Q2 2023 Akamai Technologies Inc Earnings Call
Akamai technologies second quarter of 2023 earnings conference call, all participants will be in listen only mode.
Need assistance. Please signal conference specialist my personal Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
Not like to turn the call over to.
Mr. Tom Barth head of Investor Relations. Please go ahead Sir.
Thank you operator, good afternoon, everyone and thank you for joining Akamai second 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 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 S E C.
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 will be referring to some non-GAAP financial metrics. During today's call. A detailed reconciliation of GAAP and non-GAAP metrics can be found under the financial portion of the Investor Relations section of Akamai Dot com.
And with that let me turn the call over to Tom.
Thanks, Tom and thank you all for joining US today I'm pleased to report that Akamai delivered strong results in the second quarter. Despite the ongoing challenges with the global economic environment and slower Internet traffic growth.
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 EPS 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 are growing concerned about being locked into contracts, but cloud giants that are consuming large and rapidly increasing shares of their it budgets.
They want more choice and compute and are open to alternative clouds likely 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 cost high in part because of the fees for moving data.
Pardon me, ladies and gentlemen.
You have to interrupt the call at this time one moment please.
Okay, sorry about that everyone. We are ready to begin the real call that was the warm up I apologize again, and what I'd like to do is just use.
Our CEO Dr. Tom Leighton.
Actually the standby for a minute operator could you put the call on whole Curry Zelle will travel with technical difficulties on the call here.
Thank you Nick Hello next operator.
Yes. Thank you everyone will be on hold.
While you.
Gather your information and get going again, thank you everyone.
Tom do you want me to email your script.
Okay.
Oh.
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Okay.
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Pardon me everyone as the operator, thank you for holding.
And in buy we have Mr. Tom Barth ready to takeover again protocol. Please go ahead Sir.
Okay. Thank you everyone for your patience.
Again apologize for the technical glitch, but we are ready to go and I'd like to reiterate that we serve.
No that donlin.
Sure.
Thanks, Tom and thank you all for joining us today are sorry about the production snafu there anyway I am very pleased to report that Akamai delivered strong results in the second quarter.
With revenue coming in near the high end of our guidance range and earnings exceeding the high end of our guidance range by sat in search.
Revenue grew to $936 million in Q2.
Up 4% year over year, both as reported and in constant currency non.
non-GAAP operating margin was 29% and non-GAAP earnings per share was a dollar and 49 cents up 10% as reported and up 11% in constant currency.
As you can see and as Ed will explain in his portion of the call our actions to increase profitability are delivering good results.
I will now say a few words about each of our three main product areas, starting with security, which is our largest source of revenue.
Security revenue grew to $433 million in Q2 up 14% year over year, both as reported and in constant currency.
The improvement in our security growth rate was driven by multiple products with especially strong growth of our market leading segmentation solution.
We entered the segmentation market with our acquisition of Garda core in Q4 of 2021 and.
And we're nearing an annualized revenue run rate of $100 million at this scale segmentation is having a bigger impact on our overall security gross rate.
Customers are adopting our segmentation solution to help defend against ransomware and data ex filtration attacks, which you've become more frequent and damage.
For example, last quarter, we signed a three year $8 million segmentation deal with one of the world's largest carriers.
Large carriers that banks want to protect their consumer data from losses that can damage their brands and trigger large fines from regulators they.
They also appreciate spending less on legacy firewalls that no longer provide adequate protection.
We also saw strong growth in Q2 for our market, leading web App firewall and Bot management solutions, where we continue to fare well against the competition due in part to their challenges with reliability and performance.
For example, we recently took business away from a competitor at one of the world's largest microblogging platforms.
Outages on their former providers platform made the customer seek a more reliable partner so they switched to akamai for their global expansion plan in Europe and Asia.
In another example, a leading Asian financial institution recently returned to Akamai also because of reliability challenges with this competitor's platform.
As we look to the future. We're also excited about our new API security solution that we announced last week enabled in part by our acquisition of <unk> in May.
