Akamai Technologies Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2021

There are 12 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to Akamai Technologies Inc. Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.

Speaker 1

As a

Operator

reminder, this conference call is being recorded. I would now like to turn the conference over to Tom Barth, Head of Investor Relations. Thank you. Please go ahead.

Speaker 2

Thank you, operator. Good afternoon, everyone, and thank you for joining Akamai's 3rd quarter 2021 earnings conference call. Speaking today will be Tom Layton, Akamai's Chief Executive Officer and Ed McGowan, Akamai's Chief Financial Officer. Before we get started, 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.

Speaker 2

These factors include uncertainty stemming from the COVID-nineteen pandemic, the integration of any acquisitions and any impact from unexpected geopolitical developments. Additional information concerning these factors is contained in Akamai's filings with the SEC, including our annual report on Form 10 ks and quarterly reports on Form 10 Q. The forward looking statements included in this call will present the company's view on November 2, 2021. Akamai disclaims any obligation to update these statements to reflect future events for circumstances. As a reminder, we will be referring to some non GAAP financial metrics during today's call.

Speaker 2

A detailed reconciliation of GAAP and non GAAP metrics can be found under the financial portion of the Investor Relations section of akamai.com. And with that, let me turn the call over to Tom.

Speaker 3

Thanks, Tom, and thank you all for joining us today. I'm pleased to report that Akamai delivered excellent financial results in the 3rd quarter, coming in at or above the high end of our guidance ranges for revenue, Operating margin and earnings per share. Q3 revenue was $860,000,000 up 9% year over year and up 8% in constant currency. Non GAAP operating margin in Q3 was 32%, which reflects our continued focus on operational efficiency, even as we've continued to invest for future growth. Q3 non GAAP EPS was $1.45 per diluted share, up 11% year over year.

Speaker 3

Akamai's strong performance in Q3 was largely driven by our security business, which is now one of the leading cloud security businesses in the world with an annualized revenue run rate of more than $1,300,000,000 up 26% year over year and up 25% in constant currency. Over the last several years, we've grown our The unique breadth of our defenses is important to our customers who want more security capabilities from fewer vendors. Our security solutions are highly differentiated and recognized as best in class by our customers who see us as a leading provider of services that protect our most Critical assets, including enterprise websites, applications, data and access. We routinely earned top rankings in multiple categories for major industry analysts. For example, Akamai disrupted the web app security market when we launched With Gartner recently naming Akamai as a market leader for the 5th year in a row.

Speaker 3

Akamai has been the market leader at DDoS Protection Since we acquired Prolexic in 2014, Forrester recently said large enterprise clients that want an experienced trusted vendor To make their DDoS problem go away, should look to Akamai. As new threat vectors have emerged, We've extended our platform to defend against them. For example, we created the 1st comprehensive bot management solution to protect our customers from sophisticated bot operators who try to steal content, disrupt operations or penetrate user accounts. According to Forrester, Akamai is best for companies wanting to thwart bots at the edge. Bloomberg Businessweek even quoted a hacker calling Akamai's bot defense the hardest to crack.

Speaker 3

More recently, we released Akamai Page Integrity Manager to identify malicious code in 3rd party scripts and websites that's designed to steal end user data. Page Integrity Manager helps to address a major threat that's been costing businesses 100 of 1,000,000 of dollars in fines as well as serious reputation damage. We plan to extend our web app Sure that the entity logging into an account is the true owner of that account. Audience hijacking prevention can help businesses protect sales by thwarting malware that diverts a customer just before the completion of a transaction. Since founding Akamai over 20 years ago, our vision has always been to help our customers solve their toughest Internet challenges.

Speaker 3

And today that includes stopping ransomware. Ransomware is a huge problem for enterprises around the world With a new attack striking every 11 seconds, the damage resulting from ransomware is expected to amount to over $20,000,000,000 This year alone Gardacore is critical to stopping the spread of ransomware and that's a key reason why we acquired the company. Akamai is already selling solutions such as enterprise application access that help prevent attackers from gaining access to enterprise infrastructure and applications. But to be secure in today's world, you also need a second layer of defense to block the spread of malware that has gained a foothold in the enterprise. And that's where Gardacore comes in.

Speaker 3

Gardacore helps detect when a breach has occurred by identifying anomalous data flows within enterprise Gardacore's micro segmentation solution limits access within the enterprise to only those applications that are authorized to communicate with One another. Denying communication as the default greatly limits the spread of malware and protects the flow of enterprise data across the network. And that's the key to stopping ransomware. We believe Gardacore's best in class micro segmentation solution is the perfect addition to our 0 Trust portfolio, enabling Akamai to offer customers a comprehensive solution to stop the damage being caused by ransomware and malware. During the call we held on September 29, We spoke about the parallels between our acquisition of Gardicore with our acquisition of Prolexic in 2014.

