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Akamai Technologies Q2 2023 Earnings Call Transcript

Participants

Corporate Executives

  • Tom Barth
    Investor Relations
  • Tom Leighton
    Co-Founder, CEO & Director
  • Ed McGowan
    Chief Financial Officer

Analysts

Presentation

Operator

Good day, and welcome to the Akamai Technologies Second Quarter 2023 earnings conference call. All participants will be in listen only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd like to turn the call over to Mr. Tom Barth, Head of Investor Relations. Please go ahead, sir.

Tom Barth
Investor Relations at Akamai Technologies

Thank you, operator. Good afternoon, everyone, and thank you for joining Akamai's second-quarter 2022 earnings call. Speaking today will be Tom Leighton, 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.

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-K and quarterly reports on Form 10-Q. The forward-looking statements included in this call represent Akamai's view on August 9, 2022. 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'll be referring to some non-GAAP financial metrics during today's call. 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.

Tom Leighton
Co-Founder, CEO & Director at Akamai Technologies

Thanks, Tom, and thank you all for joining us today. I'm pleased to report that Akamai delivered strong results in the second-quarter despite the ongoing challenges with the global economic environment and slower Internet traffic growth. Q2 revenue was $903 million, up 6% Year-over-Year and up 9% in constant-currency. This result was driven by the continued rapid growth of our security and compute businesses which when taken together were up 30% in constant currency.

These two business lines now account for 54% of our overall revenue. Q2 non-GAAP operating margin was 29%. Q2 non-GAAP EPS was $1.35 per diluted share, down 5% Year-over-Year, but up 0.5% in constant-currency. As Ed will discuss later, EPS was negatively impacted by foreign-exchange rates and a higher effective tax-rate compared to last year. Free-cash flow was very strong at $223 million in Q2 and it accounted for 25% of revenue. We've been leveraging our financial strength to make substantial investments in enterprise security and cloud computing.

We've also use some of this cash to buyback additional stock in the first-half of the year, we spent $268 million to repurchase 2.6 million shares. This puts us on track to go beyond what's needed to offset dilution from employee equity programs this year. I will now say a few words about each of our three main lines of business security, compute, and deliver it. Starting with security. Our security solutions generated revenue of $381 million in Q2, up 17% Year-over-Year and up 21% in constant currency. Growth in security was driven primarily by our app and API security portfolio which includes our market-leading web app firewall, Bot Manager, account protector and Page Integrity Manager solutions.

Our zero trust enterprise security portfolio led by Guardicore also performed well in Q2 with numerous significant customer wins. A leading global provider of financial data concerned about ransomware added Guardicore segmentation solution to the seven security products, they already buy from Akamai. A major insurance company in France, became a new customer for Akamai when they adopted our Guardicore solution to help meet European financial regulations. The sale led by one of our carrier partners is indicative of the excitement we're seeing for our zero trust solutions among our partners.

And Australia's largest telecom provider Telstra expanded their business with us by adding our Secure Web Gateway solution to their portfolio of Akamai products. They told us quote as part of Telstra is journey and delivering fit-for-purpose solutions Akamai has been a key industry partner with network-based anti-phishing malware protection and content filtering. Telstra blocks millions of threats, every single day and Akamai is a key partner in that protection and quote.

Overall, our zero trust solutions delivered $43 million of revenue in Q2, up 59% Year-over-Year in constant-currency. This is an area where we're making continuing to make major investments and where we anticipate significant future growth. Turning now to compute. I'm very pleased to report that the revenue for our compute product group was $106 million in Q2, up 74% Year-over-Year and up 78% in constant-currency. As a reminder, the compute product group includes Linode and Akamai solutions for edge computing, storage, cloud optimization and edge applications.

A common theme that I heard when I met with executives from around the world in Q2, was there, growing concern about being locked into contracts with cloud giants that are consuming large and rapidly increasing shares of their IT budgets. They want more choice and compute and are open to alternative clouds like Linode as a more efficient way to build, run and, secure their applications. As a result, many large enterprises have begun testing the Linode platform, including a major US airline. One of the world's top gaming companies and a global provider of weather data.

Major media companies in particular expressed significant concerns with their growing use of the giant clouds. Not only are the cost high, in-part because of the fees for moving [technical issue]

Operator

Good morning ladies and gentlemen. [Technial issue] Sorry about that everyone. We are ready to begin the real call that was the warm-up. I apologize again and what I'd like to do is introduce our CEO, Dr. Tom Leighton. [Operator Instructions] Operator?

