Akamai at Morgan Stanley Conference: Strategic Shift to Security and Cloud

On Thursday, 06 March 2025, Akamai Technologies Inc (NASDAQ: AKAM) presented at the Morgan Stanley Technology, Media & Telecom Conference. The company highlighted its strategic pivot from being a traditional content delivery network (CDN) provider to a leader in security and cloud-based solutions. While facing challenges in the slowing CDN market, Akamai is capitalizing on growth opportunities in enterprise and API security.

Key Takeaways

• Akamai’s security business has grown to $1.8 billion, driven by web application firewalls and DDoS protection.
• The acquisition of Linode supports Akamai’s cloud strategy, offering enhanced compute capabilities and managing cloud spending.
• The company targets 10% growth in its security segment, with significant potential in API security and Guardicore.
• Akamai’s compute business, bolstered by Linode, is poised to become its largest segment.
• Double-digit earnings growth is achievable through margin expansion and strategic business shifts.

Strategic Evolution

• CDN Market: Akamai has transitioned from a focus on CDN to security over the past 12-13 years, responding to a decline in CDN growth.
• Web Security Business: The web security segment has reached $1.8 billion, with plans to expand further into enterprise security and API security.
• Compute Market: Entering the compute market, Akamai is addressing cloud spending and offering scalable solutions with the Linode acquisition.

Security Segment Growth

• Growth Target: Aiming for 10% growth in the security segment, leveraging web portfolio, Guardicore, and API security.
• API Market: With a potential market size of $3 billion by the decade’s end, Akamai’s API security is positioned as a market leader.
• Guardicore: Expected to be a $1 billion product, contributing significantly to Akamai’s growth strategy.

Compute Side

• Existing Capability: Akamai’s edge computing capabilities are enhanced by Linode’s full stack offerings.
• Scale Advantage: With 4,300 points of presence, Akamai’s distributed infrastructure supports its managed container service.
• Growth Potential: Compute is expected to be Akamai’s largest business, with competitive advantages in cost and performance.

Financial Outlook

• Earnings Growth: Double-digit earnings growth is feasible through margin expansion and share buybacks, despite slower top-line growth.
• Top-Line Growth Timeline: Achieving double-digit top-line growth will take time, focusing on stabilizing CDN and enhancing security and compute segments.

Readers are encouraged to refer to the full transcript for a more detailed understanding of Akamai’s strategic insights and financial outlook.

Full transcript - Morgan Stanley Technology, Media & Telecom Conference:

Keith Weiss, Software Equity Research, Morgan Stanley: Excellent. Thank you for joining us. My name is Keith Weiss. I run the Software Equity Research franchise here at Morgan Stanley, and very pleased to have with us from Akamai, Executive Vice President and Chief Financial Officer, Ed McGowan. So Ed, thanks so much

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: for joining us. Keith, thank you for having me. Great conference.

Keith Weiss, Software Equity Research, Morgan Stanley: Excellent. I wanted to start out and with a high level picture about how Akamai has been evolving over the past couple of years. Both in terms of kind of solution portfolio, we’ve gone significantly from being a CDN company. Now it’s a security company, right? And it’s going into becoming a cloud company, but also kind of how you guys are thinking about distribution.

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Sure. Yes. Good question. I think we’ve seen if you don’t evolve in the CDN market, it’s very difficult to survive. We had four competitors go out of the business.

I give Tom a ton of credit. He got us into security about twelve, thirteen years ago now and it’s been a great we started off in web security leveraging the platform. So that was a huge benefit. Whether you’re doing application layer DDoS protection or you’re doing web app firewall, leveraging the platform is such a key differentiator for us because number one, very cost effective. Number two, it’s great scale and performance because you’re delivering that web application firewall rule while you’re delivering the content from the same server at the same time.

So the user has a great experience rather than having to be backhauled somewhere and slow down the experience. So it was a very natural thing for us to do. Plus we see every Internet user multiple times a day, tons of data and information. And we’ve grown that business to about 1,800,000,000.0 of web security business. We broke that out this last quarter.

