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

All right. Good afternoon. Thanks so much to everyone for joining us at the Akamai session at the Goldman Communacopia Conference, my colleague, Max Camper, and I'm delighted to have on stage Ed McGowan, CFO of Akamai. Hey, thanks for being here, Ed.

Thanks for having me. Have a great conference so far. So thank you for doing this as well.

The pleasure is ours, Ed, you're in the middle of a very interesting inflection point for Akamai. Give us a little bit of a download of the last 6 to 12 months when -- you all have an executive team realize that this network that you've built over multiple decades can now essentially be upgraded along with the compute assets that you have into something that is a next-generation AI compute network.

Sure. Yes, it's been probably the most exciting time since we first began. I've been with the company since 2000. And back then, demand was insane, right? Pretty much the Internet was just exploding, incredible demand in that now with AI. And we made a decision 5 years ago to get into the compute business, and we acquired Linode and we always had this vision of, a, using it ourselves to start because we're spending so much with hyperscalers. But to make that into enterprise-grade network that would be comparable to using a hyperscale. I may not have all the capacity and all the features, but it was an alternative. And we thought that, look, we can leverage a lot of what we've done over the years with our CDN network, leveraging a lot of the same teams that build some of the functionality, running the distributed platform, the operational teams, et cetera. And I think the big turning point for us is when we sat down with NVIDIA about a year ago or so and realize that there's this big opportunity to lean into not only GPUs, but compute in a much bigger way and start building out bigger locations and an offering for compute from large-scale and GPU deployments, doing things like post training or support systems that go along with a lot of these big AI companies and leveraging our platform all the way down to our MCS, our managed container service, where we are taking the technology and slicing off part of the CPU that we're using for CDN and for compute to run companies to do things like manipulation of video and synchronization of video, doing a real-time ad decisioning and things like that. And it goes way beyond what we were doing before with Functions as a Service, where you could basic programming in web assembly or JavaScript. Now the customer has a lot more ability to do a lot more compute right out at the edge. So from core data centers all the way up to the edge.

Tell us a little bit about how you've been able to merge the best of the Wind assets with the best of the Akamai assets to the point where you're signing multi-hundred million dollar, multibillion-dollar deals.

Yes. So it was really pretty simple. The first thing we did is we, over the years, built out a massive backbone. So we carry hundreds of terabits a second of traffic across our backbone. We stitched together our main CDN locations across the world. So we have this big asset that's connected up to all the locations that we acquired from Linode, and we built out another 20 or 30 or so sites that were initially 5 to 10 megawatts in size. So they could do a decent amount of revenue, a couple of hundred million of revenue per site. And all we're really doing is just now expanding those sites to be a lot larger. So leveraging the same teams that build the CDN network that negotiate for colo, working with a lot of the same colo providers. We've worked with the past and building out the platform to be able to take on all sorts of different chipsets. Both CPU and GPU, and it's been a relatively light lift in terms of investment in people and technology. It's been really just doing a lot more of what we're doing at a bigger scale.

Tell us a little bit more about how you go through network upgrade cycle. And what I'm getting at here is we sometimes hear the bare case that Akamai's network is built over multiple decades. It has a legacy feel to it. Therefore, it's not going to meet the performance and cost requirements of a frontier model today. Tell us how that statement is wrong?

Yes. So first of all, most of the 4,000 POPs we wouldn't use for a frontier model, right? So maybe if they were using, say, it was a CDN application that was going alongside that. Sure, we could use the exactly. Very different use case. In terms of what we're buying today for building out, let's say, a customer comes to us and says they want 5,000 GPU in various shapes and sizes or they want 10 million virtual CPUs or whatever. We're using the latest hardware, latest chipsets, et cetera, and we have the visibility of getting a big order for multiple years, and it's just the most modern equipment that's necessary that performs very well. And it's an extent that it's at all connected to the network if they're, say, running some code in the servers that we have for managed container service, that's all modern and usable today. We don't need to go and upgrade the network. No notion of saying, "Hey, we have to throw out what we've done and rebuild something else. We're just adding locations with more servers.

Make sense. Let me ask you 1 more here, and then I'll turn it over to Max. When you sign these big initial come out to customers, you've given us a couple of others on the economics. What I find what's interesting is this could be the beginning of a much longer-term relationship where you cross-sell into these initial customers that have signed up on the compute side. What does that customer journey look like for maybe take the 2 larger deals that you've announced today?

