Q4 2022 Akamai Technologies Inc Earnings Call
Good afternoon, and welcome to the Akamai Technologies, Inc. Earnings Q4 fiscal year 2022 earnings conference call.
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I'll 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 fourth quarter 2022 earnings call speaking 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 macroeconomic trends the integration of any acquisitions and any impact from geopolitical.
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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 February 14th 2023.
Goodbye disclaims any obligation to update these statements to reflect new information future events or circumstances, except as required by law.
As a reminder would 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 at 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 strong results in the fourth quarter exceeding the high end of our guidance range on both the top and bottom lines. Despite ongoing challenges with the global economic environment.
Q4 revenue was $928 million up 6% year over year in constant currency. Our revenue growth was driven by continued strong demand for our security products are fast growing compute business and by higher than expected delivery traffic.
Security and compute accounted for 55% of our overall revenue in the fourth quarter and grew a combined 22% year over year in constant currency.
non-GAAP operating margin in Q4 was 28% Q4, non-GAAP EPS was $1.37 per diluted share down 2% year over year in constant currency.
For the full year revenue was $3.62 billion up 8% over 2021 in constant currency non.
non-GAAP operating margin was 29% down from 32% in 2021 and slightly below our goal of 30%. The decline last year was due to the impact of foreign exchange the challenging macroeconomic environment. The investments we made to grow guard of course segmentation product and the <unk>.
Rising costs of third party cloud services.
As Ed will describe in a few minutes, we're taking several actions to reduce costs and to shift resources to areas with the strongest potential for growth such as cyber security and especially cloud computing.
Going forward, we anticipate that our margins will likely remain slightly under 30% in the near term and our goal is to grow margins back over 30% during the medium to long term.
non-GAAP EPS last year was $5.37 down 1% over 2021 in constant currency.
2022 was another strong year for cash generation at Akamai with $816 million in free cash flow, representing 23% of revenue.
Akamai strong cash generation enables us to make strategic acquisitions, while also returning value to shareholders. In 2022, we spent $608 million to buy back 6.4 million shares over the last 10 years, we've reduced the number of Akamai shares outstanding by approximately two.
Two 1 million or 12%.
I will now say a few words about each of our three main lines of business starting with security.
Our security products generated revenue of $400 million in Q4 up 14% year over year in constant currency.
For the full year security revenue reached $1.54 billion and grew 20% over 2021 in constant currency.
We saw especially strong growth for our market, leading guard of course segmentation product with revenue, reaching $68 million for the full year.
New segmentation customers in Q4 included one of the largest insurance companies in the U S. A leading internet services conglomerate in Japan, and one of the largest banks in Scandinavia.
Enterprises are choosing our segmentation solution because of its ability to protect against ransomware and data ex filtration attacks and also for the visibility it provides into their internal infrastructure.
These are also among the reasons that Akamai was named as the leader in the Forrester New wave for micro segmentation last year.
We also saw large wins for our market, leading application security solutions in Q4, including at one of the Uk's largest multinational energy companies one of the big three multinational banks in Singapore in two of the largest tech hardware companies in the U S.
Overall security accounted for 43% of our revenue last year up from 39% in 2020 one.
In 2023, we expect security to become our largest line of business. This represents a significant milestone in our evolution since we pioneered the CDN market place 25 years ago.
That said and as the security business becomes larger and with customers, becoming more cost conscious due to the challenging macroeconomic environment the growth rate of our security business has slowed.
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As you might expect we're working hard to realize the full potential of our security business, both in terms of growth and efficiency.
For example, we're in the process of moving the compute components of our security products from third party cloud providers to our new Akamai connected cloud platform, a transformation that will save us a substantial amount of opex over the next several years, we're redeploying resources within security from low.
Sure growth areas, the high growth areas such as segmentation.
And we're redeploying go to market resources to achieve stronger cross sell and penetration within our existing base.
We're also working more closely with partners to drive better adoption, among new customers and we're continuing to innovate new capabilities such as our recently released account protector and our new brand protector solutions to keep our customers safe amidst a rapidly evolving attack landscape.
While we believe that our security business will continue to generate strong returns for our shareholders. We foresee an even bigger opportunity in cloud computing and its potential to return akamai to double digit topline growth over the longer term.
Our compute business performed well in Q4 with revenue of $112 million up 65% year over year in constant currency for.
For the full year compute revenue was $405 million and grew 64% over 2021 in constant currency.
Earlier today, we unveiled akamai connected cloud our massively distributed platform for cloud computing security and content delivery.
Can my connected cloud links low nodes 11 core data centers with Akamai is 4100 edge computing locations. In addition, we're in the process of building out 14, more core enterprise scale data centers with at least three expected to come online in the next few months.
We believe integrating these core cloud computing data centers with our unique edge platform will allow us to offer our customers better performance greater scale and lower cost for enterprise workloads.
We also plan to have our new virtual private cloud capability and the first of more than 50 distributed cloud computing sites available in the second half of the year there.
The distributed sites will enable us to bring cloud computing much closer to end users around the world, which will further enhance the performance benefits of Akamai connected cloud.
Of course, and as Ed will describe shortly we will be incurring substantial capex and co location costs associated with the build out of our compute infrastructure over the near term.
We're also in the process of re tasking, approximately 1000 positions or about 10% of our workforce to spend the majority of their time working on the development deployment support and go to market efforts associated with Akamai connected cloud.
Because of the natural synergy and close integration between cloud computing and our existing edge platform. We believe we can accomplish this transformation without adding significant head count to the business.
This shift will also further enhance the efficiency of our delivery business.
We're undertaking this ambitious investment and Akamai connected cloud because we believe it will create substantial value for shareholders in the medium and long term, we expect to achieve nearly half a billion dollars in revenue from compute in 2023 and the investment we're making this year should help drive that number substantially.
Tangibly higher in 'twenty, 'twenty, four and beyond as we use the new capabilities and capacity to support mission critical enterprise workloads.
I think it's worth noting that akamai is taking a fundamentally different approach to the cloud computing market than providers, who base their platforms solely on core data centers.
