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

Hello, and welcome to the Akamai Technologies First Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mark Stoutenberg, Head of Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining Akamai's First Quarter 2025 Earnings Call. Speaking today will be Tom Leighton, Akamai's Chief Executive Officer; and Ed McGowan, Akamai's Chief Financial Officer. Please note that today's comments include forward-looking statements, including those regarding revenue and earnings guidance. These forward-looking statements are based on current expectations, assumptions that are subject to certain risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied. The factors include, but are not limited to, any impact from macroeconomic trends, the integration of any acquisition, geopolitical developments and any other risk factors identified in our filings with the SEC. The statements included on today's call represent the company's views on May 8, 2025. And we assume no obligation to update any forward-looking statements. As a reminder, we will be referring to certain non-GAAP financial metrics during today's call. A detailed reconciliation of GAAP to non-GAAP metrics can be found under the financial portion of the Investor Relations section of akamai.com. With that, I'll now hand the call off to our CEO, Dr. Tom Leighton.

Thanks, Mark. I'm pleased to report that Akamai got off to a solid start on the year. First quarter revenue grew to $1.015 billion, up 3% year-over-year reported, and up 4% in constant currency. Non-GAAP operating margin came in above guidance at 30%, and non-GAAP earnings per share came in well above the high end of our guidance range at $1.70, up 4% year-over-year and up 6% in constant currency. Security and compute combined to account for 69% of our total revenue in Q1, growing 10% year-over-year as reported and 11% in constant currency, underscoring Akamai's ongoing transformation from a CDN pioneer into the cybersecurity and cloud computing company that powers and protects business online. Security growth in Q1 was driven in part by continued strong demand for our market-leading Guardicore segmentation solution as more enterprises relied on Akamai to meet compliance requirements and to defend against malware and ransomware. The FBI's Internet crime report released last month called ransomware the most pervasive threat to critical infrastructure, and segmentation is the last and most important line of defense for an enterprise. Once an attack finds its way through the perimeter defenses, Guardicore is designed to spot it and proactively prevented from spreading and causing serious harm. In Q1, we achieved several large competitive takeaways for our Guardicore solution, including at a major bank in the U.S. and had a government revenue and customs authority in Europe. Both told us that they were not getting the help they needed from their incumbent provider. They also told us that their trust and confidence in Akamai were factors in switching from the competitor to us. We beat out another segmentation competitor at a clinical research laboratory and at a major credit union, which told us that our solution was easier for them to manage while offering unified control over their on-prem and hybrid environments. In addition, we expanded existing contracts for Guardicore at a well-known financial analytics company in the U.S., a global Fortune 500 manufacturer in Europe and a major telco in Latin America. We also continue to see strong interest in our market-leading API security solution in Q1. Almost everything online today leverages APIs, including attackers who know that APIs usually don't come with sufficient security and controls. Akamai stated the Internet security report issued last month showed that API has now cost organizations around $87 billion a year with shadow and zombie APIs being especially vulnerable to attack. When we do proofs of concept for our API security solution, most CISOs and CIOs are surprised to learn just how many APIs they have exposed. For example, at one of our customer events in Q1, the CISO of a major Korean company told attendees about how our solution detected numerous undocumented APIs, along with multiple vulnerabilities, including about 40 security issues, ranging from exposure of sensitive data through unauthenticated and publicly accessible APIs to weak password policies and unencrypted passwords. In Q1, we signed contracts for API security with numerous companies, including a leading U.S. fintech provider, one of the largest banks in Canada, one of the largest pharmacy benefits managers in the U.S., 2 large U.S. insurance companies, a well-known auto manufacturer in the U.K., a global online fashion retailer in China, and a multinational investment bank in Australia. And last week at the RSA Security Conference, our API security solution won a global Infosec Award from Cyber Defense Magazine. Also last week at RSA, we announced our newest security offering, Firewall for AI, which CISO Magazine highlighted as one of the top cybersecurity products at RSA, and which CRN hailed as one of the coolest new cybersecurity products at the show. Many enterprises today are deploying LLMs to provide myriad services such as chatbots inference engines, content generation and cataloging. Some are beginning to go further and deploy Agentic AI, software agents with the ability to gather information, connect with other tools, reason, make decisions and then act autonomously. In fact, Deloitte forecast that 1/4 of the organizations using GenAI today will deploy AI agents this year, and half will use them by 2027. As is often the case when enterprises adopt new technologies, cyber criminals quickly learn how to attack the new technology for nefarious purposes. GenAI and the use of AI apps and agents are just the latest examples with a variety of exploits already well publicized. Akamai's Firewall for AI is designed to protect AI agents, AI-powered applications, LLMs and AI-driven APIs from these new threats. By securing inbound AI queries and outbound AI responses, it offers multilayered protection by detecting and blocking sensitive data leaks in AI-generated responses, defending against remote code execution, model back doors and data poisoning attacks, filtering inappropriate content, such as misinformation, hate speech and other offensive material, and mitigating AI-driven denial of service attacks by controlling excessive query usage and model overload. The new product is generating strong interest from customers. For example, a financial services firm told us: "Akamai's AI firewall has given us great insight into the interactions with our AI chat agent, which helps paint a picture of the threat landscape unique to LLMs. This tool will allow us to save critical systems resources for real clients rather than being consumed by bad actors." In Q1, we also received accolades for our other security products. Akamai was named a leader in the Forrester Wave Web Application Firewall report and achieved the highest possible score for 11 criteria including detection models, Layer 7 DDoS protection, pricing transparency and flexibility, road map and vision. Our WAF continues to be an