So that was a great pivot for us. We’re taking that knowledge. Now we’re getting more into enterprise security with GuardaCore, with our access product, now with API security, which is kind of both, right, because every modern application uses API. So very natural from a distribution standpoint, sell through to our web app firewall customers, but also think of how big the market is from a non web application perspective. So it dovetails with our cloud business as that grows as well.

And then the last piece over the last three years, we’ve journeyed into the compute market. And we got there really by for two reasons. One, we had a cloud spend that was growing out of control because when you’re a security company, you process a ton of data and you’re doing a lot of compute on that data. So we were seeing our cloud build grow 60%, seventy % a year and that’s just unsustainable. So we said, we got to bring this in house, how do we do it?

We also had customers, one very big customer, we’ve talked about Apple that is running private relay on us and wanted to run your own code and we didn’t have that offering. So we’ve built something custom and said, you know what, we’re getting a lot more requests for that now and that’s not sustainable. So Linode came along very, very great deal for us. It was pretty accretive right away. It had the capabilities, the raw capabilities, you had to obviously put a lot of effort into it.

We saved an enormous amount on cloud spend. If we hadn’t done that, our margins gross margins would be a couple of points lower. And we have now have a repeatable scalable offering for customers that want to do anything that they choose to on the platform from a compute perspective. So we also think we’re very differentiated again with the platform. We connected the platform to all of our data centers where we have compute big compute facilities.

We just launched a managed container service now that you can run pretty much at any location. So it’s again a very nice synergy for us, but there was real clear signs of demand from our customers as well as our own needs to get there. So very logical for us to go down that path. And so the transition has been CDN is in a bit of a decline. The traffic growth on the Internet is not nearly as robust as it’s been.

And our web security business is slowing a little bit, but our enterprise and API business is growing really, really fast. So we continue to innovate and add new services. And from a distribution perspective, we are leveraging a lot more channels now with the enterprise security. So some of the we talked about Deloitte and Touche on one of our calls and I think it was on our last call. But we’re working with a lot of the big system integrators and the value added resellers to help us bring those products to market.

We’ll be doing the same thing with the API as well. We’ve got some partnerships there as well. So hopefully, we get a lot

Unidentified speaker: evolution from

Keith Weiss, Software Equity Research, Morgan Stanley: kind of CDN to DDoS protection and what about the evolution from kind of CDN to DDoS protection and web activation firewall, it seems super logical in terms of like, you have this network that can deliver all this traffic. Right. Exactly. So basically, you’re kind of running in reverse. By and large, very similar customer, right?

Yes. The person who’s buying CDN is going to be also the person who’s buying web application firewall. The question in there is, in that like understanding sort of CDN business has its pressures on it. When we think about web allocation firewall and we think about DDoS where you guys are industry leaders, how much more room for growth is there in those markets?

Unidentified speaker: Yes, it’s

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: a good question. I think there’s still room for growth in the sense that our existing customers generally will start off with their mission critical app. So we see more and more customers standardize and have all of our applications protected by web app firewall. So there’s existing growth inside the existing customer base. There’s also new innovation.

So for example, two years ago we came up with Page Integrity Manager, which protects the third party content on a site. So WAF protects the base page, page integrity will protect the links and all the third party content, which is an attack vector that can be exploited. So we’ll continue to innovate. There’s other products like bot management that we came up with that was effectively what’s happening is most of the traffic online today is actually machine and not human. So giving our customers the ability to understand who’s interacting with their site and then giving them tools to deal with it, block an attack or get somebody who’s doing nefarious things, you can give them a safe price scraping bot, you can give them a different price list, right, to kind of fake them out or whatever.

And then we are now invented a human fraud product to know that this is Keith Weiss’ credentials, but it might not be Keith because I just saw him log in over in Australia now trying to log in San Francisco An Hour later. That’s not possible. Something doesn’t make sense or the way you’re typing is different. So we continue to innovate and I think there’ll be a continued innovation in that suite of products. So we do expect that product line to continue to grow and there’s more websites coming up online every day and that sort of thing.

So there’ll be but we just don’t expect it to be growing as fast as it has in the past, very high penetration in the customer base.

