The paragraph covers the beginning of Akamai Technologies' Third Quarter 2024 Earnings Conference Call. The call is introduced by the operator, followed by Mark Stoutenberg, the Head of Investor Relations, who mentions that Tom Leighton, the CEO, and Ed McGowan, the CFO, will be speaking. Stoutenberg notes that the call will include forward-looking statements subject to risks and uncertainties and mentions that further details are available in the company's SEC filings. He also highlights that non-GAAP financial metrics will be used, with reconciliations available on the company's website. The call is then handed over to CEO Tom Leighton, who states that Akamai had a solid third quarter and reached two significant milestones.

Akamai achieved significant milestones with its annual revenue run rate surpassing $4 billion, driven largely by security and computing services, which now contribute to over two-thirds of its revenue. The company is transitioning from a content delivery pioneer to a cybersecurity and cloud computing leader. Its security offerings, which began with a web app firewall, have expanded to include comprehensive solutions for various threats, including DDoS, DNS, application attacks, and ransomware. Akamai leverages generative AI to enhance its security products and distinguishes itself with deep threat intelligence and expert managed services.

In the third quarter, customer interest in the company's security solutions remained strong, resulting in significant contracts, including a $70 million deal with a major financial institution. Notable agreements also included upgrades and expansions with leading chemical producers, auto manufacturers, and financial institutions, as well as a competitive contract for their new API security solution. The API security solution is on track to reach an annualized revenue run rate of $50 million, while the Zero Trust segment is expected to hit $180 million by year-end. Additionally, there is growing interest in their Prolexic service due to large DDoS attacks in Asia. The company successfully mitigated two massive DDoS attacks, emphasizing the reliability and enterprise-grade protection they provide, with customers praising their capabilities as a differentiator from competitors.

The paragraph highlights Akamai's recent successes in the security and compute sectors. The company provided emergency assistance to a major financial institution in Australia and signed a leading Indian financial institution, showcasing its enterprise-grade security capabilities. Akamai excels in reliability, expertise, and innovation, notably launching a new behavioral DDoS engine leveraging machine learning for enhanced protection. In compute, Akamai saw significant growth, with Q3 revenue reaching $167 million, marking a 28% increase year-over-year. The company gained new compute customers across various sectors in the US and Europe, including retail, SaaS, gaming, transportation, and travel platforms.

The paragraph highlights Akamai's growing success in various global markets, emphasizing increased commitments from major enterprises such as a telecommunications company and a Brazilian bank utilizing their compute solutions. The company is attracting strong interest in its cloud computing platform, especially for cloud-native apps, observability, better performance, and cost-effectiveness. Retailers, in particular, have reported significant performance improvements and increased revenue using Akamai Connected Cloud. The platform's AI support capabilities are expanding, with new video workflow features introduced and enhanced object storage capabilities. Notably, Canal+, a French TV channel, has significantly reduced costs by adopting Akamai's cloud computing and storage services.

In the article, Akamai has entered a multiyear partnership with a video workflow ISV, involving a $17 million investment in its enterprise compute services. Forrester has recognized Akamai as a strong performer in public cloud platforms, citing its leading edge platform for low latency workloads and global edge locations. Akamai is gaining momentum in compute services and sees significant growth opportunities ahead. Despite challenges in its delivery business due to economic headwinds and fluctuations in internet traffic, Akamai anticipates a rebound in traffic growth, driven by shifts in video consumption, advertising, and advancements in gaming and online sports. The company believes it is well-positioned to capitalize on future traffic growth compared to its competitors.

The paragraph discusses Akamai's profitable growth strategy, leveraging its market position to generate cross-selling opportunities and reinvesting cash flow into fast-growing business areas. The company highlights synergies between its delivery, security, and compute offerings, resulting in improved performance, customer retention, and the ability to counter cyber threats. Akamai has transformed from a content delivery leader into a cybersecurity and cloud computing company, with its security business surpassing $2 billion in annual revenue. Looking ahead, Akamai plans to invest more in developing its cloud computing and security offerings and expanding its market reach.