industry leader and serves as the bedrock for app security used by many of the world's largest enterprises. For example, in Q1, we signed multimillion-dollar contracts with a global bank based in India and the world's third largest railway, with over 60 million daily users. As is often the case, these new WAF customers are also making use of our content delivery services to provide the best possible performance for their web applications. Turning now to delivery. I'm pleased to report that we saw better-than-expected results for our delivery products in Q1. This was due in part to improved overall traffic growth, our continued excellent performance for both enterprise web apps and large live events, and incremental growth from new customer accounts that we acquired from Edgio in December. One of those new customer accounts led to a $16 million commitment over 3 years for Akamai to deliver 100% of their traffic along with Akamai API security, App & API Protector, professional services and 2 solutions from our compute ISV partners. That's a great example of the opportunity and competitive advantage we have by providing world-class delivery, security and compute together on a single platform, supported by the best in managed professional services. Turning now to cloud computing. In Q1, we continued our strong momentum in cloud computing, introducing new capabilities to serve customers, signing up new accounts, and expanding our go-to-market reach, both in-house and with partners. In March, we introduced our new Akamai Cloud inference solution, which provides what we believe is a better architecture for customers to build and run AI applications in data-intensive workloads closer to end users. AI inference and Agentic AI apps often require high throughput networking to manage large volumes of data and return accurate results with the milliseconds. By running these workloads at the edge, we can achieve better throughput, lower latency and significant cost savings compared to other cloud providers in the market. For example, in one proof of concept, a company's artificial intelligence application achieved 30% faster response times using our new compute platform than they had with a hyperscaler. In another proof of concept, a publishing company saw a 2.5x faster response times, with 3x higher throughput and significant cost savings compared to another hyperscaler. Customers who signed deals with us for cloud computing in Q1 included a global livestreaming service with hundreds of millions of users, a major cybersecurity provider in the U.S., a European industrial products company and a global developer of immersive video games. We also saw numerous large deals in Q1 come through our growing roster of ISV partners, including at one of the largest retailers in the world, one of the large pharmacy benefits managers, a major European fashion retailer and a leading broadcasting company in Japan. As a result of our competitive advantages, Gartner named Akamai an emerging leader for GenAI specialized infrastructure. And it's one of the reasons why VAST Data, the AI data platform company, has partnered with Akamai to make data-intensive AI inferencing faster and more efficient for our joint customers. Our edge computing capabilities will be further enhanced by the introduction of our new mMnaged Container Service, or MCS, that we announced in Q1. MCS will provide support for customer containers in any of our 4,000-plus POPs around the world. That means we'll be able to run customer compute instances in over 700 cities. No other provider comes anywhere close to doing that today. Also in Q1, Akamai became the first and only provider to offer video processing units, or VPUs, in the cloud, with our new accelerated compute instances solution built on specialized processors from Net Inc. A VPU architecture can offer up to 20x greater throughput than CPU solutions, which results in greatly improved performance, as well as significant savings for media companies. This gives Akamai another way to complement and cement our long-standing relationships with major media companies, which include all of the top 10 media companies in the world. It's also very synergistic with the media workflow services provided by our ISV partners on Akamai Cloud. Overall, we believe that the combination of world-class delivery, compute and security available on our platform provides a low-cost, high-performance and massively scalable alternative to the hyperscalers for media and entertainment companies. And unlike the hyperscalers, we do compete with our customers. At the NAB Show in Las Vegas last month and in recent visits with customers across Europe and Asia, many executives told me how they see real value in what we're doing, in part because they're tired of writing huge checks to the hyperscalers who then use the funds to compete against them. On the go-to-market front, the sales transformation efforts that we outlined during our last call are on track as planned. We're making good progress in rebalancing our sales team to provide greater focus on new customer acquisition while maintaining strong customer relationships. We've implemented a better sales play methodology to improve our installed base penetration, especially for fast-growing security and cloud infrastructure offerings. And we're seeing good early success with changes to reward sellers and customers for longer multiyear contracts. Like all of you, we're keeping a close eye on global economic and political challenges. As we noted during the call, we've taken steps to minimize the ecto tariffs on our business. And as of now, we anticipate that the direct impact to Akamai from tariffs in 2025 will be about $10 million in CapEx, which is amortized over 6 years. That said, there is concern among some of our customers in a possible recession, which could impact later in the year. And some of our customers outside the U.S. have raised concerns about whether they should rely on American companies for critical infrastructure. Neither issue has impacted our business to date. And we're working to reassure customers that Akamai will continue to serve them as we always have. We're also staying very engaged with our U.S. federal sector customers. Overall, we arrived less than 5% of our revenue from the U.S. public sector, including state and federal. Based on our current line of sight, we had to lose a few million dollars of revenue in the back half of 2025 and related to federal cutbacks. There's also a possibility of increasing revenue in situations where our solutions can generate significant savings for federal agencies. Lastly, we were very pleased to see Akamai recognized last quarter as one of the most trustworthy companies in America by Newsweek Magazine, which partnered with a market research firm to analyze more than 100,000 evaluations generated by customers, employees and investors. Trust and integrity are core values at Akamai, and they really matter to customers who rely on us to be there for them. So I want to express thanks to our employees who work so hard to help Akamai earn the trust of our customers and shareholders. Now I'll turn the call over to Ed to say more on our Q1 results and our outlook for the rest of the year. Ed?

