Good day, and welcome to the Akamai Technologies Second Quarter 2022 Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Tom Barth, Head of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining Akamai's Second Quarter 2022 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 statements regarding revenue and earnings guidance. These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. The factors include any impact from macroeconomic trends, the integration of any acquisitions and any impact from geopolitical developments. Additional information concerning these factors is contained in Akamai's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking statements included in this call represent Akamai's view on August 9, 2022. Akamai disclaims any obligation to update these statements to reflect new information, future events or circumstances, except as required by law. As a reminder, we will be referring to some non-GAAP financial metrics during today's call. A detailed reconciliation of GAAP and non-GAAP metrics can be found under the financial portion of the Investor Relations section of akamai.com. And with that, let me turn the call over to Tom.

Thanks, Tom, and thank you all for joining us today. I'm pleased to report that Akamai delivered strong results in the second quarter despite the ongoing challenges with the global economic environment and slower Internet traffic growth. Q2 revenue was $903 million, up 6% year-over-year and up 9% in constant currency. This result was driven by the continued rapid growth of our Security and Compute businesses, which when taken together, were up 30% in constant currency. These 2 business lines now account for 54% of our overall revenue. Q2 non-GAAP operating margin was 29%. Q2 non-GAAP EPS was $1.35 per diluted share, down 5% year-over-year, but up 0.5% in constant currency. As Ed will discuss later, EPS was negatively impacted by foreign exchange rates and a higher effective tax rate compared to last year. Free cash flow was very strong at $223 million in Q2 and it accounted for 25% of revenue. We've been leveraging our financial strength to make substantial investments in enterprise security and cloud computing. We've also used some of this cash to buy back additional stock. In the first half of the year, we spent $268 million to repurchase 2.6 million shares. This puts us on track to go beyond what's needed to offset dilution from employee equity programs this year. I'll now say a few words about each of our 3 main lines of business: Security, Compute and Delivery, starting with Security. Our Security Solutions generated revenue of $381 million in Q2, up 17% year-over-year and up 21% in constant currency. Growth in security was driven primarily by our app and API security portfolio, which includes our market-leading web app firewall, Bot Manager, Account Protector and Page Integrity Manager solutions. Our Zero Trust enterprise security portfolio, led by Guardicore, also performed well in Q2, with…

Thank you, Tom. As Tom mentioned, Akamai delivered another solid quarter in Q2. Q2 revenue was $903 million, up 6% year-over-year or 9% in constant currency. Revenue was in line with our guidance and was led by our Security and Compute businesses. As we mentioned on our last call, we expected significant foreign exchange headwinds to impact our revenue in Q2. The much stronger U.S. dollar negatively impacted our year-over-year growth rate by 3 points or approximately $29 million of revenue year-over-year and $14 million on a sequential basis. On a combined basis, our Security and Compute businesses represented 54% of total revenue, growing 26% year-over-year and 30% in constant currency. Security revenue was $381 million and grew 17% year-over-year and 21% in constant currency, with continued strength from our Zero Trust business led by Guardicore. Guardicore delivered approximately $14 million of revenue in Q2. Security represented 42% of total revenue in Q2, which is up 4 points from Q2 a year ago. Compute revenue was $106 million in Q2, growing 74% year-over-year and 78% in constant currency. Linode contributed revenue of approximately $32 million in the second quarter. Delivery revenue was $417 million, down 11% year-over-year and 8% in constant currency. It's worth noting that while traffic on our network continued to grow, the rate of that traffic growth declined sequentially in Q2. As Tom mentioned, we believe that the current macroeconomic environment has had the greatest impact on customers in our media vertical, most notably in advertising and gaming. These challenges are most apparent in our delivery results. Also, as we talked about at our Analyst Day in May, we started to align our pricing strategy with the new traffic growth rates we have seen on our network over the last 2 quarters. In addition to scaling back…

[Operator Instructions]. The first question is from James Breen of William Blair.

Can you just talk about, obviously, the revenue guidance for the third quarter is lower than where consensus by about $10 million? Can you talk about the trade-off between margins and going after some of this delivery traffic in general because it's -- the EBITDA margins are about the same, but obviously, the growth is slowing at the top line.

