Good day. And welcome to the Akamai Technologies Third Quarter 2024 Earnings Conference Call [Operator Instructions]. Please note that today's event is being recorded. I would now like to turn the conference over to Mr. Mark Stoutenberg, Head of Investor Relations. Please go ahead, sir.

Good afternoon, everyone. And thank you for joining Akamai's third quarter 2024 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 certain 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 our quarterly reports on Form 10-Q. These forward-looking statements included on this call represent the company's view on November 7, 2024. Akamai disclaims any obligation to update these statements to reflect new information or future events, except as required by law. As a reminder, we will be referring to certain 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. I'll now hand the call off to our CEO, Dr. Tom Leighton.

Thanks, Mark. I'm pleased to report that Akamai delivered a solid third quarter in which we achieved two significant milestones. For the first time, Akamai's total annual revenue run rate exceeded $4 billion and our security annual revenue run rate exceeded $2 billion. Our compute results were also very strong, growing 28% year-over-year in constant currency. Non-GAAP operating margin was 29% and non-GAAP earnings per share was $1.59 in line with our guidance. On last quarter's earnings call, we reviewed how Akamai is undergoing a fundamental transformation from a content delivery pioneer into the cybersecurity and cloud computing company that powers and protects business online. Security now delivers the majority of Akamai revenue and compute and security combined account for more than two thirds of our revenue. Since entering the security market a little more than a decade ago with web app firewall as a cloud service, we greatly expanded our security product set into an impressive portfolio, covering infrastructure, application and enterprise network security. We now offer market leading solutions to help protect against DDoS and DNS attacks, application and API attacks, account abuse and fraud and ransomware and data exfiltration attacks. We're already leveraging generative AI to enhance the security and ease of use of our Guardicore and WAF solutions. And we set ourselves apart from the competition with our extensive threat visibility and intelligence and our expert managed services that customers rely upon to protect their businesses. Customer interest in our security solutions remained strong in Q3 and we signed many significant contracts, including a $70 million agreement with one of the world's largest financial institutions, which included our Guardicore segmentation solution, API Security and Prolexic DDoS protection; a $6 million upgrade at one of the world's leading chemical producers that included Guardicore to increase visibility and…

Thank you, Tom. Today, I plan to review our Q3 results, provide some financial color on our restructuring charge and then discuss our expectations for Q4. I'll start with our third quarter results. Total revenue for the third quarter was $1.005 billion, up 4% year-over-year as reported and in constant currency, marking our first $1 billion quarter. Compute revenue was $167 million, up 28% year-over-year as reported and in constant currency. These results included a $7 million onetime benefit related to the release of some deferred revenue in conjunction with the expiration of a long term legacy compute contract. As Tom mentioned, we continue to see very positive market momentum with our enterprise compute solutions and remain on track to exit the year with an annualized revenue run rate of more than $100 million. Moving to security revenue. In the third quarter, security revenue was $519 million, a 14% year-over-year increase as reported and in constant currency. During Q3, we had $3 million of 1 time license revenue compared to $6 million in Q3 of last year. During Q3, revenue from Noname was approximately $8 million in line with our expectations. It's worth noting that similar to Guardicore, our partner and channel ecosystem is the driving force behind the majority of new customer wins for our new API security solutions. Combined, compute and security revenue grew 17% year-over-year as reported and in constant currency, representing 68% of total revenue. Delivery revenue was $319 million, a 16% year-over-year decline, both as reported and in constant currency. Sequentially, delivery revenue decreased 3%, which is an improvement compared to the 6% and 10% sequential declines in the previous two quarters. As Tom mentioned, delivery has been impacted by recent macroeconomic headwinds that have been felt industry wide. As a result, we have seen…

[Operator Instructions] And today's first question comes from Rishi Jaluria with RBC.

Maybe, Tom, in your prepared remarks, you talked a little bit about some of the traction that you're having on the AI side, including with AI companies. Can you help us understand philosophically, how you're thinking about the role that GenAI could play in security on both sides of the equation, both from what happens? How you can leverage GenAI to make security offerings better but maybe more significantly, what does that do to attack surfaces and attack vectors, especially if GenAI is going to get in the hands of nefarious actors? And then I've got a quick follow-up.

