Akamai Technologies, Inc. (AKAM) Earnings Call Transcript & Summary

I think we're live. Awesome. I'm Roger Boyd. I cover cybersecurity and infrastructure software here at UBS. I'm very happy to be hosting the Akamai team, Tom Leighton, who's the CEO and Co-founder of the company. So thank you for being here, Tom.

Hi. It's very nice to be here. Thank you.

Awesome. I think maybe we could just start with the kind of cliche summary of the Akamai journey, because it has evolved quite a bit in the past couple of years. Really a lot grew over the last quarter of a century, really, being maybe the first edge platform to really be out there. If you could just start with kind of the overall kind of summary of what's happened over the last couple of years as you evolve to support more edge use cases.

Yes. We started with content delivery and the first and today still, by far, the largest edge platform with 4,000 POPs in over 750 cities. And then about a little over 10 years ago, we created the Web App Firewall as a cloud service marketplace. We're the leader there by far today, and in fact, security is now our largest product line, bigger than delivery. And most recently, been putting a lot of investment and focus around compute. We've always done compute. Think of function-as-a-service on our edge platform. But now we're supporting containers, VMs, more mainstream compute, initially in core data centers, and now we're in the process of moving that support out into some of our edge POPs. So the goal will be to have really fully distributed support for containers and VMs, which is unique in the marketplace.

That's interesting. Maybe just to follow on with the delivery business. As you pointed out, until this year, it was the largest revenue segment. It's been slowly declining for a couple of years. Can you just talk about what's happened in the CDN market? We've gone from a somewhat concentrated market to a point of extreme diversification and now back to some consolidation from an end user perspective. What's the latest there? And as a leader in that space, what's the health check on the overall delivery market as it relates to pricing, traffic growth, demand?

Yes. Delivery is a very competitive market. It's a marketplace we created 25 years ago, so you can imagine it's -- a lot of commoditization has taken place. We're the market leader by far. Some firms have us with a majority market share, but there's a lot of competition, and there's price pressure associated with that, including the hyperscalers who, in many cases, will give delivery away for free, if you use their compute. In fact, as we get into compute, we'll do the same thing. You give us your compute, which often will be 10x the revenue associated with delivery. Yes, it makes sense for us to give discounts on delivery as well. One change for us in delivery is we're doing less of the really spiky traffic, where we don't get paid enough for it. So that hurt revenue a little bit, but improved profitability. A lot less spend on CapEx as a result, and we're using that investment actually for compute now, which gives us a better ROI.

Makes sense. To that point of consolidation, Akamai recently purchased the CDN business from 2 smaller vendors who decided to leave that. What do you think -- or what is your view on what those exits from the CDN business suggest about the competitiveness in that market and particularly the challenges delivering a profitable business at scale in this environment?

Yes, there's a lot of competition. I don't think any of them is profitable. Akamai is very profitable. We're unique because of our architecture. We're deployed inside about 1,400 other networks. Most of our POPs, we get free. Colo, free. Power, free. Bandwidth. And so it generates a lot of cash for us. We're very profitable at it. But the competitors don't have that capability, and so they're not able to generate profit. And in this case, two of them independently decided they wanted to terminate their CDN business. They wanted to keep their customers for other products, and so they wanted a way that they could get the CDN out but not hurt the customer. So they both independently approached us as the market leader and said, "Look, we want you to take over our CDN customers, give them good service so that their customers stay whole." And the economics were very compelling for us, so it made a lot of sense for us to purchase the contracts. We'll get about 200 new customers and now we can cross-sell other services. So financially, it was good for us. It was good for the customer, and it was good for those companies.

Yes. I read that as, from a customer acquisition perspective, a lot more favorable than you going after those customers in the market.

Yes. It was very easy. There will be 3 months migration period. And a very profitable transfer to us.

Yes. On that cross-sell opportunity, 200 new customers, I think the overlap between those 2 customer bases and the core Akamai base is fairly low. Can you just talk about how the customer bases differ from what you typically service? And on the cross-sell side, what -- how much of an opportunity do you see to sell things like compute and security?

