Akamai at Oppenheimer Conference: AI and Security Drive Growth

On Tuesday, August 12, 2025, Akamai Technologies Inc. (NASDAQ:AKAM) participated in the Oppenheimer 28th Annual Technology, Internet & Communications Conference. The discussion, led by CFO Ed McGowan, highlighted Akamai’s strategic transition towards security and compute, leveraging its vast platform infrastructure. While the company faces challenges such as slowing Internet traffic growth, it remains optimistic about its future, focusing on AI-driven security solutions and cloud services to drive revenue growth.

Key Takeaways

• Akamai is transitioning from a CDN to a security and compute-focused company.
• AI is a significant driver for security demand, despite increasing attack sophistication.
• The company aims for double-digit revenue growth, particularly in security.
• Cloud Infrastructure Services grew 30% year-over-year.
• Akamai is investing in FedRAMP high to expand its federal government business.

Financial Results

• Revenue has stabilized between $3.18 billion and $3.20 billion over the past three quarters.
• Security revenue, including API security and Guardicore platforms, grew 32% year-over-year, reaching $67 million this quarter.
• Cloud Infrastructure Services expanded by 30% year-over-year, with expectations for further growth.
• Operating margins stood at 30%, and EPS exceeded expectations by 15¢.
• The quarter included an $8 million inorganic contribution from NoName.

Operational Updates

• Akamai’s platform includes 400,000 machines across 4,000 locations, enhancing performance and security capabilities.
• The company has launched an AI firewall product targeting commerce companies and travel sites.
• AI sophistication is increasing security demand, with Akamai offering GPU-as-a-service.

Future Outlook

• Akamai is working to become FedRAMP high, aiming to grow its federal government business.
• The company targets sustainable double-digit revenue growth, with a focus on security and cloud services.
• Cloud Infrastructure Services is expected to significantly contribute to future growth.
• Operating margins are projected to expand beyond 30% over time.

Q&A Highlights

• Ed McGowan emphasized the strategic importance of Akamai’s platform for security and delivery.
• He noted that the security landscape is rapidly evolving due to AI advancements.
• McGowan expressed confidence in Akamai’s ability to leverage its infrastructure for growth.

Readers are encouraged to refer to the full transcript for more detailed insights.

Full transcript - Oppenheimer 28th Annual Technology, Internet & Communications Conference:

Tim Horan, Analyst, Oppenheimer: Great. Good morning, everybody. Tim Horan. I am the digital infrastructure communications and now satellite analyst at Oppenheimer. My pleasure to be hosting Ed McGowan, the CFO long, long time CFO of Akamai and long time, Akamai employee.

Thank you so much for joining us, Ed. And I I guess, the company has evolved dramatically over the last your career there. Last five years, ten years, fifty fifteen years. You have a hell of a lot of new products. You know, cloud is a major business for you guys now, and growing rapidly.

Security is a huge major business kinda growing rapidly. You know, how do you how do you explain what the company is now or define what it is and kinda well, you know, what is the strategy tying all this together here longer term? Yeah.

Ed McGowan, CFO, Akamai: Yeah. Well, hey, Tim. Thanks, for having me today. Good to see you again. Yeah.

So, you know, I’ve been here twenty five years, and we we’ve changed quite a bit. What what’s interesting, though, I think if you go back to even our IPO slides, there was a a view of how the company was going to evolve, starting with CDN, going to security, compute was on the horizon as well. So it’s kind of played out how we had thought it would over time. Obviously, it’s, you know, each business is in a very different state at the moment, but all of the different services do leverage a common platform. And, you know, even our compute data centers, even though they’re separate from the CDN, we have connected our backbone to the location.

So that serves as a competitive advantage, where you’ve got better performance, but also basically zero cost because of how much traffic we serve. And if you look at every hyperscaler, they’ve got some form of a delivery platform. It’s required if your users are displaced and your applications are further away, you need some type of a platform. We did a great job of moving from a CDN to a security company over, say, call it from 2011 through continuing on today, it’s over half our revenue. And there we leveraged the platform, the data that we had got from the platform.

We saw every Internet user multiple times a day, and we built a very big web security business. And now we’re moving into, you know, the enterprise security space with our Guardicore and, you know, API security, which does a little bit of both web and enterprise. So it all does fit together. You know, our strategy in terms of where the business is going, I think, you know, CDN is kind of a flattish to down slightly type business. Obviously, it’s gone through a couple years of some challenges in terms of traffic growth rates and, you know, the pricing dynamics, but things are starting to get a little bit better there.

