Akamai Technologies, Inc. (AKAM) on Q3 2021 Results - Earnings Call Transcript

Operator: Good day, ladies and gentlemen, and welcome to Akamai Technologies, Inc. third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference, . As a reminder, this conference call is being recorded. I will now like to turn the conference over to Tom Barton, Head of Investor Relations. Thank you. Please go ahead. Tom Barth: Thank you, operator. Good afternoon, everyone. And thank you for joining Akamai's third quarter 2021 earnings conference call. Speaking today will be Tom Leighton, Akamai's Chief Executive Officer, and Ed McGowan, Akamai's Chief Financial Officer. Before we get started, 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 then Involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. These factors include uncertainty stemming from the COVID-19 pandemic, the integration of any acquisitions and any impact from unexpected geopolitical developments. Additional information concerning these factors is contained in Akamai's filings with the SCC, including our Annual Report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking statements included in this call will represent the Company's view on November second, 2021, Akamai disclaims any obligation to update these statements to reflect future events or circumstances. 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: Thanks, Tom. And thank you all for joining us today. I'm pleased to report that Akamai delivered excellent financial results in the third quarter, coming in at or above the high end of our guidance ranges for revenue, operating margin, and earnings per share. Q3 revenue was $860 million, up 9% year-over-year, and up 8% in constant-currency. Non-GAAP operating margin in Q3 was 32%, which reflects our continued focus on operational efficiency even as we've continued to invest for future growth. Q3 non-GAAP EPS was a $1.45 per diluted share, up 11% year-over-year. Akamai's strong performance in Q3 was largely driven by our security business, which is now one of our leading cloud security businesses in the world, with an annualized revenue run rate of more than $1.3 billion, up 26% year-over-year, and up 25% in constant currency. Over the last several years, we've grown our security portfolio from point solutions into a comprehensive platform that provides defense in depth to address our customers biggest threats. The unique breadth of our defenses is important to our customers who want more security capabilities from fewer vendors. Our security solutions are highly differentiated and recognized as best-in-class by our customers, who see us as a leading provider of services to protect our most critical assets, including enterprise websites, applications, data, and access. We routinely earned top rankings in multiple categories for major industry analysts. For example, Akamai disrupted the web apps security market when we launched Kona Site Defender in 2012. Since then we've continued to extend our leadership position and the web app firewall sector with Gartner recently naming Akamai as a market leader for the 5th year in a row. Akamai has been the market leader in DDoS protection since we acquired Prolexic in 2014, Forester recently said, ''Large enterprise clients that want an experienced, trusted vendor to make their DDoS problem go away, should look to Akamai. '' As new threat vectors have emerged, we've extended our platform to defend against them. For example, we created the first comprehensive bot management solution to protect our customers from sophisticated bot operators would try to steal content, disrupt operations are penetrate user accounts. According to Forester, Akamai is best for companies wanting to bots off the edge. Bloomberg Business Week even quoted a hacker calling Akamai's bot defense the hardest to crack. More recently, we released Akamai page integrity manager to identify malicious code of third-party scripts and websites that's designed to steal end-user data. Page integrity manager helps to address a major threat that's been costing businesses hundreds of millions of dollars and fines, as well as serious reputation damage. We plan to extend our web app protections further in the coming months with the release of Account Protector and Audience Hijacking Prevention. Account Protector is designed to reduce fraud by making sure that the entity logging into an account is the crew owner of that account. Audience Hijacking Prevention can help businesses protects sales by fording malware that diverts a customer just before the completion of a transaction. Since founding, Akamai over 20 years ago, our vision has always been to help our customers solve their toughest Internet challenges, and today that includes stopping ransomware. Ransomware is a huge problem for enterprises around the world, with a new attack striking every 11 seconds. The damage resulting from ransomware is expected to amount over $20 billion this year alone. Garda core (ph.) is critical to stopping the spread of ransomware, and that's a key reason why we acquired the Company. Akamai is already selling solutions such as Enterprise Application Access that help prevent attackers from gaining access to enterprise infrastructure and applications. But to be secure in today's world, you also need a second layer of defense to lock the spread of malware that has gained a foothold in the enterprise. And that's where Garda core comes in. Garda core helps detect when a breach occurred by identifying anomalous data flows within enterprise networks. Garda core also helps prevent the malware from spreading through a capability known as micro-segmentation. Garda core's, micro-segmentation solution limits access within the enterprise to only those applications that are authorized to communicate with one another. Denying communication as the default greatly limits the spread of malware and protects the flow of enterprise data across the network. And that's the key to stopping ransomware. We believe Guard core 's best-in-class micro-segmentation solution is the perfect addition to our Zero Trust portfolio, enabling Akamai to offer customers a comprehensive solution to stop the damage being caused by ransomware and malware. During the call we held on September 29, we spoke about the parallels between our acquisition of Guard core with our acquisition of Prolexic in 2014. Just as the acquisition of Prolexic propelled us to a leadership position in helping to stop DDoS attacks. We believe that the acquisition of Guard core will establish Akamai as a leader in helping to stop the damage caused by ransomware, as well as other forms of malware. Customers see, Akamai as a strategic partner in security, not only because of the strength and breadth of our solutions, but also because of the depth of our security expertise in threat intelligence and the scale of our platform. The same platform that underpins our world-leading CDN. Akamai CDN handles over 5 trillion requests every day. In addition, we resolve more than 3 trillion DNS queries each day. This gives us unmatched real-time insight into the world's Internet traffic, which we analyzed to provide best-in-class threat intelligence, protection, and support. We also have one of the industry's largest and most experienced teams of security professionals with thousands of engineers and consultants working on security for our customers. Our security solutions are tightly integrated into the world's largest and most distributed Edge platform. And that provides unmatched global scale to defend customers against not only the largest DDoS attacks, but also against the best spot armies that are waging attacks from the edge. The integration of our security solutions with our CDN solutions also provides benefits to our customers in terms of improved performance and ease of use. With Akamai, security and performance go hand in hand. You can buy them together as a single for tech and perform package, which makes purchasing and integration easy for the customer. And