The company has experienced success with its new solutions in API security, enterprise security, and cloud computing, leading to expansion into new enterprise markets. They plan to hire additional sales and specialist staff and enhance their partner ecosystem to support these ventures. However, to fund these initiatives, they will eliminate about 2.5% of current roles, aiming to maintain an operating margin target of 30% and increase profitability as the business grows. In the third quarter, the company achieved total revenue of $1.005 billion, marking its first $1 billion quarter, with compute revenue particularly rising by 28% year-over-year, aided by a $7 million one-time benefit from expiring deferred revenue.

In the third quarter, the company saw strong market momentum in its enterprise compute solutions, anticipating an annualized revenue run rate of over $100 million by year-end. Security revenue increased by 14% year-over-year to $519 million, with Noname contributing $8 million. The partner and channel ecosystem played a key role in new customer acquisitions for API security solutions. Overall, compute and security revenues grew by 17% from the previous year, accounting for 68% of total revenue. Delivery revenue, however, saw a 16% decline year-over-year, attributed to macroeconomic challenges affecting industry-wide growth in video streaming and gaming. Despite this, the company believes it is well-positioned for future growth. International revenue rose by 3% to $480 million, making up 48% of total revenue, with foreign exchange fluctuations impacting results slightly.

In the third quarter, the company reported a non-GAAP net income of $244 million, with earnings per share down 2% from the previous year. Their operating margin was 29%, and they held $2 billion in cash and securities. They spent $166 million on share buybacks and plan to continue this strategy to offset employee equity dilution. A restructuring charge of $82 million was taken due to workforce reductions and asset write-downs, anticipating $45 million in annual savings. They plan to reinvest these savings in growth areas like compute and security. Seasonal factors usually affect Q4, but weaker-than-normal traffic is expected to persist, and Q4 expenses will increase due to higher sales commissions.

The company announced its Q4 guidance, projecting revenue between $995 million and $1.020 billion, with a cash gross margin of 72% to 73%. Foreign exchange fluctuations are expected to negatively impact Q4 revenue by $7 million compared to Q3 and by $5 million year-over-year. Non-GAAP operating expenses are predicted to be $321 million to $327 million, with an EBITDA margin of 40% to 41%. Non-GAAP depreciation expense will range from $131 million to $133 million, and the operating margin is estimated at 27% to 28%. The company plans to spend $184 million to $192 million on CapEx, representing 18% to 19% of projected revenue. Expected Q4 non-GAAP EPS is $1.49 to $1.56, assuming a tax expense of $54 million to $57 million and 153 million fully diluted shares. For the full year, projected revenue is $3.966 billion to $3.991 billion, reflecting a 4% to 5% year-over-year increase, with foreign exchange impacts and 15% to 17% security growth in 2024.

The company reports positive financial expectations for 2024, with projected compute revenue growth of about 25%, a non-GAAP operating margin of approximately 29%, and non-GAAP earnings per diluted share between $6.31 and $6.38. They estimate a non-GAAP tax rate of 19% and anticipate a fully diluted share count of 154 million. Capital expenditures are expected to be about 17% of total revenue. The company is pleased with the progress of its enterprise compute solutions and the early results from new API solutions. During a Q&A, a question is raised about the impact of Generative AI (GenAI) on security, highlighting its potential use by malicious actors to increase attacks and bypass defenses.

The paragraph discusses the use of AI and machine learning in security products by a company, highlighting its role in anomaly and bot detection, and improving efficiency. The company is also employing Generative AI (GenAI) to enhance customer management of security solutions by allowing users to interact with their infrastructure in natural language. The paragraph acknowledges the early adoption stage of GenAI but notes that cyber adversaries are also utilizing it effectively. It then shifts to address a question from Rishi Jaluria about the impact on business due to the bankruptcy and market shakeout of a competitor. Tom Leighton responds by suggesting that consolidation in the delivery market is overdue, implying potential opportunities for market share gain and adjustments in the pricing environment.