Speaker 3

Just as the acquisition of Prolexic propelled us to a leadership position in helping to stop DDoS attacks, We believe that the acquisition of Gardicore will establish Akamai as a leader in helping to stop the damage caused by ransomware as well as other forms of malware. Customers see Akamai as a strategic partner in security, Not only because of the strength and breadth of our solutions, but also because of the depth of our security expertise and threat intelligence and the scale of our platform, the same platform that underpins our world leading CDN. Akamai CDN handles over 5,000,000,000,000 requests every day. In addition, we resolve more than 3,000,000,000,000 DNS queries each day. This gives us unmatched Real time insight into the world's Internet traffic, which we analyze to provide best in class threat intelligence, protection and support.

Speaker 3

We also have one of the industry's largest and most experienced teams of security professionals with thousands of engineers and consultants working on Our security solutions are tightly integrated into the world's largest and most distributed edge platform And that provides unmatched global scale to defend customers against not only the largest DDoS attacks, but also against the vast spot armies that are waging attacks from the edge. The integration of our security solutions with our CDM solutions also provides benefits to our customers in terms of improved performance and ease of use. With Akamai, security and performance go hand in hand. You can buy them together as a single protect and perform package, which makes purchasing and integration easy for the customer. And when you buy security from Akamai, your performance is automatically improved.

Speaker 3

That's because we apply the security layer As we are delivering the content from the world's true edge platform, this means that the processing needed for security stays close to the end user, which makes for much better performance. Akamai's unique combination of security and delivery provides a powerful offering in the market, which is one reason why we're the market leaders in both security and CDN. Our CDN business also generates substantial cash that we can use to invest in future growth as we've recently done with the Gardacore acquisition. For example, Our CDN business generated revenue of $526,000,000 in Q3 and contributed substantially to our overall free cash flow of $273,000,000 enough to cover almost half of what we spent to acquire Gardacore. We believe that having the world's largest and most distributed edge network also provides a great foundation for the growth of our edge applications business.

Speaker 3

As 5 gs rolls out, as IoT applications proliferate and as more data is created and processed at the edge, Akamai's edge compute platform is very well suited to support the high throughput and low latency applications that are not well served by traditional cloud providers From delivery and performance to compute and security, the world's leading brands want our help. That's because the Internet is getting more complicated with more traffic, higher user expectations and more cyber threats every day. And the world's leading enterprises know that Akamai can help keep their digital experiences close to their end users and the threats farther away. They know that what we do makes life better for billions of people, billions of times a day and that nobody powers and protects life online like Akamai. I'll now turn the call over to Ed to provide further details on our Q3 results and our outlook for the rest of the year.

Speaker 3

Ed?

Speaker 4

Thank you, Tom. As Tom just outlined, Akamai delivered another excellent quarter. Q3 revenue was $860,000,000 up 9% year over year or 8% in constant currency. Revenue was again driven by very strong results in our Security business. Revenue from our Security Technology Group was $335,000,000 up 26% year over year or 25% in constant currency.

Speaker 4

Security now accounts for 39% of our total revenue. Revenue from our Edge Technology Group was $526,000,000 flat year over year and down 1% in constant currency. Foreign exchange fluctuations had a negative impact on revenue of $5,000,000 on a sequential basis and positive $4,000,000 on a year over year basis. International revenue was $412,000,000 up 16% year over year were 15% in constant currency. Sales in our international markets represented 48% of total revenue in Q3, up 3 points from Q3 2020 and up 1 point from Q2 levels.

Speaker 4

Finally, revenue from our U. S. Market was $449,000,000 up 3% year over year. Moving now to costs. Cash gross margin was 76%, in line with our expectations.

Speaker 4

GAAP gross margin, which includes both depreciation and stock based compensation, was 63%. Non GAAP cash operating expenses were $261,000,000 Now moving on to profitability. Adjusted EBITDA was $396,000,000 Our adjusted EBITDA margin was 46%. Non GAAP operating income was $277,000,000 and non GAAP operating margin was 32%. Capital expenditures in Q3, excluding equity compensation and capitalized interest expense were $129,000,000 This was below our guidance range, primarily due to continued progress on network CapEx efficiency projects.

Speaker 4

GAAP net income for the Q3 was $179,000,000 or $1.08 of earnings per diluted share. Non GAAP net income was $239,000,000 or $1.45 of earnings per diluted share, up 11% year over year, up 10% in constant currency and $0.04 above the high end of our guidance range. Taxes included in our non GAAP earnings were $39,000,000 based on a Q3 effective tax rate of approximately 14%. Moving now to cash and our use of capital. As of September 30, our cash, cash equivalents and marketable securities totaled approximately $2,800,000,000 After accounting for the $2,300,000,000 of combined principal amounts Of our 2 convertible notes, net cash was approximately $452,000,000 as of September 30.

