Akamai Technologies, Inc.

Good day, and welcome to the second quarter 2024 Akamai Technology earnings conference call. All participants will be in a 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 a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mark Daugenberg, head of investor relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining Akamai's second quarter 2024 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 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 acquisition, and any impact from geopolitical developments. Additional information concerning these factors is contained in optimized filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. The forward-looking statements included in this call represent the company's view on August 8, 2024. 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 certain non-GAAP financial metrics today. 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 co-founder and CEO, Dr. Tom Layton.

Thanks, Mark. I'm pleased to report that in the second quarter, Akamai delivered continued strong momentum in compute, strong growth in our security portfolio, steady operating margins, and healthy earnings growth on the bottom line. Second quarter revenue grew to $980 million, up 5% year-over-year as reported, and up 6% in constant currency. Non-GAAP operating margin was 29%. Non-GAAP earnings per share was $1.58, up 6% year-over-year and up 9% in constant currency. These results were in line with or above our guidance. Before I provide more color on our performance, I'd like to review how Akamai is evolving as we grow. As most of you know, Akamai first made its name with the invention of content delivery services, and we're still the world's leader in that market today. We stand out for providing the scale and performance required by the world's top brands as we help them deliver reliable, secure, and near-flawless digital experiences. Recent examples include delivering the Euros football tournament and the summer games in Paris for top broadcasters around the world. As we've said in previous calls, our delivery business has been challenged in recent quarters by macroeconomic and geopolitical headwinds. Our plan for delivery is threefold. First, we will remain disciplined when it comes to the profitability of traffic that we choose to serve. Second, we will continue to leverage our market leadership position and installed base of major enterprises to generate cross-selling opportunities. And third, we will continue to take steps to retain our market leadership while also reinvesting most of the cash flow from our delivery product line into the fast-growing areas of the business. In Q2, delivery accounted for one-third of our revenue, or $329 million. This is quite a change from five years ago when delivery accounted for two-thirds of Akamai revenue. The diversification of our revenue across new markets through continuous innovation has long been a core part of Akamai's strategy for long-term profitable revenue growth. A little more than a decade ago, we expanded our business into security with the creation of Web App Firewall as a cloud service. We did this to meet what we recognized as a growing customer need in a way that was complementary to what Akamai was already doing for customers with delivery. The opportunity was clear to us because we listened to our customers. We created what has proved to be a very successful cloud service for Web App Firewall. And now for the first time in Akamai history, security delivered the majority of Akamai's revenue, $499 million in Q2, up 15% year-over-year and up 16% in constant currency. This amounts to an annual run rate of about $2 billion per year. Of course, we greatly expanded our security product set over the years. We now offer market-leading solutions for DDoS prevention, bot management, account and content protection, app and API security, and zero trust enterprise security led by our GuardaCore segmentation solution. Customer interest in our security solutions is strong, and we had many significant wins in Q2. One of the world's largest energy companies became a new zero trust customer with Akamai. One of the top three airlines in the U.S. is moving from a legacy VPN architecture to a zero-trust architecture with Akamai. We provided Akamai app and API protector to one of the largest providers of HR management software and services in the U.S., and to German retailers DeLife, Douglas, Wagner, and Zalando. Effaflex, the German maker of high-speed industrial doors, purchased our segmentation solution. as did a major stock exchange and a leading cybersecurity company in Latin America. We provided DDoS protection to one of the largest banks in the world and to a government ministry in the Middle East. And at one major electric utility in Southeast Asia, we replaced a well-known competitor in a five-year deal for our web app firewall, DDoS protection, bot management, account takeover prevention, and API security. We're especially excited about the most recent additions to our security portfolio. In Q2, we announced our new Akamai GuardaCore platform, the first of its kind to enable zero-trust security through a fully integrated combination of micro-segmentation, zero-trust network access, multi-factor authentication, DNS firewall, and threat hunting. Its single agent and unified control console powered by GenAI, are designed to strengthen and simplify enterprise security with broad visibility and granular controls. The new GenAI interface enables our customers' operations teams to ask questions in a human language to gain information about their enterprise networks. The new Akamai GardaCore platform reflects our evolution as a security vendor, growing beyond point solutions to a broader and more comprehensive security offering. Customers tell us they want to consolidate security products and tools with vendors they can trust, and we think this will appeal to their needs. In Q2, we also closed the acquisition of no-name security as we accelerate our momentum in the fast-growing API security market. IDC forecasts this market will grow at a CAGR of 34%, to nearly $1 billion by 2027. With NoName, we believe that Akamai now has one of the most comprehensive API security solutions in the industry. Within two weeks of the close, Akamai offered NoName customers our new Edge Connector, an integration with Akamai Web App and API Protector that works with a click of a button. NoName saw a significant increase in closed deals in Q2. including wins at some of the largest banks and insurance companies