The operator welcomes participants to the Second Quarter 2024 Akamai Technologies Earnings Conference Call. After the presentation, there will be an opportunity for questions. The call is being recorded and will be turned over to Mark Stoutenberg, Head of Investor Relations. He introduces the speakers, Tom Leighton (CEO) and Ed McGowan (CFO). Forward-looking statements and non-GAAP financial metrics will be discussed. Tom Leighton thanks Mark and begins his presentation.

In the second quarter, Akamai reported strong growth in compute and security, steady operating margins, and healthy earnings growth. Revenue was $980 million, up 5% year-over-year. The company's delivery business, which was the main focus in the past, now accounts for only one third of revenue compared to two thirds five years ago. Akamai plans to remain disciplined in profitability, leverage its market leadership for cross-selling opportunities, and reinvest cash flow into fast-growing areas of the business.

Akamai has successfully diversified its revenue by expanding into new markets, particularly in the security sector. This shift has resulted in security services becoming the main source of revenue for the company, with a significant increase in Q2. Akamai's security product offerings have also expanded, including solutions for DDoS prevention, Bot management, and zero trust enterprise security. The company has seen strong customer interest and significant wins in Q2, including partnerships with major energy companies, airlines, HR management software providers, and government organizations.

In Q2, Akamai announced the launch of their new Akamai Guardicore platform, which combines various security features such as micro segmentation, zero trust network access, and threat hunting. This reflects their growth as a security vendor and their focus on providing a comprehensive security offering. They also acquired no name security, allowing them to offer a more comprehensive API security solution. This has resulted in increased closed deals and an up-sell motion with early adopters of no name.

The company Akamai has expanded its offerings to include cloud computing in response to customer demand. This move also benefits the company by providing synergies and improved performance. Additionally, Akamai's existing relationships with customers and carrier networks make it a strong partner for providing these services.

The hyperscalers have followed a similar path as Akamai in offering cloud computing, infrastructure as a service, and security. However, Akamai's distributed cloud platform provides better performance, economics, and reliability. The initial response to Akamai's new cloud offering has been positive, with compute revenue growing by 23% year-over-year. New compute customers added in Q2 include well-known media and entertainment brands, cybersecurity companies, and technology platforms. Customers are also utilizing Akamai's ISV partners for low latency workloads and large scale events.

Akamai is now offering a full suite of media workflow offerings on their connected cloud, providing synergy with their delivery platform and allowing media companies to leverage advanced ad tech and ad strategies at scale. Customers are also building new apps on the platform, such as AI-powered Chatbots and machine learning engines for security scanning. Akamai has also migrated most of their own apps to their connected cloud, resulting in better performance and significantly reduced costs. This transformation has positioned Akamai as a cloud company that powers and protects life online, with compute and security now generating two thirds of their revenue and providing potential for future growth and profitability.

The company has successfully maintained strong margins while experiencing growth in both their security and cloud computing portfolios. They have a near term operating margin goal of 30% and see potential for even higher margins in the future. In the first half of 2024, they saw strong performance in both security and compute. Looking ahead, they are excited about their potential for future growth with the integration of noname and the increasing traction of their compute offerings. In the second quarter, total revenue was $980 million, up 5% year-over-year, with compute revenue up 23% and security revenue up 15%. The company is seeing a wide range of enterprise compute use cases and strong enthusiasm in the market.

In the second quarter, the company saw strong performance in their Guardicore Zero trust and API security solutions, with combined compute and security revenue growing by 17% year-over-year. Delivery revenue declined as expected due to previously outlined factors. International revenue increased, but was impacted by foreign exchange fluctuations. Non-GAAP net income and operating margin also saw growth. The company has a strong cash position and plans to continue buying back shares and being opportunistic in M&A. The speaker also mentioned upcoming guidance for Q3 and the full year.

In the third quarter, the no name security acquisition is expected to add $8 to $10 million in revenue and be dilutive to non-GAAP EPS and operating margin. The Paris Summer Games will drive an additional $3 to $4 million in revenue. The elimination of India's digital service tax may result in a small increase in the effective non-GAAP tax rate. The company is projecting revenue of $988 million to $1.008 billion for the third quarter, with a 2% to 4% increase as reported and 3% to 5% increase in constant currency. Foreign exchange fluctuations are expected to have a positive impact on revenue compared to the previous quarter but a negative impact year-over-year. Cash gross margins are expected to be around 73%. The company notes that the macroeconomic environment and geopolitical tensions could have a significant impact on their business.

