The operator welcomed everyone to the Akamai Technologies Second Quarter 2023 Earnings Conference Call and noted that the event was being recorded. Tom Barth, Head of Investor Relations, then took over the call and warned that there were forward-looking statements that could cause actual results to differ materially from those expressed or implied. He also noted that non-GAAP financial metrics would be referred to during the call and that a detailed reconciliation of GAAP and non-GAAP metrics could be found on the company's website. Finally, Tom Leighton, Akamai's Chief Executive Officer, thanked everyone for joining the call.

Akamai reported strong results in the second quarter, with revenue up 6% year-over-year and non-GAAP EPS down 5%. Security Solutions revenue was up 17% year-over-year, driven by web app firewall, bot manager, account protector, and page integrity manager solutions. Guardicore segmentation solution saw numerous significant customer wins, including a leading global provider of financial data. Akamai has used its financial strength to make investments in enterprise security and cloud computing, and to buyback additional stock.

Akamai's Zero Trust Solutions have seen significant growth in Q2, with a major insurance company in France and Telstra, Australia's largest telecom provider, adopting their solutions. Compute Product Group revenue has also seen a significant increase of 74% year-over-year, with large enterprises testing the Linode platform, including a major U.S. airline, one of the world's top gaming companies, and a global provider of weather data.

Tom Barth and Dr. Tom Leighton apologized for a technical difficulty that occurred during a call and then reported that Akamai had delivered strong results in the second quarter. Revenue was up 4% year-over-year, non-GAAP operating margin was 29%, and non-GAAP earnings per share was $1.49, up 10% as reported and up 11% in constant currency. They then discussed their three main product areas, beginning with security, which is their largest source of revenue.

In Q2, Akamai's security revenue grew 14% year-over-year, driven by multiple products, with strong growth for their segmentation solution. Customers are using the segmentation solution to protect against ransomware and data exfiltration attacks, and Akamai has signed a 3-year $8 million segmentation deal with one of the world's largest carriers. Additionally, their web app firewall and bot management solutions have seen strong growth, with customers switching due to competitors' reliability and performance issues. Akamai has also recently announced a new API security solution, enabled by the acquisition of NeoSec in May, which is becoming a critical need for major enterprises.

Akamai is developing an API security product that uses AI-based analytics and threat hunting capabilities to discover APIs, analyze their behavior, identify vulnerabilities and help customers defend against attacks. This product is CDN agnostic and is expected to exceed $1 billion in market value by 2027. Akamai is also taking a new approach to cloud computing with more points of presence, better latency and performance, scalability, portability and cost savings. Three new cloud computing sites have already gone live in Washington D.C., Chicago and Paris, with 10 more planned for later this year.

Akamai has announced a plan to launch a connected cloud platform that will span over 4,100 locations and 130 countries. This platform will feature compute, storage, database, and other services. It will also include a premium instances for large commercial workloads, a global load balancer, and the ability to spin up instances to handle flash crowds. This platform is designed to deliver consistent performance with predictable resource and cost allocation, and to minimize latency and ensure no single point of failure. It is also well-suited for applications that benefit from being closer to end users, such as e-commerce, video and gaming, AI, and cyber security.

In the second quarter, Akamai reported total revenue of $936 million, an increase of 4% year-over-year. Security revenue grew 14%, driven by demand for WAC, slot management and segmentation solutions. Compute revenue was up 19%, driven by the demand for cloud computing services. Additionally, the company saw double-digit EPS growth. Akamai's strong performance in the first half of the year has led to increased guidance for the full year of 2023.

Revenue for the quarter was $123 million, growing 16% year-over-year, and $380 million for delivery, declining 9% year-over-year. International revenue was $456 million, up 7% year-over-year and representing half of total revenue. Non-GAAP net income was $228 million or $1.49 of earnings per diluted share, up 10% year-over-year. This was driven by higher revenues, savings from headcount reductions, and cost savings initiatives such as third-party cloud savings, real estate costs, depreciation expense, and tighter travel and expense policy management. The company also saw a modest decline in third-party cloud spend for the first time year-over-year.

Akamai has achieved investment grade credit ratings from Moody's and S&P, and has $1 billion in cash, cash equivalents, and marketable securities as of June 30. The company has a cash gross margin of 73%, adjusted EBITDA margin of 41%, and a non-GAAP operating margin of 29%. Akamai also has a share buyback authorization of $700 million and two convertible debt instruments outstanding, with $1.15 billion due in May 2025 and $1.15 billion due in September 2027. Additionally, the company has implemented annual merit-based wage increases effective July 1.

The company is projecting revenue of $937 million to $952 million for Q3, with a cash gross margin of 74%. Non-GAAP operating expenses are expected to be $297 million to $302 million, with an EBITDA margin of approximately 42%. Additionally, the company plans to spend $162 million to $170 million on CapEx. This will result in a non-GAAP EPS of $1.48 to $1.52, with a non-GAAP tax rate of 16%. For the full year, the company has increased its revenue to a range of $3.765 million to $3.795 billion, up 4% to 5% year-over-year.