in North America and at leading software companies in Europe and Asia. We're also beginning to see a good upsell motion with early no-name adopters. For example, one of the largest U.S. healthcare insurers more than doubled their no-name contract in Q2 to over $1.7 million annually. About a decade after we entered the security market, We again expanded Akamai's future opportunity by developing a much broader offering in cloud computing. As many of you know, Akamai has offered function as a service in our edge platform for many years. This kind of edge computing has been used by thousands of our customers, and it is deeply integrated into our delivery and security services. But our customers asked for more. They wanted us to offer full stack cloud computing. so that they could run their VMs and containers on the Akamai platform. And they wanted us to do it in a way that would be more efficient and less costly than comparable offerings provided by the hyperscalers. They wanted Akamai to do this because they were already delivering and securing their sites and apps on our platform. They liked our track record of reliability, and they knew they could trust Akamai to be a good partner. Many of them also liked the fact that we don't compete against them unlike the hyperscalers. Adding cloud computing to our portfolio also makes good sense for Akamai. In addition to satisfying customer demand, we can reap the advantages from offering customers delivery, security, and compute on the same platform. The synergies include improved performance, seamless integration, and other operational efficiencies, bundling for cross-selling and strong customer retention, Increased margins for all of our services. Deepening relationships with carrier networks. Capacity to quickly detect and stop massive cyber attacks at the edge. Unmatched visibility into enormous volumes of traffic. And the security insights and threat intelligence that we gain as a result. If you step back and look at how the marketplace has evolved, you can see how the hyperscalers have worked to achieve a similar suite of offerings. although they've taken a different route to get there. They started with cloud computing and infrastructure as a service, and then moved into security and delivery, validating our view that there is synergy in offering customers all three together. The hyperscalers also have a more centralized architecture. While Akamai has the world's most distributed cloud platform, with more than 4,100 points of presence in over 700 cities, across 130 countries. We believe that being more distributed provides customers with better performance, better economics, and greater reliability. As we reported in our last earnings call, the initial response from customers to our new cloud offering has been very encouraging. The strong early momentum that we achieved in Q1 continued in Q2, with compute revenue growing to $151 million. up 23% year-over-year, and up 24% in constant currency. New compute customers added in Q2 include one of the world's best-known media and entertainment brands, based here in the U.S., the European cybersecurity company Sequoia.io, Claro Video, the video brand of the biggest telco in Latin America, MWare TV, a technology platform for IPTV and OTT services, and a cable satellite IPTV provider that reaches almost half the households in Australia. Customers are also leveraging our ISV partners, which we call qualified compute partners, to run low-latency workloads on our compute platform. These include solutions for observability into workload behavior, cybersecurity, and large-scale events. where the need to store very large sets of data makes Akamai a more attractive and cost-effective option than competitors. Our media customers can now take advantage of a full suite of media workflow offerings on Akamai Connected Cloud, which provides valuable synergy with our delivery platform for more efficient image manipulation, decisioning, and video transcoding. And with Akamai's latest qualified compute partner and customer, YoSpace, Media companies around the globe can leverage their advanced ad tech and ad strategies at scale across the Akamai Connected Cloud. Customers are also building new apps on our platform where low latency data distribution and processing provides a better user experience for their customers at significantly reduced cost. One customer is training and testing the machine learning engines that power their security scanning product. Another is building an AI powered chat bot application to improve their customer experience and streamline operations with intelligent conversational customer engagement. Such AI powered applications are increasingly popular with recent advances in large language models. Akamai is also a very large user of our new cloud solution. As a result of migrating most of our own apps from the hyperscalers to Akamai Connected Cloud, we're seeing better performance and greatly reduced cost. In fact, we expect to reduce our spending on third-party clouds to less than a third of what it would have been this year had we stayed on the hyperscalers, saving us well over $100 million in annual OPEX. It sure feels good not writing a nine-figure check to your competitors every year. And this is a feeling that we look forward to providing to our large enterprise customers. In summary, Akamai has undergone a fundamental transformation. We've transformed from a content delivery pioneer into the cloud company that powers and protects life online. Compute and security now generate two-thirds of our revenue, and we believe that they provide Akamai with excellent potential for future growth and profitability. And we've achieved this transformation while successfully maintaining robust margins because both of our fast-growing product areas Our large security portfolio and our rapidly growing cloud computing portfolio are built upon and enabled by the foundation of our business, our highly efficient and massively distributed delivery platform. Our near-term operating margin goal remains 30%, and we see potential margin upside over time as the fast-growing areas of the business expand our profitability. Looking back at the first half of 2024, we're pleased by our strong performance and security in compute. Looking ahead, we're very excited about our potential for future growth as we integrate NoName and as our fast-growing compute offerings continue to gain traction with customers. Now I'll turn the call over to Ed for more on our Q2 results and our outlook for Q3 and the full year. Ed?