Q2 2021 Akamai Technologies Inc Earnings Call
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Good day, and thank you for standing by and welcome to the Q2.2021, Akamai Technologies, Inc. Earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
The question during the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Tom Barth Investor Relations for Akamai technologies. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining the Akamai second quarter 2021 earnings Conference call speaking today will be Tom Leighton Akamai, as Chief Executive Officer, and Ed Mcgowan Akamai.
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 involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. The.
The factors include uncertainty stemming from the COVID-19, pandemic and any impact from unexpected geopolitical developments.
Additional information concerning these factors is contained in the Akamai 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 the company's view on August 3.2021.
<unk> 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 of <unk>.
Detailed reconciliation of GAAP and non-GAAP metrics can be found under the financial portion of the Investor Relations section at Akamai Dotcom and.
And with that let me turn the call over to Tom.
Thanks, Tom and thank you all for joining US today I'm pleased to report that Akamai delivered excellent financial results from the second quarter coming in at or above the high end of our guidance range for both revenue and EPS.
Q2 revenue was $853 million up 7% year over year and up 5% in constant currency.
Non-GAAP operating margin in Q2 was 32%, which reflects our continued focus on operational efficiency, even as we've continued to invest for future growth.
Q2, non-GAAP EPS was a dollar of 42 cents per diluted share up 3% year over year.
Akamai security solutions continued to perform especially well in Q2 generating revenue of $325 million up 25% year over year and up 22% in constant currency.
Cyber attacks generated headlines throughout the first half of the year and our strong growth reflects the criticality of security the organizations in every sector and geography of the world.
Akamai is increasingly recognized as the security leader that offers not just innovative and market leading solutions, but also insights into an enormous amount of internet data and threat intelligence.
Mass of distributed platform at the edge of the Internet, where most attacks originate and the technical expertise of 1 of the industry's largest and most experienced teams of security professionals.
The strong growth of our security portfolio was driven by several product lines, including our market leading solutions for web App firewall Bot management, Ddos prevention and access control.
Our recently released Akamai page integrity manager continued to have rapid adoption in Q2.
Page integrity manager helps businesses protect their users from having credit card data or other personal information stolen by malware embedded in third party content.
It's also designed to prevent user data from being intentionally or inadvertently sent to third parties such as advertisers of social networks, which can result in a violation of privacy laws and steep fines.
As an example, 1 of our customers is a leading furniture retailer pay.
Page integrity manager detected that 1 of their partners of major social media platform was taking their shoppers email addresses in violation of their data privacy rules.
Agent Tegra the manager blocks, such transfers of personal data and immediately notify as our customers so that appropriate business actions can be taken.
In June we entered beta with the related solution that we call audience hijacking protection.
<unk> hijacking protection is designed to detect and block malicious or unwanted activity from client side plug ins browser extension and malware for.
For example, it can quickly identify vulnerable resources detects suspicious behavior and block unwanted ads pop ups affiliate fraud, and other malicious activities that attempt to hijack of retailers audience.
Initial customer interest in this new capability is very strong.
Akamai Bot manager also continued to perform very well in Q2 with revenue growing 40% year over year.
Bot manager now has nearly 800 customers with an annualized revenue run rate of nearly $200 million.
Our customers use bot manager to afford a variety of unwanted activities and of tasks such as price scraping inventory manipulation credential stuffing and account takeover.
Recently, we enhanced our ability to defend against account takeover attempts with the beta launch of Akamai account protector.
It's designed to proactively identify and block human fraudulent activity using advanced machine learning behavioral analytics and reputation heuristics.
Account protector intelligently evaluates every logging request to determine if it's coming from a legitimate user or an of personnel.
Q2 bookings were also strong for our Prolexic service, which helps organizations defend against the surge of ransom Ddos attacks that began in Q3 of last year.
As an example of leading financial analytics company recently adopted prolexic to protect them from this growing threat prior.
Prior to that the company faced operational and technical challenges from needing to manage multiple security technologies from various niche vendors and cloud service providers since.
Since consolidating with Akamai they have greatly benefited from reduced complexity improve security and greater consistency for our compliance and risk management across their many business units.
As you all likely know there've been widespread ransomware data theft, and other malware attacks against major enterprises this year.
Included were well publicized attacks on critical infrastructure at a major pipeline company, the world's largest meat Packer and afraid operator that serves as the lifeline for 2 popular island destinations in new England.
The need to stop these kinds of attacks is driving organizations to adopt new zero Trust and secure access service edge or chassis solutions such as those offered by Akamai.
For example, when the exchange server attack yet thousands of organizations in March Akamai as the email wasn't compromised because of our I T Department uses Akamai enterprise application access solution.
