Q3 2024 Akamai Technologies Inc Earnings Call
Transcription by CastingWords
Speaker Change: Good day and welcome to the Akamai Technologies 3rd Quarter 2024 Earnings Conference Call. Today, all participants will be in a listen-only mode. Should you need assistance during today's call, please signal for a conference specialist by pressing the star key, followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note that today's event is being recorded.
Speaker Change: I would now like to turn the conference over to Mr. Mark Stoutenberg.
Head of Investor Relations. Please go ahead, sir.
Speaker Change: Good afternoon, everyone, and thank you for joining ACMI's third quarter 2024 earnings call.
Speaker Change: Speaking today will be Tom Leighton, Akamai's Chief Executive Officer and Ed McGowan, Akamai's Chief Financial Officer.
Speaker Change: Please note that today's comments include forward-looking statements, including statements regarding revenue and earnings guidance.
Speaker Change: These forward-looking statements are subject to certain 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.
Speaker Change: The factors include any impact from macroeconomic trends, the integration of any acquisitions, and any impact from geopolitical developments.
Speaker Change: Additional information concerning these factors is contained in optimized filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q.
Speaker Change: These forward-looking statements included on this hall represent the company's view on November 7th, 2024.
Speaker Change: Akamai disclaims any obligation to update these statements to reflect new information or future events except as required by law.
Speaker Change: As a reminder, we will be referring to certain non-GAP financial metrics during today's call. A detailed reconciliation of GAP and non-GAP metrics can be found under the financial portion of the investor relations section of Akamai.com.
Speaker Change: I'll now hand the call off to our CEO, Dr. Tom Leighton.
Speaker Change: Thanks, Mark. I'm pleased to report that Akamai delivered a solid third quarter in which we achieved two significant milestones.
Speaker Change: For the first time, Akamai's total annual revenue run rate exceeded $4 billion, and our security annual revenue run rate exceeded $2 billion.
Speaker Change: Our compute results were also very strong, growing 28% year-over-year in constant currency.
Speaker Change: Non-GAAP operating margin was 29%, and non-GAAP earnings per share was $1.59, in line with our guidance.
Speaker Change: On last quarter's earnings call we reviewed how Akamai is undergoing a fundamental transformation from a content delivery pioneer into the cybersecurity and cloud computing company that powers and protects business online.
Speaker Change: Security now delivers the majority of Akamai revenue, and compute and security combined account for more than two-thirds of our revenue.
Speaker Change: Since entering the security market a little more than a decade ago with Web App Firewall as a cloud service, we've greatly expanded our security product set into an impressive portfolio covering infrastructure, application, and enterprise network security.
Speaker Change: We now offer market-leading solutions to help protect against DDoS and DNS attacks, application and API attacks, account abuse and fraud, and ransomware and data exfiltration attacks.
Speaker Change: We're already leveraging generative AI to enhance the security and ease of use of our GuardaCore and WAF solutions.
Speaker Change: And we set ourselves apart from the competition with our extensive threat visibility and intelligence and our expert managed services that customers rely upon to protect their businesses.
Speaker Change: Customer interest in our security solutions remained strong in Q3, and we signed many significant contracts, including a 70 million dollar agreement with one of the world's largest financial institutions, which included our GuardaCore segmentation solution, API security, and Perlexic DDoS protection.
Speaker Change: A $6 million upgrade at one of the world's leading chemical producers that included Gardacor to increase visibility and better protect against ransomware.
Speaker Change: A $3 million expansion with one of the world's leading auto manufacturers that included Guardacore to protect their critical high-performance computing clusters.
Speaker Change: A $5 million upgrade from another of the world's largest financial institutions to protect their apps and APIs from malicious activity. And a competitive takeaway for our new API security solution at one of the world's largest multinational technology companies.
Speaker Change: And our Zero Trust segment, led by Guarda Corps, is on track to achieve an annualized revenue run rate of more than $180 million by year end.
Speaker Change: We're also seeing strong interest in our prolexic service as a result of the large DDoS attacks that have been raging across Asia. Our State of the Internet report in September warned of how geopolitical tensions are increasing the risk of attacks.