Keith Weiss, Software Equity Research, Morgan Stanley: And it seems like the commonality of these solutions is it leverages a lot of the data that you guys have in the network. And jumping to Guardicore. Guardicore has been a very successful acquisition for you guys. You’ve been able to grow that business well. It was a great technology.

Even before you acquired it, I had run across Guard to Car and it was very well regarded. I’ll be honest with you though, like I don’t you guys have done well with it, but I don’t understand how it fits in that industrial logic in the same way, right? It’s like it doesn’t it’s not necessarily the same buyer, it doesn’t necessarily leverage the network. Like how did you guys make that leap of like Articore makes sense?

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Yes. So we kind of went down the zero trust path and it makes sense. Like you think about like our remote access product, for example, much safer way rather than getting in behind the firewall, you have the application dial out. Anytime you move security to the cloud, you run into performance challenges.

Unidentified speaker: And so

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: if you’re doing secure web gateway, for example, if you’re proxying traffic back to a handful of data centers, the performance for your users can be terrible. So we got into the Zero Trust market saying, no, we can leverage the network and the data and all that stuff in the same way. Guardicore, we’re looking at micro segmentation as sort of rounding out a portfolio. It just was an opportune time to pick up the technology. And what’s interesting with Guardicore is no matter how good your perimeter security is or you might have endpoint solutions and you might have email phishing and all that sort of stuff, something always gets in and with especially with AI now, the attacks are getting more and more sophisticated.

The deepfakes are so much better that if you have a user that inadvertently clicks on something, the malware gets in and spreads. And that’s where the damage happens. So what Guardicore allows you to do is segment your network using agent basically agents. So it’s not deploying lots of hardware. And you can basically look at discover what’s going on in your network.

So if something gets in, you can discover it. You can set up rules to basically manage traffic flows as it goes across your network. And it was part of an overall vision of having one pane of glass to do all the different things that you would do for Zero Trust. It happens that that’s a market leading product. And that’s what we found was we had much better success with that than we did with say, SWIG.

We were a little bit later to market with that product. We still sell up, it’s not as big of a demand for us and we’re focusing on micro segmentation. I think the market really is pretty much anybody, but it’s really a good hygiene. We’re seeing financial institutions, pretty much all of them are adopting that. Governments are starting to adopt it now, but it’s something that really gives you an incredible visibility of what’s going on your network and limits the damage of an attack.

Unidentified speaker: Got it. Got it. GardenCore, I

Keith Weiss, Software Equity Research, Morgan Stanley: mean, in Zero Trust architecture, somewhat different buyer from your traditional buyer who is kind of managing the website. And in this necessitated it’s kind of building on a little bit of a

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: different kind of channel. Yes, absolutely.

Keith Weiss, Software Equity Research, Morgan Stanley: How far like that effort is mostly complete though, right? In terms of getting into those additional channels and building out that kind of

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Yes, for the most part. There’s still a few you always want to continue to leverage the channel model as best you can and work with new channels, come up with different ways of going to market. But we’ve done a great job there. Most of our business with the exception of our install base really comes from the channel. So and you’re seeing a lot of non traditional CDN logos that come in through the channel for Guardicore, which is great because now we have some API security, some computes.

And yes, you do have a different buyer. One of the trends that we’re seeing and we’re leveraging this a bit with our CDN customers, WAF customers is you hear a lot of talk about platformization or really buying from fewer vendors,

Unidentified speaker: right?

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Because it’s a trend. I run IT at Akamai, so I focus on that and we’re trying to cut down the number of vendors we use. You have different point solutions, it’s expensive. You have a lot of companies will get acquired and all that stuff that gets could be kind of messy. So using fewer vendors is definitely something that we’re doing and we’re here for a lot of customers.

So we have that relationship with the CISO with our web application firewall business, bot business, etcetera, and that can be leveraged to get to the right buyer inside the company. So we’re doing some of that as well.

Keith Weiss, Software Equity Research, Morgan Stanley: Got it. Got it. So and then, how should we be thinking about the sort of the durability of growth within that security segment? And I think you targeted like 10% growth. Both in terms of like the current year, but also you guys see that being durable on a go forward basis.

How should we think about that equation of durability? Like what’s going to enable that?