We don’t look at that as a significant growth driver, but it is a very strategic asset for us, required in both security and in compute. And, you know, with the enterprise compute business, I think that’s a significant area of growth, a long way to go there with innovation and m and a. So we think that can continue to be a good source of growth for us. And I think the real big opportunity in where, you know, if if we execute well, the company will, you know, find its largest source of revenue over time coming from compute.

Tim Horan, Analyst, Oppenheimer: And how do you define your platform? I know you said it’s a common platform, but, you know, what what it what are they all leveraging, you know, together, and how has that platform kind of evolved here?

Ed McGowan, CFO, Akamai: Yeah. So, I mean, it’s it’s as at its basic level, when we designed the platform, it’s, you know, now 400,000 machines and over 4,000 locations. The concept originally was the Internet wasn’t designed for performance. So we built a overlay network effectively that is performance based. Right?

Now when I say we leverage the platform, if I think about the security products today, let’s say web application firewall, that same server that’s delivering, say, a video experience to your house might be blocking an attack coming from your neighbor’s house. Let’s say they have an infected device and they’re part of a bot army or something. So we are able to get a lot of leverage off of that platform for the security and delivery business, both for the physical infrastructure as well as the data. And also, if you think about being able to, say, for denial of service attacks, block attacks where they emanate instead of bringing them into a central location, you get significantly more capacity out at the edge to be able to block those attacks. But also it’s very cost effective for us too, because we’re using those machines for multiple purposes.

So that’s the platform in terms of security and compute from the physical side. Then with the, like I talked about, sorry, delivery and security, with compute, it’s tying the CDN network into the core data centers. And also, we just launched our container service, which effectively is being able to run a container in any one of those 4,000 locations to the extent that it makes sense, if there’s enough capacity there and the economics make sense for us and there’s customer demand. So there’s that physical side in terms of the hardware, and then also some of the core technology, the routing technology and all that kind of stuff. But then there’s also from an engineering perspective and operational perspective, the same people that build out the delivery platform or building out the the cloud infrastructure platform.

We get a lot of similar engineering efforts across the different product lines. And then from a go to market perspective, there’s scale where we’re selling to the same customers, multiple products, so you’re getting pretty good scale in the go to market. There are some overlay functions that are specialized in selling some of these advanced capabilities, but in general, the whole field force can sell pretty much every product. So you get up, you know, some scale there as well. So that’s what I mean when I talk about sort of the overall platform from a plat like, the technical platform, but also just the, you know, operational platform that we have as a company and the ability to have people multitask.

Tim Horan, Analyst, Oppenheimer: So you’ve you’ve kinda you’ve integrated Linode and a bunch of your cloud computing capabilities into the same platform at this point?

Ed McGowan, CFO, Akamai: Yes. Mhmm. Yep.

Tim Horan, Analyst, Oppenheimer: Got it. So just switching gears a little bit. One of the themes I’m getting from the conference is that AI is actually starting to happen. You know, I know it’s been happening for a while, but people are at enterprises, I should say, are deploying it, and they’re seeing productivity improvements, improved improvements on products, you know, on and on. And, apparently, this is also creating, new demands for different well, lower latency networking Mhmm.

Different forms of network, maybe forms of edge compute. Yep. You know, so kind of related to all this, you know, what does AI mean for your business from a revenue and a technology perspective? Then I’d love I’d love to understand after that, you know, what does it mean for your, you know, own your your own operations and how you’re. Yeah.

Ed McGowan, CFO, Akamai: Yeah. So if I think about the security business, we just launched a product, an AI firewall product, which, you know, we weren’t even thinking about several years ago. So a new category, which effectively helps, you know, say a commerce company or a travel site has a chatbot of some sort, and there’s requests going in and outbound, being able to put a firewall in place to ensure what’s going in what should be going in, and you’re not getting hit with denial of service attacks or bots, you name it. And then also what’s coming out, the responses are not hallucinations or something that might be offensive or personal identifiable information or trade secrets and that sort of thing. So that’s a new area.

So there’s a, you a new revenue source there. We just launched that. A lot of demand so far from customers, a lot of proof of concepts, couple of paying customers. So it’s still early days there. I think there’ll be more security related products to come there.

In terms of security demand, I think it’s a a massive driver of security demand. Think about how sophisticated the attacks are getting even you know, I was talking with my HR team. We just went through a training on how to identify that you’re actually talking to a real person when you’re interviewing them remotely, that the you know, these AI technologies got so so advanced that you could actually fake someone out. And when you think you’re actually talking to a human, it’s actually not a human. So there’s, you know, just the the sophistication of these attacks are gonna get even more and more, sophisticated.