when you buy security from Akamai, your performance is automatically improved. That's because we apply the security layer as we're delivering the content from the world's true Edge platform. This means that the processing needed for security stays close to the end-user, which makes for much better performance. Akamai's unique combination of security and delivery provides a powerful offering in the market, which is one reason by we are the market leaders in both security CDN. Our CDN business also generates substantial cash that we can use to invest in future growth. As we've recently done with the Guard core acquisition. For example, our CDN business generated revenue of $526 million in Q3, and contributed substantially to our overall free cash flow of $273 million. Enough to cover almost half of what we spent to acquire Guard core. We believe that having the world's largest and most distributed Edge network also provides a great foundation for the growth of our Edge applications business. As 5G rolls out, as IOT applications proliferate, and as more data is created and processed at the edge. A kamai's Edge compute platform is very well-suited to support the high throughput and low latency applications that are not well served by traditional cloud providers today. From delivery and performance to compute and security, the world's leading brands want our help. That's because the internet is getting more complicated with more traffic, higher user expectations, and more cyber threats every day. And the world's leading enterprises know that, Akamai can help keep their digital experiences close to their end-users and the threats further away. They know that what we do makes life better for billions of people, billions of times a day, and that nobody powers and protects life online like Akamai. I will now turn the call over to Ed to provide further details on our Q3 results and our outlook for the rest of the year. Ed. Ed Mc Gowan: Thank you, Tom. As Tom just outlined, Akamai delivered another excellent quarter. Q3 revenue was $860 million, up 9% year-over-year, or 8% in constant currency. Revenue was again driven by very strong results in our security business. Revenue from our security technology group was $335 million, up 26% year-over-year, or 25% in constant currency. Security now accounts for 39% of our total revenue. Revenue from our Edge technology group was $526 million flat year-over-year and down 1% in constant currency. Foreign exchange fluctuations heading negative impact on revenue of $5 million on a sequential basis in positive $4 million on a year-over-year basis. International revenue was $412 million up 16% year-over-year, or 15% in constant currency. Sales in our international markets represented 48% of total revenue in Q3, up 3 points from Q3, 2020, and up 1 point from Q2 levels. Finally, revenue from our U.S. market was $449 million up 3% year-over-year. Moving now to costs, cash gross margin was 76% in line with our expectations. GAAP gross margin, which includes both depreciation and stock-based compensation, was 63% non-GAAP cash operating expenses were $261 Million. Now moving on to profitability, adjusted EBITDA was $396 million. Our adjusted EBITDA margin was 46%, non-GAAP operating income was $277 million and Non-GAAP operating margin was 32%. Capital expenditures in Q3, excluding equity compensation and capitalized interest expense were $129 million. This was below our guidance range, primarily due to continued progress on network capex efficiency projects. GAAP Net Income for the third quarter was $179 million or $1.08 of earnings per diluted share. Non-GAAP net income was $239 million or $1.45 of earnings per diluted share, up 11% year-over-year, up 10% in constant currency, and $0.04 above the high-end of our guidance range. Taxes included in our non-GAAP earnings were $39 million based on a Q3 effective tax rate of approximately 14%. Moving now to cash in our use of capital. As of September 30th, our cash equivalents and marketable securities totaled approximately $2.8 billion after accounting for the $2.3 billion of combined principal amounts of our 2 convertible notes. Net cash was approximately $452 million as of September 30th. During the third quarter, we spent approximately $97 million to repurchase shares, buying back approximately 800 thousand shares. We ended Q3 with approximately $321 million remaining on our current repurchase authorization, which runs through the end of this year. As noted in today's press release, our Board authorized a new buyback program of up to $1.8 billion beginning January 1st, 2022, and running through the end of 2024. As we've previously discussed, our primary intention is to buy back shares to offset dilution from employee equity programs over time. However, our repurchase authorizations also allow us to opportunistically deploy capital if or when we believe there is a valuation disconnect in the market based on business or market conditions. Combining the two authorizations, we currently have more than $2 billion available for share repurchases through the end of 2024. We believe our strong Balance Sheet and significant free cash flow generation, which totaled $273 million or 32% of total revenue in Q3 also provides us with significant financial flexibility to pursue a balanced capital deployment strategy. As such, we plan to continue to invest organically in R&D and product development, expand our capabilities through M&A as you saw with our most recent acquisition of Guard core and return capital to shareholders via share repurchases. Moving onto Q4 guidance, there are two factors to consider as you update your models for the Fourth Quarter. First, we closed the acquisition Guard core on October 20th. Our guidance assumes Guard core will contribute approximately $6 to $7 million of revenue in Q4. It also assumes that Quadcore will be approximately $0.05 dilutive to our total non-GAAP earnings per share in Q4. Second, as in prior years, seasonality plays a large role in determining our Fourth Quarter financial performance. We typically see higher-than-normal traffic for our large media customers and from seasonal online retail activity for our e-commerce customers, which are both difficult to predict. With that in mind, we're projecting Q4 revenue in the range of $883 million to $908 million or up 4% to 7% as reported or 5% to 8% in constant currency over Q4 2020 Foreign exchange fluctuations are expected to have a negative $3 million impact on Q4 revenue compared to Q3 levels, and a negative $6 million impact year-over-year. At these revenue levels, we expect cash gross margins of approximately 76%. Q4 non-GAAP operating expenses are projected to be $290 to $297 million. We anticipate Q4 EBITDA margins of approximately 43% to 44%. We expect non-GAAP depreciation expense to be between $120 to $121 million. factoring in this guidance, we expect non-GAAP operating margin of approximately 30% for Q4. Moving on to capex, we expect to spend approximately $128 to $133 million excluding equity compensation in the fourth quarter. This represents less than 15% of anticipated total revenue. And with the overall revenue and spend configuration I just outlined, we expect Q4 non-GAAP EPS in a range of $1.37 to $1.44. The CPS guidance assumes taxes of $38 to $39 million based on an estimated quarterly non-GAAP tax rate of approximately 14.5%. That also reflects a fully diluted share count of approximately 164 million shares. Looking ahead to the full year, we are raising our guidance. We now expect revenue of $3.439 billion to $3.464 billion, which is up 8% year-over-year as reported, or up 7% in constant currency. We now expect security revenue growth to be in the mid-20% range for the full year 2021. We are estimating non-GAAP operating margin of approximately 31% and non-GAAP earnings per diluted share of $5.63 to $5.69. And this non-GAAP earnings guidance is based on a non-GAAP effective tax rate of approximately 14.5%. They fully diluted share count of approximately 