Our strategy is to offer the worlds most distributed platform, placing compute storage database and other cloud services closer to end users and enterprise data centers.
As I D. CS VP of research, Dave Mccarthy says.
The clouds next phase requires a shift in how developers and enterprises think about getting applications and data closer to their customers. It redefines, how the industry looks at things like performance scale cost and security as workloads are no longer built for one place but.
Our delivered across a wide spectrum of compute and geography.
I D. C adds that Akamai is innovative rethinking of how this gets done and how it is architected. The akamai connected cloud puts it in a unique position to usher in an exciting new era for technology and to help enterprises build deploy and secure distributed applications.
We couldn't agree more distributed applications require a distributed architecture.
Akamai has leadership position at the edge of the Internet enables us to scale just about everything we touch we scaled content, putting digital experiences closer to users than anyone we scale cyber security keeping threats farther away from business and people and now we're building on Akamai has 25 years of experience.
Areas with scaling and securing the internet for the world's largest enterprises. So we can scale cloud computing and provide better performance at lower cost.
Although we still have much work to do we're encouraged by the reaction from customers, who want to realize the value of our approach.
Last quarter are well known digital fitness platform brought business to us that they previously did with a major cloud provider. They chose akamai connected cloud because we can optimize their performance and provide better economics.
When a gaming company suffered a ddos attack that took out their internet relay chat servers, they turn to akamai connected cloud to get back online.
After utilizing connected cloud for a few weeks. They also migrated their peer to peer matchmaking servers to akamai.
This is what they say to other gaming businesses with similar use cases.
Our adoption of optimized cloud computing solution was painless and turnkey Akamai has a great backbone network and the connective layer between our global servers has been rock solid with Akamai has extensive global network, we provide a better experience to our gamers by delivering from the edge and reducing latency.
With Akamai Theres no reason to go anywhere else.
As you can see from this example, there's a strong synergy between our emerging cloud computing business, and our delivery and security businesses, especially for customers in the gaming media and commerce verticals.
Turning now to content delivery, our CDN business generated revenue of $415 million in Q4 down 8% from Q4 and 2021 in constant currency.
For the full year delivery revenue was $1.67 billion also down 8% year over year.
Traffic on the network was better than expected in Q4, reaching a new peak record of 261 Terabits per second on December 14th as we supported more than 50 customers globally and delivering the World Cup along with other streaming gaming and software download businesses.
This World Cup was the first time and Akamai is 25 year history. When do we delivered more than an exabyte of data for an event.
How much is an extra buy.
It's 1000 Petabytes.
That's 1 billion gigabytes.
For the person transcribing this call that's one bite with 18th Zeroes. After it that's a lot of zeros and a lot of traffic.
I doubt if anyone has managed such a feed before.
Once again Akamai finished the year as the CDN market leader by far as we continue to support the world's leading brands by delivering reliable secure high performing online experiences.
Looking back at 2022, we're pleased that we continued to grow the business and add significant new capabilities in the face of Sirius global macroeconomic challenges.
Today, we are redefining our future with Akamai connected cloud to become the world's most distributed cloud platform with leading solutions for delivery security and cloud computing.
With our expanded strategy and business model, we believe that we're on a path to provide even greater value for shareholders and to make akamai, the cloud company that powers and pretax life online.
Now I'll turn the call over to Ed for more on our Q4 and full year results and our outlook for 2023.
Ed.
Okay.
Thank you John .
Today I plan to provide brief highlights of our strong Q4 results. Some color on 2023 and touch on some items to help you with your models and then close with our Q1 and full year 2023 guidance.
Starting with Q4 highlights we were very pleased with our strong Q4 results. Despite continued difficult macroeconomic conditions Q4 revenue was $928 million up 2% year over year or 6% in constant currency.
We saw very strong growth in both our compute and security businesses as well as better than expected traffic in our delivery business during the fourth quarter.
As Tom mentioned, our compute business was $112 million growing 61% year over year as reported and 65% in constant currency.
We continue to be very pleased with the initial feedback from our customers on our future compute capabilities and we are very optimistic about capturing a meaningful share of our customers' cloud spend and the years to come.
Our security revenue was $400 million up 10% year over year and up 14% in constant currency.
Our delivery revenue was $415 million, which declined 12% year over year and 8% in constant currency traffic.
Traffic exceeded our expectations during the quarter led by higher video traffic stronger than expected commerce traffic and record setting World Cup online viewership.
International revenue was $445 million up 4% year over year, we're up 12% in constant currency, representing 48% of our total revenue in Q4.
Foreign exchange fluctuations had a negative impact on revenue of $2 million on a sequential basis, a negative $36 million on a year over year basis.
non-GAAP net income was $216 million or $1.37 of earnings per diluted share down 8% year over year and down 2% in constant currency with seven cents above the high end of our guidance range.
Moving to our capital allocation strategy during the fourth quarter, we spent approximately $178 million to buyback approximately two 1 million shares for the full year, we spent approximately $608 million to buy back approximately six 4 million shares.
We ended 2022 with approximately $1 $2 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 and to be opportunistic in both M&A and share repurchases.
It's worth noting that in addition to offsetting dilution we have reduced shares outstanding by approximately $21 2 million shares or 12% since January one 2013.
Before I move on to guidance. There are several items that I want to highlight to help you with your 2023 models.
The first relates to a change in our network server useful lives.
As some of you may recall, we announced on our Q4 2018 earnings call that we were required to extend the useful life of our network servers from four years to five years based on the actual server useful life trends.
We carefully monitor the useful lives of all of our capital assets annually and based on the outcome of our most recent review.
We now are extending the useful lives of our servers from five years to six years similar.
Similar to when we made the change four years ago. This extended useful life as a direct result of the continued software and hardware initiatives that we have put in place to manage our global network more efficiently.
Because we are now using the servers in our network for an average of six years, we were required under GAAP accounting to adjust our useful life policy to six years, beginning in Q1 of 2023.
Please keep in mind that this change has no impact on cash flow.