And a product like Guardicore becomes even more, crucial because all your external defenses, your, you know, endpoint detection, your, you know, your secure web gateways, all that stuff, something’s gonna get in because the attackers are getting so much better. So, that helps the demand environment. In terms of compute, we are seeing some early days with, you know, GPU as a service. We do offer that in the platform. We do have some folks running inference engines, you know, kind of very early days on that.

So it’s not a ton of revenue yet, but I do think that’s a good opportunity for us.

Tim Horan, Analyst, Oppenheimer: As an aside, how do you tell you’re interviewing AI instead of a human? What is the trick to do that?

Ed McGowan, CFO, Akamai: Yeah. I didn’t really pay attention because I don’t really interview anybody, but there was a whole training that we just launched for it. But, yeah, there’s, like, you know, tricks you can ask them certain questions and, you know, look for eye contact and all these different things. But it is becoming a challenge. It’s, you know, that’s something I would not have thought.

I mean, certainly doing deep fakes, like you could find your voice or my voice with all the earnings calls that we’ve done and, you know, make phone calls and tell my employees to do something using my voice. Right? And how do my employees gonna know that? You have to make sure you put in controls in place to be able to, you know, ensure that that, you know, my treasurer doesn’t go and launch, you know, a wire out to somebody, and we just make sure we have controls around them. But security environments can be the same thing, right, where, you know, things will get much better at faking people out.

Tim Horan, Analyst, Oppenheimer: Yeah. That’s that’s incredible. So, you know, is AI it sounds like it is it driving more security attacks and and quite different security attacks? Yeah. Mhmm.

Ed McGowan, CFO, Akamai: Yeah. Definitely. Definitely. Yeah. So we’re, you know, we’re seeing you know, just even if you think about your own, you know, world of, you know, your the texts that you get or voicemails that are fakes and the emails that, you know, go back ten, twelve years ago, it used to be that I have an uncle over in, you know, somewhere in Africa or whatever, and, you know, it’s a misspellings and poor language, and you knew like, okay, this obviously isn’t real, but some people would fall for it, and they would, you know, give their bank account information to get their money stolen.

Now it’s a lot more sophisticated, and it does look like it’s, you know, maybe something coming from, you know, your boss or my boss, and it’s, you know, something we should act upon, or a link that we should click on. Like, I’ve seen some fakes. You know, I’m I’m one of the bigger targets in my environment since I’m the CFO, the finance departments usually get hit with a ton of email fakes, and they’re starting to get really good with the workflow. So it’ll look like, say, come coming from an Oracle application or a Microsoft application or something like that, where it does look like it’s legitimate workflow that you would click on to go perform an action. And as soon as you do that, the the bad the bad guy’s in, your machine is infected, and now you’ve got a you’ve got ransomware running around in your environment.

Tim Horan, Analyst, Oppenheimer: Yeah. Incredible. And, also, you know, a lot of companies lot of your customers in particular have content that, that content, unbeknownst to them, has been used to train AI models, and

Ed McGowan, CFO, Akamai: they would

Tim Horan, Analyst, Oppenheimer: rather get paid for it.

Ed McGowan, CFO, Akamai: No. It’s a it’s a great great point. That’s something the publishers in particular are trying to figure out. And, you know, obviously, search is gonna be potentially turned upside down in terms of the model. I think we’re in a pretty good position to participate in that.

You know, obviously, certainly if there’s protections that customers want in terms of not allowing AI bots to get in and get their information. We can identify those and block those. You know, that’s just one example. But, you know, as the commerce model changes, there’s a potential that we could be involved somehow. You know, I don’t have an answer to that yet today, but it is does create an opportunity.

I know some people are worried that does that mean there’s less Internet traffic? Maybe on the margin, you know, you might see a little less traffic to some publishers, but, you know, I think the streaming, that’s not gonna be replaced by AI. That’s where most of the traffic is, the software downloads and that sort of stuff. So I don’t think it’ll have a material impact on traffic on the Internet. It certainly will have some, but, I do think it opens up new business models for sure.

Tim Horan, Analyst, Oppenheimer: I I definitely wanted to talk about the traffic in in a little bit because I’ve I’ve heard different theories about it. But just getting back to your ability to kinda host models from an inferencing perspective, it would seem like your infrastructure is really, really well positioned to do that Mhmm. You know, in some form of edge compute with lower latency. Right. Mhmm.

And I know you’re starting to see that a little bit. But are are you starting to create products or infrastructure that can really support that?

