Good day and welcome to the First Quarter 2024 Akamai Technologies Incorporated Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mark Stoutenberg, Head of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining Akamai's First 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 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. The forward-looking statements included in this call represent the company's view on May 9th, 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 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 will now hand the call off to our CEO, Dr. Tom Leighton.

Thanks, Mark. Akamai got off to a strong start for the year with our Security and Compute portfolios. And we continued to experience industry headwinds with our delivery product-line. First quarter revenue grew to $987 million, up 8% year-over-year as reported and in constant currency. Non-GAAP operating margin was 30% and non-GAAP earnings per share was $1.64, up 17% year-over-year and up 18% in constant currency. The fast growing parts of our business, security and cloud computing, grew to represent almost two-thirds of total revenue in Q1, and combined they grew 22% over Q1 of 2023. The continued shift in Akamai's revenue mix towards security and compute, is a clear indicator that our growth strategy is achieving the intended results. We continue to successfully leverage the market leadership and cashflow of our delivery product line to invest in our faster growing and more profitable security and cloud computing portfolios. And we are excited about the opportunities we have ahead of us, especially with our planned acquisition of Noname Security, which we announced this week. I'll say more about Noname in a minute. But first, looking at our security portfolio more broadly, security revenue grew 21% year-over-year in Q1 to $491 million, driven in part by continued strong demand for our market-leading Guardicore Segmentation Solution. Customers who purchased Segmentation from Akamai in Q1 included one of the top telcos in the US, a supermarket chain with more than 1,500 stores across Canada, and a major business management software company in Latin America. Our Zero Trust Network Access Solution, is also seeing good traction. For example, the United States Army announced last month that it selected Akamai for Zero Trust Security in Battlefield Networks. After a competitive evaluation of more than 40 vendors, the Army will use Akamai for its tactical identity, credential, and access management to enhance defenses in high-risk operational environments and limit network access to authorized users, devices, applications, and services. In response to customer requests to bring our Enterprise Zero Trust solutions together into a single platform, we've integrated Guardicore with our other enterprise security solutions to form our recently announced Akamai Guardicore platform. This new platform is 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. All designed to strengthen and simplify enterprise security with broad visibility and granular controls through a single console. We think it will appeal to customers looking to consolidate security vendors and integrate their security tools. We also continue to see strong customer interests in our app and API security solutions. Customers who purchased Akamai API Security in Q1, included a major consumer financial services company, a US supermarket chain with more than 1,200 stores, and a leading US manufacturer of electric vehicles. Last month, one of our largest customers, a well-known hyperscaler, was hit with a massive denial-of-service attack, 24 million requests per minute. Using our rate controls and custom web app firewall rules, the customer successfully forwarded 99.999% of the attack traffic. That's five nines of protection. The customer was delighted, telling us, “that's an A-plus by just about every calculation”. Unlike some of our competitors who struggled to defend against far smaller DDoS attacks in recent months, Akamai is capable of protecting even the hyperscalers. The scale of Akamai defenses and the depth of our expertise really matter for customers, who named Akamai a Customer's Choice for the fifth-year in a row in the new Gartner Peer Insights Voice of the Customers report for cloud web app and API protection. And soon, our suite of app and API security solutions will become even stronger with the planned acquisition of Noname Security. The use of APIs has exploded in nearly every industry, driven by digital transformation, the widespread adoption of mobile phones and IoT devices, and the increased sharing of data between third-party providers. The increasing use of APIs also opens up new threat vectors for attackers and the need for API security. For example, we saw API attacks on our platform more than double from January 2023 to January 2024. And IDC Research now predicts that the API security market will grow at a CAGR of 34% to nearly a $1 billion by 2027. That's one reason why we are so excited about our plan to acquire Noname, as we accelerate our momentum in this fast growing segment. As one of the market leading API security offerings, Noname delivers visibility into API business logic abuse and contextual awareness between API requests and responses to ensure that anomalous traffic is detected, inspected, and blocked when warranted. We believe that the addition of Noname to our API security solution will offer Akamai customers enhanced attack analysis, more flexible deployment options, and extensive vendor integrations. Ed will share some financial details about the acquisition shortly. Turning now to cloud computing, I'm pleased to say that 2024 is off to a great start, with strong early momentum across multiple verticals. Customers are excited about our differentiated cloud platform, which offers superior performance through a more distributed