Q2 2022 Akamai Technologies Inc Earnings Call
Good day and welcome to the Akamai technologies second quarter 2022 conference call all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask why.
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I'd now like to turn the conference over to Tom Barth head of Investor Relations. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining Akamai second quarter 2022 earnings call.
Today will be Tom Leighton, Akamai, Chief Executive Officer, and Ed Mcgowan, Akamai Chief Financial Officer.
Please note that today's comments include forward looking statements, including statements regarding revenue and earnings guidance.
These forward looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. The factors include any impact from macro economic trends the integration of any acquisitions and any impact from geopolitical developments.
Additional information concerning these factors is contained in 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 Akamai view on August 9th 2020 to Akamai disclaims any obligation to update these statements to reflect new information future events or circumstances, except as required by law.
As a reminder, we'll be referring to some non-GAAP financial metrics during today's call. A detailed reconciliation of GAAP and non-GAAP metrics can be found under the financial portion of the Investor Relations section of Akamai Dotcom.
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 strong results in the second quarter. Despite the ongoing challenges with the global economic environment and slower Internet traffic growth Q.
Q2 revenue was $903 million up 6% year over year and up 9% in constant currency.
This result was driven by the continued rapid growth of our security and compute businesses, which when taken together were up 30% in constant currency. These two business lines now account for 54% of our overall revenue.
Q2, non-GAAP operating margin was 29% Q.
Q2, non-GAAP EPS was $1 35 per diluted share down 5% year over year, but up half a percent in constant currency.
As Ed will discuss later E. P. S was negatively impacted by foreign exchange rates and a higher effective tax rate compared to last year.
Free cash flow was very strong at $223 million in Q2, and it accounted for 25% of revenue.
We've been leveraging our financial strength to make substantial investments in enterprise security and cloud computing we've.
We've also used some of this cash to buy back additional stock in the first half of the year, we spent $268 million to repurchase two 6 million shares. This puts us on track to go beyond what's needed to offset dilution from employee equity programs. This year.
I will now say a few words about each of our three main lines of business security compute and deliberate starting with security.
Our security solutions generated revenue of $381 million in Q2 up 17% year over year and up 21% in constant currency.
Growth in security was driven primarily by our App and API security portfolio, which includes our market leading web App firewall Bot manager account protector and page integrity manager solutions.
Our zero Trust Enterprise security portfolio led by Garda core also performed well in Q2 with numerous significant customer wins.
A leading global provider of financial data concerned about ransomware added guard of course segmentation solution to the seven security products they already buy from Akamai.
A major insurance company in France became a new customer for Akamai when they adopted our guard a core solution to help meet European financial regulations.
The sale led by one of our carrier partners is indicative of the excitement we're seeing for our zero Trust solutions among our partners.
And Australia's largest telecom provider Telstra expanded their business with us by adding our secure web gateway solution to their portfolio of Akamai products.
They told US quote as part of <unk> journey in delivering fit for purpose solutions Akamai has been a key industry partner with network based anti phishing malware protection and content filtering.
Telstra blocks millions of threats every single day and Akamai as a key partner in that protection and quote.
Overall, our zero Trust solutions delivered $43 million of revenue in Q2 up 59% year over year in constant currency.
This is an area, where we're making continuing to make major investments and where we anticipate significant future growth.
Turning now to compute I'm very pleased to report that the revenue for a compute product group was $106 million in Q2 up 74% year over year and up 78% in constant currency.
As a reminder, the compute product group includes low node and Akamai solutions for edge computing storage cloud optimization and edge applications.
A common theme that I heard when I met with executives from around the world in Q2, whereas they're growing concerned about being locked into contracts with cloud Giants that are consuming large and rapidly increasing shares of their it budgets.
Want more choice and compute and are open to alternative clouds like with node as a more efficient way to build run and secure their applications.
As a result, many large enterprises have begun testing the lenovo platform, including a major U S airline one of the world's top gaming companies and a global provider of weather data.
Major media companies in particular expressed significant concerns with their growing use of the giant clouds.
Not only are the costs high in part because of the fees for moving data from cloud storage to a CDN for delivery, but they're also concerned about their increasing reliance on a direct competitor.
As an example, I'm very pleased to announce that we recently signed a contract with one of the world's largest media companies to run a critical new workload on Lenovo.
The service is live today, and we anticipate that it will generate millions of dollars of annual revenue as their usage grows over time.
This is just the tip of the iceberg when it comes to our potential for future revenue growth in compute.
Cloud computing is a fast growing multi hundred billion dollar market.
And as we scale a node to be enterprise grade with Pops and hundreds of locations around the world, we should be in an excellent position to capture a share of this market.
Particularly from companies that value, our industry, leading security and delivery solutions and they don't want to be locked in to more expensive options with our cloud giants that competes against them.
Our delivery products generated revenue of $417 million in Q2 down 11% year over year and down 8% in constant currency.
These results were clearly impacted by a continued deceleration in traffic growth among our largest media customers and by the lower unit pricing, we provided as part of their recent contract renewals.
It's important to note that akamai remains the market leader in delivery by far Moreover, customer churn in the first half of this year remained at record lows and lost annual revenue from churned accounts in Q2 was even less than in Q1.