Which prevented unauthorized access to our exchange server.
Our access control suite of products continued to be Akamai fastest growing security segment in Q2 with revenue up 161% year over year, including the acquisition of of savvy and up 57% on an organic basis.
As 1 example of a new customer we closed a large security contract in Q2 with a company that helps maritime operators manage risk.
This company has thousands of employees and hundreds of offices throughout the world.
They adopted our enterprise application access and Kona site defender solutions to secure the access to their applications and to protect their internal systems from malware and other threats.
I'll now turn to our CDN portfolio.
Which generated revenue of $528 million in Q2.
Down 1% year over year and 4% in constant currency. This result was in line with our expectations and reflects the challenging comparison against last year's pandemic related jump in traffic and the loss of revenue from Chinese applications that were banned from India in July of 2020.
Traffic on our platform remained strong in Q2 with peaks exceeding 130 Terabits per second every day throughout the quarter.
This enormous amount of traffic provides strong evidence of how much customers rely on our platforms unparalleled scale and reach which is enabled by more than 4200 points of presence at the edge in a 135 countries around the world.
Our tremendous global presence is especially important to the world's major broadcasters, who continue to look to akamai to deliver the world's most significant events.
For example, during the recent European Football tournament, the peak traffic that we deliver globally for more than 30 broadcasters.
35 Terabits per second.
Nearly 5 times the peak observed in 2016.
Our fast growing edge applications segment delivered $47 million in Q2 up 35% year over year and up 32% in constant currency.
This rapid growth rate reflects the shift of compute workloads from core data centers on prem or in the cloud to our edge platform for offload improved performance security and global scale.
For example, each time of user access is 1 of our retailer customer sites. The retailers Geo location code is executed on an akamai edge server to identify the user's location and then the labor content tailored for that location.
Overall, we're now supporting an average of 5 billion such edge computing instantiation per day on our platform.
In summary, I am pleased to report that we've executed according to the plan we outlined for investors during our February analyst day in.
In particular, we've continued to achieve strong demand from customers for our security and edge computing solutions diversification of our business across products geographies and sales channels and.
And strong financial performance of both the top and bottom lines.
Before turning the call over to Ed I'd like to formally welcome Sharon Bowen to our board of directors.
Sharon's had extensive experience in financial and securities transactions for large global companies and we're very much looking forward to benefiting from her engagement and counsel.
In addition, as many of you know our board is now chaired by Dan Hirsi.
Who succeeded Fred Salerno in June.
Dan has held senior management positions from the telco industry for many years, including of C. E O of sprint.
He is also recognized as the leader in ESG and is providing valuable advice and oversight of our senior management team.
Of course, we all deeply appreciate creds many years of outstanding leadership and service the Akamai and we wish him the very best of his future endeavors.
I'll now turn the call over to Ed to provide further details on our Q2 results and our outlook for next quarter and the full year.
Ed.
Thank you Tom as Tom outlined Akamai delivered another excellent quarter Q2 revenue was $853 million at the high end of our guidance range and up 7% year over year, we're 5 per cent in constant currency.
Revenue growth was led by broad based strength across our security business globally.
Revenue from our security Technology group was $325 million of 25% year over year were 22% in constant currency 6.
The security now accounts for 38 per cent of our total revenue.
We saw strong performance across our major security products, including Bot manager Prolexic and our access control products suite.
Revenue from our edge technology group was $528 million down 1% year over year or 4% in constant currency.
These results were in line with our internal expectations, which factored in challenging comparisons from our outstanding CDN results in Q2 the year ago.
The tough year over year compares within our edge delivery business offset the continued strong growth in our edge applications business.
Foreign exchange fluctuations had a negative impact on revenue of $2 million on a sequential basis and a positive 19 million dollar or the year over year basis, largely in line with our expectations.
International revenue was $403 million up 15% year over year or 9% in constant currency sales.
Sales in our international markets represented 47 per cent of total revenue in Q2 up 3 points from Q2, 2020 and up 2 points from Q1 levels.
As a reminder, our Q2 results last year included approximately $15 million of revenue from China based apps that were banned in India from Q3, 'twenty 'twenty onwards.
Adjusting for this impact the international growth would have been approximately 20% year over year and 14% in constant currency.
Finally revenue from our U S market was $450 million up 1% year over year.
Moving now to costs cash.
Cash gross margin was 76% inline with our expectations GAAP gross margin, which includes both depreciation and stock based compensation was 62%.
Non-GAAP cash operating expenses were $259 million slightly below our guidance range due to lower than expected hiring during the quarter.
Now moving onto profitability the.
Adjusted EBITDA was $386 million, our adjusted EBITDA margin was 45% in line with our guidance.