But will result in a depreciation benefit roughly $56 million in 2023, and approximately $31 million in 2024.
We have provided a supplemental table in the Investor Relations section of our website that details the impact of this change.
Second.
We're expecting non-GAAP gross margins to decline by approximately two points in 2023 due to two primary items.
First.
As we build out our new compute locations. We are required to account for a co location leases under GAAP accounting standard ASC 842.
In order to achieve more favorable unit economics, we often sign longer term co location agreements that include certain financial commitments.
ASC 842 requires we straight line the cost of those future financial commitments over the life of the agreements as a result, we expect to record approximately $40 million of noncash co location costs related to this accounting standard in 2023.
The second item impacting gross margin as our third party cloud costs as we've mentioned in the past we expect to migrate the majority of our third party cloud spend onto our own cloud infrastructure over the next 12 to 18 months.
That said, we expect the majority of the migration effort to impact the back half of the year. We expect we will incur just over $100 million of third party cloud costs and cost of goods sold in 2023, we do however, expect we will exit the year on a path to significantly lower our third party cloud cost in 2024.
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Third we expect international sales will represent nearly half of our total revenue in 2023 and.
In the currency markets remain incredibly incredibly volatile.
I will provide more detail on the impact of currency on each quarter's earnings call, but it is important to note that the strengthening or weakening of the U S. Dollar could have a material impact on our reported results and guidance as a reminder, the currencies that have the largest impact on our business are the euro the yen and the great British pounds.
Fourth I want to remind you the typical seasonality that we experienced on the top and bottom lines throughout the year.
Regarding revenue the fourth quarter is usually our strongest quarter and we typically see a step down in Q1 revenue from Q4 levels.
Regarding profitability as a reminder, in Q3, we have the annual company wide Merit increase and in Q4, we typically see higher sales Commission expense.
And one final thought before we move onto guidance, Tom mentioned that we will be investing in what we believe will be to areas of higher growth for the company for years to come security and compute.
While we expect to manage the business below our target operating margin of 30% in 2023, and we expect 2023 to be a higher than normal year for Capex, we will continue to reduce costs and drive efficiency gains in key areas such as.
Third party clouds savings, we expect expect to save over $100 million in annual cost as we migrate workloads from the Hyperscale as to our own platform over the next 12 to 18 months.
Real estate rationalization as our employees have largely elected to work remotely we expect to reduce our real estate costs by approximately $20 million in 2023 and achieve further savings in 2024.
Shifting resources as Tom mentioned.
We'll be incurring substantial capex and co location costs associated with the Buildout of our compute infrastructure over the near term as a result, we are prioritizing certain actions and re tasking approximately 1000 positions from other parts of the business to our compute business. In addition, during the fourth quarter, we closed approximately five.
Hundred open positions and we will continue to be very prudent with any head count additions during the year.
Finally, we are lowering capex related to delivery, we expect to reduce our capex related to the delivery business to 4% of revenue in 2023.
Now moving onto guidance our guidance for 2023 assumes no material changes good or bad in the current macroeconomic landscape, which read which we review as challenging but navigable.
For the first quarter of 2023, we're projecting revenue in the range of $900 million to $915 million were up zero to 1% as reported or 2% to 3% in constant currency over Q1 2022.
Foreign exchange fluctuations are expected to have a positive $13 million impact on Q1 revenue compared to Q4 levels, but a negative $19 million impact year over year.
At these revenue levels, we expect gross cash gross margins of approximately 73%.
Q1, non-GAAP operating expenses are projected to be $299 million to $303 million, we anticipate Q1, EBITDA margins of approximately 39% to 40%.
We expect non-GAAP depreciation expense to be between $109 million to $111 million and we expect non-GAAP operating margin of approximately 27% to 28% for Q1.
And with the overall revenue and spend configuration I just outlined we expect Q1 non-GAAP EPS in the range of $1 30 to $1.34.
C. P. S guidance assumes taxes of $43 million to $44 million based on an estimated quarterly non-GAAP tax rate of approximately 17, 5%. It also reflects a fully diluted share count of approximately 157 million shares.
Moving on to Capex, we expect to spend approximately $220 million to $228 million, excluding equity compensation and capitalized interest in the first quarter. This represents approximately 24% to 25% of anticipated total revenue.
Looking ahead to the full year, we expect revenue of 3.7 to $3 $78 billion, which is up 2% to 4% year over year, both on as reported and in constant currency.
We expect security revenue growth to be in the low double digits for the full year 2023.
We are estimating non-GAAP operating margin of approximately 27% to 28% and full year Capex is expected to be approximately 21% of total revenue, we expect our capex to be roughly broken down as follows approximately 4% of revenue for our delivery business approximately 9% of revenue.
Our our compute business of which roughly $100 million of that will be for internal workloads moving in house and the remainder for future revenue growth.
Approximately 7% of revenue for capitalized software and the remaining about 1% for it and facility related spend.
We expect non-GAAP earnings per diluted share of $5 40.
To $5 60, Ms. non-GAAP earnings guidance is based on a non-GAAP effective tax rate of approximately 17, 5% and a fully diluted share count of approximately 157 million shares.
In closing we are very pleased with the strong finish to 2022 and we are excited about our growth prospects in both security and cloud computing now 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 you touched on the phone.
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At this time, we will pause momentarily to assemble our roster.
Our first question will come from James Fish with Piper Sandler you May now go ahead.
Hey, guys. Thanks for the questions and appreciate all those details on the moving parts.
I know theres a lot there.
Actually wanted to dive into the security business here.
You had mentioned you know.
Thinking about go to market investments.
And looking to prioritize.
Better address the market are you guys changing at all how youre approaching the market, especially on the network security side with with Zero Trust is it seems to be a little bit of a disconnect.
And is it possible, we can actually get an update on what that access control Zero Trust business finished up for 2022.
Yeah No. Good question and we are increasing the allocation of our go to market investment.
The enterprise side and Zero Trust.
We have specialist teams are really focused on guard our core and now the other enterprise products as we integrate them in with the guard a core solution and we've had a lot of success with that team as you can see from the really good growth in the Garda core product and so we're doubling down there and.