Speaker 4

During the Q3, we spent approximately $97,000,000 to repurchase shares, buying back approximately 800,000 shares. We ended Q3 with approximately $321,000,000 remaining on our current repurchase authorization, which runs through the end of this year. As noted in today's press release, our Board authorized a new buyback program of up to $1,800,000,000 beginning January 1, 2022 and running through the end of 2024. As we've previously discussed, our primary intention is to buy back shares to offset dilution from employee equity programs over time. However, our repurchase authorizations also allow us to opportunistically deploy capital if or when we believe There is a valuation disconnect in the market based on business or market conditions.

Speaker 4

Combining the 2 authorizations, We currently have more than $2,000,000,000 available for share repurchases through the end of 2024. We believe our strong balance sheet and significant free cash flow generation, which totaled $273,000,000 where 32% of total revenue in Q3 also provides us with significant financial flexibility to pursue a balanced capital deployment strategy. As such, we plan to continue to invest organically in R and D and product development, Expand our capabilities through M and A, as you saw with our most recent acquisition of Gardicore and return capital to shareholders via share repurchases. Moving on to Q4 guidance. There are two factors to consider as you update your models for the Q4.

Speaker 4

First, we closed the acquisition of Gardacor on October 20. Our guidance assumes Gardacor will contribute approximately 6 to $7,000,000 of revenue in Q4. It also assumes that Gardacor will be approximately $0.05 dilutive to our total non GAAP earnings per share in Q4. 2nd, as in prior years, seasonality plays a large role in determining our Q4 financial performance. We typically see higher than normal traffic for our large media customers and from seasonal online retail activity for our e commerce customers, which are both difficult to predict.

Speaker 4

With that in mind, we are projecting Q4 revenue in the range of $883,000,000 to $908,000,000 or up 4 to 7% as reported or 5% to 8% in constant currency over Q4 2020. Foreign exchange fluctuations are expected to have a negative $3,000,000 impact on Q4 revenue compared to Q3 levels and a negative $6,000,000 impact year over year. At these revenue levels, we expect cash gross margins of approximately 76%. Q4 non GAAP operating expenses are projected to be $290,000,000 to $297,000,000 We anticipate Q4 EBITDA margins of approximately 43% to 44%. We expect non GAAP depreciation expense to be between $120,000,000 to $121,000,000 Factoring in this guidance, we expect non GAAP operating margin of approximately 30% for Q4.

Speaker 4

Moving on to CapEx. We expect to spend approximately 128 $133,000,000 excluding equity compensation in the 4th quarter. This represents less than 15% of anticipated total revenue. And with the overall revenue and spend configuration I just outlined, we expect Q4 non GAAP EPS in the range of $1.37 to $1.44 This EPS guidance assumes taxes of $38,000,000 to $39,000,000 Based on an estimated quarterly non GAAP tax rate of approximately 14.5%, it also reflects a fully diluted share count of approximately 164,000,000 shares. Looking ahead to the full year, we are raising our guidance.

Speaker 4

We now expect revenue of $3,439,000,000 to $3,464,000,000 which is up 8% year over year as reported or up 7% in constant currency. We now expect security revenue growth to be in the mid-twenty percent range for the full year 2021. We are estimating non GAAP operating margin of approximately 31% and non GAAP earnings per diluted share of $5.63 to $5.69 And this non GAAP earnings guidance is based on a non GAAP effective tax rate of approximately 14.5% and a fully diluted share count of approximately 164,000,000 shares. Finally, full year CapEx is anticipated to be approximately 16% of revenue, consistent with our prior guidance. We are very pleased to deliver another quarter of excellent financial results,

Speaker 3

Thank

Operator

you. Your first question comes from the line of James Fish from Piper Sandler. Your line is now open.

Speaker 5

Hey guys, nice quarter. Thanks for the questions. A couple of your competitors are starting to get a little bit louder on the security side with getting a foot in the door with Government and 0 Trust Architectures. So I guess my question is, how was the federal vertical for you this quarter? And what will it take for Akamai to become more a part of those conversations, especially when you guys already do service some government stuff?

Speaker 3

Yes. Our government business is very strong, particularly in security. We defend most all the major Agencies in the government, pretty much every branch of the military. So I would say we have a very strong business there.

Speaker 5

All right. And then on Guardicore, how long until the 100 plus reps are likely selling the entire Security portfolio and really also any update to the go to market on total security standalone sales channel

Speaker 4

Yes. Hey, Jim, it's Ed here. I'll take the first one and then maybe Tom can follow-up on the developers. But in terms of the sales force, We're going to maintain the sales force that we acquired from Gardacore. This is pretty typical what we do with our acquisitions.

Speaker 4

They'll be Primarily in an overlay function. It's a little bit different of a sale, very similar to some of our enterprise sales and we just will build out that team a bit. It'll probably take maybe a year or so as the reps start to introduce Gardacore into their accounts that they begin to get comfortable With the we're selling Gardicore, it's been our typical model. So I think we've got a pretty good Quite a great team from Gardacore and we just combine that with our existing enterprise sales team. And then as far as channels go, we did pick up Few channel partners as a result of Garden Core, we're still actively out recruiting more and more channel partners.

