The operator welcomes listeners to the Akamai Technologies, Inc. Fourth Quarter 2023 Earnings Conference Call and introduces Tom Barth, Head of Investor Relations. Tom Leighton, CEO, and Ed McGowan, CFO, will be speaking. The call may include forward-looking statements and non-GAAP financial metrics. The operator has transitioned to Mark Stoutenberg as Head of Akamai's investor roles.

In the second paragraph, the speaker thanks Tom for bringing them into the Akamai culture 10 years ago and announces their move to another role internally. They also welcome Mark as their successor. The speaker then turns the call over to Tom, who reports on the company's Q4 results and highlights the strong growth in security revenue, driven by demand for their Guardicore Segmentation Solution and API Security Solution. They also mention some notable customers who have recently purchased these solutions. Overall, the company had a successful 2023, with revenue of $995 million in Q4 and $3.81 billion for the full year.

Akamai's new API Security Solution has been well received by customers, with some paying over half a million dollars per year for the service. The company has also been recognized as an industry leader in API security and management by KuppingerCole and Gartner. In terms of cloud computing, Akamai has successfully deployed infrastructure, developed products, and onboarded major enterprise customers onto their Connected Cloud platform. They have also expanded their global reach with 14 new computing regions and enhanced their cloud compute offering. Additionally, the company has launched a Global Load Balancer and a collaborative partner program to better meet the needs of their customers.

Akamai has partnered with leading SaaS and PaaS providers and cloud data and processing platforms, and is gaining traction with large customers migrating to their cloud platform. They have exceeded their cloud computing revenue goal and have migrated their own applications from hyperscalers to Akamai Connected Cloud, resulting in significant cost savings. They are now announcing the next phase of their strategy to transform the cloud marketplace by bringing cloud computing to the edge through their distributed edge network.

Akamai's new initiative, Gecko, combines the power of their cloud platform with the efficiency of the edge to bring computing capabilities closer to users. This will be achieved by deploying cloud computing capabilities into Akamai's worldwide edge platform, which will also utilize existing operational tools and processes. Akamai plans to implement this in about 100 cities by the end of the year, with support for virtual machines and containers. They also plan to develop automated workload orchestration to make it easier for developers to build applications across distributed locations. Early trials with enterprise customers have shown promising results.

The early feedback for Gecko has been positive and it is being used for various tasks such as AI, data analytics, and media workflows. Akamai remains the market leader in content delivery and their delivery business continues to generate profit and support their other businesses. They are selective about less profitable delivery opportunities and plan to focus more on security and cloud computing. Overall, they are pleased with their accomplishments in 2023 and are seeing growth in their cloud computing and security businesses. Ed will now discuss their results and outlook for Q1 and 2024.

The speaker thanks Tom Barth for his service as head of investor relations and discusses the company's fiscal 2023 year results, including delivering $6.20 of non-GAAP earnings per share and double-digit earnings growth. They also cover Q4 results, mentioning strong growth in the compute and security businesses. Revenue was $995 million, up 7% year-over-year, with compute revenue growing 20% and security revenue growing 18%. The company is optimistic about early traction from enterprise customers and is encouraged by the early success of their new API security solution. They also mention the acquisition of contracts from StackPath and Lumen, and note that international revenue accounted for 48% of total revenue in Q4.

In the fourth quarter, the company experienced a negative impact on revenue due to foreign exchange fluctuations, but still generated strong non-GAAP net income and earnings per diluted share. This was driven by cost-saving initiatives and lower-than-expected transition service costs. The company also had a strong focus on lowering the capital intensity of their delivery business, resulting in strong free cash flow. They also spent a significant amount on share buybacks and have plans to continue buying back shares and being opportunistic in M&A. In the first half of 2024, seven of the company's top 10 CDN customers' contracts will be up for renewal.

In the upcoming year, the company expects to see a drop in revenue due to renewals, but anticipates growth as traffic increases. They plan to optimize their delivery business by charging higher fees for certain customers and shedding less profitable traffic. The company also expects an increase in their non-GAAP effective tax rate and a significant increase in free cash flow due to lower capital expenditures and a focus on profitability. These factors have been factored into their 2024 guidance.

The full cost to build out the Gecko compute sites is included in the Q1 and full year 2024 capital expenditure guidance. The company experiences seasonality in revenue and profitability throughout the year, with Q4 being the strongest quarter and Q1 having higher operating costs due to payroll taxes and stock vesting. The company anticipates volatility in foreign currency markets in 2024 and will provide annual guidance in constant currency. The company's costs in non-U.S. dollars are significantly lower than their revenue. The guidance for 2024 assumes no major changes in the current macroeconomic landscape.