Over the course of this year, you'll see I think more cross sell with our enterprise application access product and Garda core and ETP.
And then I'll turn the other question over to Ed.
Hi, Jim Yeah, So what I'd say about zero trust as we ended the year on a run rate of about $200 million and zero Trust and we had a very strong finish to two Garda corn Garda core we'd expect this year to be on a run rate of $100 million. So very very strong finish to the year Guard Corp.
Just a follow up on the compute side.
Big question, we've been getting is weather.
Cute business could get traction really outside of the immediate vertical or is that really going to be the focus.
In terms of gaming and streaming kind of storage and compute on the backend and kind of what's the confidence level that you're not going to see an erosion in that more traditional one node F&B base. Thanks, guys.
I think media is the big a first set of adopters in fact as you know one of the world's largest if not the largest social media company is already using it.
And I think that's because.
Media really is concerned about performance and so we're doing things like trans coding.
Much closer to the end user and that's a key thesis of our architecture and our approach to compute is to be much more distributed with the compute have containers in Vms is much closer to the end users are gaming.
Gaming. Another example, where that makes a lot of sense.
You know things like lead our boards, you know manage groups of users as they play the game you.
You need low latency theres, a lot of back and forth with the clients and you want that to be close to the end user that said. This is not limited to media Commerce is also very sensitive to performance and we've already signed up commerce companies.
I M Commerce companies of course, especially with these macroeconomic challenges very sensitive to.
Cost and so we're in a position where we can give them I think you know with Akamai connected cloud better performance add up you know more.
Our competitive price points. So I think you'll see you know penetration on the commerce vertical as well and of course Akamai is really close to the big companies in media Commerce, you know I have the opportunity to talk to the most senior executives in many of these companies and they are very interested in what we can do.
Do for them and they've been asking us to do this and I think they're excited about the potential for Akamai connected cloud I think down the road take little bit longer the financial vertical is another vertical that is very strong for akamai because of our our work in security and our market leading products. There you know there we have a little bit more work to do on the certifications.
The bars, a little bit higher for financial institutions, but I think that would follow media and commerce in terms of adoption of Akamai connected cloud.
Yes.
Yeah.
Our next question will come from James Breen with William Blair.
Now go ahead.
Thanks for taking the question can you just talk a little bit about sort of the internal decision, making around shifting resources to the security and cloud side, maybe a little bit of delivery side of.
Market share.
To some extent, giving up some market share within that business.
For the benefit of overall profitability in the long term. Thanks.
Well, yeah, I think it makes good sense to be shifting resources towards the higher growth areas.
Both security, but especially in cloud computing.
I think we'll see a lot stronger return on the investment we still have the market leading delivery business, we haven't lost share.
Best of my knowledge.
We have turned away some a small amount of the business, it's very spiky.
And that doesn't make as much sense for us to take that business at the price point isn't right today, and that's because traffic growth rates are lower than they used to be so you know you have to spend money to build out for the spike and if your traffic growth rates are lower it takes longer to fill that capacity on a daily basis.
You know with with delivery your cost is associated with your peak and your revenue more associated with the daily usage of our total aggregate usage and so we have as we've talked about turned down some deals there just because the ROI doesn't make as much sense in this environment and we get a lot better ROI from.
Investing in compute.
And I think obviously security and then within security, we're reallocating investment decisions there.
To focus more resources on the fastest growing security products.
So I think it just it just makes good sense and you know for now with compute it's something our customers are really asking us to do and even in this challenging macroeconomic environment.
The thing that I think the timing, maybe even a little bit better there because of that.
Great. Thanks.
Our next question will come from Keith Weiss with Morgan Stanley You May now go ahead.
Excellent. Thank you guys for taking the question.
A couple of questions I have a ton of questions.
Two or three on the cloud computing side of the equation.
The award of the year amongst investors has been optimization.
And we've heard it from AWS and you've heard it from Azure.
Really interested to hear how that impacted one node.
Given kind of being a lower cost provider in the marketplace do you get like did you see optimization of people trying to sort of reduce the amount of consumption on your platform, where you guys like more of a net beneficiary because the.
People are ultimately seeking just kind of lower cost overall.
And then also on cloud I don't know did you guys mention what the contribution was from one note this quarter.
You guys have been giving me kind of inorganic contribution over the past couple of quarters, and then I have one for Ed.
Arjun sided equation.
All right I'll take the first part of that and let Ed take the second part I think lienau.
You know it was a much smaller company and really sort of a different market than the giant cloud companies that are.
Maybe referring to optimization.
I didn't see a we don't see a big impact on the node now what we're doing is making low note. So it can be used by the big enterprises for mission critical applications and you know that in part is building out scale, it's making it be more distributed available and more city integrating it with the <unk>.
<unk> platform and our edge regions.
And you know increasing the functionality so a lot of work taking place on one node platforms. So we can sell it at a much higher scale to major enterprises and we're in the stage now with early adopters there.
And I think as we get towards the end of this year would be in a position to take on a lot more business, there and I think the value proposition.
Is that we would have better performance will be more distributed closer to end users at a more competitive price points and I think in this environment, yeah pricing matters, especially you look at as we talked about Big media Big Commerce, They care and they are spending a lot in the cloud today.
Think that the phenomenon, you're seeing take effect as we're in a position to take on more you know large scale business from large enterprises and then at all.
You can take the second part of that question.
Yeah sure. So the node, but you know it will get more difficult to break sort of emerging and with everything but it was about 34 million little over $34 million, we did see a slight increase in the growth rate.
As the year went on and we haven't seen any change in the consumption of around optimization, meaning folks are using less of our.
Of the cloud.
Okay.
Perfect Perfect and then on the expense side of the equation.
I just want to make sure I'm understanding this correctly it sounds like you're.
Slowing down or pausing hiring and I'm, assuming you close those positions that could be hired into them, but you just took it off the job board. If you will and then repositioning employees rather than any like restructuring or headcount reduction so should the way that we should be thinking about it is you're aiming toward relatively flat head count in 2023.
