The operator welcomes listeners to the Akamai Technology Third Quarter 2023 Earnings Conference Call and introduces Tom Barth, Head of Investor Relations. Tom Barth then introduces Tom Leighton, Akamai's CEO, and Ed McGowan, CFO. He also mentions that the call will include forward-looking statements and refers to the company's filings with the SEC for more information. He also mentions that the company will be discussing non-GAAP financial metrics and provides a website for a detailed reconciliation of GAAP and non-GAAP metrics. Tom Leighton then thanks everyone for joining and announces that Akamai exceeded its guidance range for revenue, operating margin, and earnings in the third quarter.

In the third quarter, the company's revenue increased by 9% to $965 million, with a non-GAAP operating margin of 31% and non-GAAP earnings per share of $1.63, a 29% increase from the previous year. The security division was the main driver of this growth, with a 20% increase in revenue. This was due to high demand for the company's Guardicor segmentation solution, as well as recent headlines about ransomware attacks. The company also saw success in their web app firewall solutions, with customers switching from competitors due to Akamai's superior support and professional services.

Akamai customers value being able to purchase a suite of integrated security products from a trusted provider. The new API security solution has already been integrated with the web app firewall solution, making it easier for customers to implement. The product was also recognized as one of the top cybersecurity tools at a recent security conference. In terms of cloud computing, Akamai has gone live with 7 more core compute regions, bringing the total to 24. These regions are interconnected with Akamai's massively distributed edge platform, which has over 4100 points of presence across 750 cities and 130 countries. This network is a key differentiator in Akamai's strategy, according to industry experts.

The company believes that the future of cloud computing will involve a more decentralized approach, with compute being done closer to end users. This will give Akamai an advantage over more centralized models, and they have already gained business across various industries and geographies. They have also seen growth in their content delivery services and recently acquired enterprise customer contracts from other companies exiting the CDN market.

In the third quarter, the company experienced strong growth in revenue, particularly in the security and compute business lines. This was due to the successful adoption of new security bundles by both new and existing customers. The compute business also saw significant growth. Delivery revenue declined, but was aided by revenue from acquired contracts. International revenue increased, but was impacted by foreign exchange fluctuations. Non-GAAP net income and earnings per share also saw significant growth, driven by higher revenues and cost-saving initiatives. Third-party cloud spend was reduced by migrating internal workloads to the connected cloud platform. Cash gross margin was 73%.

In the third quarter, the company incurred $5 million in transition services agreement costs and had a 43% adjusted EBITDA margin and 31% non-GAAP operating margin. They also raised $1.65 billion in convertible debt and invested the proceeds in marketable securities. They spent $113 million on share buybacks and have $600 million remaining on their authorization. Their capital allocation strategy remains the same.

The fourth quarter is a significant period for Akamai due to seasonal traffic patterns and higher operating expenses. The recent acquisitions of StackPath and Lumen will add approximately $17 million to $20 million in revenue, but will also result in TSA costs of $13 million to $14 million, impacting gross margin and EPS. These acquisitions are expected to add $20 million in revenue and be accretive to non-GAAP earnings per share in 2024.

In the fourth quarter, the company expects to see a 6-8% increase in revenue compared to the same period in the previous year. This is due in part to the acquisition of customer contracts from women, which is projected to add $40-50 million in revenue and be accretive to non-GAAP EPS. Foreign exchange fluctuations are expected to have a negative impact on revenue, but the company still expects a cash gross margin of approximately 72%. Operating expenses are projected to be $305-311 million, with an adjusted EBITDA margin of 41%. Depreciation expense is expected to be $123-125 million, and the company expects a non-GAAP operating margin of 29%. CapEx is expected to be $143-153 million, and non-GAAP EPS is projected to be $1.57-1.62. For the full year, the company has increased its revenue guidance to a range of $3.802-3.22 billion, representing a 5-6% increase year-over-year.

