The operator introduces the First Quarter 2024 Akamai Technologies Incorporated Earnings Conference Call and turns it over to Mark Stoutenberg, Head of Investor Relations. He introduces the speakers, CEO Tom Leighton and CFO Ed McGowan. He also mentions that the call will include forward-looking statements and refers listeners to the company's filings with the SEC for more information. Non-GAAP financial metrics will be discussed and are available on the company's website. CEO Tom Leighton discusses the company's strong start in the first quarter with their Security and Compute portfolios, but also notes challenges with their delivery product-line.

In the first quarter, Akamai's revenue grew to $987 million, with a 22% increase in the security and cloud computing sectors. This shift in revenue mix shows the success of their growth strategy. The company also announced their acquisition of Noname Security. In terms of security, there was a 21% growth, driven by strong demand for their Guardicore Segmentation Solution. The United States Army also selected Akamai for their Zero Trust Network Access Solution after evaluating 40 vendors.

Akamai has integrated Guardicore with their other enterprise security solutions to create the Akamai Guardicore platform, the first of its kind to enable Zero Trust Security. This platform appeals to customers looking to consolidate security vendors and integrate their tools. Akamai's app and API security solutions continue to be in high demand, with major companies such as a consumer financial services company, a US supermarket chain, and a leading US manufacturer of electric vehicles purchasing them. Akamai's strong defenses were able to successfully protect one of their largest customers, a well-known hyperscaler, from a massive denial-of-service attack. This has earned them recognition from customers, as seen in Gartner Peer Insights Voice of the Customers report. Akamai's suite of app and API security solutions will become even stronger with the planned acquisition of Noname Security.

The use of APIs has increased significantly in various industries due to digital transformation and the widespread use of mobile and IoT devices, leading to a rise in API attacks. The API security market is expected to grow rapidly, and Akamai's acquisition of Noname will enhance their API security solution. Additionally, Akamai's cloud computing platform has seen strong early momentum with various major enterprises utilizing their services.

The paragraph discusses Akamai's success in securing deals with major global corporations, including a media company, Sony Group, and various ISV partners. These partnerships involve using Akamai's new cloud computing platform for various purposes such as improving search engine optimization and providing a fair customer experience. The company has also partnered with a media workflow provider and an observability solution provider to offer joint solutions to customers, resulting in deals with a gaming company, a luxury goods brand, and a conglomerate in India. These solutions offer real-time data ingestion, fast query performance, and cost-effective data retention.

In Q1, an ISV partner helped a popular travel website go live with a geolocation implementation that utilized Akamai's Edge Computing. This resulted in a significant increase in Edge Compute instances and a rise in customers and revenue for Akamai's cloud computing solutions. The global enterprise cloud sales team is now led by Dan Lawrence, who joined from AWS. Akamai remains the market leader in content delivery, but their revenue was lower than expected due to slowing traffic growth and a large social media customer reducing costs. As a result, Akamai expects a higher decline in delivery revenue this year.

The company's delivery segment continues to generate profits and support their security and cloud computing portfolios. While there has been a decline in delivery revenue, the company remains confident in the importance of their CDN and the potential for future growth in their security and compute portfolios. The company is pleased with the performance of these portfolios in the first quarter and is optimistic about their potential for future growth and profitability. The call will now be turned over to Ed to discuss the company's Q1 results, expectations for Q2, and updated guidance for the full year, including the impact of their recent acquisition.

The US Dollar has strengthened, causing a negative impact on the company's top and bottom lines for the full year of 2024. This is expected to result in a decrease of $40 million in revenue and a decrease of $0.12 in non-GAAP EPS. Additionally, a large social media customer has reduced their overall traffic, resulting in a decrease of $40 million to $60 million in revenue for the year. The company has also seen lower than expected traffic in their delivery business, particularly in gaming and video, which is in line with industry trends of a drop in active users and a push for ad-supported versions and password sharing crackdowns. As a result, the company expects a continued weakness in traffic for the remainder of 2024, resulting in a decrease of $20 million to $30 million in delivery revenue for the year.