Yeah, Keith so the way to think it'll probably go up a little bit it wont be up as much as it's been up certainly last year, but I mean, youre thinking about it in the right way and one of the things that we're fortunate enough to do is if you think about what we would but typical company would do if you didn't have the skill sets in house you'd have to do a lay off that's expensive and then you have to go hire new talent, we're fortunate enough in the <unk>.
Areas that Tom talked about whether it's development or build out of the network. The sales functions that we can ship those resources over so if you think about the cost to build out we're doing it would call somebody else with a significant amount of money, but we're able to shift those resources and as far as the new head count going forward, we're going to be pretty judicious with where we're hiring but it's going to be primarily in the areas of <unk>.
Cloud and security and maybe a few on the go to market side.
Got it and then the shift take place both in terms of development as well as go to market or is it more like the development resources are being shifted.
There's a lot of resources being shifted with.
Within our platform and delivery organizations.
Think of the one hundreds of people that are managing our network deployment.
That build out our 4100 regions today.
And the tremendous scale, we have and they are now heavily focused on building out our compute resources you know think of the people that manage the operations. The automatic deployment of software the payload with a load balancing that resiliency.
They are heavily focused on incorporating those capabilities for compute building on top of that node framework. So I would say that the large majority of the resources are of that nature that we're re tasking.
Outstanding. Thank you so much for taking the questions guys.
Our next question will come from Tim Horan with Oppenheimer You May now go ahead.
Thanks, guys are also on the cloud can you talk a little bit about your improvement in price and performance versus the comments you can give some metrics. There and then can you talk a little bit about what type of cloud you're building out for I know Tom in the past you were a little skeptical that we could do kind of gaming as a service over cloud infrastructure is that.
And you could optimize your cloud for AI or block chain or more networking or very very low latency just any color. There and then lastly have you contemplated maybe partnering with some of the larger cloud providers with a you know a are really starting to take off can can you are you know.
Thanks.
Apartment to a few of them are one of them that would really accelerate things.
Oh, yeah good questions.
It won't be the most distributed cloud services provider and of course, we start with 4100 Pops for.
Function as a service Java script at the edge.
And we're building out the core cloud capabilities and then this notion of the of a more distributed containers closer to the edge be EMS closer to me yet now that will give you better performance for things, where you want to be close to the unusual because it'll be closer to more end users will be in some cases countries, where you don't.
Our presence from the Hyperscale ours, and our pricing will be less already you can look at the list pricing and see that it's less than what the Hyperscale is charged and we're because we're integrating it with our it backbone and with our edge platform that gives us great economics on the delivery taking.
The data in and out of storage or compute and getting it to end users were in a position to do that.
At a lower cost and to give consumers a better price point.
Yeah. This works not for all gaming functions, but for a lot of the things you want to do with gaming.
Great use case streaming obviously transcoding.
A P is chatty API as you know people communicating during a sporting event.
That's all it is very relevant to having a more distributed model AI.
I think elementary stuff that you can put in a container or V. M. Yeah that makes perfect sense.
If you want to have the monolithic storage associated with that that's more cloud core cloud compute I would say.
You know I think in terms of partnering yeah, we have a lot of customers that obviously use akamai services today as well as the cloud Giants in fact, the cloud Giants themselves. A couple of them are very large akamai customers and so they also use their own services. So I think it's an ecosystem, where yeah I think there'll be <unk>.
Customers that would use us and use the the hyper scaler.
You know depending on the application and what they're looking to do.
You know when we very much believe in a multi cloud approach.
Thank you.
Our next question will come from Mark Murphy with J P. Morgan you May now go ahead.
Oh. Thank you very much is it possible to ballpark the revenue contribution there was driven by this huge scale of the World Cup. So that we could then removed that from our models for the next three years and then I guess, presumably included back in in year four.
Yeah, Hey, Mark is that there's about a 5 million roughly.
Okay got it and then as a follow up.
Just to clarify during Q4 were you able to capture some of the business that Amazon is losing.
Either due to the lower.
Pricing structure that you have for the node or because you have disadvantage of broader points of presence like I guess I'm just interested in it sounds like from what you're describing that potential is there I'm. Just wondering if there was a material benefit or tailwind from that in Q4.
Naughty and compute in Q4, obviously, we compete very successfully and delivery and security.
With the Hyperscale are sound with a market leader there now and compute they are the market leaders by far.
And so nothing that we would do in compute is going to make any difference to them I mean, we're looking to get to.
Two a 1% market share.
Market, that's $100 billion to $200 billion a year.
So it will take us a while in compute before I think a hyperscale or what have you been really really notice and of course, a one or 2% market share. It means a lot to us.
In compute that several billion dollars means.
It means less obviously to folks at the scale of those guys.
Understood. Thank you very much.
Our next question will come from Rishi Galeria with RBC you May now go ahead.
Waterfall on thanks, so much for taking my questions I've got two first I wanted to start on the compute side of the equation I. Appreciate all the color around Capex and please forgive me if my math is shaadi over here, but if I just do rough back of the envelope numbers right with <unk>.
9% of total revenue are being capex, specifically for the compute business and when I strip out 100 million of nonrecurring that's still telling me that capex are complete capex. This year in 2023 it can be 45% of our compute.
Compute revenue, which are you know I get it it's a growing business and everything that number one they're actually thinking about this in may and maybe number piece number two to that is how should we be thinking about steady state capex for the compute business.
Once we get through maybe the next year year, and a half and then I've got a follow up.
Yeah sure so you're doing the math right. So the way to think about the 100 million.
That will enable us for our internal use that'll enable us to see a lot more than $100 million. So.
Think of it you think about it right in terms of as a one time sort of burst of a charge. Obviously, if we continue to use our own compute capabilities.
Capabilities over time down the road, we'll be adding a little bit from time to time there but.
Are you thinking about that correctly.
In terms of what is the steady state look like we talked.
At the analyst day about how you can approximate sort of future growth percentage with what you would spend so for example, if were.
The $1 billion, and we're spending 30% and capex or growth rate would be probably around 30%, it's not quite dollar for dollar but.