We also saw some notable delivery customers move business to our platform in Q2 after trying out competing solutions.
No matter, which competitor they've been working with they chose akamai because of our superior performance and reliability.
Like many companies, we're managing through a time of substantial economic headwinds and uncertainty with escalating inflation the strengthening U S. Dollar growing concerns about global recession, escalating geopolitical tensions and conflicts and a slowing of the internet traffic growth as the world tries to return to normal in the midst of a.
Pandemic.
As Ed will talk about shortly I think it is prudent to assume that these headwinds will dampen our growth rates and profitability over the next several quarters, particularly in our delivery business, which is being impacted by the challenges that many major media companies have recently reported.
Given the enormous market opportunity in front of US we will continue to focus our investment on zero Trust enterprise security like bike Arctic or in cloud computing led by Lenovo.
These investments combined with the economic headwinds I, just mentioned will likely result in our operating margin remaining below 30% in the near term.
We expect our margins to improve over time as our security and compute businesses continue to grow and account for a larger share of total revenue in.
In addition, we're embarking on several major initiatives to reduce costs and improve operational efficiency that should help return our margins to 30% or better in the medium to longer term.
As Ed will discuss further these initiatives include leveraging lienau to significantly reduce our cloud spend with hyper scaler.
Slowing the capital expenditures for our delivery platform and optimizing our real estate footprint.
While these are challenging times to be sure I believe that Akamai is on the right track for long term growth and success and that we're well positioned because of our unique global edge platform, our market, leading security and delivery solutions or new compute capabilities, which provide great performance at an affordable cost our premier <unk>.
Enterprise customer base, and our strong financial position and profitable business model.
Now I'll turn the call over to Ed for more on Q2, and our outlook going forward Ed.
Thank you Tom as Tom mentioned Akamai delivered another solid quarter in Q2 Q.
Q2 revenue was $903 million up 6% year over year or 9% in constant currency.
It was in line with our guidance and was led by our security and compute businesses as we mentioned on our last call. We expected significant foreign exchange headwinds to impact our revenue in Q2.
The much stronger U S dollar negatively impacted our year over year growth rate by three points or approximately $29 million of revenue year over year and $14 million on a sequential basis.
On a combined basis, our security and compute businesses represented 54% of total revenue growing 26% year over year and 30% in constant currency.
Security revenue was $381 million and grew 17% year over year and 21% in constant currency with continued strength from our zero Trust business led by God of War.
Garda core delivered approximately $14 million of revenue in Q2.
Security represented 42% of total revenue in Q2, which is up four points from Q2, a year ago compute.
Compute revenue was $106 million in Q2, growing 74% year over year and 78% in constant currency with node contributed revenue of approximately $32 million in the second quarter.
Delivery revenue was $417 million down 11% year over year and 8% in constant currency.
Worth, noting that while traffic on our network continued to grow the rate of that traffic rose declined sequentially in Q2.
As Tom mentioned, we believe that the current macroeconomic environment.
Had the greatest impact on customers and our media vertical most notably in advertising and gaming.
These challenges are most apparent in our delivery results.
Also as we talked about at our analyst day in May we started to align our pricing strategy with the new traffic growth rates, we have seen on our network over the last two quarters.
In addition to scaling back discounts provided upon renewal, we've decided to turn away some business from a very small number of customers, who have extreme traffic peaks compared to their daily usage patterns.
Well. This will result in slightly less revenue it will enable us to significantly lower our network capex as we focus on cash flow from our delivery business to help accelerate our investments in faster growing areas like compute and security.
Sales in our international markets represented 47% of total revenue in Q2 unchanged from Q1.
International revenue grew 6% year over year or 13% in constant currency.
Finally revenue from our U S market was $477 million and grew 6% year over year.
Yeah.
Now to cost and profitability cash gross margin was 75%.
GAAP gross margin, which includes both depreciation and stock based compensation was 62%.
non-GAAP cash operating expenses were $292 million.
Adjusted EBITDA was $388 million and our adjusted EBITA margin was 43%.
non-GAAP operating income was $262 million non-GAAP operating margin was 29%.
It is worth noting that our non-GAAP operating margin was negatively impacted by approximately one point due to unfavorable foreign exchange.
Capital expenditures in Q2, excluding equity compensation and capitalized interest expense were $104 million. This was much better than we expected partly due to some one node specific capex that pushed from Q2 into Q3 as well as some savings from our strategy of being more selective on certain types of customer traffic.
These savings were most apparent in our network capex, excluding lienau, which was only about 3% of revenue.
GAAP net income for the second quarter was $120 million for 74 cents of earnings per diluted share.
non-GAAP net income was $216 million for one dollar and 35 cents of earnings per diluted share down 5% year over year and up one half of 1% in constant currency.
It's worth noting that foreign exchange negatively impacted our non-GAAP EPS by approximately seven cents.
Taxes included in our non-GAAP earnings were $42 million based on the Q2 effective tax rate of approximately 60%.
This was about one and a half points higher than last year.
Now to cash and our use of capital.
As of June 30th our cash cash equivalents in marketable securities totaled approximately $1 $3 billion.
During the second quarter, we spent approximately $165 million to repurchase shares buying back approximately one 6 million shares.
