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spk09: Good day, and welcome to the Akamai Technologies first quarter 2023 earnings conference call. All participants are 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 telephone keypad. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Tom Barth, Head of Investor Relations. Please go ahead.
spk15: Thank you. Good afternoon, everyone, and thank you for joining Akamai's first quarter 2023 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 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 the company's view on May 9, 2023. 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 gap and non-gap 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.
spk14: Thanks, Tom, and thank you all for joining us today. I'm pleased to report that despite the challenging macroeconomic environment, Akamai delivered strong results in the first quarter, with both revenue and earnings exceeding the high end of our guidance range. Revenue grew to $916 million, and non-GAAP operating margin expanded to 29% in Q1. Non-GAAP earnings per share was $1.40. In what has been a good start to the year for Akamai, we've continued to invest in the key areas that we expect to drive our future growth, while also taking actions to improve margins. As Ed will explain in his portion of the call, we remain focused on returning to our operating margin target of at least 30% as we work to accelerate growth. I'll now say a few words about each of our three main product areas, starting with security. For the first time in Akamai's 25-year history, security represented the largest share of Akamai's revenue in Q1. This marks a significant milestone for Akamai since our expansion into security a decade ago. While we take pride in this achievement, we're focused on accelerating our security revenue growth rate from here, both organically and through disciplined M&A. For example, this past week, we closed our acquisition of Neosec, which complements Akamai's market-leading app and API security portfolio by extending our capabilities in the rapidly growing API security market. Last year saw a record number of web app and API attacks more than double the number in 2021. The rapid rise in API attacks is becoming a critical challenge for enterprises across all verticals, with IDC and Gartner now projecting the API security market to exceed $1 billion by 2027. The company we acquired, Neosec, is a powerful SaaS security platform that leverages AI-based behavioral analytics, unmatched visibility, and threat hunting capabilities to discover APIs, analyze their behavior, identify vulnerabilities, and help customers defend against attacks. We plan to take Neosec to market immediately while our combined teams work together on product innovation. With the majority of its engineers located in Tel Aviv, where we already have a significant security engineering presence, we expect Neosec will be an excellent fit with our culture. And like our GuardaCore acquisition, We can sell NeoSec to customers that don't use our CDN. Speaking of GuardaCore, our segmentation solution to protect against ransomware continued to achieve strong traction with new customers in Q1, including with one of the largest banking groups in Europe and one of the largest airlines in the UK. We're also continuing our organic investment in innovative new products to help protect major enterprises. For example, at the RSA conference two weeks ago, our new brand protector solution was named one of the 20 hottest security products by CRM. Another trade publication, CSO, listed both brand protector and our new Perlexic network cloud firewall among the most interesting products to see at RSA this year. At RSA, we also featured a new managed security service called Akamai Hunt, Akamai agentless segmentation, and multiple enhancements to our market-leading bot management solution. In addition to our investments in new products, we're focused on accelerating security growth by winning new customers and expanding our relationships with existing customers. For example, one of the biggest security threats in the news last quarter was Killnet's coordinated series of DDoS attacks against some of the top medical centers in the U.S., In response, some very prominent healthcare institutions adopted Akamai's industry-leading solution for DDoS protection. In recognition of the value Akamai provides, the CIO of a world-famous clinic emailed us afterward, thanking Akamai for enabling him to sleep well at night. We're also making good progress on the cloud computing front. Last quarter, we acquired the cloud storage