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

Yes. It depends on the customer's vertical and what their role is. Most enterprises, certainly if you're talking to the CISO, they know they got a big problem with API security. They know they're exposed, and they got to do something. Generally they're very worried about ransomware and a data Breach. And so segmentation is a big conversation. On the other side of the house, compute builds is a big topic. Resi growth? Yes, just in general, but certainly, the egress is a monster, but all the things are getting charged for now, including a lot of the third-party SaaS companies. If the spend is out of control, and it's now costing them a lot more to be in the cloud than to be in their data center. And it's untenable. And so that's a great conversation for us to talk about our compute capabilities Because we can substantially lower their costs. We'll give them better performance. And that's a great conversation for us to be having now.

We'll get to compute, but I wanted to kind of round up this conversation at the beginning and as I said ask you the strategic road map and you were talking about adding new products. As you look at your Current portfolio, where are the -- do you see any gaps in the product portfolio where like, "Okay, this is something that we need to address," or do you feel like right now based on where the market is [indiscernible] adequately covered?

Yes. I think at the high level, we're in a good position. At the macro level, the big gap for us was the core cloud compute, supporting VMs and containers in a way that can really compete with the hyperscalers. That was a big gap and a huge opportunity, which we're in a good position there now. Within security there's always new developments, new kinds of Attacks, and that's constantly evolving. And so not like there's a glaring gap there, but I'm sure there'll be other things we're going to want to do In the future.

Got it. As you think of the [indiscernible] of where the paths are happening currently, what are you seeing in the leading edge. And is There anything we can infer to kind of the direction of for the broader security industry?

I try to say 2 things. First, you got to have the basics. Make sure your doors and windows are locked. And today, that means you need API security because you might have -- you have your web app firewall or something like that. But if you don't have API security, your windows are all open, and that's bad. Then the second thing is even when you lock all the doors and windows today, you can buy everybody's products. Malware is still getting in. And with Gen AI, that just gets worse. And so what You really most need now is your interior layer of Defense, the last line of defense, which is Segmentation. And that tells you that you've been penetrated, so you know Very quickly and it proactively blocks it from spreading. Ransomware is not so bad when it gets into that first Server. It gets bad when it spreads and locks everything Down. You can stop the spreading, you've limited your Damage. Same with data exfiltration malware. It's not so bad When it gets into your HVAC system. It's when it sits there And uses that as the hub to go get all your data and then Exfiltrate it to the bot net, and that's where you're in big Trouble. And so that's why I think Guardicore is doing so Well as a product because you need to have that capability The evolution of the [indiscernible] bots.

Maybe shifting over and talk a little bit about the Compute business. You talked about in the past that You believe it could be our largest product line in 3 to 5 years. You're also reallocating resources out Of delivery into the compute business. Curious if You can share any color in terms of how you see that Shift progressing in terms of the reallocation of Resources? And then also, just outline what the Biggest opportunities are in the compute business?

Yes. We've reallocated a lot of resources. You see It in our CapEx breakdown that what used to be What, 8% of revenue in platform CapEx or delivery. That's down to about 3% now and it includes security, too. So there's been a big shift there. You don't see it as much in the people, but we moved a ton of our people all the way from development, operations, procurement, deployment from delivery into compute. So we got a huge investment going into compute. And in particular, it's upgrading Linode to work for the big enterprises for mission-critical apps. And we're just now getting to the point where we can start to sign those deals. So this is the first year that pretty much the whole field force has come on getting compute last year was a few people in media. So we're finally to the point we can start selling, and we did in the call, break out that, "Okay, at the end of Q1, we had $50 million in ARR, up 4x Year-over-year." So huge potential from here. Our goal is to take that little $50 million and make it billion. And that's what we're working really hard on. And the initial sweet spot for us is big media. And there are several reasons for that. First they need to cut cost. Second, they're spending a fortune with the hyperscalers, usually with a hyperscaler that is their biggest competitor. And that's not a nice place to be. They care about performance. We know them well because we do The majority of their delivery and provide their security. We know the CXO there. They like us. They tend not to like their big cloud provider who's their competitor. And at the same time, we put a focus on our marketplace and our ecosystem for cloud with media workflow companies. So that now we can actually offer the media workflow on our cloud to compete with an elemental say. So you don't have to be locked in to your hyperscalers. You can use Akamai. And our first big wins that contribute to that $50 million ARR are big media [indiscernible].