164 million shares. Finally, full-year CapEx is anticipated to be approximately 16% of revenue, consistent with our prior guidance. We are very pleased to deliver another quarter of excellent financial results, and we look forward to closing out a strong 2021. Thank you. Tom and I will be happy to take your questions, Operator. Operator: Thank you. . Your first question comes from the line of James Fish from Piper Sandler. Your line is now open. James Fish: Hey, guys, nice quarter. Thanks for the questions. A couple of your competitors are starting to get a little bit louder on the security side with getting a foot in the door with government and 0 trust architectures so, I guess my question is, how was the federal vertical for you this quarter, and what will it take for Akamai to become more a part of those conversations, especially when you guys already do service some government stuff? Tom Leighton: Our government business is very strong, particularly in security. We defend most -- all the major agencies in the government, pretty much every branch of the military. So, I would say we have a very strong business there. James Fish: All right. And then on Guard core, how long until the 100-plus reps are likely selling the entire security portfolio? And really also any update to the go-to-market onto security standalone sales with channel partners, as well as what you guys are doing to target developers better with Edge applications. Thanks, guys. Ed Mc Gowan: Yeah, hey Jim, it's Ed. I'll take the first one and then maybe Tom can follow up on the developers. But in terms of the sales force, we're going to maintain the sales force that we acquired from Guard core. This is pretty typical what we do with our acquisitions. They will be primarily in an overlay function. It's a little bit different of a sale. Very similar to some of our enterprise sales and we just we'll build out that team a bit. Probably takes maybe a year or so as the rep start to introduce Guard core into their accounts that they begin to get comfortable with selling Guard core. That's been our typical model, so I think we've got a pretty good -- acquired a great team from Guard core and we just combine that with our existing enterprise sales team. And then as far as channels go, we did pick up a few channel partners as a result of Guard core and we're still actively out recruiting more and more channel partners. Tom Leighton: And in terms of the developer focused question, we've done a lot of work to make our platform be very accessible to developers. A lot of efforts there and strong progress. And in fact, on a daily basis, we're now spinning up about 5 billion applications on Edge workers and that's every day. So strong adoption of our capabilities in terms of Edge computing. Tom Barth: Operator, next question. Operator: Yes, thank you. Next question comes the line of Sterling Auty from J.P. Morgan. Your line is now open. Sterling Auty: Yes. Thanks. Hi, guys. You gave us the security growth on a constant currency. But can you give us a sense of what it was on an organic constant currency basis. And Tom, you had highlighted a number of different areas and strengthened DDoS, etc. What was the tip of the sphere that drove the growth, this quarter in particular? Ed Mc Gowan: So, the organic security growth in constant currency should be about 22%, so odds will be added about 3 points of growth. Tom you want to take the other part? Tom Leighton: Yeah. And the strength was really across all of our product categories. All of them growing at close to 20% or more. Infrastructure doing well, app and API protection. Fraud, well into close to 30% growth, and access, the best of all. And of course, that will get a lot stronger now, with Guard core and the ransomware solution. So, it's across-the-board in security. Sterling Auty: That's great. And maybe one really quick one. Given the contribution you're expecting from Guard core in Q4, does that mean that the run rate in terms of what the contribution in '22 might actually be better than what you thought at the time of the acquisition? Ed Mc Gowan: Yeah. Hey, Sterling, 2 points on that, so yes, I think we should see better contribution from Guard core and also, we've been off to a pretty good start here in the first couple of weeks since we closed the acquisition rate, they finished very strong. I was very impressed to see several multimillion-dollar deals, in several different verticals across the different GOs. We saw a couple in the U.S., a couple in EMEA and APJ, we saw deals and transportation which isn't really a huge vertical for Akamai as well as other verticals were strong in like insurance and finance. So off to a pretty good start, pretty optimistic so far, and I do think they'll contribute a bit more next year. We'll give you a full guidance on our next call for next year, but so far off to a pretty good start. Sterling Auty: Excellent. Thank you. Operator: Your next question comes from the line of Colby Synesael from Cowen and Company. Your line is now open. Michael Elias: Hi, this is Michael on for Colby. 2 questions if I may. First, as you think about the incremental security offerings that could make sense to add via M&A moving forward, what comes to mind? And then the second, what are you seeing from the customer verticals that have been more heavily impacted by the pandemic as we go into the holiday season? Thank you. Tom Leighton: Yes. We continue to look and invest in new capabilities and security, both organically and through M&A. As we talked about, tape integrity manager released in the last year, very exciting technology. Going forward we have account protector, there's a lot of customer interest there. And then early next year, audience hijacking protection. I think that's -- a lot of customers have asked for that and that stops malware plug-ins from stealing or hijacking their audience right before the point-of-sale or the transaction is executed. Obviously, in the Access segment, I think that's a huge area of future growth. Really excited about the Guard core acquisition that combines very nicely with our 0 trust solutions that combines with enterprise application access to give you the full combination of North Southeast, West will be compelling in the market. So, we're continuing to invest across the board and a portion of the existing solutions that -- we continually work on those to add features, stay ahead of the new attack vectors. So, it's not just like you building a web app firewall, you're constantly adding new capabilities to it to stay ahead of the attackers to keep our customers safe. Ed Mc Gowan: And then on your second question? Yes. Sure. On the second question was around the verticals that were impacted and if you recall we out commerce and travel. I would say in travel we're starting to see a bit of improvement there, we're starting to see traffic pick up a little bit. As a reminder, that's above 4% of our total revenue, so it doesn't have a huge impact in terms of what we're seeing as far as an improvement, but it's good to see that that's starting to pick up a little bit. Commerce, I would say is pretty mixed. We're seeing good strength in security, still seeing some pressure, especially in the U.S. Commerce vertical. That's a much bigger vertical. That's around 15% of total revenue. So, we're not quite out of the woods yet with commerce, again, especially in the U.S. That's the area that we're probably seeing the most weakness, and that's still persisting from the pandemic. Michael Elias: Thank you. Operator: The next question comes from the line of Keith Weiss from Morgan Stanley. Your line is now open. Keith Weiss: Just wanted to thank you guys for taking the question. Two areas that I was hoping to dig into. Could you talk to the disparity in growth between the U.S. and international? I thought it had more to do historically with platform customers in the U.S. under performing, but now the platform customers are actually doing really well and growing pretty well. So, I on why the