API security is rapidly emerging as a critical need for major enterprises, that's because as enterprises modernize their infrastructure to create better digital experiences, they're making increasing use of API to improve developer agility and end user performance.
The problem is that these API or off and not adequately secured and they open up new vectors for attack.
Our new API security product Leverages, AI based analytics and threat hunting capabilities to discover API analyze their behavior identify vulnerabilities and help customers defend against the caps.
Customers, who thought they had a thousand API might turn on API security and discover hundreds more they never knew they had.
With vulnerabilities lurking within legacy infrastructure or new applications.
This is why banks are establishing API governance groups today and it helps to explain why IDC and Gartner project at the API security market will surpass $1 billion by 2027.
Like our segmentation solution customers can buy our API security product without being an akamai CDN customer.
The security solutions, our CDN agnostic demonstrating how we can go to market as a security provider first.
We also continue to make good progress on the cloud computing crop.
<unk> is taking a fundamentally new approach to cloud computing, making it fully distributed with many more points of presence that are available with traditional solutions.
By leveraging Akamai is unique platform and capabilities. We believe that we can offer enterprises better latency better performance automated scalability and portability and reduce cost, especially for applications that incur high egress fees with the hyperscale.
Since our call with you in May we've gone live with three new cloud computing sites in Washington D C. Chicago in Paris, and we plan to open 10 more later this year. These.
These new sites are part of our plan to connect compute storage database and other services into the same platform that powers, our edge network today, a massively distributed footprint that spans more than 4100 locations and 130 countries.
Last month, we also announced a doubling of the capacity of our object storage solution, a new premium instances for large commercial workloads that are designed to deliver consistent performance with predictable resourcing cost allocation.
And our plan to launch in beta the Akamai global load Balancer later this quarter. This new integrated services designed to route traffic request or the optimal datacenter to minimize latency and ensure no single point of failure.
We believe that the akamai connected cloud will be ideally suited for applications that benefit from being closer to end users. For example in ecommerce our customers want to tailor their online shopping experience to the individual user. They also want a better performance you get I being closer to the end user that's big.
<unk> better performance translates into higher conversion rates.
In video and gaming our customers want the game engine closer to the end user to reduce latency and to tailor experiences based on the user's device type and connectivity.
In AI the basic models will be generated and trained in the car, but the infant tangents, which generate alerts and responses to queries will be more efficient to run at the edge, where and when they're needed.
And as cyber attackers exploit advances in AI to create more forms of malware and more dangerous spots more security will be deployed at the edge to intercept attacks before they can reach and swamp a customer's data center in the core.
In all these areas our customers also want the ability to spin up instances to handle flash crowds on demand something that's very hard to do with competing cloud solutions.
In summary, we believe that next generation applications will need next generation cloud infrastructure and Akamai is charting the course for this next decade of cloud computing when more of the compute will be down closer to the end user and where we believe our platform will have an important edge over more centralized models.
Turning now to content delivery I'm pleased to report that we continue to be the market leader, providing industry, leading performance and scale as we continue to support the world's top brands by delivering reliable secure and near flawless online experiences.
We enjoy a strong synergy between our delivery security and cloud computing offerings, as we power and protect life online.
The synergy is both on the topline as long time delivery customers by our security and cloud computing products and also on the bottom line as we realize the cost benefits of using a single infrastructure to provide security and compute services as well as delivery.
Overall I'm pleased to see that Akamai performed well in the first half of the year.
Pica macroeconomic challenges, we continued to invest in the key areas that we expect to drive our future growth, while also taking actions to improve our profitability.
Now I'll turn the call over to Ed for more on our Q2 results and our outlook for Q3 and the full year Ed.
Thank you Tom.
Today I plan to review our Q2 results provide some color on Q3, along with our increased full year 2023 guidance.
I'm pleased that Q2 was another strong and very profitable quarter I'll have more to say about our double digit EPS growth in a moment.
First lets discuss revenue.