Non-GAAP operating income was $270 million and our non-GAAP operating margin was 32% slightly favorable to our guidance due to lower operating expenses I just mentioned.
Capital expenditures in Q2, excluding equity compensation and capitalized interest expense of $138 million consistent with our guidance range.
GAAP net income for the second quarter was $156 million were 94 cents of earnings per diluted share.
Non-GAAP net income was $233 million of $1.42 of earnings per diluted share up 3% year over year down.
<unk> down 1% in constant currency and 2 cents above the high end of our guidance range.
Taxes included in our non-GAAP earnings were $39 million based on the Q2 effective tax rate of approximately 14, 5%.
Now I will discuss some balance sheet items as of June 30th our cash cash equivalents and marketable securities totaled approximately $2.6 billion.
After accounting for the $2.3 billion of combined principal amounts of our 2 convertible notes net cash was approximately $281 million as of June 30th.
Now I will review our use of capital.
During the second quarter, we spent approximately $96 million to repurchase shares buying back approximately 900000 shares. We ended Q2 with approximately $417 million remaining on our previously announced share repurchase authorization.
Our plan remains to leverage our share buyback program to offset dilution, resulting from equity compensation overtime.
Moving onto Q3 guidance, we are projecting Q3 revenue in the range of $845 million to $860 million were up 7% to 9% as reported were 6% to 8% in constant currency over Q3.2020.
Foreign exchange fluctuations are expected to have a negative 3 million dollar impact on Q3 revenue compared to Q2 levels and a positive $5 million impact year over year.
At these revenue levels, we expect cash gross margins of approximately 76%.
Q3, non-GAAP operating expenses are projected to be.
$257 million to $262 million, and we anticipate Q3 EBITDA margins of approximately 45 per cent.
Moving now to depreciation.
We expect non-GAAP depreciation expense to be between $120 million to $121 million.
Factoring in this guidance, we expect non-GAAP operating margin of approximately 31% for Q3.
Moving on to Capex, we expect to spend approximately $135 million to $140 million, excluding equity compensation in the third quarter.
And with the overall revenue and spend configuration I just outlined we expect Q3 non-GAAP EPS in the range of $1.37 to $1.41.
The EPS guidance assumes taxes of $38 million to $39 million.
Based on an estimated quarterly non-GAAP tax rate of approximately <unk> 14 in the half percent.
It also reflects the fully diluted share count of approximately 165 million shares.
Looking ahead to the full year, we are raising our guidance for both revenue and EPS. We now expect revenue of $3.42 billion to $3.45 billion, which is up 7% to 8% year over year as reported or up 6% to 7% in constant currency.
We now expect security revenue growth to be in the low to mid 20% range for the full year 'twenty 'twenty 1.
We are estimating non-GAAP operating margin of approximately 31%.
Non-GAAP earnings per diluted share of $5.54 to $5.65.
And this non-GAAP earnings guidance is based on a non-GAAP effective tax rate of approximately 14, 5% and a fully diluted share count of approximately 164 million shares.
Finally full year Capex is anticipated to be approximately 16% of revenue.
[noise] system with our prior guidance.
We are very pleased with our excellent financial results from the first half and we look forward to delivering a strong second half.
Thank you, Tom and I would be happy to take your questions operator.
I will remind you in cash flow question, you will need the press star 1 on your telephone to withdraw your question press the pound key.
<unk> will become Paul the Q&A roster.
Our first question comes from the line of James Breen from William Blair. Your line is now open.
Thanks for taking the question.
Can you can you talk about some of the seasonality around the business second third quarter. Tom Obviously, the Olympics is happening right now and sort of how you see the impact of the business given.
How the traffic patterns have been so far and then it seemed like operating income 31% is moving up a little bit can you just talk about some of the day of Maxim and where you see that going as a security of maybe becomes a bigger part of the business. Thanks.
Hey, Jim Thanks of the question this is Ed.
In terms of seasonality Q3 typically.
We tend to see a little bit of the slowdown in traffic over the summer months.
You don't calling for sort of of flat flattish quarter to Q2 here.
The guide.
We'll see a little bit of slowdown in August I would expect you don't get the Olympics and they're not expecting a ton from the Olympics.
This year, it's a couple million bucks that we have in the quarter we.
We did see in terms of ex seasonality in Q2, we did see a bit of of lighter gaming quarter in Q2.
So we would expect to see that probably pick up a bit here in the back half of the year and then obviously in Q4, that's our most challenging.
Challenging quarter to call, we with you've got really 2 seasons, there you've got the commerce season, and then the.
We typically see the large media season as well so we're expecting that.