In the third quarter, Q3, the company expects non-GAAP operating expenses to be $307 million to $312 million, with an EBITDA margin of 42%. Depreciation expenses are projected to be $129 million to $131 million, and the operating margin is estimated to be 29%. The company plans to spend $166 million to $174 million on CapEx, which is about 17% of projected revenue. For the full year, the company expects revenue to increase by 4-5% year-over-year, with a negative impact of $20 million from foreign exchange. Security revenue is expected to grow by 15-17%, and enterprise compute revenue is expected to double to over $100 million. The overall compute revenue growth is estimated to be 23-25%. The company also expects a non-GAAP operating margin of 29% and non-GAAP earnings per diluted share. The non-GAAP effective tax rate is estimated to be 19-20%, and CapEx is expected to be 16% of total revenue for the full year.

The company is pleased with the success of their enterprise compute services and looks forward to helping customers migrate to the Yakamai connected cloud. They have seen rapid adoption and are on track to reach $100 million in revenue by the end of the year. They are optimistic about strong growth in compute and see a large market for their services. However, they have also acknowledged potential headwinds for their delivery business in 2024.

The speaker asks about the company's guidance for the future and whether the current challenges are temporary or long-term. The CEO responds that they expect growth to continue, although possibly at a slower rate, and that delivery is a profitable and synergistic business for them. He also mentions potential geopolitical concerns for the next year but overall believes the company's security and compute product lines will help mitigate any impact. The next question asks about the company's full year guidance and the speaker notes that the midpoint of the guidance has increased by $5 million, but the company is adding $20 million in revenue. They ask if there is a part of the business that is causing caution.

The speaker asks a question about Guardicore, a company that specializes in network segmentation. They note that segmentation is becoming more relevant in the market and is seen as an essential component to a zero trust environment. The speaker also mentions that Akamai acquired Guardicore a couple of years ago.

Tom Leighton explains how Akamai's Guardicore Zero trust platform helps enterprises establish a secure environment by segmenting and locking down all assets. In the past, segmentation was not favored due to its inflexibility and potential security risks, but Guardicore's software-based solution has made it easier and more effective. Educating the market about the benefits of this platform has been a key focus for Akamai.

The speaker discusses the importance of their platform, Guardicore, in protecting against ransomware and internal communication. They have combined various security measures, such as North, South, and East-West, into a single platform that customers are excited about. This platform also includes DNS firewall, multifactor authentication, and threat-hunting capabilities. The speaker emphasizes the value of having a single agent for all these features and mentions the use of Gen AI for better visibility and compliance. They also mention that Guardicore is a channel-based platform and partners can add value through their integration and deployment expertise.

The partner will often make more revenue than Akamai from Guardicore, and it is an easy-to-use and channel-friendly product. Other competitors in the market include Illumio, but Guardicore's solution is believed to be better due to its own mini firewall and ability to cover legacy systems. There is a large opportunity for growth as many enterprises do not currently have segmentation implemented, with early adopters being critical infrastructure companies.

During a conference call, Mark Murphy from JPMorgan asked Ed McGowan about the FX headwind to the full year revenue forecast. Ed stated that there hasn't been much change and it's still around $40 million for the full year. Tom Leighton also mentioned a variety of workload types on their cloud computing platform, including deep learning and AI models. However, he estimated that AI workloads currently make up a small fraction of their ARR, but there is potential for growth in the future. They are not targeting the business of giant models used for learning everything.

The company's customer base is primarily focused on specific applications, such as commerce or security, and do not need a large model to provide value. The company's Akamai Guardicore platform with Gen AI is a specific application that can run on their platform, which has both GPUs and CPUs, providing better ROI for customers. The company has seen growth in both traditional and non-traditional customers for their Connected Cloud, with a significant portion coming from media customers.