Speaker 3

And in terms of the developer focus question, we've done a lot of work to make our platform be very accessible to developers. A lot of effort there and strong progress. And in fact, on a daily basis, we're now spinning up about 5,000,000,000 applications on edge workers, and that's every day. So strong adoption Of our capabilities in terms of edge computing.

Speaker 6

Your next question comes

Operator

from the line of Sterling Auty from JPMorgan. Your line is now open.

Speaker 4

Yes, thanks. Hi, guys. So you gave us the security growth on a constant currency, but can

Speaker 6

you give us a sense of what it

Speaker 4

was on an Organic constant currency basis, and Tom, you had highlighted a number of different areas, the strength in DDoS, etcetera. What was kind of the tip of the spear that drove the growth this quarter in particular? Yes. Hey, Song, this is Ed. So the organic Security growth in constant currency would be about 22%.

Speaker 4

So Aussie added about 3 points of growth.

Speaker 7

Tom, do

Speaker 4

you want to take the other part?

Speaker 3

Yes. And the strength was really across all of our product categories, all of them growing at close to 20% or more, Infrastructure doing well, app and API protection, fraud well into close to 30% growth And access the best of all. And of course, that will get a lot stronger now with Gardacore and the ransomware solution. So I guess it's across the board in security.

Speaker 4

It's great. Maybe one real quick one. Given the contribution you're expecting from Gardicore In Q4, does that mean that the run rate in terms of what the contribution in 2022 might actually be better than what you thought at the time of the acquisition? Yes. Hey, Sterling.

Speaker 4

Two points on that. So yes, I think we should see better contribution from Gardicore. And we've been off to a pretty good start here in the 1st couple of weeks since we've closed the acquisition. They finished very strong. I was very impressed to see several multi $1,000,000 deals in several different verticals across the different geos.

Speaker 4

We saw a couple in the U. S, Couple in EMEA and APJ, we saw deals in transportation, which isn't really a huge vertical for Akamai as well as Other verticals we're strong in like insurance and finance. So off to a pretty good start, pretty optimistic so far, and I do think they'll contribute a bit more next year. Give you a full guidance on our next call for next year, but so far off to a pretty good start.

Speaker 2

Excellent. Thank you.

Operator

Your next question comes from the line of Colby Synesael from Cowen and Company. Your line is now open.

Speaker 8

Hi, this is Michael on for Colby. Two questions, if I may. First, as you think about the incremental security offerings that could make sense To add via M and A moving forward, what comes to mind? And then second, what are you seeing from the customer verticals that have been more heavily impacted

Speaker 3

Yes. We continue to look and invest In new capabilities and security, both organically and through M and A, as we talked about Page Integrity Manager released in the last year, Very exciting technology. Going forward, we have account protector. There's a lot of customer interest there. And then Early next year, audience hijacking protection.

Speaker 3

I think that's a lot of customers have asked for that and that stops malware plug ins from Stealing or hijacking their audience right before the point of sale or the transaction is executed. Obviously, in the Access segment, I think that's a huge area of future growth. Really excited about the Gardacore acquisition. That combines very nicely with our 0 Trust solutions. It combines with enterprise application Across the board and of course with the existing solutions, that we continually work on those to add features, stay ahead of the new attack vectors.

Speaker 3

So it's not just like you build a web app firewall, you're constantly adding new capabilities to it to stay ahead of the attackers to keep our Customers are

Speaker 4

safe. Yes, sure. So on the second question was around the verticals that were impacted. And if you Recall, we called out commerce and travel. I'd say in travel, we're starting to see a bit of improvement there, starting to see traffic pick up a As a reminder, that's about 4% of our total revenue.

Speaker 4

So it doesn't have a huge impact in terms of what we're seeing as far as an improvement, but it's good to see that that's It's starting to pick up a little bit. Commerce, I would say, is pretty mixed. We're seeing good strength in security, still seeing some pressure, especially in the U. S. Commerce vertical, that's a much bigger vertical.

Speaker 4

That's around 15% of total revenue. So we're not quite out of the woods yet With commerce again, especially in the U. S, that's the area that we're probably seeing the most weakness, and that's still persisting from the pandemic.

Speaker 9

Perfect. Thank you.

Operator

Your next question comes from the line is Keith Weiss from Morgan Stanley. Your line is now open.

Speaker 1

Excellent. Thank you guys for taking the question. Two kind of areas that I was hoping to dig into. Can you talk to the I thought it had more to do historically with sort of platform customers in the U. S.

Speaker 1

Underperforming, but Now the platform customers are actually doing really well and growing pretty well. So I kind of lost the thread on why the U. S. Is still underperforming international regions. And then a second question on sort of the operating margin side of the equation.