Thank you, Tom. Today, I plan to review our Q1 results and then provide some color on our Q2 expectations and our updated full year 2025 guidance. As Tom mentioned, we got off to a solid start to the year with total Q1 revenue of $1.015 billion, which was up 3% year-over-year as reported and 4% in constant currency. We continue to see strong performance within our compute and security portfolios during the first quarter. Compute revenue grew to $165 million, a 14% year-over-year increase as reported and 15% in constant currency. Security revenue was $531 million, growing 8% year-over-year reported and 10% in constant currency. During Q1, we had approximately $6 million of onetime license revenue compared to $4 million in Q1 of last year and $12 million in Q4 2024. For the first quarter, combined revenue from compute and security increased by 10% year-over-year as reported and 11% in constant currency, accounting for 69% of total revenue. Our delivery revenue was $319 million, down 9% year-over-year as reported and down 8% in constant currency. Delivery revenue was stronger than expected in Q1. And while it's too early to call a bottom in delivery, we are encouraged by some improving trends in the delivery business to start 2025. International revenue was $486 million, up 2% year-over-year or 5% in constant currency, representing 48% of total revenue in Q1. Foreign exchange fluctuations had a negative impact on revenue of $5 million on a sequential basis and a negative $14 million impact on a year-over-year basis. Finally, it's worth noting that Edgio contributed approximately $23 million of revenue in the quarter, which was in line with our expectations. Moving to profitability. In Q1, we generated non-GAAP net income of $256 million or $1.70 of earnings per diluted share, up 4% year-over-year as reported up 6% in constant currency and well above the high end of our guidance range. Our EPS outperformance was driven by better-than-expected Q1 revenue, lower-than-expected transition services or TSA costs related to the Edgio trasaction, better-than-expected bandwidth costs, lower than expected payroll taxes primarily related to stock-based compensation as a result of a lower stock price. And lower employee medical claims related to our self-insured medical plan. Finally, our Q1 CapEx was $226 million or 22% of revenue. Our first quarter CapEx came in slightly lower than our guidance which was mostly due to timing as some CapEx has been pushed from Q1 into Q2. Moving to our capital allocation strategy. During the first quarter, we spent approximately $500 million to buy back approximately 6.2 million shares. We ended the first quarter with approximately $1.5 billion remaining on our current repurchase authorization. Our intention remains the same, to continue buying back shares to offset dilution from employee equity programs over time and to be opportunistic in both M&A and share repurchases. As of March 31st, we had approximately $1.3 billion of cash, cash equivalents and marketable securities. It's worth noting that subsequent to the end of the first quarter, and prior to today's earnings announcement, we used cash on hand and funds available under our revolving credit facility fully repay $1.15 billion of our outstanding convertible notes that matured on May 1st of this year. Before I provide our Q2 and full year 2025 guidance, I want to touch on some housekeeping items. First, we have completed our migrationof Edgio customers to the Akamai platform. As a result, we will not have any additional TSA costs moving forward and our revenue expectations from the transaction remain the same, approximately $85 million to $105 million of Edgio revenue contributions for 2025. Second, we expect an increase in operating expenses for the second quarter, partly due to a weaker U.S. dollar as well as higher marketing expenditures for Q2 events, our annual sales President's Club trip and the impact of our annual employee merit cycle, which went into effect on April 1st. Third, we continue to expect our CapEx to be heavily front-end loaded with significantly higher expenditures in the first half of the year compared to the second half of the year. This includes approximately $10 million of CapEx pulled forward to the first half of the year to help mitigate potential tariff risks. Fourth, we expect interest income to decline in 2025 due primarily to lower cash balances resulting from stock repurchases, recent acquisitions and the retirement of our $1.15 billion convertible debt. Additionally, we anticipate lower investment yields as interest rates are projected to come down throughout the year. As a result, we expect net interest income to decrease by approximately $5 million per month starting in May of 2025. Finally, we are maintaining wider forecast ranges due to the larger scale of our business to effectively navigate increased volatility within the current economic environment, the volatility in the foreign exchange markets and the potential impact of the pending TikTok ban. So with those factors in mind, I'll now move to our Q2 guidance. For Q2, we are projecting revenue in the range of $1.012 billion to $1.032 billion or up 3% to 5% as reported and in constant currency over Q2 2024. At current spot rates, foreign exchange fluctuations are expected to have a positive $15 million impact on Q2 revenue compared to Q1 levels and a positive $7 million impact year-over-year. At these revenue levels, we expect cash gross margins of approximately 72%. Q2 non-GAAP operating expenses are projected to be $315 million to $320 million. This is up from Q1 levels due to the items I just mentioned. We expect Q2 EBITDA margin of approximately 41% to 42%. We expect non-GAAP depreciation expense to be between $135 million to $137 million, and we expect non-GAAP operating margin of approximately 28% for Q2. Moving on to CapEx. We expect to spend approximately $226 million to $236 million. This represents approximately 22% to 23% of our projected total revenue. Based on our expectations for revenue and costs, we expect Q2 non-GAAP EPS in the range of $1.52 to $1.58. This EPS guidance assumes taxes of $54 million to $57 million based on an estimated quarterly non-GAAP tax rate of approximately 19% to 20%. It also reflects a fully diluted share count of approximately 148 million shares. Looking ahead to the full year for 2025, we expect revenue of $4.050 billion to $4.2 billion, which is up 1% to 5% as reported and in constant currency. As a reminder, we would expect to come in at the higher end of that range -- if we see continued weakening of the U.S. dollar, traffic growth materially exceeds their current levels and there is no ban in the U.S. for our largest customer. We would expect them at the mid- to lower end of that range if we see significant strengthening of the U.S. dollar, a significant downturn in the economy in the back half of the year, traffic growth materially slows from current levels, and our largest customer is banned in the U.S. Moving on to security. We continue to expect security revenue growth of approximately 10% in constant currency for 2025. And we continue to expect the combined ARR from our Zero Trust enterprise and API security solutions to increase by 30% to 35% year-over-year and constant currency for 2025. For compute, we continue to expect revenue to be approximately 15% in constant currency. And as a reminder, included within our compute, we continue to expect cloud infrastructure services ARR year-over-year growth in the range of 30% to 45% in constant currency for 2025. At current spot rates, our guidance assumes foreign exchange will have a positive $8 million impact to revenue in 2025 on a year-over-year basis. Moving on to operating margins. For 2025, we are estimating a non-GAAP operating margin of approximately 8% as measured in today's FX rates. We anticipate that our full year capital expenditures will be approximately 19% to 20% of total revenue. Moving to EPS. For the full year 2025, we expect non-GAAP earnings per diluted share in the range of $6.10 to $6.40. This non-GAAP earnings guidance is based on a non-GAAP effective tax rate of approximately 19% to 20% and a fully diluted share count of approximately 150 million shares. In summary, although we anticipate heightened economic volatility, we believe that Akamai is in a strong position to continue delivering revenue growth and maintaining healthy margins. This is supported by our newer security and cloud computing products, a moderation in our content delivery revenue declines, and an ongoing commitment to disciplined cost management. With that, I'll wrap things up, and Tom and I are happy to take your questions. operator?