The paragraph discusses the challenges faced by companies operating at a loss, often funded by private equity or Wall Street, and how it doesn't make long-term financial sense. It highlights the struggles of companies offering unsustainable pricing and suggests that market consolidation could be beneficial. Examples of companies facing difficulties are mentioned, including Instart Logic, StackPath, Lumen, and the merger of EdgeCast and Limelight into Edgio, which is in Chapter 11 bankruptcy. The speaker emphasizes careful pricing strategies and turning away unprofitable business, contrasting with competitors willing to take losses for short-term revenue growth. The conversation then shifts to a question from James Fish about a company's investment strategy in sales and market channels, which Tom Leighton answers by highlighting their success with API security and promising future prospects, stating a shift to support "hunters," sales specialists, and channels due to their recent traction in the market.

The paragraph discusses the company's progress and strategic direction with its platform and new product areas. It mentions achieving significant traction with their platform, targeting $100 million in annual recurring revenue by year-end, which validates further investment. The new products appeal to a broader enterprise market compared to traditional services like delivery and cloud WAF, necessitating investment in account acquisition and specialist sales personnel. It highlights that these new products are more channel-friendly, creating opportunities for channel partners and increasing engagement with Independent Software Vendors (ISVs). James Fish inquires about the penetration of their advanced security package introduced two years ago and its effect on security growth and delivery impact.

In the paragraph, Ed McGowan addresses questions about recent business developments. The company experienced high early adoption of a new product package, with sales activity stabilizing now. In response to Frank Louthan's query, McGowan clarifies that the acquisition of the Lumen CDN did not include network assets, only customer contracts, and does not disclose any partnership details. Regarding profitability, McGowan mentions that the compute business is still scaling up, which is why greater operating leverage has not yet been evident, although future growth should improve gross and operating margins.

In this paragraph, Ed McGowan speaks about capital expenditure (CapEx) and delivery revenue. He indicates that the company is not providing CapEx guidance for the next year but wants to maintain it at a certain range unless large deals necessitate more investment. He acknowledges that the company's delivery revenue is projected to be down 20-21% year-over-year in Q4 despite continued traffic growth. Part of this decline is attributed to the acquisitions of Lumen and StackPath in the previous Q4, which had transition services agreements and contracts that were anticipated to decrease over time.

The paragraph discusses a challenging Q4 with slow traffic growth and minor pricing improvements. Despite slight price increases, the low single-digit traffic growth results in overall contraction rather than growth. On the financial side, Rudy Kessinger notes an approximate $40 million increase in CapEx, which Ed McGowan confirms is mostly correct but clarifies it involves more than just compute; it includes delivery demand in specific locations and infrastructure services. Timing differences between quarters also influenced the numbers. The operator then introduces a question from Matt Dezort regarding the performance of early use cases and verticals within compute.

The paragraph discusses the growth and diversification of Connected Cloud's customer base and offerings. Early revenue focus was on media workflows, but compute sales are now expanding across various sectors with new clients. The platform hosts a range of solutions from ISV partners, including database, observability, video processing, digital asset management, Kubernetes, AI, and API performance tools. Media workflows remain a strong area, supported by an extensive partner ecosystem providing improved performance and cost-effective distributed compute. In security, excluding Guardicore and Noname, the Web Application Firewall (WAF) and DDoS offerings performed well in the third quarter, with notable wins contributing to positive results. The commenter inquires about how these successes may influence future strategies.

In the paragraph, Ed McGowan discusses the strong growth seen across various products, including Guardicore, Zero Trust with the Enterprise Access product, Web Application Firewall (WAF), and Distributed Denial of Service (DDoS) protection. Although revenue from DDoS attacks doesn't spike immediately, there is strong demand similar to the previous quarter. An unidentified analyst, standing in for Mark Murphy from JP Morgan, inquires about the growth in Akamai's compute services and the addition of new customers beyond its typical demographic. Tom Leighton expresses enthusiasm about the increased adoption of their compute services, noting that many new customers, including those not previously using Akamai's other services, are signing up. As a result, expectations for enterprise compute revenue have been raised throughout the year. The paragraph concludes with the operator ending the Q&A session and Mark Stoutenberg thanking the participants.

The company announced that they will be attending several investor conferences later in the quarter and expressed gratitude to participants of the current call. The operator then concluded the conference and invited attendees to disconnect.

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