Jim, this is Ed. So in terms of the guide, there's really 2 pieces to it. The first one is obviously FX has gotten incrementally worse. That's probably about half of the delta. The rest of it is the slower traffic that we talked about. I think your question was specific to the trade-off that we're making. The first immediate impact that you get on that trade-off from taking less of that peak traffic as you save on CapEx. So that will make its way through the P&L through lower depreciation and obviously immediately through cash flow. And so the decision that we've made is obviously, as we talked about in May, as traffic levels have come down, the discounts that we offer upon renewal are lower. And in some cases, we've seen a small handful of customers that have the traffic. Their peaks are still growing at pretty significant rates, but their day-to-day traffic is not. So there's a formula that we go through in a trade-off that we made that I think makes a lot of sense for us, especially as I look at the types of returns we can get from the faster-growing areas like security and compute.

So the shift in general just to a more -- a little bit more of an asset-light business and focusing on some of these other areas?

Yes. I mean, I would say, obviously, compute can be, I wouldn't call it an asset-heavy business, but it does have a fair bit of CapEx. We talked about our CapEx for Linode being about 2% of revenue in total. And obviously, it's going to be a little bit front-end loaded. We actually took the advantage to try to spend a little bit more for Linode. Based on some of the conversations we're having, we're starting to see some good demand. And obviously, Tom talked about signing a pretty significant customer in the quarter. So what we're doing though, on the Akamai, of course, I call it the legacy Akamai delivery business is we are being a bit more selective in reducing CapEx. I made a comment that our network CapEx excluding Linode was 3%. That's typically around, call it, 8% to 10%, at least where it's been running over the last couple of years. So I think it's just a question of being more selective with certain types of traffic. It's really a handful of customers that have that type of traffic pattern. It's generally event-driven. And what we're seeing is it's just a better return to shift some of that investment in other places.

Great. And then just maybe just one for Tom. On Linode, can you just talk about some of the success you're having sort of selling that product into your existing customer base?

Yes. Obviously, very early days. We've got a lot of work ahead of us with Linode, as we've talked about. But it's great to land our first very large customer, putting a critical app. Actually, it's for transcoding, user content onto the Linode platform. As I mentioned, that's just that app alone as it scales is worth several million dollars a year of revenue for us. And tip of the iceberg, this is a customer that spends many hundreds of millions of dollars a year on cloud computing. And that's just 1 customer. So a lot of good opportunity ahead, and we're making good progress on our road map for Linode.

The next question is from James Fish of Piper Sandler.

We've seen some security vendors report here and Security is going through kind of actually still a strong environment despite the macro. And when I look at your normalized rate of about 17%, it's a bit lighter than what we saw in Q1 in the last couple of years really. What's going on, especially on the core WAF and DDoS and in Bot management in terms of the sizing and growth against some of the newer solutions like EAA and PIM here? And is there a way to think about if you guys are seeing any higher net churn overall or how to balance net new business versus the expansion that you're seeing with your existing customers and security?

I'll start with that and then maybe Ed will add some comments. Security is very strong. We have the market-leading WAF by far. In fact, you look at their most recent Magic Quadrants and analyst ratings, and we've widened the gap with competition. Bot Manager also the market leader by far. Now we have Account Protector built on top, growing very well. EAA is small today, good opportunity for growth, particularly coming on the following Guardicore. Guardicore, very exciting. You think about the enterprise security landscape, and our segmentation, I think, has been something that historically was overlooked mainly because it wasn't done very well. But I think as you look to the future, it's probably the most important thing an enterprise can do. You could buy everybody's security products today, a company could buy everything. And now we're still going to find a way in somewhere. And the real key is to identify when the malware has gotten inside, where it is and block it from spreading. And that's why Guardicore is the best defense against malware and ransomware, and they have the best solution as rated by analysts, and we see really good traction there, but still on relatively small numbers. Page Integrity Manager, a relatively new product but a very bright future. Again, it's new, so it's still small today, but that's going to allow companies to satisfy the new PCI requirement, something that's hard for a company to do on their own. The new requirements say that a company has to have safeguards against malware that gets into the digital supply chain and winds up on their users' browser. And that's just very hard for any enterprise to do. But when Akamai is delivering that content, we can place our scripts on the page to make sure that the user experience is safe and to make sure that if the user has ingested malware somewhere in the supply chain that we can identify and block it so the user is not compromised. So I think when you look at our security product portfolio really doing very well, and we're in early days with some of the most exciting products that have a lot of future runway.

