NASDAQ:AKAM Akamai Technologies Q4 2022 Earnings Report $79.79 +0.59 (+0.74%) Closing price 04/25/2025 04:00 PM EasternExtended Trading$79.47 -0.32 (-0.40%) As of 04/25/2025 07:10 PM Eastern Extended trading is trading that happens on electronic markets outside of regular trading hours. This is a fair market value extended hours price provided by Polygon.io. Learn more. Earnings HistoryForecast Akamai Technologies EPS ResultsActual EPS$1.37Consensus EPS $1.27Beat/MissBeat by +$0.11One Year Ago EPS$1.26Akamai Technologies Revenue ResultsActual Revenue$927.78 millionExpected Revenue$904.80 millionBeat/MissBeat by +$22.98 millionYoY Revenue Growth+2.50%Akamai Technologies Announcement DetailsQuarterQ4 2022Date2/14/2023TimeAfter Market ClosesConference Call DateTuesday, February 14, 2023Conference Call Time4:30PM ETUpcoming EarningsAkamai Technologies' Q1 2025 earnings is scheduled for Thursday, May 8, 2025, with a conference call scheduled at 4:30 PM ET. Check back for transcripts, audio, and key financial metrics as they become available.Q1 2025 Earnings ReportConference Call ResourcesConference Call AudioConference Call TranscriptAnnual Report (10-K)Earnings HistoryCompany ProfilePowered by Akamai Technologies Q4 2022 Earnings Call TranscriptProvided by QuartrFebruary 14, 2023 ShareLink copied to clipboard.There are 16 speakers on the call. Operator00:00:01Good afternoon, and welcome to the Akamai Technologies Inc. Earnings Q4 Fiscal Year 2022 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Tom Barth, Head of Investor Relations. Operator00:00:34Please go ahead. Speaker 100:00:37Thank you, operator. Good afternoon, everyone, and thank you for joining 4th quarter 2022 earnings call. Speaking today will be Tom Layton, Akamai's Chief Executive Officer and Ed McGowan, Akamai's Chief Financial Officer. Please note that today's comments include forward looking statements, including statements regarding revenue and earnings guidance. These forward looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Speaker 100:01:11The factors include any impact from macroeconomic trends, the integration of any acquisitions and any impact from geopolitical developments. Additional information concerning these factors is contained in Akamai's filings with the SEC, including our annual report on Form 10 ks and quarterly reports on Form 10 Q. The forward looking statements included in this call represent the company's view on February 14, 2023. Akamai disclaims any obligation to update these statements to reflect new information, future events or circumstances, except as required by law. As a reminder, we will be referring to some non GAAP financial metrics during today's call. Speaker 100:01:54A detailed reconciliation of GAAP and non GAAP metrics can be found under the financial portion of the Investor Relations section at akamai.com. And with that, let me turn the call over to Tom. Speaker 200:02:07Thanks, Tom, and thank you all for joining us today. I'm pleased to report that Akamai delivered strong results in the 4th quarter, Exceeding the high end of our guidance range on both the top and bottom lines, despite ongoing challenges with the global economic environment. Q4 revenue was $928,000,000 up 6% year over year in constant currency. Our revenue growth was driven by continued strong demand for our security products, our fast growing compute business and by higher than expected delivery traffic. Security and compute accounted for 55% of our overall revenue in the 4th quarter and grew a combined 22% year over year in constant currency. Speaker 200:02:50Non GAAP operating margin in Q4 was 28%. Q4 non GAAP EPS was $1.37 per diluted share, down 2% year over year in constant currency. For the full year, revenue was $3,620,000,000 up 8% over 2021 in constant currency. Non GAAP operating margin was 29%, Down from 32% in 2021 and slightly below our goal of 30%. The decline last year was due to the impact of foreign exchange, As Ed will describe in a few minutes, we're taking several actions to reduce costs and to shift resources to areas with the strongest potential for growth, such as cybersecurity and especially cloud computing. Speaker 200:03:49Going forward, we anticipate that our margins will likely remain slightly under 30% in the near term and our goal is to grow margins back over 30 down 1% over 2021 in constant currency. 2022 was another strong year for cash generation at Akamai With $816,000,000 in free cash flow, representing 23% of revenue, Akamai's strong cash generation enables us to make to buy back 6,400,000 shares. Over the last 10 years, we've reduced the number of Akamai shares outstanding by approximately $21,000,000 or 12%. I'll now say a few words about each of our 3 main lines of business Starting with security. Our security products generated revenue of $400,000,000 in Q4, up 14% year over year in constant currency. Speaker 200:05:01For the full year, security revenue reached $1,540,000,000 and grew 20% over 2021 in constant currency. We saw especially strong growth for our market leading Gardacore segmentation product, With revenue reaching $68,000,000 for the full year. New segmentation customers in Q4 included 1 of the largest companies in the U. S, a leading Internet services conglomerate in Japan and one of the largest banks in Scandinavia. Enterprises are choosing our segmentation solution because of its ability to protect against ransomware and data exfiltration attacks, And also for the visibility it provides into their internal infrastructure. Speaker 200:05:48These are also among the reasons that Akamai was named as the leader in the Forrester New Wave for micro segmentation last year. We also saw large wins for our market leading Security Solutions in Q4, including one of the UK's largest multinational energy companies, 1 of the big 3 multinational banks in Singapore and 2 of the largest tech hardware companies in the U. S. Overall, security accounted for 43% of our revenue last year, up from 39% in 2021. In 2023, we expect security to become our largest line of business. Speaker 200:06:28This represents a significant milestone in our evolution since we pioneered the CDN marketplace 25 years ago. That said, and as the security business becomes larger and with customers becoming more cost conscious due to the challenging macroeconomic environment, the growth rate of our security business has slowed, a trend that we anticipate will continue over the coming year. As you might expect, we're working hard to realize the full potential of our security business, both in terms of growth and efficiency. For example, we're in the process of moving the compute components of our security products From 3rd party cloud providers to our new Akamai Connected Cloud Platform, a transformation that will save us a substantial amount of OpEx over the next Several years. We're redeploying resources within security from lower growth areas to high growth areas such as segmentation. Speaker 200:07:27And we're redeploying go to market resources to achieve stronger cross sell and penetration within our existing base. We're also working more closely with partners to drive better adoption among new customers. And we're continuing to innovate new capabilities, such as our recently released account protector and our new brand protector solutions to keep our customers safe amidst the rapidly evolving attack landscape. While we believe that our security business will continue to generate strong returns for our shareholders, We foresee an even bigger opportunity in cloud computing and its potential to return Akamai to double digit top line growth over the longer term. Our compute business performed well in Q4 with revenue of $112,000,000 up 65% year over year in constant currency. Speaker 200:08:20For the full year, compute revenue was $405,000,000 and grew 64% over 2021 in constant currency. Earlier today, we unveiled Akamai Connected Cloud, our massively distributed platform for cloud computing, security and content delivery. Akamai Connected Cloud links Linode's 11 core data centers with Akamai's 4,100 edge computing locations. In addition, We're in the process of building out 14 more core enterprise scale data centers with at least 3 expected to come online in the next few months. We believe integrating these core cloud computing data centers with our unique edge platform will allow us Cloud capability and the first of more than 50 distributed cloud computing sites available in the second half of the year. Speaker 200:09:22The distributed sites will enable us to bring cloud computing much closer to end users around the world, which will further enhance performance benefits of Akamai Connected Cloud. Of course, and as Ed will describe shortly, we'll be incurring substantial CapEx And co location costs associated with the build out of our compute infrastructure over the near term. We're also in the process of retasking 1,000 positions or about 10% of our workforce to spend the majority of their time working on the development, deployment, Support and go to market efforts associated with Akamai Connected Cloud. Because of the natural synergy and close integration between cloud computing and our existing Edge platform, we believe we can accomplish this transformation without adding significant headcount to This shift will also further enhance the efficiency of our delivery business. We're undertaking this ambitious investment in Akamai Connected Cloud because we believe it will create substantial value for shareholders in the medium and long term. Speaker 200:10:32We expect to achieve nearly $500,000,000 in revenue from compute in 2023. And the investment we're making this year should help drive that number substantially higher in 2024 and beyond as we use the new capabilities and capacity to support mission critical enterprise workloads. I think it's worth noting that Akamai is taking a fundamentally different approach to the cloud computing market than providers who base their platforms solely on core data centers. Our strategy is to offer the world's most distributed As IDC's VP of Research, Dave McCarthy says, the cloud's next phase requires a shift in how developers and Enterprises think about getting applications and data closer to their customers. It redefines how the industry looks at things like performance, Scale, cost and security as workloads are no longer built for one place, but are delivered across a wide IDC adds that Akamai's innovative rethinking of how this gets done And how it is architecting the Akamai Connected Cloud puts it in a unique position to usher in an exciting new era for and to help enterprises build, deploy and secure distributed applications. Speaker 200:12:07We couldn't agree more. Distributed applications require a distributed architecture. Akamai's leadership position at the edge of the Internet enables us to scale just about everything we touch. We scale content, putting digital experiences closer to users than anyone. We scale cybersecurity, keeping threats farther away from business and people. Speaker 200:12:30And now we're building on Akamai's 25 years of Although we still have much work to do, we're encouraged by the reaction from customers who want to realize the value of our approach. Last quarter, a well known digital fitness platform brought business to us that they previously did with a major cloud provider. They chose Akamai Connected Cloud because we can optimize their performance and provide better economics. When a gaming company suffered a DDoS attack that took out their Internet Relay chat servers, they turned to Akamai Connected Cloud to get back online. After utilizing Connected Cloud for a few weeks, they also migrated their peer to peer matchmaking servers to Akamai. Speaker 200:13:23This is what they say to other gaming businesses with similar use cases. Our adoption of Akamai's cloud computing solution was painless and turnkey. Akamai has a great backbone network and the connective layer between our global servers has been rock solid. With Akamai's extensive global network, we provide a better experience to our gamers by delivering from the edge and reducing latency. With Akamai, there's no reason to go anywhere else. Speaker 200:13:53As you can see from this example, there's a strong synergy between our emerging cloud computing business Turning now to content delivery, our CDN business generated revenue of $415,000,000 in Q4, down 8% from Q4 2021 in constant currency. For the full year, delivery revenue was $1,670,000,000 also down 8% year over year. Traffic on the network was better than expected in Q4, reaching a new peak record of 2 61 terabits per second on December 14, as we supported more than 50 customers globally in delivering the World Cup, along with other streaming, gaming and software download businesses. This World Cup was the first time in Akamai's 25 year history We delivered more than an exabyte of data for an event. How much is an exabyte? Speaker 200:14:54It's 1,000 petabytes. That's 1,000,000,000 gigabytes. For the person transcribing this call, that's 1 byte with 18 zeros after it. That's a lot of zeros Looking back at 2022, we're pleased that we continue to grow the business and add significant new capabilities in the face of serious global macroeconomic challenges. Today, we're redefining our future with Akamai Connected Cloud to become the world's most distributed cloud platform with leading solutions for delivery, security and cloud computing. Speaker 200:15:50With our expanded strategy and business model, we believe that we're on a path to provide even greater value for shareholders and to make Akamai the cloud company that powers and protects life online. Now I'll turn the call over to Ed for more on our Q4 and full year results and our outlook for 2023. Ed? Speaker 300:16:12Thank you, Tom. Today, I plan to provide brief highlights of our strong Q4 results, some color on 2023 and touch on some items to help you with your models and then close with our Q1 and full year 2023 guidance. Starting with Q4 highlights. We were very pleased with our strong Q4 results despite continued difficult macroeconomic conditions. Q4 revenue was $928,000,000 up 2% year over year or 6% in constant currency. Speaker 300:16:45We saw very strong growth in both our compute and security businesses as well as better than expected traffic in our delivery business during the Q4. As Tom mentioned, our compute business was $112,000,000 Growing 61% year over year