footprint, cloud diversification, and lower costs. Examples of major enterprises using our cloud computing platform now include one of the world's largest e-commerce platforms, several global auto manufacturers, several large direct-to-consumer and OTT providers, several global SaaS providers, numerous travel and hospitality companies, including one of the world's largest cruise lines and a large airline in Asia, one of the largest credit unions in the US. A multinational financial services company. An iconic global corporation that manufactures and sells consumer electronics, computer software, and online services. A European cyber security company, and a leading ad tech company. Just this week, we signed up one of the world's best known media companies to a two-year deal worth several million dollars per year for compute. Yet another great example of major enterprises using our new cloud computing platform is Sony Group. Sony is excited about Akamai's investment into Edge Compute and has multiple latency-sensitive compute workloads that are running on Akamai. Current use cases include PlayStation.com, leveraging Edge Compute to improve search engine optimization, and PlayStation Direct, leveraging Edge Compute to ensure a fair experience for customers purchasing PlayStation Hardware. We're also seeing strong early traction with our Independent Software Vendor, or ISV, partners. They offer solutions that run on our compute platform in which our go-to-market teams co-sell to help customers solve big challenges with a better together solution. For example, a media workflow provider, which powers OTT video, now offers its live encoder solution on Akamai Connected Cloud. The solution is designed to increase efficiency for large scale streaming while also lowering egress fees, by as much as 90% according to their calculations. Joint customers of the offering include OneFootball, one of the world's biggest digital soccer platforms, backed by clubs such as Real Madrid, Manchester City, and Bayern Munich. In partnership with an observability solution provider, we won cloud computing deals in Q1 with one of the world's leading gaming companies, a leading luxury goods brand in Europe and one of India's largest conglomerates. Their solution powers observability using Akamai Cloud computing and enables real-time data ingestion at scale, lightning fast query performance, and extensive data retention at a fraction of the cost of other platforms. Another ISV partner that is providing distributed database services, enabled a well-known online travel marketplace to go live in Q1, with a geolocation implementation that uses Akamai’s Edge Computing to execute code at the edge for optimal performance. The travel site invoked more than 68 billion Edge Compute instances in March alone. By the end of Q1, we had over 200 customers spending $36,000 or more in Annual Recurring Revenue for our new compute services, with about half spending $100,000 or more, and six spending over $1 million per year, all just for compute. All of these customer counts are triple what we had in Q1 of last year. Collectively, these customers are spending over $50 million annually coming out of Q1 for our new cloud computing solutions, which is up more than 4 times year-over-year. Beginning this quarter, our global enterprise cloud sales team is now led by Dan Lawrence, who joined us from AWS, where he ran data and analytics for its private equity segment. Before that, Dan ran the Americas analytics business for five customer segments, including gaming and high-tech SaaS. Dan joined Akamai for the potential he sees to combine Akamai's trusted brand and Edge Computing platform with the large market opportunity and distributed cloud. I'll now say a few words about content delivery, which represents a little over one-third of our overall revenue. Akamai remains the market leader in delivery by a wide margin, providing the scale and performance required by the world's top brands as we help them deliver reliable, secure, and near-flawless digital experiences. That said, our delivery revenue was less than expected in Q1, due to slowing traffic growth across the industry, and a large social media customer that is now optimizing their business to reduce costs. As a result, and as Ed will discuss shortly, we now expect our delivery revenue to decline at a higher rate this year. As we've noted before, delivery continues to generate profits that we use to fuel our future growth. It also helps our security and cloud computing portfolios, as we harvest the competitive and cost advantages of offering delivery, security, and compute on the same platform. Of course, we are not happy to see the declining revenue in our delivery portfolio. And while it remains difficult to predict exactly when that business will begin to stabilize, we believe that Akamai’s CDN remains a critical enabler of doing business on the internet. This has been the case for the past 25 years, and we remain convinced that businesses will continue to need Akamai's superior scale, reliability, and security in the future as they migrate more workloads to the cloud, seek to secure their internal and external applications, and look to unlock the promise of AI, often while also leveraging Akamai security and compute capabilities. Moreover, given the exciting growth we're seeing in our security and compute portfolios, we believe it is only a matter of time before these businesses drive accelerating revenue growth for Akamai as a whole. In summary, we are pleased by the strong performance of our security and compute portfolios to start the year. And we are very excited about our potential for future growth and profitability, as we add Noname to our security portfolio and as our fast-growing compute portfolio contributes a larger share of revenue. 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?