[Operator Instructions] Today's first question comes from Amit Daryanani with Evercore.

I guess maybe to just start on the delivery side. Can you just talk about what really drove the upside for you folks in the quarter? Was it more pricing or traffic driven? And then what's restraining you from saying this can sustain into the out quarters? Just kind of [indiscernible] what was the upside and why the hesitation about the sustaining?

Amit, this is Ed. Thanks for the question. Yes, so I'd say what drove it was really traffic. Pricing you typically -- unless you have large renewals, doesn't have a huge impact in any given quarter, and we didn't have any significant concentration in renewals. So it was all about traffic growth. And it was pretty strong across pretty much every subvertical. So we saw strong video traffic, strong gaming traffic, strong software downloads and even across commerce and some of the other subverticals. So it's just a better -- an improved environment. And just being cautious in terms of calling a bottom. This is the third quarter in a row here where revenue has kind of been flattish sequentially, which is better than what it's been, which has been declining. But we're seeing decent trends here in April, and we're just being a bit more cautious and don't want to call the bottom quite yet.

Got it. That's totally fair. And if I could just follow up on the security side, I'd love to hear how you would characterize your performance in the March quarter. It looks a little bit lower, I think, like not -- $10 million-$15 million from what the [ Street ] was modeling perhaps. I'd love to understand how that end up versus your own internal expectations. And then as you think about this acceleration from 8% to, call it, 10% in security, what enables that for the year?