GenAI is already in the hands and being widely used by nefarious actors, and that's one reason why we're seeing a lot more attacks and penetrations. Probably, you've all seen the deepfakes very compelling but it's also used to generate the malware and train it to get around defenses. So it is increasing the need for defenses, defenses and depth. I think it's a big reason why you really need segmentation now and the Guardicore solution is doing so well. On our side of the house, we've been using AI and ML really forever in our security products. We use it for anomaly detection, bot detection. If it's a human logging into an account, making sure it's the right human and not somebody who stole credentials. We also use it to -- across the company really to be more efficient in the various operations we do. We're using it in -- already in two of our products, security products with GenAI as an interface. So it helps our customers manage their deployments of our security solution, gives them greater visibility. You can interface with your infrastructure and human language. Using our capabilities, you can ask what's that device there? Are the firewall rules up to date? You can ask questions like what do I need to do to bring my firewall rules within the last couple iterations so they're not too far out of date. And it answers and tells you. It's really very compelling and very interesting capabilities. So a lot of use of GenAI, I would say, at Akamai. Still early days. But unfortunately, the bad guys are using it too, very effectively.

And then just quickly, Tom, you alluded to this in your prepared remarks, but obviously, seeing some higher profile shakeouts, including a long awaited bankruptcy of one of your long time competitors. Maybe help us understand both near term, long term, how we should be thinking about the impact on your business from consolidation? Maybe is there an opportunity for you to gain share of wallet, especially as the kind of stable player and leader in the space? And then longer term, with one less player that had been maybe aggressive on pricing, how do you think this shakes out in the overall pricing environment, specifically on the delivery side?

Yes, I think consolidation in the delivery market is long overdue. And you've seen a lot of companies operating at losses in part funded by private equity or Wall Street. And it just didn't make sense. These companies were never going to make money. You still see some of it out there today with companies that are just really struggling, offering pricing which for them, loses money. And so I do think it makes sense to have some consolidation. And you're right, we've seen -- there was Instart Logic, StackPath, Lumen all gone. Edgio, which is the combination of EdgeCast and Limelight and Chapter 11, we'll see how that works out. But I do think this shake out makes sense. And I do think long run, it helps lead to a stabilization of the delivery market. As we talked about, we are very careful with our pricing. And we do turn away business that we don't think makes sense for us. And sometimes, other companies will step in and take that, they'll lose money in the hopes of showing some revenue growth. But I think it's not sustainable for them to do that. And I think the shakeout may be the beginning of something very positive and will help the delivery business over the medium to longer term.

And the next question comes from James Fish with Piper Sandler.

You made a comment about shifting investments here on the go-to-market to investing behind hunters as well as sales specialists as well as the channel. Can you just talk about what caused you to make the shift now rather than at year end? How to think about the mix of that investment between the direct and specialists against kind of the indirect approach with the channel?

I think we are really seeing good traction now. We already had traction, I would say, in Guardicore. But now with API security, we talked about achieving an ARR of $50 million at year end versus near zero last year. So we really, I think, proved that out and we're very excited about the future. And with compute, last year, we really weren't even selling enterprise compute. The platform just wasn't at that level. And this year, as we talked about, we are now beginning to sell it and seeing great traction to the point where we think that will be a $100 million ARR by the end of the year. So we've now, I think, proved it certainly to ourselves that this is worthy of more investment. Now at the same time, the new product areas are attracted to a much broader market of enterprises than our traditional leading products, which would be delivery and cloud WAF. And so there's a lot of enterprises and verticals that do use cloud computing, do need API security, do need enterprise security that works in the sweet spot for our traditional services. And so that says we do need to invest more in hunting now. We got to go after those accounts. And in addition, I think it's very helpful for us to have specialists, people that are really familiar with selling cloud computing and that will help our traction as we accelerate the growth there. So that's why we're doing it now and we didn't do it last year and why we're growing the resources there. And of course, these new products are also very channel friendly in ways that our traditional services weren't. Delivery in cloud WAF weren't just -- we had channel partners, but they weren't as friendly and as attractive. The new products, very attractive to the channel, and there's a real role for our channel partners to play. And of course with cloud computing, we've got a lot of ISVs now getting on the platform. So that's why we're making this investment now.