Speaker 1

Any kind of guidelines you could give us and how we should think about calendar year 2022? Are there kind of a lot of companies are talking to us about rehydration, if you will, maybe more spending on travel and people come back to the office and marketing events Ramping back up, on the flip side of the equation, you've been kind of underspending on CapEx versus the original target and that's coming down as a percentage of revenue. Perhaps there's some gross margin benefit that you could see in calendar year 2022 could offset that. So any kind of sense you could give us on how to start thinking about calendar year 2022 margins?

Speaker 4

Sure. So I'll start with the second part on margin. So yes, you're correct. Next year, we'll be expecting that we should start traveling again. So there'll be a little bit more OpEx there.

Speaker 4

You're right to call out CapEx. I think the team is doing a fantastic job on a lot of CapEx efficiency projects that we've got going with both software and hardware, being able to drive that down, we would expect that CapEx to be at a back to those normal levels that we've seen, maybe even a touch lower. So that impacts your depreciation, but it takes a while for that to flow through the model. So you won't get a ton of benefit of that right away, but certainly down the road you will. I'd given some prior guidance when we had the Gardacore Call about operating in the 29% to 30% range for next year and then hopefully getting back or we will get back to over 30% In 'twenty three.

Speaker 4

Obviously, we'll update you. I mentioned earlier to Sterling that Gardicore's contribution will probably be a bit better Then what we said earlier on, I don't have a number to call out yet, so that will obviously help out the operating margins a touch there. And then you asked about U. S. And international and the disparity between the 2.

Speaker 4

I'd sort of flip it around and say that it's not so much the U. S. Being weak, but really just Strong international growth. I mean U. S.

Speaker 4

Is kind of low single digit. I mentioned on the previous question, that's where we're having the most trouble With our U. S. Commerce vertical, which is a pretty significant vertical in the U. S, and then we also have a lot of large Media customers that are in the U.

Speaker 4

S. And that's where you tend to see more of the splitting of traffic and pricing pressure. So those things combined Sort of put a little bit of pressure in terms of the growth rate in the U. S, but really the strength outside the U. S.

Speaker 4

Is something that I think is a Significant advantage for us, we made a lot of investments both in the network and the sales teams, etcetera, and we've been able to drive pretty significant growth. Very happy with what I'm seeing in terms of Participation as far as strong growth in countries like Korea, Spain, Brazil, Mexico, Hong Kong, Singapore, Taiwan, I mean across the board we're seeing very strong growth. Latin America in particular has been very strong. We made an acquisition there a couple of years ago, so I can get some good scale out of that. So a little bit of a mixed picture in the U.

Speaker 4

S. With some challenges in commerce, but really I'd look at it Just very strong international presence and growth.

Speaker 1

Got it. I mean, should the takeaway be that like If we just looked at the security side of the equation, the growth in U. S. And international would be more even on the security side of the equation than it would on the EdTech side?

Speaker 4

Yes, I think that's a good way to look at it, Keith. I mean, if I look at the web performance, especially In Commerce, that's where the primary challenge is right now. But if I look at security, it's obviously the U. S. Was the first to adopt.

Speaker 4

We're still seeing very, very strong growth. As a matter of fact, now 67% of our customers are buying 1 security product, 34% are buying 2.

Speaker 6

To sort of put that into perspective, in

Speaker 4

a year, we've gone up 6 points in terms of security adoption of the customer base. That's adding over 600 customers. So we're seeing good broad based strength in security both here in the U. S. And also internationally.

Speaker 4

But I think you're thinking about it in the right way In terms of having strong security growth in both regions.

Speaker 1

Got it. Excellent. That's super helpful. Thank you, guys.

Operator

Your next question comes from the line of James Breen from William Blair. Your line is now open.

Speaker 7

Thanks for taking the question. Just on the cash flow side, it seemed like particularly strong quarter, given some of the improvements you've had in the network and just Expense control in general, how should we think about that cash flow going forward? Is this a particularly strong quarter and it could Kind of drift down over time or is it going to be lumpy or we had a sort of a new run rate in terms of cash generation? Thanks.

Speaker 4

Yes. Great question, Jim. Q1 And to be the lower quarter from a cash flow perspective just because of working capital is when you say your bonus is off. But I think if you peg your CapEx to that sort of 15% range, you're looking at pretty significant improvement. So I think if you use that As your guide, kind of working off the operating margins we gave you and think about Q1 as probably being a low point As you're modeling out your free cash flow.

Speaker 4

But yes, very, very strong free cash flow generation this quarter for sure.

Speaker 7

Great. Thanks. And then just one other one. As you look at the revenue growth excluding the platform customers, the platform customers were down about $3,000,000 sequentially. Is there a range now where you feel like in the sort of low-60s range where that revenue is going to hover for those companies Given the amount of growth you've seen in the last kind of 12 to 18 months from that?

