Q3 2021 Akamai Technologies Inc Earnings Call
Ladies and gentlemen, this is the operator your conference will begin momentarily. Thank you for standing by your conference will begin momentarily.
[music].
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.
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Please press star zero on your telephone.
As a reminder, this conference call is being recorded.
I would now like to turn the conference over to Tom Barth head of Investor Relations. Thank you. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining Akamai third quarter 2021 earnings conference call.
Speaking today will be Tom Leighton, Akamai, Chief Executive Officer, and Ed Mcgowan, Akamai 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 involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements.
These factors include uncertainties 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 <unk> 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 November 2nd 2021 Akamai disclaims.
Claims 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 Dot com 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 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 $1.45 per diluted share up 11% year over year.
Akamai strong performance in Q3 was largely driven by our security business, which is now one of the 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 that 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 App security market, when we launched Kona site defender in 2012. Since then we've continued to extend our leadership position in the web App firewall sector with Gartner recently naming akamai as a market leader for the fifth year in a row.
<unk> has been the market leader in Ddos protection since we acquired Prolexic in 2014.
Forrester 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, who try to steal content disrupt operations, where penetrate user accounts.
According to Forrester Akamai is best for companies wanting to thwart bots at the edge.
Bloomberg business week, even quoted a hacker, calling akamai spot defense the hardest to crack.
More recently, we released Akamai page integrity manager to identify malicious code and third party scripts and website, that's designed to steal and user data.
Age integrity manager helps to address a major threat, that's been costing businesses hundreds of millions of dollars in fines as well as serious reputation damage.
We plan to extend our web App protection further in the coming months with the release of account protector and audience hijacking prevent.
Account protector is designed to reduce fraud by making sure that the entity logging into an account is the true owner of that account.
<unk> hijacking prevention can help businesses protect sales by forwarding 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 to over $20 billion. This year alone.
Garda core 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 block the spread of malware that has gained a foothold in the enterprise and that's where Garda core comes in.
Got a core helps detect when a breach has occurred identifying anomalous data flows within enterprise networks garlic or also helps prevent the malware from spreading through our capability known as micro segmentation.
God of course 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 limit the spread of malware and protects the floor of enterprise data across the network.
And that's the key to stopping ransomware.
We believe guard of course 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 Garda 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 Garda 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 and threat intelligence and the scale of our platform. The same platform that underpins our world leading CDN.
Akamai CDN handles over five trillion requests every day. In addition, we resolved more than three trillion DNS queries each day.
This gives us unmatched real time insight into the world's internet traffic, which we analyze 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 protect and perform package, which makes purchasing and integration easy for the customer.
And when you buy security from Akamai. Your performance is automatically improve that's because we apply the security layer as we are 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 has unique combination of security and delivery provides a powerful offering in the market, which is one reason why we're the market leaders in both security and CDN.
Our CDN business also generates substantial cash that we can use to invest in future growth as we've recently done with regard to 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 Garnock War.
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 <unk> rolls out as Iot applications proliferate and as more data is created and processed at the edge Akamai 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 experience as close to their end users and the threats farther 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'll 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.
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 had a negative impact on revenue of $5 million on a sequential basis and 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 three points from Q3, 'twenty 'twenty and up one 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 EBITA 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 one dollar and eight cents 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 four cents above the high end of our guidance range.
Taxes included in our non-GAAP earnings were $39 million based on our Q3 effective tax rate of approximately 14%.
Moving now to cash and our use of capital.
As of September 30th our cash cash equivalents in marketable securities totaled approximately $2.8 billion after accounting for the $2.3 billion of combined principal amounts of our two 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 800000 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.
A binding 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.
<unk> 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 Garda 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 of Garda core on October 20th.
Our guidance assumes Garda core will contribute approximately $6 million to $7 million of revenue in Q4.
It also assumes that Garter core will be approximately five cents 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 <unk>.
From seasonal online retail activity for our e-commerce customers, which are both difficult to predict.
With that in mind, we are 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% Q.
Q4, non-GAAP operating expenses are projected to be $290 million to $297 million.
We anticipate Q4 EBITDA margins of approximately 43% to 44%.
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 30% for Q4.
Moving on to Capex.
We expect to spend approximately $128 million 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 the range of one dollar and 37 cents to $1 40 for.
This EPS guidance assumes taxes of $38 million to $39 million based on an estimated quarterly non-GAAP tax rate of approximately 14, 5%.
It also reflects a fully diluted share count of approximately 164 million shares.
Yeah.
Looking ahead to the full year, we are raising our guidance, we now expect revenue of $3.439 billion to $3.464 billion.