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Yes. I mean, we’ve had a great run so far and we’ve been largely producing a couple of hundred million of security revenue every year. So we have the capacity to do that. I think the mix will shift a bit. So we’re not expecting as much growth from the web portfolio.

We think it still will grow. So that’ll be driving some decent growth in terms of absolute dollars. As a percentage will be a little bit lower. And then the Guardicorn API business is very large opportunities. API, if you believe the analysts, no, not you guys, but the product analyst folks, They think $3,000,000,000 market potentially by the end of the decade, right?

So that’s a big market. We have a market leading product there. I can tell you that most customers are asking about that because there’s really it’s a huge attack vector that’s being exploited very often. And we’re getting a tremendous pipeline growing that very, very fast. That could be a $1,000,000,000 product for us.

I think Guardicore could as well. So I think as over time what will happen is you’ll see if web as the web business slows down a bit, the Guardicore and API business, which is growing much, much faster will become larger and obviously maintain that growth. But we think those are $1,000,000,000 product potentials or maybe even more.

Unidentified speaker: Got it. So if we think about it

Keith Weiss, Software Equity Research, Morgan Stanley: sort of holistically, you’re trying to put together kind of waves of growth, if you will, right? We Guardicore and API management sort of the ascending wave of growth that can help sustain growth as the more mature products start to slow down a little bit. And the I guess the extension of that is, should we be expecting additional acquisitions as like new opportunities that present themselves, you will continue to bolster out that security portfolio to garner the next ways?

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Yes. No, it’s a really good question. And I’d say the answer to that is yes. There will be a combination of innovation, but also some acquisitions. And if you think about like one of the big challenges of being this big as a company, twenty five years old, investors want growth.

If you go and invest in building, let’s say we want to build our own version of No Name, it takes years to get the product out and growing to the size that it is now five, seventy or something like that. So by doing I think we do acquisitions pretty well. Not everyone’s a success, but we’ve had a lot of success with them. And getting a company that’s around the GardaCore size, I think it was 20 something million when we bought them and no name was around 40. Getting them at that size where they’re at the point where they’re now looking at major investments and go to market to really get to scale has been very successful for us.

And so we’ll do things more likely in the enterprise security side. I think the web security side will probably be a lot more innovation. So as new threats emerge and we make the product more robust to handle whatever new threats come along, I think you’ll see a lot more internal innovation there. But if we have the opportunity to get some market leading products that are adjacent or make sense from who our buyers are, we’ll certainly take a look at it. I don’t think you’ll see anything massive from us.

I think it’s same type of size, couple of tuck ins potentially and then kind of that acquisition, a couple of hundred million dollar size acquisitions, but not a transformative. I don’t see us doing anything like

Keith Weiss, Software Equity Research, Morgan Stanley: So it sounds like to me like on the website of the equation, you guys have a ton of data that’s flowing through your networks. You get a lot of visibility on that. The like within security, it’s account and house gap, right? Like there’s new threats that come out, you get visibility into those threats and you have a capability to build solutions effectively against that. And that’s what’s going to expand the web security.

On the enterprise side of the equation, it’s going to be more opportunistic to leverage your distribution channel, leverage the customer base to be able to feed into that consolidation fee. Correct. Being that

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Being a trusted vendor and leveraging that, absolutely.

Keith Weiss, Software Equity Research, Morgan Stanley: Got it. So when you’re thinking about those acquisitions and this is you’ve taken an opportunity to test my theories with you. It’s I think about it almost in terms of like an area under the curve, right? Like if you were going to develop this solution, it would take you two years to get something in the market, another year to get traction. If you acquire it, you get the technology upfront.

Yes, you have to pay $200,000,000.400000000 dollars for it, but you have those three years in market with much more momentum to begin.

Unidentified speaker: And

Keith Weiss, Software Equity Research, Morgan Stanley: if the area in the triangle is less than the $400,000,000 it makes sense. Sense.

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Right. Absolutely right.

Keith Weiss, Software Equity Research, Morgan Stanley: Got

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: it. So I want to shift

Keith Weiss, Software Equity Research, Morgan Stanley: gears and talk about the compute side of the equation. And the like the interesting thing about compute is that there was a capability in Akamai already. Like you guys had programmability on the edge. You had the your customers were taking advantage of that. There was functionality that they were running on the edge.