The company has raised its revenue growth expectations for 2023 and expects a negative impact from foreign exchange. They have also raised their security revenue growth and non-GAAP operating margin expectations, and have estimated non-GAAP earnings per diluted share. The company is pleased with their performance and is investing for revenue growth and improved profitability. The sales process outside of the installed base for security and compute is going well, with new customers being acquired.

The speaker discusses the acquisition of Guardicore and the potential for growth in the installed base. They also mention the opportunity to sell security and compute solutions to new customers gained through contracts. The interviewer asks about the overall market trend towards consolidation in the delivery industry and the speaker shares their perspective on this trend.

The speaker discusses the recent acquisition of two competitors in the CDN space and how it will impact pricing dynamics. They clarify that this is not a common occurrence and was a unique opportunity presented to them. The speaker does not anticipate any major changes in the marketplace or pricing due to this acquisition. The speaker also mentions their focus on investing in their compute offering and being more conservative with pricing. The follow-up question is about the third-party cloud spend that the company is in-sourcing, which was previously estimated at around $100 million.

The speaker confirms that the recollection of $100 million in savings from the in-sourcing of third-party cloud spend on the Connected Cloud platform is correct. They are still early in the process but have made good progress and expect to see continued savings. The next question asks about security trends between international and domestic markets, to which the speaker responds that there is no fundamental difference in the nature of attacks, but there may be more attacks in areas of political tension. The speaker also mentions that the company has seen success in international deals, but there is also appetite for their products domestically.

Tom Leighton discusses the universal appeal of Akamai's compute capabilities and the company's success in engaging with major enterprises in various regions. Ed McGowan provides details on the company's targeted program to upsell services and functionality to selected customers in certain verticals, with about half of the 2,000-3,000 customers having already renewed their contracts.

The company's program is expected to run for 18 months to 2 years and has seen a significant increase in average sale price. The majority of core data centers are now online and the company's focus is on filling out the contracted space and achieving high utilization in 2024. The company has completed major buildouts and is now focusing on equipping existing Edge pops with compute. This will result in a smaller amount of capital expenditure compared to this year. The company will continue to build out as revenue grows.

The speaker discusses the current state of their company's compute deals and how it has improved over the past 6 months. They mention that they are now able to handle mission-critical applications from big enterprises and have learned a lot from putting their own workloads on the platform. They have seen cost savings and better performance, but also acknowledge that it is not a simple process to switch from using hyperscalers to their own cloud.

The speaker discusses the success of Akamai's cloud services and the company's ability to attract major media, gaming, and commerce companies due to their trusted reputation for scale, reliability, and security. These companies are also drawn to Akamai's lower price point and the benefit of not having to share their data with a leading competitor. The company is currently in many promising conversations with potential customers and partners.

Akamai is a highly efficient and cost-effective platform for data delivery, and they are now expanding into compute services. While they may not have the same bargaining power as the larger hyperscalers, Akamai can still offer competitive prices and good margins. They are targeting applications that are easily portable onto their platform and are not locked into other marketplace offerings. Akamai is confident in their ability to capture a significant share of the growing market for compute services.

The company has identified a lot of applications in the media vertical that can be moved to their platform, and their partners in the marketplace are also interested in this. They have leverage with their backbone and go-to-market strategy, and they are seeing large proposals with margins similar to the company's. They expect to save a lot of money by moving their own applications and potentially offer some of those savings to customers. The questioner is surprised that AI has not been mentioned yet and asks about its potential impact on the company's ability to bring it to compute.

Tom Leighton discusses the potential opportunity and risk of using AI and machine learning in Akamai's products. He explains that AI has been used for a long time in anomaly detection, bot detection, and other applications, but with the emergence of Gen AI, there is more risk for cybersecurity. This requires a stronger defense and depth strategy, with products like segmentation becoming even more critical. Akamai's growth rate in this area is market-leading.