Speaker Change: and we recently thwarted two of the largest DDoS attacks ever seen, one against a leading financial institution in the Middle East and the other against a popular generative AI service.
Speaker Change: In both cases, our customers didn't see any impact thanks to our protection.
Speaker Change: The Gen-AI customer, a well-known hyperscaler, told us that the enterprise-grade protection we provide to their business is a true differentiator, and it's why they partner with Akamai over competing vendors who have struggled when confronted with large attacks.
Speaker Change: As another example, a major financial institution in Australia called on us last month for emergency assistance when the competitor they were using for security failed in the face of an attack, resulting in a significant disruption to their business and painful news headlines.
Speaker Change: We also signed up one of the leading financial institutions in India as they sought to defend themselves from the increasing scale of DDoS attacks.
Speaker Change: I think it's worth noting that enterprise-grade security is not just about scale and reach, which Akamai has plenty of. It's also about having the right people and expertise to partner with and support the most demanding enterprise accounts.
Speaker Change: And it's about having five nines of platform reliability. These are critical areas where Akamai excels, and they're key reasons why customers trust Akamai to keep them operating normally during even the most challenging circumstances.
Speaker Change: We've also continued to advance our security capabilities through innovation. For example, last month we announced the availability of our new behavioral DDoS engine for Akamai's App and API Protector solution.
Speaker Change: It leverages machine learning and intelligence from our global platform to analyze data from multiple sources to provide automated protection against application layer attacks.
Turning now to Compute.
Speaker Change: The strong momentum that we achieved in the first half of the year accelerated in Q3, with compute revenue growing to $167 million.
Speaker Change: up 28% year over year. We continue to add new compute customers at a strong pace and we remain on track for our new enterprise compute solutions to exit the year with an annualized revenue run rate of more than a hundred million dollars.
Speaker Change: In Q3, we saw enterprise compute wins in the U.S. at one of the largest retailers, one of the world's largest SaaS platforms, a large e-gaming platform, a large sports gaming platform, a nationwide passenger railroad, and a global weather forecaster.
Speaker Change: In Europe, we saw a large compute win with a major German travel platform, and a major telco doubled their prior commit for our enterprise compute solutions.
Speaker Change: In Latin America, one of the largest private banks in Brazil expanded their reliance on Akamai to adopt an ISV observability solution that provides insights into data to help improve user experience.
Speaker Change: And in APJ, we signed up an international domain management platform that enables domain owners to optimize and manage their domains using our compute solutions.
Speaker Change: Across the world, we're seeing strong interest in our differentiated cloud computing platform for cloud-native apps, observability, better performance, and lower cost.
Speaker Change: We're also seeing more opportunities for our platform to support the use of AI for tasks such as image generation and processing, speech recognition, consumer analytics and prediction, and generation of short videos for advertising.
Speaker Change: In September, we introduced new video workflow capabilities from our ISV partners that integrate our compute and delivery platforms to give media customers unprecedented flexibility to tailor media experiences to meet their user demands.
Speaker Change: And over the past year, we've greatly expanded our object storage capabilities to help customers get reliable, scalable, and low-latency workload performance at a fraction of the cost charged by hyperscalers.
Customers have responded.
Speaker Change: For example, French premium television channel Canal Plus expanded their use of our services last quarter, adding Akamai Cloud Computing and migrating their video assets to Akamai's object store. This enabled them to significantly reduce their costs while improving performance and reliability.
Speaker Change: And just this month, Akamai entered into a multi-year strategic partnership with a large video workflow ISV that includes a $17 million commitment for Akamai's Enterprise Compute Services.
Speaker Change: In an evaluation of public cloud platforms released last quarter, Forrester named Akamai a strong performer and noted that Akamai offers, quote, a market-leading edge platform that provides businesses with a distributed platform to build, run, and secure applications.
Speaker Change: The vision to lead as an IAAS alternative by offering compute at the edge of networks for low-latency workloads.
Speaker Change: and strengths in edge development with a significant global fabric of edge locations and robust computing platform that developers can utilize to deploy applications closer to users." End quote.
