Akamai Technologies, Inc.

Good day and welcome to the Akamai Technologies second quarter 2022 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw from the question queue, please press star then two. 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 Layton, 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 risk 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 Occamized 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 two 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 half a percent 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 is 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 three 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 GuardaCore, also performed well in Q2 with numerous significant customer wins. A leading global provider of financial data concerned about ransomware added GardaCore segmentation solution to the seven security products they already buy from Akamai. A major insurance company in France became a new customer for Akamai when they adopted our GardaCore solution to help meet European financial regulations. DeSale, led by one of our carrier partners, is indicative of the excitement we're seeing for our zero trust solutions among our partners. And Australia's largest telecom provider, Telstra, expanded their business with us by adding our secure web gateway solution to their portfolio of Akamai products. They told us, quote, as part of Telstra's journey in delivering fit for purpose solutions, Akamai has been a key industry partner with network-based anti-phishing malware protection and content filtering. Telstra blocks millions of threats every single day, and Akamai is a key partner in that protection." Overall, our Zero Trust solutions delivered $43 million of revenue in Q2, up 59% year-over-year in constant currency. This is an area where we're continuing to make major investments and where we anticipate significant future growth. Turning now to compute, I'm very pleased to report that the revenue for our compute product group was $106 million in Q2, up 74% year-over-year, and up 78% in constant currency. As a reminder, the compute product group includes Linode and Akamai solutions for edge computing, storage, cloud optimization, and edge applications. A common theme that I heard when I met with executives from around the world in Q2 was their growing concern about being locked into contracts with cloud giants that are consuming large and rapidly increasing shares of their IT budgets. They want more choice in compute and are open to alternative clouds like Linode as a more efficient way to build, run, and secure their applications. As a result, many large enterprises have begun testing the Linode platform. including a major US airline, one of the world's top gaming companies, and a global provider of weather data. Major media companies, in particular, express significant concerns with their growing use of the giant clouds. Not only are the costs high, in part because of the fees for moving data from cloud storage to a CDN for delivery, but they're also concerned about their increasing reliance on a direct competitor. As an example, I'm very pleased to announce that we recently signed a contract with one of the world's largest media companies to run a critical new workload on Linode. The service is live today, and we anticipate that it will generate millions of dollars of annual revenue as their usage grows over time. This is just the tip of the iceberg when it comes to our potential for future revenue growth in compute. Cloud computing is a fast-growing, multi-hundred billion dollar market. And as we scale a node to be enterprise-grade with POPs in hundreds of locations around the world, we should be in an excellent position to capture a share of this market, particularly from companies that value our industry-leading security and delivery solutions and that don't want to be locked in to more expensive options with a cloud giant that competes against them. Our delivery products generated revenue of $417 million in Q2. down 11% year-over-year, and down 8% in constant currency. These results were clearly impacted by a continued deceleration in traffic growth among our largest media customers and by the lower unit pricing we provided as part of their recent contract renewals. It's important to note that Akamai remains the market leader in delivery by far. Moreover, customer churn in the first half of this year remained at record lows, and lost annual revenue from churned accounts in Q2 was even less than in Q1. We also saw some notable delivery customers move business to our platform in Q2 after trying out competing solutions. No matter which competitor they'd been working with, they chose Akamai because of our superior performance and reliability. Like many companies, we're managing through a time of substantial economic headwinds and uncertainty, with escalating inflation, the strengthening US dollar, growing concerns about a global recession, escalating geopolitical tensions and conflicts, and a slowing of internet traffic growth as the world tries to return to normal in the midst of a pandemic. As Ed will talk about shortly, I think it's prudent to assume that these headwinds will dampen our growth rates and profitability over the next several quarters, particularly in our delivery business, which is being impacted by the challenges that many major media companies have recently reported. Given the enormous market opportunity in front of us, we will continue to focus our investment on Zero Trust Enterprise Security, led by Guardicore, and Cloud Computing, led by Linode. These investments, combined with the economic headwinds I just mentioned, will likely result in our operating margin remaining below 30% in the near term. We expect our margins to improve over time as our security and compute businesses continue to grow and account for a larger share of total revenue. In addition, we're embarking on several major initiatives to reduce cost and improve operational efficiency that should help return our margins to 30% or better in the medium to longer term. As Ed will discuss further, these initiatives include leveraging Linode to significantly reduce our cloud spend with hyperscalers, slowing the capital expenditures for our delivery platform, and optimizing our real estate footprint. While these are challenging times to be sure, I believe that Akamai is on the right track for long-term growth and success, and that we're well positioned because of our unique global edge platform, our market-leading security and delivery solutions, our new compute capabilities, which provide great performance at an affordable cost, our premier enterprise customer base, and our strong financial position and profitable business model. Now I'll turn the call over to Ed for more on Q2 and our outlook going forward. Ed?