U.S. is still under performing international regions. And then, a second question on the operating margin side of the equation, any guideline you could give us and how we should think about calendar year 22. Are there kind of a lot of companies are talking to us? Reiteration, if you will, or maybe more spending on travel and people come back to the office and marketing events, ramping back up. On the flip side of the equation, you’ve been kind of under-spending on CapEx versus the original target, and that's coming down as a percentage of revenue. So perhaps there's some gross margin benefit that you could see in calendar '22. It's a good offset that. So, any kind of sense you can give us on how to start thinking about calendar '22 margins? Ed Mc Gowan: Sure. Well, I'll start with the second part on margin. So yes, you're correct. Next year, we'll be expecting that we should start traveling again, so it'll be a little bit more OpEx there. You're right to call it CapEx as I think the team is doing a fantastic job on a lot of CapEx efficiency projects that we've got going with both software and hardware. Being able to drive that down you would expect that CapEx to be back to those normal levels that we've seen, maybe even a touch lower. So that impacts your depreciation, but it takes a while for that to flow through the model. I'm sure you won't get a ton of benefit of that right away, but certainly down the road you will. I have given some prior guidance when we had the Guardicore call about operating in the 29% to 30% range for next year. And then hopefully getting back, or we will get back to over 30% in '23. Obviously, we'll update you. I mentioned earlier to Sterling that Guardicore contribution probably a bit better than what we said earlier on. I don't have a number to call out yet, so that'll obviously help out the operating margins a touch there. And then you asked about U.S. and international and the disparity between the two. I sort of flip it around and say that it's not so much the U.S. being weak, but really just strong international growth. U.S. is low single-digit. I mentioned on the previous question that's where we're having the most trouble with our U.S. commerce vertical, which are pretty significant vertical in the U.S. and then we also have a lot of large media customers that are in the U.S. and that's where you tend to see more of the splitting of traffic and pricing pressure. So those things combined sort of put a little bit of pressure in terms of the growth rate in the U.S. but, really the strength outside the U.S. is something that I think is a significant advantage for us. We made a lot of investments both in the network and the sales teams, etc. and we've been able to drive pretty significant growth. Very happy with what I'm seeing in terms of participation, or as strong growth in countries like Korea, Spain, Brazil, Mexico, Hong Kong, Singapore, Taiwan, I mean across-the-board, we're seeing very strong growth. Latin America, in particular has been very strong. We made an acquisition there a couple of years ago, start to get some good scale out of that. A little bit of a mixed picture in the U.S. with some challenges in commerce. But really, I have looked at it as just very strong international presence and growth. Keith Weiss: Got it. I mean, should the take away be that like -- if we just looked at the security side of the equation. The growth in U.S. and international be more even on the security side of equation than it would on the Edge Tech side? Ed Mc Gowan: Yes, I think that's a good way to look at the key. If I look at in the web performance, especially in commerce, that's where the primary challenge is right now. But if I look at security, obviously the U.S. was the first to adopt. We're still seeing very, very strong growth, and as matter of fact, 67% of our customers are buying 1 security product, 34% are buying 2. If you put that into perspective in a year, we've gone up 6 points in terms of security adoption for the customer base. That's adding over 600 customers. So, we're seeing good broad-based strength in security, both here in the U.S. and also internationally. But I think you're thinking about it in the right way in terms of having strong security growth in both regions. Keith Weiss: Got it. Excellent. That's very helpful. Thank you, guys. Operator: Your next question comes from the line of James Breen from William Blair. Your line is now open. James Breen: Thanks for taking the question. Just on the cash flow side, it seemed like strictly strong quarter given some of the improvements you've had, the network and just expense control in general. How do we -- how should we think about that cash flow going forward? Is this a particular strong quarter? And it can tend, tend to drift down over time or is it going to be lumpy or are we at a sort of a new run rate in terms of cash generation? Thanks. Ed Mc Gowan: Yes, great question, Jim. Q1 tend be the lower quarter from a cash flow perspective just because of working capitals, when you say your bonus is off. But I think if you peg your CapEx to that 15% range, you're looking at pretty significant improvements. I think if you use that as your guide, working off the operating margins we gave you and think about Q1 as probably being a low point as you're modeling out your free cash flow. But yeah, very, very strong free cash flow generation this quarter for sure. James Breen: Great, thanks. And then just one other one. As you look at the revenue growth, excluding the platform customers, the platform customers were down about 3 million sequentially. Is there a range now where you feel like in the sort of low 60's range where that revenue is going to hover for those companies given the amount of growth you've seen in the last 12 to 18 months from that? Tom Leighton: Yeah, I think that's probably not a bad place to peg it Jim. Q4 always tends to be a bit of a stronger quarter and that verticals, a little bit of seasonality there. You always have renewals. So, whenever you have a renewal, you'll see it pull back a couple of million dollars depending on the timing and that sort of stuff. But I think it's been a low 60's, it's probably a decent place to peg it. James Breen: Terrific. Thank you. Operator: Your next question comes from the line of Frank Louthan from Raymond James. Your line is now open. Frank Louthan: Yeah. Great. Just wanted to talk a little bit about the buybacks you said you'd opportunistically use that take advantage of the market valuation. What levels seem appropriate here. It's kind of the first question and I've got a follow-up. Tom Leighton: Primarily, we've used the equity buyback to offset the equity dilution from employee grants. And from time-to-time, we do buy back additional shares and we've seen that over the years. And we use that approach such that as the stock price declines, we will buy back more. Ed Mc Gowan: And I do feel that in this market, Akamai has a very strong presence, both in CDN and security. Our security business growing at 25% on a very big number. And I do feel that Akamai is worth lower in this market. And so, you may see us buyback additional shares, especially depending on how the stock price fluctuates. Frank Louthan: Alright, great. And then, you've done a good job adding together some M&A for the secure -- on the security side, any other tools do you think you need to make yourself more competitive in the market? Do you feel like you've got kind of the right mix here to -- for that product set? Tom Leighton: Yeah, we're always looking at new capabilities as I mentioned. And of course, the attackers are always innovating with new forms of attack. But I am very excited about the Guardicore acquisition and I think it really does fill out and complete our access story, our ability to stop ransomware and malware. As I mentioned, we already have capabilities that prevent the malware from getting in. Enterprise Application Access in particular governs what employees can touch and access and even