In Q4, and we'll update you as we go we'll get more information as the.
As the year goes on for the next call. We'll update you on of what we're seeing from the Q4 seasonality.
The margin question, Yeah, we had a better.
The quarter from an operating margin perspective hiring was a little bit lighter than the normal just a couple of things to keep in mind on the margin front. The July is when we have our annual merit increase of our salary increases so that comes into effect. The beginning in Q3 and then also we do expect that we'll see some.
Some travel expenses and some costs related to office is reopening in the back half of the year as well as Tom and I've talked about we plan on operating the business from the 30% range. This year, we'll do a little bit better, but we do want to continue to invest for the opportunities we see in front of us in security.
Great. Thanks.
Thank you. Our next question comes from the line of Sterling Auty from Jpmorgan. Your line is now open.
Yeah, Thanks, Hi, guys.
I'm curious the understand how youre thinking about the investment on the go to market, specifically sales head count in the security side of the business given the strength that you're seeing.
We do.
Have a specialist team for our newest security products.
And that's very helpful until the field can get up the speed, but our entire go to market operation is now well versed in selling security products. So they really only need the assist for the newly released products.
And so we don't have a bifurcated sales force now.
Understood and then just.
1 follow up in terms of the security competitive landscape, especially on the newer solutions like page integrity manager.
Who is the point person who are selling into and are these uncontested or what other solutions do they tend to consider when they're looking at it.
Yeah, Parag new solutions.
You might see a startup out there with something.
Similar or a normal competition doesn't have these capabilities.
And.
It's a big advantage to be able to offer these capabilities with the existing platform.
Cause once you're on Akamai for example, you're using our web App firewall, which is market leading solution, it's very easy to add page integrity manager on top.
We just take care of the customer says they want it and we turn it on.
And the request of the data flow is not not changed the same will be true with audience hijacking protection same thing built right on top of the web App firewall and our other solutions. So it really is very convenient for customers to buy from us and there really isn't you know something thats.
Comparable in the marketplace and these are adding great value in terms of the buyer.
Audience hijacking protection that could really go the range probably it ends up more towards the marketing side of the house because the literally their audience is being hijacked today any retailer has the problem where because.
Because of the malware that's on the user's browser or plug ins or extensions they have.
That malware and those plug ins are looking for somebody about to do a transaction and what they'll do is put some pop up over it saying wait a minute go here instead or even worst it'll be some fraud, where they'll change the refer header in time credit for this buyer and our customer now has to pay more.
So if our products like that it could be anywhere from the security side, all the way through the website and through the marketing side of the house because it provides so much value it reduces cost increases revenue and provides greater security.
And it really it's very nice to see that because of its a very good blend between you know our delivery performance solutions and our security solutions all wrapped up in 1.1 package.
Makes sense. Thank you.
Thank you. Our next question comes from the line of will Tyler from Baird. Your line is now open.
Hey, this is Charlie Ehrlich on for will thanks for taking the question.
And the sort of a 2 part question on contract renegotiations.
I guess first are there any big contracts coming up the we should be aware of.
Or is it pretty spread out of the over the back half of the year and as the next year.
And then part 2 for the contract renegotiations that you've already had kind of curious what you're hearing in terms of sort of the health of the customers and are they still asking for price concessions.
Or are we closer to the back to.
Pre pandemic levels in that respect.
Yeah. So on the in terms of the big contracts up for renewal we had a few.
That we did this quarter.
And then I'd say, the rest of sort of spread out.
Early evenly if there's ever anything that is major I tend to try to call that out but.
As we disclosed in our IR day.
No we don't have.
The significant customer concentration of risk, but sometimes you can get a few of them altogether that can make a little bit of noise in the quarter, but they're pretty much spread out and in terms of the health of the customers it really varies by vertical.
We do see I would say pretty standard pricing discussions of this industry traditionally is Ed <unk>.
Deflationary pricing comes through especially volumes third party driven.
Driven by volume, but I don't see any major change there really nothing to call out.
I think it's still too early to call.
You know when Ed into the pandemic, obviously, so you've got some we've got some significant business with commerce and retailers and that's still the.
The kind of playing itself out at this point we.
We've seen some pickup in volume, but the way.
We're not out of the woods, yet there, but but in terms of overall pricing really nothing to call out in terms of any major changes.
Great. Thanks, Ed.
If I can just squeeze in another 1 you used to give this helpful metric from the percentage of customers that are taking 1 security product and the percentage of their taking multiple security products is that something that you can provide us now or are you not giving that metric anymore.
Yeah sure I can give you that number so right now we've got about 55 per cent of our customers that are buying 1 security product and about 32% of buying more than 1 but just keep in mind that our customer base has grown.