as reported and 65% in constant currency. We continue to be very pleased with the initial feedback from our customers on our future compute capabilities, and we are very optimistic about capturing a meaningful share of our customers' cloud spend in the years to come. Our security revenue was $400,000,000 up 10% year over year and up 14% in constant currency. Our delivery revenue was $415,000,000 which declined 12% year over year and 8% in constant currency, traffic exceeded our expectations during the quarter led by higher video traffic, stronger than expected commerce traffic in record setting World Cup online viewership. Speaker 300:17:48International revenue was $445,000,000 up 4% year over year We're up 12% in constant currency, representing 48% of our total revenue in Q4. Foreign exchange fluctuations had a negative impact on revenue of $2,000,000 on a sequential basis and negative $36,000,000 on a year over year basis. Non GAAP net income was $216,000,000 or $1.37 of earnings per diluted share, down 8% year over year and down 2% in constant currency, but $0.07 above the high end of our guidance range. Moving to our capital allocation strategy. During the Q4, we spent approximately $178,000,000 to buyback approximately 2,100,000 shares. Speaker 300:18:37For the full year, we spent approximately $608,000,000 to buy back approximately 6,400,000 shares. We ended 2022 with approximately $1,200,000,000 remaining on our current repurchase authorization. Our intention is to continue to buy back shares to offset dilution from employee equity programs over time and to be opportunistic in both M and A and share repurchases. It's worth noting that in addition to offsetting dilution, we have reduced shares outstanding by approximately 21,200,000 shares or 12% since January 1, 2013. Before I move on to guidance, there are several items that I want to highlight to help you with your 2023 models. Speaker 300:19:25The first relates to a change in our network server useful lives. As some of you may recall, we announced on our Q4 2018 earnings call that we were required to extend the useful life of our network servers from 4 years to 5 years based on the actual server useful life trends. We carefully monitor the useful lives This extended useful life is a direct result of the continued software and hardware initiatives that we have put in place to manage our global network more efficiently. Because we are now using the servers in our network for an average of 6 years, we are required under GAAP accounting to adjust our useful life policy to 6 years beginning in Q1 of 2023. Please keep in mind that this change has no impact on cash flow, but will result in a depreciation benefit of roughly $56,000,000 in 2023 and approximately $31,000,000 in 2024. Speaker 300:20:38We have provided a supplemental table in the Investor Relations section of our website that details the impact of this change. 2nd, We're expecting non GAAP gross margins to decline by approximately 2 points in 2023 due to 2 primary items. 1st, As we build out our new compute locations, we are required to account for our co location leases under GAAP Accounting Standard ASC 842. In order to achieve more favorable unit economics, we often sign longer term co location agreements That includes certain financial commitments. ASC 842 requires we straight line the cost of those future financial commitments over the life of the agreement. Speaker 300:21:24As a result, we expect to record approximately $40,000,000 of non cash co location costs related to this accounting standard in 2023. The second item impacting gross margin is our 3rd party cloud costs. As we've mentioned in the past, we expect to migrate the majority of our 3rd party cloud spend onto our own cloud infrastructure over the next 12 to 18 months. That said, we expect the majority of the migration effort to impact the back half of the year. We expect we will incur just over $100,000,000 of third party cloud and cost of goods sold in 2023. Speaker 300:22:03We do however expect we will exit the year on a path to significantly lower our 3rd party cloud costs in 2024. 3rd, we expect international sales will represent nearly half of our total revenue in 2023 And the currency markets remain incredibly volatile. I will provide more detail on the impact of currency on each quarter's earnings call, It is important to note that the strengthening or weakening of the U. S. Dollar can have a material impact on our reported results and guidance. Speaker 300:22:36As a reminder, the currencies that have the largest impact on our business are the euro, the yen and the Great British Pounds. 4th, I want to remind you of the typical seasonality that we experienced on the top and bottom lines throughout the year. Regarding revenue, The Q4 is usually our strongest quarter and we typically see a step down in Q1 revenue from Q4 levels. Regarding profitability as a reminder, In Q3, we have the annual company wide merit increase and in Q4, we typically see higher sales commission expense. And one final thought before we move on to guidance. Speaker 300:23:13Tom mentioned that we will be investing in what we believe will be 2 areas of higher growth for the company For years to come, security and compute. While we expect to manage the business below our target operating margin of 30% in 2023, We expect 2023 to be a higher than normal year for CapEx. We will continue to reduce costs and drive efficiency gains in key areas Such as 3rd party cloud savings. We expect to save over $100,000,000 in annual cost as we migrate workloads From the hyperscalers to our own platform over the next 12 to 18 months. Real estate rationalization. Speaker 300:23:54As our employees have largely elected to work remotely, We expect to reduce our real estate costs by approximately $20,000,000 in 2023 and achieve further savings in 2024. Shifting resources. As Tom mentioned, we'll be incurring substantial CapEx and co location costs associated with the build out of our compute infrastructure over the near term. As a result, we are prioritizing certain actions in retasking approximately 1,000 positions from other parts of the business to our compute business. In addition, during the Q4, we closed approximately 500 open positions And we will continue to be very prudent with any headcount additions during the year. Speaker 300:24:35Finally, we are lowering CapEx related to delivery. We expect to reduce our CapEx related to the delivery business to 4% of revenue in 2023. Now moving on to guidance. Our guidance for 2023 assumes no material changes, good or bad, in the current macroeconomic landscape, which we view as challenging but navigable. For the Q1 of 2023, we are projecting revenue in the range of $900,000,000 to $915,000,000 were up 0% to 1% as reported or 2% to 3% in constant currency over Q1 2022. Speaker 300:25:15Foreign exchange fluctuations are expected to have a positive $13,000,000 impact on Q1 revenue compared to Q4 levels, but a negative $19,000,000 impact year over year. At these revenue levels, we expect cash gross margins of approximately 73%. Q1 non GAAP operating expenses are projected to be $299,000,000 to $303,000,000 We anticipate Q1 EBITDA margins of approximately 39% to 40%. We expect non GAAP depreciation expense be between $109,000,000 to $111,000,000 and we expect non GAAP operating margin of approximately 27% to 28% for Q1. With the overall revenue and spend configuration I just outlined, we expect Q1 non GAAP EPS in the range of $1.30 to $1.34 The CPS guidance assumes taxes of $43,000,000 to $44,000,000 based on an estimated quarterly non GAAP tax rate of approximately 17.5%. Speaker 300:26:17It also reflects a fully diluted share count of approximately 157,000,000 shares. Moving on to CapEx. We expect to spend approximately $220,000,000 to $228,000,000 excluding equity compensation and capitalized interest in the Q1. This represents approximately 24% to 25% of anticipated total revenue. Looking ahead to the full year, We expect revenue of $3,700,000,000 to $3,780,000,000 which is up 2% to 4% year over year, both in as reported and in constant currency. Speaker 300:26:51We expect security revenue growth to be in the low double digits for the full year 2023. We are estimating non GAAP operating margin of approximately 27 28% and full year CapEx is expected to be approximately 21% of total revenue. We expect our CapEx to be roughly broken down as follows: approximately 4% of revenue for our delivery business Approximately 9% of revenue for our compute business, of which roughly $100,000,000 of that will be for internal workloads moving in house and the remainder for future revenue growth. Approximately 7% of revenue per capitalized software and the remaining about 1% for IT and facility related spend. We expect non GAAP earnings per diluted share of $5.40 to $5.60 and this non GAAP earnings guidance is based on A non GAAP effective tax rate of approximately 17.5% and a fully diluted share count of approximately 157,000,000 shares. Speaker 300:27:53In closing, we are very pleased with the strong finish to 2022 and we are excited about our growth prospects in both security and cloud computing. Tom and I would be happy to take your questions. Operator? Operator00:28:08We will now begin the question and answer Our first question will come from James Fish with Piper Sandler. You may now go ahead. Speaker 400:28:36Hey, guys. Thanks for the questions and appreciate all those details on the moving part. Ed, I know there's a lot there. I actually want to dive into the security business here. Tom, you had mentioned thinking about Go to market investments and looking to prioritize on how to better address the market. Speaker 400:29:00Are you guys changing at all how you're approaching the market, especially on the network security side with 0 Trust as it seems to be a little bit of a disconnect? And Ed, is it possible we can actually get an update on what that access control, 0 Trust kind of business finished at for 2022? Speaker 200:29:19Yes. No, good question. And we are increasing the allocation of our go to market Investments around the enterprise side and 0 Trust. We have specialist teams there really focused on Gardacore And now the other enterprise products as we integrate them in with the Gardacore solution. And we've had a lot of success with that team, as you can see from the really good growth in the Gardicore product. Speaker 200:29:48And so we're Doubling down there and over the course of this year, you'll see I think more cross sell with our enterprise application access product in Gardacore and ETP. And then I'll turn the other question over to Ed. Speaker 500:30:05Hey, Jim. Yes. So, what I'd say about 0 Trust is, we ended the year on a run rate of about $200,000,000 in 0 Trust And we had a very strong finish to Gardicore. And Gardicore, we'd expect this year to be on a run rate of $100,000,000 very, Speaker 300:30:21very strong finish to the year at Guardicorp. Speaker 400:30:25Helpful. And just a follow-up on the compute side. The big question we've been getting is whether the compute business could get traction really outside the media vertical? Or is that really going to be the focus In terms of gaming and streaming kind of storage and compute on the back end and kind of what's the confidence level that not going to see an erosion in that more traditional Linode SMB base? Thanks guys. Speaker 200:30:53I think media is the big First, set of adopters. In fact, as you know, one of the world's largest, if not the largest social media company is already using it. And I think that's because media really is concerned about performance. And so we're doing things like transcoding much Closer to the end user and that's a key thesis of our architecture and our approach to compute is to be much more distributed Yes, the compute have containers and VMs much closer to the end users. Gaming, another example, that makes a lot of sense. Speaker 200:31:30Things like leaderboards, manage groups of users as they play the game. You need low latency. There's a lot of back and forth with the clients and you want that to be close to the end user. That said, this is not limited to media. Commerce is also very sensitive to performance and we've already signed up commerce companies. Speaker 200:31:52And commerce companies, of course, especially with these macroeconomic challenges, very sensitive to cost. And so we're in a position where we can give them, I think, With Akamai Connected Cloud, better performance at a more competitive price point. So I think you'll see penetration on the commerce vertical as well. And of course, Akamai is really close to the big companies in media and commerce. I have the opportunity to talk to the Most senior executives in many of these companies and they're very interested in what we can do for them. Speaker 200:32:28They've been asking us to do this and I think they're excited about the potential for Akamai Connected Cloud. I think down the road, take a little bit longer, The financial vertical is another vertical that's very strong for Akamai because of our work in security and our market leading products there. There we have a little bit more work to do on the certifications. The bar is a little bit higher for financial institutions, but I think that would follow Media and Commerce in terms of adoption of Akamai Connected Cloud. Operator00:33:06Our next question will comes from James Breen with William Blair. You may now go ahead. Speaker 600:33:12Thanks for taking the question. Can you just talk a little bit about sort of the internal decision making around shifting resources to the security and cloud side and maybe a little bit on delivery side of Market share, to some extent, giving up some market share within that business for the benefit of overall profitability in the long term? Thanks. Speaker 200:33:33Well, yes, I think it makes good sense to be shifting resources towards the higher growth areas, both Security, but especially in cloud computing. I think we'll see a lot stronger return on the investment. Speaker 700:33:49We still Speaker 200:33:49have the market leading delivery business. We haven't lost share to the best of my knowledge. We have turned away Some small amount of the business that's very spiky, and that doesn't make as much sense for us to take that business if Price point isn't right today, and that's because traffic growth rates are lower than they used to be. So you have to