then, it has to come through Akamai's application firewall, so we're making sure that malware doesn't come in. We also have multi-factor authentication which make sure that the employee is who they say they are. And now we're -- Guardicore, we stopped the spread of the malware if it does get in. And there are a lot of ways the into the enterprise today. It is really -- despite all the defenses you put in place, somebody for example, in the capital pipeline case, a password or potential gets out there. Now we still have ways of catching that somebody is using a stolen credential, but malware does get in still, and so the real key there is stopping the spread, and that's what Guardicore does. And so now I think it's really nice because you stopped the ransomware with Guardicore, but we've got the whole package in whole solution now. And I think that's really unique in the marketplace and very exciting. Frank Louthan: Alright, great. Thank you very much. Operator: Your next question comes from the line of Amit Daryanani from Evercore. Your line is now open. Amit Daryanani: Thanks a lot. And good evening, everyone. I have two questions as well up near the first one I was hoping you could talk about. As I look at the midpoint of the guide for December of is there a way to think about how are you thinking about seasonality in Edge and security? In the bottom, are you going to get through the security numbers may imply a much more severe deceleration than what people are modeling. So, I just love to understand how are you assuming those two segments stacking up in the December quarter. Ed Mc Gowan: Yeah. Sure, I'll take that. We'll start with the Edge. Obviously, Edge, is quite a busy quarter in Q4. As I talked about, seasonality from e-commerce, I think it's obviously a tougher quarter to call here with some supply chain disruptions and things like that. Does that drive more or less Internet traffic, and what does that holiday season look like? Typically, a very strong media quarter where you see new devices, and games coming online -- I'm sorry. Devices, consoles, etc. coming online. And then you also have a lot of sporting events in Q4, back-to-school, you've got lots of game releases, so it can be a pretty robust season for us and obviously challenging to call I looked at the events calendar, it's pretty full, so provided we can see some good traffic, you can see good upside we delivered that in the last couple of years. In terms of security, it’s not stopped as seasonal. Certainly, there are some bundles we have where there is -- traffic can impact that a bit but, I think to take our security guidance, we've been pretty conservative in the way that we've approached security, and we've been over-delivering every quarter. I think, with that obviously Guardicore is off to a good start so I wouldn't imply that as a seasonal down tick or anything like that in our security growth. Amit Daryanani: Got it. And then if I could follow-up the CapEx number for September quarter and really for December as well. I mean, capex as a percent of sales, I think will be 14, 15% for the back half of the year, versus 19%, 20% of the last several quarters prior to that up. I'm curious. Is capex coming down because you feel like there's enough capacity you have out there and you can see that lower or is it more that you just can't get your hands on the supply chain and the products and need to drive capex. I'm trying to understand what's taking capex lower, and then how do I think about this as we go into 2022? Ed Mc Gowan: Yes. I would say it's good execution. And if anything, with the supply chain, we're not seeing supply chain disruptions in terms of the fact that we actually, if you remember a few calls ago, we talked about in the pandemic, we took capex up and we were pretty cautious in terms of making sure that we had plenty of extra capacity available for -- if you see the pandemic continue and see traffic growth, etc. So, we learned in, we built up our inventory a bit, we fund a lot of small equipment so that we're not concerned right now anyway with the supply chain. So, I'd say that's part of what's driving it as we built out ahead of demand, we're pretty smart in the way we did that. But also, I mentioned there's a number of CapEx efficiencies that Adam and his team are working on. Not only just software, but network design, deployment optimization, looking at different hardware improvements, and just to anyway to drive a good focus on lowering our need for capex and also keep in mind we have great relationships with the networks and ISP. So, in terms of doing optimization inside of their networks, are able to do that as well. So, I'd say it's really a great execution on the team's part, and CapEx has come down pretty significantly, you see that in our free cash flow results. Amit Daryanani: Does that sustain next year? This mid-teens CapEx as a percent of sales, is that the right way to model this out? Ed Mc Gowan: Yes. Right now you see another pandemic or some major events and we see some crazy unexpected traffic growth, yeah, I think it's a sustainable number, certainly going into next year. I don't want to get into giving guidance, but I think that I talked about in the past that we'd be getting back to this level and we're actually operating a little bit better than that. Amit Daryanani: Perfect. Thank you. Operator: Your next question comes from the line of Rishi Jaluria from RBC. Your line is now open. Rishi Jaluria: Hey, guys. Thanks so much for taking my questions. And nice to see security growth hold up and actually accelerate with this quarter. 2 questions. First, I wanted to go a little bit deeper on the supply chain issues. I appreciate you've obviously over invested capacity with the OTT launches and the pandemic last year. You seem pretty well insulated from the rising cost, but at what point that this continues dragging out, does it begin to become a worry, and you might have to overspend in order to keep capacity and not have to turn away business? And maybe related to that. As we think about the environment heading into Q4, how do we expect that to shake out, especially given Q4 is such a -- traditionally such a strong commerce season? A lot of companies are telling us they're not going to able to meet demand. especially when it comes to electronic goods. So, is that a worry that you have, and maybe how are you thinking about embedding that in your guidance? Thank you. Ed Mc Gowan: Yes. So, I'll take the second part first. You know, that's why we give a pretty wide range. I just mentioned on the last question that, it's hard to predict what the commerce season looks like. And obviously, when you are in the business of delivering Internet traffic, one model could suggest that, well, shelves are not stocked. People are doing more surfing to find things. Another model would suggest that there's not as much shopping and people are giving cash and gift cards. Hard to tell, but we did put out a pretty big range there. Also keep in mind that a lot of our Commerce customers, about half of our Commerce customers have taken, we call our 0 overage, so you've kind of flattened out that first thing. So, the bursting for commerce is not as big of an impact if we're still has an impact. In terms of the device cycle, that's an interesting one. We do expect and we have seen over the last several years, especially in the last couple of weeks of the year, as new devices come online as a lot of firmware updates and things like that, I still expect to see that, but there's other things that are not as dependent on that, for example, gaming releases, new video content that comes out if you don't have a new machine, you're watching it on your old machine. So, I still think that we'll have a pretty big immediate quarter for sure. That's why I've given a pretty wide range to try to take those things into consideration. And then on your supply chain question you had asked about, when does this become a problem? That's funny. I asked the same questions to