Our ongoing share repurchase activity has resulted in a net reduction in our non-GAAP fully diluted shares outstanding of approximately 4 million shares or roughly 2% on a year over year basis.
We ended Q2 with approximately $1.5 billion remaining on our current repurchase authorization.
Our intention is to continue to buy back shares to offset dilution from employee equity programs over time to be opportunistic both M&A and share repurchases.
Before I provide our Q3 outlook and an update to our 2022 guidance I want to highlight several factors.
First with nearly 50% of our revenue coming from outside the U S. Foreign exchange continues to be a significant headwind to our reported results at current spot rates. Our guidance now assumes foreign exchange was a negative $114 million impact to revenue in 2022 on a year over year basis.
As I mentioned previously foreign exchange also impacts our margins and earnings we.
We estimate FX will negatively impact non-GAAP operating margin by approximately one point year over year and non-GAAP earnings by approximately 31 cents for the full year 2022.
Second.
We are incrementally more cautious on the outlook for traffic growth in Q3 Q4.
Just on our year to date trend plus what we what we are hearing from other large internet companies, we are anticipating a slower than usual traffic growth rate for the remainder of 2022.
Third as a result of the expected slower traffic growth rate and are updating pricing strategy that we noted earlier we.
We anticipate capex to be significantly below our previous outlook.
Finally, as Tom mentioned, we expect the more challenging macroeconomic environment to dampen our revenue gross margins in the near term.
When combined with the impact of renewing eight of our top 10 customers in the first half of the year, we expect delivery revenue to decline at a slightly higher rate on a year over year basis for the next two quarters.
As a result of these factors, we also expect margins to decline over the near term as well.
We believe strongly in the long term opportunities in front of us, especially in security and compute and therefore plan to continue to invest to exploit the market opportunity in these areas.
That said as Tom highlighted we are embarking on several major initiatives to reduce costs and improve operational efficiency.
The potential savings for each of these areas is in the tens of millions of dollars specifically, we're planning to do the following three things first.
Significantly reduce our cloud spend with hyperscale or as we migrate internal akamai workloads to Lenovo.
Second.
Realized savings from our strategy of being more selective on certain types of customer traffic, which we expect will result in both lower capital expenditures and depreciation expense.
And third optimize our real estate footprint as.
As the hybrid work experience becomes more permanent.
Now turning to our Q3 guidance.
We are projecting revenue in the range of 868 $883 million were up 1% to 3% as reported or 5% to 7% in constant currency over Q3, 2021.
Foreign exchange fluctuations are expected to have a negative $11 million impact on Q3 revenue compared to Q2 levels and a negative $36 million in tax year over year.
At these revenue levels, we expect cash gross margins of approximately 74%.
In the short term our gross margin is negatively impacted by our continued investment in Garda court in the node related head count as well as higher third party cloud costs.
However, we are confident that this is a short term impact only we expect our gross margin to expand to the high 70% long term target model as we see continued strong growth from both Garda Cortland node and as we reduce our third party cloud costs over time.
Q3, non-GAAP operating expenses are projected to be $283 million to $291 million, we anticipate Q3 EBITDA margins of approximately 41%.
We expect non-GAAP depreciation expense to be between $125 million to $128 million.
And we expect non-GAAP operating margin to be approximately 27% for Q3 is.
As mentioned previously the near term decline in operating margin is due to slower traffic and revenue growth. Our annual merit based wage increase which become effective July 1st the negative impact from foreign exchange investments associated with Garda Cortland node and increase third party cloud costs.
As our security and compute business continue to grow and we reap the benefits of the cost savings actions. I described earlier, we are confident that our operating margins returned to 30% and then grow from there.
Moving onto Capex.
We expect to spend approximately $109 million to $119 million, excluding equity compensation and capitalized interest in the third quarter. This represents approximately 13% of projected total revenue.
And with the overall revenue and spend configuration I just outlined we expect Q3 non-GAAP EPS in the range of $1.21 to $1.26. The.
C. P. S guidance assumes taxes of $37 million to $38 million based on an estimated quarterly non-GAAP effective tax rate of approximately 16%.
It also reflects a fully diluted share count of approximately 160 million shares.
Looking ahead to the full year, we now expect revenue of 3.573.
$3.61 billion, which was up 3% to 4% year over year as reported or up 6% to 8% in constant currency.
We continue to expect security growth of approximately 20% in constant currency for the full year 2022.
We now estimate non-GAAP operating margins to be approximately 28% to 29% and.
non-GAAP earnings per diluted share of $5.19 to $5.37 and this non-GAAP earnings guidance is based on a non-GAAP effective tax rate of approximately 16% and a fully diluted share count of approximately 160 million shares.
Finally full year Capex is anticipated to be approximately 12% to 13% of revenue.
In closing, while the macroeconomic backdrop has become more uncertain. We believe that we are on the right markets differentiated products that remain highly valued by our customers.
Thank you, Tom and I would be happy to take your questions operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
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The first question is from James Breen of William Blair. Please go ahead.
Thanks can you just talk about obviously the revenue guidance for the third quarters lower than where consensus by about $10 million.
Can you talk about the trade off between margins and going after some of this delivery traffic in general because it's you know the EBITDA margins are about the same but obviously the growth is Florida topline.