company, Ondat. Storage is a key component of cloud computing, and we expect that ONDAT's technology and considerable expertise will further enhance our enterprise-grade storage solution for Akamai Connected Cloud. Akamai intends to offer the world's most distributed platform, placing compute, storage, databases, and other cloud services closer to end users and enterprise data centers. As a result, we believe that Akamai will be able to offer customers better performance, more points of presence, and lower cost, for many mission-critical enterprise workloads. That's the fundamental difference in our approach compared to other providers. We already have partners working with Akamai to run globally distributed databases with very low latency for synchronization. We have partners utilizing our cloud platform to provide customers with real-time visibility into telemetry from their end users around the world. We're working with customers in e-commerce, travel, hospitality, software as a service, media and entertainment, to improve their ability to personalize experiences, monetize content, accelerate data processing, facilitate collaboration, simplify management, improve performance, and reduce costs, in some cases by large amounts. And we're having early discussions about potentially leveraging Akamai Connected Cloud for AI inference engines. Each of these use cases plays to Akamai's advantage in terms of numbers of pops, global reach, performance, and cost. Another advantage that we hear repeatedly from customers, including those I met with last month at the NAB conference, is that they trust us. They value the years of highly reliable service that we provided in delivery and security, and they trust us not to use their data to compete with them. I'll now say a few words about our delivery business. which experienced an encouraging uptick in traffic growth late in Q1. Akamai continues to be the market leader in delivery, providing industry-leading performance and scale as we continue to support the world's top brands by delivering reliable, secure, and near flawless online experiences. And we continue to see a strong synergy between our delivery business and our security and compute offerings. especially for customers in the gaming, media, and commerce verticals. The synergy is both on the top line, as longtime delivery customers buy our security and compute products, and also on the bottom line, as we realize the cost benefits of using a single infrastructure to provide security and compute services, as well as delivery. We plan to pass some of the cost savings on to our customers, which is especially valuable for customers who are paying exorbitant egress fees to the hyperscalers to access or move their data. The synergy of having a single cloud platform will also help us in our ongoing effort to improve profitability. Not only can we leverage existing infrastructure, but we can also leverage existing talent as we shift resources and focus from delivery to compute. As Ed will explain shortly, We're very focused on managing costs and deploying resources where they generate the best long-term returns. As one part of this effort, we plan to reduce our worldwide workforce by a little less than 3% this quarter. This was a difficult decision, but it was necessary for us to prioritize investments in the areas with the greatest potential for future growth as we strive to deliver greater value for shareholders. I'd like to take this opportunity to thank all of our employees for their hard work on behalf of our customers and shareholders. From our developers and engineers who build and operate the services that power and protect life online, to our sales, services, and marketing teams who do such a great job helping our customers in this challenging environment, and our back office and administrative support teams who help make Akamai be such a great place to work. It really is a privilege for me to be able to work with such an outstanding group of people as we make life better for billions of people, billions of times a day. While this is a time of substantial macroeconomic uncertainty, I believe that it is also a time of great future opportunity for Akamai as we bring new security and compute capabilities to market and as we deploy Akamai Connected Cloud. As you may know, I continue to be a personal buyer of Akamai stock under the 10B51 plan that I filed last year. And I'm pleased to let you know that Akamai repurchased 4.6 million shares of Akamai stock in Q1 for a total of $349 million. Now I'll turn the call over to Ed for more on our Q1 results and our outlook for Q2 in the full year. Ed?