Ed McGowan, CFO, Akamai: Yeah. So, I mean, we are we the the managed container service is probably the best example of something we launched recently where if you wanted to run-in, you know, say, hundreds of locations, we certainly have that capability now where you can you know, whether it’s running GPUs or CPU running your model in in multiple locations, very low cost. You know, it’s the same locations where we would have some CDN infrastructure. Obviously, you’re not talking about a training model out there. It’s a very lightweight application, where latency and cost is a is a big issue.

So that’s that’s a that’s a good example of something that we recently launched. But we’re working on other things too. You know, like I said, there’s some demand for GPUs today. You know, we’re being pretty smart about how we’re thinking about rolling that out, but that’s another area potentially of of some interesting revenue for us. You know, I don’t think you’ll see us get into the training model anytime soon, you know, if at all, because it’s you know, the hyperscalers pretty much are gonna lock that that market up.

Tim Horan, Analyst, Oppenheimer: So then, you know, on the traffic side, there’s a lot it does feel like Internet traffic has been slowing here a bit the last couple years. Well, do do you think that’s correct? And do you have have a sense of what’s driving that and maybe what can reaccelerate? I guess there’s some thinking that AI could maybe, you know, reaccelerate the traffic growth again. But, you know

Ed McGowan, CFO, Akamai: Yeah. I’ve heard both sides of the argument. Right? Some say it’ll take traffic away. Some say it might accelerate.

Depends on the application, right? If it’s something that’s gonna have consumers spending more time online consuming high bandwidth applications, certainly that’s gonna drive a lot of traffic. But in terms of demand, I think we saw over the last, say, eighteen months, two years, you know, obviously out of the pandemic, extremely strong volume, even the year after the first year of the pandemic, but then it started to taper off. One thing that we noted from our customers, especially the streaming customers, one, there was the writer strike. So content new content was not as readily available, and there’s a lag between when you produce a movie and when it actually gets released or a show.

There’s usually a year lag or sometimes two years for a movie. So there was, you know, less new exciting content. The streaming folks like New Disney’s of the world and NBC’s are focusing on, you know, cost savings. You know, they had kind of rolled out aggressively, got a lot of consumers, and then they started cracking down on things like password sharing. There was some experimental stuff going on with the, you know, new codecs so that you would play around with the bit rates to try to get good quality with fewer bits.

Fewer bits means less traffic, obviously. I think that’s kinda largely played itself out. There’ll always be new advances in technology, but we are seeing much better streaming traffic, especially over the last two two quarters and continuing here in in in, you know, in in the month of July and early August. So we’re seeing better traffic. It’s not the typical 30% plus traffic growth we’re seeing on the internet as a whole, but it’s a much better environment.

Some of that could also be there’s less competition too. You had four sort of scale players on the large volume side exit the market. We were a benefactor of a lot of that. So the demand environment’s better. You know, there’s still do it yourself with the really large players, and that can, you know, throw things around a bit.

But I think in general, the trends are are looking better.

Tim Horan, Analyst, Oppenheimer: Oh, that that’s interesting. So you think it was a bit of a onetime hiccup in traffic growth? We didn’t have a lot of huge new content, and, you know, some of the password sharing crackdown was a bit of a onetime issue. Mhmm. Yeah.

Interesting. And so was traffic for streaming is has it improved? Like, is it, like, 50% better than it was, 25% better? You know, just

Ed McGowan, CFO, Akamai: Yeah. That’s a good question. I would say it’s it’s not 50% better, but it’s it’s noticeably better.

Tim Horan, Analyst, Oppenheimer: Okay.

Ed McGowan, CFO, Akamai: We’re seeing, you know, much like looking at my model coming into the year, we’re doing a lot better from an overall aggregate growth standpoint, maybe a third better or something like that. You know, that’s

Tim Horan, Analyst, Oppenheimer: And I guess while we’re we’re we’re on it, your overall revenues on CDN have improved a bit. I know the Agio acquisition had helped there. Yep. But are are you seeing you know, what what’s going on with pricing trends? I mean, they were brutal there for about a decade

Ed McGowan, CFO, Akamai: Yeah.

Tim Horan, Analyst, Oppenheimer: On and off. Have they improved from the the trends?

Ed McGowan, CFO, Akamai: Yeah. So there’s I always sort of break the business into two components. There’s a super high volume, big media streaming software downloads, gaming customers where they put the most downward pressure on pricing for the first fifteen, twenty years. And that was just volumes were significantly, you know, growing and and just you know, you do a deal for a year, and then you build out a a table, and the volume a year later is much higher than you ever contemplated. So that put a lot of downward pressure on pricing.