Yes. I would say at a high level, they are comparable to our base. It's just accounts that they'd had for whatever reason. Maybe they were a large Lumen customer, for other reasons, and had taken on compute or stack pass, similar story. So they had a fundamentally different kind of customer. They're in our target customer base. So -- which is good, because then it's very natural for us to sell them our security solutions and ultimately compute as well. Big delivery customers are our first target for compute.

Yes. It's a good segue into the security business. Again, as you pointed out, it's now the largest revenue segment for Akamai. Historically, that had been growing kind of mid-20s growth, slowed a little bit last year and has now reaccelerated. Can you just unpack -- I know you went through this on the third quarter call, but what's contributing to that reacceleration? What's working well in security, and what are you seeing competitively there?

Yes. We have several market-leading products. The attack landscape has increased, which has increased the need for our capabilities. And we have been pleased this year that our security business is doing a little bit better than we had initially forecasted. Now we're projecting, for the year, 15% growth. Our -- most of our revenue is in app and API security. That's led by our Web App Firewall, which is the leading solution in the marketplace by far. Still have reasonable growth there, even though we've been in that space now for over 10 years. We built, bought management on top of it, now at about $0.25 billion a year run rate with good growth. Again, market-leading solution by a wide margin. There's other capabilities that are smaller that we've built that are growing rapidly, but on small numbers. I think the exciting thing for the future in that segment is API security, which is just being recognized as something major enterprises have to have. Our leading competitors there are startups. I think we're in a very good position. Zero revenue today, effectively. It's a new capability, but we've already made a very nice integration with our Web App Firewall, something we call the easy-on button. So very quickly, we can set it up with a proof of concept and get it going for customers. And I'm optimistic about substantial future growth there. We also have the scrubbing segment, the anti-DDoS solutions. They're very mature. We're starting with Prolexic. And so generally, we don't see as much growth. But from time to time, things happen. KillNet, for example, here in the U.S., took out a lot of medical centers that became large Akamai customers. And that was a global attack base that helped with the Prolexic revenue this year. And then the third pillar of security is enterprise security, led by Guardicore. Again, the market leader by a good margin. Nearly doubled revenue year-over-year in Q3. I think with the more and more penetrations and now GenAI being used by the attackers, everybody is -- pretty much everybody is getting penetrated. And so there's a much stronger recognition that you need that interior layer of defense. And that's what Guardicore provides. So yes, malware getting in, the key is to identify it quickly and proactively wall it off, not let it spread. And that's what Guardicore does really well. And I think that's leading to the substantial growth there now at about $100 million a year. So we've been very pleased with that.

On Guardicore, I kind of think about that as -- I mean, you obviously have a very large and successful business in the Web App Firewall and DDoS, but I think about that as kind of the new age crown jewel in the portfolio right now. Lots of growth there. It's a market-leading solution. Can you just talk about how important that product is from a growth perspective? But I guess more so from a go-to-market perspective and a channel presence, a product that can be sold outside of the typical CDN sales motion, and how that's helped you kind of along in that segment?

Yes. I think you captured the advantages very well. All those things are pluses for Guardicore. In fact, if you think of the go-to-market motion, with our API security, also is independent of CDN, really unrelated to CDN. We're leveraging our Guardicore go-to-market motion for API security now, which has been very successful for Guardicore, and we want to carry that over as we grow API security. Also, Guardicore will help us with our other enterprise products like Enterprise Application Access. Early in the year in Q1, we're going to have Enterprise Application Access on the same control plane as Guardicore. And that will enable our customers to unify their approach to north-south and east-west, as those solutions are known. And that will be a unique capability in the marketplace. So I think Guardicore, very important for us.

Yes. I'll echo the comments on API security. It seems like it's getting a lot more attention from CISOs and operators is a growing area of risk. How big do you think that market could be relative to something like Web App Firewall? It seems like over time, that should be something that's pretty sizable.

Yes, I think that's the right compare. It seems like it ought to be at least as large as Web App Firewall. At a high level, it's very comparable. And the whole world is, in a short period of time, moving to APIs. And so this provides the defenses there that Web App Firewall provides for web apps. So it should be as large, and we want to become the market leader there too. And we've got a good, I think, head start in doing that.