Over the over the last year, it's up probably about 5 or 6% over the last year. So.
We're doing a pretty good job of getting penetration into the base, but the base is also growing.
I go back a year ago.
Q2 of 2020 that number for folks that of course.
Out of the security product was around 59%. So we're seeing really healthy growth in terms of the overall number of customers.
Both of the penetration of the base, but also just the size of the customer base is growing as well.
Great. Thanks very much.
Thank you. Our next question comes from the line of Keith Weiss from Morgan Stanley. Your line is now open.
Yeah.
Hi, It's Matt Wilson on for Keith Weiss. Thank you for taking our question I'd like to dig a little bit deeper into the edge applications. What type of use cases, you're seeing and what other verticals you are kind of seeing traction and besides retail you gave a nice example in your prepared remarks, but anything additional would be helpful.
Sure. It really is useful of I think across all verticals.
Gaming is another example of the big carpet gaming customers have interest there they want to get local decisions made in terms of who's playing who what master server, maybe they go back to for the gaming instructions.
Another Great example is the Covid vaccine registration sites. In this case was the third party company unrelated to US built a queuing application on top of our edge worker solution.
<unk> is used today by think dozens now governments and pharmaceutical companies.
To assist in.
Getting the vaccine registrations.
And of course in the early days in the U S and still in many countries. There is a lot more people that want to get a vaccine then you have capacity for and so you want to be fair. So if somebody comes into the website they get into the queue and they know how long. The Q is in that whole process is managed and again, that's an ideal application.
You know to run with our edge computing service.
And also handles all of the excess load of the flash crowd around the site. When you announce okay. We've got a lot of vaccines available on a certain period of time a lot of people come at once or maybe they know when thats kind of happening. So we provide the the overflow capacity for that but really you know anything you could imagine that involves the locale.
The need to rapidly scale.
It would.
It would be a suitable use for our edge worker solutions Iot applications I think in the future is a big driver of demand there and I think that gets enabled by 5 G. As it gets deployed and you get a lot more devices connected but there you've got a lot of devices, we have a lot of communication.
Back and forth very chatty protocols data being sent in and you need to aggregate data and make decisions quickly locally on the fly edge computing and edge applications as a good examples of that you know tailoring the content.
Based on the device type and the local connectivity as another example, we do that with our image and video manager of applications.
Where if you're on a per se of cellular device you don't have a big screen and maybe you don't have great connectivity.
Automatically at the edge the edge computing put in a.
A smaller lower resolution version of the image and on your device. It will look the same so theres no real reduction in quality, but the less traffic needed to convey the image means you'll get better performance for the end users.
All sorts of applications that people are using in that work, we're doing those kinds of things 5 billion times of day on our edge platform using ex Java.
That's really great color and then pivoting to the CDN solutions within the edge technology group anything to call out in terms of pricing and then how should we think about revenue from the internet platform customers in the second half of 'twenty 'twenty 1.
Yes, so I'll take that will tell them. So the in terms of pricing as I, just mentioned really nothing to call out on the pricing side.
As far as Internet platform customers go.
The team is doing a great job of executing there.
The continue to grow that group of customers, obviously very highly innovative customer base.
A lot of them have their own <unk>, but you'll.
So we're doing a good job of growing that business and I'm very happy with the the performance there and expect.
Net revenue stream to continue to.
Run along about the same pace of its going now for the.
The rest of the year, maybe see a little bit of upside in the.
Fourth quarter.
Alright, thanks, guys.
Thank you. Our next question comes from the line of James Fish from Piper Sandler. Your line is now open.
Hey, guys. Thanks for the questions first on the external.
And internal based cloud ACA solutions, what 1 of its really leading the charge at this point in what has been the pushback from customers.
That are evaluating other solutions that may pick a competitor and do you plan on building or acquiring into the rest of that SaaS ease back like in the L. P of cozby.
So yes, we're interested in the entire of SaaS of stack I would say, we're really focused though on stopping malware stopping these ransom ddos ransomware attacks stopping data extra filtration.
And that puts us in the the direction of of our focus on access.
To make sure that we do the access control of the application layer of not as it's traditionally done at the network layer and that makes a huge difference in terms of the malware getting inside in the first place.
So we have secure web gateway capabilities.
The market, leading DNS capabilities, which makes a big difference in terms of day to ex filtration and we do have some DLP capabilities today with our newest version of enterprise threat protector cash be less capabilities, there today potentially of interest but not the primary.
Mission in terms of stopping.
The data ex filtration the ransomware attacks the malware attacks on enterprise and of course ransom Ddos.
Of which our Prolexic solution helps a lot where the along with Kona.
