozen core locations By the end of the year, we have a ton more capacity than we had before.

Speaker 2

Object storage and the new architecture there, Much more capacity and capability. The certifications, we now have PCI compliance for our use, so we can run Bot Manager On it, we have market leading bot management solution. We have 300 customers now using that solution on Akamai Connected Cloud instead of 3rd party cloud, and that does take advantage of deep learning technology. So already, we have those capabilities to support that on Akamai's cloud. I think overall with the timeline, the way we think about it, by the end of this year, we should be in a position to start Taking on more serious bookings or bookings with large customers for really important applications.

Speaker 2

We have a couple already using it And then start generating more revenue next year from major applications. Now in terms of competing with the hyperscalers, We're not going to be fully competitive for every application. And we don't have to be. It's a $200,000,000,000 a year market growing at 15%. And we are targeting a subset of that market, Primarily initially vertical, media and gaming, followed by commerce after that, where in particular applications where Performance matters.

Speaker 2

So the application is being used in some way by end users or business partners. Maybe you want to have that application running closer, so it has better performance. Where scalability, rapid scalability matters And cost, especially for the applications that involve moving data around or have a lot of hits. And you see that in media, gaming and commerce. So that's really what we're targeting, which is a pretty reasonable subset of the $200,000,000,000 Now Within that subset, if you're an enterprise that uses a lot of the 3rd party apps that are Available as managed services on existing platforms, probably it's harder to migrate and that's not where we'd go first.

Speaker 2

Fortunately, if you look at media workflow, in the areas where we're targeting, often that's not the case. And it's Easier for us to manage supporting. Now, you don't just flip a switch. So it's not that easy, unfortunately. And we've learned that.

Speaker 2

But at Akamai, pretty much all of our applications are in the process of migrating From 3rd party cloud onto our compute platform. And so it does take some effort, but it is eminently doable and we're going to save a lot By doing that, and we're not the biggest company out there. Our big media customers spend, Well, 100 and 100 of 1,000,000 of dollars a year in the cloud with often case their primary competitor. And so I think 100 of 1,000,000 of dollars a year in the cloud, with often case their primary competitor. And so I think we're in a position that we can now help them based on our experience, migrate a bunch of those applications to Akamai, Good for us, good for them.

Speaker 2

Wonderful. Really helpful. Thank you so much.

Operator

Thank you. Next question will be from Rudy Kissinger, D. A. Davidson. Please go ahead.

Speaker 6

Hey, great. Thanks for taking the questions. Just I know a lot of questions have been asked on security. Can you share the Gardacore growth rate? What kind of growth are

Speaker 9

you seeing in that business?

Speaker 3

Hey, Rudy, this is Ed. About 60% year over year. And as Tom talked about, we should be at $100,000,000 run rate Very, very soon, I would be surprised if we don't get there next quarter.

Speaker 6

Great. That is very impressive. As it relates to compute, 17% year over year constant currency, that's fully organic figure this quarter as you've left that acquisition. The guide implies, Depending how you monitor the model, the sequential is maybe 1 to 2 points of acceleration by year end. I guess just how is the pipeline building for Linode as you get some of these sites online.

Speaker 6

And when should we expect to see more material growth acceleration? Just what are your growth aspirations there in terms of maybe 2024?

Speaker 2

Yes. So when you talk about Linode, almost all the revenue there is in their traditional business, Developers, small, medium enterprises, low ARPU customers, that business was a little over $100,000,000 a year when we bought it, growing in the teens. And it's growing a little bit faster now, but it's not that's not the game changer. And why we bought Linode was to be able to use it as the base to create a service for major enterprises with mission critical applications, Very high ARPU accounts. And today, the revenue there, we have actually signed up a few important cases, customers.

Speaker 2

And so we do have revenue there now, but it is small, in the 1,000,000 of dollars. And so but that's where the growth And that's we're trying to get a 1% of the $200,000,000,000 market. So over a period of time to go from a few million to We don't have a timeframe on that yet, but we're trying to do that as quickly as we can. But that's where the real growth comes from. It starts from a very small portion of our roughly $500,000,000 compute business today.

Speaker 6

That's helpful. Thank you.

Speaker 2

Operator, Tom Bartlett, time for one more question.

Operator

Thank you. Our last question will be from Amit Dayani of Evercore. Please go ahead.

Speaker 11

Yes. Thanks for taking my question. I guess maybe to start on the security side, can you just touch about as you see the acceleration that's happening there, is that skewing more From new customers or expansion of existing customers, just any flavor there would be helpful. And then was there any licensing revenues that helped you with Guardicore in June?

Speaker 3

Amit, this is Ed. So as I talked about earlier, there was really no material license revenue in the quarter. And as I said, I'd call it anything if So, a couple of points of growth or anything like that. So, nothing to report there. In terms of the new customers and existing, we are seeing, as I talked a pretty good expansion in the existing installed base, both with just pure penetration rates up a couple of points in the last two quarters As I look at customers buying multiple products, I mentioned earlier, we have over 700 customers now buying 4 products.

Speaker 3

So the majority of the revenue growth is coming from the installed base buying more, but I'm very encouraged with the new logo acquisition, especially with what we're seeing in Gardicore, very encouraging to see them Be able to attract new customers and verticals that were typically not very strong. And so, again, mostly from the installed base in terms of buying more products, is great, but very encouraging on the new logo acquisition as well.

Speaker 11

Got it. And then if I may just follow-up on one thing, I think you talked about Full year operating margins being around 29%, that's about what you have in the first half of the year as well. But that would imply that sales will accelerate in H2 2 versus H1 from a dollar basis, but operating margins don't go up. So maybe I'm missing this, but what's the offset? Is it the merit increases or is there other offset

Speaker 3

But also the depreciation picks up quite a bit because of the CapEx in the first half of the year. So those are really the 2 Main drivers, but I'm pretty pleased with what we've been able to accomplish on the margin front, making huge investments in the business and acquisition, The big investments we're making in compute to be able to deliver 29% operating margin for the year is pretty impressive and then to deliver You'll be able to raise EPS guidance. Very pleased with the team. I think everybody's pitching and done a great job. So happy with that and We're pleased to see us able to maintain the 29% margins despite the fact that there's increased depreciation and merit increases.

Speaker 11

Perfect. That's helpful. Thank you.

Speaker 1

Thank you, Amit, and thank you, everyone. In closing, we will be

Speaker 2

you for joining us, and all of us here at Akamai wish you and yours a wonderful rest of the summer. Have a nice evening.

Operator

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Akamai Technologies Q2 2023
00:00 / 00:00