Speaker 4

Yes. I think that's probably not a bad place to peg it, Jim. I mean the Q4 always tends to be a bit of a stronger quarter and that verticals a little bit of seasonality there. You always have renewals. So whenever you have a renewal, you'll see it Pull back a couple of $1,000,000 depending on the timing and that sort of stuff.

Speaker 4

But I think in the 60s, low 60s is probably a decent place to peg it.

Speaker 7

Terrific. Thank you.

Operator

Your next question comes from the line of Frank Louvain from Raymond James. Your line is now open.

Speaker 10

Yes, great. Just wanted to talk a little bit about the buybacks. You said you'd opportunistically use that to take advantage of the market valuation. What level seem appropriate here? That's kind of the first question, and then I've got a follow-up.

Speaker 3

So primarily, we've used the equity buyback to offset the equity dilution from employee grants. And from time to time, we do buy back additional shares and we've seen that over the years. And we use an approach such that as the stock price declines, we will buy back more. And I do feel That in this market, Akamai has a very strong presence, both in CDN and Our security business growing at 25% on a very big number. And I do feel that Akamai is worth a lot more in this market.

Speaker 3

And so you may see us buy back additional shares, especially depending on how the stock price fluctuates.

Speaker 10

All right, great. And then you've done a good job adding together some M and A for the security on the security side. Any other tools that you think you need to make yourself more competitive in the market, do you feel like you've got kind of the right mix here to for that product set?

Speaker 3

Yes. We're always looking at new capabilities, as I Excited about the Gardicore acquisition and I think it really does fill out and complete our access story, our ability to stop ransomware and malware. As I mentioned, we already have capabilities that prevent the malware from getting in. Enterprise application access in particular governs what employees can touch and access and even then it has to come through Akamai's application firewall. So we're making sure But malware doesn't come in.

Speaker 3

We also have multi factor authentication, which make sure that the employee is who they say they are. And now with Gardacore, we stop the spread of the malware if it does get in. And there are a lot of ways into the enterprise today. It is Really, despite all the defenses you try to put in place, somebody, for example, in the Capital Pipeline case, a password or a Prudential gets out there. Now we still have ways of catching that somebody is using a stolen credential, but malware does Get in still and so the real key there is stopping the spread and that's what Gardacore does.

Speaker 3

And so now I think It's really nice because you stopped the ransomware with Guardicore, but we've got the whole package and whole solution now. And I think that's really unique in the marketplace and very exciting.

Speaker 10

All right, great. Thank you very

Operator

much. Your next question comes from the line of Amit Duryanani from Evercore.

Speaker 6

Thanks, Lon, and good evening, everyone. I have two questions as well. The first one I was hoping if you could talk about, as I look at the midpoint of your guide for December, is there a way to think about how are you thinking about seasonality in edge And security, and the part I'm really trying to get to is the security numbers may imply a much more severe deceleration than what people are modeling. So just love to understand how are you assuming those 2 segments stacking up in the December quarter?

Speaker 4

Yes, sure. So I'll take that. So we'll start with the Edge. Obviously, Edge is quite a busy quarter in Q4. As I talked about, you have seasonality from e commerce.

Speaker 4

I think it's Obviously, a tougher quarter to call here with some supply chain disruptions and things like that. Does that drive more or less Internet traffic and what does that holiday season look like? Typically a very strong media quarter where you see new devices and games coming online Sorry, devices, consoles, etcetera coming online. And then you also have a lot of sporting events in Q4, Back to school, you've got lots of game releases. So it can be a pretty robust Season for us and obviously challenging to call.

Speaker 4

I kind of looked at the events calendar, it's pretty full. So provided we can see some good traffic, you can see good upside. We delivered that in the last couple of years. In terms of security, It's not as seasonal. Certainly, there are some bundles we have where there is traffic can impact that a bit.

Speaker 4

But I think To take our security guidance, we've been pretty conservative in the way that we've approached security and we've been over delivering every quarter. I think We've had obviously Gardicore is off to a good start. So I wouldn't imply that as a seasonal downtick or anything like that in our security growth.

Speaker 11

Got it. And then if

Speaker 6

I could follow-up, the CapEx number for September quarter and really for December as well, mean CapEx as a percent of sales, I think it will be 14%, 15% for the back half of the year versus 19%, 20% for the last several quarters prior to that. I'm curious, is CapEx coming down because you feel like there's enough capacity you have out there and you can scale it lower? Or is it more that You just can't get your hands on the supply chain and the products you need to drive CapEx. I'm trying to understand what's taking CapEx lower and then how do I think about this as we go into 2022?

Speaker 4

Yes. So I would say it's good execution. And if anything with the supply chain, we're not seeing supply chain disruptions In terms of the fact that we actually, if you remember a few calls ago, we talked about in the pandemic, we took CapEx up and we were pretty cautious In terms of making sure that we had plenty of extra capacity available for if we see the pandemic continue and see traffic grow, etcetera. So we We leaned in, we built up our inventory a bit. We bought a lot of small equipment, so that we're not concerned right now anyway With the supply chain, so I'd say that's part of what's driving it as we built out ahead of demand.