I guess on that point, you pointed out that a lot of your competitors in that space are startup companies. What do you think positions Akamai from a delivery standpoint, from a Web App Firewall standpoint that allows you to compete better there? And can you talk a little bit about the asset you bought in terms of the breadth that you -- that Neosec provides, everything from visibility to detection? That's one of the more broad solutions out there.

Yes, we thought it was the best solution, and it's the only solution that records the entire transaction history so that you can call that up and get the replay. Customers first needed to get visibility into all the APIs they have. Most big enterprises, the CISO or the CIO will tell you they don't even know all the APIs they have, because their developers have created them, put them out there and who knew? And so first thing we do is tell you what you got, then we tell you which ones have vulnerabilities, then which ones, vulnerabilities, are being actively exploited, and then, of course, ultimately block that. So yes, very important. A few years ago, it didn't matter because people weren't doing so much of the APIs. But now that enterprises are relying on the APIs for everything, the attackers have learned how to exploit them. And there's a lot of vulnerabilities there.

Who do you think about as the buyer of a solution for API security? Is that the team that's buying Web App Firewall? Is it the developers? Is it kind of a DevOps mix?

It's like Web App Firewall, so it's your CISO or CIO, depending how you're structured.

Maybe shifting to compute. It's been a pretty big part of the story over the last year or so. Can you just outline, again, the vision of a connected cloud, leveraging the fact that you are the most distributed edge presence out there, the importance of connecting that back to more centralized compute? What does that look like over time, and where you are today in that -- building out that vision?

Yes. So today, on our edge platform in 4,000 POPs, we run JavaScript. So we'll spin up JavaScript apps function-as-a-service in a few milliseconds based on user demand. And that's very valuable. You could do a lot of things with that. But 99.9% of the compute revenue is in sort of the core cloud compute, containers, VMs as a service. And that's what we now are able to support, starting with the acquisition of Linode. Now Linode was focused on small and medium business, which is not our target market. And we're maintaining their business, growing in the mid-teens. So we've maintained that, but we made a very large investment to upgrade it so that it can be used by major enterprises for the mission-critical apps. And that's where all the money is. And so initially, we're supporting that in core data centers. We've added 13 new ones. Linode had 11. We're working on upgrading those 11. We're in the early days of actually now migrating the compute capability into our edge regions. Now we're not going to go to all 4,000. Initially, this year, we'll be in about a dozen. We're in beta now with a couple of customers. Next year, we'd like to add dozens more. But the idea there is that we're going to support containers and VMs as a service in many cities around the world where the hyperscalers don't have a presence. That will be pretty cool. And after that, we're working on it now, it won't be available next year, but we want to spin those up on demand based on user demand, just like we do with JavaScript. So you don't have to preplan and pre-provision manually, in many cases, where your VMs are, how many you've got, where your containers are, but it all happens automatically. And that will be a, I think, pretty exciting development. So we get better performance. And of course, we're also at a lower price point than the hyperscalers. And some of our customers really need to save money. For example, big media, I think, is our first target segment. They care about performance. They're already using us for a lot of their delivery. They have huge bills with the hyperscalers. They need to save money, and we're a very natural choice. In fact, it was through conversations with many of them that really led us to decide that we wanted to embark on this.

Yes. I want to touch on some of those early use cases you're seeing, but you've famously been dogfooding it yourself, and Akamai has been moving some of your own cloud costs into your own data centers. What's the status there? And what have you learned from kind of a reliability, scalability perspective that you think you can take to other customers?

Yes, we're our first big customer. Our cloud bills just were spinning out of control, like our customers tell me is happening to them. And so, this year, without migrating our own apps into our own cloud, we have spent over $150 million. We'll probably spend a little over $100 million now, saving ballpark $50 million, which, for us, is a lot. And next year probably would have been over $200 million, at the rate it was growing. It was growing at a fast clip, and we want to cut our spend in half from this year. So huge, huge savings. We've learned a ton about it. It's not trivial to do. You don't flip the switch. And so we have that understanding with working with our customers. I can tell you the -- you talk to the CXO at the big media companies, and that's an easy conversation, because we have better performance at much lower cost. They want to flip the switch, but it takes time. You've got to get the development teams engaged. It takes effort to do. So you look at us, and it's really over the course of the year that this is happening, but massive savings and better performance and so very, very worth it. Very pleased.