Thank you, Tom. Today I plan to review our Q1 results and then provide some color on our Q2 expectations in our updated full year 2024 guidance, along with the financial impact of our recently announced acquisition of Noname Security. Before we get into that, I wanted to address a few items, including what Tom mentioned in his remarks, that have caused us to reduce our guidance for the remainder of the year. First, the US Dollar has strengthened significantly since the start of the year. As we have noted on many prior calls, foreign exchange fluctuations can significantly impact our top and bottom lines. Based on the strength of the US dollar, we now expect FX to have a negative impact of approximately $40 million on our top-line outlook for the full year 2024. That translates to a negative impact of approximately $0.12 to our expected non-GAAP EPS for 2024. In addition, we expect this will negatively impact our full year 2024 non-GAAP operating margin by approximately 30 basis points. Second, as Tom mentioned, a large social media customer has recently taken steps to lower its costs through a series of optimizations across its platform. As a result, they have reduced their overall traffic. Therefore, we now expect approximately $40 million to $60 million less revenue from this customer for the full year than we previously thought. This change will primarily impact our delivery product line. Finally, as Tom mentioned in his remarks, in addition to the large social media customer, we have seen lower than expected traffic in our delivery business over the past two months, most notably in gaming and video. This is in-line with similar patterns that were cited earlier this week in a research note from a leading Wall Street bank that stated, video streaming services were seeing a drop in downloads, in active users during April. The note also mentioned that weakness was coming from streaming service providers pushing for ad-supported versions and password sharing crackdowns to stay ahead in the streaming wars. As a result of these recent market conditions, it's prudent to assume that this traffic weakness will continue for the remainder of 2024. This lower traffic outlook would translate into approximately $20 million to $30 million less delivery revenue for the remainder of the year than we previously expected. The good news is that in contrast to some other competitors in the industry, both our delivery business and the overall company continue to be highly profitable. As a result, the significant cash flows we generate give us the financial flexibility to execute strategic acquisitions, return capital to shareholders, invest in our future growth, and further diversify our business away from delivery and into the faster growing and even more profitable areas of security and compute. Turning now to our first quarter results. Total revenue for the first quarter was $987 million, up 8% year-over-year as reported and in constant currency. Our two fastest growing offerings, Compute and Security, grew 22% year-over-year on a combined basis and now represent 64% of total revenue. Compute revenue was $145 million, up 25% year-over-year as reported and in constant currency. As Tom mentioned, we have more than 200 enterprise customers using our cloud computing solutions. Our offerings clearly resonate well with customers and we remain optimistic about the early traction we see from large enterprise businesses. It's worth noting that the annual run rate of our enterprise compute revenue is now over $50 million and is growing at over 300% year-over-year. Security revenue was $491 million. Security revenue grew 21% year-over-year as reported, and in constant currency. We are very pleased by our continued performance with our Guardicore Zero Trust Solution and highly encouraged by the traction we are seeing in our recently launched API security solution. Moving to delivery. Revenue was $352 million, which declined 11% year-over-year as reported and 10% in constant currency. International revenue was $475 million, up 7% year-over-year and up 8% in constant currency, representing 48% of total revenue in Q1. Foreign exchange fluctuations had a positive impact on revenue of $2 million on a sequential basis and a negative $4 million impact on a year-over-year basis. Non-GAAP net income was $225 million or $1.64 of earnings per diluted share, up 17% year-over-year and up 18% in constant currency. And finally, our non-GAAP operating margin in Q1 was 30%. Moving now to cash and our use of capital. As of March 31, our cash, cash equivalents, and marketable securities totaled approximately $2.3 billion. During the first quarter, we spent approximately $125 million to repurchase approximately 1.1 million shares. We now have roughly $400 million remaining on our previously announced share buyback authorization. As noted in today's press release, our board authorized a new buyback program of up to $2 billion effective today in running through the end of June, 2027. Combining the two authorizations, we currently have roughly $2.4 billion available for share repurchases. Our intention is to continue buying back shares to offset dilution from employee equity programs over time and to be opportunistic in both M&A and share repurchases. Earlier this week, we announced our intent to acquire Noname security for approximately $450 million. We believe this acquisition demonstrates our continued balance approach to capital allocation by opportunistically buying back shares over time, while maintaining sufficient capital to deploy when strategic M&A presents itself. Before I provide our Q2 and full year 2024 guidance, I wanted to touch on some housekeeping items. First, regarding our planned acquisition of Noname Security. We expect this transaction to add approximately $20 million in revenue for the full year, to be diluted to non-GAAP EPS by approximately $0.10, and to be diluted to non-GAAP operating margin by approximately 50 basis points in 2024. We expect that the acquisition will close sometime in June. We do not expect the acquisition to have a material impact on Q2 results. And as a reminder, our updated full-year guidance includes the impact of the acquisition. Finally, specific to traffic, we expect a modest uptick in media traffic in Q3, primarily due to the Olympics. This event is expected to drive approximately $3 million to $4 million of additional revenue in the third quarter. And while Q4 is typically our strongest quarter seasonally, we saw a more muted impact of that seasonality last year. We expect that we will see a similar result this year. So with those factors in mind, turning to our Q2 guidance. We are now projecting revenue in a range of $967 million to $986 million or up 3% to 5% as reported, and 4% to 6% in constant currency over Q2 2023. At current spot rates, foreign exchange fluctuations are expected to have a negative $5 million impact on Q2 revenue compared to Q1 levels and a negative $9 million impact year-over-year. At these revenue levels, we expect cash gross margins of approximately 72% to 73%. Q2 non-GAAP operating expenses are projected to be $302 million to $307 million. We expect Q2 EBITDA margins of approximately 41% to 42%. We expect non-GAAP depreciation expense to be between $126 million to $128 million. And we expect non-GAAP operating margin of approximately 28% to 29% for Q2. Moving on to CapEx, we expect to spend approximately $175 million to $183 million. This represents approximately 18% to 19% of our projected total revenue. Based on our expectations for revenue and cost, we expect Q2 non-GAAP EPS in the range of $1.51 to $1.56. The CPS guidance assumes taxes of $56 million to $59 million, based on an estimated quarterly non-GAAP tax rate of approximately 19% to 19.5%. It also reflects a fully diluted share count of approximately 155 million shares. Looking ahead to the full year, we now expect revenue of $3,950 million to $4,020 million, which is up 4% to 5% year-over-year as [reported now] (ph) 4% to 6% in constant currency. We now expect security revenue growth of approximately 15% to 17% in constant currency in 2024, including the contribution from the acquisition of Noname. With a strong start for our compute offerings in Q1, we now expect compute revenue growth to be approximately 21% to 23% in constant currency for the full year 2024. We are estimating non-GAAP operating margin of approximately 28% to 29%. We now estimate non-GAAP earnings per diluted share of $6.20 to $6.40. Our non-GAAP earnings guidance is based on the non-GAAP effective tax rate of approximately 19% to 19.5%, and fully diluted share count of approximately 155 million shares. Finally, our full year CapEx is expected to be approximately 16% of total revenue. This updated CapEx is higher than our original expectations outlined last quarter due to our lower revenue outlook, slightly higher software capitalization rates across the business as more work is being done on capitalized projects and higher than expected server component costs, driven primarily by NAND storage pricing in certain servers that support our cloud computing buildup. In closing, we are pleased with our progress in security and compute to start the year. Tom and I would be very happy to take your questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Madeline Brooks from Bank of America. Please go ahead.