Along those lines, one of the things we just mentioned is That getting the Linode platform to be essentially ready to sell to the large, large enterprise, I mean that's really how you drive that growth and get a share of that wallet. What were some of the maybe features or functionalities that Linode on its own was lacking. Was it just a global scale or geographic scale?

Everything. Capacity, scale, certifications reliability, some of the basic functionality, BPC. Just a lot -- storage to be able to do the upload rates and egress rates that you need for big companies. And Linode was great, designed for small and medium-sized companies or developers, very easy to use, very popular, not ready for big enterprises at Al. And so it takes time to build something that can legitimately compete and for some applications and customers, we have the hyperscalers.

Where do we stand in that evolution, in terms of getting it to the point where it can be broad-based sold to these large enterprises?

Well, we're at the point now where we can sell it. So we are -- it's now worth our rep's time out there to do it. And of course, we still -- it's not -- we're not going after everything. If you've got an application that's using 20 applications in the marketplace, that's hard. Or you really have gotten yourself locked into a hyperscale or probably not worth the effort. So we focus in particular areas where it is worth the effort to migrate to our platform. And we will save them a ton of money and give them really good performance. So we're to the point now where we can start selling. So on the selling side, we're in the first inning. And of course, we spend a lot of time getting ready to be there.

Okay. So we should be seeing the fruits of these labors.

Well, that is the goal.

In terms of the build-out, right, as I think you just think about a cloud platform or compute platform, you need distributed compute, right? You've talked about kind of expanding the number of core locations that you have. Where do we stand in the buildout of the actual infrastructure to support this, the compute business? And what should we be expecting moving forward in terms of additional locations?

Yes. In terms of the core locations, we're in 25 cities. We are this year expanding out some of the original Linode locations. And we're doing that with a new architecture and sometimes, in a new data center. So it will be the same city but a different data center with new capabilities. But most of that is done. This year, we're doing what we call Gecko, which is the next level of supporting containers and VMs in our existing larger edge regions. And we're live in beta today with a bunch of customers in 10 cities there, including some cities and countries where there's no hyperscaler. And the goal by the end of the year, ballpark to have 100 total cities all in. So we're counting the 25, we got from the core. The 10 we've got so far to build out more of these Gecko regions. And that will be more than any hyperscaler has in terms of cities where they can actually support VMs or containers. And then we had before, legacy ability to do function as a service or a JavaScript. And so we'll spin up your JavaScript apps in a few milliseconds in all 4,000 edge [ bots ] and that today is in 750 cities. So it's sort of a hierarchy, but the goal is more and more of the support be close to the end users.

As you build up more of these locations, that lease data center capacity, that taking as a third-party operator to support the compute?

Yes. Now in some cases, those locations, most of our edge locations, we don't have to pay because the local carrier or local ASP wants us there because we help their performance and lower their cost with all the content that we carry. Some of the bigger ones we will pay for that. And in some cases, it means we're adding new hardware. In some cases, maybe not. In any case, they tend to be less expensive. The big ones are already connected into our backbone. We're already set up there. So it's a much easier deployment for us and lighter weight than the big core data centers.

So shift gears a little bit. AI is, obviously, a hot topic. One of the questions that I get from Investors is, is the Akamai position to benefit from AI? One of the areas that come to mind is in the compute -- within the compute business. But I'd be curious, how do you think as you iterate through AI, whether it be through security vertical, there will be more traffic that gets generated as a result of more compute. How do you see your business benefiting from?

Yes. We've used AI forever in security. It's how we decide if you're a bot or a human, if somebody's logging into your bank account. It's how we decide is it you or somebody who stole your credentials anomaly detection. So just across the board for a long time. Now with Gen AI, we're using it, as I mentioned, with the new user interface, the Guardicore. We have in development capability, that it will suggest the right way to segment your network for you, these kinds of things. So early days, but there seems to be potential there. unfortunately, it really helps the attacker. It's really easy to develop really nasty malware now using GenAI. Now on the compute side, GenAI is going to drive a lot of cycles for compute to the point where potentially puts stress on the whole power grid, just to power all this. that's good for the compute business because we're in the business of selling compute cycle. Now today, we don't do the heavy GPU training stuff. We're not doing that. We do have GPUs, we're buying more. Most of them, actually, for graphics for our gaming customers, but we also do some of the GenAI stuff on it. Most of our spend on the CapEx is for CPUs. And most of the inference work for AI is using CPUs. And that's because it's more cost effective for us and for the customer. But we certainly are capable of supporting the gpus, and we'll do that if the economics are right.