Yeah, Hey, Jim This is Ed.
In terms of the the guide there's really two pieces to it. The first one is obviously FX has gotten incrementally worse, that's probably about half of the of the Delta. The rest of it is the slower traffic that we talked about I think your question was specific to the.
The tradeoff that we're making.
The first immediate impact that you get on that trade off from taking less of that peaky traffic as you save on Capex. So that will make its way through the P&L through lower depreciation and obviously immediately through cash flow and so the decision that we've made is obviously as we talked about in may.
As traffic levels have come down the discounts that we offer upon renewal are lower and in some cases, we've seen a small handful of customers that have the traffic. There are peaks are still growing at pretty significant rates, but their day to day traffic's not so there is a formula that we go through when a tradeoff that we made that I think makes a lot of sense for us.
Especially as I look at the types of returns we can get from the faster growing areas like security and compute.
So there is a shift in general just to a more a little bit more of an asset light business and focusing on some of these other areas.
Yeah, I mean, I would say you know the obviously compute can be.
I wouldn't call it an asset heavy business, but it does have a fair bit of Capex, we talked about our capex for Llanelli being about 2% of revenue.
In total it obviously it could be a little bit front end loaded we actually took the advantage to try to spend a little bit more for Lenovo.
Just on some of the conversations we're having we're starting to see some good demand and obviously, Tom talked about signing of a pretty significant customer in the quarter. So.
You know what we're doing though on the on the Akamai cause that called the legacy Akamai delivery businesses, we are being a bit more selective than reducing capex I made a comment that our network capex. Excluding the node was 3% that's typically around call it 8% to 10% at least where it's been running over the last couple of years.
So I think it's just a question of being more selective.
With certain types of traffic is really a handful of customers that have that type of traffic pattern is generally event driven and what we're saying is it's just a better return to ship some of that investment in other places.
Great and then just maybe just one for Tom.
Can you just talk about some of the success youre, having sort of selling that product into your existing customer base.
Yeah, obviously very early days, we've got a lot of work.
With one L. A as we've talked about but it's great to land our first very large customer playing a critical app actually it's for transcoding user content onto the other node platform as I mentioned, that's a just that app alone as it scales is worth several million dollars a year of revenue for us.
Tip of the iceberg. This is a customer that spans many hundreds of millions of dollars a year on cloud computing.
That's just one customer so a lot of good opportunity ahead, and we're making good progress on our roadmap for one out.
Great. Thanks.
The next question is from James Fish with Piper Sandler. Please go ahead.
Hey, guys. Thanks for the questions.
You know we've seen some security vendors report here in securities going through kind of actually still a strong environments, but despite the macro and when I look at your normalized rate of about 17% you know, it's a bit lighter than what we saw in Q1 in the last couple last couple of years really what's what's going on especially on the core WAF.
And Ddos and unit and I'll throw Bot management.
In terms of the sizing and growth against some of the newer solutions like EAA and Penn here and is there a way to think about if you guys are seeing any higher net churn overall or how to balance net new business versus kind of the expansion that you're seeing with your existing customers and security.
I'll start with that and then maybe some comments a security is a very strong.
We have the market leading WAF are by far in fact that if you look at the most recent magic quadrants in analyst ratings, and we widen the gap with the competition Bot manager or also the market leader by far and now we have a count protect their belt on top growing very well you know he is.
Small today, a good opportunity for growth, particularly coming on the following Garda core Garter called very exciting you know when you think about the enterprise security landscape and segmentation I think it's been something that historically was overlooked mainly because it wasn't done very well, but I think as you look for.
Our future is probably the most important thing in enterprise can do.
You could buy everybody's security products today, a company can buy everything and now we're still going to find a way in somewhere and the real key is to identify a when the malware has gotten inside where it is and block at some sporadic.
And that's why Gartner core is the best defense against malware.
And ransomware.
And they have the best solution as rated by analysts and we see really good traction there, but still on relatively small numbers page integrity manager, a relatively new product, but a very bright future again, it's new so it's still small today, but that's going to allow company.
He is satisfied the new PCI requirement something that's hard for a company to do on their own you know the new requirements.
As a company.
It has to have safe guards against malware that gets into the digital supply chain and winds up on their user's browser.
You know and that's just very hard for any enterprise to do but when when akamai is delivering that content. We can place our scripts on the page to make sure that the user experience is safe and to make sure that if the if the user has you know ingested malware somewhere in the supply chain that we can identify it in blue.
Lock it so the users not compromised. So I think if you look at our security product portfolio are really doing very well and we're in early days with some of the most exciting products that have a lot of future runway.
Got it maybe for Ed on the delivery side and you alluded to you know a handful of customers that you guys are essentially don't really want to deal with going forward. Just in terms of the type of traffic that you're delivering for band versus you know obviously the peaks versus the average you know taking a step back what are you seeing in terms of this new price.
<unk> strategy versus kind of a churn as well as how to think about you know this removal of customers on the second half guide and if it really impacts you know the security business going forward.
Yeah, Great question, Jim So let me just clarify that we're not.
Not doing business with these customers just kind of taking a step back you know like I said, it's a handful of customers who typically.
Would you look at it is these are multi CDN customers that use many different vendors and tend to have big peaks for events.