Hi, team. Thanks so much for taking my question, and great to see compute kick up in terms of the guidance. One question for me on the delivery side of the house. Last quarter you had mentioned that first quarter and second quarter of this year we were going to see a few renewals. I just wanted to see how those renewals were going if there was any updated outlook in your guidance from the renewal side of the house. Thank you.

Hey, Madeline, this is Ed. Yeah, so the renewals are going as planned in terms of the pricing expectations. We've got a few of them done now. We'll have about five of the seven completed by the end of this quarter, and the other two will be done in early Q3. As far as expectations go, like I said, pricing is coming in-line. Volume a little bit lower than we expected normally when we do these large renewals. We tend to see an uptick in traffic. We just haven't seen that. So that's all been reflected in our guidance.

Great. Thanks. Let me ask you one more question if I could. For those renewals [or financing] (ph) your larger deals, are you seeing any type of offsetting with compute growth for maybe some larger customers where you are seeing lower volume?

I'm sorry, could you just repeat that again?

Are you seeing a lower customers, larger customers who are coming in maybe with lower volume than expected? Are you seeing that offset at all by any type of compute growth or growth in other areas of the business?

Yeah, they're not directly tied, but as we talked about, several of the world's largest media companies are starting to use our compute capabilities for a variety of tasks. So that's a good new story. It's not tied to the traffic levels in any way. Of course, these big media companies still use Akamai for a large fraction of their delivery needs, but traffic in the industry as a whole, especially media and gaming, is lower than we had initially expected.

Great, thank you so much.

The next question comes from Keith Weiss from Morgan Stanley. Please go ahead.

Thank you, this is Josh Baer on for Keith. The Question was on margin guidance. It was lowered I think by 150 basis points at the midpoint, 50 from the Noname acquisition. You mentioned 30 base points from FX. I was hoping you could just walk through the rest of the move lower on the margin guidance?

Yeah, I think just the rest of that would just be due to the lower delivery revenue as a whole.

Okay, got it. I guess as a follow-up related to margins, is there any structural change in reaching, I guess, the low 30s type of long-term target and just asking given the lower guidance for this year but also because from a mixed perspective you've actually moved faster to the higher margin security and compute versus delivery. Thank you.

Yeah, sure. So there's really no structural change. Obviously, we're making some pretty big investments in R&D, and you can see that in the R&D line. And also just the acquisitions, we made an acquisition last year, made an acquisition now. So we're investing in growth. But there's also a fair bit of investment that goes into the cost of goods sold-line as we build out our compute platform. So you can see that in the higher co-location costs. And there is some accounting that you have to do when you enter into some of the long-term agreements for co-location. So we should start to see that, get some benefit of that as compute grows even faster.

Great, thank you.

The next question comes from James Fish from Piper Sandler. Please go ahead.

Hey guys, just on the social media customer here, I think I may know what's going on, but you know, it does seem as though traffic has been slowing for the last, you know, two years or so from what we can tell. But on some of these renewals and specifically on the social media customer, I guess what's the confidence that this isn't just tied to kind of DIY efforts picking back up in the space?

Yeah, for the large social media customer we talked about, there's a few components generally tied to their efforts to reduce costs. You know, they are using less bits per transaction and end-user experience. They're optimizing their doing less prefetching. They do have a very large DIY component as well and we haven't seen the impact of that yet but we do think that they may use that more throughout the rest of the year and that's factored into our lower guidance for this particular customer. So we haven't seen that yet, but we anticipated at this point as part of their overall cost reduction efforts.

Got it. And then on the security side of the house, I mean, what did Noname have that [sure] (ph) Neosec was smaller in scale, but that Neosec didn't. And so why isn't this just kind of a role of strategy of kind of the API space? And Ed, if you could just walk me through the security guidance? You guys had a pretty good beat here. And I get FX is kind of moving against you on this, but why wouldn't we see further upside given the strength you saw in Q1? Is it just because some of the security revenues tied to some of these delivery renewals or why the conservative security guide?

I'll take the first part and then let Ed to answer the second part. Yeah, Noname is a market leader. And they have a lot of capabilities that we don't have yet. And it's actually very synergistic with what we have. They have an on-prem and hybrid-solution. Our solution has been SaaS-only. They have a great channel partner ecosystem, market-leading presence, very easy to use and to integrate. And by the time we get the acquisition closed later this quarter, we anticipate we'll have full integration with Akamai Security Services, which is the piece they were really missing. And great user experience and console. So really strong capabilities and of course much bigger business. And with our solution, we can add to that I think stronger forensics and threat hunting with our data lake capabilities and by putting the pieces together, really a very compelling solution. I was just out at RSA earlier this week and I got to say the news was incredibly well received. A lot of customers, both ours and Noname customers, very happy about the acquisition and what we're going to be able to do for them. Also, the partner ecosystem, Noname is very partner friendly. That will really help our go-to-market motion and they were very excited about the news as well. And Ed, I'll turn it over to you for the second part there.