It's sort of a rough approximation, so think of us spending roughly $100 million. This year on internal use another say call. It 225 to $2 50, depending where you are on your models.
That enables you to get that type of revenue scale potentially obviously, it's going to have to play out in the market a little bit more if we get a little bit less that's a pretty decent rule of thumb and then obviously as we're growing out. These locations you know were pretty ambitious in terms of the core locations that were putting online also distribute location locations are putting online we're going to be investing ahead of revenue.
So I would expect for the next year and a half for two years to have elevated capex related to our to the compute business and we'll start to scale into it.
Okay got it thanks that's helpful.
And then just maybe going back to the security business, you know going past this year longer term you know what what needs to happen to see security overall reaccelerate the growth rate that that you'd be happy with is that <unk>.
I'm really going to be driven by a continued garlic or mix shift is that going to be you know more on the zero Trust portfolio <unk> got a core maybe walk us through kind of what needs to happen to get security up to kind of an organic growth rate that you'd be happy with.
Yeah, No I think you characterized it well.
And it is a more of a mix shift to the newer products for us that are growing at a rapid rate, but are still relatively small.
We've got a substantial return from Bot manager now that's a great example, starting to really help.
Next is Garda core, which as Ed mentioned, you know we want to as we exit 'twenty three should be at over 100 million dollar run rate and you know once you start getting to that Si and.
And it's rapidly growing it starts making a difference for the big security number and of course as that number gets bigger it obviously gets more challenging to maintain the higher growth rates, we're continuing to invest in new capabilities are account protectors off to a very good start really excited about that.
But it will take time.
To do that and we're continuing to look for a potential acquisition that can help jumpstart ground I don't think anything you know huge that gets you. The return right away, but areas that we think are really important that we can become market leaders in like we've done for application firewall Bot management.
You know for segmentation and that over than a period of years can drive significant growth for us.
Alright wonderful. Thank you so much guys.
Yeah.
Our next question will come from Amit dairy.
<unk> with Evercore you May now go ahead.
If thanks to a two questions from me as well I guess the first one you know when you think about 2% to 4% kind of topline growth and 23 in constant currency.
About security growing double digits as a way to think about how do you think growth stocks up on the compute and the delivery side as well for the year.
Yeah sure. So what we didn't give specific guidance for either delivery or compute Tom did talk about us.
Achieving half a billion or so in compute revenue so depending on where you put your models you're inside of a half a billion for compute and you just saw for the delivery I think if you were to be on the higher end of the business delivery might do a little bit better as we saw in Q4.
You get a security going if the macroeconomic conditions.
Improve and then obviously the really just the timing issue in terms of when we can start moving major workloads on compute.
Got it and then as we think about sort of thought the pop from the old, Let's just say 27, 5% operating margins that you will be out in 'twenty three.
With the 30% kind of target you folks have had in the past you have them now actually what do you think it takes to achieve that target is there a revenue number that you need to get there or a mix or the cost reduction. If you just maybe provide a bit of a bridge on how do you get from 27.5% to 30% EBIT margins that would be really helpful.
Yeah, So it's a little bit of everything, but I think as we've laid out about five or six different things that we're doing probably the biggest near term item would be the third party cloud costs, so as we migrate that but.
We're going to save about $100 million or so.
Think about that is.
Some of that will happen this year a lot more of it in 'twenty four and then by 'twenty five we should have you know almost all majority of our internal cloud.
Third party cloud on a regional system. So that's you know to a two to three points right there.
Colocation I talked a bit about the oddity of the ASC 842 on lease accounting, we have a little bit more of a burden that we have to take at the beginning of some of these longer term agreements, but also we're spending on co location that we haven't quite scaled into yet. So there's your question about revenue as revenue scales, you'll get scale with your March.
<unk>.
And then.
Just through some of the depreciation savings that we're getting on delivery and the real estate savings, we're spending call. It before this year around $100 million and real estate, we're going to save about $20 million this year, probably room to get them.
Maybe another 20 or 30 out of that as well. So it's really a combination of getting the compute revenue to scale into our investments in a mostly our co location facilities and third party cloud savings those are probably the two biggest areas for margin expansion.
Perfect.
Like most of the ramp to margins is going to be driven by self help levers versus revenue I mean, it seems like the SKU might be a bit more on self help is that a fair way to characterize it.
Yeah, I mean, I think that's you know when you look at the size of those numbers certainly I mean, obviously revenue cures all your rails right. We've got a pretty scalable model. So if we see the acceleration in revenue, especially on the compute side, you're going to see pretty good flow through but yeah theres a lot in our control here and I think we're doing the responsible things as far as hiring goes shifting resources focusing on <unk>.
<unk>, our real estate costs, and really focusing on driving down that third party cloud costs, which has really taken a pretty big chunk out of our gross margin.
Perfect. Thank you.
Our next question will come from Fatima <unk> with Citi. You May now go ahead.
Hi, Good afternoon I appreciate you taking my questions two from me.
On the delivery segment. The last couple of years for you have been maybe a little bit more erratic just by way of lapping some of the benefits from the pandemic.
Some of the dynamics you signed the gaming area, where trends are moderating so at a high level for you you know when you think about the underlying cadence from a volume perspective, what are you assuming that's maybe different the same better or worse versus the trends you saw this year.
Considering the big renewal cohort.
<unk> mentioned around holding co on pricing, so any sort of color commentary you can give us for the delivery segment in terms of traffic trends and pricing terms under those.
And then I have a follow up please.
Yes sure Great question. So let me see if I can pick that all at once here. So in terms of the major renewals, we don't have nearly as many major renewals as we had last year. So that's gonna be one thing that works in our favor.
We are not anticipating in our guidance any significant increase in traffic in terms of levels of growth that we saw last year, we're anticipating slight increase but nothing significant.
We're anticipating that and we're starting to see the price declines are moderating a bit they're.
They're not nearly as steep as they've been in.
In the past.
And then we will continue our posture in terms of being a little bit more selective with some of the spiky traffic once we start seeing volumes get back to the.