spend money to build out for the spike, And if your traffic growth rates are lower, it takes longer to fill that capacity on a daily basis. With delivery, your cost is associated with your With your peak and your revenue more associated with the daily usage or total aggregate usage. Speaker 200:34:32And so we have, as we've talked about, Turned down some deals there just because the ROI doesn't make as much sense in this environment and we get a lot better ROI from investing in Compute, and I think obviously security. And then within security, we're reallocating investment decisions there To focus more resources on the fastest growing security products. So I think it just makes good sense. And for now with compute, it's something our customers are really asking us to do. And even in this challenging macroeconomic environment, It's something that I think the timing may be even a little bit better there because of that. Speaker 600:35:17Great. Thanks. Operator00:35:22Our next question will come from Keith Weiss with Morgan Stanley. You may now go ahead. Speaker 600:35:28Excellent. Thank you guys for taking the question. A couple of questions. I have a ton of questions, but I'll try to limit it to 2 or 3. On the cloud computing side of the equation, the word of the year amongst investors has been optimization. Speaker 600:35:43And we've heard it from AWS and we've heard it from Azure. I'm really interested to hear how that impacted Linode, given kind of being a lower cost provider in the marketplace. Did you see optimization of people trying to sort of reduce the amount of consumption on your platform? Were you guys like more of a net beneficiary People are ultimately seeking just kind of lower costs overall. And then also on cloud, I don't know, Did you guys mention what the contribution was from Linode this quarter? Speaker 600:36:13I believe you guys have been given the kind of inorganic contribution for the couple of quarters. And then I have one for Ed on the margin side of the equation. Speaker 200:36:22All right. I'll take the first part of that and let Ed take the second All right. I think Linode is a much smaller company and really sort of a different market than the giant cloud companies that are Maybe referring to optimization. So I didn't see we don't see a big impact on Linode. Now what we're doing is making Linode so it can be used by the big enterprises for mission critical applications. Speaker 200:36:50And that in part is building out scale, it's making it be more distributed, Available in more of Citi, integrating it with the Akamai platform in our Edge regions and increasing the functionality. So a lot of work taking place on the Linode platform, so we can sell it at a much higher scale to major enterprises. And we're in the stage now with early adopters there. And I think as we get towards the end of this year, we'll be in a position to take on a lot More business there. And I think the value proposition is that we would have better performance, we'll be more distributed closer to end users Adding more competitive price points. Speaker 200:37:32And I think in this environment, yes, pricing matters, especially you look at, as we talked about, big media, big Commerce, they care and they are spending a lot in the cloud today. So I think that's a phenomenon you'll see take effect as we're in a position to take on more large scale business from large enterprises? And then Ed, I'll you can take the second part of that question. Speaker 500:37:58Yes, sure. So the note, it will get more difficult to break up sort of merging in with everything, but it was about $34,000,000 a little over $34,000,000 We did see a We did see a slight increase in the growth rate as the year went on. And we haven't seen any change in the consumption around optimization, Meaning folks are using less of the cloud at this point. Speaker 600:38:20Perfect, perfect. And then on the expense side of the equation, I just want to make sure I'm understanding this correctly. It sounds like you're slowing down or pausing hiring and I'm assuming you closed those positions you hired into them, but you just like took it off the job board, if you will. And then repositioning employees rather than any like restructuring or headcount reduction. Should the way that we should be thinking about it is you're aiming towards relatively flat headcount in 2023? Speaker 500:38:48Yes, Keith. So the way to think, it will probably go up a little bit. It won't be up as much as it's been up certainly last year. But I mean, you're thinking about it in the right way. And one of that we're fortunate enough to do is, if you think about what we would what typical company would do if you didn't have the skill sets and how should have to do a layoff, that's And then you have to go hire new talent. Speaker 500:39:06We're fortunate enough in the areas that Tom talked about, whether it's development or build out of the network, the sales functions That we can shift those resources over. So if you think about the cost to build out what we're doing, it would cost somebody else a significant amount of money, but we're able to shift those resources. As far as the new headcount going forward, we're going to be pretty judicious with where we're hiring, but it's going to be primarily in the areas of cloud and security and maybe a few on the go to market side. Speaker 600:39:32Got it. And the shift takes place both in terms of development as well as go to market? Or is it more so like the development resources are being shifted? Speaker 200:39:41There's a lot of resources being shifted within our platform and delivery organizations. Think of the hundreds of people that are managing our network deployment, that build out our 4,100 regions today and the tremendous scale we have and they are now heavily focused on building out compute resources. Think of the people that manage The operations, the automatic deployment of software, the failover, the load balancing, the resiliency, They are heavily focused on incorporating those capabilities for compute, building on top of the Linode framework. So I would say The large majority of the resources are of that nature that we're retasking. Speaker 600:40:28Outstanding. Thank you so much for taking the questions, guys. Operator00:40:34Our next question will come from Tim Horan with Oppenheimer. You may now go ahead. Speaker 800:40:39Thanks guys. Also on the cloud, can you talk a little bit about your improvement in price and performance versus The incumbents, can you give us some metrics there? And then can you talk a little bit about what type of cloud you're building out for? I know, Tom, in the past, you were a little skeptical that we could do kind of gaming as a service over cloud infrastructure. Is that changing? Speaker 800:41:00And You could optimize your cloud for AI or blockchain or more networking or very, very low latency. Just any color there. And then lastly, Have you contemplated maybe partnering with some of the larger cloud providers with AI really starting to take off? Can you Be a partner to a few of them or one of them that would really accelerate things? Speaker 900:41:23Yes, good Speaker 200:41:24questions. We'll be the most distributed cloud And we're building out the core cloud capabilities and then this notion of a more distributed Containers closer to the edge, VMs closer to the edge. Now that will give you better performance for things where you want to be close And our pricing will be less already. You can look at the list pricing and see that it's less than what the hyperscalers charge. And because we're integrating it with our backbone and with our Edge platform, that gives us great economics On the delivery, taking the data in and out of storage or compute and getting it to end users, We're in a position to do that at a lower cost and to give consumers a better price point. Speaker 200:42:31Yes, this works not for all gaming functions, but for a lot of the things you want to do with gaming. It's a great use case. Streaming, obviously, transcoding, APIs, chatting APIs, people communicating during a Boarding event, that's all is very relevant to having a more distributed model. AI, I think Elementary stuff you can put in a container or VM, yes, that makes perfect sense. If you want to have the monolithic storage associated with that, that's more cloud, core Cloud compute, I would say. Speaker 200:43:06I think in terms of partnering, yes, we have a lot of customers that use Akamai services today as well as the cloud giants. In fact, the cloud giants themselves, a couple of them are very large Akamai customers So they also use their own services. So I think it's an ecosystem where, yes, I think there'll be customers that would use us and use the hyperscalers Depending on the application and what they're looking to do. And we very much believe in a multi cloud approach. Speaker 600:43:39Thank you. Operator00:43:43Our next question will come from Mark Murphy with JPMorgan. You may now go ahead. Speaker 1000:43:50Thank you very much. Is it possible to ballpark the revenue contribution that was driven by this huge scale of the World Cup So that we could then remove that from our models for the next 3 years and then I guess presumably included back in year 4? Speaker 500:44:08Yes. Hey, Mark, it's Ed. It's about $5,000,000 roughly. Speaker 1000:44:13Okay, got it. And then As a follow-up, just to clarify, during Q4, were you able to capture some of the business that Amazon is losing Either due to the lower pricing structure that you have for Linode or because you have this advantage of Broader points of presence. I guess I'm just interested in it sounds like from what you're describing that potential is there. I'm just wondering if there was a material Benefit or tailwind from that in Q4? Speaker 200:44:46Not in compute in Q4. Obviously, we compete very successfully In delivery and security, with the hypersalers with the market leader there, now in compute, they are the market leaders by far. And so nothing that we would do and compute is going to make any difference to them. I mean, we're looking to get to a 1% market Share in a market that's $100,000,000,000 to $200,000,000,000 a year. So it'll take us a while in compute before I think a hyper Scalar would even really, really notice. Speaker 200:45:22And of course, the 1% or 2% market share means a lot to us in compute, that several $1,000,000,000 Needed less obviously to folks at the scale of those guys. Speaker 1000:45:35Understood. Thank you very much. Operator00:45:41Our next question will come from rishi Jaluria with RBC. You may now go ahead. Speaker 700:45:47Wonderful. Thanks so much for taking my questions. I've got 2. First, I wanted to start on the compute side of the equation. I Appreciate all the color around CapEx. Speaker 700:45:57And please forgive me if my math is shoddy over here. But if I just do rough back of the envelope numbers, right, with 9% of total revenue being CapEx specifically for the compute business. And then I strip out $100,000,000 of non recurring. That's still telling me that CapEx, compute CapEx this year in 2023 is going to be 45% of Compute revenue, which I get it's a growing business and everything. Number 1, am I directly thinking about this? Speaker 700:46:25And maybe number piece number 2 to that is how should we be thinking about steady state CapEx for the compute business once we get through maybe the next year, year and a half? And then I've got a follow-up. Speaker 500:46:39Yes, sure. So you're doing the math right. So the way to think about the $100,000,000 that will enable us for our internal use, that will enable us to save Lot more than $100,000,000 So, think of it, you think about it right in terms of as a one time sort of burst of a charge. Obviously, if we continue to use our own Compute capabilities over time down the road will be adding a little bit from time to time there, but you're thinking about that correctly. In terms of what does a steady state look like? Speaker 500:47:06We talked at the Analyst Day about how you can approximate sort of future growth Percentage with what you would spend. So for example, if we're at $1,000,000,000 and we're spending 30% CapEx, our growth rate would be probably around 30%. It's not quite dollar for dollar, but it's sort of a rough approximation. So think of us spending roughly $100,000,000 this year on Internal use another say call $225,000,000 to $250,000,000 depending where you are on your models. That enables you to get that type of revenue scale potentially. Speaker 500:47:38Obviously, it's going to have to play out in the market a little bit more, if we get a little bit less. That's a pretty decent rule of thumb. And then obviously, as we're growing out these locations, we're Pretty ambitious in terms of the core locations that we're putting online, also distributed locations we're putting online. We're going to be investing ahead of revenue. So I would expect for the next year and a half or two years to have elevated CapEx related to the compute business and we'll start to scale into it. Speaker 700:48:04Okay, got it. Thanks. That's helpful. And then just maybe going back to the security business, going past This year longer term, what needs to happen to see security overall re Accelerate to growth rate that you'd be happy with. Is that primarily going to be driven by continued Guardicore mix shift? Speaker 700:48:27Is that going to be more on the 0 Trust portfolio ex Guardicore? Or maybe walk us through kind of what needs to happen to get security up to kind of an organic growth rate that you'd be happy with? Thanks. Speaker 200:48:38Yes. No, I think you characterized it well. And it is more the mix shift to the newer products for us that are growing at a rapid rate, but are still relatively small. We've got a substantial return from Bot Manager now, That's a great example, starting to really help. Next is Gardacore, which as Ed mentioned, we want to as we exit 23 should be at over $100,000,000 run rate. Speaker 200:49:09And once you start getting to that size and it's rapidly growing, it Starts making a difference for the big security number. And of course, as that number gets bigger, it obviously gets more challenging to maintain the higher growth rates. We're continuing To invest in new capabilities there, account protectors off to a very good start, really excited about that. But it will take time To do that. And we're continuing to look for potential