Yeah, sure. So first of all, just a great quarter for security, great sequential growth, strength across the board really in terms of pretty much all of our solutions, obviously seeing great growth with API security and expect that will accelerate now that we have Noname in the mix. But I think as you look at last year, we had very, very strong sequential growth, sort of unusually strong, including some license revenue in the back half of last year. So the compares get a little bit tougher. I don't think there's anything structurally that we're seeing that would cause us to be less bullish. I think one thing, just to keep in mind, we introduced some bundles last year. We had identified about 3,000 customers or so. Obviously, we had great success with that. That's going to have less of an impact this year as we start to anniversary that. But we are very excited about what we're seeing with Guardicore, which is starting to become more material, and the growth from API security. So we're very bullish with the growth going forward. I think just getting it to tougher comps in the back half, which is going to perhaps cause the percentages to be a little bit lower than what we saw here in Q1.

Thanks Ed.

The next question comes from Fatima Boolani from Citi. Please go ahead.

Good afternoon. Thank you for taking my question. Just one on delivery. You know, I can appreciate how difficult it is to sort of parameterize some of the trends that are playing out in the industry. I think both of you sort of laid that out in the prepared remarks. But how should we think about the floor in terms of declines in this business and what type of GuardRails you're anticipating and putting around this business? And essentially what I'm trying to get around is how confident are you that this recalibration lower does take into consideration everything that's happening in them? And then I have a follow-up.

Yeah, I'll start and then Ed will give us some more color on this. Of course, you know, when we give guidance, we do it based on the best available information we have at the time. Obviously, we don't like to see, the revenue decline and you never like to be in a position of taking down the guidance for one of your portfolios. We do believe that, you know, our delivery business is critical for major enterprises to operate on the Internet. That said, delivery is a very competitive environment And we are subject to overall traffic levels on the internet, which we now believe will be in a lower state than we had thought before. And you know, this is typical. We've been doing this as the market leader now for 25 years, and there's times, when traffic accelerates more than you might have thought and times when it doesn't. And I think we're in sort of the latter mode right now. Now we do believe the business will get back to par. I can't tell you exactly when that will be. It's important for us to do that. I should add though, it's not our top priority. We are not out there doing whatever price it takes to go grab all the business. In fact, I think we've been pretty clear that's not the case. There's traffic that we are not taking because we don't feel that it's profitable or really strategic for us. Our primary goal is using delivery for very strong cash flow that we can invest in security and compute, which we think are much more lucrative markets in the long run, offering much more growth. And also we use it with our customers to introduce, for example compute. The [big-bit] (ph) customers, big media, gaming, are big prospects in compute. And the largest customers there are over $1 billion in third-party cloud spend, typical large media customer, hundreds of millions. And we want to get a share of that business which is much more profitable and ultimately much larger than delivery. So that is our focus here. Obviously we want to get back to PAR. We don't like to see a declining business but it's a bigger picture. And of course we are competing with a lot of companies that are very desperate just to get a little bit more growth in delivery, and even if they are doing it at a very unprofitable level, and that makes it more challenging. And Ed, maybe you want to talk a little bit more on the details of the guidance and the confidence?

Yeah, as Tom talked about, we use the best information we possibly can. We obviously work with a lot of the big telcos. We try to get feedback from them to see what they're seeing. We talk to our large customers to get an understanding of what they have planned in terms of the big events or if they're doing downloads, how big the downloads are going to be, what sort of share we should expect as we go through things like our large renewals and that sort of stuff. When we see a trend like we saw in March where traffic was lower than we expected and then continued into April, it did cause us to go back and relook at our forecasts and be a little bit more cautious. But those forecasts, it's unusual to see traffic decline month over month. It doesn't generally happen. But there is a big pressure in the industry to save costs, especially in the streaming business. Gaming tends to be very seasonal and a little fickle in terms of different titles being popular and not. We're just sort of in the downtrend in gaming. But as Tom mentioned, we've seen these trends before. We're usually pretty good at predicting when things will turn around. But when we do see something that is concerning, we're going to call it out and reset our forecast.

I appreciate that. And just with regards to the new go-to-market leadership on the compute side, I'm just curious if there are going to be any material changes or is this a deepening of the bench that's going to allow for an ongoing, ideally, acceleration of the compute business? We'd love to just get a little bit more detail on that go-to-market change for someone with a pretty excellent category. Thanks so much.

Yeah, it's more of the latter and getting really solid experience and expertise as we increase our investment in the go-to-market effort around compute. And we think Dan is an excellent addition to our leadership.

The next question comes from Mark Murphy from JP Morgan. Please go ahead.