In the first quarter of 2024, the projected revenue is between $980 million to $1 billion, with a 7% to 9% increase compared to the same quarter in 2023. Foreign exchange fluctuations are expected to have a positive impact on revenue. Cash gross margin is expected to be 73%, with non-GAAP operating expenses of $305 million to $310 million. EBITDA margins are projected to be 42% to 43%, with non-GAAP operating margin of 29% to 30%. Non-GAAP EPS is expected to be $1.59 to $1.64, with taxes of $56 million to $58 million and a fully diluted share count of 155 million shares. CapEx for the first quarter is estimated to be $146 million to $154 million. For the full year of 2024, revenue growth is expected to be 6% to 8% in constant currency, with security revenue growth of 14% to 16% and compute revenue growth of 20%. The estimated non-GAAP operating margin for the full year is 30% in constant currency. CapEx is expected to be 15% of total constant currency revenue, including the Gecko compute buildup.

The company expects their CapEx to be allocated towards delivery and security, compute, capitalized software, and IT and facility spend. They anticipate a 7-11% growth in non-GAAP earnings per diluted share, based on a non-GAAP effective tax rate and fully diluted share count. The company is pleased with their strong finish in 2023 and is optimistic about their growth prospects. In regards to the delivery segment, the company saw organic traffic trends and acquired contracts from StackPath and Lumen. They did not provide a timeframe for absorbing the acquired traffic. The company's full year guidance implies a 6% decrease in delivery, which may be attributed to lower quality traffic being removed. The speaker will now take questions.

In the fourth quarter, the company saw a stronger seasonal quarter, with retail customers bursting less due to the popularity of zero overage. Gaming had a better year, but high tech was weaker. The company has largely absorbed the traffic from recent acquisitions and transition costs are immaterial. The company is seeing a 6% decrease in delivery this year.

The company is experiencing a decrease in revenue due to the renewal of contracts with larger customers in the first half of the year. This is due to a combination of staggered contracts and customers spending their revenue commit in a shorter period of time. The company is also being more stringent with peak to average ratios and has implemented a new system to build for more specific destinations in order to better manage traffic and reduce costs.

The company is looking to improve their delivery performance by targeting areas with higher costs. However, they are unsure if customers will choose to go elsewhere. The company's competitors may not prioritize profit as much, which could impact their performance. The company expects their gross margins to improve due to a higher mix of security business and moving third-party cloud costs onto their own platform. However, the build of new facilities will also incur additional costs.

Gecko is a new capability being offered by the company, which will provide full-stack compute services in 100 cities initially and eventually in hundreds of cities. This is different from their current offering of function as a service in 4,000 locations. The goal is to provide better performance, scalability, and cost savings to customers.

The speaker discusses a new cloud computing offering that they believe is highly compelling and unique in the market. They also mention plans to incorporate support for virtual machines and containers, and the ability to spin them up on demand. The speaker then addresses a question about an acquisition and explains that they have successfully migrated most of the customers they had hoped to. The next question is about security, which was lower than expected in the fourth quarter.

Ed McGowan, the speaker, responds to Jim's question about the drivers of mid-teens growth for 2024. He mentions that there were no deals that pushed out in Q4 and the performance has been strong, particularly in Guardicore, API security, and bundled products. He also mentions that there were no macroeconomic challenges in Q4 and the projections for this year are confident. They have been conservative in their approach to security growth and do not factor in any major attacks.

During a recent conference call, Tom Leighton and Ed saw that they were not able to provide a specific percentage for the CDN and compute business. They mentioned that they may offer discounted or free delivery in exchange for a significant portion of the compute business, as this would be more profitable and generate more revenue. The next question was directed to Ed, asking about the lack of margin expansion despite the savings initiatives and migration to internal cloud. Ed did not provide a specific reason for this, but some possible factors could include investments in Gecko or other incremental investments.

Tom Leighton discusses the company's approach to balancing investments for growth and maintaining margins. He mentions recent acquisitions and investments in areas such as API security, go-to-market, and compute, which have shown promising returns. He also mentions the onboarding of submission-critical apps and a strong pipeline for such apps in 2024.

Akamai's infrastructure is currently handling larger workloads well and they plan to add more mission-critical apps from major enterprises. They already have several successful applications and are focused on taking on more this year. The platform is reliable, high-performing, and has global load balancing and failover capabilities.

Mark Murphy asks Ed McGowan about the company's fiscal year guidance and how it would be affected by fluctuations in the spot market. McGowan explains that while it is difficult to predict the exact impact of currency changes, the company's revenue growth would still be in the 6-8% range, though it may be slightly lower due to the recent strengthening of the US dollar.

The speaker discusses the company's security offerings and mentions their market leadership in Web App Firewall for 10 years. They have added capabilities such as bot management, account protector, brand protector, and denial of service protection. They also mention their success with Guardicore on the enterprise side.