How does sort of the compute at the edge capability, how did that compare to what Linode brought into the equation?

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Yes, sure. Good question. So the compute at the edge would be I’ll use an example of say there’s a company that wants to start up a video service, right? So they need to obviously procure a lot of hardware or potentially use a cloud. And so what they do is they’d say, okay, I need to build a content management system, I need storage for all my content, I need encoding, transcoding.

So there’s a whole bunch of compute needs for the customer. Now let’s say you could build that on Linode. Now obviously a lot more robust now and it has a lot more features and that sort of stuff. You could build that on Linode. You can’t build that on the old Akamai system.

But what you could do, let’s say for example, they said, hey, I want to have on my website, I want to have a waiting room application because I’m launching a new video or whatever and it’s going to be wildly popular and I don’t want to overrun my login server. So can you build me an application that someone shows up and it says you’re next in queue or whatever? Sure. You can build that using JavaScript and put that out on the edge. Our edge servers can do that computation and do all that work.

Or say you want to do AB testing, you’re doing you’re showing ads to a different audience and you want to understand what’s happening with who interacts with what ad whatever. Use JavaScript for that as well or WebAssembly whatever. You can do that, but that’s sort of more of a function as a service. But that full stack of building and running the actual website itself, the commerce engine, the encoding and transcoding, we didn’t have that functionality. Linode brings us that functionality today.

So if you think about it from a spend perspective, let’s say I’m spending $100,000,000 a month on a big property, Probably 80% of that or so is going to the compute vendor. Maybe 10% of that’s going to the CDN. And of that, maybe a couple million would be for that function as a service. So think about the opportunity size is so much bigger. And now one of the things that we’re bringing to market that’s a little bit different is the distributed nature of our computing is more distributed than any other platform.

And you might say, well, why does that matter? Well, latency is a big issue. And like Tom talked about this on one of our calls. We had a financial services customer who used us to comply with Apple Pay. They were using a hyperscale.

They couldn’t meet the latency requirement, but they could with us, right? So that’s just one example, but there’s a lot of different examples there. But it just opens up a much bigger market for us. And the other business is still growing. We do have customers that come to us and ask us for things to basically augment their website and do certain functions that you can run at the edge.

That makes sense to run at the edge, but it’s not a replacement for your compute spend. Got it.

Unidentified speaker: And if you just think about sort of

Keith Weiss, Software Equity Research, Morgan Stanley: the scale in terms of your plant, 3,500 points of presence?

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: 43.

Keith Weiss, Software Equity Research, Morgan Stanley: Four thousand three hundred points of presence. All right, General.

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Yes, no, you’re close. Sorry, I work for mathematician, so I have to be accurate.

Keith Weiss, Software Equity Research, Morgan Stanley: So the 4,300 points of presence, you could run those functions in all 400 today, right?

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Pretty much, yes. You could, yes. How do we

Keith Weiss, Software Equity Research, Morgan Stanley: think about that scale versus one node? Like, does one node have to be like,

Unidentified speaker: will it ever be 48,300 points?

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Probably not. I mean, I don’t think it makes economic sense to do that. Technically, there’s no reason why we couldn’t do that. We just launched last week, we announced our managed container service. So that’s we’re doing some testing with the customer right now in over 100 locations that you can run your code in those managed containers, right?

So if you have a node functionality, we’re leveraging the platform now, we can roll that out. People can spin that up as they want. So we will be taking advantage of the scale, but it’s really going to be dictated by the customer demand. I think technically you can do it. It just doesn’t make sense to to some of the sites we have are pretty small.

You may have a rack of five servers that’s serving to a college campus or something like that. So it wouldn’t make sense to run something there, but we do have some pretty big deployments where it does make sense to be very widely distributed.

Keith Weiss, Software Equity Research, Morgan Stanley: Got it. So it’s Winode is an augmentation of sort of that compute capability on a go forward basis. Absolutely. It’s a cost saving initiative for you guys as you bring a year in sourcing and additional capability. In terms of the end customer, to what extent is the Linode customer the same customer that you guys were serving before versus sort of an extension that you’re going out to a new customer?