Historical Internet growth rates and beyond then maybe that posture may change, but that's the way we're going to play it for now.
I appreciate that and just start the delineation between your U S business and the international business anything you can point to by way of.
Geographical differences in procurement is there more sensitivity on budget for the U S versus international you know any characterization there because international continues to be a strong hold for you versus.
Maybe sort of a malaise I'm on the U S side, but would love to get a little bit more granular on what's continuing to drive that strong, but it's not a bad budgetary pressure that you alluded to on the security side is maybe showing up more pronounced where you lost versus international that's it for me. Thank you.
Sure Yeah, I would say I'm, just kind of general macro across all regions I'd say, new customer acquisition is more challenging in an environment like this and I think you hear a lot of companies talk about that we're seeing that as well in terms of geographic you know obviously the European economy is struggling a bit more than we are in the U S.
Slightly higher inflation et cetera. So.
I expect that area to be a bit more weaker than what I'm seeing in the U S Asia still been pretty strong Latin America has been pretty strong.
U S has been you know.
On a holding holding firm here, but I would expect that the European business in particular is to be the most impacted by the macroeconomic factors.
Our next question will come from Frank Loosen with Raymond James You May now go ahead.
Great. Thank you so with the significant number of Pops that you have already what is it about the cloud platform you need to expand these sites and you know what it's about the location and the capabilities that they bring for expanding a compute platform that you already have and then you you touched on possibility for M&A I'm, what do you consider you know cigna.
And what are the you know what size M&A do you think you might be looking at if you do any in the next 12 months. Thanks.
Yes, so on the Akamai.
Akamai connected cloud architecture, you know, we already have 4100 edge regions and these regions do delivery and security. They are the first line of defense.
They also do what we call edge computing, which is function as a service a Java script at the edge now in the core where the note had 11 data centers and we're going to more than double that.
You have very large scale storage object and block storage, you've got V. MSS service container as a service kubernetes core cloud compute now we're adding a also an intermediate layer we call those sort of the distributed compute layer and this would have not a monolithic storage.
You'd have containers.
Service Cooper Natty is you know Vms as a service so you could do compute there and so what you.
What you do and where you want to do it depends on the application.
You know things that are a lot of back and forth with the end user that are lighter weight that can be handled with Javascript.
Want to be doing that in the 4100 edge regions.
Like you know transcoding.
Youre doing some data processing, you've got an app in a container, but performance matters you Wanna be close to the end user OSA a gaming application that you'll want to do in our distributed edge platform and the reason you have that as you know theres a lot of cities and in places in the world that don't have a giant cloud.
Data center there.
And they can't really take advantage of the cloud for applications that you now have where the proximity to the user is important and so that's something that we want to be able to provide so theres three sort of levels here of compute.
You know and you Wanna be actually using generally all three for a major company, but the specific application.
Dictates, where you want to be doing it.
And what combination that you want to use.
Okay.
Yeah.
Okay, great potential for M&A and any thoughts on you know what you would consider significant versus more tuck in.
Oh, yes good.
So you know I think tuck ins are a a team that has the beginnings of a product or technology that we can scale on behalf of our customers.
We've done a lot of acquisitions like that.
More substantial would be something like Arctic core that you know had at that time the number two product in the marketplace and we've invested around that they're now number one which is great to see.
And a more significant cost associated with that and they they had a developed product already back go back farther Prolexic is another example of that where they haven't developed product there already and at $40 $50 million in.
<unk>.
And those are we do occasionally and we're always looking but we do those occasionally but more you'll see that the tech tuck ins and then we develop from there.
Alright, thank you.
Our next question will come from Rudy Kessinger with D. A Davidson you May now go ahead.
Hey, guys. Thanks for taking my questions.
I guess I'm curious.
How did the macro trend in the quarter, just with deals lengthening and you know how many deals did you see push I guess relative to Q3 and the guide assumes no.
Positive or negative change in the macro just you know why make that assumption why not be a bit more conservative maybe assume it gets a little worse.
Yeah.
Yes.
So in terms of.
The biggest impact on the quarter I would say.
Coming in we're expecting potentially a week commerce season, we actually saw a pretty commerce season, we.
We saw a decent video traffic, we saw obviously talked about the World Cup being better than our expectations I would say gaming was noticeably weak we didn't see as much activity as you typically see in our Q4 and then from a sales side a couple of deals pushed a few large.
Garda Court deals we track that.
And then also new customer acquisitions are slower than we'd like to say those are really the big thing and its first as far as the macro economic conditions. You know it's tough when you sit in the seat to try to play economist and what else. Obviously extra is probably the biggest impact on us more than anything given arc, we felt longer.
Term contracts, but.
It's hard to say that you know look things can change and get dramatically worse I'm, just expecting what I see right now in front of us in terms of the macroeconomic environment is challenging, but I think we can navigate it pretty well.
That's what we based our guidance on if things change, we'll obviously update the guidance, but I was just trying to get a lot of times people will ask me what was your thinking as you put your your your guidance that you're expecting things to get dramatically worse. In this case no do I expect things dramatically better know, it's kind of roughly the two minutes things do change, we'll obviously update you as we get.
More information.
Yeah, Okay. That's fair and then you know at.
At a higher level I mean, obviously it sounds like compute is kinda slotted into growth.
Growth priority, one if you will kind of a head of security and just at the high level I'm curious what really is given your conviction.
To invest so much in compute is that they are.
Customers that you've signed is it just conversations is that the pipeline growth you've seen over the last few quarters. Since you made the acquisition, what's what's giving you so much conviction to make such a large investment goal in our compute.
Well, it's all of the above plus the compelling logic.
The situation is.
As I mentioned, you know I do have the opportunity to meet with the senior most executives that you know a lot of the world's largest companies.
You think media Commerce gaming and so forth and there is a lot of interest there and our ability to help them.
They're in a situation, where they're spending a ton.
On a third party cloud.
It's growing rapidly.
Many of them describe it as being out of control and it's even hard to know how.
How big at all yet.