That’s starting to moderate, and you can see that because it’s, you know, tens of customers that are in that category. That’s been improving. You’re not seeing the type of annual discounts like you saw in the past, so that’s good. There’s also less people chasing it too, so that helps a bit. And part of that has to do with volumes are not growing nearly as fast.

You know, we literally, for the first ten or fifteen years, our traffic doubled every single year, and we’re not, you know, seeing that now. We’re, you know, talking about hundreds of terabits of traffic on the platform. But, then there’s the rest of the base. That’s your commerce, your travel, your financial services, manufacturing, just kinda auto, you know, all that rest of the traffic. Small percentage in the grand scheme of things, but there is probably a little bit more, you know, price sensitive than the upper end.

On aggregate, if I look at my traffic my pricing trends, they are moderating. So, look, if I look at my year over year price declines, they are heading in the right direction. They’re starting to moderate, and that’s been helping with sort of flattening out the business. If you look at our revenue the last three quarters, it’s been between $3.18 and $3.20, so we’re kind of flattening out a bit, which is good. You’ll always have renewals.

There’ll always be a big customer or two that’s gonna bounce you around. Maybe you decline a couple million over, you know, quarter over quarter, but definitely much healthier than both pricing and volume.

Tim Horan, Analyst, Oppenheimer: And I guess in that regard, in this that particular segment, you had a new competitor in well, not that new anymore, Fastly, seemed, for initial period, have, you know, some features and functionality that you guys didn’t have. Do do you think, you know, you have kind of similar latency to them and now in a sim or maybe even better and, you know, a better overall product at this point?

Ed McGowan, CFO, Akamai: Yeah. You know, it’s interesting. The where they started off was going after the the second group of customers I was talking about. They come after the commerce and the, you know, the the less traffic type customer that higher price point, you know, lower traffic focused on acceleration, not just delivering and caching. And they, you know, find it’s tough to grow.

We don’t lose a lot of customers, so it was sort of a futile, you know, endeavor. Where they started to focus after that was on the big delivery. So you see them in at the, you know, the Disney’s, TikTok’s, Sony’s, you know, Microsoft’s of the world, and they pick off a percentage of the share. A lot of those folks will load balance between, you know, sometimes their own infrastructure and three or four CDNs. So they’re picking up growth there.

And that’s you can grow pretty quickly for a year doing that. If you become, you know, a new entrant at, you know, Microsoft or Apple or whoever, and you pick up 10 or 15%, you’re gonna show growth for a year and, you know, that can be meaningful. But, you know, that’s a tough business. Right? That’s, you know, heavy CapEx.

It’s you know, the margins are much worse than ours. I don’t think I would say they had significant technology advantages. They were, in some cases, they had some tooling that was a little bit easier for customers to onboard themselves. We had more sophisticated products to solve more sophisticated and difficult challenges with enterprises, and we had a much bigger services organization to you know, very sticky with the customer because we’re a lot of times, would outsource a lot of what running the sites and running the security, like web app firewall. We have a pretty big services business that runs the runs whether it’s bot management or web app firewall for our customers.

You know, we handle all the rules, rule changes, and things like that. But, you know, they had little things like Fast Purge was a thing that they had at one point. They had a origin offload product that we created, something very, very similar. So I wouldn’t say it was anything significant. In terms of performance, they performed decent in some of the bigger Internet locations.

But when you get a heavy traffic day, that can cause some serious concerns. We tend to see more share shift our way in that particular time. Because of being on the other side of the choke point or the congestion point, when you’re deployed in many locations in a ISP, you’re gonna get better performance. And a lot of these sophisticated load balancers will balance off of performance.

Tim Horan, Analyst, Oppenheimer: Good. Good. And, are you seeing much impact from Cloudflare? Do you compete against them much?

Ed McGowan, CFO, Akamai: Yeah. So Cloudflare doesn’t compete on the big media streaming and gaming yet. I think at some point, they might. I think it’ll be probably a bad decision because it’s, it’s got a very different growth profile, and it’s got a very different set of economics, and it’s more much more capital intensive to get in that business. We do see them compete for web app firewall to some extent, probably lose a handful of customers a year.

We take about a handful of customers. Our churn in terms of lost customer annualized revenue for customers that churn off the platform is less than one half of 1%, and it’s been like that for years. So they don’t take a lot of customers. They’re more of a nuisance where they’ll go to a procurement and say, hey. We can do it for a third of the price, and you’re just in there, you know, dealing with, you know, price declines on renewals as a result.