So good traction there as you see the gross on the access side of the house now well over 50% organically and of course as the county of savvy acquisition over 160% year over year. We plan to continue investing there organically also to potentially M&A, we're always looking there.
And I think that has a lot of future potential force.
But that's helpful. Tom and I guess I'll be the wanted to take the bait.
Obviously Q outages.
During the the last couple of months here can you just walk us through maybe what the financial impact of B in terms of any SOA refunds or what you heard back in terms of feedback from customers regarding the DNS and ddos issues. Thanks, guys.
Yeah in terms of financial impact of de Minimis, We lost at the peak of about 2% of our traffic for up to an hour.
So not not of any financial impact per se that said you know we care a lot about the liability at Akamai. It is core to everything we wanted to and we've put a ton of effort into making our solutions be reliable.
Over the last 10 plus years in fact, you have to go back to 2004 to find any sort of comparable in terms of what's happened on our platform in 2004 of them. We actually took the entire platform down for about an hour which was the disastrous.
That didn't happen in this case, but but we did hurt.
Hundreds of our customers and we deeply regret that we impact of them in their users and that's unacceptable.
In the in both cases, there was an update.
That caused the problem and we have invested a lot of the infrastructure to make sure that updates are done the safely.
In this case the updates for totally different totally different systems at Akamai, but as the result of this.
We're taking a fresh look at how we release updates to make sure that something like this won't happen again, and Meanwhile, we have locked down all update channels as we do a thorough investigation of each 1.
People don't often realize it but we are constantly doing updates we have of platform with dozens of services. We have many many thousands of customers any given customers maybe wanted to make an update to their site on an hourly basis or more and so it's just thousands and thousands of day of updates.
That are taking place in the platform and because of the really.
Very intense work that we've done over the last decade, we have had an excellent track record of keeping any problem with an update from spreading.
Humans, making updates will make mistakes.
Our goal is to prevent the catch them early and prevent them from spreading and in this case there were 2 different channels, where that didn't happen the way.
We wanted to and so we are putting in a lot of effort to look at every possible channel.
And make sure it is working the way we want to.
And not only do we not wanted to of any more incidents. This year, we don't want to be having this happen in the next 10 years and so there's a lot of effort going into making sure. That's the case.
Yeah.
Thank you. Our next question comes from the line of Tim Horan from Oppenheimer. Your line is now from.
Thanks, Tom just maybe to really higher level questions can you just talk about how important edge compute do you think is going to be cloud in terms of or specific applications of what percentage, we will have some edge component to it.
Hum.
How did you think of your infrastructure eat of holds up the compares to competitors.
We're providing that edge and then on the securities of 1 another just really high level question.
The customers understand how much better cloud based security is than you do on Prem and the where are we with the process.
Yeah. Good questions I think edge computing is really important.
In the future and when I say edge I really mean etch and that's a big difference with the competition.
None of whom really have an edge platform of course, you know for the last couple of years everybody says they have edge everything it's just it's not true.
We're in over 4000 locations.
1000 cities and of 135 countries and nobody is anywhere anywhere close to that and we offer date of Java script support now.
You know a lot of the hopes of talk about the edge computing don't.
And we spin up.
Our apps and a few milliseconds and that's you know of factor of 1000 better than some of the folks that the talk a lot of edge computing out there. So I think we stack up very well against the competition, there and I think you'll see that reflected in our very strong growth.
The.
That segment now well over 30% growth year over year, we think we can maintain that and on a reasonable size.
Last year of $150 million or now almost up to a $200 million annual revenue run rate per hour.
Edge applications business.
So I think very strong future potential and as you're growing at 30% of year on a number that's about 200 million now after a few years that that starts really being meaningful and I think that drives accelerated growth for the CDN business.
And remind me again of the security question you had.
Well it seems like the securities rapidly moving to the cloud I guess the customers understand how much better that is where do you think we are in the process.
Oh, Yeah, that's a good question.
It's interesting because we started with application firewall and if you go back 5 or 6 years.
The much everybody bought of device and managed it in their data center and.
Today.
A few enterprises, the do that but pretty much all of the major BDC companies won't large majority of them are now using akamai for that as a cloud service.
And we're the market leader by far.
Application firewall you look at Ddos and again go back 5 plus years that was managed either in the data center or with a single carrier and that just doesn't work anymore. You can handle the volume and so now akamai as the market leader by far with the cloud service there I think.
You will see the same thing happened with <unk>.
Enterprise security.
Day. It is done you get your VPN and debt your boxes and you manage them in your data center.
That is not a good way to do it and that's why you have all of these breaches. When you are providing network layer of access. It's a disaster you look at the you know the big pipeline company that had a problem. Its just 1 of many thousands of enterprises.