Thank you very much. I wanted to congratulate you on the strength in the Compute and Security and the US Army win the Sony -- win, obviously good things happening there. Going back to the social media company that you referenced, is that a typical kind of [garden variety] (ph) case of cost optimization or is there perhaps anything unusual like a corner case where The clock might be ticking on legislative proposals and they are moving in advance of that. Could it be a social media company that is struggling and shrinking? Anything along those lines?

No, I think you described it pretty well in the first two descriptions you gave. And they just are a very large customer for Akamai, and a very good customer. They are looking to cut costs and they are looking at potential, geopolitical challenges. And so that, I think a lot of companies look to cut costs, particularly these days in media and maybe they have additional concerns.

I understand. Okay. And then Ed, the security company you're acquiring, I forget the name of it, can you provide any metrics on the headcount or their growth rate in the last 12 months or the gross margins? And I'm just wondering, does it focus on API security that aligns any more or less across any of the particular hyperscalers?

Yeah, I'll take the first part, Tom. You can take the second part about the product. Now in terms of growth rates and stuff like that, I hesitate to give growth rates because we obviously have to translate everything they're doing into GAAP revenue ASC 606. But needless to say, they were growing pretty quickly. We talked about we think it will contribute about $20 million of revenue, but again growing very fast as we introduce them into the mix. We think we can accelerate that growth rate quite a bit as we introduce them to our customer base. Gross margins I would say is pretty typical of what you see in a software company. It's called like high 70s, maybe low 80s. There are some people cost that go into your cost of goods sold. As far as people go, right around 250 people, give or take, 60% or so is in R&D, 30% in go-to-market and the rest is sort of mixed in kind of your back-office support.

Yeah, in terms of the question on the hyperscalers and API security, they don't offer API security. They have API gateways, which is something totally different. In our competition, in API security is more startups or younger companies smaller. It's an emerging field and really we feel Noname as a leader there.

Thank you.

The next question comes from Frank Louthan from Raymond James. Please go ahead.

Great, thank you. Just to go back on the delivery side, was there a price that they would have been willing to stick with? There was just pretty much a business decision there. And Tom, you mentioned get back to PAR. What do you mean by that? Is that a level of revenue? How should we think about what it would be to kind of getting back to PAR?

Well, PAR, we don't want to see revenue decline in our portfolio. We'd like to see it to grow. And we're declining, obviously, now in delivery. And in the particular case of the large social media company, I don't think, this is a price-related issue, really. And as Ed mentioned, I think pricing, obviously very competitive out there. And we don't go and chase the bottom stuff that's not really profitable for us. But you know, pricing is sort of as we expect and more of it's a traffic, overall traffic in the industry right now.

Okay, and at what level do you see the delivery business sort of bottoming it out that would be considered sort of flat for you.

Yeah, you know as Tom talked about, it's hard to predict. I mean, I think what you need to see for that to happen is traffic growth to improve, to see pricing rationalize a bit more than where it is now, and less concentration of big renewals. But that's really the formula that you would need to see a sort of a stabilized delivery business.

Okay, great. Thank you.

The next question comes from Amit Daryanani from Evercore. Please go ahead.

Hey, guys. Thanks for taking the question. This is [Chant] (ph) on for Amit. I just had a quick one on the delivery business. You know, given this is an election year, do you think we could see a step up in the delivery business, maybe in the back half? I think normally elections tend to drive some sort of benefit as well as kind of the Olympic benefits you mentioned earlier.

Yes, we talked about the Olympics as a decent event for us. Our estimate is $3 million to $4 million this year. As far as the election goes, really hard to tell. You know, we saw back in [2016] (ph) a bit more traffic, [2020] (ph) didn't really drive a ton of traffic. I'd say this is probably closer to what we saw in 2020, so we're not really anticipating a significant amount of traffic as a result of this year's election, but we'll see.

Got it. And then just as a follow-up, I think free cash flow is really strong during this quarter, but if I look back historically, Q1 is kind of the low, and then sequentially in the June and September quarter it's much greater. So could you talk about maybe any changes to your CapEx and free cash flow expectations for fiscal 2024?

Yeah, so I would think that next year should play out, or excuse me, 2024 should play out like it's done in the past. Q1 was a little bit stronger than normal. As we talked about on several calls back last year, we did move some folks to a stock-based bonus program. So we used to have a cash-based bonus program that would play out in Q1 that would drive cash flow down a little bit in Q1, but in terms of the progress throughout the year, it should look like the other years.

Great. Thanks for that.

The next question comes from Jonathan Ho from William Blair & Company. Please go ahead.

Hi. Good afternoon. Just wanted to understand the Zero Trust platform that you announced today. Can you talk a little bit about how customers are thinking about purchasing the assembly of products that you're talking about and how that compares with maybe some of the other views on how SASE and other Zero Trust platforms will evolve over time.