acquisitions that can help jumpstart growth. Speaker 200:49:41I don't think anything huge that gets you the return right away, but areas that we think are really important that we can become market leaders in, Like we've done for application firewall, bot management, for segmentation and that over then a period of years can drive significant growth Operator00:50:07Our next question will come from Amit Dheri Anani with Evercore. You may now go ahead. Speaker 1100:50:14Thanks. Two questions for me as well. I guess the first one, when you think about 2% to 4% kind of top line growth in 2023 in constant currency, I think you talked about security growing double digits. Is there a way to think about how do you think growth stacks up on the compute and delivery side as well for the year? Speaker 500:50:31Yes, sure. So while we didn't give specific guidance for either delivery or compute, Tom did talk about us Achieving $500,000,000 or so in compute revenue. So depending on where you put your models, you're either side of $500,000,000 for compute and you just solve for The delivery, I think if you were to be on the higher end of the business delivery might do a little bit better as we saw in Q4, potentially get security going If the macroeconomic conditions improve and then obviously, really just a timing issue in terms of when we can start moving major workloads on compute. Speaker 1200:51:06Got it. And then as we Speaker 1100:51:08think about sort of the path from, let's just say, 27.5% operating margins that you'll be at in 'twenty three Towards this 30% kind of target you folks have had in the past you have now actually, what do you think it takes to achieve that target? Is there a revenue number that you need to get There are a mix or the cost reduction. If you just maybe provide a bit of a bridge on how do you get from 27.5% to 30% EBIT margins, that would be really helpful. Speaker 500:51:33Yes. So it's a little bit of everything, right? But I think as we laid out about 5 or 6 different things that we're doing, probably the biggest near term item would be The 3rd party cloud costs. So as we migrate that to our own cloud, we're going to save about $100,000,000 or so. Think about that as some of that will happen this year, a lot more of it in 'twenty four and then by 'twenty five, we should have almost a majority of our Internal cloud or third party cloud on our internal system. Speaker 500:52:03So that's 2 to 3 points right there. Co location, I talked a bit about the Audity of the ASC 842 and lease accounting, we have a little bit more of a burden that we have to take at the beginning of some of these longer term agreements. But also we're spending on co location that we haven't quite scaled into yet. So there's your question about revenue as revenue scales, you'll get scale with your margins. And then just through some of the depreciation savings that we're getting on delivery and the real estate savings. Speaker 500:52:33We're Call it before this year around $100,000,000 in real estate, we're going to save about $20,000,000 this year, probably room to get Maybe another 20 or 30 out of that as well. So it's really a combination of getting the compute revenue to scale into our investments in mostly our co location facilities And 3rd party cloud savings, those would probably be the 2 biggest areas for margin expansion. Speaker 200:52:58Perfect. And by the way, it's think Speaker 1100:52:59most of the ramp to margins is going to be driven by self help levers versus revenue tailwinds. I mean, it seems like the SKU might be a bit more on self help. Is that a fair way to characterize it? Speaker 500:53:10Yes, I mean, I think that's when you look at the size of those numbers, certainly, I mean, obviously, revenue cures all your rails, right? We've got a pretty scalable model. So if we see Acceleration in revenue, especially on the compute side, you're going to see pretty good flow through. But yes, there's a lot in our control here. I think we're doing the responsible things as things as far as hiring goes, shifting resources, focusing on reducing our real estate costs and really focusing on driving down that third party cloud costs, which has really Taking a pretty big chunk out of our gross margin. Speaker 1100:53:39Perfect. Thank you. Operator00:53:44Our next question will come from Fatima Boolani with Citi. You may now go ahead. Speaker 1300:53:50Good afternoon. I appreciate you taking my questions. 2 from me. On the delivery segment, the last couple of years for you have been Maybe a little bit more erratic just by way of lapping some of the benefits from the pandemic, some of the dynamics You saw in the gaming area where trends are moderating. So Ed, at a high level for you, when we think about the underlying cadence From a volume perspective, what are you assuming that's maybe different, the same, better or worse versus the trends you saw This year, I'm considering the big renewal cohort, what you've mentioned around holding co on pricing. Speaker 1300:54:32So Any sort of color commentary you can give us for the delivery segment in terms of traffic trends and in pricing trends under the hood? And then I have a follow-up, please. Speaker 500:54:42Yes, sure. Great question. So let me see if I can pick that all at once here. So in terms of the major renewals, we don't have nearly as many major renewals as we had last year. So that's going to be one thing that works in our favor. Speaker 500:54:55We are not anticipating in our guidance any significant increase In traffic, in terms of levels of growth that we saw last year, we're anticipating slight increase, but nothing significant. We're anticipating that and we're starting to see that price declines are moderating a bit. They're not nearly as steep as they've been in the past. And then we will continue our posture in terms of being a little bit more selective with some of the spiky traffic. Once we start seeing Volumes get back to the historical Internet growth rates and beyond, then maybe that posture may change, but that's the way we're going to play it for now. Speaker 1300:55:32I appreciate that. And just the delineation between your U. S. Business and the international business, anything you can point to by way of Geographical differences in procurement, is there more sensitivity on budgets in the U. S. Speaker 1300:55:48Versus international, any characterization there because international continues to be a stronghold for you versus Some of the maybe some of the malaise on the U. S. Side, but would love to get a little bit more granular on what's continuing to drive that strength and if some of that budgetary pressure that you alluded to on The security side is maybe showing up more pronouncedly in U. S. Versus international. Speaker 1300:56:09That's it for me. Thank you. Speaker 500:56:11Sure. Yes, I would say, just kind of general macro Across all regions, I'd say new customer acquisition is more challenging in an environment like this. And I think you hear a lot of companies talk about that. We're seeing that as well. In terms of geographic, obviously, the European economy is struggling a bit more than we are in the U. Speaker 500:56:31S, slightly higher inflation, etcetera. I expect that area to be a bit more weaker than what I'm seeing in the U. S. Asia still I've been pretty strong. Latin America has been pretty strong. Speaker 500:56:44U. S. Has been kind of holding Firm here, but I would expect the European business in particular to be the most impacted by the macroeconomic factors. Operator00:57:01Our next question will come from Frank Louthan with Raymond James. You may now go ahead. Speaker 900:57:07Great. Thank you. So with the significant number of pops that you have already, what is it about the cloud platform you need to expand these sites? And what is about the location and the capabilities that they bring for expanding the compute platform that you already have? And then you touched on possibility for M and A. Speaker 900:57:24What do you consider significant and what are the what size M and A do you think you might be looking at if you do any in the next 12 months? Thanks. Speaker 200:57:34Yes. So on the Akamai Connected Cloud architecture, we already have 4,100 Edge Regions. And these regions do delivery and security. They're the first line of defense. They also do what we call edge Computing, which is function as a service, JavaScript at the edge. Speaker 200:57:56Now in the core, where the node had 11 data centers We're going to more than double that. You have very large scale storage object and block storage. You've got VM as a service, container as a service, Kubernetes, core cloud compute. Now we're adding also an intermediate layer, we call the The distributed compute layer and this would have not the monolithic storage, but you'd have containers as a service, Kubernetes, VMs as a service, so you could do compute there. And so what you do and where you want to do it Depends on the application. Speaker 200:58:38Things that are a lot of back and forth with the end user that are Lighter weight, it could be handled in JavaScript. You want to be doing that in the 4,100 Edge regions. Something like transcoding, You're doing some data processing, you've got an app in a container, but performance matters, you want to be close to the end user Or say a gaming application that you'll want to do in our distributed edge platform. And the reason you have that is, there's a lot of Cities and places in the world that don't have a giant cloud data center there, and they can't really take advantage of the cloud for locations that have where the proximity to the user is important. And so that's something that we want to be able to provide. Speaker 200:59:27So there's 3 sort of levels here of compute, and you want to be actually using Generally, all 3 for a major company, but the specific application dictates where you want to be doing it And what combination of that you want to use? Speaker 900:59:50Okay. Great. What's the potential for M and A and thoughts on what you would consider significant versus more tuck in? Speaker 200:59:58Yes, good. So I think tuck ins are a team that has the beginnings of a product For technology that we can scale on behalf of our customers, we've done a lot of acquisitions like that. More substantial would be something like Gardicore that had at that time the number 2 product in the marketplace and we've invested around that. They're now number 1, which is great to see, and a more significant cost associated with that. And they had a developed product already Go back farther, Prolexic is another example of that, where they had a developed product, they're already at $40,000,000 $50,000,000 in ARR, and those are we do occasionally and we're always looking, but we do those occasionally, but more you'll see the tuck ins and then redevelop from there. Speaker 901:00:55All right. Thank you. Operator01:00:59Our next question will come from Rudy Kessinger with D. A. Davidson. You may now go ahead. Speaker 701:01:06Hey, guys. Thanks for taking my questions. Speaker 1201:01:09I guess I'm curious, how did the macro trend in the quarter just with deals lengthening and how many deals did you see push, That's relative to Q3. And the guide assumes no positive or negative change in the macro. Just Why make that assumption? Why not be a bit more conservative maybe assume it gets a little worse? Speaker 501:01:32Yes. So this is Ed. So in terms of the biggest impact on the quarter, I would say, coming in, we were expecting potentially a weak commerce Season, we actually saw a pretty decent commerce season. We saw a decent video traffic. We saw obviously we talked about the World Cup being better than our expectations. Speaker 501:01:50I would say gaming was noticeably weak. We didn't see as much activity as you typically see in the Q4. And then from a sales side, A couple of deals pushed, there's a few large Gardacore deals we tracked that pushed and then also new customer Those are really the big things. Then as far as the macroeconomic conditions, it's tough when you Sit in the seat to try to play economist. And with us, obviously, AXA is probably the biggest impact on us more than anything, given our we've got longer term contracts. Speaker 501:02:25But It's hard to say that, look, things can change and get dramatically worse. I'm just expecting what I see right now in front of us in terms of The macroeconomic environment is challenging, but I think we can navigate it pretty well. So that's what we base our guidance on. If things change, we'll obviously update the guidance. But was just trying to a lot of times people ask me what was what were you thinking as you put your guidance that are you expecting things to get dramatically worse? Speaker 501:02:52In this case, no. Do I expect things Dramatically better know it's kind of roughly the time and if things do change, we'll obviously update you as we get more information. Speaker 1201:03:03Yes, okay. That's fair. And then at a higher level, I mean, obviously, it sounds like compute has kind of slotted into growth priority 1, you will, kind of ahead of security. And just at the high level, I'm curious what really has given you conviction to invest so much in compute? Is it The early customers that you've signed, is it just conversations? Speaker 1201:03:23Is that the pipeline growth you've seen over the last few quarters since you made the acquisition? What's given you so much Conviction to make such a large investment, go all in on compute? Speaker 201:03:33Well, it's all of the above plus the compelling logic You know of the situation, as I mentioned, I do have the opportunity to meet with the few most executives at A lot of the world's largest companies, especially you think media, commerce, gaming and so forth, and there is a lot of interest there And our ability to help them. They're in a situation where they're spending a ton on third party cloud. It's growing rapidly. Many of them describe it as being out of control and it's even hard to know How big it will get? In some cases, they're spending this with a competitor and on top of it, they've got major company initiatives to cut cost Because of the challenging global economic conditions. Speaker 201:04:25And so when we can offer them A service with at least as good, better performance at a lower price point, that's very attractive. Now on top of it, these companies, they know us Well, they already trust us with