spk07: Thank you, Tom. Today, I plan to review our Q1 results and provide some color on Q2 and our updated full year 2023 guidance, where we increased our expectations for revenue, non-GAAP operating margin, and non-GAAP EPS, while decreasing our planned CAPEX spend for the year. We were very pleased with our strong Q1 results in light of the continued difficult macroeconomic landscape. Total revenue for the first quarter was $916 million, up 1% year over year and 4% in constant currency. Security revenue was $406 million and is now our largest business, representing 44% of total revenue. In the first quarter, security revenue grew 6% year over year and 9% in constant currency. As a reminder, last year we had roughly $7 million of upfront license revenue in Q1, If you normalize for this one-time impact, the security growth rate would have been approximately 11% in constant currency. Finally, I was also pleased to see we had a very strong bookings quarter in security, specifically with our GuardaCore segmentation in WAF solutions. Moving on to compute. Revenue was $116 million, growing 49% year-over-year as reported, and 51% in constant currency. On a combined basis, our security and compute product lines represented 57% of total revenue, growing 13% year-over-year and 16% in constant currency. Now on to delivery. Revenue was $394 million, which declined 11% year-over-year and 9% in constant currency. Delivery continues to provide strategic value in its customer base and generate strong cash flows. I'm optimistic about improving traffic volumes over the past two months, and to a lesser extent, the slightly better pricing dynamics we've recently seen in the market. International revenue was $442 million, up 5% year-over-year and 9% in constant currency, representing 48% of total revenue in Q1. Foreign exchange fluctuations had a positive impact on revenue of $11 million on a sequential basis, and a negative $21 million impact on a year-over-year basis. Non-GAAP net income was $218 million for $1.40 of earnings per diluted share, up 1% year-over-year and 4% in constant currency and 6 cents above the high end of our guidance range. Turning now to margins. Our non-GAAP operating margin in Q1 was 29%. This was slightly above our plan, primarily due to higher than expected revenue and continued focus on operational efficiencies. During the first quarter, we recorded a $45 million restructuring charge, primarily related to severance costs, along with facility-related charges as we continue to reduce our real estate footprint. The impact of these charges has been incorporated into our second quarter and full year 2023 guidance. In addition to these specific actions, we also continue to be very focused on cost savings initiatives I described last quarter, which include third-party cloud savings, continued real estate rationalization, depreciation expense and other operating costs associated with lower CapEx related to our delivery business, disciplined spending with vendors, and tighter travel and expense policy management. I'm pleased with our progress on these initiatives, which helped drive improvements to our margins in Q1 compared to our expectations coming into the year. Moving now to cash and our use of capital. As of March 31st, our cash, cash equivalents and marketable securities totaled approximately $1.1 billion. During the first quarter, we have spent approximately $349 million to repurchase approximately 4.6 million shares. We now have just under $850 million remaining on our previously announced buyback authorizations. In addition to being aggressive with our buyback program, we have made two acquisitions since our last earnings call that will help drive revenue growth, with Ondat in the first quarter and Neosec in the second quarter. We believe this demonstrates our continued balanced approach to capital allocation, opportunistically buying back shares to offset dilution from employee equity programs over time, while maintaining sufficient capital to deploy when strategic M&A presents itself. Before I provide our Q2 and full year 2023 guidance, I want to touch on some housekeeping items. Regarding our two acquisitions, while neither was material to revenue, both are expected to be dilutive to non-GAAP EPS in 2023, with ONDAT dilutive by 2 to 4 cents and NEOSEC dilutive by 4 to 6 cents. Finally, as you build out your models, I'd like to remind you our annual merit-based wage increases become effective in Q3, From a seasonality perspective, Q4 is typically our strongest financial performance quarter, and the guidance I will provide assumes no change, good or bad, to the current macroeconomic environment. So with those factors in mind, turning to our Q2 guidance, we are now projecting revenue in the range of $923 to $937 million, up 2% to 4% as reported, and 3% to 4% in constant currency over Q2 2022. At current spot rates, Foreign exchange fluctuations are expected to have a positive $2 million impact on Q2 revenue compared to Q1 levels and a negative $3 million impact year over year. At these revenue levels, we expect cash gross margins of approximately 73%. Q2 non-GAAP operating expenses are projected to be $300 to $305 million. We expect Q2 EBITDA margins of approximately 41%. We expect non-GAAP depreciation expense to be between $116 to $118 million. And we expect non-GAAP operating margin of approximately 28.5% for Q2. Moving on to CapEx, we expect to spend approximately $195 to $202 million, excluding equity compensation and capitalized interest in the second quarter. This represents approximately 21 to 22% of our projected total revenue. Based on our expectations for revenue and cost, we expect Q2 non-GAAP EPS in the range of $1.38, $1.42. The CPS guidance assumes taxes of $45 to $47 million based on an estimated quarterly non-GAAP tax rate of approximately 17.5 to 18%. It also reflects a fully diluted share count of approximately 153 million shares. Looking ahead to the full year, we now expect revenue of $3.740 to $3.785 billion, which is up three to 5% year over year as reported and in constant currency. At current spot rates, our guidance assumes foreign exchange fluctuations will have a positive $3 million impact on revenue in 2023 on a year over year basis. We continue to expect security revenue growth to be in the low double digits for the full year 2023, and we continue to expect to achieve approximately a half a billion dollars in revenue from compute in 2023. We are estimating non-GAAP operating margin of approximately 28 to 29 percent, and we now estimate non-GAAP earnings per share of $5.69 to $5.84. Our non-GAAP Earnings guidance is based on a non-GAAP effective tax rate of approximately 17.5% to 18%, and a fully diluted share count of approximately 153 million shares. Finally, our updated full-year CapEx is expected to be approximately 18.5% to 19% of total revenue. This CapEx is lower than our original expectations outlined last quarter due to Strong pricing negotiations resulting in better than anticipated server pricing, along with improved efficiencies, integrating Linode with Akamai's existing supply chain earlier than expected. In closing, we are very pleased with the strong start to 2023, and we look forward to your questions. Operator?