Yeah, this is a really good platform for Zero Trust for enterprise applications. So you get your micro segmentation and your employees Zero Trust Network access which is your employee access. That's your North, South and East, West now combined. Same agents, you don't have to have two different agents, same console and [plane of class] (ph). And on top of it, you get your MFA, your DNS security, and your threat hunting service, all packaged in a platform. And that's something customers have been asking for. It makes their lives a lot easier than having what seem to be different products with different agents and different interfaces. On top of it, at RSA we demonstrated a very cool new capability that actually uses a GenAI, LLMs, to give a very nice human interface into your enterprise infrastructure. It identifies what your various applications and devices are, and you'd sort of think, oh, well people would know, but they don't. Enterprise, major enterprises just have zillions of applications and devices on the internal network and they don't even know what they all are. And this tells you, in actually a human language form, can actually tell you what is not sufficiently protected or if the firewall rules, the agent rules are out-of-date. We've got a lot of positive feedback about that at RSA. And it's something that over time we want to take to our entire suite of security services, which I think will be pretty exciting. So yeah, so this helps because customers want to see, really have a few basic platforms of which Akamai is one and simplification of interface and control, both for the control plane and for the agent that's on their applications and service.

Excellent, excellent. And just in terms of a follow-up, with compute, you obviously spoke about a number of large wins here, large types of customers. Can you talk about the potential to take that larger share of the pie over time as you grow within these customers and help us understand, are you landing in sort of a small footprint to begin with and then growing from there? Are you just sort of taking everything up front? I'm just trying to understand what that net retention opportunity looks like over time. Thank you.

Yeah, great question. It very much is a land small. Somebody will try out a single app with a little of the traffic forward and then grow it, and then add more apps. And you see that with our profile of customers, starting with the ones that $3,000 a month, then half of them now up to [$100,000] (ph) a year, [$60 million] (ph), [$100 million] (ph) a year. And Akamai is actually our first $100 million a year customer on the platform. And that's the same progression we went through over the last year-and-a-half. And we expect, and that's what we're trying to do with all of our accounts. These customers I talked about I couldn't give you most of their names, but you would recognize them. And they are -- what they're spending now with us is a tiny fraction, even the big ones, of their overall cloud spend. And they are finding the platform is easy to use, performs very well, and is saving them a boatload of money. And I think that's why we're seeing such good early traction. And now the goal is to grow those accounts, both in terms of the number of use cases and the scale of a use case, and then to add more customers. And again, they will come in at the lower revenue volumes to start.

The next question comes from Alex Henderson from Needham. Please go ahead.

Great, thanks. First off, congratulations. Picking off Noname was a real coup for you. I think that's an outstanding acquisition. So congratulations on that. I wanted to ask some content around the compute piece. First, you moved a bunch of your internal apps from other compute platforms to internal. Where are you on that? What does that look like in terms of the cost savings? And what has been the variance relative to what you'd expected when you started it, I assume you probably got better results, not worse results. And I was hoping you could, within the context of the compute platform, talk about gross retention as opposed to net retention. Obviously your net retention looks very good with these upticks, but I was wondering if there was any churn of people who were on the platform before that may have fallen out of the equation?

Yeah, we're more than halfway through the migration of our third-party cloud spend onto Akamai Connected Cloud. And as I mentioned, seeing really dramatic savings and also performance improvements. So we're more than $100 million a year in on the platform now, which is really fabulous for us. And maybe, Ed you want to take the second part of that question?

Yeah, so if you think about where you see that, Alex, is there some absolute savings if you look at our – in our cost of goods sold line, you can see that on that network build and support sub-line, sub-category. It's offset a little bit by what you see in [colocation] (ph) fees. So you're not seeing a ton of margin expansion. But what doesn't show up there is that that line was growing at 30%, 40%, or 50% a year. Now, probably we'd be growing 30%, 40% if we hadn't done it. So the cost avoidance is pretty significant. As Tom said, we're finding this to be much better than we had expected. We should get the rest of the expected applications moved over here between now and the early part of next year, end of this year into the early part of next year. So I'm very, very pleased with that. And again, a lot of cost avoidance and some absolute cost savings, like I said, being a little bit [massive] (ph), investments we're making in the platform. And then you also asked a question on gross retention, I think was the term you used in terms of are we seeing any churn. On the enterprise side, we're not seeing any churn so far. We haven't seen any customers that have left the platform. We do see a little bit of churn in the legacy retail node business which was pretty common when you talked about the SMTs. But where we're really aiming to grow the business, we're not seeing any of that yet.

Okay, great. And just one last question on this subject. Can you talk about whether you're seeing any potential around inference AI on this platform because it hasn't been mentioned yet. Thanks.

Oh yeah, we already have several customers doing all sorts of AI, but inference AI on our platform, and we have partners, our ISV partners. Some of them, that's their product capability. So yeah, we foresee substantial use of the platform for inference.

Great. Thank you.

The next question comes from Rudy Kessinger from DA Davidson. Please go ahead.

Hey, Thanks for taking my questions. Ed, just given the quicker than expected mix shift of the higher gross margin revenue lines, why aren't we seeing gross margins at least hold steady, if not expand? It's been compressing for the last few years.

Yes, so if you look back a few years ago, they've been compressing a bit. We had some pricing pressure as we always do in the delivery business. But I talked a little bit about this a few questions ago, and even a little bit with Alex in the last question. As we invest in the platform to build out compute locations, we're doing the GECO build out. We built out 25 core locations last year. We entered into these long-term leases for colocation. And where there's underlying [commits] (ph), you have to straight line that. So there's some non-cash colocation expenses. So if you look at our [co-loc] (ph) cost line, that's been growing pretty substantially. So that's masking a lot of the savings that you're seeing from our third-party compute costs. There's also additional build out and support costs that go along with it as well. So that's why you're seeing that margin sort of holding flat to where they've been over let's say the last year or so, but I don't expect them to decline. Hopefully over time they should start to expand a bit, but as we're building out aggressively in the compute platform that does put a little bit of pressure on margins, but as we start to fill up those locations, we should start to see expansion in margin.

