Q1 2025 Akamai Technologies Inc Earnings Call
Cole: [music].
Hello, and welcome to the Akamai technologies first quarter 2025 earnings conference call, all participants will be in listen only mode.
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Speaker Change: I would now like to turn the conference over to Mark Stoutenburg head of Investor Relations. Please go ahead.
Mark Stoutenburg: Good afternoon, everyone and thank you for joining Akamai is first quarter 2025 earnings call.
Tom Leighton: Speaking today will be Tom Leighton, Akamai, Chief Executive Officer, and Ed Mcgowan, <unk> Chief Financial Officer.
Tom Leighton: Please note that today's comments include forward looking statements, including those regarding revenue and earnings guidance.
Tom Leighton: These forward looking statements are based on current expectations and assumptions that are subject to certain risks and uncertainties.
Tom Leighton: While the number of factors that could cause actual results to differ materially from those expressed or implied.
Tom Leighton: The factors include but are not limited to any impact from macro economic trends the integration of any acquisition geopolitical developments and any other risk factors identified in our filings with the SEC.
Tom Leighton: The statements included on today's call represent the company's views on May eight 2025.
Tom Leighton: We assume no obligation to update any forward looking statements.
Tom Leighton: As a reminder, we'll be referring to certain non-GAAP financial metrics during today's call.
Tom Leighton: A detailed reconciliation of GAAP to non-GAAP metrics can be found under the financial portion of the Investor Relations section of Akamai Dot com.
Tom Leighton: With that I am.
Tom Leighton: Now I'll hand, the call off to our CEO Dr.
Tom Leighton: Dr. Tom Leighton.
Tom Leighton: Thanks, Mark I'm pleased to report that Akamai got off to a solid start on the year first quarter revenue grew to $1.015 billion up 3% year over year as reported and up 4% in constant currency.
Tom Leighton: non-GAAP operating margin came in above guidance at 30%.
Tom Leighton: And non-GAAP earnings per share came in well above the high end of our guidance range at a dollar and 70 cents up 4% year over year and up 6% in constant currency.
Tom Leighton: Security and compute combined to account for 69% of our total revenue in Q1 growing 10% year over year as reported and 11% in constant currency underscoring Akamai is ongoing transformation from a C D and pioneer into the cyber security and cloud computing company there.
Tom Leighton: Powers and pretax business online.
Tom Leighton: Security growth in Q1 was driven in part by continued strong demand for our market, leading Garda core segmentation solution as more enterprises relied on akamai to meet compliance requirements and to defend against malware and ransomware.
Tom Leighton: The F. B is Internet crime report released last month called ransomware, the most pervasive threat to critical infrastructure.
Tom Leighton: And segmentation is the last and most important line of defense for an enterprise once an attack finds its way through the perimeter defenses Garda core is designed to spot it and proactively prevent it from spreading and causing serious harm.
Tom Leighton: In Q1, we achieved several large competitive takeaways for our guard of course solution, including at a major bank in the U S and that our government revenue and customs authority in Europe.
Tom Leighton: Both told us that they were not getting the help they needed from their incumbent provider. They also told us that their trust and confidence in Akamai were factors in switching from the competitor to us.
Tom Leighton: We beat out another segmentation competitor at a clinical research laboratory and at a major credit Union, which told us that our solution was easier for them to manage while offering unified control over their on Prem and hybrid environments.
Tom Leighton: In addition, we expanded existing contracts regard our core at a well known financial analytics company in the U S. A global Fortune 500 manufacturer in Europe, and a major telco in Latin America.
Tom Leighton: We also continued to see strong interest in our market, leading API security solution in Q1.
Tom Leighton: Almost everything online today Leverages, a P is including attackers, who know that a P. I, usually don't come with sufficient security and controls.
Tom Leighton: Akamai state of the Internet Security report issued last month showed that API hacks now cost organizations around $87 billion, a year with shadow a zombie a P is being especially vulnerable to attack.
Tom Leighton: When we do proofs of concept for our API security solution. Most of these shows and Cio's are surprised to learn just how many a P is they have exposed.
Speaker Change: For example, at one of our customer events in Q1, the CEO of a major Korean company told attendees about how our solution detected numerous undocumented a P i's along with multiple vulnerabilities, including about 40 security issues ranging from exposure of sensitive data through.
Speaker Change: On authentication and publicly accessible a P is too weak password policies and not encrypted passwords.
Speaker Change: In Q1, we signed contracts for API security with numerous companies, including a leading U S. Fintech provider one of the largest banks in Canada.
Speaker Change: One of the largest pharmacy benefits managers in the U S.
Speaker Change: Two large U S insurance companies.
Speaker Change: A well known auto manufacturer in the U K.
Speaker Change: Our global online fashion retailer in China.
Speaker Change: And a multinational investment bank in Australia.
Speaker Change: And last week at the RSA Security Conference, our API security solution, when our global Info SEC Award from Cyber Defense magazine.
Speaker Change: Also last week at RSA, we announced our newest security offering firewall for AI, which seashell magazine highlighted as one of the top cyber security products at RSA, and which see Iran. Hailed as one of the coolest new cyber security products at the show.
Speaker Change: Many enterprises today are deploying L. L lambs to provide myriad services, such as chat bots inference engines content generation and cataloging.
Speaker Change: Some are beginning to go further and deploy adjourn take AI software agents with the ability to gather information connect with other tools reason make decisions and then act autonomous late.