Total revenue for the second quarter was $936 million up 4% year over year in the second quarter security revenue was $433 million growing 14% year over year.
Tom mentioned security revenue was driven by strong demand for our WAF.
Management and segmentation solutions moving to compute revenue was $123 million growing 16% year over year as reported and 17% in constant currency on a combined basis, our security and compute product lines represented 59% of total revenue growing 14% year over year.
And 15% in constant currency shift.
Shifting to deliver.
Revenue was $380 million declining 9% year over year as reported and 8% in constant currency.
International revenue was $456 million up 7% year over year and 8% in constant currency and now represents approximately half of our total revenue.
Foreign exchange fluctuations were flat on a sequential basis negative $6 million on a year over year basis move.
Moving now to profitability.
non-GAAP net income was $228 million or $1.49 of earnings per diluted share up 10% year over year and up 11% in constant currency.
The strong EPS results exceeded the high end of our guidance range by seven cents and were driven primarily by higher revenues JV from savings from the head count actions. We took earlier in the second quarter and continued progress on our cost savings initiatives. As a reminder, those cost savings initiatives include third party clouds.
Savings rationalization of our real estate cost depreciation expense and other operating costs associated with lower caps capex related to our delivery business.
Disciplined spending with vendors and tighter travel and expense policy management.
With respect to third party cloud spend I'm pleased to report that for as long as we attract this expense Q2 was the first quarter, where total third party cloud spend declined year over year.
While the decline was relatively modest at risk it reflects disciplined and vendor management as well as the beginning of savings related to the migration of our workloads onto our own cloud platform.
We now have about $700 million remaining in our previously announced share buyback authorization.
Our approach to capital allocation remains the same.
Opportunistically buy back shares to offset dilution from employee equity programs over time, while maintaining sufficient capital to deploy when strategic M&A presents itself.
Finally, I'm pleased to announce that Akamai has obtained investment grade credit ratings from Moody's and S&P.
These ratings are part of a broader financial policy to further reinforce our business and financial strength not only with investors, but also with customers vendors and other parties that we engage with from a commercial perspective.
The credit rating also broadens, our financial toolkit, allowing us to.
Evaluate all available financing instruments determined to determine whats best suited for our financial goals.
Finally, as a reminder, akamai currently has two convertible debt instruments outstanding 1.15 billion due in May 2025, and 1.15 billion due in September 2027.
Before I provide our Q3 and full year 2023 guidance I wanted to touch on some housekeeping items.
First our annual Merit based wage increases became effective July one.
This will result in an.
An additional net operating costs of approximately $12 million per quarter.
Second in late July the IRS released a notice that granted temporary relief for determining eligibility of foreign tax credits. This will result in a lower than expected non-GAAP effective tax rate in Q3 and for the full year.
And finally, the guidance I will provide assumes no change good or bad to the current macroeconomic environment.
So those factors in mind, I will turn to our Q3 guidance.
We are now projecting revenue in the range of $937 million to $952 million or up 6% to 8% as reported and 5% to 7% in constant currency over Q3 2022.
Current spot rates foreign exchange fluctuations are expected to have a positive $1 million impact on Q3 revenue compared to Q2 levels.
Was it a $10 million impact year over year.
At these revenue levels, we expect cash gross margins of approximately 74%.
Q3, non-GAAP operating expenses are projected to be one.
Third $97 million to $302 million.
We expect Q3 EBITDA margin of approximately 42%.
We expect non-GAAP depreciation expense to be between $121 million to $123 million and we expect non-GAAP operating margin of approximately 29% for Q3.
Moving on to Capex, we expect to spend approximately $162 million to $170 million, excluding equity compensation and capitalized interest in the third quarter, which represents approximately 17% to 18% of our projected total revenue for the third quarter.
Based on our expectations for revenue and cost we.
We expect Q3, non-GAAP EPS to be $1 48 to $1 52.
This EPS guidance assumes taxes of $42 million to $45 million based on an estimated quarterly non-GAAP tax rate of approximately 16%.