spk09: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speaker phone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Keith Weiss with Morgan Stanley. Please go ahead.
spk04: Excellent. Thank you guys for taking the question and nice quarter. Maybe one top line, one bottom line question. On the top line side of the equation, you talked to strong bookings performance in the quarter, particularly with Garda Corps. Is that a broader security kind of commentary and maybe part of what kind of sustains kind of your confidence in the double-digit growth throughout the year? Perhaps maybe even sort of can we see some acceleration on a go-forward basis based upon that booking? So one is kind of like a perspective on real-time what's going on in security. And then on the better operating margins on a go-forward basis, can you give us some sense of where the headcount reductions are coming from in that 3% headcount reduction? And when we think about the better margins that you guys are projecting, how much of that comes from this recent round of headcount reductions? How much is just better op-ed controls that you guys exhibited thus far in the year? Thank you.
spk14: Great. I'll take a first pass at these, then turn it over to Ed, and he'll get into more of the details. Yeah, we saw strong bookings and security across the board. You know, it is a challenging environment out there, for sure, especially with commits on larger deals. On the other hand, we do see a little bit of a silver lining, especially in the financial vertical, which is large for us. With everything that's gone on in the banking sector, there is more concern than ever around security and reliability. And I think the last thing a major financial institution wants to see is some kind of problem now, an outage or some kind of hack be successful. And I think that helps us, you know, Akamai is widely recognized as the best when it comes to reliability and in terms of security. And so I think that is also, you know, helping us, especially vis-a-vis the competition. We're also pretty excited about, you know, Neosec, a lot of very positive conversations early on with customers on top of GuardaCore and of course the whole suite of security products. In terms of margins, The focus of the reduction in force on the go-to-market side was really in the management layers so that we can actually get more feet on the street in services. We can get more people helping customers, particularly in the areas of expertise with security and compute, and in some cases in geographies that we feel are untapped and that we can get more leveraged. And I think probably I'll turn it over to Ed now in terms of, you know, how this shapes up with all the other things we're doing to improve operational efficiency. Ed?
spk07: Yeah, hey, Keith. So, you know, we talked about taking a restructuring charge. About half of that was severance-related, so the headcount savings, and then the other half was roughly half was related to real estate. In terms of thinking about the headcount savings, you know, our payroll is a little over a billion dollars. We've reduced a little less than 3%. So on an annualized basis, think of that as kind of in the $40 million range, give or take. We'll get about three quarters of the benefit of that this year. In terms of the real estate, we've probably saved about 25 to 30% of our current spend. More to go there. I expect we can reduce that probably by a similar amount next year. The big savings to come is going to be in third-party cloud. We did see a reduction this quarter, which was nice. We reduced our spend as we start to optimize and start to move some things over. But that's a big one. That's about $100 million in total spend or a little bit more. And we'll start to see that benefit next year, a little bit more this year, but mostly into next year and into 2025. Teams doing a great job with vendor management, including being able to engineer out certain functions that we may be using a third party for. So I would say it's a combination of things, but just to sort of put it in perspective, that headcount savings is, call it roughly a little over a point of margin on an annualized basis. That also gives you, giving you that sort of kind of run rate payroll number will give you the math necessary to build your models to factor in that annual increase that we give every year in the third quarter.