Speaker Change: In summary, we're pleased with the momentum that we've achieved in Compute this year, and we're very excited about the enormous opportunity ahead.
Now turning to delivery.
Speaker Change: As we've noted on recent calls, our delivery solutions have been weathering macroeconomic headwinds that have been felt industry-wide.
Speaker Change: In the 25 years that we've been in the delivery business, we've seen numerous swings in traffic levels, such as when traffic slowed as the largest internet companies adopted DIY a decade ago, and as when traffic boomed at the start of the pandemic.
Speaker Change: Most recently, we've seen traffic grow slow as the streaming and gaming verticals have faced their own headwinds.
Speaker Change: Looking forward, we expect that traffic growth will eventually rebound, just as it has in the past.
Speaker Change: Catalysts for potential future traffic growth include the analysis by Nielsen that 59% of video consumption has yet to move online, along with a lot of advertising which will presumably follow the audience.
Speaker Change: More advanced video games and the growth of online sports, which is still in the early innings, are also catalysts to watch.
Speaker Change: When traffic growth picks up, we believe that Akamai is in a much stronger position than competitors to capture it.
Speaker Change: Given our scale and cost structure, we can add traffic very profitably, while it appears that many of our competitors are struggling to even stay in business.
Speaker Change: In the meantime, and as I've said before, our plan for delivery is threefold. First, we'll remain disciplined when it comes to the profitability of traffic that we choose to serve.
Speaker Change: Second, we'll continue to leverage our market leadership position and installed base of major enterprises to generate cross-selling opportunities.
Speaker Change: And third, we'll continue to take steps to retain our market leadership while also reinvesting most of the cash flow from our delivery product line into the fast-growing areas of the business.
Speaker Change: It's important to note that Akamai realizes strong synergies and competitive advantages by offering customers delivery in addition to security and compute. These synergies and advantages include improved performance and seamless integration.
Bundling for cross-selling and strong customer retention.
increase margins for all of our services.
Unmatched visibility from seeing enormous volumes of traffic.
Speaker Change: and the capacity to quickly detect and stop massive cyber attacks at the edge.
Speaker Change: As you can see from our results, Akamai has come a long way in our evolution from the leading content delivery company into the cybersecurity and cloud computing company that powers and protects business online.
Speaker Change: We're very pleased to see our security business exceed two billion dollars in annual revenue run rate, and we're very excited about the enormous potential for future growth in cloud computing.
Speaker Change: But we still have more work to do to fully realize the potential of the fast-growing areas of our business.
Speaker Change: As our next step, we plan to shift more investment into the development of our cloud computing capabilities and new security products, as well as into the go-to-market resources and partner ecosystem to sell these services to a broader portion of the enterprise marketplace.
Speaker Change: With the success of our new solutions in API security, enterprise security, and cloud computing, we're now selling to enterprises who were not in the sweet spot for our delivery or cloud WAF services.
Speaker Change: And so we plan to add go-to-market positions for hunting as well as experienced specialists to support sales of the new products.
Speaker Change: Our new offerings are also much more partner-friendly than our traditional delivery and cloud WAF solutions, and so we're also continuing to strengthen our partner ecosystem.
Speaker Change: In order to help fund these investments in the fast-growing areas of the business, we've made the difficult decision to eliminate about two and a half percent of the current roles across the company.
Speaker Change: This was a painful decision because it impacts our people, whose innovation and drive have been an important part of our success.
Speaker Change: We believe that redeploying these resources will enable us to grow while still maintaining our near-term operating margin target of about 30% and then be in a better position to climb above 30% as the fast-growing areas of our business expand our profitability.
Ed Mcgowan: Now, I'll turn the call over to Ed, who will review the Q3 results in more detail and provide our outlook on Q4. Ed?
Thank you, Tom. Today I plan to review
Ed Mcgowan: provide some financial color on our restructuring charge and then discuss our expectations for Q4.
Ed Mcgowan: I'll start with our third quarter results. Total revenue for the third quarter was 1.005 billion dollars, up 4% year-over-year as reported, and in constant currency, marking our first billion dollar quarter.