It also reflects a fully diluted share count of approximately 155 million shares.
F E P S guidance for the full year.
We believe that <unk> is a special class of businesses that have the ability and discipline to invest in future revenue growth, while continuing to be extremely profitable and generate significant cash flows with that we now look forward to your questions operator.
Thank you now begin the question and answer session to ask a question. Please press Star then one on your Touchtone phone.
Using a speaker phone please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
<unk> paused momentarily to assemble thereafter.
First question it'll be from James Fish Piper Sandler. Please go ahead.
I got congrats on the corner and the security <unk> and speaking of security you know how how should we think about the bookings heading into Q3 for this segment or the bookings related slash and and really the crux of my question is just trying to understand the sustainability here in understanding where we're raising by two points for.
A four year just trying to give some.
Color around the confidence for the year's Israeli what I'm asking.
Yeah, Hey, Jen. Thanks for the question is is that I'll take that one.
So I would say we had two back to back very strong orders of bookings so that was very encouraging.
We also saw stray and if I look at my sequential growth quarter over quarter, we actually saw all three major product lines accelerate so we saw.
Growth in a P I.
And a protection segmentation was very strong article was extremely strong and a quarter and even the infrastructure business still has some hang over effect from the kill net pretax we saw earlier so all those product lines grew sequentially quarter over quarter in terms of the customer penetration you know if I go back to queue for look at where were you.
Now we start about a two and a half per cent increase in customers buying a security product left about 75.5%. So we're seeing great penetration in the installed base and just one other sound by 40, we now have about 700 customers who are buying for for more products and security. So we're seeing really good strength with new customer additions bookings.
Cross all products product lines, and then just another thing on segmentation when we're seeing renewals with segmentation, we're seeing those for noon very favorably and generally with expansion orders included.
[noise] helpful. And then Tom maybe for you on the computer side, how are you guys looking to invest behind.
G P U as a service side of window does this something your customers particular, you're large media customers are looking at a ploy with you or do you see that as more reserved for the hyperscalers and so you're going to be more focused on that AI influence opportunity. Thanks guys.
Yeah, we we do support G. P. U's today, it's not our primary focus and that's just a financial decision I would say gaming is more where you'd see that with our big media customers doing video and media workflow Cpus are just fine and much more economical and attractive there.
You know in terms of AI, you know I think over time, probably that migrates or at least in terms of the inference engines migrates to a C. P U as well and I think that over time as we talked about probably something you want to be doing it the yet, but we're fully capable of supporting G. P. U's, we do that some today really <unk>.
Just on demand from our customer base in financials.
Thank you next question will be from Keith Weiss Morgan Stanley . Please go ahead.
I wanted to follow up on the security question in the security business.
Reacceleration this quarter and I just want to understand like some of the drivers behind that whether you're seeing a better set environment sounded like the bookings were were pretty solid is it sort of sales execution. Why are you seeing sort of like newer offerings like part of core sort of reached material scale to drive that sort of dollar grilled onion here for your basis I was wondering if considered.
Packs, the strength and security and and let it Cook for 10 for the for future quarters.
Yeah, Ed Ed talk to that somewhat let me just give some additional color of their you know it's still a challenging spend environment in general you know so that when you said that's changed a lot. We are getting strong sales execution and you know security is really important N as we've talked about before.
This environment, you know financial institution. They just can't afford to you know have a glitch and this is where our reliability really helps and stands out against the competition. They can't afford to get hacked and again, we stand out there because we have the market leading solutions you know for a web app firewall and for pot management.
You know with guard a core really seeing strong growth has had talked about and I think you know what we're seeing in the marketplaces. There's good tailwind. There you know, particularly now you have <unk> and her body. The tools are out there the variants of that to produce.
More malignant boss to morph malware. So it's harder to attack you can train the boss pretty easily to get around a lot of the firewall defenses and so I I think what you're gonna see is even more penetrations of the traditional defenses and at this point at that point. What you really need is is guard accord to identify when you are.