Yes. So it's interesting, when you sign 1 of these big deals, it creates this sort of network effect where we get a lot of inbounds today, like the pipeline is bigger than I've ever seen. I've never seen anything like this where people realize, okay, you are an option at a scale that I didn't think you operated at. And then once you get in -- start doing work with any of these bigger companies, like the biggest companies that we're working with, foundation models as well as others, you uncover a lot of other opportunities, right? And I think what people don't quite understand about us is that our business isn't just GPUs. That's not all that's growing. As a matter of fact, the pipeline is mostly CPU, a lot of our revenue to the CPU generated. It's a little bit different in terms of the unit economics, power usage and things like that. But what goes along with these -- even the big investments in GPU. There's always some drag along for CPU and storage. And my CTO said to me today, think of the GPU is the brain, but the CPUs are all the arms, legs, the tooling, et cetera, that these systems have a lot of subsystems. So I might be working with someone who is spending billions with 1 of the hyperscalers, but I may carve off a piece of a support system to run several hundred million on CPU. And as you start working with these customers, you find more and more opportunities to grow with them. Over time, I think there's opportunity to cross-sell security. A lot of the customers we're working with today are already existing customers of security and delivery. And the demand is coming from new logos as well as existing customers and expansion orders with some of the customers that we've already done some compute business with already.

You've now signed over EUR 2.8 billion in multiyear cloud infrastructure commitment. What are the most important milestones, operational milestones between signing those deals and then seeing them show up in revenue?

Yes, great question. And it's funny. The way we're managing the business now is pretty interesting. So we start with the sort of 3 components, right? There's colocation or power, its capital and its equipment, okay? And each 1 of them has a little interesting twist and dynamic to it. So we're very fortunate that capital is not an issue for us now. We have plenty of capital. We have the ability to raise capital if we need it. So that's not a big problem for us. Co-location is probably the most challenging issue, power and space is probably the area where that is the biggest walker to near-term growth. And nobody has a lot of power and space just laying around. We have a very different model where we work with hundreds of colo providers around the globe, and we're actually a very interesting buyer from them because one, we're investment-grade credit. And two, we buy a fair amount of colo. So someone like some of the major colo providers are building 5 or 6 sites across the country, we may take 20 or 30 megawatts from them in 5 or 6 different locations or whatever. So we can make long-term commitments of good financial backing. And we're able to cobble together in multiple locations, stitching that all together with our backbone in areas that might be cheaper than some of the major cities and that sort of thing. And we're not building these gigawatt facilities or anything like that. So getting power is sort of step #1. So I've got a lot of demand right now. And what I do is I sit down with my operations team and say, let's map out how much power we can light up between now and say, the end of '27 and then give me a look at what 28 looks like. And we'll start to map that out by month and by quarter. And then I'll go back to the customers who will come to me and say, Ed, I want to do GPU. I needed to perform like this. I want to use this chipset. I want to do this with that. And I'd like to have that up as fast as possible. I say, okay, I can slot you into these locations over this time period, usually get an agreement, it might take you 90 days or so to kind of hammer agreement. You -- at the same time, you walk in your colo, you're now looking in your supply chain. So I'll be ordering the chips, be putting together the equipment. We use contract manufacturers to put all that stuff together. Sometimes you're buying, say, like a total NVIDIA stack, other times, you're just using CPU and putting the pieces together. And we'll make sure that if there's any delay or any sort of a time difference we're, say, risking memory price is going up, we sort of factored that into our agreement. But it gives us an enormous visibility to where we can start to slot in some of these bigger opportunities. And I'm making my colo buying vision based on what my pipeline looks like, I want to secure, let's say, I'm going to sign 100 megawatts staying round figures. I'd like to get, say, 70% to 80% or greater of that secured with deals behind it before I place that order. I'll leave some amount 10 or 20 megawatts or liver for stuff that's not done or maybe there's options that I have to take additional colo. But I try to keep that as tight as possible because that's the 1 area where that can do the most damage to your P&L near term. So if you think about signing the deal, ordering the equipment, getting the colo probably takes 6 to 9 months between signing the deal and getting to revenue. And you start to take the expense for colo a minute, you get the keys to the facility. Depreciation could be pretty tightly linked to revenue. So there's a bit of a delay. So if I take on 100 megawatts of power, I'm going to have a pretty big expense, even if it's for 90 days, it can put a point or 2 a pressure on my margin. So I try to keep that as tight as possible. So it's really about as soon as I light up power, and I know when power is coming in, I can start to slot deals into that. So it's been a -- operationally, it's a fairly easy thing to run and power is definitely the 1 area that is sort of the gating factor, if you will.

Is there any color you can provide us on the pipeline beyond the EUR 2.8 billion committed amount from now. Is this the limiting factor, mainly colo and power? Or is there anything else that would hold Jack from onboarding more?