spk14: Also, as we talked about, in terms of the reductions, Obviously, we're directing a lot of resources that were on the delivery side of the house into compute. And that, in many cases, is the same person changing what they're doing, but also in this reduction that we're taking, you'll see that effect as well.
spk04: Got it. And just to be clear, the lower CapEx intensity, it sounds like that's more efficient sourcing, not any change in the scope of build-out that you guys are expecting for the cloud side of the business.
spk07: Yeah, so the way to think about that, Keith, is two things. One, we were able to benefit pretty significantly, actually, with pricing reductions in the server pricing. My understanding is that's somewhat of an industry phenomenon, but also just given our buying power, a big chunk of that decline in CapEx was related to that. The other thing that I find pretty exciting is we envisioned when we sort of built the models that we'd be able to integrate with our supply chain to be really tight with our demand and build, meaning not having to overbuild for demand. We've been able to knock down the time that it takes for us to deploy. So the initial builds that we're building out would be a little bit smaller than we originally anticipated because we expected a longer lead time with our supply chain. So now that we've been able to shrink that down, we can tighten that up a bit. So those are really the main factors, a little bit of push in terms of a couple of sites that we push into 24, but those two factors were pretty significant and we're very happy that we're able to deliver that this quickly.
spk04: Excellent. That's super helpful guys. Thank you.
spk09: Thank you. And our next question today comes from James Fish and Piper Sandler. Please go ahead.
spk01: Hey guys. Thanks for the question here. I'm wanting to build off of Keith a little bit here now. Now that you rolled out your objectives for 2023 here, how are you thinking about not just the capex intensity for this year as you're starting to kind of get the savings greater than you expected? Is this the right way to think about next year's capital spending? And I think, Tom, you actually had alluded to getting to that long-term 30%. Is there an update on the timeframe there?
spk14: Yeah, let me take a first pass at this. You know, this year is when we're doing the initial build out for compute and obviously very substantial. And future years will depend on how fast we sell the capacity that we're building out now. And so if we're able to sell that quickly, then there would be more CapEx spend next year. If it takes us longer to fill that capacity, then you would see CapEx be much less next year. So it really depends on how rapidly we get uptake on the initial build out that we're doing. And on the 30%, we're not issuing, you know, a specific timeline there. But obviously, you know, we're having, I think, really good success in our efficiency. And we're taking actions to, you know, improve margins. And so we'd like to get back to 30 and beyond, you know, just as quickly as we can. you know, subject to making the investments for future growth. And I'm very optimistic about our ability to do that. Ed, was there something you'd like to add there?
spk07: No, I think that covered it, Tom.
spk01: Great. And just to follow up on the security side as well, it sounds like you guys are pointing to this being the kind of trough in growth. But as you think about network security offerings in particular, including the Zero Trust overall portfolio, not just GuardiCorp, how do you feel about how your go-to-market is aligned with selling these types of solutions that tend to go through indirect sources that really aren't MSPs that you guys have historically been lined up with? Thanks, guys.
spk14: Yeah, I do think we should see improvement in security growth from here, particularly now that we're adding API security into the mix. You know, I think the channel is really important for us, and it's something we're putting a lot of effort into, and especially on the enterprise security side. You know, for example, GuardaCore is all through the channel, very successful partnerships, and it's something we'll be focused on with API security as well.
spk08: Thank you. And our next question today comes from Jonathan Ho with William Blair.
spk09: Please go ahead.