But don’t lose a ton of business there. We do on CDN, there’s they focused on the down like, lower part of the market. So, like, they have a million free customers or something like that and 100,000 or so paying customers. We focus more on the top of the pyramid. They’ve been trying to come up market into the enterprise space, so we don’t see them a ton.

There’s also some traffic we don’t touch, but I know that they do deliver some of the adult content and some of the other stuff, the dark web stuff that we don’t touch, but, you know, that that I have no idea what the economics look like there. I assume they’re pretty good. But, you know, they also have a pretty good secure web gateway business from what I understand. We don’t see them that often. They compete quite a bit with Zscaler.

Our Swig is not a huge revenue generator for us. They don’t have an API security solution, and they don’t have micro segmentation. And in terms of compute, maybe a bit on the functions as a service business, but in terms of, you know, the big compute opportunities, we don’t see them there. They’re they’re more of a kinda legacy edge compute. They do have a storage platform, but yeah.

So they’re not a a huge source of of competition for us.

Tim Horan, Analyst, Oppenheimer: So when I, talk to investors about you guys, I guess the the key question people were asking me to ask is, you know, can you can you maintain double digit revenue growth in security? It seems to be pretty big focus. I know, you know, you’re entering the enterprise security market, which is substantially larger, but I think you’ve been entering that for, you know, quite a few years. I think you have some very differentiated products now. But Mhmm.

Yeah. Are those products enough in enterprise security to maintain double digit revenue growth?

Ed McGowan, CFO, Akamai: Yeah. So we broke out, the growth rates for you guys, this last quarter. We we bundled, API security with Guardicore platforms, which includes, you know, secure web gateway and our our, enterprise access solution. And there, you know, that business was growing 32%, year over year, 67,000,000 in revenue. That’s you know?

So you’re approaching 300,000,000, growing at a very nice clip. Obviously, that’s not enough to offset, you know, the rest of the plat the the product slowdown. That rest of the products, WAF, DDoS, Prolexic, that’s growing 7% roughly as a total category. Some products growing a little bit faster, some growing a little bit slower, but that’s a fairly decent number to think about. We’ve always said that 10% would include acquisitions.

So in order to maintain the 10% over a longer period of time, there’ll be acquisitions as we’ve always done. The enterprise category is probably the area that has the most opportunity for for growth for us. We’ve had some fits and starts, and I think now we’re we’re getting our sea legs, you know, much, you know, better there and starting to get some real traction and, you know, think that there’s more to do from a platform perspective. So there’ll be some homegrown products. You know, we just launched the, like I said, the AI firewall earlier in our conversation, and, you know, we’ll be launching new new features and functionality.

The the I think the security landscape is gonna change much faster and, you know, very quickly over time as a as a result of AI. So I think there’s certainly lots of opportunity for both continued growth with the stuff we have now, but also new innovation and acquisition.

Tim Horan, Analyst, Oppenheimer: Yeah. That’s really helpful. And I I would think it’s a different sales motion, enterprise security, than web security, and that obviously is taking some time to develop. But where where are you with that sales motion and go to market?

Ed McGowan, CFO, Akamai: Yeah. So we’re we’re we’re continuing to invest in our we call our overlay sales team. When we do an acquisition, we tend to keep especially in the enterprise space where we even with with no name, we kept their Salesforce. And with Guardicore, kept their Salesforce and their channel and kept the channel for a API as well. But, we have a a gentleman who’s senior vice president who reports directly to to PJ who runs sales, runs an overlay team that has license to hunt in all of our existing accounts and has a big hunting effort outside of our existing accounts because, obviously, enterprise security is a much bigger opportunity than web security because there’s certain verticals where websites really don’t matter, and they have lots of employees and, you know, spend a lot on IT security.

So we do a fair bit of hunting there. There’s more sophisticated channel operation there. We do, I think, almost all of our business with the exception of some stuff we sell to our internal, you know, our existing customers just goes through the channel with Guardicore. So I’d say we’re probably, you know, in the later innings there in terms of, you know, we’ll be adding more capabilities to that, looking to add a few more channel partners. And and to the extent that we do acquisitions, if it makes sense, we’ll keep the the sales specialists that come along with with an acquisition and just roll them under that team.

But it’s a smaller team than our regular field force, obviously, and, you know, they work in conjunction with our the owners of our major accounts. And, you know, we have compensation to make sure that both both sides get paid for a deal if it goes you know, we have multiple folks working on it.