Yes. Good question. So I would say it came in, in line with what we had expected for the quarter. And as you heard a few minutes ago, I reiterated our guidance for 10% constant currency, and we did deliver 10% constant currency this quarter. There's a little bit of noise in there with license revenue, and I sort of called that out for you. We had about $12 million of license revenue last quarter, about $6 million less this quarter. So that can sometimes -- sometimes folks don't quite get the model right, going from Q4 to Q1. And also, with some of the bundles, Q4 tends to have a little bit of volumetric revenue associated with some of our commerce customers and things like that, that you don't see repeat at such a level in Q1. So I would say it came in, in line with what we expected. The big drivers for growth is exactly what we had thought in terms of the bookings. We're seeing a very strong API security growth and very strong Guardicore growth as we expected. And things are playing out exactly how we had thought.

The next question is from Jonathan Ho with William Blair.

Congrats on the strong quarter. Can you provide a little bit more detail on the role you can play with Agentic AI with your AI firewall. And perhaps help us understand how you could potentially benefit as GenAI utilization in the enterprise really begins to expand?

Yes. There's a lot of attacks now that have been published against AI apps of all kinds, including Agentic AI. Attacks where the adversary is able to trick the agent, the AI agent, into giving up sensitive data, code, PII, able to trick the agent into saying things that it shouldn't. Could be offensive content, could be deals, prices for things that aren't right. And so you got to protect the app, particularly if it's an agent, making decisions and doing things. You got to protect it from the attackers that cause it to do bad things. Also, you've got to protect it from ingesting bad information. A lot of these apps are learning as they go along. And the adversaries have figured out how to submit information to it that causes it to learn bad things, which can cause problems in the future. AI is a brand-new attack service and being rapidly deployed. In fact, a lot of enterprises are -- they're forming rules inside the enterprise, about what they can and can't do with AI. But, on the other hand, they can't even keep track of all the AI applications that they are using and have exposed. So another aspect of what we're doing, same as we do for API security. The first thing is letting our customers know what AI apps do they have exposed. And then making sure that they're protected. And I imagine this is going to be really a war of escalation. So the first attacks are being seen out there. We have the first line of defenses now with the [indiscernible] top 10 and additional capabilities tailored to particular customer use cases. And I think there'll be some back and forth there that more attacks will be figured out. And our job is to stay ahead of that and keep our customers safe.

Excellent. And you mentioned some customers expressing worry over whether they could rely on U.S.-based services. Is there potential for diversification or multisourcing pressure from some of your customers internationally? Just wondering.

Yes, today, I don't think there's good alternatives, especially when it comes to security. Pretty much all the world's major banks, most of the major commerce companies rely on Akamai for their security because we're really the best and -- in terms of protecting them. So, there's not good alternatives for them today. I think, over the long haul, our job is to make sure that they understand that they can continue to rely on Akamai. No matter what happens with the geopolitics and the rhetoric. But it's a topic that's come up in some accounts. And so we're being careful that they understand that Akamai is here for them over the long haul. And that we're not going away and that they can continue to rely on us.

The next question is from Will Power with Baird.

Okay. Great. Maybe to come back to the Security segment. You called out a number of competitive takeaways for the segmentation products. I guess it would just be helpful if you can kind of just help distill down what's really setting you apart in that market, allowing you to take share? And then secondly, it'd be great to get any update on progress, trends within the kind of the rest of the broader Zero Trust portfolio and where go-to-market sits there?

Yes. I think scale sets us apart to the larger enterprises could have hundreds of thousands of applications and devices they need to protect, and we're unique in being able to do that. Ease of use has come up in several accounts and particularly with our new AI-enabled interface that can make the integration be a lot faster and simpler. Our new engine suggests the initial firewall rules that they should be set up for all the various devices inside the enterprise actually tells our customer and their operator what the various devices are. Notifies them if firewall rules are out of date or not the most recent set of rules that they need to have. So ease of use is really important because if you think about installing hundreds of thousands of agents, you need really good automation to do that effectively. And trust, I think is really important. And we've been told that by our customers because these agents are running inside the company. And it's really important that they be reliable and Akamai has a great track record there. We're not the lowest cost provider. There's others out there with lower cost solutions. But when it comes to protecting critical infrastructure from the devastation of ransomware or data exfiltration with software that's running really in the inside on the important applications, Akamai is pretty unique in being able to do that and being trusted for that. In terms of Zero Trust, Guardicore is our flagship solution. It's sort of the anchor point, and we do have other capabilities. We've combined North, South, East, West protections built around Guardicore and our Enterprise Application Access solution, so that we can provide really a comprehensive set of solutions to protect the enterprise applications and data.