And maybe Ed, for you, as we think about the advanced security package changes that you guys made almost two years ago now. How penetrated is that across the security installed base, how much more room do we have to go with cross or upselling that unit? Trying to understand the year-to-date impact on security growth and anything as it pertains to the delivery impact as we think about those bundles.

So we talked last quarter a lot about this as we had anniversaried the introduction of the package and had a pretty high penetration, obviously, especially with the -- early on with the early adopters of it. We're sort of the end of that at this point. So the way to think about it is you've got year-over-year compares that have us selling in both quarters.

And our next question comes from Frank Louthan with Raymond James.

Since you acquired the Lumen CDN last year, you're a little over a year ago, did you get any network elements with that? And is there any aspect of their new networks that they're building to support their AI partners that they're having conversations with you about, about implementing your capabilities and layering them on top of that network to help maybe deliver some of that AI traffic?

So with the Lumen acquisition, there was no acquisition of any assets aside from the customer contracts. So there was no network acquisitions. And as far as any partnership discussions we have with Lumen, we're not prepared to talk about anything but there's nothing specific to what you mentioned there.

The next question comes from Fatima Boolani with Citigroup.

This is Mark on for Fatima. Maybe just -- great to hear the momentum that you guys are seeing on compute, but maybe just on profitability. Why aren't we seeing maybe greater evidence of operating leverage given the compute outperformance, especially since the segment commands better relative gross profit characteristics to delivery, which is declining?

So we're still in the scaling up factor within the compute business, so we haven't reached scale yet. And you're right to think that once we get to a much larger scale, we should start to see better flow through. You'll see, hopefully, gross margins expand a little bit and operating margin expand. But we're still in the investment phase of the business and haven't reached scale yet.

And maybe just a quick follow-on. How should we think about CapEx trajectory going through '25 from sort of the '24 70% level going forward?

So we're not going to provide guidance on this call for next year. But as we talked about -- last year was a pretty heavy investment year for CapEx related to building out some of the major data centers for compute. We don't anticipate anything like that going forward. But what I've said in the past is if we do see unusually large deals that come with more revenue, there may be some additional builds. But as we've talked about this CapEx level somewhere in this range is generally where we'd like to keep the business for now. Obviously, as compute gets bigger, that may change over time. But certainly, over the next couple of years, that's about the range we'd like to stay in.

And our next question is from Rudy Kessinger with D.A. Davidson.

Ed, I want to ask on delivery. It's basically implied in Q4 that delivery revenue is down 20%, 21% year-over-year by my math. I guess, it seems kind of hard to wrap my head around that if traffic is still growing. I know you're saying traffic growth is not as strong as you've seen in the past. But if traffic growth is still growing, just help us try to understand how delivery could be down over 20% year-over-year unless you're seeing much higher pricing pressure than you've seen in the past? And then as we think about going forward, maybe '25 is it fair to assume that delivery is at least a double digit decline going forward?

So a couple of things to think about here. So if you remember, last Q4 we had the Lumen and StackPath acquisitions. And during that time, when it entered into the transition services agreement, we had all of the contracts even though we had anticipated some of those would go away. So it's a really difficult compare, Q4. And in terms of traffic growth, it is growing very slowly. So at rates that we haven't seen in the 25 plus years we've been in this business, so it's growing very, very slow. Pricing is getting a little bit better. But even if you have 5%, 10% price declines and your traffic is growing in low single digits, you're not going to see growth, you're going to see contraction. So it's just been a weak traffic environment. Pricing, as I said, is getting a little bit better. But it takes a lot longer for that to work its way through the system and we get a tough compare. So those are the factors.