my team as we go through our capex build-out. We've done a nice job of building out several quarters’ worth of inventory here, and we've diversified our supply chain. And the team's done a good job of ensuring that we're not seeing any significant increase in price or anything like that. A little bit on the freight side, but it's not really material and I think that should start to work itself out. But if we do see another massive growth and traffic, maybe we should start to run into some problems, but so far so good. And like I said, the team did a really good job preparing, not expecting this type of a disruption in the supply chain, but expecting that the result from the pandemic would last a lot longer. So, we did some scenario planning, so we're in pretty good shape at the moment. Rishi Jaluria: That's really helpful. Thank you so much. Operator: Your next question comes from the line of Alex Henderson from Needham. Your line is now open. Alex Henderson: Thanks. Looking at the guidance and the commentary, it does sound like your security businesses exp - if I add in some of the inorganic, that would imply even lower growth. Is it reasonable to think that the security business can sustain a 20% growth rate organically in '22 or is that too aggressive of an expectation for a billion three business? Ed Mc Gowan: Yes, I think one thing to keep in mind, Alex, is you've got the anniversary of Southern Europe, your growth rate lapse in Q4 for and then we got in Guardicore. We've said in the -- when we did our analyst data that we expected to be able to grow 20% 3 to 5 years with acquisitions being part of the strategy. And you can see that the Guardicore acquisition with the prior guidance, and a couple of points of growth. We obviously did much better this year than we expected going into the year. Security has over performed every single quarter. We still feel pretty comfortable with our 20% growth rate as we talked about, as a matter of fact coming out of this year we're doing a bit better than that. So, I think, if you're taking the super all end of the range, maybe you could come up with that formula, but we're expecting pretty solid growth here over the security in Q4. Tom Leighton: Yes. Our strategy in security is to combine organic development, we have intelligence, and timely acquisitions. And we'll continue to do that. And of course, when you buy a Company after a year, its growth becomes organic and it's no longer counted as an acquisition growth per se, and I think we've had a really great track record of doing that in security, going back all the way to Prolexic acquisition in 2014. And as I mentioned, I think Guardicore is fundamentally like that in terms of really transforming our enterprise security business, just like Prolexic transformed our DDoS business, which of course today is very, very successful. We're the market leader by far and our goal is to do that on the Enterprise Security side to things like stopping ransomware and stopping malware. And as we -- as Ed said, as we continue to want to grow our security business over the longer term at 20+% that we'll include acquisitions, and I think acquisitions are a good thing. It gives you a jump start on technology, an important area. Guardicore has been working for a long time to develop their micro-segmentation approach. I believe it is market getting what they do. They're the best folks out there, and now we have the benefit of all of the years of effort that they put into that at a perfect time. Because a lot of companies are rightly worried about stopping ransomware and now Akamai's in a position to help them do that. And of course, it sits with a lot of our organic development on technology around EAA. It's an ideal combination. So, we'll continue to do both and in working hard to continue to our security growth that Alex Henderson: Okay. I get it. Thanks. That's helpful. Can you talk a little bit about the pricing environment, whether there's been any change in competitive landscape, have you seen more competition or less competition? How should we think about the environment? I think we're also seeing enterprise is spending more this year. Do you think that that sustains into 2022 given the first half of spike in an attack caused a flurry of spending intentions? Ed Mc Gowan: I think the competitive environment is very similar to what it's been in the past. It's -- it is a very competitive environment. Across-the-board from Cloud giants who are also our largest customers, all the way down to startups. Obviously, CDN is a mature environment. competitively, and so I don't see there's any fundamental change there. Security is really a great environment for us. We're the market leader by far in the core areas of defending and protecting websites, applications, and APIs, The leader by far and DDoS prevention. And those are areas that have a lot of attacks taking place. And now, the new category for us where we're going to encounter new competition because we're moving into that space in a big way would be Tom Leighton: enterprise security. We already have a very strong access solution there. And now we have what we believe is the best solution to stop ransomware for with micro-segmentation. And by adding that to Akamai, we now have a new set of competitors there, because we're entering their space and we think there's a lot of potential gain for Akamai there, and ability to help major enterprises. Alex Henderson: Great. Thank you very much. Operator: Your last question comes from the line of Brandon Nispel from KeyBanc Capital Markets. Your line is now open. Brandon Nispel: Awesome. Thank you for taking the question. Could you unpack the growth in the Edge Technology Group, please? What was the growth in the quarter for Edge applications, and what does that imply for the growth in the Edge delivery business? And then how do you expect these two segments within that larger group to trend exiting the year? Thanks. Ed Mc Gowan: So, Brian, we're not going to breakout Edge apps every quarter. We talked about it last time growing at over 30%, and we think that business can continue to sustain that. I think we'll exit the year on a run rate over $200 million, which is a pretty good healthy growth rate there. And then just the -- again, we're not breaking out the Edge delivery business this quarter, we'll do it at the end of the year. Brandon Nispel: If I could just follow up on that when you back out some of the one-time items that are affecting comparability and the Edge technology business specifically, I think India apps and you're still lapping. Is that business growing? And what's going to cause that business to return to growth next year? Thanks. Ed Mc Gowan: Yes. So, it's obviously a just a tougher compare. This is the First Quarter that we don't have that compare and you saw that we were roughly flat in terms of total Edge Tech. I think as we get into next year, it's an easier compare. I think we're comfortable with our longer-term growth, a low single-digits for the Edge business over time, obviously. With the Edge applications business much faster growing as that becomes more material that could change the growth rate. I think it's just continued execution and traffic growth going into next year on a much easier to compare, I think you'll start to see a bit of growth rate pick up a little bit there. Tom Leighton: Okay, thank you, everyone. In closing we'll be presenting at a number of investor conferences and road shows throughout the rest of the fourth quarter. And details of these can be found in the Investor Relations section of akamai.com. We appreciate you joining us, and all of us here at Akamai wish continued good health to you and yours, and have a great evening. Thank you. Operator: This concludes today's conference call. Thank you for participating and have a wonderful day. You may all disconnect.
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Akamai Technologies Maintains Bullish Outlook on Compute Business Despite Delivery Segment Concerns