spk13: Hi there. I just wanted to understand a little bit better about maybe your confidence level around the macro environment, what you're seeing out there, and why you're not potentially taking a more conservative stance. I think you said that you expected macro to remain consistent.
spk14: Well, you know, I think our guidance does reflect our, you know, the current situation and our view. We're not assuming that the macro environment will improve. And so I do think we are taking a reasonably conservative view going forward. We are very happy with a strong start to the year on several fronts, as we talked about. Ed, would you like to, you know, say a little bit more about that?
spk07: Yeah, sure. I mean, in terms of, you know, some of the negatives that we're seeing, obviously, sales cycles are a little bit longer. We are seeing, you know, difficulty with adding new customers, with the exception of GardaCore. You know, Tom alluded to the fact that Garter Corps brought a pretty good channel organization with them, and we're seeing pretty good new logo acquisition there. So that's probably the exception to that rule. We're seeing some pricing pressure from some verticals. We are seeing, I mentioned, better pricing environment for some of the higher media delivery business. You know, inflation obviously causes some challenges. We've seen some bankruptcies in the retail space and a couple in the financial services. None that's overly material. And as I said, we're not anticipating things to get worse. If things did get worse, potentially we'd see a little bit more of that. On the pro side, we are seeing lower turnover of employees, faster time to hire, which isn't much of a surprise. With rates going up and we have cash interest rates are better for us from a reinvestment perspective. The dollar's slightly weaker. As the dollar gets weaker, that helps our benefits significantly. And then also just from the vendor side, just, you know, continued focus on, you know, pushing vendors for better pricing and things like that. So it's a mixed environment, obviously a challenging environment. I think we're navigating through it pretty well. And, you know, we've built in what we thought we could achieve based on what we see today.
spk14: You know, on the silver lining side, you know, as we get our compute offerings, prepared to take on major mission-critical enterprise workloads, there is the potential that because we can do it less expensively, particularly for applications involving large amounts of data and delivery of data, that that could be a net benefit for us competitively in a time when companies are looking to cut costs. And it's something a lot of our customers have told us, particularly customers with large volumes of data, that they need to cut the cloud expense. And I think we'll be in a position to help them do that. And as I mentioned earlier, at a time like this, when there's a lot of concern in the financial sector, Akamai's reliability and security, it really becomes paramount. And that's helpful to help mitigate the impacts of a difficult macroeconomic environment.
spk13: Excellent. And then just as a quick follow-up, in terms of the delivery business, I think you talked about some favorable trends around the traffic side. Can you talk about what you're seeing in terms of those improvements and maybe the sustainability of that as we think about, again, the delivery traffic? Thank you.
spk14: Yeah, you know, about March, really, of last year is when we really saw traffic growth take a hit, part because of the economy as a whole, part because of the war in Ukraine. And now we're laughing that. And so when you look at the year-over-year rates, indeed, they did start improving in March. And so we're optimistic about that and hope to see that be more sustainable just because you have a more reasonable compare. Ed, did you want to add more color on that?
spk07: Yeah, the only thing I would add, I did touch a little bit on just slightly better pricing environment, which makes sense given the volumes. They're still not back to pre-pandemic levels better than what we saw last year. Also, we've seen in some accounts, in larger accounts, some vendor consolidation, and we've been a benefactor of that, which makes sense. You know, some customers will have four or five CDNs. You can get to be pretty expensive. Sometimes they build up teams. They have technology they use for load balancing and things like that, so they consolidate vendors. And a lot of us have volume-based tiered pricing, so you can take advantage of lower unit economics as you consolidate to, you know, one or two vendors. So that's been a positive trend for us. It's another reason why we've seen a little bit of an uptick in traffic. Thank you.
spk08: Thank you. And our next question comes from Frank Lelfan with Raymond James. Please go ahead.
spk05: Hey, guys. This is Rob one for Frank. So who do you run into in the marketplace now for compute specifically? And how would you guys evaluate the outlook for that business in particular going forward? And what's driving that outlook primarily?