Credentials to the VPN or stolen put on the dark web somebody get some and that just gives them access to the entire network and you can't do it half way.
And that's why our solutions are so important with application layer of access now share you can steal somebody's credentials, but of course, you want multifactor authentication and then you only get access to the App, if you're using Akamai you don't even get access to the App directly you gotta come through us and we will make sure there's no malware going for that app or youre not exploiting vulnerabilities.
And then you don't have those kinds of situations.
So I think if you look at the exchange server situation, which I talked about a few minutes ago.
Again by having Akamai in front with our enterprise application access our e-mail wasn't stolen even though we had the vulnerable software like everybody else debt.
So it will take some time, we're at the beginnings of I'd say zero, the zero trust approach and moving to the cloud.
And the 6 or to the edge Akamai edge platform for enterprise security, but I do think theres, a tremendous future of there because we're in a position to really stop those breaches.
Thank you.
Thank you. Our next question comes from the line of Colby Smith.
Sales from Cowen Your line is now open.
Great. Thank you.
2 modeling questions if I might the first 1 just looking at the guide increase for 2021, just curious if youre going to agree with how I'm thinking about it which is it seems like it reflects the.
QQ upside, maybe a little bit of upside in terms of the expectations for <unk>, but really no change.
As it relates to your assumptions for <unk> and it sounds like Thats more of a function just lack of visibility opposed to SUNS.
Some type of step down or.
The negative impact of do you want that you're now anticipating just curious.
Thinking about that correctly and then secondly, it sounded like in response to 1 of the questions regarding M&A, Tom may have been suggesting that you guys. Obviously continue to look.
It may even be close to something are you guys still holding a line where M&A is expected to be accretive in some short period of time, where our valuation is getting to a point now where if you were in fact, the do something of materiality it could actually be relatively.
Meaningfully dilutive just given just kind of what you would have to day. Thank you.
Alright, so call I'll take the first question Colby. So in terms of Q4, I think the thinking correctly.
We always thought Q4 being the hardest quarter to call and then obviously, there's been a bit of a flare up here was the delta virus. So.
We're going with what we see now as I said earlier in the call. We will update you as we get more visibility there's 2 seasons to call. There's the commerce season, and Congresses of very important vertical for US and then also as we've seen the last several years there tends to be a big jump step up in media. So we'll get some more information as we.
But I think you're thinking about it the curve.
Correct.
Yeah and in terms of the M&A question, we're always looking.
The companies that have a novel capabilities that we can use to build products for our customers that are synergistic with our platform and our solutions we have today.
And you're right there are areas, particularly in security and also edge computing.
That have very high valuations to that Ed.
And that makes it harder to do acquisitions that makes sense, because we're not going to do something that's crazy.
Now when you're when you're looking at acquisition, we'd look at it over the long term.
And so that we want it to be accretive certainly over the long term.
In addition to the purchase price, we also worry about the hit margins.
Actually when you do an acquisition often as you know the first year you have revenue recognition issues, where you don't get to recognize you know of.
All of the revenue right away and so in the first year you can take a hit to your margins.
And you.
If we find the right acquisition that is really helpful to us in gross over the long term and it won't be accretive to margins over the long term.
<unk> situation, where we would take a short term hit to margins.
And then we would improve them from there.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Brandon <unk> from Keybanc Capital. Your line is now from.
Great. Thanks for taking the questions I'm curious about you mentioned the head count growth slowed and actually it was down sequentially can you update us on your hiring plans for the rest of the year.
And he believes the company needs of my mother of phases.
Investing in head count in order to sustain the current growth trajectory. Thanks.
Yeah sure. So you know I talked about head count being.
A little bit behind hiring you know obviously last year, we had sort of record low attrition and we're still not back to the attrition levels that we saw pre pandemic, but.
We're just a little bit behind on all of our hiring I expect it will we'll catch up.
We're scaling the company very well as you can see our margins have improved quite a bit but we still want to make investments in security of you've seen some of our newer products have grown just as a pretty material size. We've got some very fast of exciting growing businesses with of our.
Our edge computing business along with the.
Very.
Deep.
Product Thats for security. So we're going to continue to invest there will be some investments in go to market and then obviously as we continue to grow there'll be some scaling ed so we'd have to true AD, but nothing in terms of like a major investment cycle or anything like that that we anticipate coming.
Thank you. Our next question comes from the line of Mike <unk> from Needham and company. Your line is now from.
Hi team. Thanks for taking the questions here I wanted to focus on the security and the improved outlook you guys provided today.
It seems like the the security in general is facing broad based demand, but are there any solutions specifically there that are driving this improved outlook and then I guess the follow on with the current.