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Yes. So the acquisition we did, there was, I’d say, very few well, there was a few customers of ours, but it was mainly developed for the developer, the hobbyist, the guy that the CEO who started the company said I designed this, so I never had to talk to a customer. So it’s super simple, easy to use, right? Swipe your credit card, you’re in a virtual machine in five minutes, right? Up and running.

And we did it we do have a bunch of customers that have told us, I use that for myself. I use it for my demos or something. I’m doing an all hands meeting or something. And I never thought of using it as for the company because it was just a small company. But now that you guys are doing it and you’re adding all the capabilities, you connected it to your backbone, you’ve got PCI compliance, you’ve got all this other capability, That’s interesting.

I’ve always liked the platform. I’m interested in using it. They had 150,000 ish customers at the time. So very different business than what we do. We have 8,000 really big customers, biggest web properties and stuff like that.

We’re adding a lot more customers now with compute in different verticals that we don’t typically sell to, but don’t really think about their website all that often. So it’s there’s some overlap there, but it was a lot of new customers and some of them have blossomed into pretty good sized customers as we add more functionality. And all those customers get all the benefits that we’re adding. There’s a lot more locations now, there’s better performance, there’s more security, there’s starting to build out an ecosystem of ISV partners. So it’s been going great.

So to me that’s the probably it will be our biggest business at some point in the near future.

Keith Weiss, Software Equity Research, Morgan Stanley: So you can almost think about Akamai in terms of when we’re talking about security, there’s the ways of growth in security that’s going to enable you guys to sustain that 10% overall growth in security. You were talking about, is it 20% growth in terms of computing? Yes. It’s similar type of kind of waves of growth. You have your core kind of capability in the Akamai network and now you have to know that people have a much bigger part of the equation.

And then we think about kind of CDN, security, compute, as we shift more and more to the compute side of the equation, just as that’s growing faster, becomes a bigger part of the business, The mix shift should support better growth for

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: our clients. It should. That’s exactly right. Exactly right. Yes.

Keith Weiss, Software Equity Research, Morgan Stanley: Got it. I’m sorry. Double clicking into the just one more on the compute side of the equation. In terms of distribution, so it’s no longer just the like the self-service model.

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Correct. Well, it’s still available. Yes. It’s still available.

Keith Weiss, Software Equity Research, Morgan Stanley: But like you guys are looking to add more of a kind of outbound motion. Exactly.

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Where are we

Keith Weiss, Software Equity Research, Morgan Stanley: in kind of building that up? What’s that going to look like?

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Yes. So we are we hired a gentleman from AWS who runs our sales overlay team. We’re building out that a bit more. Probably have another 50 or so people added to that. All of our reps sell compute.

So this year we changed our comp plans pretty dramatically. You’re not going to make your numbers if you don’t sell compute and security. It’s a we’re going to be hiring a bunch of hunters as well, because my ROI on hunting is so much greater. If I were to sell to say a big oil company, if I’m selling them CDN and web security, probably not going to come up with a big order, right? But if I’m selling compute and enterprise security, that’s happy hunting.

There’s a lot of opportunity there. And we have a differentiated offering, etcetera. So the ROI on our hunting model will be much greater. So we’re going to be investing in some more hunting as part of the distribution channel. We also do have a stable channel partners that will bring us business over time.

There’s an opportunity for our size actually. If you think about how the process we went through of moving all of our compute off of a hyperscaler, we’re about 50% cheaper at list. So you’re spending a couple of hundred million, if you want to move to us, we can save you a bundle. So if you want to put a process in place and go through the change management and the whole process of moving and doing all the inspection and all that stuff, and S and I could sell that as a package, right? And there’s a lot of consulting dollars there for them with a huge ROI.

So that’s another possibility. Got it.

Keith Weiss, Software Equity Research, Morgan Stanley: And when you think about your competitive dynamic, I remember when you guys first acquired a node, the position was like, hey, listen, we don’t have to sell against AWS, right? There’s a lot of business being done in compute. We could take some of those smaller parts of the business that AWS is focusing on. As you guys have been able to improve on node, have you been able to upmarket it, as you have more distribution, does the purview on like competing with the big guys change at all? Like, and you now look at it like, listen, we could come in and present a value proposition for 40%, fifty % cheaper against an AWS or an Azure or a GCP?