Speaker 4

We're pretty smart in the way we did that. But also I mentioned there's a number of CapEx efficiencies that Adam and his team are working on, not only just software, but network design, deployment optimization, Looking at different hardware improvements and just continuing to drive a big focus on lowering our need for CapEx. Also keep in mind, we have great relationships with the networks and ISPs. So in terms of doing optimizations inside of their networks, we're able to do that as well. So I'd say it's really great execution on the team's part and CapEx has come down pretty significantly.

Speaker 4

You see that And our free cash flow results.

Speaker 6

I'm sorry, does that sustain next year, like this mid teens CapEx as a personal sales, is that the right way to model this out?

Speaker 4

Yes. So I mean, right now, if I'm unless you see another pandemic or some major event and we see some crazy Unexpected traffic growth. Yes, I think it's a sustainable number certainly going into next year. I don't want to get into giving guidance, but I think that I've talked about In the past that we'd be getting back to this level and we're actually operating a little bit better than that.

Speaker 6

Perfect. Thank you.

Operator

Your next question comes from the line of Rishi Jaluria from RBC. Your line is now open.

Speaker 8

Hey guys, thanks so much for taking my questions and nice See, security growth, hold up and actually accelerated this quarter. Two questions. First, I wanted to go a little bit deeper on The supply chain issues, I appreciate you've obviously over invested capacity with the OTT launches and the pandemic last year. So you seem pretty well insulated from the rising costs. But at what point that this continues dragging out, Does it begin to become a worry and you might have to overspend in order to keep capacity and not have to turn away business?

Speaker 8

And maybe related to that, As we think about the environment heading into Q4, how do we expect that to shake out, especially given Q4 is such a traditionally such Strong commerce season. A lot of companies are telling us they're not going to be able to meet demand, especially when it comes to electronic goods. So is that a worry that you have and maybe how are you thinking about embedding that

Speaker 9

in your guidance? Thank you.

Speaker 4

Yes. So I'll take the second part first. That's why we gave a pretty wide range. I just mentioned on the last question that it's hard to predict what the commerce season looks like. And obviously, when you're in the business Delivering Internet traffic, one model could suggest that well shelves are not stocked, people are doing more surfing to find things.

Speaker 4

Another model would suggest that there's not as much shopping and people are giving cash and gift cards. So hard to tell, but we did put out a pretty big range there. Also keep in mind That a lot of our commerce customers, about half of our commerce customers have taken, we call our 0 overage. So You've kind of flattened out that bursting. So the bursting for Commerce is not as big of an impact.

Speaker 4

Q4 still has an impact. In terms of the device cycle, that's an interesting one. We do Expect and we've seen over the last several years, especially in the last couple of weeks of the year, As new devices come online, there's a lot of firmware updates and things like that. I still expect to see that. But there's other things that are not as dependent on that, for example, gaming Releases, new video content that comes out, if you don't have a new machine, you're watching it on your old machine.

Speaker 4

So I still think that we'll have a pretty big, media quarter for sure. But that's why I've given a pretty wide range to try to take those things into consideration. And then on your supply chain question, Xin, you had asked about when does this become a problem. It's funny I asked the same questions to my team as we go through our CapEx build out. We've done a nice job of building out several quarters' worth of inventory here.

Speaker 4

And we've diversified our supply chain And the team has done a good job of ensuring that we're not seeing any significant increase in pricing or anything like that. A little bit on the freight side, but it's not Really material and I think that should start to work itself out. But if we do see another massive growth in traffic, maybe we To run into some problems, but so far so good. And like I said, the team did a really good job preparing, not expecting this type of a disruption in the supply chain, but expecting that The result from the pandemic would last a lot longer, so we did some scenario planning. So we're in pretty good shape at the moment.

Speaker 8

All right. That's really helpful. Thank you so much.

Operator

Your next question comes from the line of Alex Henderson from Needham. Your line is now open.

Speaker 11

Thanks. Looking at the guidance and the commentary, it does sound like your Security business is expected to decelerate to below 20% growth in the 4th quarter. Certainly, with if I add in some of the inorganic, that would Why even lower growth. Is it reasonable to think that the Security business can sustain a 20% growth rate organically in 22 or is that too aggressive an expectation for $1,300,000,000 business?

Speaker 4

Yes. So I think one thing to keep in mind, Alex, is you've got the anniversary of ozavi. So your growth rate Lapse in Q4 for Ferrozovy and then we also had in Gardicore. We've said in the when we did our Analyst Day that we expected to be able to grow 20% CAGR of 3 to 5 years with acquisitions being part of the strategy and you can see that The Gardacore acquisition with the prior guide is only a couple of points of growth. We obviously did much better this year than we expected going into the year.