spk14: Yes, the hyperscalers. And also do-it-yourselves. And I think the outlook for us is positive. You know, we're not trying to take 30% market share. It's a $100, $200 billion market. But we do think we can be very competitive for certain kinds of applications, particularly in, you know, the verticals where we do a lot of business, you know, the media vertical, entertainment, obviously, you know, video, gaming, commerce. And that's because, you know, those customers, they know us, they like us, they use us for the delivery and security. And I think we're in a position to offer them a very compelling capability in terms of better performance and a lower price point. So we'll see, you know, but so far, I think we're very pleased with what we've been hearing for customers, making good progress, getting results. our connected cloud platform built out, upgrading Linode to really take on large-scale mission-critical enterprise workloads.
spk05: Great. Thank you.
spk09: Thank you. And our next question today comes from Rudy Kessinger with DA Davidson. Please go ahead.
spk06: Hey, great. Thanks for taking my questions, guys. Just want to double-click maybe on security. You said GuardaCore had $7 million of license revenue Q1 last year. Was there any license revenue for GuardaCore in this Q1 this year?
spk07: Yeah, no, nothing material, no.
spk06: Yeah, okay, got it. And then maybe just to follow up on delivery, certainly stronger revenue performance than we expected there. is there i guess was there anything in the quarter you talked about maybe some customers consolidating from four or five vendors maybe three um anything in particular in the quarter that would give you hopes that delivery maybe you could potentially turn that back to a i don't know say a flat or maybe only a three five percent declining business as opposed to a ten percent ish declining business as we've seen over the last few quarters
spk07: Yeah, you know, it's obviously continued traffic growth. I think if we get back to kind of pre-pandemic levels, that's certainly going to help. You know, we've done a pretty good job on pricing, especially with the larger customers. You know, in the old web verticals, especially commerce, we're still seeing some pricing pressure there. So, really, it's a combination. But I'd say the stronger traffic growth is going to be the main thing. You know, as we get into Q2 and Q3, we've got slightly easier campaigns. If you recall last year, we had significant renewals in our top 10. You know, we have renewals all the time, but that was an unusual year for that. So, you know, the double-digit declines, I wouldn't expect that, you know, certainly next quarter or the quarter after that. I mean, Q4 is always the toughest quarter to call. But, you know, things should get a little bit better from a year-over-year compare standpoint. But in terms of getting to sort of flat or even, you know, plus or minus a point, you're going to need to see stronger traffic growth than what we're seeing now.
spk05: Got it. Fair enough. Thank you.
spk09: Thank you. And our next question today comes from Ray McDonough with Duganheim. Please go ahead.
spk12: Great. Thanks for taking the questions. Tom, maybe first for you, another question around security go-to-market. I know you touched on the focus on the channel, but you did mention you were also redeploying go-to-market resources within the security group as well. Can you talk more specifically to the changes made in that organization, and is there any early results to point to from those changes that give you confidence that you will be able to reaccelerate growth here in the rest of 2023?
spk14: Well, we're just taking the actions, you know, as we speak. So nothing to see directly from that yet. I would say they're in three areas. One is less investment in management and more in, say, feet on the street. The next would be you know, more focus on security and compute and getting the right expertise in front of the customer. And that would be both in pre-sales and also in services. And then the third is a shift in resources to some of the, I would say, undertapped geographies where we think there's the potential for a lot of growth. So I think all three are, you know, very helpful. And then, of course, channels, particularly for our enterprise security solutions, where that's, I think, a much better way of doing it. You know, for our established web app firewall, we do have a significant channels presence, but also a significant direct presence. And, you know, we expect to start seeing the benefits here towards, you know, the end of the year. as we hire the new resources in these areas.