Got it. And maybe for Ed, on the delivery side, Ed, you alluded to a handful of customers that you guys essentially don't really want to deal with going forward just in terms of the type of traffic that you're delivering for them versus obviously the peaks versus the average. Taking a step back, what are you seeing in terms of this new pricing strategy versus kind of the churn as well as how to think about this removal of customers on the second half guide and if it really impacts the Security business going forward?

Yes. Great question, Jim. So let me just clarify that we're not doing business with these customers, just kind of taking a step back, like I say, it's a handful of customers. And typically, what you look at is these are multi-CDN customers that use many different vendors and tend to have big peaks for events. And the way you look at those customers is, there's a certain amount of day-to-day traffic you get, a certain price point that you're willing to sell at and there's a certain peak to average ratio that you're looking at. So as we go and renew some of these customers, we're being a lot more disciplined in terms of the -- taking a different approach as far as the level of discount that we're willing to provide. So therefore, the customer has to make a decision about still using us, but how are they going to handle those peaks? then going to straighten them out over a longer period of time, try to find additional peak in the market, et cetera. So they're still very big customers of ours, but we are pushing back a bit in terms of how much peak we're willing to take on the network. And as a result, we may lose a little bit of that day-to-day traffic, but we're still a significant vendor. As far as the impact on security and other products, we have not seen any impact on that. We're not losing these customers. They're not leaving the platform. It's just -- we are holding the line a bit more on price, and we may lose a little bit of the delivery as a result. But we're also losing a lot of that big peak and that ratio is getting more in line with what makes more economic sense.

The next question is from Rishi Jaluria of RBC.

Wonderful. Maybe first, I want to touch on Security. So you've obviously been talking a lot about the Delivery business. But we've seen a pretty decent decel in Security this quarter relative to last quarter, even looking on a constant currency basis. And look, on a constant currency basis, you saw only less than $6 million added sequentially from Q1 to Q2. And what should be a pretty strong security spending environment, at least based on what others in the space are saying. Can you maybe just help us understand what's going on in the security business and just how we should be thinking about that going forward? And then I have a follow-up.

Yes, Rishi, sure. So I'll take that. Keep in mind, if you remember last quarter, we talked about Guardicore revenue having about $7 million of onetime license revenue, which was a pull forward of about 1% or so of growth into that quarter. So that impacted it as well. We are -- one other thing to keep in mind, too, if you recall, with our [indiscernible] business during 2020 and 2021, we had a pretty strong uptick from the educational vertical. And there, that was when kids were working from -- sorry, working from home, doing school from home. And there was some government funding that was enabling folks to be able to work or go to school remotely and that funding has gone away. So we've seen a little bit of a decline there. I think it's a combination of those 2 factors that led to a little bit lighter of a sort of a sequential growth quarter-over-quarter. But some of the other things that we're seeing underlying our business, we're seeing very strong demand in Bot Manager. Account Protector is a newer version of that product or an add-on. That's going pretty well, but it's still pretty early days. It takes a while for that to -- good to add to growth. But those are some factors that you need to consider as you think about the slowdown in the growth there.

Got it. That's really helpful. And then just maybe I want to be explicit about macro in the guidance. When we think about your guidance, you talked about all the moving pieces between customers and turning [indiscernible] piece of the business and all that kind of stuff. But I want to be explicit, what are you assuming in terms of the macro environment? Are you assuming it kind of stays as it is today? Or are you seeing some sort of macro degradation? And maybe to really round that out, right? If I think about your last true recession that you are around for, right, '08,'09, even though traffic continued to grow at a nice rate during those years. Pricing compression led to a pretty big decel, I know this is obviously a very different business than it was 15 years ago. But maybe I just want to understand your macro assumptions and maybe tied into the macro assumptions, what you're assuming for the pricing environment. Again, consistent with what you're seeing, worse, better? Any color there would be helpful.