Unidentified Participant
at Akamai Technologies

Yes, thank you, everyone. [Techical issue] while you gather your information and get going again. Thank you, everyone.

Operator

Thank you for holding -- standing by. We have Mr. Tom Barth ready to take-over again for the call. Please go ahead, sir.

Tom Barth
Investor Relations at Akamai Technologies

Okay, thank you everyone for your patience today and we then apologize for the technical glitch [techical issue]I would ike to reintroduce our CEO Tom Leighton. Tom?

Tom Leighton
Co-Founder, CEO & Director at Akamai Technologies

Thanks Tom and thank you all for joining us today. Anyway, I am very pleased to report that Akamai delivered strong results in the second-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 million 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. 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 three main product areas, starting with security which is our largest source of revenue. Security revenue grew to $433 million 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 Guardicore in Q4 of 2021. And we're nearing an annualized revenue run-rate of $100 million. At this scale segmentation is having a bigger impact on our overall security growth rate. Customers are adopting our segmentation solution to help defend against ransomware and data exfiltration attacks, which you become more frequent and damaging.

For example, last quarter, we signed a three-year $8 million segmentation deal with one of the world's largest carriers, large carriers have banks want to protect their consumer data from losses that can damage their brands and trigger large volumes 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.

For example, we recently took business away from a competitor. One of the world's largest microblogging platforms. Outages on their former providers platform, 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 competitors 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 [indecipherable]. 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.

The problem is that these are often not adequately secure and they are often not adequately secure and they open up new vectors for attack. Our new API security product leverages AI-based analytics and threat hunting capabilitie. To discover APIs analyze their behavior, identify vulnerabilities and help customers defend against the taps. 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. This is why banks are establishing API governance groups today and it helps to explain why IDC and Gartner projects that the API security market will surpass $1 billion by 2027 without being an Akamai's 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. Akamai is taking a fundamentally new approach to cloud computing, making it fully distributed with many more points of presence that 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 three 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 4100 locations at 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. This new integrated services designed to route traffic to the optimal datacenter 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 from 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 better performance, translate into higher conversion rate. In video and gaming, our customers want the game engine closer that's because, better performance translates into higher conversion rates. 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 are needed. And if cyber attackers exploit advances in AI to create more forms of malware and more dangerous spots 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 computing cloud solutions. In summary, we believe that next generation applications the next-generation cloud infrastructure and Akamai is charting the course for this next decade of cloud computing. When more of the compute will be down closer to the end user and where we believe our platform will have an important edge over more centralized models.

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 support the world's top range by delivering reliable, secure, and near flawless online experiences. 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 realized 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 challenges, 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 will turn the call over to Ed for more on our Q2 results and our outlook for Q3 and the full-year, Ed?

Ed McGowan
Chief Financial Officer at Akamai Technologies

Thank you, Tom. Today, I plan to review our Q2 results to 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. Total revenue for the second-quarter was $936 million, up 4% Year-over-Year. In the second-quarter security revenue was $433 million, 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 million, 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 50% in constant-currency. Shifting to delivery. Revenue was $380 million, declining 9% Year-over-Year as reported, and 8% in constant-currency.

International revenue was $456 million, up 7% Year-over-Year, and 8% in constant-currency and now represents approximately half of our total revenue. Foreign-exchange fluctuations were flat on a sequential basis, a negative 6 million on a Year-over-Year basis. Moving now to profitability. Non-GAAP net income was $228 million or $1.49 of earnings per diluted share, up 10% Year-over-Year and up 11% in constant-currency. These strong EPS results exceeded the high-end of our guidance range by $0.07 and were driven primarily by higher revenues, from savings from the headcount actions we took earlier in the second-quarter and continued progress on our cost-savings initiatives.

As a reminder, those cost-savings initiatives include third-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 third-party cloud spend. I'm pleased to report that for as long as we have attract this expense. Q2 was the first-quarter with 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 Tmall cloud platform.

This migration effort to move away from third-party clouds is in the early stages and we are seeing promising signs. For example, our Bot Management Solution is now running production workloads for 100s 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 the needed capacity and features. Moving to margins, our cash gross margin was 73%, adjusted EBITDA margin was 41%, and our non-GAAP operating margin is 29%, slightly ahead of our guidance.

Moving now to cash-in our use of capital as of June 30th, our cash, cash equivalents and marketable securities totaled approximately $1 billion. During the second-quarter, we spent roughly $137 million, to repurchase approximately 1.6 million shares. We now have about $700 million remaining on 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&A presents itself.