And the way you look at those customers as Theres, a certain amount of day to day traffic you've got a certain price point that you are willing to sell at and there's a certain peak to average ratio that you are looking at so as we go and renew some of these customers were being a lot more disciplined in terms of the ore.
Taking a different approach as far as the level of discount that we're willing to provide so therefore, the customer has to make a decision about they're still using us, but how are they going to handle those peaks anything to straighten them out over a longer period of time try to find additional peak in the market et cetera. So there's still very big customers of ours, what we are.
Pushing back a bit in terms of how much people are willing to take on the network and as a result, we may lose a little bit of that day to day traffic, but we're still a significant vendor as far as the impact on security and other products, we have not seen any impact on that we're not losing these customers they're not leaving the platform. It's just we are holding the line a bit more on price and we may lose a little bit of the delivery is.
As a result, but what we're also losing a lot of the big peak and that ratio is getting more in line with what makes more economic sense.
That's very helpful. Thanks.
The next question is from Rishi Deloria of RBC. Please go ahead.
Oh wonderful. Thanks, so much for taking my question, maybe first I want to touch on on security. So we've obviously been talked a lot about the delivery business, but we've seen a pretty decent diesel in security this quarter relative to last quarter, even looking on a constant currency basis I Love you know even on a constant currency.
Basically as you saw on the less than $6 million added sequentially.
Q1 to Q2, and what should be a pretty strong security spending environment at least based on what others in the space are saying can you maybe just help US understand you know what what what what's going on in the security business and just how we should be thinking about that going forward and then I have a follow up.
Yeah sure so I'll take that.
Keep in mind, if you remember last quarter, we talked about Garda core revenue, having about $7 million of one license revenue, which was a pull forward of about a percent or so of growth into that quarter, so that impacted it as well.
One other thing to keep in mind too if you recall.
That's the business during 'twenty 2020 'twenty, one we had a pretty strong uptick from the educational vertical and there that was when kids were working from home working from home doing school from home and there was some government funding that was enabling folks to.
Be able to work.
Go to school remotely and that funding has gone away. So we've seen a little bit of a decline there I think it's a combination of those two factors that led to a <unk>.
Little bit lighter adult sort of a sequential growth quarter over quarter, but some of the other things that we're seeing on the line.
Our business, we're seeing very strong demand and bot manager Count project. There is a newer version of that product or an AD, that's going pretty well, but it's still pretty early days takes a while for that too.
The growth, but those are the factors that you need to consider as you think about the slowdown in the growth there.
Got it that's that's that's really helpful. Thank you and then just maybe I want to be explicit about macro in the guidance. When we think about you know your your guidance you talked about all the moving pieces between customers and turning away some piece of the business and all that kind of stuff, but I wanna be explicit what are you assuming in <unk>.
Terms of the macro environment are you assuming it kind of stays as it is today or are you, assuming some sort of macro degradation.
And and and media you know to really round that out right.
You know I, if I think about your last true recession now that you are around for right Oh eight O. Nine you know, even though traffic continued to grow at a nice rate during those years pricing compression you know led to a pretty big diesel I know, there's obviously a very different business than it was 15 years ago, but maybe I just want to understand your macro assumptions and maybe you know tied into them.
Macro assumptions, what you're assuming for the pricing environment again, consistent with what you're seeing worse better any color there would be helpful. Thank you.
Sure Yeah. So.
So I'll start with start with pricing. So one of the things the biggest area, where you see pricing in fact, the business is on delivery we.
Don't see the typical price declines that you would expect to see in the security business the business it doesn't work that way.
I don't anticipate that being a significant problem for us obviously.
Anticipating that traffic is not going to recover to growth rates like we've seen in the past, we said that in our prepared remarks, so kind of a muted more muted Q4 than we typically see Q4 tends to be a strong quarter for us we anticipate that the macroeconomic environment is not going to get any better one of the areas that I'm keeping a close eye on is Europe .
We're seeing.
A lot of challenges in Europe are seeing.
Seeing no.
Energy prices for example are really really high over in Europe coming into the winter session. So you could see.
Potentially less traffic related to people cutting subscriptions or doing things like that less shopping online.
So that's one of the things that I'm concerned about and then also the recession and the impact that it could have on our customers potentially delaying buying decisions and things like that but you know obviously, we're producing a tremendous amount of cash the business is in great shape, it's much more well diversified than in the past. So I think we'll weather the storm pretty well, but I do think as Tom and I both.
As mentioned in our prepared remarks that it is going to dampen our revenue growth a bit Aaron now also our margins for a short period of time.
Yeah.
Alright got it. Thank you so much I appreciate it.
The next question is from Keith Weiss of Morgan Stanley . Please go ahead.
Thanks. This is Josh Baer on for Keith I appreciate the question.
Wanted to ask about one node or are these enterprises that are testing out the platform are they considering one node as primary cloud vendor and I guess, assuming it's it's a multi cloud strategy approach. What are some use cases that enterprises are testing with one node what types of workloads or products do you expect to be pop.
<unk> with enterprises.
Well really any kind of a cloud compute application is suitable for lent out obviously, we support you know of containers as a service V M. As a service so anything you'd do it in the cloud you could do online out I I think the use cases, initially and how the customers are viewing it as is trying.