scale and performance and security because we provide The vast majority of their delivery and security. So we are a very logical choice. It's not like we're just somebody coming along here Saying, hey, we got a cloud service, it's not like that at all. We've got a lot of credibility with these companies and They are pretty clear that they think this could be very attractive for them. Speaker 201:05:06In fact, I think one of the analysts on this call did a survey of 50 of our Larger customers have found the same thing. The same thing was reported to them. So we see that, that our customers need that and would like to shift business to us, but we want to get ready for that and help them. And that means building out the capacity, building out the new distributed architecture and Getting the functionality to the level that they're going to be comfortable putting mission critical applications at very large scale on our platform. Of course, Akamai will be one of the first examples of that. Speaker 201:05:47We're going to place our services that are used by pretty much all the major enterprises, A lot of the major enterprises out there for example security onto our platform and that will be another great proof point That Akamai Connected Cloud is really going to work for them. Operator01:06:11Our next question will come from Ray McDonough with Guggenheim. You may now go ahead. Speaker 1401:06:17Great. Thanks. Tom, maybe just to ask the M and A question in a slightly different way. As we think about the Strategic plan going forward, do you feel the organization has enough operational capacity to continue to expand Linode right now and do another acquisition in security At this point to help you reaccelerate growth, and is 20% long term growth including acquisitions in the security business something you're still targeting after this year? Speaker 201:06:43Yes, good question. First, the work on Linode, which is extensive, It uses different teams by and large than our security technology group. And so yes, we're in a position that we can continue that work and also do security acquisition. There's I don't think there's any challenge there. Now we have, as we talked about, retasked a lot of the positions, either people or positions From our platform and delivery organizations to the compute effort. Speaker 201:07:20So there is a lot of effort there And that will be increasing throughout the year. Now in terms of the 20%, what we're talking about is we're guiding this year into the low double digits and then we'll see where we are. Obviously, we'd like to be growing Faster than that, but there are very challenging conditions out there as we've talked about, and we'll have to see. So we'll update that guidance as we maybe we get to an Investor Day or get into next year. But right now, we're just guiding for this year in security in the low double digits. Speaker 501:08:00Great. And one more if Speaker 1401:08:02I could. The work we've done on Linode does suggest your customer base is interested in leveraging Linode. And when I think about sort of the lead times for capacity additions in the data center space that you've already leased, How long are the lead times to fill that data center space? And at what point would you expect it at least to get to a Somewhat full utilization of just the space that you've already contracted for? Speaker 201:08:32Yes. So good question. There's the contracting, there's Build out, there's getting it all turned on. And the way you want to think of it is, we would be doing Core data center build out, the focus of that is in the first half and we'll have a lot of that done then. We should finish that Early in the second half or get substantially more than we have today. Speaker 201:08:56And then late in the second half taking on the distributed Architecture, we should have a bunch of those regions turned on live later in the year. And at that point And also at the same time getting the certifications in place, virtual private cloud, other capabilities that the big enterprises need. So that when we get to the later part of the year, we're in a position that we can take on this business and it will just Happen all at once. A major enterprise will try it, use some applications and then some of the big ones you For some of the traffic over and so I think the major filling of it and use of it really comes more in 2024, not so much this year. We expect, as we talked about this year, to do about $500,000,000 in compute. Speaker 201:09:49But the real growth, I think, And the monetization of what we're building out now comes in 2024 and 2025. And also for our own use, this year we're in the process Supporting our own applications. As Ed talked about, we're going to save some this year, but really the big savings for us comes in 2024. So that's the way I think to think about it. Speaker 1401:10:13Great. That's helpful. Thanks for taking the questions. Speaker 201:10:16Well, it is Valentine's Day, so we're running a little Speaker 101:10:19bit over. But operator, why don't we take one more question? I know there's probably a few more, but let's just take one more and we'll end the call. Okay. Operator01:10:26Our last question will come from Michael Elias with Cowen and Company. You may now go ahead. Speaker 1501:10:31Thanks for squeezing me in here. Just Two questions for you. First is, you talked about some Gardacore deals slipping and last quarter there was commentary around elongating sales cycles. I was just wondering if you could give us some color on how sales cycles have evolved for not only Gardacor, but the broader portfolio. And then my second question for you is, maybe to phrase it a different or frame it a different way Is there a rule of thumb that we should use to think about the correlation between incremental revenue and incremental megawatts of data center capacity I. Speaker 1501:11:02E. To support an incremental $100,000,000 in compute revenue, you would need X amount of megawatts? Thanks. Speaker 501:11:11Right. I'll try the second one is going to be a little bit more challenging and maybe I'll come back with a metric on that one. I don't have the Exact metric down to the megawatt, but I'm sure somewhere in the business I can find somebody who does. But I've sort of used sort of a rule of $1 of CapEx is $1 of revenue roughly Speaking, that may change a bit, but sort of a good rule of thumb. In terms of sales cycles, The good news with the deals slipping is they're not going away. Speaker 501:11:39This is typically a big purchase that you make, especially with Gardacore that It could be something where the decision makers just pushing it off a quarter or 2 and it's not that the deals are losing. It just becomes In terms of just overall sales cycles, like I said, the biggest impact is new customers, It's a lot easier with your existing customers. You're going through renewal cycles. You're having upgrade conversations and things like that. Getting new customers to open up a new buying pattern is challenging. Speaker 501:12:12I do think one thing that will work in our advantage in all of this though is we talk about compute And the need to find a cheaper alternative, go multi cloud, I think that's going to work in our favor. So I think it's one thing this All the negatives that come with the macroeconomic backdrop that we have, I think that's one positive that will work in our favor. And we are starting to see our pipeline grow Pretty dramatically in that area. And as Tom talked about, we should start to see deals close towards the back half of the year and then really set ourselves up for the big 24. Speaker 1501:12:44Thanks for the color. Speaker 101:12:47Okay. Well, thank you, Michael. Thank you, everyone. And in closing, we'll be presenting at Several investor conferences and events throughout the rest of the Q1. Details of these can be found in the Investor Relations section at akamai.com. Speaker 101:13:00We want to thank all of you for joining us and we wish you a Speaker 501:13:03very good Speaker 101:13:06health and good health to your family. So have a nice evening. Take care. Operator01:13:13The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallAkamai Technologies Q4 202200:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsAnnual report(10-K) Akamai Technologies Earnings HeadlinesAkamai Technologies (AKAM) Stock Moves 0.74%: What You Should KnowApril 26 at 8:50 AM | msn.comAsia Pacific and Japan see 51bn web attacks in 2024, driven by AI useApril 24 at 11:02 PM | msn.comHere’s How to Claim Your Stake in Elon’s Private Company, xAII predict this single breakthrough could make Elon the world’s first trillionaire — and mint more new millionaires than any tech advance in history. And for a limited time, you have the chance to claim a stake in this project, even though it’s housed inside Elon’s private company, xAI.April 26, 2025 | Brownstone Research (Ad)Former MTV 'Real World' house in Old City looking for new tenantApril 24 at 11:02 PM | bizjournals.comAkamai Empowers Partners to Deliver Services and SupportApril 24 at 6:00 AM | prnewswire.comAI-Driven Web Attacks Surge 73% in APJ, Akamai Report RevealsApril 24 at 5:31 AM | msn.comSee More Akamai Technologies Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like Akamai Technologies? Sign up for Earnings360's daily newsletter to receive timely earnings updates on Akamai Technologies and other key companies, straight to your email. Email Address About Akamai TechnologiesAkamai Technologies (NASDAQ:AKAM) provides cloud computing, security, and content delivery services in the United States and internationally. The company offers cloud solutions to keep infrastructure, websites, applications, application programming interfaces, and users safe from various cyberattacks and online threats while enhancing performance. It also provides web and mobile performance solutions to enable dynamic websites and applications; media delivery solutions, including video streaming and video player services, game and software delivery, broadcast operations, authoritative domain name system, resolution, and data and analytics; and cloud computing services, such as compute, storage, networking, database, and container management services to build, deploy, and secure applications and workloads. In addition, the company offers content delivery solutions; and an array of service and support to assist customers with integrating, configuring, optimizing, and managing its offerings. It sells its solutions through various channel partners. 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There are 16 speakers on the call. Operator00:00:01Good afternoon, and welcome to the Akamai Technologies Inc. Earnings Q4 Fiscal Year 2022 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Tom Barth, Head of Investor Relations. Operator00:00:34Please go ahead. Speaker 100:00:37Thank you, operator. Good afternoon, everyone, and thank you for joining 4th quarter 2022 earnings call. Speaking today will be Tom Layton, Akamai's Chief Executive Officer and Ed McGowan, Akamai's Chief Financial Officer. Please note that today's comments include forward looking statements, including statements regarding revenue and earnings guidance. These forward looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Speaker 100:01:11The factors include any impact from macroeconomic trends, the integration of any acquisitions and any impact from geopolitical developments. Additional information concerning these factors is contained in Akamai's filings with the SEC, including our annual report on Form 10 ks and quarterly reports on Form 10 Q. The forward looking statements included in this call represent the company's view on February 14, 2023. Akamai disclaims any obligation to update these statements to reflect new information, future events or circumstances, except as required by law. As a reminder, we will be referring to some non GAAP financial metrics during today's call. Speaker 100:01:54A detailed reconciliation of GAAP and non GAAP metrics can be found under the financial portion of the Investor Relations section at akamai.com. And with that, let me turn the call over to Tom. Speaker 200:02:07Thanks, Tom, and thank you all for joining us today. I'm pleased to report that Akamai delivered strong results in the 4th quarter, Exceeding the high end of our guidance range on both the top and bottom lines, despite ongoing challenges with the global economic environment. Q4 revenue was $928,000,000 up 6% year over year in constant currency. Our revenue growth was driven by continued strong demand for our security products, our fast growing compute business and by higher than expected delivery traffic. Security and compute accounted for 55% of our overall revenue in the 4th quarter and grew a combined 22% year over year in constant currency. Speaker 200:02:50Non GAAP operating margin in Q4 was 28%. Q4 non GAAP EPS was $1.37 per diluted share, down 2% year over year in constant currency. For the full year, revenue was $3,620,000,000 up 8% over 2021 in constant currency. Non GAAP operating margin was 29%, Down from 32% in 2021 and slightly below our goal of 30%. The decline last year was due to the impact of foreign exchange, As Ed will describe in a few minutes, we're taking several actions to reduce costs and to shift resources to areas with the strongest potential for growth, such as cybersecurity and especially cloud computing. Speaker 200:03:49Going forward, we anticipate that our margins will likely remain slightly under 30% in the near term and our goal is to grow margins back over 30 down 1% over 2021 in constant currency. 