From a customer perspective, I think you've talked about some of the early use cases being a very small fraction of your customers' overall cloud spend. But in terms of materiality at Akamai, it's fairly substantial. What are the initial use cases you're seeing? You talked a lot about the fact that the media vertical is kind of the prime opportunity off the bat. But what other verticals are you thinking about as kind of the next steps there?

It really goes across the board, but it's applications where performance matters. If you're doing QA or some central back office thing and performance doesn't matter, okay. Fine. Probably not an initial target. It's customers that are spending a lot, especially on egress fees or per-hit charges, as those costs will go way down with us. If you're not doing that, okay. It doesn't -- not very compelling. If you've got applications that are on containers and VMs and don't use a lot of third-party apps as managed services, that's a good candidate. If you've got something that is really locked in deep to the hyperscaler, forget it, because that's going to be a lot of effort and there's just easier things to do. And so yes, our goal is initially to get to say, 1% of the cloud spend, which probably a couple of billion dollars, which is huge for us, trivial in the marketplace. And so we're focusing initially on big media. Commerce is related. We're PCI-compliant today for our use, but it won't be until next year we're PCI-compliant for general use, but then commerce becomes viable. Also, media and commerce are good because those companies compete with their hyperscaler quite often. And we don't. And we'll protect their data. We're not going to use their data for other purposes. And so that helps. And they are already big Akamai customers. They know us and trust us.

How do you think about the competitive environment for what you're building? Because I think it's -- I mean it's clearly primarily the hyperscalers who are trying to build edge presence. It's a long road ahead for them. But you have other competitors with edge clouds that are talking about this environment. Just how do you think about who's really able to compete and have the uniqueness of the centralized compete that you've -- you now have embedded into that?

Yes. For that, we're headed, it's 100% the hyperscalers. Obviously, Linode competed with DigitalOcean and other folks that focus on SMB. We compete there, but that's not our focus. There's other CDNs that have some flavors of compute, but they don't support containers and VMs, so they're not competitive.

From an investment standpoint, I think the messaging coming out of this last quarter was from a capacity build-out standpoint, you're at a good spot. It sounds like some of the regulatory aspects are coming next year. You've added 13 new core compute regions this year. The CapEx assumptions, I think moderate from here. Is that the right perspective? And are we in a position where heading into the counter '24, you're really in an opportunity to go out and start winning some business?

Yes, I think that you characterized it well. The initial tranche of CapEx, basically done. There's a little more for upgrading existing Linode regions. Some of those, we're upgrading. There's a little more for porting the technology into some of our edge regions, as I mentioned. But that's much smaller than the initial build-out for the core data centers. And from here, we need to fill that with revenue. We're filling it with Akamai business, and that takes a chunk of it, but it's -- filling it with revenue. And as we do that and fill that up, then we'll come back and buy more CapEx. But that's a problem I want to have.

Yes. One of the use cases for edge that's been highlighted over the past couple of quarters -- or I guess a couple of quarters, has been the opportunity to run some level of generative AI inference at the edge. I think you've been fairly measured in how big of an opportunity, some of your competitors have been a little less. But how do you think about the role that edge can play in machine learning inference use cases? And at a very high level, where do you expect AI, ML inference to be done if you think about centralized cloud, distributed edge on device?