Which was 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.
The $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 would be happy to take your questions operator.
Thank you at this time to ask a question you will need to press star one on your telephone keypad.
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Your first question comes from the line of James Fish from Piper Sandler Your line is now open.
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, we're getting equipment door with government and zero 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 some.
Government stuff.
Yeah, our government business is very strong, particularly in security.
We defend most all the major agencies and the government pretty much every branch of the military.
So I would say we have a very strong business there.
Alright, and then on garden core hull them until the 100, plus reps are likely selling the entire security portfolio and really also any update to the go to market on both security Standalone sales channel partners as well as what you guys are doing to target developers better with.
Edge applications. Thanks, guys.
Yeah, Hey, Jim It's a bad year I'll 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 garlic or this is pretty typical of what we do with our acquisitions.
It 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 will build out that team a bit.
Probably take you know maybe a year or so as the reps start to introduce guard. According to their accounts that they begin to get comfortable.
With the we're selling Garda core.
Our typical model so I think we've got a pretty good.
Acquired a great team from Garda 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 garlic former selectively out Rick.
Accruing more and more channel partners.
And in terms of the developer focused question.
Done a lot of work to make our platform be very accessible to developers.
A lot of a lot of effort, there and strong progress and in fact on a daily basis. We're now spending up about 5 billion applications on edge workers and that's every.
Every day so.
Strong adoption of our capabilities in terms of edge computing.
Operator next question yes.
Yes. Thank you. Your next question comes from the line of Sterling Auty from J P. Morgan. Your line is now open.
Yeah. Thanks, Hi, guys. So 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 highlighted a number of different areas and strength in Ddos et cetera, what was kind of the tip of the spear that drove the growth this quarter in particular.
Hey, Sterling this is Ed so the organic.
Security growth in constant currency would be about 22%. So also be added about three points of growth.
Well I think the other part yeah.
<unk> was really across all of our.
What categories are you know all of them growing at close to 20% or more.
Restructure doing well App and API protection Prod, you know well into close to 30% growth and access to the best of all and of course that will get a lot stronger now.
<unk> got a core and the ransomware solution. So it's across the board in security.
Oh, that's great and maybe one real quick one given the contribution you're expecting from Garda core in Q4 does that mean that the run rate in terms of what the contribution in 'twenty two might actually be better than what you thought at the time of the acquisition.
Yeah, Hey, Sterling two points on that so yes, I think.
We should see better contribution from Garda core and also we've been off to a pretty good start here in the first couple of weeks.
Since we closed the acquisition they they finish very strong I was very impressed to see several multi million dollar deals.
In several different verticals across the different Geos, we saw a couple in the U S.
Couple in EMEA May P. J, we saw deals in transportation, which isn't really a huge vertical for akamai as well as you.
Other verticals were strong and 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 for next year, but so far off to a pretty good start.
Excellent. Thank you.
Your next question comes the line of Colby send Marcel from Cowen <unk> Company. Your line is now open.
Hi, This is Michael on for Colby two questions. If I may 1st you know as you think about the incremental security offerings that could make sense to add via M&A moving forward now 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.
Yeah, we continue to look and invest in new capabilities and security both organically and through M&A as.
As we talked about page 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.
That's you know 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 you know in the App.
Access segment, I think that's a huge area of future growth.
Really excited about the guard a core acquisition.
You know what that combines very nicely with our zero Trust solutions and combines with enterprise application access to give you the whole combination of north South East West.
That will be compelling in the market.
So we're continuing to invest across the board and of course with 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 build a web app firewall.
Constantly adding new capabilities to it to stay ahead of the attackers to keep our customers safe.
Yes, and on your second.
Question, Yes sure on the second question was around the verticals that were impacted in Q recall, we called out commerce and <unk>.
Travel.
I'd say in travel, we're starting to see a bit of improvement there starting to see traffic pick up a little bit as a reminder, that's about 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 it was 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 in.
And that's still persisting from from the pandemic.
Perfect. Thank you.
Your next question comes from the line of Keith Weiss from Morgan Stanley. Your line is now open.
Excellent. Thank you guys for taking the question.
Two kind of areas of I was hoping to dig into.
Can you talk to the disparity in growth between the U S and international.
I thought it had more to do historically with sort of platform customers in the U S underperforming, but now the platform customers are actually doing really well and growing pretty well. So I kind of lost the thread on why the U S is still underperforming international regions.
And then a second question on sort of the operating margin side of the equation any kind of guidelines you can give us and how we should think about calendar 'twenty. Two are there kind of a lot of companies are talking to us about rehydration, if you will 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 Thats coming down as a percentage of revenue. So perhaps there's some gross margin benefit that you could see in calendar 'twenty two should offset that so any kind of sense you could give us on how to start thinking about calendar 'twenty two margins.