It up with some some new applications and in the one case of the media company, we talked about it as a critical application, they're running their new transcoding app per user generated content on us that's about as critical as it gets and as I mentioned that you know may become worth millions of dollars that's it.
Scales up but this is a company that's spending many hundreds of millions of dollars in the cloud. So it's not a situation where we think they're just gonna go switch all of that onto Akamai, you know right away, but it is a business that I think we can really grow in that we're in excellent position to tap into a very large cloud computing market you know that.
Market is a you know a couple of hundred billion dollars growing at a very rapid clip and akamai as a trusted partner for many major enterprises that are looking for some diversification that want a reliable partner has great performance, which we do with our distributed platform knows how to.
Handle scale and at an affordable price point, which were in an excellent position to provide so I'm I'm really optimistic about the future of our compute business.
Great. It sounds like a lot of the focus is on the Hyperscale or is in the enterprise opportunity I. Just also wanted to ask if you're seeing any changes in the competitive landscape around some of the other alternative cloud providers, serving F. N B I'm just in regard to any pricing changes or any other moving pieces in the market.
Well as you know one of our competitors they're raised pricing.
You know what I.
I would say so far there's not a big change in the competitive landscape in the SMB market, we do intend to offer other services such as security to that customer base, but I think the real focus for us is bringing upscaling lienau to make it really enterprise major enterprise grade and scaling it out and making it be much more of that.
<unk>, which will obviously improve performance and you know going after the large enterprises are you now Matt.
Many of our customers spend.
10, or more times as much with the major clouds and they do.
With us for delivery and security.
And so that's a great opportunity for akamai to be able to now provide them with compute as well so that they can build their apps on akamai run them, obviously deliver and secure them on akamai it really at an incredible opportunity.
Great. Thank you.
The next question is from Frank Louthan of Raymond James. Please go ahead.
Great. Thank you can you just be a little bit more clear some of them you mentioned the media companies and the issues with some of the you know the traffic slowing down do you think this is more of a near term issue or seasonal.
And how long do you think before some of that traffic begins to come back a bit.
Yeah, as we mentioned there's a variety of factors that are impacting the media companies and enhance traffic.
You've sort of got a year I mean, we still got called it but this is more like a non COVID-19 year lapping of Covid year, and so people are out and about more and so there's less traffic growth due to that.
You've got impacts of what you know in some places as a recession and you've seen some of the media companies report you know that they've got their own challenges with usage and so that tends to reduce traffic, obviously I've got foreign exchange headwinds, which impacts the revenue we get from media companies overseas.
And so all of that is impacting traffic and the media business for Akamai I don't see those as being permanent and you know we do expect over the long term debt.
You know the traffic returns to more normal growth rates are and that the revenue for the delivery business stabilizes.
It may take a little while several quarters are at this point, but I don't think that's a long term phenomenon.
Okay, Great and can you quantify how much capex you might be saving annually from sort of the pushing out some of the higher volume folks.
Yeah, Frank probably the best way to think about that if you remember coming into the year, we were sort of got into that 15% to 16% range, who says well no. It would be a couple of points. We're now down at 12 to 13, so that's somewhere in the three to four.
Cent range is probably a good number to be working with I also gave the data point out that our network only sort of legacy akamai delivery business or Akamai network Capex was around 3%, where it typically had run around 8%.
Now well, obviously, you still have to invest in the network and we expect traffic to grow et cetera.
But I think we can remain in a lower than sort of long term trend model here for a while obviously if we see significant increase in traffic, we'll obviously have better deliver results on book deal with it at the time, but kind of looking out over the next.
Several quarters and into next year I'd expect to see the capex levels that sort of the levels Youre seeing here.
Alright, great. Thank you very much.
Yeah.
The next question is from Santa Monica Ronnie at Citi. Please go ahead.
Thank you for taking my question. This one's for you just with respect to a lot of the detailed commentary on your expectations that the delivery franchise for the second half. So a number of moving pieces here, but what I wanted to focus on it maybe doubling back to some of your comments from the last earnings call with respect to kill the observations around gaming.
Traffic slowing down so I mean, very nice bolt is a claim that you're talking about from a delivery standpoint, it's purely coming from the OTT side, but I'd love to kind of get a contract.
More of an in depth.
The U S, where you're seeing most I guess elasticity or volatility from traffic.
Dan Cohen, and how youre thinking about those trends and maybe a more granular fashion in the back half, especially on the back of the renewals that are now behind you.
Yeah. Good question so.
We just try to answer it this way our obviously our largest source of traffic is video traffic and we are seeing video traffic.
The growth rate of that slower than we had expected still growing but slower than we expected.
Probably the more noticeable areas would be gaming software and then.
And advertising related.
So with some of the portal news portals et cetera that sort of stuff that.
I went back to buy buy advertising.
But that's the area, but if you have a slowdown in video it's such a significant portion of traffic that can tend to be the biggest driver now will that recover what we typically see in Q4 as we do see somewhat of a device cycle, where you see new devices coming online oftentimes you see new content that comes online in Q4.
It was back to school there is the start of the fall sports season that we typically see.