Yeah, okay. And then on delivery, could you just talk about where some of the repricings came in with some of those contracts? And if I look at kind of what's implied for delivery in the rest of the year on an organic basis adjusting for some of those contracts you acquired, it looks like it kind of probably gets down to down 20%-ish year-over-year on an organic basis. What is the mix of price compression versus traffic growth? Is it flat kind of traffic on the network given all the things you talked about and 20% price compression or what is the combination there?

Yeah, so we don't share those numbers for obvious reasons with the price compression because obviously there's customers that get certain discounts, others don't get as high discount because they don't have as much traffic. And also it's a competitive number. I'd want to know what my competitors are doing with that number as well. But if I think about sort of the mix of what's driving it. Pricing is always a factor. And if you don't get the commensurate traffic growth offset that, then you're going to decline. And that's what we're seeing. It's really the back-half story is a lower than expected traffic. Now, couple that with your, some of your largest customers renewing at the same time. You don't have that, that volume offset. It just exaggerates the impact at the back half of the year. So like I said, it's really more of a volume issue than it is an overall pricing issue.

Okay, operator, I think we've got time for one last question.

The next question comes from Tom Blakey from KeyBanc Capital Markets. Please go ahead.

Hey, Mark and guys, thanks for squeezing me in here. I just wanted to go back, I think maybe to dive a little deeper on Rudy's question about gross margins. You talk about moving to more profitable solutions longer-term and made some headway here in one queue. In the past, you've kind of given us a framework about lowering CapEx, as a percentage of revenue for CDN. Essentially, 0% CapEx is needed, theoretically anyway, for security. Can you just walk us through what the -- not the near-term manned price components are, but longer-term structurally, what does compute look like at scale for Akamai? And have a follow up.

Yeah, so good questions. What -- I'll start with what the components of CapEx are today. So we said 16%. About 8% of that is Software CAP, so that's probably going to be 7%, 8% sort of going forward. Don't expect much of a change there. That's kind of been historically in that range. Compute this year is about 4%. CDN and securities around 3%, and then there's always 1% call it first. You know, you're [back-off](ph) if there's your IT systems and your facility related stuff. So in terms of how that's going to go throughout the years, we've obviously driven down our CapEx on the CDN business pretty dramatically. That used to be sort of 8% to 10% is what we used to talk about. So we've more than cut that in half. And I expect that -- that kind of low single-digit range will probably be where we stay unless we see just a dramatic increase like we saw during the pandemic. But there's no reason to believe that is to happen with what we know about the industry right now. In terms of the compute business, it's really a question of growth. Now we're expanding in terms of the number of locations right now. Obviously, revenue is growing very fastly, we made a big investment last year, and we talked about having room for revenue growth. And obviously, that enterprise revenue growth is quite substantial in terms of year-over-year and getting to more material numbers. Tom and I talked about being on a $50 million run rate just for that and growing it over 300%. Now, we've used kind of a metric of about a $1 of CapEx for a dollar of revenue. Not a perfect metric, but it's not a bad one to use. I've actually looked at some of the hyperscalers and some of the other public information that's available. It's a fairly decent proxy, obviously, as you're making major investments like testing an AI now. But I think that's a fairly decent place to put it for now and then obviously as we get more experience we'll update you from there.

Okay thanks again for that review and update there. Back to Noname and the kind of setup here so we model it correctly and look at organic growth. Did that $20 million for the back half includes like a cross-sell or uplift from being on the Akamai platform? Is that just kind of annualizing what Noname's revenues are today? And maybe from a strategic perspective for Tom, like is with Noname also purchased to be more of a -- strategic asset in the context of not just API related posture management and bundling there, or is Noname going to be in -- its code base going be more of a hub for bundling more additional security services for Akamai?

Yeah, I'll just do a quick answer on the second part there. Yeah, Noname is strategic, API security is strategic, and we're looking forward to integrating that more deeply in the Akamai platform and then building on top of it with new capabilities. And Ed, I'll let you talk about the financial.

Yeah, so what we've baked in really is just essentially what we expect their contribution to be without a significant increase in sales from our revenue synergy. So there's an opportunity to drive additional revenue synergy throughout the back-half of the year. Assumption there is it closes sometime in June. Going to train our sales reps up. It always takes a little while for an acquisition to settle, and then you start opening up sales campaigns and we'll start closing some deals towards the latter part of the year. Hopefully we can do better than that but in terms of our thinking we just sort of layer in what that contribution will be and hopefully we can drive some revenue synergy in addition to that.

Thanks. Thank you.

Okay. Thank you, everyone. In closing, we'll be presenting at several investor conferences throughout the rest of the quarter. We look forward to seeing you at those. And thanks again for joining us tonight. We hope you have a nice evening. Operator you can now end the call.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.