Ed Mcgowan: Compute revenue was $167 million, up 28% year-over-year as reported, and in constant currency.
Ed Mcgowan: These results included a $7 million one-time benefit related to the release of some deferred revenue in conjunction with the expiration of a long-term legacy compute contract.
Speaker Change: As Tom mentioned, we continue to see very positive market momentum with our enterprise compute solutions and remain on track to exit the year with an annualized revenue run rate of more than 100 million dollars.
Moving to security revenue.
Speaker Change: Delivery revenue was 319 million dollars, a 16% year-over-year decline both as reported and in constant currency.
Speaker Change: Sequentially, delivery revenue decreased 3%, which is an improvement compared to the 6% and 10% sequential declines in the previous two quarters.
Speaker Change: As Tom mentioned, delivery has been impacted by recent macroeconomic headwinds that have been felt industry-wide.
Speaker Change: As a result, we've seen a significant slowdown in year-over-year traffic growth, most notably in video streaming and gaming. While it's difficult to predict exactly when the industry will recover,
Speaker Change: and growth will resume. We believe our business will be uniquely positioned to capitalize on the recovery. Our scale and cost structure enables us to attract and retain customers very profitably and our delivery business continues to generate very desirable cash flows.
Speaker Change: International revenue was 480 million dollars, up 3% year-over-year as reported and in constant currency, representing 48% of total revenue in 2003.
Speaker Change: Foreign exchange fluctuations had a positive impact on revenue of five million dollars on a sequential basis and a negative three million dollar impact on the year-over-year basis.
Speaker Change: Non-GAAP net income was $244 million, or $1.59 of earnings per diluted share, down 2% year-over-year, down 1% in constant currency. As a reminder, included in our Q3 results is a full quarter's worth of no-names revenue and expense.
And finally, our non-GAAP operating margin in Q3 was 29%.
Speaker Change: Moving now to cash and our use of capital. As of September 30th, our cash, cash equivalents, and marketable securities totaled approximately $2 billion.
Speaker Change: During the third quarter, we spent approximately $166 million repurchasing approximately 1.7 million shares.
Speaker Change: We now have an aggregate of roughly $2.1 billion remaining in our share buyback authorizations.
Speaker Change: As it relates to the use of capital, our intentions remain the same, to continue buying back shares over time, to offset dilution from employee equity programs, and to be opportunistic in both M&A and share repurchases.
Speaker Change: Before I provide our Q4 guidance, I want to touch on some housekeeping items.
Speaker Change: First, as part of our new go-to-market approach and subsequent workforce realignment that Tom mentioned, we took an $82 million restructuring charge in Q3. This charge was primarily driven by our workforce reduction in related severance costs.
Speaker Change: along with the write-down of intangible assets related to the NEOSEC acquisition.
Speaker Change: We estimate the workforce action will result in approximately $45 million of annualized savings going forward. We expect to reinvest most of those savings as part of the plan Tom discussed to refocus our go-to-market efforts around our fast-growing compute and security offerings.
Speaker Change: Second, in previous years, seasonal factors significantly influenced our Q4 financial performance.
Speaker Change: This year we are seeing weaker than normal traffic trends persisting into October. As a result, we do not anticipate an improvement in traffic growth for the remainder of 2024.
Speaker Change: Finally, Q4 operating expenses tend to be higher than Q3 due to increased sales commissions for reps who exceed their annual sales quotas. And this year, our annual employee merit cycle went into effect on October 1st.
Speaker Change: So with those factors in mind, I'll move to our Q4 guidance. We are projecting revenue in the range of $995 million to $1.020 billion, which is flat to up 3% as reported and in constant currency over Q4 2023.
Speaker Change: At current spot rates, including the significant volatility from yesterday, foreign exchange fluctuations are expected to have a negative $7 million impact on Q4 revenue compared to Q3 levels and a negative $5 million impact on a year-over-year basis.
Speaker Change: At these revenue levels, we expect cash gross margins of approximately 72 to 73 percent.
Speaker Change: Q4 non-GAAP operating expenses are projected to be $321 to $327 million.