Okay. Great. No, that's helpful. And maybe just to add quickly [indiscernible]. Nice to see the better margins in the quarter, I mean it sounds like you expect them to dip back down in Q2. So I guess I'm just trying to sort out what proportion of that upside in the quarter could be more sustainable versus some conservatism going forward?

Yes. I think for this quarter, in particular, I'd say you'd have to see some revenue upside to drive higher margins. We obviously have very good leverage. If you think about, as I broke out in the prepared remarks, the items that drove the upside both in Q1 and then in Q2, what's driving the higher cost. Some of it is event driven. But there is the -- we did pull our merit cycle in a little bit earlier this year. We typically do it in the middle of the year, so we just brought it to April. So that has a recurring cost. We're also doing some hiring. So that has an impact as well. But we think over time, as the business grows will improve our margins. And maybe in the back half, there's a potential if we hit the upside to expand margins a bit as well.

The question comes from Frank Louthan with Raymond James.

Great. This is Rob on for Frank. So can you talk about the recent sales changes? Where are you as far as the new folks you need to hire, moving people around within their different roles between the hunters and farmers? And then what are some other drivers of margin improvement that you see taking shape the rest of this year and into next year?

I'll start with that and then hand it off to Ed on the margin question. I'd say we're about 1/3 of the way there. We've made a lot of changes, seeing some very good progress, shifting more of the force towards hunting now that we have products that a lot of new to Akamai customers need. For example, API security segmentation cloud computing, and they're going to need Firewall for AI as well. Also hiring more of the specialists that have a lot of expertise that can help facilitate those sales. We've made shifts to incent both our sellers and customers to longer-term contracts, starting to see some impact there, which is good. And overall, over time, growing the overall presence in the marketplace. So I'd say we're about 1/3 of the way there and making good progress. And Ed, do you want to talk about the margins?

Yes, sure. So I'd say it's probably 3 main drivers. The first one would be just as we scale up our compute business. So right now, we are subscale. So if we look at some of the facilities as we start to sell those out and get to a bit of scale inside of some of the different deployments. We are seeing very attractive margins in line with what we talked about. But we do have a long way to go in terms of reaching scale. So, as we start to grow in compute, I do expect our margins to expand obviously there. And then as security continues to grow, it's a higher-margin product for us. API security is a very high-margin product for us, much lower CapEx associated with your security business. So that's going to help. And then as delivery stops being such a big drain, that also helps as well. So if we get back to kind of low single-digit or even flat CDM growth. That obviously has a big help on margins. As far as other operating areas, we're always looking at efficiencies, we've wrung out a lot of costs. There's a little bit in the room potentially in real estate, and we can find -- sublease some of our unused space. And then with compute, in terms of our own use of compute, we've migrated a lot of our stuff to [indiscernible]. We'll look to do some more. But it's really going to come from scaling up of the business and as the mix shifts over time.

The next question comes from Jeff Van Rhee with Craig-Hallum.

Just a couple, maybe on the security front. Just high level, if I look at the organics and try to back up the acquisitions, it looks like it's fallen off fairly quickly from 15% to 10% to maybe now mid-single digits going sequentially last quarter was 10% year-over-year in this quarter, looks like mid-single digits. Just talk to me a little bit. I know you touched on it last quarter, but I want to make sure I fully understand what's played out there on the security. And I think you had pointed to WAF, but -- maybe if you could just start there.

Yes, sure. So yes, they're sort of inorganic in the number, but it's not a significant portion of revenue for us. In terms of if you break out the business in the different subsegments, we are seeing WAF slowdown naturally a little bit. It's still growing, but it's not growing nearly as fast as it was very high penetration, which is expected. Obviously, API security is growing incredibly fast, and we think itcan be a very, very significant grower for us over time. Our infrastructure security business is a low single-digit growing business and it is kind of in that range. Prolexic is growing in kind of in its normal range. We haven't had a lot of big attacks or anything like that, that tend to be kind of more, call it, episodic that drives spikes in demand there. So we haven't seen that in a while. So that's also slowing a bit. And then our services revenue has been consistent in that sort of high single digit, low single digit -- or, sorry, low double-digit growth area. So it's really just a mix shift right now as we talked about exactly what we're expecting with some of the products that have been in the market for a while, just naturally slowing down. And then the newer products like Guardicore and API taking off, but just not at the scale yet to offset the slower growth in the other products.

Got it. That's helpful. And on compute, you had commented last quarter around some exiting of some legacy revenue streams around video, I think transcoding, image management and some other things in there. How much -- how was the headwind from that this quarter in compute compared to what you were expecting when you gave the guide?

Yes, I'd say it's playing out exactly how we expected. And we're still seeing very strong growth in our CIS compute infrastructure services business, and I reiterated our guidance there for very strong 40% to 45% growth in ARR. So everything's playing out exactly as we expected. We said it would take a while to -- for some of this to play out probably about 2 years or something like that, but it came in exactly as we had thought. So...