Penetrated and we're in her proactively block the spread so I think you're gonna see more demand for segmentation is is there really into critical defence going forward. So strong you know has had talked about strong execution and performance across all three pillars, and then you look to the future.
P. I security is gonna be I think a very important market for us very early days.
But I I think really critical so which really pleasing to see the momentum that we've been building in the first half of the year with security and at that can I think helped drive us forward.
Alright, I appreciate the thoughts Tom and just as a follow up sort of toggling to the to the delivery business just Wanna get an update and you guys have talked about this before but just wanted to update until the operating principles and the operating philosophy around the delivery business with respect to sort of you know managing for sort of revenue share versus.
Harvesting for profit to fund investments in the in the in the computer business given the you know the ambitious roadmap you have there what sort of the what are the right. What do we think that you guys gonna strike that balance between those two objectives.
Yeah, It really comes down to price and profitability and as we've talked about we have turned down business that we you know, it's very spiky and we don't get you know what we think are paid enough to do it and so we've left at others to take and Meanwhile, growing the highly profitable.
You know delivery business the core business. There you know and I I think we are starting to see some positive signs. There you know traffic growth is not where it was before you know the pandemic, but Ah getting better we're seeing some acceleration you know there which is good price declines.
You know I'd say, a softening a little bit here and so you know I'm optimistic that you know, but you know over the next one to two years, we should see more of a stabilization of that of that business. You know so still price pressure, but you know I'm I'm pleased with the progress, we're making their and a strong cash.
Generation.
Thank you for the details ma'am appreciate it.
Thank you. The next question will be from rain Mcdonald.
Securities. Please go ahead.
Great. Thanks for taking my questions, Tom maybe just to stay on the security side of things last quarter. You mentioned actions you were taking on the go to market side and security and you mentioned execution as part of the driver of security Reacceleration, but I'm wondering if you could <unk> more color on the sort of go to market changes that that might be working here.
And you know we've been hearing that you that akamine has been more successful engaging traditional security resellers recently has that helped drive an acceleration of growth here at all or is that still too early and and maybe a contributor into the future.
No. Our partners are very important for security sales and packed some of our products are partner only for example, segmentations and very pleased to just recently announced a partnership with Ww T that'll be bundling in our solutions for segmentation and a P I security and that kind of partner.
<unk> is obviously very helpful for us and driving a lot of the improved execution. We also have dedicated resources for some of the newer and more advanced security services like segmentation and I think that helps with sales and we're seeing you know customers new customers to akamai.
Which is great and also upselling are solutions into the existing base in his add noted now 700 customers you know buying for different security solutions and add do you want to add anything to that.
No I think you've covered it <unk>.
We've made a lot of the your investments already so it's not a big investment needed in the fields overlay functions I'm very happy with that as a matter of fact, a lot of the new customer acquisition was coming from <unk>, They are actually getting penetration and some.
Some vertical that are traditionally strong like this quarter, we saw some some wins in education state and local government manufactured in pharmaceutical places are typically are very big web probably your properties that are typical C. D. On customers. So I think we're seeing really good execution across all the parts of security direct sales the overlay teams and.
And the channel.
Right that makes sense may be able to follow up bad.
I I know <unk> and and some of your other businesses. There there could be some upfront license deals that that could contribute in any given quarter was there anything to call out from an upfront license recognition in the quarter insecurity in particular that that might not be repeatable that we should just know about and is there any renewals that might be coming up in the back half of the year that we should be aware of.
Yeah. So I'm so nothing material. This quote a couple million bucks, but nothing material. If it's go over a couple of points I call. It out so nothing nothing there to call out one thing I will say, though with the with the.
Licensing, we do with garlic or a particular term licenses. So it's generally two to three years typically and those license deals renew and one of the comments I made earlier. So we are seeing very strong renewal soap windows license deals come up we assume renewal typically with expansion orders, which is really encouraging. So you have somebody who's renewing and then adding on more <unk>.