Speaker Change: We expect Q4 EBITDA margin of approximately 40 to 41 percent.
Speaker Change: We expect non-gap depreciation expense to be between 131 to 133 million dollars.
Speaker Change: And we expect non-GAAP operating margin of approximately 27 to 28 percent per Q4.
Speaker Change: Moving on to CapEx, we expect to spend 184 to 192 million dollars. This represents approximately 18 to 19 percent of our projected total revenue.
Speaker Change: The sequential increase in CapEx is primarily due to timing, as several projects were delayed from Q3 to Q4.
Speaker Change: Based on our expectations for revenue and cost, we expect Q4 non-GAAP EPS in a range of $1.49 to $1.56.
Speaker Change: The CPS guidance assumes taxes of $54 to $57 million based on an estimated quarterly non-gap tax rate of approximately 19 percent. It also reflects a fully diluted share count of approximately 153 million shares.
Speaker Change: Looking ahead to the full year, we now expect revenue of $3.966 to $3.991 billion, which is up 4% to 5% year-over-year as reported, and up 5% in cost and currency.
Speaker Change: At current spot rates, our guidance assumes foreign exchange will have a negative $22 million impact on revenue in 2024 on a year-over-year basis.
Speaker Change: We expect security growth of approximately 15 to 17% in cost and currency in 2024.
Speaker Change: Given the continued adoption of our enterprise compute solution, we are now increasing our overall expected compute revenue growth to the higher end of our prior guidance, or approximately 25% in cost and currency for the full year 2024.
Speaker Change: Our non-GAAP earnings guidance is based on a non-GAAP effective tax rate of approximately 19% and a fully diluted share count of approximately 154 million shares. Finally, our full-year CAPEX is expected to be approximately 17% of total revenue.
Speaker Change: In conclusion, we are very pleased with our continued progress with our enterprise compute solutions and excited about the early returns for our recently introduced API solutions. Thank you. Tom and I are now happy to take your questions. Operator?
Thank you.
Speaker Change: We will now begin the question and answer session. As a reminder, to ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw it, please press star then two. At this time we will pause momentarily to assemble our roster.
Speaker Change: And today's first question comes from Rishi Jaluria with RBC. Please proceed.
Rishi Jaluria: Thanks so much for taking my questions. Really appreciate all the detail. Maybe, Tom, in your prepared remarks, you talked a little bit about some of the traction that you're having on the AI side, including with AI companies.
Rishi Jaluria: Can you help us understand philosophically how you're thinking about the role that GEN-AI can play in security on both sides of the equation, both from what happens, you know, how you can leverage GEN-AI to make security offerings better, but maybe more...
Rishi Jaluria: significantly, what does that do to attack surfaces and attack vectors, especially if Gen-AI is going to get in the hands of nefarious actors? And then I've got a quick follow-up.
Speaker Change: Sure. Gen AI is already in the hands and being widely used by nefarious actors and that's one reason why we're seeing a lot more attacks and
Speaker Change: penetrations. Probably you've all seen the deep fakes, very compelling, but it's also used to generate the malware and train it to get around offenses.
Speaker Change: So it is increasing the need for defenses, defenses in depth.
Speaker Change: I think it's a, you know, a big reason why you really need segmentation now and the GardaCore solution is...
Speaker Change: is doing so well. On our side of the house, you know, we've been using AI and ML, you know, really forever in our security products.
Speaker Change: We use it for anomaly detection, bot detection, if it's a human logging into an account, making sure it's the right human and not somebody who stole credentials.
Speaker Change: We also use it across the company, really, to be more efficient in the various operations we do. We're using it already in two of our products, security products, with Gen AI as an interface. So it helps our customers, you know, manage...
Speaker Change: Using our capabilities, you can ask, what's that device there? Are the firewall rules up to date? You can ask questions like, what do I need to do to bring my firewall rules within the last couple iterations so they're not too far out of date? And it answers and tells you. It's really very compelling and very interesting capabilities.
Speaker Change: A lot of use of Gen-AI, I would say, at Akamai still, early days, but unfortunately the bad guys are using it too, very effectively.