Sure. So I'll start with the second part on margins. So yes, you're correct. The next year will be expecting that we should start traveling again.
So there'll be a little bit more opex, there you're right to call out Capex. So I think the team's done 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.
We would expect that capex to be back to those normal levels that we've seen maybe even a touch lower so that that impacts your depreciation, but it takes a while for that to flow through the model.
So you won't get a ton of benefit that right away, but certainly down the road you will I've given some prior guidance when we had the garlic or call about operating in the 29% to 30% range.
For next year, and then hopefully getting back or we will get back over 30%.
23.
We will update you I mentioned earlier to Sterling that Oh God of course contribution will probably be a bit better.
Then what we said earlier on I don't have a number to call out yet so that'll obviously help out the operating margins are a touch there.
And then you asked about U S and international on the disparity between the two I'd sort of flip it around and say that it's not so much the U S being weak, but really just strong international growth I mean U S is kind of 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 is a 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 pressures 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've made a lot of investments both in the network and the sales teams et cetera, and we've been able to drive pretty significant grow very happy with what I'm seeing in terms of participation.
There is strong growth in countries like Korea, Spain, Brazil, Mexico, Hong Kong, Singapore, Taiwan and across the board we're seeing.
Strong growth Latin America in particular has been very strong you made an acquisition. There are a couple of years ago, starting to get some good scale out of that so.
You know a little bit of a mixed picture in the U S with some challenges in commerce, but really I would look at it as just very strong international presence and growth.
Got it.
Should the takeaway would be that if.
If we just looked at the security sided equation the growth in U S and international would be more even.
On the security side of the equation than it would on the edge Tech.
Yeah, I think that's a good way to look at it Keith I mean, if I look at.
In the web performance, especially in commerce that that's where the primary challenges right now.
But if I look at security. It's you know obviously the U S was the first to adopt.
We're still seeing very very strong growth as a matter of fact now 67% of our customers are buying one security product, 34% are buying too.
So to put that into perspective in a year, we've gone up six points in terms of security adoption or the customer base, that's adding over 600 customers.
So we're seeing good broad based strength and security both here in the U S and also internationally, but I think youre thinking about it in the right way in terms of having strong security growth in both both in both regions.
Got it excellent that's super helpful. Thank you guys.
Your next question comes from the line of James Breen from William Blair. Your line is now open.
Thanks for taking the question.
Just on the cash flow side, it seemed like particularly 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 particularly strong quarter and it could turn tend to drift down over time or is it going be lumpier or are we at a sort of a new run rate in terms of cash generation. Thanks.
Yeah, Great question, Jim Q1 tends to be the lower.
Quarter from a cash flow perspective, just because of working capital is when you say your bonuses off but.
I think it would be if you peg your.
Capex to that sort of 15% range Youre looking at.
Pretty significant improvement so I think if you use that as your as your guide.
Kind of working off the operating margins. We gave you and think about Q1 is probably being the low point as you're modeling out your free cash flow.
But you have very very strong free cash flow generation this quarter for sure.
Great. Thanks, and then just one other one as you look at the revenue growth excluding the platform customers.
Platform customers are down about 3 million sequentially.
Is there a range now where you feel like in this sort of low 60% range, where that revenue is going to cover for those companies.
Given the amount of growth you've seen in the last kind of 12 to 18 months from that.
Yeah, I think that's probably not a bad place to peg a Jim I mean the.
Q4 always tends to be a bit of a stronger quarter than that.
Verticals, a little bit of seasonality.
There you always have renewals. So whenever you have a renewal you'll have you'll see it pull back a couple of million dollars, depending on the timing and that sort of stuff, but I think since the sixties was being a low sixty's is probably a decent place to peg it.
Terrific. Thank you.
Your next question comes from the line of Frank Lucerne from Raymond James Your line is open.
Yeah, Great I, just wanted to talk a little bit about the about the buybacks you said you'd opportunistically use that take advantage of the market valuation.
You know what level theme seem appropriate.
Here.
The first question then I've got a follow up.
So primarily we've used the equity buyback to offset the equity dilution from employee grants and from time to time, we do buyback additional shares and we've seen that over the years and we use an approach such that as the stock price declines.
We will buyback more.
And I do feel that in this market.
Akamai.
As 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 more in this market.
And so you may see us buyback additional shares.
Especially depending on how the stock price fluctuates.
Alright, great and then you've done a good job.
Adding together some some M&A for the secure on the security side any other tools that 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.