2022 was another strong year for cash generation at Akamai With $816,000,000 in free cash flow, representing 23% of revenue, Akamai's strong cash generation enables us to make to buy back 6,400,000 shares. Over the last 10 years, we've reduced the number of Akamai shares outstanding by approximately $21,000,000 or 12%. I'll now say a few words about each of our 3 main lines of business Starting with security. Our security products generated revenue of $400,000,000 in Q4, up 14% year over year in constant currency. Speaker 200:05:01For the full year, security revenue reached $1,540,000,000 and grew 20% over 2021 in constant currency. We saw especially strong growth for our market leading Gardacore segmentation product, With revenue reaching $68,000,000 for the full year. New segmentation customers in Q4 included 1 of the largest companies in the U. S, a leading Internet services conglomerate in Japan and one of the largest banks in Scandinavia. Enterprises are choosing our segmentation solution because of its ability to protect against ransomware and data exfiltration attacks, And also for the visibility it provides into their internal infrastructure. Speaker 200:05:48These are also among the reasons that Akamai was named as the leader in the Forrester New Wave for micro segmentation last year. We also saw large wins for our market leading Security Solutions in Q4, including one of the UK's largest multinational energy companies, 1 of the big 3 multinational banks in Singapore and 2 of the largest tech hardware companies in the U. S. Overall, security accounted for 43% of our revenue last year, up from 39% in 2021. In 2023, we expect security to become our largest line of business. Speaker 200:06:28This represents a significant milestone in our evolution since we pioneered the CDN marketplace 25 years ago. That said, and as the security business becomes larger and with customers becoming more cost conscious due to the challenging macroeconomic environment, the growth rate of our security business has slowed, a trend that we anticipate will continue over the coming year. As you might expect, we're working hard to realize the full potential of our security business, both in terms of growth and efficiency. For example, we're in the process of moving the compute components of our security products From 3rd party cloud providers to our new Akamai Connected Cloud Platform, a transformation that will save us a substantial amount of OpEx over the next Several years. We're redeploying resources within security from lower growth areas to high growth areas such as segmentation. Speaker 200:07:27And we're redeploying go to market resources to achieve stronger cross sell and penetration within our existing base. We're also working more closely with partners to drive better adoption among new customers. And we're continuing to innovate new capabilities, such as our recently released account protector and our new brand protector solutions to keep our customers safe amidst the rapidly evolving attack landscape. While we believe that our security business will continue to generate strong returns for our shareholders, We foresee an even bigger opportunity in cloud computing and its potential to return Akamai to double digit top line growth over the longer term. Our compute business performed well in Q4 with revenue of $112,000,000 up 65% year over year in constant currency. Speaker 200:08:20For the full year, compute revenue was $405,000,000 and grew 64% over 2021 in constant currency. Earlier today, we unveiled Akamai Connected Cloud, our massively distributed platform for cloud computing, security and content delivery. Akamai Connected Cloud links Linode's 11 core data centers with Akamai's 4,100 edge computing locations. In addition, We're in the process of building out 14 more core enterprise scale data centers with at least 3 expected to come online in the next few months. We believe integrating these core cloud computing data centers with our unique edge platform will allow us Cloud capability and the first of more than 50 distributed cloud computing sites available in the second half of the year. Speaker 200:09:22The distributed sites will enable us to bring cloud computing much closer to end users around the world, which will further enhance performance benefits of Akamai Connected Cloud. Of course, and as Ed will describe shortly, we'll be incurring substantial CapEx And co location costs associated with the build out of our compute infrastructure over the near term. We're also in the process of retasking 1,000 positions or about 10% of our workforce to spend the majority of their time working on the development, deployment, Support and go to market efforts associated with Akamai Connected Cloud. Because of the natural synergy and close integration between cloud computing and our existing Edge platform, we believe we can accomplish this transformation without adding significant headcount to This shift will also further enhance the efficiency of our delivery business. We're undertaking this ambitious investment in Akamai Connected Cloud because we believe it will create substantial value for shareholders in the medium and long term. Speaker 200:10:32We expect to achieve nearly $500,000,000 in revenue from compute in 2023. And the investment we're making this year should help drive that number substantially higher in 2024 and beyond as we use the new capabilities and capacity to support mission critical enterprise workloads. I think it's worth noting that Akamai is taking a fundamentally different approach to the cloud computing market than providers who base their platforms solely on core data centers. Our strategy is to offer the world's most distributed As IDC's VP of Research, Dave McCarthy says, the cloud's next phase requires a shift in how developers and Enterprises think about getting applications and data closer to their customers. It redefines how the industry looks at things like performance, Scale, cost and security as workloads are no longer built for one place, but are delivered across a wide IDC adds that Akamai's innovative rethinking of how this gets done And how it is architecting the Akamai Connected Cloud puts it in a unique position to usher in an exciting new era for and to help enterprises build, deploy and secure distributed applications. Speaker 200:12:07We couldn't agree more. Distributed applications require a distributed architecture. Akamai's leadership position at the edge of the Internet enables us to scale just about everything we touch. We scale content, putting digital experiences closer to users than anyone. We scale cybersecurity, keeping threats farther away from business and people. Speaker 200:12:30And now we're building on Akamai's 25 years of Although we still have much work to do, we're encouraged by the reaction from customers who want to realize the value of our approach. Last quarter, a well known digital fitness platform brought business to us that they previously did with a major cloud provider. They chose Akamai Connected Cloud because we can optimize their performance and provide better economics. When a gaming company suffered a DDoS attack that took out their Internet Relay chat servers, they turned to Akamai Connected Cloud to get back online. After utilizing Connected Cloud for a few weeks, they also migrated their peer to peer matchmaking servers to Akamai. Speaker 200:13:23This is what they say to other gaming businesses with similar use cases. Our adoption of Akamai's cloud computing solution was painless and turnkey. Akamai has a great backbone network and the connective layer between our global servers has been rock solid. With Akamai's extensive global network, we provide a better experience to our gamers by delivering from the edge and reducing latency. With Akamai, there's no reason to go anywhere else. Speaker 200:13:53As you can see from this example, there's a strong synergy between our emerging cloud computing business Turning now to content delivery, our CDN business generated revenue of $415,000,000 in Q4, down 8% from Q4 2021 in constant currency. For the full year, delivery revenue was $1,670,000,000 also down 8% year over year. Traffic on the network was better than expected in Q4, reaching a new peak record of 2 61 terabits per second on December 14, as we supported more than 50 customers globally in delivering the World Cup, along with other streaming, gaming and software download businesses. This World Cup was the first time in Akamai's 25 year history We delivered more than an exabyte of data for an event. How much is an exabyte? Speaker 200:14:54It's 1,000 petabytes. That's 1,000,000,000 gigabytes. For the person transcribing this call, that's 1 byte with 18 zeros after it. That's a lot of zeros Looking back at 2022, we're pleased that we continue to grow the business and add significant new capabilities in the face of serious global macroeconomic challenges. Today, we're redefining our future with Akamai Connected Cloud to become the world's most distributed cloud platform with leading solutions for delivery, security and cloud computing. Speaker 200:15:50With our expanded strategy and business model, we believe that we're on a path to provide even greater value for shareholders and to make Akamai the cloud company that powers and protects life online. Now I'll turn the call over to Ed for more on our Q4 and full year results and our outlook for 2023. Ed? Speaker 300:16:12Thank you, Tom. Today, I plan to provide brief highlights of our strong Q4 results, some color on 2023 and touch on some items to help you with your models and then close with our Q1 and full year 2023 guidance. Starting with Q4 highlights. We were very pleased with our strong Q4 results despite continued difficult macroeconomic conditions. Q4 revenue was $928,000,000 up 2% year over year or 6% in constant currency. Speaker 300:16:45We saw very strong growth in both our compute and security businesses as well as better than expected traffic in our delivery business during the Q4. As Tom mentioned, our compute business was $112,000,000 Growing 61% year over year as reported and 65% in constant currency. We continue to be very pleased with the initial feedback from our customers on our future compute capabilities, and we are very optimistic about capturing a meaningful share of our customers' cloud spend in the years to come. Our security revenue was $400,000,000 up 10% year over year and up 14% in constant currency. Our delivery revenue was $415,000,000 which declined 12% year over year and 8% in constant currency, traffic exceeded our expectations during the quarter led by higher video traffic, stronger than expected commerce traffic in record setting World Cup online viewership. Speaker 300:17:48International revenue was $445,000,000 up 4% year over year We're up 12% in constant currency, representing 48% of our total revenue in Q4. Foreign exchange fluctuations had a negative impact on revenue of $2,000,000 on a sequential basis and negative $36,000,000 on a year over year basis. Non GAAP net income was $216,000,000 or $1.37 of earnings per diluted share, down 8% year over year and down 2% in constant currency, but $0.07 above the high end of our guidance range. Moving to our capital allocation strategy. During the Q4, we spent approximately $178,000,000 to buyback approximately 2,100,000 shares. Speaker 300:18:37For the full year, we spent approximately $608,000,000 to buy back approximately 6,400,000 shares. We ended 2022 with approximately $1,200,000,000 remaining on our current repurchase authorization. Our intention is to continue to buy back shares to offset dilution from employee equity programs over time and to be opportunistic in both M and A and share repurchases. It's worth noting that in addition to offsetting dilution, we have reduced shares outstanding by approximately 21,200,000 shares or 12% since January 1, 2013. Before I move on to guidance, there are several items that I want to highlight to help you with your 2023 models. Speaker 300:19:25The first relates to a change in our network server useful lives. As some of you may recall, we announced on our Q4 2018 earnings call that we were required to extend the useful life of our network servers from 4 years to 5 years based on the actual server useful life trends. We carefully monitor the useful lives This extended useful life is a direct result of the continued software and hardware initiatives that we have put in place to manage our global network more efficiently. Because we are now using the servers in our network for an average of 6 years, we are required under GAAP accounting to adjust our useful life policy to 6 years beginning in Q1 of 2023. Please keep in mind that this change has no impact on cash flow, but will result in a depreciation benefit of roughly $56,000,000 in 2023 and approximately $31,000,000 in 2024. Speaker 300:20:38We have provided a supplemental table in the Investor Relations section of our website that details the impact of this change. 2nd, We're expecting non GAAP gross margins to decline by approximately 2 points in 2023 due to 2 primary items. 1st, As we build out our new compute locations, we are required to account for our co location leases under GAAP Accounting Standard ASC 842. In order to achieve more favorable unit economics, we often sign longer term co location agreements That includes certain financial commitments. ASC 842 requires we straight line the cost of those future financial commitments over the life of the agreement. Speaker 300:21:24As a result, we expect to record approximately $40,000,000 of non cash co location costs related to this accounting standard in 2023. The second item impacting gross margin is our 3rd party cloud costs. As we've mentioned in the past, we expect to migrate the majority of our 3rd party cloud spend onto our own cloud infrastructure over the next 12 to 18 months. That said, we expect the majority of the migration effort to impact the back half of the year. We expect we will incur just over $100,000,000 of third party cloud and cost of goods sold in 2023. Speaker 300:22:03We do however expect we will exit the year on a path to significantly lower our 3rd party cloud costs in 2024. 3rd, we expect international sales will represent nearly half of our total revenue in 2023 And the currency markets remain incredibly volatile. I will provide more detail on the impact of currency on each quarter's earnings call, It is important to note that the strengthening or weakening of the U. S. Dollar can have a material impact on our reported results and guidance. Speaker 300:22:36As a reminder, the currencies that have the largest impact on our business are the euro, the yen and the Great British Pounds. 