Extra lacrosse there.
Colonel infrastructure.
I'm, hoping to call out this quarter.
Great. Thanks for the color.
Thank you next question I'll be from Brank Latham Raymond James. Please go ahead.
Great. Thank you on the delivery business can you talk to us about any impact you think he might see from the writers' strike you'd think does that backing any of that and and the decline and then just comment on the sort of the sequential change in in the business there what sort of the outlook for their for the for the rest of the year. Thanks.
Yeah, he probably if this is a.
From the Writers' strike I wouldn't anticipate any major impact from that you know certainly not hearing anything from our customers. There, obviously that would potentially impact new releases, which you could take a couple of years to get out, but I'm not seeing anything there in terms of the second part of the question what are some of the fundamentals of what we're sending it was Tom talked about we are seeing.
Profit growth rates improve it's going up a couple of points a quarter pricing is still a bit challenging and put some of the old web performance vertical has been Palmer, some a little bit and travel as well, but we are seeing with the larger customers.
Big media traditional media customers pricing, starting to abate a bit there still pricing declines, but not nearly as steep. So I think its profit continues to improve and you know, we obviously have Q4 coming up.
A few months will be in queue for that always tends to be generally strong quarter from the Internet as kids go back to school and.
<unk>, new gaming console are sold and connected devices and all that stuff and it also tends to be pretty popular with new T. V series in sports and whatnot that you know we're optimistic that you know traffic should continue to to to improve in.
[noise], it's Tom talked about that and hopefully we get this business back to stable them next year or so.
Are you great are you seeing any more vendor consolidation like we saw earlier this year with some of the larger media companies.
There was one probably real notable one that went from five vendors down to two and we were the bleeding provider there and did pick up some additional shares of one of the ones who won there but nothing really notable this quarter that is that happened I think at the end of last quarter.
Okay, great. Thank you.
Thank you next question will be from Mark Murphy J P. Morgan. Please go ahead.
Hi, This is already on for a more perfect. Thanks for taking my question and congrats on the quarter.
Start off you mentioned earlier that you expect to see if they <unk> and the delivery market over the next couple of your can you describe what trends are seeing that kind of lead you to think that.
Okay.
Yeah sure I'll take this time, if you want to add something.
So I think it's really you know the delivery business it comes down to pricing in traffic.
<unk> growth rates now, we're starting to see traffic growth rates.
Improve it also cops become a little bit easier. The other thing is we talked about moving away from some of the peak your business with that will do is improve the profitability. So the delivery business to us as a really strategic asset for arthritis. It enables us to get really great economics.
Which will help our cloud business, you know delivery, so a function of a cloud and a lot of ways also for our security business with it enabled us to get you know the reach and the scale of the data for security. So it's you know.
I was obviously very strategic business, but in terms of like the stabilization I would say.
We're seeing pricing moderate, especially with a with a larger customers, which is a good sign traffic improving a bit with that continues we should be back.
Back to.
Hopefully a stable plus or minus a couple of points would be would be great.
But I think one thing that will be macroeconomic environment is causing a little bit of turn or if you will or challenges and some of the traditional web verticals like cross commerce. So that's gonna have to work itself out as well So let me take a.
Ear or sofa, that's all to work its way out, but because we see traffic growth in pricing stabilize a bit more we should be a pretty good shape.
Yeah. They only have great in this environment with higher interest rates and money is harder to get there's a little less enthusiasm for investment in you know the lots of C. D ends out there that are losing money and has that noted akamai is unique position that we generate a lot of cash from our delivery business where the market.
We do it you know better than anybody and you know the smaller companies that were okay, losing money before well that's not so easy to do now and so I think that does help maybe the overall environment, a little bit and we'll see how that plays out over the next year or two.
That's very insightful. Thank you and then with regards to guard accord. It seems like you guys are having a bit of momentum on that front any changes in the competitive landscape one rates anything along those lines.
Yeah, it's gotten more favorable for us.