Yes. So I would say we have line of sight to add a significant amount of colo between now and the end of '27 and even more in '28. So I would say that's not necessarily a big factor as far as prosecuting the pipeline. I've got a very, very robust pipeline. You need to go and qualify some stuff that's in there, doesn't meet our margin requirements. It might not be the right fit. You don't want to take too much of a bet on start-up companies, for example, that might have a different financial profile, especially if I've got enterprises in there that are better credit quality and that sort of thing. So -- the near-term problem I have here is that I don't have a ton of colo just sitting around. So there's the growth we've already talked about having growth accelerating from the 6%, 7% now to the teens for next year. And that's with what we have signed today. So I still have the opportunity to sign more, but now I'm starting to build stuff that will come on late in '27 and into '28. And I see really no issue as far as having this massive pipeline. It's just a question of how quickly you can get the colo lit up, and then there's backlog for computer equipment. So it takes some time to get certain equipment. Let's say, for example, I want to sell Vera Rubin, I can start taking order now but I won't get the chips for at least 6 to months to a year, right? They're just not physically available. So there is -- we're in that period of time now where we are signing up big deals. Some of them are already in. We've already announced them. They're starting to produce revenue in Q4 and will ramp up throughout 2017. A lot of that's in the first half of the year, and we're starting to sign up additional deals to put more revenue to '27 and a lot of revenue to '28.

That makes sense. And you talked about a meaningful acceleration in DIS revenue starting in Q4 and then into 2027. Are there any directional clues you can give us to help us model this ramp from an outside end?

Yes. So we've given a little bit of a heads up on -- in terms of some of the bigger deals we've announced and how much revenue they'll produce. We're expecting $15 million from 1 of them and somewhere around $20 million for the other. So that will significantly increase the growth rate for Q4. There's some risk that if stuff comes in a week or 2 late, maybe it pushes a couple of weeks. But generally speaking, that's -- you're going to start to see a big ramp here, and then it continues to ramp into '28 as we -- sorry, '27 as we get more equipment, and we get more power letup. But it's all structured that we should start to see a significant acceleration in Q1 and then into Q2 and a little bit into Q3.

Understood. The upside from AI compute is clearly large, but investors are also focused on protected the downside. So -- how are these contracts started to protect, if any of these deals continue to slip? Or you mentioned that memory costs you have hedged against that. But what about other delays? How are you protecting that?

Yes. So generally speaking, what you do on the colo side and on the customer contract side, if you're signing, say, a 4-year dealer or a 7-year deal, you will build in like some type of an escalator to cover cost, labor costs go up, colocation costs go up. And with our colo cost, we'll do colo deals, we'll do the same thing. So I might have a 2% or 3% escalator each year. The way the accounting rules work, you have to straight-line that. You also have to straight-line your revenue. So it just comes out as flat across the period of time. You don't have that bump in terms of revenue and costs and that sort of thing. But that's generally locked in. So there's really no risk of that blowing up on me. If something comes in, say, a few weeks late, let's say, there's a delay in construction on a facility for colo and we expect to start on October 1, and it starts on November 1. All that does is just start the revenue clock later. There's no penalties the deal doesn't get shortened or anything like that. It's just literally you have a -- you're working very collaboratively with your customers saying, this is the best estimates we have from the construction site to the manufacturer in terms of when we get the equipment and as soon as the equipment is lit up and it's available for the customer to use, these deals generally are like take-or-pay, right? So as soon as the capacity is available, you start billing for the amount of capacity that's available. And sometimes it might be a ramp of a 3 or 6 months to get to full ramp. Other times, you can do it in a much shorter period of time. Now if I'm building out a, say, a big deployment and I say once I signed the contract, I'm signing a contract with the manufacturers and with the colo providers. Colo is easy. Usually, you can get that locked in. And I can actually say in the contract here the 3 or 4, 5 or 6 locations we're going to put you in, and if there's any kind of an issue, maybe there's a backup location where I might put you in. And with the equipment, let's say, I can get 80% of it contracted with all the memory and everything like that, locked in the day I signed the contract. And now there's this 20% or so that could potentially flux memory being the biggest driver of that. you work something in the agreement where you would say, look, if the prices go up by a certain percentage, we just pass it straight on, if it goes up by, say, 50% or more, we'll have a conversation and maybe we put a pause and wait a few months or maybe we just continue to build and we just passed the price on. But the concept is that we've sort of agreed on what the "margin" looks like at a high level. In other words, like how much pretty transparent with what our costs are, that if the component parts go up in price, we are going to capture that. Now once I have that locked in, now I've got the hardware, I'm just appreciating that. So the cost is already set. The colo, we've taken that into consideration with building slight revenue ramps as well. So we have definitely modeled in the risk or downside as we're signing these big deals. And to the extent that I'm building ahead of demand, I have the ability to raise my price. So let's say, if component parts go up or if colo costs go up, and I'm not a have to secure at a higher price, I'm just going to raise my price. We've done that. We've actually raised prices in some cases.

Got it. Historically, you talked about CIS resulting from $1 in CapEx turning into $1 of revenue over time. Is that still the right way to look at this? And what's the timeline to get there?