The company has a full media workflow ecosystem supported through their QCP program on the platform. They have a variety of features such as OS and firmware patch storage, personalized waiting room experience, improved page performance, and real-time log aggregation. They also have a PBX telephone switching system and 5G Internet gateway running on it. The biggest segment for compute is media customers, with a focus on large media companies. This is due to the design of the QCP program and the partnership with media workflow companies. The company also has a significant number of new customers and upsells from existing customers in the compute business.

The speaker discusses the growth of observability as a capability, which has led to new customers in nontraditional Akamai verticals. The biggest chunk of growth is in existing media companies, but there is also growth from new customers in various industries. The speaker also mentions that the company has experienced traffic degradation in the first half, but expects a worsening trajectory in the back half.

The speaker discusses the company's expected traffic growth and compares it to previous years. They mention that the acquisition of StackPath and Lumen last year will make the fourth quarter a tougher comparison for year-over-year growth rates. They also mention that there were some issues with a large social media customer but they have a handle on it. The speaker then addresses the company's strategy for scaling their compute franchise and ensuring it is wallet share accretive rather than just plugging holes in the delivery franchise. They mention that compute is different from delivery and they have mechanisms in place to drive wallet share growth and accretion within existing delivery customers.

The speaker disagrees with the idea that delivery is a bigger business opportunity than compute. They believe that compute has more potential for revenue growth and is not just filling a hole in delivery. They also mention some pricing pressures in the market, but do not see them as significantly worse than usual. The main issue is a lack of traffic growth, which affects revenue declines.

The speaker explains that pricing has not changed and competition is always present. They are not seeing the usual growth in traffic. They have integrated Noname into their existing products and are using their channel and specialists to drive sales. The acquisition has enhanced their go-to-market capability. The speaker then mentions listening to customers and their needs in terms of compute.

Tom Leighton, CEO of Akamai, believes that the company's biggest difference from other competitors is the size of their marketplace, which they are continuously expanding. They are also building out their distributed compute capabilities to be in more locations and better handle data sovereignty laws. The company is also focused on improving their platform, including storage. As the delivery business declines as a percentage of revenue, the company is not too concerned about deleveraging effects and CapEx efficiency because the new products have high gross margins and they have been able to drive down the CapEx of their core business.

Akamai's low single digit percentage of revenue for their delivery business will remain as long as traffic does not significantly increase. They are being more selective in the type of peak traffic they take on to maintain efficiency and a low CapEx posture. In terms of their cloud business, they have built capabilities for themselves and plan to make them available to customers. They expect their enterprise compute number to more than double by the end of the year.

The company's overall compute number is higher, but a significant portion of it comes from products like image and video manager and legacy Akamai net storage, which are not comparable to hyperscaler growth. The focus is on enterprise compute, which is experiencing fast growth, although it is a smaller number compared to hyperscalers. The company is not capital constrained and sees potential for significant growth in the enterprise market. There is a strong pipeline and participation from all regions. There is no issue with capital from a balance sheet and free cash flow perspective. The company does not see any constraints in terms of capital or products for its security business.

In the second half of the year, organic growth at constant currency is expected to be around 11% to 12%. This is a slowdown compared to previous quarters, and the security growth rate has been volatile. The company had some tough compares in the second half of last year, and the introduction of new security bundles also makes the compare more challenging. The company expects the growth to bounce around as new products like Guardicore and API security ramp up. On the delivery outlook, a competitor has indicated that several large media customers are shifting traffic to lower-cost providers.

Ed McGowan is responding to a question about whether they are seeing a shift to low-cost providers in the market. He says that they are not seeing this phenomenon and there are actually two less low-cost providers in the market. He explains that they have a tough comparison with the previous year and that traffic has been lower overall, with gaming and video traffic being weaker than usual. He also mentions that retail and gaming are the two verticals where they are expecting weaker traffic this year, as they have seen in the past. He attributes this to the Zero overage product they offer and a lack of major launches in the gaming industry. Overall, traffic growth has been sluggish.

The speaker does not anticipate any changes going into the fourth quarter and will update investors in November. They encourage investors to take this into account when building their models. The speaker also mentions upcoming investor presentations and thanks everyone for participating in the call.

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