Speaker Change: In fact, Deloitte forecasted a quarter of the organization using Gen. AI today will deploy AI agents this year and half will use them by 2027.
Speaker Change: As is often the case when enterprises adopt new technologies cyber criminals quickly learn how to attack the new technology for nefarious purposes.
Speaker Change: Jen AI and the use of AI apps and agents are just the latest examples with a variety of exploits already well publicized.
Speaker Change: Akamai firewall for AI is designed to protect AI agents AI powered applications L O labs, and AI driven a P is from these new threats.
Speaker Change: By securing inbound AI queries and outbound AI responses. It offers multi layered protection by detecting and blocking sensitive data leaks in AI generated responses.
Speaker Change: Defending against remote code execution model back doors at data poisoning attacks.
Speaker Change: Filtering inappropriate content, such as misinformation hate speech and other offensive material and mitigating AI driven denial of service attacks by controlling excessive query usage and model overload.
Speaker Change: The new product is generating strong interest from customers for example, a financial services firm told US quote Akamai is a firewall has given us great insight into the interactions with our AI chat agent, which helps paint a picture of the threat landscape unique to L. O labs. This tool will allow.
As to save critical systems resources for real clients, rather than being consumed by bad actors and quote.
Speaker Change: In Q1, we also received accolades for our other security products.
Speaker Change: <unk> was named a leader in the Forrester wave web application firewall report and achieve the highest possible score for 11 criteria, including detection models layer, seven Ddos protection pricing transparency and flexibility roadmap and vision.
Speaker Change: Our WAF continues to be an industry leader and serves as the bedrock for App security used by many of the world's largest enterprises. For example in Q1, we signed multimillion dollar contracts with a global bank based in India, and the world's third largest railway with over 60 million daily users.
Speaker Change: As is often the case these new WAF customers are also making use of our content delivery services to provide the best possible performance for their web applications.
Speaker Change: Turning now to delivery I'm pleased to report that we saw better than expected results for our delivery products in Q1.
Speaker Change: This was due in part to improved overall traffic growth. Our continued excellent performance for both enterprise web apps and large live events.
Speaker Change: And incremental growth from new customer accounts that we acquired from NGO in December.
Speaker Change: One of those new customer accounts led to a $16 million commitment over three years for akamai to deliver 100% of their traffic along with Akamai API security App and API protector professional services at two solutions from our compute ISP partners.
Speaker Change: That's a great example of the opportunity and competitive advantage, we have by providing world class delivery security and compute together on a single platform supported by the best and managed professional services.
Speaker Change: Turning now to cloud computing in Q1, we continued our strong momentum in cloud computing, introducing new capabilities to serve customers signing up new accounts and expanding our go to market reach both in house and with partners.
Speaker Change: In March we introduced our new Akamai cloud inference solution, which provides what we believe is a better architecture for our customers to build and run AI applications and data intensive workloads closer to end users.
Speaker Change: AI inference, and adjourn take AI apps, often require high throughput networking to manage large volumes of data and return accurate results within milliseconds by running these workloads at the edge, we can achieve better throughput lower latency and significant cost savings compared to <unk>.
Speaker Change: Other cloud providers in the market.
Speaker Change: For example, a one proof of concept our company's artificial intelligent application achieve.
Speaker Change: Achieved 30% faster response times, using our new compute platform than they had with a hyper scaler.
Speaker Change: And another proof of concept a publishing company saw two and a half times faster response times with three X higher throughput and significant cost savings compared to another hyper scaler.
Speaker Change: Customers, who signed deals with us for cloud computing in Q1 included a global live streaming service with hundreds of millions of users.
Speaker Change: Major cyber security provider in the U S. Our European industrial products company, and a global developer of immersive video games.
Speaker Change: We also saw numerous large deals in Q1 come through our growing roster of I S V partners, including at one of the largest retailers in the world one of the largest pharmacy benefits managers, a major European fashion retailer and a leading broadcasting company in Japan.
Speaker Change: As a result of our competitive advantages Gartner named Akamai and emerging leader for Gen. A I specialized infrastructure and it's one of the reasons why vast data. The AI data platform company has partnered with Akamai to make data intensive AI inferencing faster and more efficient for our joint customers.
Speaker Change: <unk>.
Speaker Change: Our edge computing capabilities will be further enhanced by the introduction of our new managed container service or M. C. S that we announced in Q1 M.
Speaker Change: M C. S will provide support for customer containers in any of our 4000 plus pops around the world.
Speaker Change: That means we'll be able to run customer compute instances and over 700 cities no. Other provider comes anywhere close to doing that today.
Speaker Change: Also in Q1, Akamai became the first and only provider to offer video processing units or V. P use in the cloud with our new accelerated compute instances solution.
Speaker Change: Built on specialized processors from netting.
Speaker Change: Our V. P. You architecture can offer up to 20 times greater throughput the GPU solutions, which results a greatly improved performance as well as significant savings for media companies.
Speaker Change: This gives akamai another way to complement and cement our longstanding relationships with major media companies, which include all of the top 10 media companies in the world.
Speaker Change: It's also very synergistic with the media workflow services provided by our I S V partners on Akamai cloud.
Speaker Change: Overall, we believe that the combination of world class delivery compute and security available on our platform provides a low cost high performance and massively scalable alternative to the hyperscale or for media and entertainment companies.