Akamai Technologies (NASDAQ:AKAM) received an increased price target of $120, up from $115, with a Buy rating maintained by DA Davidson.

In a recent investor call, Akamai's CFO Ed McGowan and Head of IR Mark Stoutenberg provided additional insights, expressing strong confidence in the company's Compute business, which is expected to see further growth acceleration, particularly as the enterprise segment continues to expand.

While there were conflicting reports about market share shifts in the Delivery segment, overall traffic growth remains weak. However, management expressed optimism about the growth potential of Noname, a key area of focus, and highlighted that operating margin expansion into the low 30% range is a top priority.

Akamai Technologies' Impressive Q2 Results

  • Akamai Technologies (NASDAQ:AKAM) reported a significant uptick in its stock price following impressive second-quarter results.
  • The company announced a 15% increase in security revenue to $498.7 million and a 23% jump in compute revenue to $151.5 million.
  • Akamai has revised its full-year adjusted EPS guidance upwards, reflecting a positive outlook and continued demand for its products.

Akamai Technologies (NASDAQ:AKAM) recently made headlines with its impressive second-quarter results, which not only exceeded expectations but also led to a significant uptick in its stock price. As a leading provider of security and cloud computing products, Akamai's financial performance is closely watched by investors and industry analysts alike. The company's shares surged by 10% to $100.94, positioning it among the top gainers in the S&P 500. This surge was a direct response to the company's announcement of a 15% increase in security revenue, reaching $498.7 million, and a 23% jump in compute revenue to $151.5 million. However, it's important to note that delivery revenue saw a decline of 13% to $329.4 million.