Perfect. Okay. And then just one last on the -- to revisit the prior question on sales and the changes you're making in sales, it sounds like a little more focus on hunters. In terms of the metrics, we'll see, where do you think the impact of these sales changes will show up first? And presumably, if you're focused on hunters, maybe a new customer metric might be the place we would look for that? But just tell me kind of how we're going to see this play out in terms of the results and metrics that we might be able to observe?

Yes. So we haven't really provided any metrics in terms of sales productivity, but it's something that we'll consider providing you some metrics in terms of how the -- number one, how the investments are going, where are -- what stage are we in, in terms of adding the capacity. And it's both with hunters as well as some specialists for both compute and security. But I think you just see it by fest itself in stronger revenue growth, but we'll consider breaking out some metrics that will be helpful. It's just sometimes a booking metric doesn't always translate to revenue cleanly, so that's not the most helpful thing to give. But we'll give us some consideration to try to give you some metrics that might be helpful.

The next question comes from Patrick Colville with Scotiabank.

This is Josh Yeager on for Patrick Colville. I wanted to better understand the nondelivery opportunity to cross-sell Edgio into the existing base and what you're seeing within that segment specifically?

This is Ed again. You added several hundred customers from Edgio. And there's a good opportunity there where Edgio did not have very many security products at all actually, and they didn't offer compute, certainly not the robust compute solutions that we have. So right now, there's not a lot to report in terms of upsell. The first thing you want to do is just make sure the customers are migrated over. They understand who their rep is, get familiar with the services and working with Akamai, and then we'll start to build campaigns. I'd expect that to take your normal 6 to 9 months to start to build a pipeline, and then we should start to see some potential upsell into that base of additional customers over time.

The next question comes from Madeline Brooks with Bank of America.

This is Kevin Niederpruem on for Madeline Brooks for Bank of America. I want to talk to you about the compute trends. You've noted over time that you expect compute to be kind of a long-term 20% growth driver or growth, or grower. What is contributing to this current growth rate that we saw this quarter? And what needs to happen to bring it back up into the 20's?

Yes. So the real driver there is our cloud infrastructure services. And as we've talked about, and as Ed said, we expect the ARR there to grow 40% to 45% this year. And that means -- and as that number gets a lot bigger, that drives the overall compute number. So that's the number to watch. We'll highlight that as we go forward and that will be driving the bigger compute number. Ultimately, that becomes a large majority of the compute number.

Great, sounds good. And then just as a follow-up on the securities side, if I look over the last 3 years or so, you've grown annually the 15% to 16% rate in the segment, and then you just kind of listed some guidance for 10% for the year. And you've already given color as to why that is. But, 2 questions. One, what gives you confidence in this 10%? And 2, do you see any upside to this 10%? And what could drive that upside?

Yes, I'll start with that. The confidence is driven by the large interest, big potential market, and very strong growth for our segmentation in API security solutions. And as we talked about, we think the ARR of those solutions this year grows 30% to 35%. A lot of demand for that. We have the market-leading solutions. And now we are adding in Firewall for AI just starting, but a lot of customer interest there. And I think that'll be a product that has a long runway ahead, even though no revenue to speak of yet just signing the first customers now. So I think having leading solutions in large potential markets that today, fairly small revenue but growing at a very good clip. That gives us confidence that we can be growing the larger security number in the 10% range. Upside would be in part based on new products, how fast they get going. And if we can beat the 30% to 35% on these products. Ed, do you want to add anything to that?

Yes. The other thing I would say is the business is very highly recurring, mostly subscription-based business. I do break out from time to time if we have some license revenue. So you do have pretty good visibility in terms of the base. There's not much price pressure in your security business, it's a very sticky product. You don't tend to have a lot of churn. So you have a lot of confidence in sort of the underlying business that you have, and it really just comes down to the pace at which you're adding existing customers buying more product and acquiring new logos. But if I look at the size of the sales force, what we've produced over the years, we certainly have the capacity to add the type of revenue that we need. And obviously, as we add -- get more reps up to speed, we'll have more capacity to sell even more.

The next question is from Rudy Kessinger with D.A. Davidson.

Ed, could you -- just on the compute side, could you maybe quantify just what would compute growth have been if not for some of the [indiscernible] compute stuff you shifted to partners, relative to the 25% in constant currency in Q4?

Yes. Sure. Good question. So if you remember last time we broke out the sub number. So the cloud infrastructure service and the -- what we call our other computer, our legacy compute. There's like 4 or 5 different things that were in there, some legacy storage, some of the first customers that we had done some custom builds for, some video optimization and image optimization, that sort of stuff. That business had grown about 20% last year and the cloud infrastructure service grew at over 30%. So I'd say we're seeing very similar growth rates in the cloud infrastructure service and where the slowdown is coming, as expected, is in that other legacy stuff where you've got a combination of some of the custom deals we did. We did a couple of big custom deals that have largely run their course and they're not growing anymore. Any new applications would go into cloud infrastructure service. Our legacy storage business is starting to decline. We've migrated a little bit of business to partners. So that's playing out exactly as we expected. So really, the decline from 20% to 15% or 25% to 15% is really all in that bucket as we had called out to you. But the [ Cel-cot ] infrastructure service is growing really, really fast.