Speaker Change: And unlike the Hyperscale, there's we don't compete with our customers at the Nab show in Las Vegas last month and in recent visits with customers across Europe and Asia. Many executives told me how they see real value in what we're doing in part because they are tired of writing huge checks to the hyper scaler, who then use the funds to.
Speaker Change: Pete against them.
Speaker Change: On the go to market front, the sales transformation efforts that we outlined during our last call are on track as planned we're making good progress in rebalancing our sales team to provide greater focus on new customer acquisition, while maintaining strong customer relationships.
Speaker Change: We've implemented a better sales play methodology to improve our installed base penetration, especially for our fast growing security and cloud infrastructure offerings.
Speaker Change: And we're seeing good early success with changes to reward sellers and customers for longer multi year contracts.
Speaker Change: Like all of you, we're keeping a close eye on global economic and political challenges as we noted during our last call we've taken steps to minimize the impact of tariffs on our business.
Speaker Change: And as of now we anticipate that the direct impact of Akamai from tariffs and 2025 will be about $10 million in Capex, which is amortized over six years.
Speaker Change: That said there is concern among some of our customers about a possible recession, which could impact bookings later in the year.
Speaker Change: And some of our customers outside the U S have raised concerns about whether they should rely on American companies for critical infrastructure.
Speaker Change: Neither issue has impacted our business to date and we're working to reassure customers that Akamai will continue to serve them as we always have.
Speaker Change: We're also staying very engaged with our U S federal sector customers.
Speaker Change: Overall, we derive less than 5% of our revenue from the U S public sector, including state and federal.
Speaker Change: Based on our current line of sight, we expect to lose a few million dollars of revenue in the back half of 2025 related to federal cutbacks.
Speaker Change: There's also a possibility of increasing revenue in situations, where our solutions can generate significant savings for federal agencies.
Speaker Change: Lastly, we were very pleased to see Akamai recognized last quarter as one of the most trustworthy companies in America by Newsweek magazine.
Speaker Change: Which partnered with a market research firm to analyze more than 100000 evaluations generated by customers employees and investors.
Speaker Change: Trust and integrity are core values at Akamai, and they really matter to customers, who rely on us to be there for them.
Speaker Change: So I want to express my thanks to our employees, who work so hard to help Akamai earned the trust of our customers and shareholders.
Speaker Change: Now I'll turn the call over to Ed to say more on our Q1 results and our outlook for the rest of the year.
Speaker Change: Ed.
Ed: Thank you Tom.
Ed: Today I plan to review, our Q1 results and then provide some color on our Q2 expectations and our updated full year 2025 guidance.
Ed: As Tom mentioned, we got off to a solid start to the year with total Q1 revenue of one point or one 5 billion, which was up 3% year over year as reported and 4% in constant currency.
Ed: We continue to see strong performance within our compute and security portfolios during the first quarter.
Ed: Revenue grew to $165 million, a 14% year over year increase as reported and 15% in constant currency.
Ed: Security revenue was $531 million growing 8% year over year as reported and 10% in constant currency.
Ed: During Q1, we had approximately $6 million of one time license revenue compared to $4 million in Q1 of last year and $12 million in Q4 2024.
Ed: For the first quarter combined revenue from compute and security increased by 10% year over year as reported and 11% in constant currency accounting for 69% of total revenue.
Ed: Our delivery revenue was $319 million down 9% year over year as reported and down 8% in constant currency.
Ed: Delivery revenue was stronger than expected in Q1, and while it's too early to call a bottom in delivery. We are encouraged by some improving trends in the delivery business to start 2025.
Ed: International revenue was $486 million up 2% year over year or 5% in constant currency, representing 48% of total revenue in Q1.
Ed: Foreign exchange fluctuations had a negative impact on revenue of $5 million on a sequential basis, and a negative $14 million impact on a year over year basis. Finally, it's worth noting that NGO who contributed approximately $23 million of revenue in the quarter, which was in line with our expectations.
Ed: Moving to profitability in Q1, we generated non-GAAP net income of $256 million or $1.70 of earnings per diluted share.
Ed: Up 4% year over year as reported up 6% in constant currency and well above the high end of our guidance range.
Ed: Our EPS outperformance was driven by better than expected Q1 revenue lower than expected transition services, our TSA costs related to the NGO transaction.
Ed: Better than expected bandwidth costs lower than expected payroll taxes, primarily related to stock based compensation as a result of a lower stock price and lower employee medical claims related to our self insured medical plan.
Ed: Finally, our Q1, capex was $226 million or 22% of revenue.
Ed: Our first quarter Capex came in slightly lower than our guidance, which was mostly due to timing as some capex has been pushed from Q1 into Q2.
Ed: Moving to our capital allocation strategy during the first quarter, we spent approximately $500 million to buyback approximately $6 2 million shares. We ended the first quarter with approximately $1.5 billion remaining on our current repurchase authorization.
Ed: Our intention remains the same to continue buying back shares to offset dilution from employee equity programs over time and to be opportunistic in both M&A and share repurchases.
Ed: As of March 31st we had approximately $1 $3 billion of cash cash equivalents in marketable securities.
Ed: It's worth noting that subsequent to the end of the first quarter and prior to today's earnings announcement we.
Ed: We used cash on hand, and funds available under our revolving credit facility to fully repay 1.15 billion of our outstanding convertible senior notes that matured on may 1st of this year.
