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

Good day, and welcome to the Akamai Customer Announcement Overview 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 us today on short notice. We have some very exciting news to share from a customer win perspective, and we will get to that in just a moment. 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 that include revenue guidance. These forward-looking statements are based on current expectations and 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 from any acquisition, geopolitical developments, and other risk factors identified with our filings with the SEC. The statements included on today's call represent the company's views on September 24, 2026, 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 GAAP to non-GAAP reconciliation is available in the Investor Relations section of akamai.com under Financials. Before I hand the call off to Tom, I have 2 quick housekeeping items to cover. First, we have published a presentation of slides outlining the financials and timing of this new contract. You can access this presentation in the IR section of our website in both the Presentations and Events or Quarterly Earnings sections. Second, during today's abbreviated Q&A, please limit yourself to one question and one follow-up focused strictly on today's announcements. We will not be addressing questions related to our third quarter results. With that, I'll now hand the call off to our CEO, Dr. Tom Leighton.

Thanks, Mark, and thank you all for joining us. As we announced in our press release earlier today, I'm very excited to tell you that Akamai has signed the largest contract in our company's history, a commitment of $11.6 billion over 7 years with Anthropic to support their accelerating CPU workload demands with Akamai Cloud's distributed AI infrastructure and software. Anthropic is advancing the AI revolution, and we are thrilled they chose Akamai's capabilities for building and operating AI infrastructure at scale. When combined with the $2.8 billion in multi-year commitments for our cloud infrastructure services that we signed earlier this year, this transaction will significantly accelerate Akamai's CIS business and overall revenue growth. For nearly 30 years, Akamai has amassed industry-leading expertise in building and operating the world's most distributed platform for content delivery and cybersecurity at global scale and with a strong reputation for reliability, quality, and trust. We were also pioneers in edge computing and took a major step forward with our cloud strategy when we acquired Linode's developer-friendly compute platform in 2022 and then integrated it with our world-leading capabilities for delivery and security, and our unique distributed platform with more than 4,000 points of presence across 700 cities in 130 countries. Over the last 4 years, we've made major investments to upgrade Linode's core compute and storage infrastructure to create Akamai Cloud, a leading cloud platform that provides the performance, security, and reliability required by the world's largest enterprises and their most critical applications. We've scaled and deployed the platform into dozens of cities around the world, all interconnected with our global network fabric, which is one of the largest in the industry. As a result of this hard work, we've made Akamai the cloud company that powers and protects an AI-driven world. Our cloud platform extends high-performance cloud computing from the core to the edge, enabling organizations to build and scale next-generation AI applications while also providing comprehensive multi-layered security to safeguard enterprises against evolving cyber threats. Customers are using our cloud infrastructure services today for a wide variety of applications with many powered by AI. Examples include conversational voice agents for customer service and personal assistance, translation for local language and cultural etiquette, speech recognition for subtitle generation, photo-realistic image generation for personalized commerce, live transcoding and ad break detection, robotics and physical AI, site reliability and root cause investigation, real-time virtual world generation and rendering for simulations, real-time AI video intelligence to transform raw CCTV feeds into actionable insights, strategic findings from complex gameplay data in seconds instead of hours, and B2B agentic DevOps assistance designed for large-scale enterprise workflows. Enterprises choose Akamai for their cloud infrastructure needs because of our low latency and global scalability, our proven ability to manage and scale distributed systems, our decades-long track record of reliability, our global network fabric, our market-leading security services, threat intelligence and expertise, our ability to get the hardware and space around the world to support our contracts, our talented and experienced technical team that puts the customer first, and our reputation as a stable, trusted and dependable partner. Akamai Cloud spans the full spectrum from core to edge and training to inference with dozens of core regions in major cities around the world, hundreds of cities with edge container support and thousands of locations for Function-as-a-Service. We plan to continue expanding our cloud platform with greater capacity and scale with diversified hardware, and with new capabilities for agent sandboxing and security, AI gateway and firewall, Model-as-a-Service and intelligent orchestration to ensure that each workload runs on the most cost-effective hardware with minimal start-up time and low latency to users and data. With the AI business we've signed this year, backed up by a very strong pipeline, we're building upon our global footprint and years of experience in serving the world's largest enterprises to enable and secure responsible AI as we position Akamai to be the infrastructure provider for the next generation of AI-powered applications. Now I'll turn the call over to Ed to say more from the financial perspective. Ed?