Okay. And on the delivery front, what are you seeing from a pricing standpoint? And in particular, since the Edgio bankruptcy, have you started to see pricing improve on renewals? And do you think 6, 12 months from now, we might get to a point where pricing -- price compression could be better than it has been historically, just given us that several low-cost providers exit the space the last few years?

Yes. Good question. So we're seeing kind of a mixed bag, as you would expect. I'd say we're seeing some somewhat encouraging signs of some of our larger media customers where the price declines aren't nearly what they used to be, but you don't also have the same type of volume growth that we used to. So that sort of makes sense. But also there is, like you pointed out, fewer options there. Across some of the other -- the rest of the base or delivery, it's a mixed bag. It depends. Sometimes you have a little bit more price pressure in commerce, if there's pressure with the economy and that sort of thing. But yes, I think over time, it's possible we'll see a moderation. We are seeing it. It's definitely improved a bit over the last year or so. And there's still room to go there. But this business has always had some element of unit economics of higher volumes, lower unit prices. I expect that to continue. But that's certainly one of the drivers to getting this business back to flatten maybe to mid- to low single-digit growth or decline over time.

The next question comes from John DiFucci with Guggenheim Securities.

I guess -- I think this question is for Ed. As you focus on the faster-growing parts of security, specifically API Security with Noname, NeoSec, and Guardicore, which I would think are largely channel focused, but different channels than are the traditional Akamai channels? And probably sold through the channel like other traditional security products are sold. I mean, are you taking steps to really ramp that up, to drive growth with new channel partners? And if so -- because we do a lot of checks and we're trying to hear more -- we'd like to hear more about Akamai in those checks. Can this new path to market -- a more focused path, if that's the case, also be used to sell more of your infrastructure and app security products?

Yes, I'll start...

I can start with some of the channel partners, you're absolutely right. They are different than the traditional Akamai channel partners. And in fact, most of our -- a large majority of our Gardicore sales, API security sales and new customers to Akamai come through those channels. Examples of partners would be Presidio, WWT, Optiv, GuidePoint, Defense X, IBM and Deloitte. Macnica, OCD, Accenture, [ Karisaw ]. So a variety of partners that are different than the, by and large, carrier partners we had in the CDN days, from before. Ed, do you want to add to that?

Yes. I would say, John, in talking with PJ, 80% to 90% of our new logo acquisition does come through the channel. I would expect with some of our installed base where we have a strong direct relationship, I would imagine a lot of the API security sales and Guardicore sales will be led by our traditional reps. But about 1/3 -- a little over 1/3 of our business in general comes through the channel, and a little over half of it comes -- in security comes to the channel. I expect that to increase over time. And as we acquired some of these companies, both NeoSec and Guardicore did come with some new channel relationships that we've obviously continue to grow and blossom as a result. So I do expect a lot of our growth going forward to come through the channel.

Ed and Tom, the -- sorry for my voice. But is -- is this an opportunity to -- through those new channel partners to also sell like your -- the slower-growing parts of security, but they're still needed, like DDoS protection and WAF, because others -- other partners or other of your competitors that sell those products are making a big push in the channel. So they're getting sort of used to selling that or the -- at least they're starting to talk about it.

Yes, and we do that. Often, it will be the new customer sales would be led with Guardicore or API security, but you're absolutely right. The whole platform, the whole security platform can be then included with that or grown to that. And those partners are very good at it. So I think you're absolutely right, and we're seeing that.

We have time for one last question. It will come from James Fish with Piper Sandler.

This is Caden on for Fish. So just one on the -- for the security weakness, was that more on the new side of the -- was that more on the new side or the expansion side of existing customers?

Yes. I wouldn't refer to it as weakness. It came in as we expected it. So we're not viewing it as weakness so it was pretty much right in line. But in terms of the impact within a quarter, you got to remember a lot of the business is recurring. So the bulk of the revenue is already spoken for with existing customers. Most of the growth, as I said, comes from the -- in terms of the newer sales is coming from API security and Guardicore as we expected. That doesn't have a huge revenue contribution in the quarter in which you sell it because it does take a -- maybe a month or so to get it up and running and revenue generating. So like I said, I think things turned out just as we expected, and the normal mix of new customer versus upsell into the base was pretty similar to what we see in a typical quarter.

That concludes our question-and-answer session. I would now like to turn the call back over to Mark Stoutenberg for closing remarks.

MJ, you can please end the call now.

All right. This concludes our presentation. Thank you for attending today's conference. You may now disconnect your lines.