Ed: Before I provide our Q2 and full year 2025 guidance I want to touch on some housekeeping items first we have completed our migration of NGL customers to the Akamai platform. As a result, we will not have any additional TSA cost moving forward and our revenue expectations from the transaction remain the same approximately 85.
To $105 million of NGL revenue contributions for 2025.
Ed: Second we expect an increase in operating expenses for the second quarter, partly due to a weaker U S dollar as well as higher marketing expenditures for Q2 events, our annual sales President's club trip.
Ed: And the impact of our annual employee Merit cycle, which went into effect on April 1st.
Ed: Third we continue to expect our capex spending to be heavily front end loaded with significantly higher expenditures in the first half of the year compared to the second half of the year. This includes approximately $10 million of Capex pulled forward to the first half of the year to help mitigate potential tariff risks.
Ed: Fourth we expect interest income to decline in 2025, due primarily to lower cash balances, resulting from stock repurchases recent acquisitions and the retirement of our 1.15 billion dollar convertible debt.
Ed: Additionally, we anticipate lower investment yields as interest rates are projected to come down throughout the year. As a result, we expect net interest income to decrease by approximately $5 million per month, starting in may of 2000 and twenty-five.
Ed: Finally, we are maintaining water forecast ranges due to the larger scale of our business to effectively navigate increased volatility within the current economic environment. The volatility in the foreign exchange markets and the potential impact of the pending tictoc down.
Ed: So with those factors in mind I'll now move to our Q2 guidance for Q2, we are projecting revenue in the range of one point or one $2 billion to $1.032 billion were up 3% to 5% as reported and in constant currency over Q2 2024.
Ed: The current spot rates foreign exchange fluctuations are expected to have a positive 15 million dollar impact on Q2 revenue compared to Q1 levels and a positive $7 million impact year over year.
Ed: At these revenue levels, we expect cash gross margins of approximately 72%.
Ed: Q2, non-GAAP operating expenses are projected to be $315 million to $320 million. This is up from Q1 levels due to the items I just mentioned.
Ed: We expect Q2 EBITDA margin of approximately 41% to 42%, we expect non-GAAP depreciation expense to be between $135 million to $137 million and.
Ed: We expect non-GAAP operating margin of approximately 28% for Q2.
Ed: Moving on to Capex, we expect to spend approximately $226 million to $236 million. This represents approximately 22% to 23% of our projected total revenue.
Ed: Based on our expectations for revenue and cost we expect Q2 non-GAAP EPS in the range of $1.52 to $1.58. This EPS guidance assumes taxes of $54 million to $57 million based on an estimated quarterly non-GAAP tax rate of approximately 19% to 20% and also refer.
Ed: Flex a fully diluted share count of approximately 148 million shares.
Ed: Looking ahead to the full year for 2025, we expect revenue of 4.05 Boe to $4 $2 billion, which was up 1% to 5% as reported and in constant currency.
Ed: As a reminder, we would expect to come in at the higher end of that range. If we see continued weakening of the U S dollar traffic growth materially exceeds our current levels and there is no ban in the U S for our largest customer.
Speaker Change: You'd expect to come in at the mid to lower end of that range. If we see significant strengthening of the U S. Dollar a significant downturn in the economy in the back half of the year traffic growth materially slows from current levels and our largest customer is banned in the U S.
Speaker Change: Moving on to security, we continue to expect security revenue growth of approximately 10% in constant currency for 2025.
Speaker Change: And we continue to expect the combined a R. R from our zero Trust enterprise and API security solutions to increase by 30% to 35% year over year in constant currency for 2025.
Speaker Change: For compute we continue to expect revenue growth to be approximately 15% in constant currency and as a reminder included within our compute we continued to expect cloud infrastructure services error year over year growth in the range of 40% to 45% in constant currency for 2025.
Speaker Change: The current spot rates, our guidance assumes foreign exchange will have a positive $8 million impact to revenue in 2025 on a year over year basis.
Speaker Change: Moving on to operating margins for 2025, we were estimating non-GAAP operating margin of approximately 28% as measured in todays FX rates.
Speaker Change: We anticipate that our full year capital expenditures will be approximately 19% to 20% of total revenue.
Speaker Change: Moving to EPS for the full year of 2025, we expect non-GAAP earnings per diluted share in the range of $6 10 to $6.40. This.
Speaker Change: This non-GAAP earnings guidance is based on a non-GAAP effective tax rate of approximately 19% to 20% and a fully diluted share count of approximately 150 million shares.
Speaker Change: In summary, although we anticipate heightened economic volatility we believe that Akamai is in a strong position to continue delivering revenue growth and maintaining healthy margins. This is supported by our newer security and cloud computing products, a moderation in our content delivery revenue declines and ongoing commitment to disciplined cost management.
Speaker Change: With that I'll wrap things up and Tom and I are happy to take your questions operator.
Speaker Change: Yeah.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
Speaker Change: To your question you May Press Star then two.
Speaker Change: And just a time, we ask analysts please limit themselves to one question and one follow up at.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: Today's first question comes from Amit Dayal with Evercore. Please go ahead.
Amit Dayal: Yeah good.
Amit Dayal: Good afternoon. Thanks for taking my question I guess, maybe you can just start on the on the delivery side can you just talk about what really drove the upside for you folks in the quarter was it more pricing or a traffic driven and then.