Yes. We've been doing AI and ML on our edge platform for a long time. You think of something like Bot Manager, and that is a big inference engine, it's deciding is it a human? Is it a bot? For commerce companies, what's the first page you present to a user before you know who they are? We have multiple customers today in apparel, and what we'll do is go get the local weather report. And if the weather report says it's 80 degrees outside, we'll present them a different page for the customer than if the weather report says it's snowing. Because if you present the page of parkas because it's snowing, you're going to lose the sale on the first impression from the person who's in 80 degrees. And so that's an example. That's all through edge computing, and we've been doing that for a long time. And it's -- and there's inference engines. Once you know something about the user, what's the next thing to show them? So that's something we've done for a long time. Now I think we are seeing a lot of the conversation now is around big LLMs and GenAI and GPUs. And that's a different kind of thing. To build a big model and initial training, yes, today, that would be GPU. And that's not at the edge. It shouldn't -- I don't think it makes any sense at the edge because you're collecting a vast amount of data. A onetime, more or less, big series of computations makes sense in a core data center. Once you have your engine and you're using it in an inference mode, there are situations like I described, okay, that makes more sense at the edge. Probably -- that's probably CPU-based, for as an inference engine. Much more economical to do it that way. With our compute, we do support GPUs. We are buying some. It's not the focus area for us, but that would be for the core. For our edge regions, that will be CPU-based. And initially, we're not focused on Gen AI. I think Gen AI is very cool. It will generate the need for a lot of compute. But we're focused on big media, their workflow. Very economical for us to do that on CPU. So that's where we're -- our money is initially going.

Yes. I think it makes sense. I mean the -- maybe just going back to the overall edge compute opportunity, and I think there's been questions about how that market evolves over time. Regardless of whether it's a significant impact to your business, do you buy this idea that generative AI applications are driving more customization and applications and that inherently is going to drive the need for more edge compute applications running closer to the edge?

It depends on what you really mean by that. Inference engines, yes, as I mentioned, we're doing that on the edge for a long, long time. I think GenAI, people are doing a lot of experimenting with it. And I think ultimately, it will drive a lot of need for compute. I also think probably more and more over time, people, now that they see how important it is and what it can do, there'll be a lot of work on the algorithms and to make it much more efficient to do than it is today and maybe a lot more use on CPU. We'll see, going forward.

Maybe just zooming out and thinking about next year, 2024, how do you think about, I guess -- on the delivery side, I think we're in a place where traffic is starting to stabilize in a pre-COVID era. Other than that, like are there agenda items that you're thinking about from a go-to-market perspective that you think you need to change? I mean with compute, it seems a lot of that's going to be very hands on. But, how are you thinking about any changes to that going into next year?

In delivery or go-to-market? Or -- I think delivery -- yes, you're right. I think we're now seeing traffic growth levels more like pre-COVID, which is nice to see. As I mentioned, we're being less willing to take spiky traffic and to give large discounts. That makes it more profitable for us and less spend on CapEx. We want to use that for compute instead. Internally, we've moved a lot of resources from the delivery teams into the compute teams. Go-to-market I think will look pretty similar next year to how it does this year, how we go about it. Security is very heavily channel-based. Delivery is heavily direct. Compute is a blend. The big media customers generally is a direct conversation. We'll have channel partners to help with the lift and shift, and we also have channel partners that do a lot of the compute work already for customers that were becoming Akamai partners now to do that. So that will be a mix, I think, going forward.

Yes. I guess maybe last question. How are you thinking about the M&A environment? You've obviously had a lot of success with Guardicore and excitement around Neosec, and Linode is a game-changing acquisition. How do you think about that as a capital allocation priority over the next year?

I think the philosophy is the same. We're always looking for acquisitions that can make a difference for us and our customers. Security is a very rapidly moving landscape, so we're always looking at the companies that come along there. A lot of start-ups are interesting. I think pricing is still pretty crazy for a lot of those companies, and we're not going to do anything crazy. Big acquisitions, we're especially careful with. We want to be really sure it's game-changing like a Guardicore or a Linode and really sure we're going to make it be successful. So we're -- you don't see that happen very often. We've been thrilled with Neosec. That was much less expensive, but I think has a ton of potential for us. So we're making a lot of investment around it.

Yes. Actually, one final question. I mean the success you've had with Guardicore, it feels a lot like what you're trying to do at Neosec. Is there 1 or 2 lessons from what you've done with Guardicore that you're looking to kind of apply to Neosec to build out that product?

We want to get a good cultural match with the team. In that kind of situation, we want the management team to want to stay. We're very happy with the channel's go-to-market operation with Guardicore, so actually, we're extending that for API security with Neosec. We do want to integrate them into the Akamai family, but take the best of what they do and use that for more of Akamai going forward.

Awesome. I will wrap it there. Tom, thank you very much for joining us. Thank you all for joining the session. And I hope everyone has a good rest of the conference.

Great. Thank you.