You know what a big increase in traffic what we're looking at this year as we're being more cautious we're still expecting it to increase like we've seen in Q4, but just not at the levels that we've seen in the past just based on the trends that we're seeing in the market today, what we're hearing from other companies what we're hearing from our customers.
But that's probably the best way to think about it.
I appreciate that and just really quickly on the macro commentary that your share gains, especially with some of the key observations in Europe and I'm curious about you know.
Concerns or observations with respect to sales cycle elongation deal decision.
Delays in deal decision, making.
Stand point anything tangible that you can share with us just with respect to those dynamics.
Yeah, the broader economy.
Yeah.
A good question, it's I'd say, it's still kind of early days, but that's certainly something that we're looking at.
Security tends to be one of the places that you wouldn't delay a purchase, especially if you're under an attack if youre not under attack, sometimes you might elongate that a little bit, but we haven't seen anything yet that's worth calling out in terms of elongated sales cycles I think I'm more.
Concerned with what happens you know going into the winter and.
Theres talk of cutting back use of natural gas and the impact on GDP that obviously would have an impact on not just talked on my part on many many companies. So that's something you look out for and then also just as you get.
I went to a situation like that you know keeping a close eye on receivables and making sure that you're not giving your customers are in good financial health. So far no issues, there, but that's again something that we'd be looking out for.
Thank you so much.
Yeah.
The next question is from Tim Moran of Oppenheimer. Please go ahead.
Thanks, guys since one lienau, how much can you save enterprises do you think on their compute bill wicklund node in seconds.
Secondly, it's just a good run rate for what are the compute segment or maybe any color on what the growth rates, you're kind of looking for there. Thank you.
Okay.
Yeah, the savings can be substantial you know.
The list pricing that we offer for Leno. It is substantially less than what you see the hyper scaler offering thats public information.
And for major enterprises, obviously, you can have some discount to that and they're really good news is that we believe we can do this at substantial margins. So as we grow the business actually improve our margins overall.
And Ed do you want to take the second part of that.
Yeah. So in terms of the run rate and the growth expectations.
Yeah, I mean, I think in terms of the near term run rate, that's probably a reasonable place to peg it.
What Tom and Adam talked about in May at our analyst day is we're making some substantial upgrades to the capabilities that will note haps has that doesn't happen overnight. So really we will start to see the big enterprise growth will be into 'twenty three in the back half of 'twenty, three 'twenty four etcetera, but.
You know pretty substantial growth here, you know, obviously group towards 74 plus percent.
And compute but good place to put it for now but it will take some time to build out the capacity as well as the added features we're going as Tom said at a pretty good pace here, but that's when you really start to see the exciting growth was once oh that capabilities up and available.
Thank you.
Yeah.
The next question is from really Katzenjammer of D. A Davidson. Please go ahead.
Great. Thanks for taking my questions guys. So you.
For the balance of the year, you're taking the revenue guide down by 55 million you said FX headwinds for the year now at 114 versus 100 previously so ex FX had when you were taken down by $41 million I'm curious, if you could kind of bucket it out that $41 million reduction.
Between lower traffic growth outlook or macro challenges versus maybe some of the revenue you're losing from intentionally taking less traffic from some of those customers with high peaks.
Or other areas, where where you're reducing the guide.
Yeah, I'd say the majority of it comes from the slower traffic that is going to be the biggest component of it the impact for some of the traffic. We're turning away isn't all that significant but it does contribute to it you know I don't have an exact percentage for you, but that's not a significant part of it and then the macroeconomic would be the remainder. So if you were to stack rank them it would be slower traffic.
And then the.
Impact from turning away some of the traffic that we've.
We've talked about in terms of the peaky traffic.
Okay, and then on the node.
I'm curious like what is your total.
Internal spend with the Hyperscale is currently what percent do you think you could move to a node over time, but what's the kind of expected cost savings do you think you can get from that.
Yeah, we're spending about $100 million a year annually now are with the cloud companies and you know over the next year or two power ultimately, we would migrate pretty much most all of that on until the note and that you know substantial savings. So that's why it's one of our several initiatives we're taking.
To improve margins also it's great to be using our own services and it'll help us as we do the work with Lenovo to make it enterprise ready to be using it across the spectrum of applications at Akamai our.
We're very much like our customers are looking for ways to save on costs and get great performance out of the cloud compute platform.
Yeah.
Great. Thanks for taking my questions.
The next question is from Jeff Van <unk> of Craig Hallum. Please go ahead.
Great just a couple for me I think on the security side I just want to clarify I know you said, you're comfortable with 20% revenue growth to.
To be clear is that as reported or constant currency and then just kind of the puts and takes of being able to sustain that 20% are in the out year given kind of the deceleration we're seeing right now.
Sure I'll take the first part Tom you can take the second part in terms of the future.
Constant currency and just remember Jeff that the.
<unk> got a core acquisition anniversaries in the fourth quarter.
Got it yeah.
Yeah and in terms of the the longer range, obviously were seeing very good growth in our flagship products.
Web App firewall and bot manager, they're the largest contribution of revenue a really good growth, but on smaller numbers, obviously for zero Trust enterprise computing in the longer timeframe I think that's what drives a lot of the growth in security the infrastructure category growing more slowly today are also on a moderate some.
<unk> number, but I think in the long term you see the enterprise Zero Trust Security group led by Garda Court.