Finally, I'm pleased to announce that Akamai has obtained investment-grade credit ratings from Moody's and S&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 engaged with from a commercial perspective. The credit rating also broadens our financial toolkit, allowing us to evaluate all available financing instruments determined to determine what's best-suited for our financial goals.

Finally as a reminder, Akamai currently has two convertible debt instruments outstanding, $1.5 billion due in May 2025, and $1.5 billion 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 first. This will result in an additional net operating costs of approximately $12 million per quarter. Second, in late July, the IRS released a notice that granted temporary relief for determining eligibility of foreign tax credits.

This will result in a lower than expected non-GAAP effective tax rate in Q3 and for the full year. And finally the guidance that we provide, so there is no change to the third macro economic environment. So with those factors in mind I will turn to our Q3 guidance. We are now projecting revenue in the range of $937 to $952 million or up 6% to 8% as reported and 5% to 7% in constant-currency over Q3 2022.

The current spot rates, foreign-exchange fluctuations are expected to have a positive one %10 million dollars impact year over year. At these revenue level we expect cash gross margins of approximately 74%, Q3 non-GAAP operating expenses are projected to be $297 to 302 million. We expect Q3 EBITDA margin of approximately 42%. We expect non-GAAP depreciation expense to be between 121, 2,123 million, CAD and we expect non-GAAP operating margin of approximately 29% for Q3.

Moving on to capex, we expect to spend approximately $162 to $170 million, excluding equity compensation and capitalized interest in the third-quarter. This represents approximately 17% to 18% of our projected total revenue for the third-quarter. Based on our expectations for revenue and cost we expect Q3 non-GAAP EPS to be $1.48 to $1.52. This EPS guidance assumes taxes of $42 to $45 million based on an estimated quarterly non-GAAP tax-rate of approximately 16%. It also reflects a fully-diluted share count of approximately 155 million shares. Looking ahead to the full-year, we have increased revenue to a range of $3.765 with $3.795 billion, which is up 45% Year-over-Year. As-reported and in constant-currency.

The current spot rates our guidance assumes foreign-exchange will have a negative $4 million impact to revenue, 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 $0.5 billion of revenue from compute in 2023. 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 and non-GAAP earnings guidance is based on a non-GAAP effective tax-rate of approximately 17% and a fully-diluted share count of approximately 155 million shares.

Finally, our full-year capex is expected to be approximately 19% of total revenue. In closing, we are very pleased with our financial achievements in the first-half of the year and our ability to increase our overall revenue. Security revenue and non-GAAP EPS guidance for the full-year. We believe that Akamai's with 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?

Questions and Answers

Operator

Thank you. Now begin the question-and-answer session. [Operator Instructions] At this time we'll pause momentarily to assemble the roster. First question will be from James Fish, Piper Sandler. Please go-ahead.

James Fish
Analyst at Piper Sandler Companies

Hey guys, congrats on the quarter and the [Technical issue]. While speaking of security how should we think about the bookings heading into Q3. For this segment are the bookings related to loss and really the crux of my question is just trying to understand the sustainability here and understanding. We're raising by two points for the full-year. Just trying to give some color around the confidence for the years is really what I'm asking.

Ed McGowan
Chief Financial Officer at Akamai Technologies

Yeah, hey, Jeff, thanks for the question. This is Ed, I'll take that one. So I would say, we had two back-to-back very strong quarters of bookings. 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 protection segmentation was very strong Guardicore was extremely strong in the quarter and even the infrastructure business still had some hangover effect from Nikhil net pretax. We saw earlier. So all those product lines grew sequentially quarter-over quarter. In terms of the customer penetration. If I go back to Q4, look at where we are now we saw about a 2.5% increase in customers buying a security product, about 75.5%, so we're seeing great penetration on the installed base. And just one other sound by 40, we now have about 700 customers who are buying four or more products in security. 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 are seeing the removal of the segmentation we are seeing those renewed very favorably and generally with expansion orders.

James Fish
Analyst at Piper Sandler Companies

Helpful, and then Tom may be for you on compute side, how are you guys looking to invest behind the CPU as a service side of Linode, is this something your customers, particularly your large media customers are looking at deploying with you or do you see that as more reserve for the hyperscalers, and so you're going to be more focused on that AI inference opportunity. Thanks, guys. Yeah, we do support CPUs today. It is not our primary focus and that is just a financial decision. I would say gaming is more where you would see that with our big media customers doing video and media workflows, CPU are just fine and much more economical and attractive there. In terms of AI, I think over time probably that might raise at least in terms of inference engine to [indecipherable] as well and I think that overtime as we talked about probably something we.wanted to be doing at the edge but we are fully capable of supporting GPUs and do that today, really based on demand from out customer base and financials.