Akamai is expecting a negative $4 million impact to revenue in 2023 due to foreign exchange, and is raising their security revenue growth expectations to 12%-14% for the full year 2023. They are expecting approximately $0.5 billion in revenue from compute in 2023, and non-GAAP operating margin of approximately 29%. They are raising their non-GAAP earnings per diluted share to a range of $5.87 to $5.95, with a non-GAAP effective tax rate of approximately 17% and a fully diluted share count of approximately 155 million shares. CapEx is expected to be approximately 19% of total revenue. Ed McGowan answered a question regarding bookings for the security segment, noting the confidence for the year.

Tom Leighton discussed the strength of the company's three major product lines, which all grew sequentially from Q4 to the current quarter. He also noted that customer penetration was up 2.5% to 75.5%, and that 700 customers were buying four or more security products. When it comes to compute, Leighton mentioned that while Linode does support GPUs, it is not the primary focus, and that gaming would be more likely to use them than the company's big media customers, who are more likely to use CPUs for video and media workflow. He added that AI inference engines may eventually migrate to CPUs as well.

Security is an important factor in the current environment, and Akamai is performing well in this area due to its reliable solutions for web app, firewall and bot management. The company is also benefiting from the growth of its Guardicore product. Additionally, the increasing prevalence of Gen AI and malignant bots is creating tailwinds for Akamai, as these tools make it more difficult to detect malicious activity.

Tom Leighton discussed how Guardicore can help proactively block the spread of malware and how API security will be a very important market for them. He also discussed the delivery business, noting that they have turned down business that is too spiky and don't get paid enough to do it, but that they are seeing positive signs with traffic growth getting better and price declines softening.

Tom Leighton and Ed McGowan discussed Akamai's go-to-market changes in security, citing a recent partnership with WWT that bundles in segmentation and API security solutions. They also noted the importance of dedicated resources for newer and more advanced security services, as well as upselling existing customers on multiple security solutions. Ed noted that they have already made the necessary investments in sales overlay functions.

Ed McGowan of Akamai discussed the success of their new customer acquisition from Guardicore and how they are seeing strong renewals and expansion orders. He mentioned that there was a couple of million dollars in upfront license recognition in the quarter but nothing material. He also mentioned that there was no impact from the writer strike on the delivery business.

Ed McGowan states that there is unlikely to be a major impact from the registry on new releases, as it could take a couple of years for them to be released. He also states that traffic growth rates have been improving, and pricing is still a bit challenging in certain verticals. However, larger customers have seen pricing declines that are not as steep. With Q4 coming up, Ed is optimistic that traffic should continue to improve and the business should become stable in the next year or so. Lastly, he mentions that there was one notable vendor consolidation earlier this year, with one company going from five vendors down to two, of which they were a leading provider.

Ed McGowan explains that the delivery business is a strategic asset for the company and that they are starting to see traffic growth rates improve and pricing become more moderate. He believes that with these trends, the delivery market will stabilize over the next couple of years, although the macroeconomic environment is causing some challenges in web verticals such as commerce. Tom Leighton adds that these trends will help the company's cloud and security businesses.

Tom Leighton discussed the current environment for CDNs, noting that money is harder to get and that Akamai is in a unique position due to their delivery business. He also noted that the competitive landscape for Guardicore has become more favorable due to investments made to improve its capabilities, making it the market leader by a wide margin. Rishi Jaluria then asked a two-part question about the compute business.

Tom Leighton discussed the progress of Linode, Kubernetes, and the build-out to a couple of dozen core locations by the end of the year. He also mentioned that they have achieved PCI compliance, have 300 customers using the bot manager solution, and will be in a position to take on more serious bookings by the end of the year.

Akamai is targeting a subset of the $200 billion cloud market, primarily in vertical media, gaming, and commerce, where performance, scalability, and cost are important. Akamai is already in the process of migrating its applications from third-party cloud platforms to its own compute platform, and is helping its big media customers do the same. This migration process takes some effort, but is doable and will save Akamai a lot of money.

Ed McGowan reported that Guardicore is growing at 60% year-over-year and should reach a $100 million run rate very soon. Tom Leighton discussed the growth of Linode, which was growing in the teens when it was bought and is now growing a bit faster. The goal is to create a service for major enterprises with high ARPU accounts, and the revenue is currently in the millions of dollars, but the goal is to reach a few billion dollars in the $200 billion market.

Ed McGowan explains that the majority of the security revenue growth is coming from existing customers buying more products, however they are seeing encouraging results from new logo acquisitions, especially with Guardicore. He notes that they are seeing customers buy multiple products, with over 700 customers now buying four products. He also mentions that there was no material license revenue in the quarter.

Ed McGowan and Amit Daryanani discussed the 29% operating margin that Akamai achieved in the first half of the year, and Ed explained that this was due to merit increases and increased depreciation from CapEx investments. Tom Barth concluded the conference by mentioning upcoming investor conferences and road shows, and wishing everyone a wonderful rest of the summer.

This summary was generated with AI and may contain some inaccuracies.