spk12: That makes sense. And, Ed, maybe just a follow-up for you on Linode. I believe you've kind of outlined an expansion of 14 core data centers by the end of the year and 50 distributed sites, I believe. Is that still the case? And maybe just following up on one of your comments earlier, Can you talk about how much smaller the compute footprints are this year, if it's a magnitude of size, and how comfortable you feel in terms of the lead times to add capacity if the macro environment or demand turns more quickly than you expect?
spk07: Yeah, I want to start with the last part first. So in terms of the timing, you know, I think we've got it down to probably 60 to 90 days. We think we can add capacity pretty quickly. We're building up, you know, we're working with our suppliers. We've had long-term relationship structuring plans. deals with them to be able to very quickly get our hands on equipment and building up some inventory and that sort of thing. So we feel pretty good about that. So I think, you know, and also, you know, these sales cycles are not immediate, right? So there's usually a trial period and that sort of thing. You know, you're starting the conversations now. So it's not like CDN where you can shift overnight and just move traffic, you know, within a day or two. So we will have good lead times there. In terms of the actual size, I just say they're small. I don't have a specific number to throw out. We're on track to deliver all of our core sites. There's a couple coming online in Q2 and a bunch coming online in Q3. No change there. As far as distributed sites, we will be building up a bunch of those. I don't have an updated figure for you. Some of them may push. Those are much smaller in terms of CapEx. So that really doesn't have a major impact on CapEx. Each one of those sites are relatively smallish, so it's not going to have a material impact. But in terms of what we're seeing with the supply chain, we feel pretty good. We've done a lot of work. Great hats off to the team. They've done a fantastic job working with our suppliers to be able to really tighten things up. And you can see that in the updated guidance.
spk03: Great. Appreciate the color.
spk08: Our next question today comes from Amit Daryayani with Evercore. Please go ahead.
spk10: Hi, this is Lauren on for Amit. So just to kind of double-click into buybacks and how you guys are thinking about the second half of the year after a fairly aggressive first quarter, that would be great.
spk14: Yeah, our policy and strategy really hasn't changed. You know, and that includes there's times when we do buy back more shares that are needed to offset dilution from employee equity programs. And those are opportunistic. And in Q1, we felt there was a substantial opportunity to buy back, you know, more than the usual allotment. And, of course, we have a programmatic buyback that buys back more. when the stock price is lower and buys back less when the stock price is higher. And so when the stock goes lower, the programmatic or automatic buying also increases. And as you know, the stock price was lower through a lot of Q1. So there's really no fundamental change in strategy. You know, prior to this year, over the last 10 years, we bought back an extra percent a year over and above the equity program dilution offset. Obviously, Q1 was more than that, you know, but so there's not a specific change in strategy that would say we're going to buy back what we did in Q1 every quarter. So no change in strategy.
spk10: Got it. Thank you.
spk08: Thank you. And our next question today comes from Mark Murphy at J.P. Morgan. Please go ahead.
spk11: Hi, this is Cameron Toler on for Mark Murphy. Thanks for taking the call and congrats on the quarter. Maybe just On compute, I think in the past you've mentioned that Linode hasn't faced the same optimization headwinds that the hyperscalers have. I'm curious if anything's changed on that front.
spk14: Hasn't faced what headwinds?
spk11: Sorry, the same optimization headwinds that the hyperscalers have been calling out the last few quarters.
spk14: Yeah, I think Linode is really in a very traditional load. Linode in a very different market. and much more affordable, and really not servicing the major enterprises. Major enterprises, at least the customers that we talk to, are very worried about their rapidly growing cloud costs. And that's something that I think we're in a position to help them with as we get our infrastructure built out and get it ready to take on mission-critical workloads.
spk11: Great. Thank you so much for that additional color. I'll leave it there and pass it back to the operator.
spk08: Thank you. And, ladies and gentlemen, we have no further questions at this time.
spk02: Okay. Well, thank you, operator, and thank you, everyone. In closing, we'll be presenting at several investor conferences and roadshows throughout the rest of the second 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.
spk09: Thank you. Ladies and gentlemen, this concludes today's conference call, and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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