The company's delivery business and overall profitability remain strong, allowing for strategic investments and diversification into other areas. In the first quarter, total revenue increased by 8%, with the fastest growing offerings being Compute and Security. Enterprise compute revenue is growing at a rate of over 300% year-over-year. Security revenue also saw strong growth, while delivery revenue declined. International revenue increased by 7% year-over-year and now represents 48% of total revenue. Foreign exchange fluctuations had a positive impact on revenue.

In the first quarter, non-GAAP net income and earnings per diluted share increased by 17% and 18% respectively. The company also has $2.3 billion in cash and marketable securities, with plans to continue share repurchases and be opportunistic in M&A. The acquisition of Noname Security is expected to add $20 million in revenue for the full year, with a slight dilution to non-GAAP EPS and operating margin. The acquisition is expected to close in June and is included in the company's updated full-year guidance.

In the third quarter, there is expected to be a modest increase in media traffic due to the Olympics, resulting in an estimated $3-4 million in additional revenue. Q4 is typically the strongest quarter, but last year saw a more muted impact of seasonality and the same is expected this year. For Q2, revenue is projected to be between $967 million to $986 million, with a 3-5% increase year-over-year. Foreign exchange fluctuations are expected to have a negative impact on revenue. Cash gross margins are expected to be around 72-73%, with operating expenses projected to be $302 million to $307 million. EBITDA margins are expected to be around 41-42%, with depreciation expenses between $126 million to $128 million. The projected non-GAAP operating margin for Q2 is approximately 28-29%. Capital expenditures are expected to be around $175 million to $183 million, representing 18-19% of projected total revenue. The projected non-GAAP EPS for Q2 is $1.51 to $1.56, assuming taxes of $56 million to $59 million and a fully diluted share count of approximately 155 million shares. For the full year, revenue is expected to be between $3,950 million to $4,020 million, with a 4-5% increase year-over-year. Security revenue is expected to grow by 15-17% in constant currency due to the acquisition of Noname.

In the first quarter, the company saw strong growth in their compute offerings and now expects a 21-23% increase in compute revenue for the full year. They also anticipate a non-GAAP operating margin of 28-29% and non-GAAP earnings per diluted share of $6.20-$6.40. The company's CapEx is expected to be 16% of total revenue due to lower revenue outlook and higher server component costs. The company is pleased with their progress in security and compute and is open to answering questions. In terms of renewals, they are going as planned with expected pricing.

The company is on track to complete five out of seven projects by the end of the quarter, with the remaining two to be finished in early Q3. Pricing is in line with expectations, but volume is lower due to a lack of traffic. The company is seeing growth in compute capabilities from large media companies, but this is not tied to traffic levels. Margins have been lowered by 150 basis points at the midpoint, with 50 from an acquisition and 30 from FX, and the rest due to lower delivery revenue.

A question was asked about whether there were any structural changes in reaching the company's long-term target of low 30s margins. The response was that there were no structural changes, but the company is making investments in R&D and acquisitions to drive growth. The higher co-location costs are also impacting margins, but as the compute platform grows, there should be some benefit. Another question was asked about a social media customer and the confidence that their decrease in traffic is not just due to DIY efforts. The response was that the customer is trying to reduce costs by using less bits per transaction and optimizing their prefetching.

The company has a large DIY component and expects it to have an impact on their lower guidance for the year. They recently acquired Noname, a market leader in security, which has capabilities that complement their own. The acquisition is expected to be fully integrated with Akamai's Security Services and is well received by the market. The company also had a strong Q1 in security, but the guidance is conservative due to FX and potential impact from delivery renewals.

The company's acquisition has been received positively by customers and the partner ecosystem. The security sector had a strong quarter with growth in all solutions, but the company expects tougher comparisons in the second half of the year. The company is also seeing growth from Guardicore and API security. The delivery of results is impacted by industry trends, making it difficult to predict.

The company is not happy about the decline in revenue in their delivery business, but they believe it will eventually recover. They are not aggressively pursuing all business in the delivery market and are instead focusing on investing in more profitable markets like security and compute.