Operator

Thank you. Next question is from Keith Weiss from Morgan Stanley. Please go ahead.

Keith Weiss
Analyst at Morgan Stanley

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

Tom Leighton
Co-Founder, CEO & Director at Akamai Technologies

Yeah, Ed, talked about somewhat let me just give some additional color there. It's still a challenging spend environment in general. So that's changed a lot. 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 afford to get hacked.

I think again we stand-out there. And because we have the market-leading solutions for Web App Firewall and for Bot Management and with Guardicore really seeing strong growth as I had talked about and I think what we're seeing in the marketplace is there 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 more malware. So it's harder to detect. You can train the bots pretty easily to get around a lot of the firewall defenses, and so I think what you're going to see is even more penetration of the traditional defenses, and at that point what you frequently need is Guardicore to identify when you are penetrated and where and to proactively 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. And then you look to 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 help drive us forward.

Keith Weiss
Analyst at Morgan Stanley

I appreciate the thoughts, Tom. And just as a follow-up, sort of toggling to the -- to the delivery business. Just wanted to get an update and you guys have talked about it before but I just wanted 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 -- what sort of the the right way to think you guys in a strike that balance between those two objectives.

Tom Leighton
Co-Founder, CEO & Director at Akamai Technologies

Yeah, it really comes down to price and profitability and as we've talked about, we have turned down business that is very spiky and we don't get what we think paid enough to do it and so we've left that 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, we're seeing some acceleration. You know there, which is good. Price declines I'd say a softening a little bit here and so I'm optimistic that over the next one to two years, we should see more of a stabilization of that -- of that business.

So still price pressure, but I'm pleased with the progress we're making there and strong cash generation.

Keith Weiss
Analyst at Morgan Stanley

Thank you for the details. Appreciate it.

Operator

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

Ray McDonough
Analyst at Guggenheim Securities

Great, thanks for taking my questions. Tom, maybe just to stay on the security side of things. Last quarter you mentioned actions you're taking on-the-go to-market side and 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 has that helped drive an acceleration in growth here at all or is that still too early and maybe a contributor into the future.

Tom Leighton
Co-Founder, CEO & Director at Akamai Technologies

Our partners are very important for security sales infact some of our products, our partner owned for example, segmentation and very pleased to just recently-announce a partnership with WWT that'll 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 up-selling our solutions into the existing base and as Ed noted, now 700 customers buying for different security solutions. And Ed, do you want to add anything to that.

Ed McGowan
Chief Financial Officer at Akamai Technologies

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 bills overlay functions. Very happy with that. As a matter of fact, lot of the new customer acquisition is coming from Guardicore and they're actually getting penetration in some -- in some verticals that are traditionally strong like this quarter we saw some wins in education and state and local government manufacturer and pharmaceutical places that typically are very big web. Your properties that are typical CDN customers, so. I think we're seeing really good execution across all parts of security direct sales, the overlay teams within the channel.

Ray McDonough
Analyst at Guggenheim Securities

Great, that makes sense. Maybe as a follow-up Ed. I know Guardicore 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 and 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.

Ed McGowan
Chief Financial Officer at Akamai Technologies

Yes, so nothing material this quarter, couple of million bucks, but nothing material that's over a couple of points, I call it out. So nothing -- nothing there to call out. One thing I will say though with the licensing we do with Guardicore in particular it's term licenses. So it's generally two to three years typically and those license deals renewal and one of the comments I made earlier is that we are seeing very strong renewals of 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 their internal infrastructure. Nothing to call out this quarter.

Ray McDonough
Analyst at Guggenheim Securities

Great, thanks for the color.

Operator

Thank you. Next question will be from Frank Louthan with Raymond James. Please go ahead.

Frank Louthan
Analyst at Raymond James

Great, thank you. On the delivery business, can you talk to us about any impact you think you might see from the writers' strike. Think is that factoring any that in the decline. And then just comment on sort of the sequential change in the business there, what sort of the outlook there for the rest of the year. Thanks.