Some cases, they're spending this with a competitor and on top of it they've got major company initiatives to cut cost because of the challenging global.
Global economic conditions.
And so you know when we can offer them a service with at least as good better performance at a lower price point, that's very attractive now on top of it these companies they know us well.
They already trust us with scale and performance and security because we provide the vast majority of their delivery.
And security. So we are a very logical choice its not like were just somebody coming along here, saying, Hey, we got a cloud service. So it's not like that at all you know we got a lot of credibility with these companies and you know they are pretty clear that they think this could be very attractive for them. In fact, I think you know one of the analysts on this.
Call did a survey of 50 of our larger customers.
<unk> and found the same thing the same thing was supported to them. So we see that our customers need that.
And would like to shift the business to us, but we want to get ready for that and help them.
And that means building out the capacity building out the new distributed architecture and getting the functionality to the level that.
They are going to be a.
Comfortable putting mission critical applications at very large scale on our platform and of course Akamai will be one of the first examples of that.
We're gonna place you know our services that are used by pretty much all the major enterprises a lot of the major enterprises out there for for example security onto our platform and that'll be another great proof point that akamai connected cloud is really going to work for them.
Yeah.
Our next question will come from Ray Mcdonald with Guggenheim You May now go ahead.
Great. Thanks, Tom maybe just to ask the M&A question in a slightly different way as we think about the strategic plan going forward do you feel the organization has enough operational capacity to continue to expand more node right now and do another acquisition in security at this point to help you reaccelerate growth and its 20% long term.
Growth, including acquisitions, and the security business something Youre still targeting after this year.
Yeah. Good question first the work on the note.
You know which is extensive.
His use of different teams by and large that our security technology group and so yes, we're in a position that we can continue that work.
And also do security acquisition, there's I don't think there's any challenge there now.
Now we have as we talked about re task a lot of the positions either people or positions.
From our platform and delivery organizations to to the compute efforts.
So there is a lot of <unk>.
Effort there.
And that will be increasing throughout the year now in terms of the 20% what we're talking about is we're guiding this year.
Into the low double digits, and then we'll see where we are obviously, we'd like to be growing faster than that but there are very challenging conditions out there as we've talked about and you know we'll have to see.
So we'll update that guidance as we maybe when you get to an investor day or get into next year, but right. Now we're just guiding for this year in security in the low double digits.
Great and then one more if I could the work we've done on mono does suggest your customer base is interesting and in leveraging one node and when I think about sort of the lead times for capacity additions in the data center space.
You've already released how long are the lead times to fill but that data center space and at what point would you expect it at least to get to a.
Somewhat full utilization of just the space that you've already contracted for.
Yeah. So good question noticed the contracting there's the build out there getting it all turned on and the way you want to think of it is.
We would be doing the core data center build out the focus of that is in the first half and.
We'll have a lot of that done then we should finish that early in the second half or get substantially more than we have today and then in the late in the second half taking on the distributed architecture and we should have a bunch of those regions turned on live later in the year and at that point and also at the same time getting them.
Vacations in place.
Virtual private cloud other capabilities that are the big enterprises need so that when we get to the later part of the year. We're in a position that we can take on.
This business ended up it will just happen all at once you know a major enterprise will try it use some applications and then some of the big ones you port some of the traffic over and so the I think the major filling of it and use of it really comes more in 'twenty four and not so much this year.
We expect as we talked about this year to do about.
Half a billion dollars in compute but the real growth I think and the monetization of what we're building out now comes in 'twenty, four and 'twenty five.
And also for our own use you know this year, we're in the process supporting our own application because that just had talked about.
Save some this year, but really the big savings for us comes in in 'twenty four.
So that's the way I think to think about.
Great. That's helpful. Thanks for taking my questions.
Well it is Valentine's day, so we're in a little bit over operator, why don't we take one more question I know, there's probably a few more but let's just take one more and more and Nicole Okay. Our last question will come from Michael Elias with Cowen and company you May now go ahead.
Thanks for squeezing me in here just two questions for you first is you talked about some go to court deal slipping in last quarter, there was commentary around.
I'm getting sales cycles I was just wondering if you could give us some color on how sales cycles have evolved for not only got a car, but the broader portfolio and then my second question for you is maybe to frame it a different frame. It a different way is is there an almost thumb that we should use to think about the correlation between incremental revenue and incremental megawatts.
Data center capacity that you need I E to support an incremental $100 million in compute revenue you would need X amount of megawatts.
Alright, I'll try the second one is going to be a little bit more challenging and maybe I'll come back with a metric on that one I don't have a <unk>.
Exact metric down to the megawatt, but I'm sure somewhere in the business I can find somebody who does but I sort of use sort of a rule of thumb about a dollar of capex as a dollar of revenue roughly speaking.
That may change a bit, but you know sort of a good rule of thumb is from it.
In terms of sales cycles.
The good news with the deal slipping as they they're not going away. It's this is typically a big purchase that you made especially with Garda core of that.
It could be something where the decision makers, just pushing it off a quarter or two and it's thought that the deals are losing it just becomes a longer sales cycle in a fight for budget.
In terms of just overall sales cycles like I said the biggest impact is new customers right. It's a lot easier with your existing customers you know you're going through renewal cycles.
You're having upgrade conversations and things like that getting new customers to open up a new.
Buying pattern is challenging I do think one thing that will work in our advantage in all of this though as we talk about compute.
And then the need to find a cheaper alternative go multi cloud I think that's going to work in our favor. So I think if one thing this.
All the negatives that come with a macroeconomic.
Backdrop that we have I think that's one positive that will work in our favor and we are starting to see our pipeline grow pretty dramatically in that area and as Tom talked about we should start to see deals closed towards the back half of the year and then really set ourselves up for the big 24.
Thanks for the color.
Okay well. Thank you Michael Thank you everyone and then closing we'll be presenting at several investor conferences and events throughout the rest of the first quarter details of these can be found in the Investor Relations section at Akamai Dot Com, we want to thank all of you for joining us and we wish you a very.
Good health and good healthier families. So I have a 90 day take care.
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