4th, I want to remind you of the typical seasonality that we experienced on the top and bottom lines throughout the year. Regarding revenue, The Q4 is usually our strongest quarter and we typically see a step down in Q1 revenue from Q4 levels. Regarding profitability as a reminder, In Q3, we have the annual company wide merit increase and in Q4, we typically see higher sales commission expense. And one final thought before we move on to guidance. Speaker 300:23:13Tom mentioned that we will be investing in what we believe will be 2 areas of higher growth for the company For years to come, security and compute. While we expect to manage the business below our target operating margin of 30% in 2023, We expect 2023 to be a higher than normal year for CapEx. We will continue to reduce costs and drive efficiency gains in key areas Such as 3rd party cloud savings. We expect to save over $100,000,000 in annual cost as we migrate workloads From the hyperscalers to our own platform over the next 12 to 18 months. Real estate rationalization. Speaker 300:23:54As our employees have largely elected to work remotely, We expect to reduce our real estate costs by approximately $20,000,000 in 2023 and achieve further savings in 2024. Shifting resources. As Tom mentioned, we'll be incurring substantial CapEx and co location costs associated with the build out of our compute infrastructure over the near term. As a result, we are prioritizing certain actions in retasking approximately 1,000 positions from other parts of the business to our compute business. In addition, during the Q4, we closed approximately 500 open positions And we will continue to be very prudent with any headcount additions during the year. Speaker 300:24:35Finally, we are lowering CapEx related to delivery. We expect to reduce our CapEx related to the delivery business to 4% of revenue in 2023. Now moving on to guidance. Our guidance for 2023 assumes no material changes, good or bad, in the current macroeconomic landscape, which we view as challenging but navigable. For the Q1 of 2023, we are projecting revenue in the range of $900,000,000 to $915,000,000 were up 0% to 1% as reported or 2% to 3% in constant currency over Q1 2022. Speaker 300:25:15Foreign exchange fluctuations are expected to have a positive $13,000,000 impact on Q1 revenue compared to Q4 levels, but a negative $19,000,000 impact year over year. At these revenue levels, we expect cash gross margins of approximately 73%. Q1 non GAAP operating expenses are projected to be $299,000,000 to $303,000,000 We anticipate Q1 EBITDA margins of approximately 39% to 40%. We expect non GAAP depreciation expense be between $109,000,000 to $111,000,000 and we expect non GAAP operating margin of approximately 27% to 28% for Q1. With the overall revenue and spend configuration I just outlined, we expect Q1 non GAAP EPS in the range of $1.30 to $1.34 The CPS guidance assumes taxes of $43,000,000 to $44,000,000 based on an estimated quarterly non GAAP tax rate of approximately 17.5%. Speaker 300:26:17It also reflects a fully diluted share count of approximately 157,000,000 shares. Moving on to CapEx. We expect to spend approximately $220,000,000 to $228,000,000 excluding equity compensation and capitalized interest in the Q1. This represents approximately 24% to 25% of anticipated total revenue. Looking ahead to the full year, We expect revenue of $3,700,000,000 to $3,780,000,000 which is up 2% to 4% year over year, both in as reported and in constant currency. Speaker 300:26:51We expect security revenue growth to be in the low double digits for the full year 2023. We are estimating non GAAP operating margin of approximately 27 28% and full year CapEx is expected to be approximately 21% of total revenue. We expect our CapEx to be roughly broken down as follows: approximately 4% of revenue for our delivery business Approximately 9% of revenue for our compute business, of which roughly $100,000,000 of that will be for internal workloads moving in house and the remainder for future revenue growth. Approximately 7% of revenue per capitalized software and the remaining about 1% for IT and facility related spend. We expect non GAAP earnings per diluted share of $5.40 to $5.60 and this non GAAP earnings guidance is based on A non GAAP effective tax rate of approximately 17.5% and a fully diluted share count of approximately 157,000,000 shares. Speaker 300:27:53In closing, we are very pleased with the strong finish to 2022 and we are excited about our growth prospects in both security and cloud computing. Tom and I would be happy to take your questions. Operator? Operator00:28:08We will now begin the question and answer Our first question will come from James Fish with Piper Sandler. You may now go ahead. Speaker 400:28:36Hey, guys. Thanks for the questions and appreciate all those details on the moving part. Ed, I know there's a lot there. I actually want to dive into the security business here. Tom, you had mentioned thinking about Go to market investments and looking to prioritize on how to better address the market. Speaker 400:29:00Are you guys changing at all how you're approaching the market, especially on the network security side with 0 Trust as it seems to be a little bit of a disconnect? And Ed, is it possible we can actually get an update on what that access control, 0 Trust kind of business finished at for 2022? Speaker 200:29:19Yes. No, good question. And we are increasing the allocation of our go to market Investments around the enterprise side and 0 Trust. We have specialist teams there really focused on Gardacore And now the other enterprise products as we integrate them in with the Gardacore solution. And we've had a lot of success with that team, as you can see from the really good growth in the Gardicore product. Speaker 200:29:48And so we're Doubling down there and over the course of this year, you'll see I think more cross sell with our enterprise application access product in Gardacore and ETP. And then I'll turn the other question over to Ed. Speaker 500:30:05Hey, Jim. Yes. So, what I'd say about 0 Trust is, we ended the year on a run rate of about $200,000,000 in 0 Trust And we had a very strong finish to Gardicore. And Gardicore, we'd expect this year to be on a run rate of $100,000,000 very, Speaker 300:30:21very strong finish to the year at Guardicorp. Speaker 400:30:25Helpful. And just a follow-up on the compute side. The big question we've been getting is whether the compute business could get traction really outside the media vertical? Or is that really going to be the focus In terms of gaming and streaming kind of storage and compute on the back end and kind of what's the confidence level that not going to see an erosion in that more traditional Linode SMB base? Thanks guys. Speaker 200:30:53I think media is the big First, set of adopters. In fact, as you know, one of the world's largest, if not the largest social media company is already using it. And I think that's because media really is concerned about performance. And so we're doing things like transcoding much Closer to the end user and that's a key thesis of our architecture and our approach to compute is to be much more distributed Yes, the compute have containers and VMs much closer to the end users. Gaming, another example, that makes a lot of sense. Speaker 200:31:30Things like leaderboards, manage groups of users as they play the game. You need low latency. There's a lot of back and forth with the clients and you want that to be close to the end user. That said, this is not limited to media. Commerce is also very sensitive to performance and we've already signed up commerce companies. Speaker 200:31:52And commerce companies, of course, especially with these macroeconomic challenges, very sensitive to cost. And so we're in a position where we can give them, I think, With Akamai Connected Cloud, better performance at a more competitive price point. So I think you'll see penetration on the commerce vertical as well. And of course, Akamai is really close to the big companies in media and commerce. I have the opportunity to talk to the Most senior executives in many of these companies and they're very interested in what we can do for them. Speaker 200:32:28They've been asking us to do this and I think they're excited about the potential for Akamai Connected Cloud. I think down the road, take a little bit longer, The financial vertical is another vertical that's very strong for Akamai because of our work in security and our market leading products there. There we have a little bit more work to do on the certifications. The bar is a little bit higher for financial institutions, but I think that would follow Media and Commerce in terms of adoption of Akamai Connected Cloud. Operator00:33:06Our next question will comes from James Breen with William Blair. You may now go ahead. Speaker 600:33:12Thanks for taking the question. Can you just talk a little bit about sort of the internal decision making around shifting resources to the security and cloud side and maybe a little bit on delivery side of Market share, to some extent, giving up some market share within that business for the benefit of overall profitability in the long term? Thanks. Speaker 200:33:33Well, yes, I think it makes good sense to be shifting resources towards the higher growth areas, both Security, but especially in cloud computing. I think we'll see a lot stronger return on the investment. Speaker 700:33:49We still Speaker 200:33:49have the market leading delivery business. We haven't lost share to the best of my knowledge. We have turned away Some small amount of the business that's very spiky, and that doesn't make as much sense for us to take that business if Price point isn't right today, and that's because traffic growth rates are lower than they used to be. So you have to spend money to build out for the spike, And if your traffic growth rates are lower, it takes longer to fill that capacity on a daily basis. With delivery, your cost is associated with your With your peak and your revenue more associated with the daily usage or total aggregate usage. Speaker 200:34:32And so we have, as we've talked about, Turned down some deals there just because the ROI doesn't make as much sense in this environment and we get a lot better ROI from investing in Compute, and I think obviously security. And then within security, we're reallocating investment decisions there To focus more resources on the fastest growing security products. So I think it just makes good sense. And for now with compute, it's something our customers are really asking us to do. And even in this challenging macroeconomic environment, It's something that I think the timing may be even a little bit better there because of that. Speaker 600:35:17Great. Thanks. Operator00:35:22Our next question will come from Keith Weiss with Morgan Stanley. You may now go ahead. Speaker 600:35:28Excellent. Thank you guys for taking the question. A couple of questions. I have a ton of questions, but I'll try to limit it to 2 or 3. On the cloud computing side of the equation, the word of the year amongst investors has been optimization. Speaker 600:35:43And we've heard it from AWS and we've heard it from Azure. I'm really interested to hear how that impacted Linode, given kind of being a lower cost provider in the marketplace. Did you see optimization of people trying to sort of reduce the amount of consumption on your platform? Were you guys like more of a net beneficiary People are ultimately seeking just kind of lower costs overall. And then also on cloud, I don't know, Did you guys mention what the contribution was from Linode this quarter? Speaker 600:36:13I believe you guys have been given the kind of inorganic contribution for the couple of quarters. And then I have one for Ed on the margin side of the equation. Speaker 200:36:22All right. I'll take the first part of that and let Ed take the second All right. I think Linode is a much smaller company and really sort of a different market than the giant cloud companies that are Maybe referring to optimization. So I didn't see we don't see a big impact on Linode. Now what we're doing is making Linode so it can be used by the big enterprises for mission critical applications. Speaker 200:36:50And that in part is building out scale, it's making it be more distributed, Available in more of Citi, integrating it with the Akamai platform in our Edge regions and increasing the functionality. So a lot of work taking place on the Linode platform, so we can sell it at a much higher scale to major enterprises. And we're in the stage now with early adopters there. And I think as we get towards the end of this year, we'll be in a position to take on a lot More business there. And I think the value proposition is that we would have better performance, we'll be more distributed closer to end users Adding more competitive price points. Speaker 200:37:32And I think in this environment, yes, pricing matters, especially you look at, as we talked about, big media, big Commerce, they care and they are spending a lot in the cloud today. So I think that's a phenomenon you'll see take effect as we're in a position to take on more large scale business from large enterprises? And then Ed, I'll you can take the second part of that question. Speaker 500:37:58Yes, sure. So the note, it will get more difficult to break up sort of merging in with everything, but it was about $34,000,000 a little over $34,000,000 We did see a We did see a slight increase in the growth rate as the year went on. And we haven't seen any change in the consumption around optimization, Meaning folks are using less of the cloud at this point. Speaker 600:38:20Perfect, perfect. And then on the expense side of the equation, I just want to make sure I'm understanding this correctly. It sounds like you're slowing down or pausing hiring and I'm assuming you closed those positions you hired into them, but you just like took it off the job board, if you will. And then repositioning employees rather than any like restructuring or headcount reduction. Should the way that we should be thinking about it is you're aiming towards relatively flat headcount in 2023? Speaker 500:38:48Yes, Keith. So the way to think, it will probably go up a little bit. It won't be up as much as it's been up certainly last year. But I mean, you're thinking about it in the right way. And one of that we're fortunate enough to do is, if you think about what we would what typical company would do if you didn't have the skill sets and how should have to do a layoff, that's And then you have to go hire new talent. Speaker 500:39:06We're fortunate enough in the areas that Tom talked about, whether it's development or build out of the network, the sales functions That we can shift those resources over. So if you think about the cost to build out what we're doing, it would cost somebody else a significant amount of money, but we're able to shift those resources. As far as the new headcount going forward, we're going to