Tim Horan, Analyst, Oppenheimer: And I know you you used the term platform. Is your web security and enterprise security, are they kind of merging onto the similar platform? And and, I I guess, you know, what what do you mean by kind of platform, and how do you

Ed McGowan, CFO, Akamai: Yeah. So with it it depends. In some cases, yes. So for example, with API security and our web app firewall, we’ve built what we call a connector. So if you’re using no name security in your web application firewall customer, you can use our web app firewall to put in rule sets to, you know, block malicious things and, you know, basically protect your API traffic, if you will.

With the Guardicore, there’s really not a connection to the web products per se. There’s, there is a platform where you’ve got enterprise access and secure web gateway along with micro segmentation. So that’s all one pane of glass. You can set one set of rules and that sort of thing. That’s an area that we’ve consolidated over the last I think it was eighteen months ago now under one leader out of out of Israel who came from GardaCore that’s, you know, making that more of a whole platform.

So we’ll be adding capabilities to that, over time.

Tim Horan, Analyst, Oppenheimer: So just switching gears, and thank you, to cloud infrastructure. You know, cloud, broadly speaking, had an acceleration of growth, it seemed like in the industry, and you guys had very, very strong growth. Is your growth sustainable, you think? And, you know, how much investment will that require? And I guess even before that, do you agree that your overall cloud sector saw some accelerating growth, and what do you think kind of drove that?

Ed McGowan, CFO, Akamai: Yeah. So, you know, there’s sort of two pieces to our our cloud business. There’s a legacy, what we call other cloud applications, which if you think about the origin of that, that was really stuff that we would build or offer as a way of, you know, getting more delivery business. So for example, we had an origin, sorry, an object storage offering for some of our big media companies that wanted to get, you know, better offload. They might say go to, you know, the storage platform before you come back to our origin if you have a cache miss.

And so that was a, you know, kind of a highly redundant, you know, object storage platform, about a $50,000,000 business. It’s not growing anymore. We’ve we’ve and we’re end of lifing that. We have a storage offering in our compute business that’s both you know, we have a block storage offering as well as an object storage offering, so we’ll be selling that now. Hopefully, most of those customers will migrate to that platform.

I assume some will just end their contract with us. So we signaled that that business will decline over time. We had some cloudlets that we developed, say, waiting room applications, image management, content video management, where we’re looking for partners to offer that as a cloud service to drive cloud business. And in some cases, we are migrating away from our own solution to a new to a partners’ products in exchange for them moving some of their cloud spend off the hyperscaler to us, and then we jointly go to market, sell that product. We don’t have to develop it anymore and that sort of thing.

So we do expect that business to decline over the next eighteen to twenty four months. You know, it grew about 3% this year. So that’s not a growth engine. The cloud infrastructure services business that grew 30%, that is a significant growth engine, and that’s where we’re really investing significant dollars. And there, we talked about, you know, 30% growth this quarter with expected accelerating growth going into the back half of this year and into next year.

We do have a lot of big customer contracts that we’ve signed that have not started to generate revenue yet, so we have very good line of sight. We did tell investors that we may have a bit of a timing issue this year where we may not be able to get enough months of revenue to hit the 15%. We might miss it by a point or two potentially, but that will just make the growth next year better. So it’s really just a question of how quickly can you migrate traffic over from an existing application to ours. In some cases, we had to do some development.

In some cases, we had to do some build out, So there was a bit of a lag that we knew coming into the year, and now we’re really at the whim of the customer in terms of how quickly they’ll migrate.

Tim Horan, Analyst, Oppenheimer: So I I have two questions from the audience I definitely wanna hit on. There’s a question on the fourth quarter, Ed. Will the no name acquisition when does that acquisition lap, and will

Ed McGowan, CFO, Akamai: that Just just

Tim Horan, Analyst, Oppenheimer: just happen.

Ed McGowan, CFO, Akamai: So June yeah. We had a couple of weeks of June revenue in June. I called it out for you. It was $8,000,000 of inorganic contribution. So if you look at that category of API and Guardicore’s 48% growth, back that out, 32 growth if you take the inorganic contribution, which was, you know, a quarter less a couple of weeks of revenue that we had last year.

Tim Horan, Analyst, Oppenheimer: Okay. Got it. And then are you still expecting some revenue losses from the US Fed in the fourth quarter?

Ed McGowan, CFO, Akamai: Yeah. That’s a good question. You know, we’ve seen some. It hasn’t been significant so far. You know, we are making a big investment in becoming FedRAMP high, so, you know, we do expect the federal government business to grow over time, certainly.