Speaker Change: Yeah, got it. No, that's that's really helpful. I appreciate the color. And then just quickly, you know, Tom, you alluded to this in
Speaker Change: your prepared remarks, but obviously seen some high-profile shakeouts including a long-awaited bankruptcy of one of your longtime competitors.
Speaker Change: Maybe help us understand both near-term, long-term, how we should be thinking about
Speaker Change: the impact on your business from consolidation, maybe is there an opportunity for you to gain share of wallet, especially as the kind of stable player and leader in the space, and then longer term with one less player that had been maybe aggressive on pricing. How do you think this shakes out in the overall pricing environment, specifically on the delivery side? Thank you.
Speaker Change: Yeah, I think consolidation in the delivery market is long overdue.
Speaker Change: And you've seen a lot of companies operating at losses, you know, in part funded by private equity or Wall Street And it just didn't make sense. These companies were never going to make money You still see some of it out there today with companies that are just really struggling Offering, you know pricing which for them loses money
Speaker Change: And so I do think it makes sense, you know, to have some consolidation.
Speaker Change: And you're right, we've seen, in other words, InstarLogic, Stackpath, Lumen, Allgone, Edgio, which is the combination of Edgecast and Limelight in Chapter 11.
Speaker Change: As we talked about, you know, we are very careful with our pricing and we do turn away business.
Speaker Change: that we don't think makes sense for us. And sometimes other companies will step in and take that. They'll lose money in the hopes of showing some revenue growth. But I think it's not sustainable for them to do that. And I think this shakeout may be the beginning of something very positive and will help the delivery business over the medium to longer term.
Speaker Change: That's really helpful. Thank you so much. I appreciate all the color.
Speaker Change: And the next question comes from James Fish with Piper Sandler. Please proceed.
Speaker Change: You know, investing behind hunters as well as sales specialists, as well as the channel. Can you just talk about what caused you to make the shift now rather than at year-end? How to think about the mix of that investment between the direct and specialists against kind of the indirect approach with the channel?
Speaker Change: Sure I think you know we are really seeing good traction now.
Speaker Change: We already had traction, I would say, in GuardaCore, but now with API security, we talked about achieving an ARR of $50 million a year end. That was near zero last year.
Speaker Change: So we've really, I think, proved that out and we're very excited about the future.
Speaker Change: And with compute, you know, last year, we really weren't even selling enterprise compute. The platform just wasn't at that level. And this year, as we talked about, we are now beginning to sell it and seeing great traction to the point where we think that'll be $100 million ARR by the end of the year.
Speaker Change: are attracted to a much broader market of enterprises than our traditional leading products, you know, which would be delivery and cloud WAF.
Speaker Change: And so there's a lot of enterprises and verticals that do use cloud computing, do need API security, do need enterprise security that weren't in the sweet spot for our traditional services.
Speaker Change: And so that says, you know, we do need to invest more in hunting now. We've got to go after those accounts.
Speaker Change: And in addition, I think it's very helpful for us to have specialists, people that are really familiar with selling cloud computing. And that will help our traction as we accelerate the growth there.
Speaker Change: So, that's why we're doing it now, and we didn't do it last year, and why we're growing the resources there. And, of course, these new products are also very channel friendly.
Speaker Change: in ways that our traditional services weren't. You know, delivery and cloud WAF weren't as, we had channel partners, but they weren't as friendly and as attractive. The new products.
Speaker Change: very attractive to the channel and there's a real role for our channel partners to play and of course with cloud computing We've got a lot of ISVs now getting on the platform So it's that's why we're making this investment now
Speaker Change: Understood. And maybe as for you, as we think about the advanced security package changes that you guys made almost two years ago now,
Speaker Change: How penetrated is that across the security install phase? How much more room do we have to go with cross or off-selling that unit, trying to understand the year-to-date impact on security growth and anything as it pertains to the delivery impact as you think about those bundles?