Sure. Yes. So let's see, I'll start with pricing. So one of the things -- the biggest area where you see pricing impact the business is on delivery. We don't see the typical price declines that you would expect to see in the Security business. The business just doesn't work that way. And I don't anticipate that being a significant problem for us. Obviously, we're anticipating that traffic is not going to recover to growth rates like we've seen in the past. We said that in our prepared remarks. So kind of a muted -- more muted Q4 than we typically see. Q4 tends to be a strong quarter for us. We anticipate that the macroeconomic environment is not going to get any better. One of the areas that I'm keeping a close eye on is Europe. We're seeing a lot of challenges in Europe, seeing energy prices, for example, are really, really high over in Europe. We're coming into the winter session. So you could see potentially less graphic related to people cutting subscriptions or doing things like that, less shopping online. So that's one of the things that I'm concerned about. And then also the recession and the impact that it could have on our customers potentially delaying buying decisions and things like that. But obviously, we're producing a tremendous amount of cash. The business is in great shape. It's much more well diversified than in the past. So I think we'll weather the storm pretty well. But I do think, as Tom and I both mentioned in our prepared remarks that it is going to dampen our revenue growth a bit here and also our margins for a short period of time.

The next question is from Keith Weiss of Morgan Stanley.

This is Josh Baer on for Keith. I wanted to ask about Linode. Are these enterprises that are testing out the platform? Are they considering Linode as primary cloud vendor? And I guess assuming it's a multi-cloud strategy approach, what are some use cases that enterprises are testing with Linode? What types of workloads or products do you expect to be popular with enterprises?

Well, really, any kind of cloud compute application is suitable for Linode. Obviously, we support containers as a service, VM as a service. So anything you do in the cloud you could do on the Linode. I think the use cases initially and how the customers are viewing it as trying it out with some new applications, and in the one case of the media company we talked about, it's a critical application. They're running their new transcoding app for user-generated content on us. It's about as critical as it gets. And as I mentioned, that may become worth millions of dollars as it scales up, but this is a company that's spending many hundreds of millions of dollars in the cloud. So it's not a situation where we think you're just going to switch all that on to Akamai right away. But it is a business that I think we can really grow and that we're in an excellent position to tap into a very large cloud computing market. That market is a couple of hundred billion dollars growing at a very rapid clip. And Akamai is a trusted partner for many major enterprises that are looking for some diversification, that want a reliable partner, has great performance which we do with our distributor platform, knows how to handle scale and at an affordable price point, which we're in an excellent position to provide. So I'm really optimistic about the future of our Compute business.

Great. And it sounds like a lot of the focus is on the hyperscalers and the enterprise opportunity. Just also wanted to ask if you're seeing any changes in the competitive landscape around some of the other alternative cloud providers serving SMB just in regard to any pricing changes or any other moving pieces in the market.

Well, as you know, one of our competitors there raised pricing. And I would say, so far, there's not a big change in the competitive landscape in the SMB market. We do intend to offer other services such as security to that customer base. But I think the real focus for us is bringing -- upscaling Linode to make it really enterprise -- major enterprise grade and scaling it out and making it be much more distributed, which will obviously improve performance. And going after the large enterprises, many of our customers spend 10 or more times as much with the major clouds than they do with us for delivery and security. And so that's a great opportunity for Akamai to be able to now provide them with compute as well, so that they can build their apps on Akamai, run them obviously deliver and secure them on Akamai. Really an incredible opportunity.

The next question is from Frank Louthan of Raymond James.

Can you just be a little bit more clear, some of the -- you mentioned the media companies and the issues with some of the traffic slowing down. Do you think this is more of a near-term issue or seasonal? And then how long do you think before some of that traffic begins to come back a bit?

Yes. As we mentioned, there's a variety of factors that are impacting the media companies and hence traffic. You've sort of got a year -- I mean we still got COVID, but this is more like a non-COVID year lapping a COVID year. And so people are out and about more, and so there's less traffic growth due to that. You've got impacts of what, in some places is a recession. And you've seen some of the media companies report that they've got their own challenges with usage. And so that tends to reduce traffic. Obviously, we've got foreign exchange headwinds, which impacts the revenue we get from media companies overseas. And so all of that is impacting traffic in the media business for Akamai. I don't see those as being permanent. And we do expect over the long term that the traffic returns to more normal growth rates and that the revenue for the Delivery business stabilizes. May take a little while, several quarters at this point, but I don't think it's a long-term phenomenon.