You know as the market leader in stopping ransomware.
So I guess, there's a bucket no clear sort of things you would call out that should drive acceleration or deceleration, maybe a different way to look at it.
Well, there's the three categories. We have today, the biggest news app and API security very strong growth I think we get continued strong growth there a lot of innovation going on with account protect our page integrity manager, we talked about being really important for PCI compliance, we have a new audience hijacking prevention.
That looks really cool.
Infrastructure is moderate size today, and that's not growing as fast that your Ddos protection and your your DNS.
Defenses.
And then the really high growth areas Zero Trust Enterprise security led by God of core, but it's the smallest of the three.
And so you sort of have three different clubs with a little bit different dynamic in each.
Mhm.
And one last if I could on on delivery, obviously, you're making some changes around the peaking traffic.
What about pricing disciplines, just didn't traffic in general I think you had commented last quarter you were taking a much more sort of across the board.
Conservative approach to pricing just pricing outside that peaking how has your approach changed this quarter and likely to change the rest of year.
Yeah. So you know we've been instituting that now for the last several months.
And as Tom talked about we have not seen a lot of churn we've been fairly successful in the renewals that we've had you know we're still offering discounts to customers while traffic growth. It's just not at the same levels that we've done historically.
Yeah, Okay fair enough. Thank you.
The next question is from will power of Baird. Please go ahead.
Hey, guys. Thanks for taking the questions Charlie really conquer we'll.
Just one question for me on the pricing and contract renegotiations kind of building on your responses any big contracts coming up for renewal that we should be aware of in the second half and then for the eight that you mentioned you had in the first half you know any more color on just the tone and the overall discussions like pricing compression.
You mentioned, a little bit, but just the health of the customer you're talking to and.
Just any more color on that would be great.
Yeah sure. So theres no no big ones coming up in the second half like I said, if we ever have a big clump of them or what we'll call. It out for I think it's just helpful to <unk>.
Provide commentary and get you guys aware of what's happening in terms of the.
Dynamics outside of pushing back a little bit on sort of the peak to average which is part of the normal discussion that we have I would say we're kind of came in line with what we had expected.
We did try to apply our strategy of being a bit more.
Disciplined I don't know if that's the right word, but more attuned to what's going on with volumes and having conversations with customers about expected volume growths et cetera. So.
I'm pleased.
Pleased with where we landed and obviously renewing large customers in this and the delivery segment is never fun thing, but kept it kind of came up as expected and then.
Your other question was on just remind me again.
I think you actually hit all of the questions. Yeah, just the overall tone of the conversations but yeah, I think you answered it pretty well.
So overall I mean that the customers are still in great shape. There are some very large brands and are still very healthy we added services to most of them. So not only were we just dealing with delivery, but we're also adding on additional capabilities as well.
Great. Thanks.
The next question is from Alex Henderson of Needham. Please go ahead.
Thanks, So given both card according the node.
Had not been in the cold for over a year I was wondering if you could look at them from the perspective of.
As if they had been in a in the poll for the entire year, what their internal growth rates look like so that we have some gauge of the rate of growth.
At those two acquisitions.
Acquisitions.
Yeah. That's a good question Alex I'll take this one time so.
No so lenovo wind up being in for most of the year, but just prior to acquisition. We had said in our commentary there growing around 15%, obviously will accelerate that as we start to add enterprise customers. So I expect that to increase with Garda core.
Our first call we've taken our guidance up quite a bit but if you look at where our kind of internal one where our run rate is now we're looking at over $60 million that would be almost a doubling of where they were when we acquired them even slightly higher than that so critical are growing extremely fast I'd say sort of if it was a stand alone on its own would be more than a double.
And with node, we just picked it up and it's starting to add that functionality and expect to accelerate that growth rate, but they were about 15% private acquisition.
There was a comment earlier.
Excuse me a comment earlier in the call that.
Adjusting for acquisitions, because the underlying growth rate was 17% as a would you confirm that that's an accurate.
You know calculus.
Yeah, that's about the right math, 21% constant currency got a core was about $14 million. So that's roughly 4%. So that's about right.
Perfect.
And then just just looking at the international markets.
How are you handling.
No.
FX swings that are going on in terms of pricing are you offsetting it.
Yeah the.
Effective price reduction that that implies.
And so if you're in local currency and where youre not in local currency are you pricing down to the to lower the burden how are you handling.
The customer pressures around that.
Yeah. So most of most of the customers outside the U S are paying us in local currency.
So they build in local currency.
There are several that are not certain countries. For example will be in U S. Dollar. So far it has not been a big issue with our customers pushing back we do some hedging on balance sheet, but not from an operational perspective, our cash flow hedging and then in terms of pricing, we do take that into consideration as.
You know, we're going through our renewals.
Customers that are done outside the U S and also just in general depending on where their traffic is that also comes into effect. If we're delivering in countries that are more expensive, we take that into effect as well.
Thanks.
Okay. Thank you Alex and thank you everyone. So in closing we will be presenting at a number of investor conferences and events throughout the rest of the third quarter details of these can be found in the Investor Relations section of Akamai Dot com. Thank you for joining us and all of US here at Akamai wish continued good health to you and yours have a nice evening.
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