Speaker Change: Hey Jim, thanks for the question. Yeah, so we talked last quarter a lot about this as we had anniversaried the introduction of the package and had
Speaker Change: pretty high penetration obviously especially with the early on with the early adopters of it we're sort of at the end of that at this point so we don't the way to think about it is you've got year-over-year compares that have us selling in both both quarters
Speaker Change: And our next question comes from Frank Laughlin with Raymond James. Please proceed.
Frank Laughlin: Great, thank you. Since you acquired the the Lumen CDN last year, a little over a year ago, did you get any network elements with that and is there any aspect of their new networks that they're building to support their AI partners that they're having conversations with you about, about implementing your capabilities and layering them on top of that network to help maybe deliver some of that AI traffic? Thanks.
Speaker Change: Yes, so with the Lumen acquisition, there was no acquisition of any assets.
Speaker Change: died from the customer contract, so there was no network acquisitions. And as far as any partnership discussions we have with Blumen, we're not prepared to talk about anything, but there's nothing specific to what you mentioned there.
Okay, great. Thank you.
Speaker Change: The next question comes from Fatima Bulani with Citigroup. Please proceed.
Speaker Change: Hey, good afternoon guys. This is Mark Han for Fatima. Thanks for taking our questions.
Speaker Change: Maybe just, you know, great to hear the momentum that you guys are seeing on Compute, but maybe just on profitability. Why aren't we seeing maybe greater evidence of operating leverage given the, you know, Compute outperformance, especially since, you know, the segment commands better relative, you know, gross profit characteristics to delivery, which is declining?
Ed Mcgowan: Hey Mark, this is Ed. Yeah, so we're still in the scaling up factor within the compute business, so we haven't reached scale yet. You're right to think that once we get to a much larger scale, we should start to see better flow through. You'll see, hopefully, gross margins expand a little bit and operating margin expand, but we're still in the investment phase of the business and haven't reached scale yet.
Speaker Change: Okay, great. And maybe just a quick follow-on, you know, how should we think about CapEx trajectory going, you know, through 25, you know, from sort of the 24-70% level, you know, going forward? Thanks.
Speaker Change: Yeah, so we're not going to provide guidance on this call for next year, but you know, as we've talked about.
Speaker Change: is generally where we'd like to keep the business for now. Obviously as compute gets bigger, that may change over time, but certainly over the next couple of years, that's about the range we'd like to stay in.
Great, thank you very much.
Speaker Change: And our next question is from Rudy Kessinger with DA Davidson. Please proceed
Great, thanks for letting me ask some questions here.
Speaker Change: It's basically implied in Q4 that delivery revenue is down, you know, 20-21% year-by-year by my math. I guess, um, it seems kind of...
Speaker Change: hard to wrap my head around that if traffic is still growing. I know you're saying traffic growth is not as strong as you've seen in the past but if traffic growth is still growing just help us
Speaker Change: Try to understand how delivery could be down over 20% year-over-year unless you're seeing much higher pricing pressure Than you've seen in the past and as we think about going forward maybe 25
Speaker Change: Is it fair to assume that delivery is, you know, at least a double-digit decliner going forward?
Speaker Change: Yeah, so a couple things to think about here. So, if you remember last Q4, we had the...
Speaker Change: Lumen and Stackpath acquisitions. During that time, when we entered into the Transition Services Agreement, we had all of the contracts, even though
Speaker Change: We had anticipated some of those would go away. So, it's really difficult to compare Q4. And in terms of traffic growth, it is growing very slowly. So, you know, rates that we haven't seen in the 25 plus years we've been in this business. So, it's growing very, very slow.
Speaker Change: Getting a little bit better, but it takes a lot longer for that to work its way through the system And we get a tough compare so those are the factors
Thank you very much.
Speaker Change: OK, that's helpful. And then on Compute, maybe it's a rounding error. CapEx, it looks like maybe at the midpoint, if you use the percent you're giving for the full year, up about $40 million for this year. Correct me if my math's wrong there, but if it is accurate, seems like a little bit of a step up with not.
Speaker Change: Much of a raise in the Compute Guide for this year if I back out the $7 million in one time that you had for Q3.
Speaker Change: related to delivery in terms of some of the places where we have outsized demand. So, unfortunately, delivery demand isn't all in one place. It's not just one number you have to build out.
certain geos as you get demand in certain places.
and Mark Stoutenberg.