Yeah, we're always looking at new capabilities as I've mentioned.
Of course, the attackers are always innovating with new forms of attacks, but.
I am very excited about the <unk> 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 is application firewall. So we're making sure that malware it doesn't come in.
Also have multifactor authentication.
Which.
Sure that the employee is who they say they are in.
Now we have got a core we stop the spread of the malware if it does get it and there are a lot of ways into the enterprise today. It is really.
Despite all of the defense as you try to put in place you know 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 credentials, but malware does.
<unk> still and so the real key there is stopping the spread and that's what Garda courtyards and so now I think it is.
Really nice because you stop the ransomware with Gartner core, but we've got the whole package and health solution now and I think that's really unique in the marketplace and very exciting.
Alright, great. Thank you very much.
Your next question comes from the line of Amit <unk> from Evercore. Your line is now open.
Thanks, a lot and good evening everyone.
I have two questions as well the first one I was hoping you could talk about you know as.
As I look at the midpoint of your guide for December is there a way to think about how you're thinking about seasonality in edge and security.
And the bottom really trying to get to is the security numbers may imply a much more severe deceleration than what people are modeling. So just love to understand how are you assuming those two segments stacking up in the December quarter.
Yeah sure I'll take that.
So we'll start with the edge obviously edge.
Quite a busy quarter in Q4 as I talked about you have seasonality from E. Commerce I think it's too.
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.
<unk>, a very strong media quarter, where you see new devices and games coming online.
Sorry devices consoles et cetera, coming online and then you also have a lot of sporting events in Q4 back.
Back to school, you've got lots of game releases, so it can be a pretty robust.
And for US obviously challenging to call it kind of looked at the the events calendar, it's pretty full so provided we see some good traffic as you can see good upside we deliver that in the last couple of years.
In terms of security is not a it's not as seasonal as certainly there are some bundles, we have where there is traffic can impact that a bit but.
I think.
Let's 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.
We've obviously got a core is off to a good start so.
Wouldn't imply that as well.
Even a downtick or anything like that in our security growth.
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 percentage of sales I think would be 14%, 15% for the back half of the year versus 19% and 20% in the last several quarters prior to that up I'm curious is capex coming down because.
Feel like there's enough.
Capacity you have out there and you can scale it lower or is it more that you're just kind of get your hands on the supply chain and the products, we need to drive capex.
Whats taken capex lower than how do I think about this as we go into 2022.
Yeah, So I would say it's good execution.
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.
Four if we see the pandemic continue and see traffic grow et cetera. So we leaned in and we built up our inventory a bit we bought 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 is we built out ahead of demand.
Pretty smart in the way, we did that but also I mentioned this number of cap 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 any way to drive a big focus on lowering our need for Capex and also keep in mind, we have great relationships with the networks and Isps. So in terms of doing optimizations inside of their networks, we're able to do that as well so I'd say it's.
Really.
Great execution on the team's part and.
Capex has come down pretty significantly you can see that.
And our free cash flow results.
Does that sustain next year mid teens capex of the personnel is that the likelihood of model this out.
Yeah, So I mean I right now.
It must do you see another pandemic or some major event that we see of some crazy unexpected traffic growth. Yeah. I think it sits a sustainable number certainly going into next year I don't want to get into giving guidance, but I think that I've 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.
Perfect. Thank you.
Your next question comes from the line of Freesheet Jed Lauria from RBC. Your line is now open.
Hey, guys. Thanks, so much for taking my questions and nice to see security growth in a hold up and I'm actually accelerated this quarter.
Two 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. So you seemed pretty pretty well insulated from the rising costs, but at what point you know.
This continues dragging out does it begin to become oriented.
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, you know 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.
Yeah. So I'll take the second part first you know that's why we gave 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're in the business of delivering internet traffic.
One model could suggest that well.
Shelves are not stock 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.
So 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 zero overage. So you have kind of flattened out that first thing. So the bursting for commerce is not as big of a impact Q4 still has an impact.
In terms of the device cycle.
It's an interesting one we do.
Expect and we've seen over the last several years, especially in the last couple of weeks of.
Of the year as new devices come online is a lot of firm where 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 youre watching it on your old machines. So I still think that we'll have a pretty big.
Our media quarter for sure, but that's why I've, given a pretty wide range to try to take those things into consideration.
Then on your supply chain question, you had asked about when does this become a problem. It was 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.
Of inventory here.
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 pricing 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 you know if we do see another massive growth in traffic, maybe we used to.
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 with last a lot longer. So we did some scenario planning so we're in pretty good shape at the moment.
Alright, Thats really helpful. Thank you so much.