Okay. Great. And can you quantify how much CapEx you might be saving annually from sort of the pushing out some of the higher volume folks?

Yes. So probably the best way to think about that, if you remember, coming into the year, we were sort of guiding that 15% to 16% range. We said, Linode will be a couple of points. We're now down to 12% to 13%. So that's somewhere in the 3% to 4% range is probably a good number to be working with. I also gave the data point out that our network-only sort of legacy Akamai Delivery business or Akamai network CapEx is around 3% where typically it had run around 8%. Now we'll, obviously, you still have to invest in the network, and we expect traffic to grow, et cetera. But I think we can remain in a lower than sort of long-term trend model here for a while. Obviously, if we see significant increase in traffic, we'll obviously have better delivery results and deal with it at the time. But kind of looking out over the next several quarters and into next year, I'd expect to see the CapEx levels at sort of levels you're seeing here.

Next question is from Fatima Boolani of Citi.

Ed, this was for you, just with respect to a lot of the detailed commentary on your expectation of the delivery franchise for the second half. So a number of moving pieces here. But what I want to focus on is maybe doubling back to some of your comments from the last earnings call with respect to the observations around gaming, traffic slowing down. So I am inferring up the bulk of the pain that you're talking about from a delivery standpoint is purely coming from the OTT side, but I'd love to kind of get a confirmation and maybe get more of an in-depth under the hooded view of where you're seeing the most, I guess, elasticity or volatility from a traffic type standpoint? And how you're thinking about those trends in maybe a more granular fashion in the back half, especially on the back of the renewals that are now behind you?

Yes, good question. So let me just try to answer it this way. Obviously, our largest source of traffic is video traffic. And we are seeing video traffic, the growth rate of that is slower than we had expected. Still growing but slower than we expected. Probably the more noticeable areas would be gaming, software and then advertising-related, so some of the portal, news portals, et cetera, that sort of stuff that are impacted by advertising that's the area. But if you have a slowdown in video, it's such a significant portion of traffic that can tend to be the biggest driver. Now will that recover? What we typically see in Q4 is we do see somewhat of a device cycle where you see new devices coming online, oftentimes you see new content that comes on in Q4. There's back-to-school. There is the start of the fall sports season that we typically see a big increase in traffic. What we're looking at this year is we're being more cautious. We're still expecting it to increase like we see in Q4, but just not at the levels that we've seen in the past just based on the trends that we're seeing in the market today, what we're hearing from other companies, what we're getting from our customers. But that's probably the best way to think about it.

I appreciate that. And just really quickly, on the macro commentary that you shared especially with some of the key observations in Europe. I'm curious about any concerns or observations with respect to sales cycle elongation, deal decision -- delays in deal decision and deal making from a procurement standpoint, anything tangible that you can share with us just with respect to those dynamics, just as the broader economy sort of softened.

It's a good question. I'd say it's still kind of early days, but that's certainly something that we're looking at. Security tends to be one of the places that you wouldn't delay a purchase, especially if you're under an attack. If you're not under attack, sometimes you might elongate that a little bit. But we haven't seen anything yet that's worth calling out in terms of elongating the sales cycles. I think I'm more concerned with what happens going into the winter, and there's talk of cutting back use of natural gas and the impact on GDP, that obviously would have an impact on not just Akamai, but on many, many companies. So that's something you look out for. And then also just as you get into a situation like that, keeping a close eye on receivables and making sure that you not -- your customers are in good financial health. So far, no issues there, but that's again something that we'd be looking out for.

The next question is from Tim Horan of Oppenheimer.

Questions on Linode. How much can you save enterprises do you think on their compute bill with Linode? Secondly, is this a good run rate for the Compute segment or maybe any color on what the growth rates you're kind of looking for there?