The company is focused on getting a share of the profitable and large third-party cloud spend from big media and gaming customers. They are facing competition from companies desperate for growth in delivery, even if it is unprofitable. The company uses information from telcos and large customers to make forecasts, but recent declines in traffic have caused them to be more cautious. They have seen similar trends before and are confident things will turn around.

The speaker discusses the company's approach to addressing concerning issues and resetting forecasts. They also mention changes in go-to-market leadership for the compute business and a recent win with the US Army. The speaker clarifies that the social media company mentioned earlier is looking to cut costs and may have additional concerns related to geopolitical challenges.

During a Q&A session, an analyst asked about the metrics of the security company being acquired by the company. The CEO responded by saying that the company has been growing rapidly and is expected to contribute $20 million in revenue. They have around 250 employees and their gross margins are in the high 70s to low 80s. When asked about API security, the CEO clarified that the company does not offer it and their main competition is startups. Another analyst asked about the decision to switch delivery partners, to which the CEO responded that it was a business decision and they are working to get back to their target revenue.

Tom Leighton and Ed McGowan discuss the PAR (pricing, traffic, and renewals) of the delivery business. They hope to see revenue growth and a stabilization of the declining delivery business. They mention that pricing is competitive and they do not chase unprofitable deals, but overall traffic in the industry needs to improve for the delivery business to stabilize. They also mention that the Olympics may bring in $3-4 million in revenue, but it is hard to predict if the upcoming election will have a significant impact on traffic.

The company has announced a new Zero Trust platform that combines micro segmentation, employee network access, and other security services. This platform is designed for enterprise applications and includes a single agent and console for ease of use. It also includes MFA, DNS security, and threat hunting services.

At RSA, Akamai demonstrated a new capability that uses GenAI to provide a user-friendly interface for enterprise infrastructure. This helps customers who struggle to keep track of their numerous applications and devices. The feedback at RSA was positive and Akamai plans to expand this capability to their entire suite of security services. With compute, Akamai typically starts with a small footprint and then grows over time as customers add more apps.

The speaker discusses the growth of their customer base, with a focus on high-paying customers, and mentions Akamai as their first $100 million a year customer. They also mention their goal to continue growing their customer base and increasing the scale of their use cases. The speaker also mentions the recent acquisition of Noname and the success of their internal migration to their own compute platform. They are asked about their cost savings and net retention, and mention that their net retention looks good but there may have been some churn of previous customers.

The company is more than halfway through migrating their third-party cloud spend onto Akamai Connected Cloud, resulting in significant savings and performance improvements. This has offset some costs and avoided further expenses, leading to potential margin expansion. There has been no churn in the enterprise side of the business, and the company is aiming to grow in this area. There has been some churn in the legacy retail node business, but not in the desired growth area. There has been no mention of potential for inference AI on the platform.

The company has seen a shift towards higher gross margin revenue lines, but gross margins have been compressing due to pricing pressure and investments in the platform. However, as the platform is built out and locations are filled, margins are expected to expand.

During a recent earnings call, the CEO and CFO of a company discussed their gross margins and the impact of pricing and traffic growth on their business. They did not disclose specific numbers for competitive reasons, but noted that pricing is always a factor and that declining traffic in the second half of the year is a major driver of their lower than expected gross margins. They also mentioned their efforts to focus on more profitable solutions in the long term, which have shown some progress in the first quarter.

Ed McGowan explains that the components of Akamai's CapEx (capital expenditure) are 8% for software, 4% for compute, 3% for CDN and security, and 1% for other expenses. He expects the CapEx for CDN to remain in the low single-digit range, unless there is a dramatic increase like during the pandemic. The CapEx for compute will depend on revenue growth, which is currently experiencing substantial growth in the enterprise sector. The company has used a metric of $1 of CapEx for every $1 of revenue.

The speaker discusses the financial projections for the company Noname and its strategic importance in the context of API security. They also mention potential revenue synergy and the timeline for the acquisition to settle.

The speaker hopes to improve their company's performance and generate additional revenue through strategic planning and synergy. They will be presenting at investor conferences in the near future and the call has now ended.

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