The speaker is discussing the potential impact of Gen AI on the compute industry. They believe that over time, Gen AI will require more compute power, which is good for companies like Akamai who sell compute. While model generation will still be done in large data centers, inference engines can run at the edge and Akamai is already working with partners to offer this service. When asked about risk, the speaker states that model generation will not be a risk for Akamai as they have many data centers, but inference engines will be done at the edge. When asked about the current enterprise spend environment, the speaker notes that many companies are being cautious and sales cycles may be elongated.

The company has seen a slight increase in bankruptcies, but their security business is not significantly impacted. They offer a cost-effective option for companies looking to save money and increase performance. The company is launching scrubbing centers in Canada to address the increase in malware and ransomware attacks, but this is separate from their application layer defenses. They are also expanding their scrubbing centers in other cities to better serve local customers.

Akamai's edge network, consisting of 4,000 POPs around the world, offers various products for defense against volumetric attacks, ransomware, malware, and API security. The company has seen an increase in demand for security services, particularly in the healthcare and financial sectors, leading to the building of scrubbing centers. This is a regular occurrence and there is no unusual CapEx needed. The recent acquisitions of contracts from StackPath and Lumin are expected to contribute $60-70 million next year, and the company is assuming a similar ongoing run rate for these contracts.

The speaker is discussing the potential for upselling and the fact that they have not factored it into their current numbers. They mention that they only purchased selected contracts and did not take on certain types of contracts. The speaker cautions against using private company numbers as they may not be accurate. They explain their process for factoring in volume and pricing dynamics of the acquired contracts. They also mention the consideration for the contracts, including an upfront fee and a small earnout for STACK PAT, and a larger upfront fee for lumen. They mention that the final numbers may be slightly higher due to fair value analysis in purchase accounting.

Tom Leighton, the CEO of Akamai, discusses the company's opportunity to capitalize on the increasing importance of data residency and sovereignty issues in the field of AI. He mentions that Akamai's global infrastructure and plans to move compute to edge locations will allow them to keep data local. The company is currently in beta with a few customers and will invest in both software and hardware to support this opportunity. Leighton also notes that they currently support GPUs in their core data centers, but for inference engines at the edge, CPUs are more cost-effective.

The speaker explains that large-scale model development would be done in core data centers, not at the edge. The edge is where inferencing is done, which will work well on their edge platform with CPUs. In terms of the StackPath and Lumen contracts, they are focused on providing an orderly transition for the customers and building warm relationships with them. They have a good track record of understanding the customers and have talked to a lot of them, giving them confidence in the numbers they have put out.

The speaker discusses the impact of the company's services on its customers and mentions their new relationship with some clients. They also mention the impact of TSA on cash gross margins and clarify that it will end by the end of the year. The speaker also addresses the delivery guidance and mentions the expected revenue from recent acquisitions. They note that there is some uncertainty in Q4 due to traffic trends.

The speaker discusses the impact of seasonality on the retail and media aspects of the business, noting that retail has been less impactful due to the 0 overage policy. They also mention being cautious about the outlook for Q4 delivery trends, citing an uptick in bankruptcies and light gaming activity. The speaker then addresses portability for cloud-agnostic workloads and the steps that could be taken to increase ease of portability.

The speaker talks about the company's data center deployments and their direct connections to major cloud providers. They mention the use of partners and the favorable terms for them. The company is also focused on growing their ecosystem of third-party capabilities, with a current focus on media. They also mention their large backbone and ability to make direct connections to major enterprises. The speaker then discusses the M&A environment, noting that valuations for companies they are interested in are still high. They suggest that there may be some changes in the future.

The speaker discusses the company's approach to buying and their focus on making decisions that benefit customers and shareholders. They also mention the sales cycle for their compute deals and the potential for growth in the future. They will be presenting at various investor events in the coming months.

The speaker thanks the audience for attending the conference and wishes them a good rest of the year. The operator then announces that the conference has ended and attendees can disconnect.

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