Ed McGowan
Chief Financial Officer at Akamai Technologies

So. Hey Frank, this is Ed. From the registered. I wouldn't anticipate any major impact from that. Certainly not hearing anything from our customers there obviously that would potentially impact new releases which you could take a couple of years to get out, but not seeing anything there in terms of your second part of the question, what are some of the fundamentals of what we're seeing as Tom talked about, we are seeing profit growth rates improve. It's still up a couple of points a quarter. Pricing is still a bit challenging. And some of the old Web performance verticals and commerce and little bit 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 it's profit 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. Gaming consoles resolved and connected devices and all that stuff, and also tends to be pretty popular TV series and sports and whatnot that. We're optimistic that traffic should continue to improve and As Tom talked about they were hoping we get the business back,

Frank Louthan
Analyst at Raymond James

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

Ed McGowan
Chief Financial Officer at Akamai Technologies

One, probably real notable one that went from five vendors down to two and we were leading provider there and did pick-up some additional shares and one of the ones, who won there, but nothing really notable this quarter that happened. I think at the end of last quarter.

Frank Louthan
Analyst at Raymond James

Okay, great, thank you.

Operator

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

Unidentified Participant
at Akamai Technologies

Hi, this is already [indecipherable] on for Mark Murphy. Thanks for taking my question and congrats on the quarter. Start-off you mentioned earlier that you expect to see stabilization in the delivery market over the next couple of years. Can you describe what trends you're seeing that kind of leads you to think that.

Tom Leighton
Co-Founder, CEO & Director at Akamai Technologies

[Indecipherable] So I think it's really the delivery business, it comes down to pricing and traffic growth rates. So 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 pickier business with that, I'll do is improve the profitability. So the delivery business to us is a really strategic asset for us. Right. It enables us to get really great economics. Mutual help our cloud business delivery sort a function of clouds 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, 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 -- would be great.

But.I think one thing that we have the macroeconomic environment is causing a little bit of churn, if you will, our challenges in some of the traditional web verticals like crop commerce. So that's going to have to work itself out as well. So let me take a year or so for that 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. Yeah. I mean the only thing. I would in this environment with higher interest rates and money is harder to get there a little less enthusiasm for investment in the lots of CDNs out there that are losing money and as Ed noted Akamai's unique position that we generate a lot of cash from our delivery business we are 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 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 two.

Mark Murphy
Analyst at JPMorgan Chase & Co.

That's very insightful. Thank you. And then with regards to Guardicore, it seems like you guys are having a bit of momentum on that front. Any changes in the competitive landscape rates, anything along those lines.

Tom Leighton
Co-Founder, CEO & Director at Akamai Technologies

Yeah, it's gotten more favorable for us. Our lead over the competition has widened as we've made a lot of investments in Guardicore 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.

Mark Murphy
Analyst at JPMorgan Chase & Co.

Got it, thank you. I'll step-back in the queue.

Operator

Thank you. Next question. Will be coming from Rishi Jaluria RBC, please go ahead.

Rishi Jaluria
Analyst at RBC Capital Markets

Hi, wonderful. Thanks so much for taking my questions. [indecipherable] the security reacceleration this quarter at a two-part question. I wanted to ask about the compute business. First, can you talk a little bit about how some of your product investments in terms of getting Linode to be enterprise scale and to be truly competitive with the likes of AWS and Azure. I think the great 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 onto that platform. And the second part and Tom, you kind of hinted a little bit earlier, right. But let me 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 general AI strategy and maybe are there additional investments we need to make in Linode to be able to capture some sort of some share of it. Thank you.

Tom Leighton
Co-Founder, CEO & Director at Akamai Technologies

Yeah, great questions. And we are making really good progress with Linode Kubernetes. And really it's about scale and we've talked about that build-out will be up to a couple of dozen core locations by the end-of-the year, we have a more capacity than we had before object storage in 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 market-leading Bot Management Solution, we have 300 customers now using that solution on Akamai connected cloud instead of third-party cloud. And that does take advantage of deep learning technology, so are ready, we have those capabilities to support that on Akamai's cloud. I think overall, what's 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, our bookings with large customers were really important applications.

We have a couple of already using it and then start generating more revenue next year for 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 billion-dollar 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, we're in particular applications where performance matters. So the application is being used in some way by end-users are business partners, you maybe you want to have that application running closer. So, it has better performance, we're 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 media, gaming and commerce. So that's really what we're targeting, which is a pretty reasonable subset of the $200 billion.