You know, we’re already FedRAMP medium, I think, what they call it, but we’re investing to become head FedRAMP high. Good line of sight to some some pretty good opportunities there. But there could be some additional, lot like, say, for example, department of education was a customer, so that’s going away. So, obviously, that revenue will go away. You know, nothing material, but it’s, you know Okay.

A little bit of headwind.

Tim Horan, Analyst, Oppenheimer: And then lastly, do you a lot of different businesses, a lot of moving parts. Can you give us a sense of what you think this business can grow at longer term of revenue? Is it a, you know, mid single digit revenue grow or high single? Can you get to, you know, double digit revenue growth, you know, overall at some point?

Ed McGowan, CFO, Akamai: Yeah. I mean, I think if you look at the ingredients to get to double digit growth, say, 10% or better, you know, one of the big impediments to that was the delivery business was shrinking eight to 10%. So now I think that’s hopefully in the, you know, low single digit, kind of zero to four as we had negative four as we had sort of set as a long term target. Think that’s probably right. There’s some risk to that.

Obviously, you know, DIY can sometimes maybe knock you off course for a year. But let’s say you get that to that sort of level of zero to minus four. If security kicks in at around 10%, that certainly is gonna help. But I think compute, especially as compute infrastructure services becomes a much larger portion of the business, certainly a much bigger market, you you have the opportunity to be a high single digit, low double digit growing business, you know, sustainably. You know, I think we’re we’re we’re not quite there yet.

I think we have the ingredients to get there. There’s a lot of execution that’s required, but, you know, that’s certainly our goal. That’s what we’re investing for. That’s what we’re trying to get to. And, you know, we think we can, you know, ultimately have the have the end markets to get to a, you know, hopefully, a sustainable double digit growing business.

That’s the goal.

Tim Horan, Analyst, Oppenheimer: And can you do that on a relatively stable EBITDA and free cash flow margins, or will that come down over time?

Ed McGowan, CFO, Akamai: Yeah. Good good question. So, you know, I think what we’re learning with the gross margin in the business for compute a lot, you know, with sort of the partner dynamics and how we’re going to be going to market there with partners versus us building our own sort of applications. Think of like media workflow. We’re not going to build our own.

We’ll partner with somebody. So if you resell it, you get a lighter margin. And then also, some of the dynamics around colo and the lease accounting, we’re probably not going to see expansion in gross margin. I’d say maybe a point, but I’m not anticipating that, even though the mix will shift. Really, you’ll see it on the operating side in terms of getting operating leverage.

And you actually saw that this quarter. Right? We beat revenue, and there’s a significant flow through to the bottom line. We delivered 30% op margin, beat EPS by 15¢. So we are definitely set up for really good operating leverage.

And I think that margins can expand beyond, 30% over time. You know, we there’s more investment to go both with capital as well as, you know, some engineering efforts. And, obviously, if you do an acquisition, you’re dilutive for a year. But, yeah, I think there’s there’s opportunity there. And then from a free cash flow perspective, I think the growth rate in compute will ultimately dictate where free cash flow lands.

There you know, I think over the next few years as we grow from 300,000,000 run rate roughly in in CIS to a couple of billion, you probably can do it at the same type of dynamic in terms of low low seventies gross margin, CapEx somewhere in that eighteen, nineteen, 20% range, and, you know, EBITDA margin’s kinda where they’re in the low forties, and then maybe the operating margin is, either side of 30. Maybe it expands a bit. Then as you get beyond that, you may be making much bigger bets on infrastructure, and at that point, it’s a very different company, and there you’re talking about a significantly larger growth in terms of dollars. So you just kind of watch the progression of the hyperscalers in the very early days. They sort of ran kind of the economics we’re talking about now in terms of the investment in CapEx to revenue.

And, obviously, they got much bigger and started building, you know, their own power plants and stuff like that. We’re many, many, many years away from that if we ever get there. So I think, you know, what you see now for margins and cash flow will probably be roughly the same and then hopefully expand a bit. And then if there’s big opportunities, we’ll certainly tell you if there’s a big investment we’re making that would lead to faster growth and more revenue. You know, certainly let you know about that.

Tim Horan, Analyst, Oppenheimer: We’re out of time, Ed. Really appreciate it. And and thank thank you, Mark, for lending us, Ed, for forty five minutes here. It was great.

Ed McGowan, CFO, Akamai: Thanks, Tim. Really appreciate it.

Tim Horan, Analyst, Oppenheimer: Absolutely. Really appreciate it. Bye.

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