The financial metrics provided by Akamai further underscore the company's strong quarter. With adjusted earnings per share (EPS) at $1.58 and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) at $408.9 million, Akamai not only surpassed analyst expectations but also showcased its robust financial health. The total revenue saw a 5% year-over-year increase to $979.6 million, which is a testament to the company's ability to grow its core business segments effectively.

In light of these strong results, Akamai has confidently revised its full-year adjusted EPS guidance upwards to between $6.34 and $6.47, from the previously forecasted range of $6.20 to $6.40. This adjustment reflects the company's positive outlook and the anticipated continued demand for its security and cloud computing products. CEO Tom Leighton's remarks about the quarter's achievements further highlight the strong customer interest in Akamai's offerings and the successful launch of new cloud services, indicating a strategic direction that aligns with market demands and emerging technology trends.

Despite the positive momentum, it's important to recognize that Akamai's shares have experienced some volatility, with a 15% decline for the year. This suggests that while the company is making significant strides in its operational and financial performance, external factors and market dynamics continue to influence its stock price. Investors and stakeholders will likely keep a close eye on Akamai's future performance, especially in the rapidly evolving sectors of security and cloud computing, where competition is fierce and innovation is key to maintaining a competitive edge.

Akamai Technologies Earns an Upgrade at Baird

Baird analysts upgraded Akamai Technologies (NASDAQ:AKAM) to Outperform from Neutral, raising the price target to $135 from $128. The firm’s upgrade stems from optimism around Akamai's expanding security business, which is anticipated to represent 50% of the company's total revenue in 2024, up from 39% three years earlier.

Highlighting the current valuation's significant discount compared to its historical five- and ten-year averages, the analysts see a compelling risk/reward scenario for investors. Despite the ongoing challenges in the delivery segment, the analysts believe this is already well accounted for in the market's expectations, and see potential upside in the compute segment by 2025 and beyond, which currently holds low investor expectations.

Akamai Technologies Drops 7% Following Q4 Results

Akamai Technologies (NASDAQ:AKAM) experienced a 7% decrease in its share price intra-day today, following the company's release of fourth-quarter results that fell short of revenue expectations and provided a cautious outlook for the first quarter of 2024.

The cloud computing firm reported earnings per share (EPS) of $1.69, beating the consensus predictions of $1.60. However, its revenue for the quarter was $995 million, slightly below the expected $999.09 million.

Within its revenue breakdown, Akamai's security services contributed $471.0 million, an 18% increase year-over-year but just below the forecast of $473.3 million. Its delivery services saw a downturn, earning $389.0 million, a 6.3% drop from the previous year and less than the $392.8 million forecast. On a positive note, compute services reported a 20% year-over-year growth to $135.0 million, exceeding the anticipated $132.7 million.

For the upcoming first quarter of 2024, Akamai anticipates its EPS to range between $1.59 and $1.64, compared to the analyst expectation of $1.59. The company expects revenue to be in the range of $980 million to $1 billion, compared to the analyst projection of $993.4 million.

Akamai Stock Jumps 8% on Solid Beat & Raise

Akamai Technologies (NASDAQ:AKAM) shares jumped more than 8% on Wednesday after the company reported its Q1 earnings results, with EPS of $1.40 coming in better than the Street estimate of $1.32. Revenue was $916 million, beating the Street estimate of $910.51 million, driven by the Delivery upside, mostly offset by another Security miss.

For Q2/23, the company expects EPS in the range of $1.38-$1.42, compared to the Street estimate of $1.35, and revenue in the range of $923-$937 million, compared to the Street estimate of $919 million.

For the full year, the company anticipates EPS of $5.69-$5.84, compared to the Street’s $5.48, and revenue of $3.74-3.785 billion, compared to the Street’s $3.73 billion.

Akamai Technologies Shares Surge 6% on Q3 Beat

Akamai Technologies (NASDAQ:AKAM) shares rose more than 6% yesterday following the company’s reported Q3 results, with EPS of $1.26 coming in better than the Street estimate of $1.22. Revenue was $882 million, compared to the Street estimate of $875.83 million.

Compute and Security accounted for 55% of revenue, but Security has seen a major slowdown in growth, and its Delivery business declined 11% year-over-year. The company noted slowing sales cycles and media and advertising under pressure. Competitors with new platforms are more integrated and bundling (network, security, compute) at major price discounts with integrated functionality.

The company’s Q4 revenue guidance implies 3.3% year-over-year decline at the midpoint, driven by (1) FX headwinds, (2) lengthening sales cycles, (3) seasonality, and (4) contained pressure in CDN from recent price reductions.

Akamai Technologies Reports Q2 Results, Provides Muted Growth Outlook

Akamai Technologies, Inc. (NASDAQ:AKAM) reported its Q2 results, with EPS of $1.35 coming in better than the Street estimate of $1.31. Revenue was $903 million, slightly better than the Street estimate of $899 million.

Delivery performance was weak (down 11% year-over-year) on moderating traffic, recent renewals, and FX headwinds.

Key points from the earnings announcement include (1) delivery traffic is expected to be muted for several quarters and, to reduce costs, Akamai is now turning away some customers with extreme peak traffic, (2) Linode commentary was encouraging, (3) security deceleration suggests continued slowdown in more established products, and (4) guide doesn't assume an improving macro and commentary suggested worsening environment in some markets (e.g., Europe).