Speaker 4

Security has over performed every single quarter. We still feel pretty comfortable with our 20% growth rate as we talked about. As a matter of fact, coming out of this year, We're doing a bit better than that. So I think if you're taking the super low end of the range, maybe you could come up with that Formula, but we're expecting pretty solid growth here with security in Q4.

Speaker 3

Yes. And Lee just add, our strategy in Charity is to combine organic development with intelligent and timely acquisitions, and we'll continue to do that. And of course, when you buy a company after a year, its growth becomes organic, and it's no longer counted as an acquisition growth per se. And I think we've had a really great track record of doing that in security, going back all the way to The Lexic acquisition in 2014. And as I mentioned, I think Articore is fundamentally like that in In terms of really transforming our enterprise security business, just like Prolexic transformed our DDoS Business, which of course today is very, very successful.

Speaker 3

We're the market leader by far. And our goal is to do that on the enterprise security side, things like Stopping ransomware and stopping malware. And as we Ed said, as we continue to want to grow our security business over the longer Term of 20 plus percent that will include acquisitions. And I think acquisitions are a good thing. It gives you a jump start on Technology in an important area.

Speaker 3

Gardacor has been working for a long time to develop their micro segmentation approach. I believe it is market leading in what they do. They're the best folks out there. And now we have the benefit of all of the years Akamai is in a position to help them do that. And of course, it fits with a lot of our organic development on technology around EAA It's an ideal combination.

Speaker 3

So we'll continue to do both and working hard to continue our security growth at 20 plus percent.

Speaker 11

Okay. I got it. Thanks. That's helpful. Can you talk a little bit about the pricing environment, where there's been any change in Have you seen more competition or less competition?

Speaker 11

How should we think about the environment? I think we're also seeing enterprises spending more this year. Do you think that that sustains into 2022 Given the first half spike in attacks caused a flurry of spending intentions?

Speaker 3

I think the competitive environment is very similar to what it's been in the past. It is a very competitive environment Across the board from cloud giants, who were also our largest customers, all the way down to startups, Obviously, CDN is a mature environment competitively, and so I don't see there's any fundamental change there. Security It's really a great endowment for us. We're the market leader by far in the core areas of defending and protecting websites, locations and APIs, the leader by far in DDoS prevention. And those are areas that have a lot of attacks taking place.

Speaker 3

And now sort of the new category for us where we'll encounter new competition because we're moving into that space in a big way would be enterprise security. We already have a very strong access solution there and now we have what we believe is the best solution to stop Ransomware with micro segmentation. And by adding that to Akamai, we now have a new set of competitors there Because we're entering their space and we think there's a lot of potential gain for Akamai there and it's really to help major enterprises.

Speaker 11

Great. Thank you

Operator

very much. Your last question comes from the line of Brandon Nispel from KeyBanc Capital Markets. Your line is now

Speaker 9

open. Awesome. Thank you for taking the question. Could you unpack the growth in the Edge Technology Group, please? What was the growth in the quarter for Edge applications?

Speaker 9

And what does that imply for the growth in the Edge delivery business? And then how do you expect these 2 segments within that larger group to trend exiting the year? Thanks.

Speaker 4

Yes. So, Brent, we're not going to break out Edge apps every Quarter, we talked about it last time growing at over 30% and we think that business can continue to Sustain that, I think we'll exit the year on a run rate over $200,000,000 which is a pretty good healthy growth rate there. And then just the again, we're not breaking out the Edge delivery business this quarter. We'll do it at the end of the year.

Speaker 9

If I could just follow-up on that. When you back out some of the one time items that are affecting comparability in the Edge Technology business, specifically, I think, the India app ban you're still lapping, Is that business growing? And what's going to cause that business to return to growth next year? Thanks.

Speaker 4

Yes. So, it's obviously just a tougher compare. This is the Q1 that we don't have that compare. You saw that we were roughly flat In terms of total EdTech, I think as we get into next year, it's an easier compare. I think we're comfortable with our Longer term growth is in the low single digits for the Edge business over time.

Speaker 4

Obviously, with the Edge applications business much faster Growing as that becomes more material that could change the growth rate. But I think it's just continued execution and traffic growth going into next year On a much easier compare, I think it's hard to see a bit of growth rate pick up a little bit there.

Speaker 2

Okay. Thank you, everyone. In closing, we will be presenting at

Speaker 8

a number of investor conferences and

Speaker 4

roadshows throughout the rest of the Q4.

Speaker 2

And details of these can be found in the Investor Relations section of akamai.com. We appreciate you joining us and all of us here at Akamai wish to continue good health to you and yours and have a great evening. Thank you.

Operator

This concludes today's conference call. Thank you for participating and have a wonderful day. You may all disconnect.

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Earnings Conference Call
Akamai Technologies Q3 2021
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