You know our lead over the competition.
It has widened as we've made a lot of investments in car decor to improve its capabilities and so now we're recognized by the analyst community is the market leader by a wide margin.
And that's very good timing, because you know that capability as an increasing need with you know major institutions. So I think the competitive environment has become more more favorable for us because of the work we've done to make it a great product.
Got it thank you off that back in the queue.
Thank you.
Next question.
Will be coming from <unk> <unk> of RBC. Please go ahead.
Oh wonderful. Thanks, so much for taking my questions guys nice to see the security Reacceleration. This quarter at a two part question I wanted to ask about the computer business first can you talk a little bit about how some of your product investments in in terms of getting leno to be enterprise scale it to be.
Be truly competitive with the likes of wheat W. S and M. As you're free to go out features and functionality like Carbonetti. For example, how those efforts are going in and you know <unk>.
[noise], what learnings you've had as you've been migrating your own cloud spend onto that platform and the second part and I'm, telling me kind of hit it a little bit at at this earlier right, but let me let me look at what the Hyperscale cloud vendors are saying they are taking a big uptick in demand right now as a result of generative AI workloads and how do you think about your.
Ability to capture some of those generative AI workloads as as companies are thinking increasingly about adopting their journey I strategy and then maybe either auditioning <unk> you need to make inland, though to be able to capture some sort of some share of August . Thank you.
Yeah, great questions, and we are making really good progress or <unk> <unk> and really it's about scale and we talked about that you know the build out will be up to a couple of dozen core locations. You know by the end of the year with a ton more capacity than we had before <unk>.
<unk> storage in the new architecture, there much more capacity and capability of the certifications you know we now have P. C. I compliance were are you. So we can run bought manager on it with market, leading part management solution. We have 300 customers now using that solution on akamai connected <unk>.
Loud instead of a third party cloud and that does take advantage of deep learning technology. So already we have those capabilities you know to support that on Akamai cloud you know I think overall with a timeline the way we think about it you know by the end of this year, we should be in a position to start taking on more serious bookings are bookings with large custer.
<unk>, we're really important applications, we have a couple of already using it and then you know start generating more revenue next year for major applications now in terms of competing with the Hyperscalers you know, we're not gonna be a fully competitive for every application.
And we don't have to be it's a 200 billion dollar a year market girl and a 15 per cent and we are targeting a subset of that market, primarily initially vertical media and gaming followed by commerce. After that we're in particular applications where performance ma'am.
<unk> so you're you're the application is being used in some way by end users are bids business partners, where you maybe you Wanna have that application running closer so it it has better performance, where scalability rapid scalability matters and cost specially for the applications that involve moving data around or have a lot.
Hips and you see that immediate gaming and commerce. So that's really what we're targeting which is a pretty reasonable subset of the 200 billion now within that subset if you're an enterprise that uses a lot of you know the third party apps that are you know available as manner.
Services on existing platforms, probably it's harder to migrate and that's not where we'd go first Fortunately you know if you look at media workflow in the areas, where we're targeting often that's not the case and it's it's easier for us to manage supporting now you don't get.
Flip a switch so it's not that easy Unfortunately, and we've learned that but you know at Akamai, you know pretty much all of our applications are in the process of migrating from third party cloud onto our compute platform and so it does take some effort, but it is eminently doable and we're gonna save a lot.
By doing that and you know we're not the biggest company out there you know our big media customers spend hundreds.
Hundreds and hundreds of millions of dollars a year in the cloud with often case their primary competitor and so I think we're in a position that we can now help them based on our experience migrate a bunch of those applications to akamai good for us good for them.
Wonderful really helpful. Thank you so much.
Thank you.
Question will be for Moody Kissinger, Yeah. Davidson. Please go ahead.
[noise], Okay, great. Thanks for taking the questions just in a lot of questions been asked on security can you share the guard a court growth rate, but what kind of groceries seeing in that business.