Amit Dayal: What's the screening you from saying this can sustain into the out quarters I've just got a lot of lumpiness on what drove the upside and why the hesitation about the sustaining.
Amit Dayal: Hi, Amit this is Ed thanks for the question Yeah, So I'd say, what what drove it was really traffic.
Amit Dayal: Reising you'd typically unless you have large renewals doesn't have a huge impact in any given quarter. When we didn't have any significant concentration of renewals. So it was all about traffic growth and it was pretty strong across pretty much every sub vertical. So we saw strong video traffic strong gaming traffic strong.
Amit Dayal: Software downloads and even across commerce and some of the other sub vertical. So it's just a better improved environment and we're just being cautious in terms of calling a bottom. This since you know the third quarter in a row here, where revenue is kind of been flattish sequentially, which is better than what it has been which has been declining but you know we're seeing decent trends here in April and we're just.
Amit Dayal: A bit more cautious and don't want to call the bottom quite yet.
Speaker Change: Got it that's totally fair and if I just follow up on the security side.
Speaker Change: I would love to hear how you would characterize your performance in the watch what it looks a little bit lower I think like not not a 10 15 million from what the street was modeling, perhaps a love to understand how did that end up versus your own internal expectations and then as you think about this acceleration you know from 8% to call it 10% in security what enables out for the year. Thank you.
Speaker Change: Yeah. Good question. So I would say it came in in line with what we had expected for the quarter and as you heard a.
Speaker Change: Now a few minutes ago, I reiterated our guidance for 10% constant currency, we delivered 10% constant currency this quarter, there's a little bit of noise in there with license revenue and I sort of called that out for you we had about $12 million.
Speaker Change: License revenue last quarter about 6 million less this quarter, so that can sometimes.
Speaker Change: Sometimes people don't quite get the model right going from Q4 to Q1 and also with some of the bundles Q4 tends to have a little bit of volumetric.
Speaker Change: Revenue associated with some of our commerce customers and things like that that you don't see repeat at such a level in Q1. So I would say it came in in line with what we expected the big drivers for growth is exactly what we had thought in terms of the bookings, we're seeing very strong API security growth and very strong garlic, where growth as we expected and you know things are playing out.
Speaker Change: Exactly how we had thought.
Speaker Change: Perfect. Thank you.
Speaker Change: The next question is from Jonathan Ho with William Blair. Please go ahead.
Jonathan Ho: Hi, good afternoon, and congrats on the strong quarter can you provide a little bit more detail on the role you can play with a gentex AI with your firewall.
FFAS Gen.A.I. Utilization in the Enterprise really begins to expand.
Speaker Change: Yeah, there's a whole lot of attacks now that have been published against AI apps of all kinds, including agentic AI.
Speaker Change: You know, a tax where the adversary is able to trick the agent, the AI agent into giving up sensitive data, code, PII.
Speaker Change: able to trick the agent into saying things that it shouldn't, could be offensive content, could be deals, you know, prices for things that aren't right.
Speaker Change: You know, and so you got to protect the app particularly if it's an agent making decisions and doing things.
Speaker Change: Also, you've got to protect it from ingesting bad information. You know, a lot of these apps are learning as they go along.
Speaker Change: and the adversaries have figured out how to submit information to it that causes it to learn bad things.
Which can cause problems in the future. [inaudible]
Speaker Change: You know, AI is a brand new attack surface and being rapidly deployed. In fact, you know, a lot of enterprises are
They're forming rules inside the Enterprise. [inaudible]
Speaker Change: about what they can and can't do with AI. But on the other hand, they can't even keep track of all the AI applications that they are using and have exposed. So, in other aspect of what we're doing, same as we do for API security. The first thing is letting our customers know what AI apps do they have exposed? The first thing is letting our customers know what AI apps do they have exposed? The first thing is letting our customers know what AI apps do they have exposed?
Speaker Change: and then making sure that they're protected. And I imagine this is going to be a really a war of escalation.
Speaker Change: So the first attacks are being seen out there. We have the first line of defenses now with the OAS top 10 and additional capabilities tailored to particular customer use cases. And I think there'll be some back and forth there that more attacks will be figured out and our job is to stay ahead of that and keep our customers safe.
Speaker Change: Excellent. And you mentioned some customers expressing worry over whether they could rely on US-based services. Is there potential for diversification or multi-sourcing pressure from some of your customers internationally? Just one thing. Thank you.
Speaker Change: Yeah, today, I don't think there's a good alternative, you know, especially when it comes to...
Speaker Change: Security, you know, pretty much all the world's major banks, most of Mr. Commerce companies rely on Akamai for their security because
Speaker Change: We're really the best in terms of protecting them. So there's not good alternatives for them today. I think over the long haul, our job is to make sure that they understand that it continued to rely on Akamai.
Speaker Change: No matter what happens, you know, with the geopolitics and the rhetoric . . . .
Speaker Change: You know, but it's a topic that's come up in some accounts and so, you know, we're being careful that they understand that Akamai is here for them over the long call and that we're not going away and that they can continue to rely on us.
Great. Thank you.
Okay. Great. Thanks.
Jonathan Ho: I, Tom, maybe to come back to the, the security segment, you called out, you know, a number of competitive takeaways for the segmentation product. I, I guess it'd just be helpful if you could kind of just help to still down which really saving you apart.