Now within that subset if you're an enterprise that uses a lot of the third-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. Unfortunately, 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. But at Akamai pretty much all of our applications are in the process of migrating from third-party cloud onto our compute platform. And so it does take some effort, but it is eminently doable and we're going to save on Walmart. By doing that, and we're not the biggest company out there. Our big media customers spend while hundreds and hundreds of millions 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.

Rishi Jaluria
Analyst at RBC Capital Markets

Wonderful, really helpful. Thank you so much.

Tom Leighton
Co-Founder, CEO & Director at Akamai Technologies

Thank you. Next question will be from Rudy Kessinger, DA Davidson. Please go ahead.

Rudy Kessinger
Analyst at DA Davidson

Hey, great thanks for taking the questions. Just I know a lot of questions have been asked on security. Can you share the Guardicore growth rate, what kind of growth are you seeing in that business.

Ed McGowan
Chief Financial Officer at Akamai Technologies

Hey, they [indecipherable] about 60% Year-over-Year. And as Tom talked about, we should be at a $100 million, run-rate very-very soon I would be surprised if we don't get there next quarter.

Rudy Kessinger
Analyst at DA Davidson

Great. That is very impressive. As it relates to compute 17% Year-over-Year constant-currency that is fully organic figure this quarter you've lapped that acquisition the guide implies. Depending how you monitor the amount of the sequential is maybe one to two points of acceleration by year end. I guess just how is the pipeline building. You for Linode as you get some of these sites and when should we expect to see more material growth acceleration just what are your growth aspirations there in terms of maybe 2024.

Tom Leighton
Co-Founder, CEO & Director at Akamai Technologies

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 million a year when we bought it, growing in the teens and it's so 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, and so we do have revenue there now, but it is small millions of dollars. And so but that's where the growth comes from and that's what we're trying to get 1%, $200 billion market. So over a period of time to go from a few million to a couple of billion. We don't have a timeframe on that yet, but we are trying to do that as quickly as we can. But that's where the real growth comes from and it starts from a very small portion of our roughly half a billion-dollar compute business today.

Rudy Kessinger
Analyst at DA Davidson

That's helpful. Thank you.

Tom Barth
Investor Relations at Akamai Technologies

Operator, this is Tom Barth. We have time for one more question.

Operator

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

Amit Daryanani
Analyst at Evercore ISI

Yeah, thanks for taking my question. I guess maybe start on the security side, can you just cut your body, you see the acceleration that's happening there is that skewing more from new customers or expansion with existing customers. Just any flavor there would be helpful. And then was there any licensing revenue that help you with Guardicore.

Ed McGowan
Chief Financial Officer at Akamai Technologies

Hey, Amit, This is Ed. As I talked about earlier that there was really no material license revenue in the quarter. And as I said I'd call it anything of that sort, 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 about a pretty good expansion of 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 like I had mentioned earlier, we have over 700 customers now buying for products. So the majority of the revenue growth is coming from the installed-base by more, but I'm very encouraged with the new logo acquisition, especially with what we're seeing in Guardicore. 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, which is great, but very encouraging on the new logo acquisition as well.

Amit Daryanani
Analyst at Evercore ISI

Got it, and if. I could 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 versus H1 from a dollar basis, but operating margins don't go up. So maybe I am missing this but what's the offset, is it the merit increases, or is there other offer to consider in terms of why aren't we seeing better operating leverage in the back-half of the year.

Tom Leighton
Co-Founder, CEO & Director at Akamai Technologies

Yes, so two things there, one is the merit increases, you called out, but also the depreciation picked-up quite a bit because of the capex in the first-half of the year. So those are really the two main drivers but I'm pretty pleased with what we've been able to accomplish with accomplish on the margin front, making huge acquisition investments in the business and acquisition, the big investments we're making and compute to be able to deliver 25% operating margin for the year. It's pretty impressive. And then to deliver. Be able to raise EPS guidance very-very pleased with the team. I think everybody especially has done a great job. So happy with that and. Pleased to see us able to maintain the 29% margins, despite the fact that there is increased depreciation on merit increases.

Amit Daryanani
Analyst at Evercore ISI

Perfect, that's helpful. Thank you.

Tom Barth
Investor Relations at Akamai Technologies

Thank you Amit and thank you everyone. In closing, we will be presenting at several investor conferences and road shows throughout the rest of the third-quarter. Details of these can be found on the Investor Relations section at akamai.com. Thank you for joining us and all of us here at Akamai wish you a wonderful rest of the summer. Have a nice evening.

Operator

[Operator Closing Remarks]

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