Hey, <unk> about 60% year over year talked about we should be at 100 million dollar run right very very soon I'll be <unk>.
If we don't get their next quarter.
That is very impressive as it relates to compute you know 17 per cent year of your constant currency, that's fully organic figure this quarter's you're glad that acquisition to guide implies depending.
Depending on your monitor that model the Sequentials, maybe one to two points of acceleration by year end I guess, just how does the pipeline building.
You know for Len node as as you get some of these sites online and and when should we expect to see more material growth acceleration.
You know just just what are your growth aspirations there in terms of maybe 2024.
Yeah. So when you talk about <unk> you know almost all the revenue there is in their traditional business <unk>.
Developers small medium enterprises low R. P. A customers that business was a little over 100 million a year when we bought it growing in the teens and you know it's growing a little bit faster now, but you know it's not that's not the game changer and why we bought Leno was to you know be able to use it.
The base to create a service for major enterprises with mission critical applications very high our food accounts and today. The revenue there we have actually signed up you know a few important cases customers and so we do have revenue there now but it is a small you know in the millions of dollars.
And so, but that's where the growth comes from and that's you know we're trying to get him, 1% or 200 billion dollar market. So over a period of time to go from a few million you know to a couple of billion. We don't have a time frame on that yet, but we are trying to do that as quickly as we can but that's where the.
Real growth comes from and it starts from a very small portion of our roughly half a billion dollar compute business today.
That's helpful. Thank you.
<unk>, Tom Barthram time for one more question.
<unk>, our last question that'd be from <unk> <unk> Uhm Evercore. Please go ahead.
Yep. Thanks for taking my question you know I guess, maybe it stops on the security side can you just cut your body that did you see the acceleration what's happening there is that screen more from new customers or expansion <unk> customers, just any clear what that would be helpful and that was at any licensing revenues that help you with god. According to.
<unk> uhm, so as I talked about earlier, there was really no material license revenue in the quarter and as I said I'd call. It anything if it's you know a couple of points of growth or anything like that so nothing to report their in terms of the new customers an existing we are seeing as I talked about it pretty good expansion the existing installed base both with just six.
Penetration rates up a couple of points in the last two quarters.
<unk> as I look at customers buying multiple products like I mentioned earlier, we have over 700 customers buying for products. So the majority of the revenue growth is coming from the installed base by more but I'm very encouraged with a new logo acquisition, especially with what we're seeing in garlic or very encouraging to see them be able to attract new customers and vertical that were tip.
Quickly not very strong and so again, mostly from the installed base in terms of buying more products, which is great, but very encouraging on the new logo acquisition as well.
Got it probably just follow up on one thing you know like I think you talked about while you're operating margins being around 29%. That's about what you have in the first half of the year as well, but that would imply that sales will accelerate in H two horses H one from a dollar basis, but operating margins don't go up so maybe I'm.
<unk> is it the merit increases the other options to consider in terms of why I'd be seeing better operating leverage in the back half of the year.
Yeah. So two things that one has the merit increases you called up but also the depreciation picks up quite a bit because of the cabinets in the first half of the year.
So it was really the two main drivers, but I I'm pretty pleased with what we've been able to to accomplishment accomplish on on the margin for making huge <unk> investments in the business and acquisition.
Big investments, we're making and compute to be able to deliver 29% operating margin for the that's pretty impressive within them to deliver it will be able to raise EPS guidance. So I think I'm very very pleased with the team I think everybody's pitching you've done a great job, so happy with that and I'm pleased to see I was able to maintain the 29% margins. Despite the.
The fact that there's increased depreciation and merit increases.
Perfect. That's helpful. Thank you.
Thank you on it and thank you everyone close and we will be presenting that several investor confidence isn't roadshows throughout the rest of the third quarter details of these can be found on the Investor Relations section at Akamai Dot com. Thank you for joining us and all of US here at Akamai wish you and yours, a wonderful rest of the summer have a nice evening.
I've heard some I have concluded. Thank you for that can be very presentation. You may now disconnect.