Jonathan Ho: in that market allowing you to take share. And then secondly, you'll be great to get any update on, you know, progress, trends within the, you know, the kind of the rest of the broader zero trust, you know, portfolio and, and work go to markets since there.
Jonathan Ho: Yeah, I think scale sets us apart so the larger enterprises could have hundreds of thousands of applications and devices they need.
Jonathan Ho: That can make the integration be a lot faster and simpler [inaudible]
Jonathan Ho: You know our new engine suggests the initial firewall rules that we set up for all the various devices inside the enterprise actually tells our customer and their operator what you know the various devices are.
I notify them if Firewall rules are out of date or not the most...
Jonathan Ho: You know, recent, you know, set of rules that they need to have. So ease of use is really important because if you think about installing, you know, hundreds of thousands of agents, you need really good automation to do that effectively. [inaudible]
And trust, you know, I think is-
Jonathan Ho: is really important and we've been told that by our customers because you know these agents are running inside the company.
Jonathan Ho: and it's really important that they be reliable and Akamai has a great track record there.
Jonathan Ho: We're not the lowest cost provider, there's others out there with lower cost solutions, but when it comes to protecting critical infrastructure from the devastation of ransomware or data ex filtration with software that's running really in the inside on the most important applications.
Jonathan Ho: Akamai is pretty unique in being able to do that and being trusted for that
Jonathan Ho: In terms of zero trust, you know, Guardacore is our flagship solution, it's sort of the beanker point, and we do have other capabilities, you know, we've combined North Southeast West protections, built around Guardacore and our enterprise application access solution.
Jonathan Ho: So that we can provide really a comprehensive set of solutions to protect the enterprise applications and data.
Speaker Change: Okay, great. Now, that's helpful. Maybe just to add quickly to you, nice to see the better margins in the quarter. I mean, it's not like you expect them to dip back down in Q2s. I guess I'm just trying to sort out what proportion of that upside in the quarter could be more sustainable versus some conservatism going forward.
Ed: The upside, both in Q1 and then in Q2, what's driving the higher cost. Some of it's a vent driven, but there is the, we did pull our merit cycle in a little bit earlier this year. We typically do it.
Ed: You know, in the middle of the year, so we just brought it to April , so that has a recurring cost. We're also doing some hiring so that has an impact as well, but we think over time is, you know, the business grows will improve our margins and, you know, maybe in the back half, there's potential if we hit the upside to expand margins a bit as well. [inaudible]
Okay. Thank you.
Speaker Change: The next question comes from Frank Louthan with Raymond James. Please go ahead.
Speaker Change: honors and farmers. And then what are some other drivers of margin improvement that you see taking shape the rest of this year and into next year?
Speaker Change: I'll start with that and then hand it off to Ed on the marching question. I'd say we're about a third of the way there. We've made a lot of changes, seeing some very good progress.
Speaker Change: shifting more of the force towards hunting, now that we have products that a lot of new to Akamai customers need.
Ed: You know, for example, API security, segmentation, cloud computing, and they're going to need, you know, firewall for AI as well. Also hiring more the specialists that have a lot of expertise that can help facilitate those sales.
Ed: Both are sellers and customers to longer term contracts starting to see some impact there which is good.
Ed: and overall, over time, growing the overall presence, you know, in the marketplace. So I think we're about a third of the way there and making good progress. And Ed, do you want to talk about the margins?
Ed: Yes, sure. So I said it was probably three main drivers. The first one would be just as we scale up our compute business. So right now we're sub-scale.
Ed: So if you look at some of the facilities as we...
Start to sell those out and get to...
Ed: You know, a bit of scale inside of some of the different deployments. We are seeing very attractive margins in line with what we talked about, but we do have a long way to go in terms of reaching scale. So as we. [inaudible] We are seeing very attractive margin. We are seeing very attractive margin.
Stoutenberg, Edward McGowan
Ed: Much lower cap-backs associated with your security business, so that's going to help [inaudible]
Get back to kind of low single digit or even flat.
Ed: CDN growth, that obviously has a big help on margins. As far as other operating areas we're always looking at efficiencies we've
Ed: Rung out a lot of costs, there's a little bit in the room potentially in real estate, and we can find, you know, some of our unused space, and then with compute in terms of our own use of compute, we migrated a lot of our stuff to Lenovo, look to do some more, but it's really going to come from
Ed: Scaling up with the business and as the next shifts over time. Thank you.
Speaker Change: The next question comes from Jeff Van Ree with Craig Hallum. Please go ahead.
Jeff VanRee: Great. Thanks for taking the questions. Just a couple. Maybe on the security front. Just high level. If I look at the organics and try to back up the acquisitions, it looks like it's fallen off fairly quickly from 15 to 10 to maybe now mid-single digits, going maybe sequentially last quarter was 10% year over year in this quarter. Looks like mid-single digits. Just talk to me a little bit. I know you touched on it last quarter, but I want to make sure I fully understand what's played out there on the security. And I think you had pointed it a laugh, but maybe if you could just start there.
Peter.
Jeff VanRee: In terms of if you break out the business in those different sub-segments, we are seeing, you know, last low down naturally a little bit, it's still growing, but it's not growing nearly as fast as it was, very high penetration, which is expected. You know, obviously, API security is growing incredibly fast, and we think can be, you know, very, very significant.
Jeff VanRee: Grower for us over time. Our infrastructure, security business is a low single-digit growing business and it is kind of in that range. Pilexic is growing in kind of in its normal range. We haven't had a lot of...