Do you see as we move past the training phase into inference space, do you see that driving a tailwind for the compute business?

Yes.

You give the customer control over their data, which obviously, for these enterprise data. How do you see that playing out and maybe the rollout of compute business can play in the inference stage of AI?

Yes. So we're already doing it for customers. Commerce site wants to tailor the content for the user add selection and targeting. So already, we're seeing that on the compute platform. In terms of traditional inferencing, not GenAI, but traditional inferencing, our biggest customer for compute doing that. You could think of Akamai as the equivalent of $100 million a year compute customer because we moved our security solutions onto it, and they're doing inferencing. We have partners in our marketplace, our ISV program that are specialized around GenAI and inferencing. Now today, most of the enterprise compute revenue is not that, it's more boring stuff, media workflow, transcoding stuff like that, but I do think inferencing is a growing part of that.

I just want to shift to delivery in the remaining time that we have. We've seen the delivery business face headwinds since we've come out of the pandemic. And I believe that the last Analyst Day, you had the guidance was for 0 to negative 4% CAGR over 3 to 5 years. Given we're still seeing headwinds in the business, do you think it's reasonable for us to expect to get back to positive growth for that delivery business? Or do you view it as a business that's it just structural [indiscernible]?

Yes. I don't think what we're seeing now is structural. We're seeing significant challenges in a very large social media customer and that was the majority of the takedown on revenue in the guidance we gave. I think long term, they've got issues they got that probably beyond their control, they really solve. Media as a whole is not going away. Traffic is going to grow, probably maybe a slower rate than maybe what was historical, certainly during the pandemic. It would be nice to see some stabilization in pricing. It's a very competitive market. 2 players have exited, 2 more in very difficult circumstances. I don't see how they can keep pricing where they are over any kind of medium or long term. So I do think over time, that stabilizes and ultimately can grow as a business. So we are experiencing certainly challenges this year. I don't see that as a long-term phenomenon. Also, in terms of Akamai as a whole, delivery today is only about 1/3 of our revenue. In a Couple of years at the rate security and computer growing If there is a bump in the road in delivery, you're not going to notice this much. Just -- it won't be that big a part of the business.

That's a fair point. I think one of the points that an investor would make is like that business does throw off a healthy amount of cash, which allows you to reinvest it, as you've talked about going into areas like security and compute. Just sticking on the topic of the delivery for a second is, have you ever seen a period -- generally, the market is characterized by traffic growth countervailed by price declines, right? Have you ever seen a period where you saw a slowdown in the rate price declines? Is that potentially a lever that can change the growth dynamic?

Yes, we're certainly slowing down the rate of our price declines. That's for sure. And traffic growth hasn't been as strong, and we're walking away from more of the business we just don't think makes sense for us. And we've talked about certainly spikey traffic and stuff that's just bottom of the barrel not engaging in. And our goal is not -- the primary goal isn't to make delivery revenue grow. The primary goal is to make Akamai grow in the long term and to accelerate growth and to be very profitable. And that dictates what we're doing in the delivery business. And you're right, it is a very good business of cash generation and profitability, and it's enabling us to make large investments in security and compute, which is our future areas for growth.

Last question for you is during the pandemic we saw -- I would say, structural shift in the way that we consume. We all went home. And we were on our devices, we're using Zoom a lot more video and obviously, that adds a lot more traffic [indiscernible] as you kind of put your forward-looking hat on, do you see anything driving changes in the amount of traffic that you're pushing through the system beyond Your typical traffic growth, right? Not to bring it back to AI but to add something. Just curious if there's anything you see [indiscernible].

Well, if we all start wearing goggles all day, that will be really good.

Fair point.

Yes, that hasn't happened yet. I think also, we'll see where GenAI goes if we're all running around with a copilot at some point that's going to drive a ton of growth. Otherwise, I think for now, as we give the outlook for the year. We're taking a more conservative posture on traffic growth this year. So it's growing, but at a little bit slower pace than we started the year that it certainly was during -- when we were all locked up at home.

And with that, we're just about out of time. So Tom, thank you so much for joining us. Really appreciate it.

Thank you.