Your next question comes from the line of Alex Henderson from Needham. Your line is now open.
Thanks.
Looking at the.
The guidance in the commentary it does sound like your security business is expected to decelerate to below 20% growth in the fourth quarter.
<unk>.
Certainly with 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.
22 or is that too aggressive.
And expectation for.
A billion three business.
Yeah. So I think one thing to keep in mind, Alex is you've got the anniversary of Basel IV. So your growth rate.
Lapse and.
In Q4 for Us would be and then we got in Garda core.
Set in the when we did our analyst day that we expect it to be able to grow 20% CAGR of three to five years.
With acquisitions being part of the strategy and you can see that.
The <unk> acquisition with the prior guide as you know only a couple of points of growth. We obviously did much better this year than we expected going into the year.
Acuity is.
Over performed every single quarter, we still feel pretty comfortable with our 20% growth rate as we talked about as you know as a matter of fact coming out of this year, we're doing a bit better than that.
So.
I'd.
I think if we're taking those the super low end of the range, maybe you could come up with that.
Formula, but we're expecting pretty solid growth here with security in Q4.
Let me just add.
Strategy in security is to combine.
Organic development.
And taligent and timely acquisitions, and we'll continue to do that and of course, when you buy a company after a year its growth the companys organic.
And it's no longer counted as.
Acquisition.
Gross per se and I think we've had a really great track record of doing that in security going back all the way to the Prolexic acquisition in 2014, and as I mentioned I think Arctic whores.
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 things like stopping ransomware and stop.
And malware.
And as we had said as we continue to want to.
Grow our security business over the longer term at 20 plus percent that will include the acquisitions and I think acquisitions are a good thing. It gives you a jumpstart.
On <unk>.
<unk> in an important area of course been working for a long time to develop.
They're micro segmentation approach I believe it is market leading.
What they do they are the best folks out there and now we have the benefit of all of the years of efforts that they put into that at a perfect time, because a lot of companies are rightly worried about stopping ransomware and now akamai is in a position to help them do that and of course, it fits with a lot of organic development.
Let me around EAA.
As an ideal combination so we will continue to do both and.
Working hard to continue our security growth at 20 plus percent.
Okay I got it. Thanks, that's helpful can you talk a little bit about the.
The pricing environment, whether theres 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.
Enterprises spending more this year do you think that that sustains into 'twenty two.
Given the first half.
Spike in attacks caused a flurry of spending intentions.
I think the competitive environment is very similar to what it's been in the past. It's a it is a very competitive environment.
Across the board from cloud Giants, but we're also our largest customers all the way down to startups, obviously CDN is.
Mature environment competitively.
And so I don't see there's any fundamental change their security is really a great environment for us we're the market leader by far and in the core areas of defending and protecting websites applications and Apis.
The leader by far in Ddos prevention, and those are areas that have a lot of attacks taking place and now sort of a new category for us where we're encounter new competition, because we're we're moving into that space in a big way would be enterprise security, we already have a very strong access solution there and now we.
What we believe is the best solution to stop ransomware or with micro segmentation.
And by adding that to Akamai, we didn't have a new set of competitors there because we're entering their space and we think there's a lot of potential gain per akamai, there and its ability to help major enterprises.
Great. Thank you very much.
Your last question comes from the line of Brandon <unk> from Keybanc capital markets. Your line is now open.
Awesome. Thank you for taking my 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 try and exiting the year. Thanks.
Yeah.
Yeah, So Brett we're not going to breakout edge apps every quarter, we talked about it last time growing it.
Over 30% and.
We think that business can continue to sustain that I think we will exit the year on a run rate.
Over $200 million, which is a pretty good healthy growth rate there.
And then just.
Again, we're not breaking out the edge delivery business. This quarter, we will we'll do it at the end of the year.
If I could just follow up on that when you back out some of the onetime items that are affecting comparability in the edge technology business, specifically, I think India, App and you're still lapping is that business growing and what's going to cause that business to return to growth next year. Thanks.
Yeah. So.
It's obviously 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 we I think we're comfortable with our longer term growth low single digits for the edge.
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.
But I think it's just continued execution.
And traffic growth going into next year on a much easier compare I think you'll start to see it.
The growth rate pick up a little bit there.
Okay. Thank you everyone and closing we'll be presenting at a number of investor conferences and roadshows throughout the rest of the fourth quarter and details of these can be found in the Investor Relations section of Akamai Dotcom. We appreciate you joining us and all.
All of US here at Akamai wish you continued good health to you and yours and have a great evening. Thank you.
This concludes today's conference call. Thank you for participating and have a wonderful day you may all disconnect.
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