Yes, the savings can be substantial. The list pricing that we offer for Linode is substantially less than when you see the hyperscalers offering, that's public information. And for major enterprises, obviously, you can have some discount to that. And the really good news is that we believe we can do this at substantial margins. So as we grow the business, actually, they'll improve our margins overall. And Ed, do you want to take the second part of that?

Yes. So in terms of the run rate and the growth expectations, yes, I mean, I think in terms of the near-term run rate, that's probably a reasonable place to peg it. What Tom and Adam talked about in May at our Analyst Day is we're making some substantial upgrades to the capabilities that Linode has, that doesn't happen overnight. So really, we will start to see -- the big enterprise growth will be into '23 and the back half of '23 '24, et cetera. But we do expect pretty substantial growth here, obviously, grew 74-plus percent in Compute, but a good place to put it for now, but it will take some time to build out the capacity as well as the added features. We're going, as Tom said, at a pretty good pace here, but that's when you really start to see the exciting growth is once all that capability is up and available.

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

Great. So for the balance of the year, you're taking the revenue guide down by $55 million. You said FX headwinds for the year now at $114 million versus $100 million previously. So ex that FX headwind, you're taking it down by $41 million. I'm curious if you could kind of bucket it out that $41 million reduction between lower traffic growth outlook or macro challenges versus maybe some of the revenue you're losing from potentially taking less traffic from some of those customers with high peaks or other areas where you're reducing the guide.

Yes. I'd say the majority of it comes from the slower traffic. That's going to be the biggest component of it. The impact for some of the traffic we're turning away isn't all that significant, but does contribute to it. I don't have an exact percentage for you, but that's not a significant part of it. And then the macroeconomic would be the remainder. So if you were to stack rank it would be slower traffic macroeconomic and then the impact from turning away some of the traffic that we talked about in terms of the peaky traffic.

Okay. And then on Linode, I guess I'm curious, like what is your total internal spend with the hyperscales currently? What percent do you think you could move to Linode over time? And what's the kind of expected cost savings you think you can get from that?

Yes, we're spending about $100 million a year annually now with the cloud companies. And over the next year or 2, ultimately, we would migrate pretty much -- most all of that on to Linode. And substantial savings. So that's why it's one of our several initiatives we're taking to improve margins. Also, it's great to be using our own services, and it will help us as we do the work with Linode to make it enterprise-ready, to be using it across the spectrum of applications at Akamai. We're very much like our customers and looking for ways to save on cost and get great performance out of our cloud compute platform.

The next question is from Jeff Van Rhee of Craig-Hallum.

Just a couple for me. I think on the Security side, I just want to clarify, I know you said you're comfortable at 24% revenue growth. To be clear, as reported or constant currency and then just kind of the puts and takes of being able to sustain that 20% in the outyear, given kind of the deceleration we're seeing right now?

Sure. I'll take the first part, Tom, you can take the second part in terms of the future. That's in constant currency. And just remember, Jeff, that the Guardicore acquisition anniversary is in the fourth quarter.

Yes. And in terms of the longer range, obviously, we're seeing very good growth in our flagship products, Web App Firewall and Bot Manager. They're the largest contribution of revenue. Really good growth, but on smaller numbers, obviously, for Zero Trust enterprise computing. In the longer time frame, I think that's what drives a lot of the growth in security. The infrastructure category growing more slowly today, also on a moderate size number. But I think in the long term, you see the enterprise Zero Trust security group grow, led by Guardicore as the market leader in stopping ransomware. .

So I guess as a bucket, no clear sort of things you would call out that should drive acceleration or deceleration, maybe a different way to look at it.

Well, there's the three categories we have today. The biggest is app in API security, very strong growth. I think we get continued strong growth there. A lot of innovation going on with Account Protector, Page Integrity Manager we talked about being really important for PCI compliance. We have a new audience hijacking prevention capability that looks really cool. Infrastructure is moderate size today, and that's not growing as fast. That's your DDoS protection and your D&S defenses. And then the really high-growth area, Zero Trust enterprise security led by Guardicore, but it's the smallest of the 3. And so you sort of have 3 different comps with a little bit different dynamic in each.