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Yes. We are getting we’re seeing a lot more wins now from the hyperscalers. Not massive wholesale changes where somebody like say an airline moving their reservation system or anything like that.

Unidentified speaker: But that

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: doesn’t mean we can’t sell to them, right? So you could get in there and get additional applications. There’s use cases where it makes perfect sense for us. But we are seeing we go head to head with some, especially with the performance based items like say someone who’s doing ad decisioning, using an ad decisioning engine, much better use case with us, much better performance. So we are seeing some competitive takeaways.

And also customers that have data that in a cloud that’s accessed very frequently, so you store your data and you’re accessing it frequently. There’s very big charges, a large charge, it’s expensive to take the data out. We actually built some products for our customers, which are calling origin services, where we might be getting a 99% cash hit rate, which is pretty good. But that 1% cash miss, if their origins in say AWS or Google might cost them three times more than the GDN bill, right, because it’s so expensive to pull it out. So we offer that for free because we’ve got one of the largest backbones in the world from what I understand.

And we’ve connected that. So I deliver hundreds of terabits per second of traffic. So the small amount of traffic that’s coming off of the platform doesn’t cost me anything. So it’s a big value add for customers that have a egress problem. And some people just use storage, it’s just literally just moving storage to us and that’s very easy to

Keith Weiss, Software Equity Research, Morgan Stanley: do. So I think the if we think about a lot of the infrastructure as a service products,

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: the

Keith Weiss, Software Equity Research, Morgan Stanley: it is a a sort of commodity underlying infrastructure, like the compute is relatively commodity, you’re talking about selling storage. You’re able to sell it for 50% cheaper, but you still have 30% operating margins. We’re not seeing a degradation in operating margins. How are you to pull off that trick? Yes.

And it’s not like we’re seeing Microsoft or AWS run at like 60% operating margin. How are you able to come in 50% cheaper and still make decent margins?

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Great question. There’s a lot of synergy, operating synergy in the business. So we’ve moved about 1,000 people out of CDN into compute. So they’re doing anything from qualifying hardware, different hardware platforms. They’re doing the distribution.

So they’re going and buying and building the network effectively. We have engineers who are doing that are experts in things like compliance requirements and leveraging that expertise. We have developers who are developing some of the new functionality. We had a for example, we had a bunch of storage engineers building a legacy storage product that we moved into build the node storage, right? So there’s a lot of synergy there.

We have huge economic advantage in a lot of our locations where we don’t pay for bandwidth, sometimes we don’t pay for colo and electricity. And we can leverage those in somewhat like in a managed container environment where we can leverage some of that. Obviously, we can’t get too big there because at some point they’ll start charging us. But there’s some big advantages there. And then also just the margin in that business is massive.

Now these guys are building massive plants and like sometimes they’re all power plant and spending a ton in CapEx. So there’s obviously a timing issue there. But our CapEx is very reasonable now for the first several billion dollars of revenue. Maybe at some point we could get a little bit bigger and maybe there might be a hit to margin at some point if we’re investing way ahead of growth at that point. But right now we are seeing very, very healthy margins because there’s just so much profit in that business.

Keith Weiss, Software Equity Research, Morgan Stanley: I would be kicked out of the software analyst globe if I didn’t ask you about generative AI. Oh, sure. So where is the it sort of how do you guys think about the opportunity perhaps within the node in terms of servicing some of that demand from Generative AI? And what parts of the equation do you think that it fits best for?

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: So training, no. We’re not going to go after the training market. You need a ton of CPU and you see companies investing billions and billions of dollars in that.

Keith Weiss, Software Equity Research, Morgan Stanley: It’s even shining clusters. Exactly.

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Huge clusters. But the infra side is something that is we’re starting to get a lot of wins in actually. And you’re seeing some pretty interesting use cases. We have like a search engine that’s doing like on the fly image manipulation and things like that. We have a text to an application that’s doing voice text to image.