Jeff VanRee: Areas, so it's really just a mixed shift right now as we talked about.
Speaker Change: Got it, that's a full thanks Ed. And on compute, you had commented last quarter around some exiting of some legacy revenue streams around video and transcoding image management and some other things in there. How much, how was the headwind from that this quarter in compute compared to what you were expecting when you gave the guide? Yeah, I did.
Speaker Change: Yeah, I say it's playing out exactly how we expected and we're still seeing very strong growth and
Speaker Change: RCIS, Compute Infrastructure Services Business, and I reiterated our guidance there for very strong 40% to 45% growth in ARR. So everything's playing out exactly as we expected, we said it would take a while for some of this to play out probably in two years or something like that, but it came in exactly as we had thought. Thank you very much.
Speaker Change: Perfect. Okay. And then just one last on to revisit the prior question on on sales and the changes in making in sales. It sounds like a little more focus on hunters, you know in terms of the metrics we'll see where do you think the impact of these sales changes will show up first and presumably if you're focused on hunters maybe a new customer metric might be the place we would look for that but just tell me kind of how we're going to see this play out in terms of the results and metrics that we might be able to observe. We'll see you in the next video.
Sales Productivity, but it's something that we'll consider. Thank you very much.
Speaker Change: providing you some metrics in terms of how the...
Speaker Change: Number one, how the investments are going, what stage are we in in terms of adding the capacity, and it's both with hunters as well as some specialists for both compute and...
Speaker Change: for security. But I think you just see it manifest itself in stronger revenue growth, but we'll consider breaking out some metrics that'll be helpful. It's just sometimes a booking metric doesn't always translate to revenue cleanly, so that's not the most helpful thing to give, but we'll give it some consideration and try to give you some metrics that might be helpful.
Understood. Thank you.
Patrick Koval: The next question comes from Patrick Colville with Scotiabank. Please go ahead.
Josh Yeager: Hello, this is Josh Yeager on for Patrick Colville. Thank you for taking my question.
Patrick Koval: I wanted to better understand the non-delivery opportunity to cross sell EGO into the existing base and what you're seeing within that segment specifically. Thank you.
Speaker Change: Yeah, hey, how you doing? This is that again. Yeah, so we added, you know, several hundred customers from NGO and There's a good opportunity there where it's NGO did not have
Patrick Koval: So right now there's not a lot to report in terms of upsell. The first thing you want to do is just make sure the customers are migrated over, they understand.
Patrick Koval: who their rep is, get familiar with the services and working with Akamai, and then we'll start to build campaigns. I'd expect that to take your normal six to nine months to start to build a pipeline. And then we should start to see some potential upsell into that base of additional customers over time. [inaudible]
Madeline Brooks: The next question comes from Madeline Brooks with Bank of America. Please go ahead.
Kevin Yerproom: Oh, yes, thank you. This is Kevin Urprume on Madeline Brooks at Bank of America.
Madeline Brooks: I want to talk to you about the compute trends. You've noted over time that you expect compute to be kind of a long-term 20% growth driver or a growth grower. What is contributing to this current growth rate that we saw this quarter and what needs to happen to bring it back up into the 20s?
Madeline Brooks: Yeah, so the real driver there is our cloud infrastructure services.
Madeline Brooks: And as we've talked about, and as Ed said, we expect the ARR there to grow 40 to 45% this year.
Madeline Brooks: And that number gets a lot bigger that drives the overall compute number. So that's the number to watch. We'll highlight that as we go forward. And that will be driving the bigger compute number. Ultimately, that becomes the large majority of the compute number.
Speaker Change: But two questions, one, what gives you confidence in this 10% and two, do you see any upside to this 10% and what to drive it upside?
Speaker Change: Yeah, I'll start with that. The confidence is driven by the large interest big potential market and very strong growth.
for our segmentation.
Speaker Change: An API Security Solutions, and as we talked about, we think the ARR of those solutions this year grows 30 to 35 percent.
Speaker Change: A lot of demand for that. We have the market-leading solutions.
Speaker Change: and now we're adding in Firewall for AI, just starting, but a lot of customer interest there.
Speaker Change: And I think that'll be a product that has a long runway ahead, even though no revenue to speak of yet, just signing the first customers now. So I think having leading solutions in large potential markets.
Speaker Change: That today, you know, a fairly small revenue, but growing at a very good clip, that gives us confidence that we can be growing the larger security number, you know, in the 10% range.
Speaker Change: Upside would be in part based on new products, how fast they get going, and if we can beat the 30 to 35% on these products, Ed, do you want to add anything to that?
Speaker Change: Mostly subscription based business. I do break out from time to time if we have some license revenue so you do have pretty good visibility in terms of the base
Speaker Change: Business that you have, but it really just comes down to the pace at which you're adding, you know, existing customers buying more product and
Speaker Change: Cutton and Nuke, you know, required new logos. But if I look at the size of the sales force, what we produced over the years, we certainly have the capacity to add
Great. Thank you so much.
Speaker Change: The next question is from Rudy Kessinger with DA Davidson. Please go ahead.
Rudy Kessinger: Great, thanks for taking my questions. Ed, could you, just on the computer side, could you maybe quantify this?
Rudy Kessinger: What would compute growth have been if not for some of the lazy compute stuff and shifted the partners relative to the, you know, 25% of constant currency in Q4?