Okay. And one last, if I could, on delivery. Obviously, you're making some changes around the peaking traffic. What about pricing disciplines just in traffic in general? I think you had commented last quarter you were taking a much more sort of across-the-board conservative approach to pricing. Just pricing outside that peaking, how has your approach changed this quarter and likely to change the rest of year?

Yes. So we've been instituting that now for the last several months. And as Tom talked about, we have not seen a lot of churn. We've been fairly successful in the renewals that we've had. We are still offering discounts to customers who have traffic growth. It's just not at the same levels that we've done historically.

The next question is from Will Power of Baird.

It's Charlie Erlikh on for Will. Just one question for me on the pricing and contract renegotiations kind of building on your response. Any big contracts coming up for renewal that we should be aware of in the second half? And then for the 8 that you mentioned you had in the first half, any more color on just the tone and the overall discussions like pricing compression, you mentioned a little bit, but just the health of the customers you're talking to and just any more color on that would be great.

Yes, sure. So there's no big ones coming up in the second half. Like I said, if we ever have a big clump in the -- we'll call it out for it. I think it's just helpful to provide commentary and get you guys aware of what's happening. In terms of the dynamics outside of pushing back a little bit on sort of the peak to average, which is part of the normal discussion that we have, I would say we're kind of came in line with what we had expected. We did try to apply our strategy of being a bit more disciplined. I don't know if that's the right word, but more attuned to what's going on with volumes and having conversations with customers about expected volume growth, et cetera. So pleased with where we landed. And obviously, renewing large customers and this -- and the delivery segment is never a fun thing. But kind of came out as expected. And then your other question was on -- just remind me again?

I think you actually hit all the questions, yes, just the overall tone of the conversations. But yes, I think you answered it pretty well.

Yes. So overall, I mean the customers are still in great shape. There are some very large brands and still very healthy. We added services to most of them. So not only are we just dealing with delivery, but we're also adding on additional capabilities as well.

The next question is from Alex Henderson of Needham.

So given both Guardicore and Linode have not been in the full for over a year, I was wondering if you could look at them from the perspective of apples-to-apples, if they had been in the fold for the entire year, what their internal growth rates look like so that we have some gauge of the rate of growth at those 2 acquisitions.

Yes, it's a good question, Alex. I'll take this one, Tom. So Linode, so Linode will end up being in for most of the year. But just prior to acquisition, we had said in our commentary, they're growing around 15%. Obviously, we'll accelerate that as we start to add enterprise customers. So I'd expect that to increase. With Guardicore, if you remember our first call, we're taking our guidance up quite a bit, but if you look at where our kind of internal -- where our run rate is now, we're looking at over $60 million. That would be almost a doubling of where they were when we acquired them even slightly higher than that. So Guardicore growing extremely fast, I would say, sort of if it was a standalone on its own would be more than a double. And Linode, we just picked it up and its starting to add that functionality and expect to accelerate that growth rate, but they were about 15% prior to acquisition.

There was a comment earlier in the call that adjusting for acquisitions, the underlying growth rate was 17%. Would you confirm that, that's an accurate calculus?

Yes. That's about the right math. 21% constant currency. Guardicore was about $14 million. So that's roughly 4%. So that's about right.

Perfect. And then just looking at the international markets, how are you handling the FX swings that are going on? In terms of pricing, are you offsetting and look the effective price reduction that implies in dollars, if you're in local currency and where you're not in local currency, are you pricing down to lower the burden? How are you handling the customer pressures around that?

Yes. So most of the customers outside the U.S. are paying us in local currency. So they're billed in local currency. There are several that are not certain countries, for example, will be in U.S. dollar. So far, it has not been a big issue with our customers pushing back. We do some hedging on balance sheet, but not from an operational perspective, not cash flow hedging. And then in terms of pricing, we do take that into consideration as we're going through with customers that are outside the U.S. And also just in general, depending on where their traffic is, that also comes into effect. If we're delivering in countries that are more expensive, we take that into effect as well.

Okay. Thank you, Alex, and thank you, everyone. So in closing, we will be presenting at a number of investor conferences and events throughout the rest of the third quarter. Details of these can be found in the Investor Relations section of akamai.com. Thank you for joining us, and all of us here at Akamai wish continued good health to you and yours. Have a nice evening.

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