So like you could say build me a whatever picture of an elephant or something and it draws it for you. And that inference is running on the node in a distributed fashion, which makes a lot of sense. The customers are using GPU with us. You can use you can do some of these inference models you’re capable of doing with CPU and really smart algorithms, you could do that, but a lot of customers are opting for GPU. So we are starting to see a lot of use cases where we’re winning and advertising is a good example of seeing more and more inference use cases coming to us.

And the nice thing is some of these customers I’ve never heard of. So it’s like companies that just it just tells you how enormous the opportunity is. When you think about our web business, it’s really the biggest banks, the biggest commerce, the biggest media, but for compute, it’s everything. And even startups are big customers, right? Because you think about you raise a round of $20,000,000 you’re not going to go spend it on buying your own servers, you’re going to go to cloud and eventually it becomes a problem.

That’s usually when we buy them, it’s a problem. You look at the spend, it’s usually the biggest line item next to people and it’s usually growing much, much faster than revenue. So there’s a lot of opportunity there as well.

Keith Weiss, Software Equity Research, Morgan Stanley: Got it. You know, I always give you a hard time about margins. Can AI help on that side of the equation? Are there kind of internal use cases? Is there ways to sort of drive, squeeze out additional efficiencies out of the business using AI on a go forward basis?

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: There’s an interesting case we’re running now where we’ve built a large language model for GuardaCore. So GardaCore is a pretty heavy lift when you go to install it. And we use it ourselves, it’s great, but it’s a heavy lift. So going through the discovery phase of understanding what’s going on in your environment and going through the installation process can be difficult, but we usually have a lot of services revenue that goes along with it. We can potentially get some good scale on that in terms of, I think your service margins are decent, but you don’t want that business to become too big, right?

So that’s a possibility to potentially scale GardaCore by leveraging that just to have a better customer satisfaction, but also just get some leverage on services potentially. Yes. I always say this, the scale in engineering is funny when you talk to those guys who say, no, we actually need more engineers. And you’re like, why is that? Because it’s more QA and also the stuff.

But I do think there will be at some point some efficiency in engineering, a little bit in sales with some of the tools that we buy from vendors like a sales force where you can get a little bit of a productivity gap, hard to measure, but there’s potential there as well.

Keith Weiss, Software Equity Research, Morgan Stanley: So maybe to wrap up in the last four seconds that we have. So you have a big question for four seconds. We talked about sort of the kind of waves of growth and sort of the mix shift on your revenue base being a positive kind of driver over time of that. We have a lot of confidence in the durability of compute growth and that’s at 20% and security is going to be durable at 10% and the negative impacts of CDN start to wane, partly because it’s not going to be as bad

Unidentified speaker: on a go forward basis.

Keith Weiss, Software Equity Research, Morgan Stanley: Pricing is getting a little bit more moderate, but mostly because it’s getting to be smaller. So there’s almost a mathematical equation for improving kind of top line growth over time. The I guess the question is here is like, what’s the timeframe that investors have to think about in terms of where we’re going to be talking about Akamai as a double digit top line grower, but also double digit like earnings grower on a go forward basis?

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Yes. I think you can get to the earnings grower faster.

Keith Weiss, Software Equity Research, Morgan Stanley: Okay.

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Because you’re going to get margin expansion and also we I said on the call over the last ten years, we bought back 16% of our stock. So there’s a share count has gone down by 16%. So there’s opportunities there as well. So between buybacks, margin expansion and top line growth, you can get to double digit earnings much faster. Top line growth is it’d be a few years out and the ingredients are very simple.

The probably the fastest thing will be getting the CDN business back to sort of a low double digit low single digit excuse me to flattish type. So that’s going to just stop being a detractor of growth. Security, we think as we talk about 10% -ish, we think that’s durable. Compute could be even bigger. So if we traction in compute, you have the opportunity to potentially do it sooner.

There’ll be a couple of years before the top line gets there, but I think you can get the bottom line there a bit faster.

Keith Weiss, Software Equity Research, Morgan Stanley: Thank you for joining us.

Ed McGowan, Executive Vice President and Chief Financial Officer, Akamai: Thank you, Keith.

Keith Weiss, Software Equity Research, Morgan Stanley: Appreciate it.

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