And then on compute, maybe it's a around in you CapEx. It looks like maybe at the midpoint, if you use the percent you're giving for the full year, up about $40 million for this year. Correct me if my math is wrong there. But if it is accurate, it seems like a little bit of a step up with not much of a raise in the compute guide for this year if I back out the $7 million in onetime that you had for Q3?

Yes, it's about that, maybe just a little bit less shade less than that. But it's a combination of a bunch of things. It's not all compute. There's some compute in there. There's some related to delivery in terms of some of the places where we have outsized demand. So unfortunately, delivery demand isn't all in one place. It's not just one number, you have to build out in certain geos as you get demand in certain places. And there's also infrastructure services, infrastructure that we use to run the platform. And there's always some timing between quarters so a little bit slipped out of Q3 and a little bit came in from Q1. So I wouldn't read too much into it.

And the next question is from Matt Dezort with Needham.

I guess within compute, could you touch on some of the early use cases and verticals and how those are performing? Any cohort metrics you can offer, especially behind some of the observability in security and media customers you guys have talked about? And any other newer tips that you guys are seeing as driving more workloads to Connected Cloud?

Yes, I would say the sweet spot early on by design in terms of revenue is media workflow but we are seeing compute sales across really all verticals and including new customers. And just to give you an idea of the range of our ISV partners who -- customers will buy solutions from them or from us on our platform. There's a couple of database partners, observability widely being sold, live encoding, transcoding, video packaging, WebRTC for interactive video, digital asset management, optimization of video, game orchestration, fleet management, DRM, Kubernetes, connectivity and auto scaling, server side ad insertion, AI inferencing and API performance and testing. And that's just the list of different ISV partners. So we really are seeing a lot of use cases across multiple verticals with a sweet spot in media workflow. And at this point, we really have a very good ecosystem media workflow partners, which is starting, as we talked about in the prepared remarks, really being well received in terms of our media customer base. They're looking for better performance, distributed compute at a lower price point and we're really in a good position to provide that today.

And as a quick follow-up. Can I ask about some of the security pieces excluding Guardicore and Noname? How did some of the larger pieces perform in 3Q across WAF? It sounds like DDoS was really strong, you touched on a number of wins there. Did that drive any incremental upside in the quarter? And how do you think about that triumvirate going forward?

So we saw pretty good strength across all different products, including -- you talked about Guardicore but even within the Zero Trust space, with our Enterprise Access product, we saw some pretty good growth there. We saw continued strong growth in WAF. We saw some acceleration in DDoS. You don't really get a big burst of revenue right away when you have attacks in a quarter. Typically, you sign up new customers and that revenue comes out over time. But it was pretty strong demand, pretty similar to what we saw in Q2 across the board.

And the next question comes from Mark Murphy with JP Morgan.

This is [Erdi Wu] on for Mark Murphy. I wanted to ask a question on compute as well. It's really good to see that momentum. I think you guys specifically called out adding customers at a strong rate and now kind of getting customers outside that sweet spot, which is very interesting to hear. So I guess my question is, is that kind of rate of addition of those customers a little bit more than you expected? And are you seeing these kind of non-sweet spot customers kind of come in earlier than you expected as well?

We're very encouraged with the adoption of our compute services, substantial increase in number of customers. And even though we planned and focused early on on the big media accounts that are already Akamai customers for using our platform, we're really seeing it across the base and a lot of new customers signing up, starting with compute that didn't use our pre-existing services. So we're very pleased to see the growth in compute. And of course, you've seen all year long as we've raised our targets for the year in terms of the enterprise compute revenue and the compute business as a whole.

And this does conclude our question-and-answer session for today. I would now like to turn the conference back over to Mr. Mark Stoutenberg for any closing remarks.

Thank you, everyone. In closing, we will be attending several investor conferences throughout the rest of the quarter. We look forward to seeing you there. Again, thanks for joining us tonight. We hope you have a nice evening. Operator, you may now end the call.

Thank you. The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.