Thanks, Tom. As Tom just outlined, today, we announced a significant expansion of our strategic relationship with Anthropic, signing an $11.6 billion 7-year commitment for CIS services to support their accelerating CPU workload demands. Additionally, our agreement provides for the potential to expand to an additional $9 billion of revenue commitments for a total of up to $20 billion over 7 years. As part of this expanded relationship, Akamai has issued a warrant to Anthropic to purchase up to 7.7 million common share equivalents of Series B non-voting convertible preferred stock of Akamai, which is equal to approximately 5% of total shares outstanding. The common stock equivalent exercise price of the warrants is $111.33. The warrants have a term of 7 years and that's based on the size of committed revenue from Anthropic. Approximately 3.1 million common share equivalents or 2% of shares outstanding are expected to vest as part of today's announcement and related to the $11.6 billion commitment. The remaining 3% would vest as Anthropic commits additional revenue in commercial agreements with approximately 1% of total shares outstanding vesting for each additional $3 billion of committed revenue, up to a total of $9 billion of additional revenue commitments. While I can't talk to all the specific details regarding the $11.6 billion commitment, what I plan to discuss today is the following: the expected timing and amount of revenue we expect to generate from this contract over the next several years as the business ramps, the expected capital expenditures and expected timing of the CapEx, some details on colocation required to power deals of this size and finally, accounting treatment for the warrants and other items for you to consider as you update your models. These points I'm about to cover are also detailed in the supplemental slides we published today to the IR section of our website. Starting with revenue. Please note that the fair value of the warrant will be deducted from the revenue ratably over the life of the contract and is included in the $11.6 billion total. So first, we do not expect to generate any revenue in 2026 related to this contract. Second, we expect revenue to begin in the second half of 2027, and we expect to generate approximately $150 million to $300 million for the full year 2027. Finally, we expect revenue to continue to ramp throughout 2028 and to be fully ramped by year-end 2028, with a go-forward annualized revenue run rate of approximately $1.7 billion per year thereafter. Because of this take-or-pay structure in which Akamai's guaranteed payment upon delivery, revenue will hold steady for the remainder of the contract once revenue is fully ramped. From a CapEx perspective, we expect to spend approximately $5.5 billion over the next 2 years to support the $11.6 billion commitment announced today. First, we plan to spend approximately $1.7 billion of the $5.5 billion to secure and pre-purchase critical supply chain components, including memory, in the fourth quarter of 2026. Second, for the full year 2027, we expect CapEx to be approximately $3.1 billion to support this contract. Third, for the full year 2028, we expect to finalize capital deployments with an additional approximately $700 million of CapEx in 2028. Also, as a reminder, depreciation will begin when the equipment is placed in service. Overall, we expect depreciation to be substantially in line with revenue. Finally, there is no contractual requirement to refresh or upgrade the equipment over the length of the contract. Moving to power requirements. While I also can't share specific power details for this particular deal, what I can say is that over the past year, we've announced several major CIS contracts totaling approximately $2.8 billion of multi-year committed revenue with various leading enterprise customers. With today's $11.6 billion announcement, our year-to-date signed total contract value reaches approximately $14.4 billion. That combined total once fully ramped, is expected to generate approximately $2.2 billion in annual recurring revenue. We believe that the required power for all of these deals combined will be approximately 95 to 105 megawatts, which averages out to roughly $22 million in annual revenue per megawatt of power for the entire portfolio. Please note, as we bring new sites online, we typically anticipate a 60- to 90-day ramp period before they reach full revenue potential. Therefore, margins will likely experience temporary pressure over the next several quarters while we ramp revenue. And before we take your questions, I want to cover a few more things for you to consider as you model the impact of this transaction. For this contract, we are required to net fair value of any warrants issued against revenue. In addition, under ASC 606, any price escalators over the term are required to be straight-lined over the life of the agreement. Please note that the revenue projections I have provided today take into account both the cost of the warrants and any price escalators in this agreement. As a side note, under ASC 842, we're required to treat colocation costs the same as revenue and any cost escalators would be factored into any guidance we provide in the future. Additionally, because we are using substantial cash to fund CapEx, please adjust your financial models for the lower interest net income. We recommend referencing my earlier comments along with the CapEx schedule on Slide 4 for the amount and timing, and please use a 4% to 4.5% yield on cash balance as you estimate the lower interest income from the cash used to fund the CapEx. Your models also should reflect an adjustment to our share count to account for the issuance of the warrant. Once we expect a tranche of warrants to vest, we will include those shares in our calculation using the treasury stock method. And finally, the treasury stock method assumes that the warrant that is expected to vest is exercised and that the proceeds from the exercise are used to buy back shares at the current stock price to offset dilution. More dilution will occur if the stock price increases and if we sign additional revenue commitments with Anthropic. So with that, I'll wrap things up, and Tom and I are happy to take your questions. Operator?

[Operator Instructions] The first question will come from John DiFucci with Guggenheim Securities.

This is Lawrence Vensko on for John DiFucci. First, I just wanted to say our congratulations to the entire Akamai team on this huge CIS win. Ed, maybe a question for you. Would you be able to provide us with a little more color on the profit metrics of this deal? You disclosed that CapEx is a little less than half the value of the deal, but we assume the useful life of the CapEx might go beyond the duration of this deal as it's defined today. You mentioned it a bit earlier, but if you could, what might be the approximate gross margins over the entire life of the deal?