Threat environment. The headlines we're seeing this driving a material change in customer interest are you seeing any noticeable impact on sales cycles of our budget flowing into the space as a result of debt.
The the good news is we're seeing strong demand across all of our major security product lines.
And also the new security products.
Obviously, not contributing a lot of revenue yet, but we're seeing strong interest in those as well so it's just a.
It's a good picture across the board the threat environment.
Certainly increases the awareness and of need for our solutions.
In terms of sales cycle, obviously, if the customers under attack the sales cycle. It can be very short is in many cases.
The integrate the customer within a matter of hours or days and.
Often.
The follow up with all the details of the contract later and we've seen a lot of that you know.
With these ransom ddos attacks dozens and dozens of major enterprises in that situation that very quickly become happy akamai customers.
So it's a.
It's a good environment I would say.
In terms of security sales.
For all of our our security products right now.
Thanks for that and if I'm, just thinking about the of the traffic trends of.
Trying to trying to parse out between the typical seasonality where there's the slower.
The slower leg, if you will in the summer months.
Hum matching that up against what we have with Covid and the skills of the variant we're seeing.
Trying to get.
Can you guys better comment on that I'm, just trying to put those 2 pieces together and see what's what's baked into the guidance as we stand today or how you see that traffic.
Playing out over the last months now that were in Q3. Thank.
Yeah, Yeah. Good question. So what we've what we've assumed here is that there really isn't going to be.
Major step up in demand like we saw last year.
So you're not anticipating major of lockdowns or anything like that so that obviously, if something like that were to happen it could increase our traffic.
In the quarter.
We do see typical seasonality and the.
The summer months typically August.
Europe in particular tends to be lighter than expected sort of anticipating that notes offset.
<unk> bye.
The Olympics again, I told you not not a ton there a few million Bucks for the Olympics, but.
The security growth is also not.
The necessarily impacted by traffic. So we could see if we do see lockdowns you could see traffic accelerate a bit and we're not really anticipating that started our guide at this point.
We are expecting to see a strong seasonal Q4 and like I said couple of times now we'll update when we talk to you again, when we get more visibility.
But you know.
The traffic because you've got back from from what I would call more normal growth rates. You know obviously, we went through the year and a half of accelerated traffic growth of launch of some major OTT.
Platforms, along with the with the pandemic so were modeling and what I would consider to be sort of a more normal.
The <unk> outlook.
Thank you. Our next question comes from the line of Ben Rose from Battle Road Research. Your line is now Frank.
Yes, good afternoon.
Question for Tom and then a question for Ed for Tom You mentioned at the outset. The Akamai account protector that you're working on in beta was curious to know if you could just provide a little bit more information.
Of the kind of benefits to customers that would come from this product that may not be available.
Commodity security portfolio currently.
Sure.
Account protector is sort of the next step beyond bot manager.
Bot manager of the tax whether it's the human B, that's trying to for example to log into an account.
And as you probably know there's a ton of accounts stuffing going on we see every day now of about a billion.
The illegitimate attempts to log in to an account of some type of a bank account of gaming account of commerce account and the vast vast majority of that spot traffic.
Credentials of the install on somewhere.
<unk> network has used the checkout dose credentials against a lot of our web site to see if you kind of hit.
Now the adversaries have evolved the attackers of evolve and now I will use humans.
To attempt to log in and steal accounts.
Can't do that at the same scale as you can with the Bot Army.
But you use things that you think may well get in and now the human will we will do it and so we need to decide well okay. It's human but is it the right human and that's what account protector is all about.
And it will use information about the human that's been using that account before.
With the.
A variety of inputs and the trust scores.
And then using machine learning to decide on the fly based on everything we can see here is this the right human from this account and we give a score that is used to decide how we're going to provide access directly do you go to some other security mechanism like you could ask questions or are captured tests of some kind of or do you just block.
And that's what account protect your debt. So it is 1 step deeper analysis that will now deal with human based fraud, and it's specifically around the logging function now.
Now of course Bot manager covers a lot of other things too like price scraping the inventory stealing.
The inventory.
Reserving all of the seats in a hotel or an airline.
The competitor that kind of things. So this is really focused on fraud and log in that's being done by humans.
Then you had a question for Ed maybe you could restate it.
I don't think it was stated.
Then what was your question for Ed.
Thank you everyone and closing we will be presenting at several investor conferences and roadshows throughout the rest of the third quarter details of these can be found on the Investor Relations section of Akamai Dot com.
You for joining us and all of US here at Akamai wish you continued good health and have a wonderful evening.
This concludes today's conference call. Thank you for participating you may now disconnect.
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