Okay. Thanks, guys.
Thank you.
Speaker Change: And the next question is from Matt DeZort with Needham. Please proceed.
Speaker Change: All right, thanks for taking the questions, guys. I guess within Compute, could you touch on some of the early use cases and verticals and how those are performing? Any cohort metrics you can offer, especially behind some of the observability and security and media customers you guys have talked about? And any other newer tips that you guys are seeing as driving more workloads to Connected Cloud?
Speaker Change: Yeah, I would say, you know, the sweet spot early on by design in terms of revenue is media workflow, but we are, you know, seeing compute sales across really all verticals and including new customers.
Speaker Change: You know and just to give you an idea of the range of you know our ISV partners
Speaker Change: who, you know, customers will buy solutions from them or from us on our platform. You know, there's a couple of database, you know, partners, observability, widely, you know, being sold, live encoding, transcoding.
Speaker Change: video packaging, WebRTC for interactive video, digital asset management, optimization of video, game orchestration, fleet management, DRM, Kubernetes, connectivity, and auto-scaling.
server-side ad insertion, AI inferencing,
and API performance and testing, and that's.
just the list of different ISV partners.
Speaker Change: So, we really are seeing a lot of use cases across multiple verticals with a sweet spot in media workflow. And at this point, we really have a very good ecosystem of media workflow partners which
Speaker Change: is starting, as we talked about in the prepared remarks, really being well-received in terms of our media customer base. They're looking for better performance, distributed compute at a lower price point, and we're really in a good position to provide that today.
Speaker Change: Great. Thanks, Tom. And as a quick follow-up, can I ask about some of the security pieces, excluding GuardaCorps and No Name? How did some of the larger pieces perform in 3Q across WAFT, bot? It sounds like DDoS was really strong. You touched on a number of wins there. Did that drive any incremental upside in the quarter? And how do you think about, you know, that triumvirate going forward?
Speaker Change: Hey, I'll take that one. So we saw pretty good strength across all different products, including, you know, you talked about GuardaCore, but even within the Zero Trust space with our Enterprise Access product, we saw some pretty good growth there. We saw, you know, continued strong growth in WAF. We saw some acceleration in DDoS. You don't really get a big burst of
Speaker Change: of revenue right away when you have a tax in a quarter. Typically you sign up new customers and that revenue comes out over time, but it was pretty strong demand, pretty similar to what we saw in Q2 across the board.
Thank you. Bye-bye.
Speaker Change: And the next question comes from Mark Murphy with J.P. Morgan. Please proceed.
Speaker Change: Hey guys, thanks for taking the question. This is already Luan from Mark Murphy. I wanted to ask a question on compute as well. It's really good to see that momentum. I think you guys specifically called out adding customers as a strong grade and now kind of getting customers outside that sweet spot, which is very interesting to hear. So I guess my question is
Speaker Change: Is that kind of rate of addition of those customers, you know, a little bit more than you expected and are you seeing these kind of non-sweet spot customers kind of come in earlier than you expected as well? Thanks.
Speaker Change: Yeah, we're very encouraged, you know, with the adoption of our compute services.
substantial increase in number of customers.
Speaker Change: And, you know, even though we planned and focused early on on the big media accounts that are already Akamai customers for using our platform, we're really seeing it across the base and a lot of new customers signing up, starting with Compute.
Speaker Change: that didn't use our pre-existing services. So we're very pleased to see the growth in compute. And of course, you've seen all year long as we've raised our targets for the year in terms of the enterprise compute revenue and the compute business as a whole.
Thank you very much.
Speaker Change: This does conclude our question and answer session for today. I would now like to turn the conference back over to Mr. Mark Stoutenberg for any closing remarks.
Speaker Change: Thank you everyone. In closing, we will be attending several investor conferences throughout the rest of the quarter. We look forward to seeing you there. Again, thanks for joining us tonight. We hope you have a nice evening. Operator, you may now end the call.
John DiFucci, John DiFucci,
Speaker Change: Thank you. The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.