Yes. Lawrence, thanks for the question. So I can't get into the specifics of this deal or any one deal in particular, but I did provide a lot of information, including the total power. So the way to think about cash gross margin, the largest cost is your colocation. So you have the total power number across that entire portfolio, so you can sort of back into that. The majority of all of this across all the portfolios is in the U.S. So that's where you can assume the cost of colo, $3 million to $4 million a megawatt, something in that range, and it's a pretty decent place to put the model. Other costs, there'll be some warranty costs, a few other things, but colo is generally the major cost there. And then from a depreciation perspective, yes, since we don't have a requirement to refresh the hardware, you can assume 7 years for depreciation for this particular deal. We have servers in our network where we get greater than 7 years. So obviously, at the end of this contract, if we can continue to use the machines, we certainly will. But I think that's probably the right way to think about your model. That's pretty much all I can say in terms of general direction for overall margins, not only for this, but for all deals in particular.

Congrats again.

The next question will come from Samik Chatterjee with JPMorgan.

Congrats from my side as well. For the first one, can you just elaborate on how to think about the $9 billion expansion opportunity? Are there certain milestones you need to meet in terms of execution on the first part of the contract to get that expansion opportunity? And is that also all CPU-based? And I have a quick follow-up.

Yes. I would think of that as an option to do additional business where there's an incentive in place, where there's additional warrants that would vest if they were to do additional business. So yes, there's no dependency for us to do anything or milestones or anything like that. That's just purely looking at additional opportunities over the life of the relationship. And to the extent that we find opportunities that Anthropic is interested in us bidding on and we find an opportunity, we'll certainly tell you about it, but there's no connection in terms of the deliverables of the first $11.6 billion to that. It's just really more of an option for us over the future to do more business with them over time.

Got it. Got it. And my follow-up, I mean, you've been talking about ARR to CapEx, the best way to sort of think about it is more like 0.5 to 1. For this deal itself, it seems more closer to sort of 1/3 on that front. Are you able to elaborate sort of what are the drivers that drive that sort of ARR to CapEx metric? It seems to be a bit of deviation from what you've been sort of suggesting as a more longer-term trend for most of the deals that you signed.

Yes. So I would say that $0.5 to $1 is pretty much holds true for the majority of the number of deals, the volume of customers, et cetera. For these larger deals, though, there's a lot of things you have to take into consideration. Number one, this particular deal, CPU, so you get much better flow-through in terms of the efficiency on power. Also, it's a 7-year deal. So when you look at the overall economics of a deal like this, you take all that into consideration. So if someone were to go buy, say, a smaller contract from us, the yield will be much higher. The pricing would be obviously different because obviously, the size and scale of this is pretty substantial. So we factor that in. And occasionally, if we can do a deal like this at this level, we'll do it, provided it fits within our margin guidance, it certainly does.

The next question will come from Sanjit Singh with Morgan Stanley.

Congrats on this nice, strategic deal. In terms of the financing of the $5.5 billion CapEx, is that sort of implied with the warrant structure here? Or is there additional financing you need that the company is going to have to execute to, to deliver the $5.5 billion over the next couple of years?

Yes, good question. So keep in mind, if you look at the schedule in my prepared remarks, the CapEx is spread out over 2 years. So we don't have a bullet, if you will, in terms of having to spend it all upfront at once. So it will be spread out over time. And we're -- the business is very profitable, obviously. We have $4.6 billion in cash as of the last report that we reported last quarter, and we also have a revolver for $1 billion. But to the extent that if there's additional capital needed, we've always been good stewards of our shareholders. And we'll -- if we need additional capital, we'll certainly have a discussion with our Board and with our senior management team and do what we think is best for shareholders overall.

The next question will come from Param Singh with Oppenheimer.

So my first one, I saw in your press release, you mentioned that the new deal was for CPU workloads. So I want to make sure the $14.4 billion of commitments you're talking about, are they all CPU architectures? Or is there some sort of GPU architecture also underlying it? And then I had a follow-up.

Yes. So this particular deal, the one we announced today, is all CPU. The 14.4, which is a mix of customers and what we've talked about is our considered, what we consider our large multiyear revenue contracts, that's a mix. That's got some CPU, that's got some GPU in there. So it's a mix of everything.

Understood. For my follow-up, 100 megawatts is a lot, and I'm glad you're expanding at a very good pace. Maybe you could give us some color on any commitments you've gotten from your colo providers? Are they new colo providers? Are you looking at having your own lease? And is this like behind-the-meter or grid power? Any kind of clarity on that 100 megawatts would be really helpful.

Yes, sure. So first of all, we're very comfortable with the portfolio and pipeline we have for colo. We're very unique, I would say, in terms of how we go about building out 100 megawatts of power, for example. We have many, many providers we work with, and we're able to get agreements for multi-years for, say, 10 to 30 megawatts in certain locations. In some cases, it might be a little bit less. But we're very comfortable with what we can put together. And there's no dependency for us to go build. We're going -- working with our colocation providers. So this is spread out among numerous providers. And like I said, we're very confident in our ability to secure that. Some of that's already been secured. So this is kind of a -- think of it as what we do on a regular basis, but just at a slightly greater scale in terms of the size that we would be ordering from some of our colo providers.