Tom Leighton, CEO of a security company, is excited about the potential for API security to become as important as Web App Firewall. The company is aiming to become the market leader in this area and has already seen success in integrating with other security products. Additionally, the compute market is growing rapidly and the company is seeing traction in both new applications and migrations from data centers to the cloud. Even as some companies optimize their cloud spending, the company is still able to benefit from this trend.

Akamai has received positive feedback from early adopters of Akamai Connected Cloud, indicating that the trend towards optimization is beneficial for the company. Rishi Jaluria of RBC asks about the potential impact of Gecko, a new product, on the company's financials. Tom Leighton, CEO of Akamai, explains that edge inferencing, used for tasks such as personalization and security, is a key feature of Gecko. This could potentially have a positive financial impact for the company, although it is still early and not factored into their current guidance.

The author discusses the importance of being at the edge for processing a large number of people in real time, especially for live events. Akamai's Gecko technology allows for this to be done in a hundred cities by the end of the year, with plans for even more in the future. This will primarily impact revenue next year, as this year's guidance is based on previous compute regions. The company hopes to continue expanding and meeting the demand for compute on Akamai.

Ed McGowan and Tom Leighton discuss the potential impact of adding Gecko's compute platform to Akamai's existing edge pops. They are not anticipating any significant changes, but are making changes to their comp plan to encourage more selling of compute. The expansion would involve adding beefier servers and additional COLO to existing edge pops. They also mention that they have not factored in any material impact from Gecko in their plans. They also mention that they have not factored in any material impact from Gecko in their plans.

The company already has the necessary infrastructure and security in place to efficiently deploy Gecko. Acquiring new customers may be challenging in the current environment, but the demand for cybersecurity is increasing. The company is also optimizing cloud spending. A question was asked about the convergence of edge and centralized sites for Gecko, and the CEO responded that they are working on a common software stack and hope to have it in place by the end of the year.

Tom Leighton discusses the deployment of more hardware in existing edge regions, with the goal of having a common software stack for delivery, security, and function as a service. The Linode stack is currently being used for Gecko, but they plan to add support for virtual machines and containers. This will allow for automatic scaling and load balancing based on end-user demand. Akamai is the only company with a full edge platform and software stack. Raymond McDonough asks for more information about the expansion of the Linode footprint and how much of it is being used for internal purposes versus revenue generation. Ed McGowan responds that they cannot provide specific numbers, but customers are currently utilizing the space and this is factored into their guidance.

The majority of growth in compute guidance will come from enterprise compute, with $1 of CapEx equating to $1 of revenue. The company is working towards one platform for all services, but this won't be achieved until 2025. The new product, Gecko, is primarily serverless.

The speaker, Tom Leighton, confirms that the new platform has all the necessary support for developers to run their applications. The platform will initially operate similar to Linode, with the ability to choose the number of VMs and containers in different cities. However, by the end of the year, the platform will expand to 100 cities and offer serverless capabilities for VMs and containers. When asked about the similarities to Cloudflare, Leighton explains that Cloudflare does not support VMs or containers and does not offer full stack cloud computing. The next question from Alex Henderson focuses on the impact of Guardicore on security growth and asks for more details on the growth rates of other security product lines. Leighton briefly mentions inferencing as an additional focus for the company.

In response to a question about their involvement in AI inferencing at the edge, Akamai's CEO and CFO discussed their growth rates in different product categories and their investment in building full stack compute for AI inferencing. They also mentioned that AI has been integrated into their products for 10 years and is a strong use case among their customers.

The speaker explains that while AI is an important use case for their platform, their biggest customers are currently using it for media workflow and live transcoding. They mention that AI can be done on their platform already, but it may take until the end of the year for it to be available in 100 cities. They also clarify that they are not currently using GPUs in their edge pops because it is not cost-effective, and they get a better ROI with CPUs. They mention that GPUs are critical for training large language models, but their focus is on getting the best ROI for their platform. They also note that most of the compute for AI is done during inferencing, which can be done on CPUs.

The question from Jonathan Ho of William Blair is about the importance of global load balancing capability and its impact on attracting customers and driving revenue. Tom Leighton explains that this capability makes the product more scalable and reliable, and greatly increases the market for compute. The last question is from Rudy Kessinger of D.A. Davidson, who asks about the $400 million in compute CapEx and the confidence in the pipeline and ramping usage. Tom Leighton responds that the enterprise compute opportunity is growing very fast, making the percentages difficult to break down due to the small starting numbers.

The company's strategy includes being competitive and building large core centers in many cities to meet demand. They are also investing in Gecko sites and have made changes to their compensation plans to sell more compute. The platform is ready to be sold and the company is building responsibly with relatively modest CapEx. The call has now ended.

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