Rudy Kessinger: Yeah, sure, good question. So, if you remember, last time we broke out.
Rudy Kessinger: Cloud Infrastructure Service, and what we call our other computer, our legacy compute. There's like four or five different things that were in there some legacy storage.
Rudy Kessinger: That business had grown about 20% last year and the Cloud Infrastructure Service grew at over 30% So I'd say we're seeing very similar growth rates in the Cloud Infrastructure Service and where the slowdown is coming as expected is in that other legacy stuff where you've got a combination of some of the
Rudy Kessinger: We did a couple of big custom deals that have largely run their course and they're not growing any more, any new applications would go into cloud infrastructure service.
Rudy Kessinger: Our legacy storage business is starting to decline, we've migrated a little bit of business to partners, so that's playing out exactly as we expected. So really the decline from 20 to 15 or 25 to 15 is really all in that bucket as we had called out to you.
But the Cullcott Infrastructure Service is going really, really fast.
Rudy Kessinger: Okay, and on delivery front, what do you think from a price and standpoint and in particular, you know, sense?
Rudy Kessinger: The Agile bankruptcy, have you started the pricing improve on renewals and do you think?
Rudy Kessinger: You know, six, twelve months from now, we might get to a point where pricing, price compression could be better than it has been historically just given us that several low cost provider sizes to space the last few years.
Rudy Kessinger: Like you pointed out, fewer, fewer options there. You know, cross some of the other, the rest of the base for, you know, delivery. It's a mixed bag. It depends. Sometimes you can have a little bit more price pressure and commerce if there's. [inaudible]
Rudy Kessinger: You know, pressure with the economy and that sort of thing. But, yeah, I think over time it's possible, we'll see a moderation. We are seeing it. It's definitely improved a bit over the last year or so.
Rudy Kessinger: But you know, that's certainly one of the drivers to getting this business back to flat and maybe to a, you know, low single-digit growth or decline over time.
Rudy Kessinger: and the New York Times are very proud of our story. I think that's a really great story. I think it's a really great story and I hope that you enjoy it. Thank you! Take care. Bye! Bye! Bye! Bye! Bye! Bye! Bye! Bye! Bye! Bye! Bye! Bye! Bye! Bye! Bye! Bye! Bye! Bye!
Speaker Change: The next question comes from John DiFucci with Guggenheim Security. Please go ahead.
Speaker Change: Thank you for taking my question. I think this question is for Ed. As you focus on the fast or growing parts of security, specifically A.P.I. Security with no name and neosec and guard
Speaker Change: and probably sold through the channel, like other traditional security products are sold. I mean, are you taking steps to really ramp that up to drive growth with new channel partners? And if so,
Speaker Change: because we do a lot of checks and we're trying to hear more, we'd like to hear more about Akamai and those checks. Can this new path to market or more focused path, if that's the case, also be used to sell more of your infrastructure and app security products?
Bye-bye.
Speaker Change: Yeah, I would say, John , be talking with PJ, 80 to 90% of our new logo acquisition does come through the channel, I would expect with some of our install base where we have a strong
Speaker Change: A little over half of it comes in security comes to the channel, I expect that to increase over time [inaudible]
Speaker Change: And as we acquire some of these companies, both Neosek and Gardakor, did come with some new channel relationships that we've obviously continued to grow and blossom as adults. So I do expect a lot of our growth going forward to come through the channel.
the un-sourge for my voice, but-
Speaker Change: Is this an opportunity to, through those new channel partners, to also sell, like the slower growing parts of security, but they're still needed, like DDoS protection and laugh.
Speaker Change: because others, other partner or other of your competitors that sell those products are making a big push in the channel so they're getting sort of used to selling that or at least they're starting to talk about it.
Speaker Change: Yeah, and we do that. You know, often, you know, it'll be the new customer sales would be led with Gartacore API security, but you're absolutely right. The whole platform, the whole security platform, you know, can be then included with that or grown to that. And those partners are very good at it.
Okay, thanks Tom, good-bye.
Speaker Change: We have time for one last question. It will come from James Fish with Piper Sandler. Please go ahead.
Speaker Change: Hi, this is Kate and I'm for Fish. So, just one for the security weakness, was that more on the new side of the, was that more on the new side or the expansion side of the existing customers? Thanks.
Speaker Change: Yeah, I wouldn't refer to it as weakness that came in because we expected it so we're not viewing it as weakness so it's pretty much right in line but in terms of the impact within a quarter, you got to remember a lot of the businesses recurring so.
The block of the revenue is already...
Spoken for the existing customers. [inaudible]
Speaker Change: Most of the growth, as I said, comes from the, in terms of the newer sales is coming from API, Security and Guardicora, as we expected. That doesn't have a huge revenue contribution in the quarter in which you sell it because it does take a, you know, maybe a month or so to get it up and running and revenue generating. So like I said, I think things turned out just as we expected. It didn't, it didn't.
Gotcha, thank you so much [inaudible]
Thank you all. Bye-bye.
Speaker Change: Thank you. That concludes our question and answer session. I would now like to turn the call back over to Mark Stoutenberg for closing remarks.
M.J., you can please end the call now.
Speaker Change: John DiFucci, John DiFucci, John DiFucci
Speaker Change: Alright, this concludes our presentation. Thank you for attending today's conference. You may now disconnect your lines.