be pretty judicious with where we're hiring, but it's going to be primarily in the areas of cloud and security and maybe a few on the go to market side. Speaker 600:39:32Got it. And the shift takes place both in terms of development as well as go to market? Or is it more so like the development resources are being shifted? Speaker 200:39:41There's a lot of resources being shifted within our platform and delivery organizations. Think of the hundreds of people that are managing our network deployment, that build out our 4,100 regions today and the tremendous scale we have and they are now heavily focused on building out compute resources. Think of the people that manage The operations, the automatic deployment of software, the failover, the load balancing, the resiliency, They are heavily focused on incorporating those capabilities for compute, building on top of the Linode framework. So I would say The large majority of the resources are of that nature that we're retasking. Speaker 600:40:28Outstanding. Thank you so much for taking the questions, guys. Operator00:40:34Our next question will come from Tim Horan with Oppenheimer. You may now go ahead. Speaker 800:40:39Thanks guys. Also on the cloud, can you talk a little bit about your improvement in price and performance versus The incumbents, can you give us some metrics there? And then can you talk a little bit about what type of cloud you're building out for? I know, Tom, in the past, you were a little skeptical that we could do kind of gaming as a service over cloud infrastructure. Is that changing? Speaker 800:41:00And You could optimize your cloud for AI or blockchain or more networking or very, very low latency. Just any color there. And then lastly, Have you contemplated maybe partnering with some of the larger cloud providers with AI really starting to take off? Can you Be a partner to a few of them or one of them that would really accelerate things? Speaker 900:41:23Yes, good Speaker 200:41:24questions. We'll be the most distributed cloud And we're building out the core cloud capabilities and then this notion of a more distributed Containers closer to the edge, VMs closer to the edge. Now that will give you better performance for things where you want to be close And our pricing will be less already. You can look at the list pricing and see that it's less than what the hyperscalers charge. And because we're integrating it with our backbone and with our Edge platform, that gives us great economics On the delivery, taking the data in and out of storage or compute and getting it to end users, We're in a position to do that at a lower cost and to give consumers a better price point. Speaker 200:42:31Yes, this works not for all gaming functions, but for a lot of the things you want to do with gaming. It's a great use case. Streaming, obviously, transcoding, APIs, chatting APIs, people communicating during a Boarding event, that's all is very relevant to having a more distributed model. AI, I think Elementary stuff you can put in a container or VM, yes, that makes perfect sense. If you want to have the monolithic storage associated with that, that's more cloud, core Cloud compute, I would say. Speaker 200:43:06I think in terms of partnering, yes, we have a lot of customers that use Akamai services today as well as the cloud giants. In fact, the cloud giants themselves, a couple of them are very large Akamai customers So they also use their own services. So I think it's an ecosystem where, yes, I think there'll be customers that would use us and use the hyperscalers Depending on the application and what they're looking to do. And we very much believe in a multi cloud approach. Speaker 600:43:39Thank you. Operator00:43:43Our next question will come from Mark Murphy with JPMorgan. You may now go ahead. Speaker 1000:43:50Thank you very much. Is it possible to ballpark the revenue contribution that was driven by this huge scale of the World Cup So that we could then remove that from our models for the next 3 years and then I guess presumably included back in year 4? Speaker 500:44:08Yes. Hey, Mark, it's Ed. It's about $5,000,000 roughly. Speaker 1000:44:13Okay, got it. And then As a follow-up, just to clarify, during Q4, were you able to capture some of the business that Amazon is losing Either due to the lower pricing structure that you have for Linode or because you have this advantage of Broader points of presence. I guess I'm just interested in it sounds like from what you're describing that potential is there. I'm just wondering if there was a material Benefit or tailwind from that in Q4? Speaker 200:44:46Not in compute in Q4. Obviously, we compete very successfully In delivery and security, with the hypersalers with the market leader there, now in compute, they are the market leaders by far. And so nothing that we would do and compute is going to make any difference to them. I mean, we're looking to get to a 1% market Share in a market that's $100,000,000,000 to $200,000,000,000 a year. So it'll take us a while in compute before I think a hyper Scalar would even really, really notice. Speaker 200:45:22And of course, the 1% or 2% market share means a lot to us in compute, that several $1,000,000,000 Needed less obviously to folks at the scale of those guys. Speaker 1000:45:35Understood. Thank you very much. Operator00:45:41Our next question will come from rishi Jaluria with RBC. You may now go ahead. Speaker 700:45:47Wonderful. Thanks so much for taking my questions. I've got 2. First, I wanted to start on the compute side of the equation. I Appreciate all the color around CapEx. Speaker 700:45:57And please forgive me if my math is shoddy over here. But if I just do rough back of the envelope numbers, right, with 9% of total revenue being CapEx specifically for the compute business. And then I strip out $100,000,000 of non recurring. That's still telling me that CapEx, compute CapEx this year in 2023 is going to be 45% of Compute revenue, which I get it's a growing business and everything. Number 1, am I directly thinking about this? Speaker 700:46:25And maybe number piece number 2 to that is how should we be thinking about steady state CapEx for the compute business once we get through maybe the next year, year and a half? And then I've got a follow-up. Speaker 500:46:39Yes, sure. So you're doing the math right. So the way to think about the $100,000,000 that will enable us for our internal use, that will enable us to save Lot more than $100,000,000 So, think of it, you think about it right in terms of as a one time sort of burst of a charge. Obviously, if we continue to use our own Compute capabilities over time down the road will be adding a little bit from time to time there, but you're thinking about that correctly. In terms of what does a steady state look like? Speaker 500:47:06We talked at the Analyst Day about how you can approximate sort of future growth Percentage with what you would spend. So for example, if we're at $1,000,000,000 and we're spending 30% CapEx, our growth rate would be probably around 30%. It's not quite dollar for dollar, but it's sort of a rough approximation. So think of us spending roughly $100,000,000 this year on Internal use another say call $225,000,000 to $250,000,000 depending where you are on your models. That enables you to get that type of revenue scale potentially. Speaker 500:47:38Obviously, it's going to have to play out in the market a little bit more, if we get a little bit less. That's a pretty decent rule of thumb. And then obviously, as we're growing out these locations, we're Pretty ambitious in terms of the core locations that we're putting online, also distributed locations we're putting online. We're going to be investing ahead of revenue. So I would expect for the next year and a half or two years to have elevated CapEx related to the compute business and we'll start to scale into it. Speaker 700:48:04Okay, got it. Thanks. That's helpful. And then just maybe going back to the security business, going past This year longer term, what needs to happen to see security overall re Accelerate to growth rate that you'd be happy with. Is that primarily going to be driven by continued Guardicore mix shift? Speaker 700:48:27Is that going to be more on the 0 Trust portfolio ex Guardicore? Or maybe walk us through kind of what needs to happen to get security up to kind of an organic growth rate that you'd be happy with? Thanks. Speaker 200:48:38Yes. No, I think you characterized it well. And it is more the mix shift to the newer products for us that are growing at a rapid rate, but are still relatively small. We've got a substantial return from Bot Manager now, That's a great example, starting to really help. Next is Gardacore, which as Ed mentioned, we want to as we exit 23 should be at over $100,000,000 run rate. Speaker 200:49:09And once you start getting to that size and it's rapidly growing, it Starts making a difference for the big security number. And of course, as that number gets bigger, it obviously gets more challenging to maintain the higher growth rates. We're continuing To invest in new capabilities there, account protectors off to a very good start, really excited about that. But it will take time To do that. And we're continuing to look for potential acquisitions that can help jumpstart growth. Speaker 200:49:41I don't think anything huge that gets you the return right away, but areas that we think are really important that we can become market leaders in, Like we've done for application firewall, bot management, for segmentation and that over then a period of years can drive significant growth Operator00:50:07Our next question will come from Amit Dheri Anani with Evercore. You may now go ahead. Speaker 1100:50:14Thanks. Two questions for me as well. I guess the first one, when you think about 2% to 4% kind of top line growth in 2023 in constant currency, I think you talked about security growing double digits. Is there a way to think about how do you think growth stacks up on the compute and delivery side as well for the year? Speaker 500:50:31Yes, sure. So while we didn't give specific guidance for either delivery or compute, Tom did talk about us Achieving $500,000,000 or so in compute revenue. So depending on where you put your models, you're either side of $500,000,000 for compute and you just solve for The delivery, I think if you were to be on the higher end of the business delivery might do a little bit better as we saw in Q4, potentially get security going If the macroeconomic conditions improve and then obviously, really just a timing issue in terms of when we can start moving major workloads on compute. Speaker 1200:51:06Got it. And then as we Speaker 1100:51:08think about sort of the path from, let's just say, 27.5% operating margins that you'll be at in 'twenty three Towards this 30% kind of target you folks have had in the past you have now actually, what do you think it takes to achieve that target? Is there a revenue number that you need to get There are a mix or the cost reduction. If you just maybe provide a bit of a bridge on how do you get from 27.5% to 30% EBIT margins, that would be really helpful. Speaker 500:51:33Yes. So it's a little bit of everything, right? But I think as we laid out about 5 or 6 different things that we're doing, probably the biggest near term item would be The 3rd party cloud costs. So as we migrate that to our own cloud, we're going to save about $100,000,000 or so. Think about that as some of that will happen this year, a lot more of it in 'twenty four and then by 'twenty five, we should have almost a majority of our Internal cloud or third party cloud on our internal system. Speaker 500:52:03So that's 2 to 3 points right there. Co location, I talked a bit about the Audity of the ASC 842 and lease accounting, we have a little bit more of a burden that we have to take at the beginning of some of these longer term agreements. But also we're spending on co location that we haven't quite scaled into yet. So there's your question about revenue as revenue scales, you'll get scale with your margins. And then just through some of the depreciation savings that we're getting on delivery and the real estate savings. Speaker 500:52:33We're Call it before this year around $100,000,000 in real estate, we're going to save about $20,000,000 this year, probably room to get Maybe another 20 or 30 out of that as well. So it's really a combination of getting the compute revenue to scale into our investments in mostly our co location facilities And 3rd party cloud savings, those would probably be the 2 biggest areas for margin expansion. Speaker 200:52:58Perfect. And by the way, it's think Speaker 1100:52:59most of the ramp to margins is going to be driven by self help levers versus revenue tailwinds. I mean, it seems like the SKU might be a bit more on self help. Is that a fair way to characterize it? Speaker 500:53:10Yes, I mean, I think that's when you look at the size of those numbers, certainly, I mean, obviously, revenue cures all your rails, right? We've got a pretty scalable model. So if we see Acceleration in revenue, especially on the compute side, you're going to see pretty good flow through. But yes, there's a lot in our control here. I think we're doing the responsible things as things as far as hiring goes, shifting resources, focusing on reducing our real estate costs and really focusing on driving down that third party cloud costs, which has really Taking a pretty big chunk out of our gross margin. Speaker 1100:53:39Perfect. Thank you. Operator00:53:44Our next question will come from Fatima Boolani with Citi. You may now go ahead. Speaker 1300:53:50Good afternoon. I appreciate you taking my questions. 2 from me. On the delivery segment, the last couple of years for you have been Maybe a little bit more erratic just by way of lapping some of the benefits from the pandemic, some of the dynamics You saw in the gaming area where trends are moderating. So Ed, at a high level for you, when we think about the underlying cadence From a volume perspective, what are you assuming that's maybe different, the same, better or worse versus the trends you saw This year, I'm considering the big renewal cohort, what you've mentioned around holding co on pricing. Speaker 1300:54:32So Any sort of color commentary you can give us for the delivery segment in terms of traffic trends and in pricing trends under the hood? And then I have a follow-up, please. Speaker 500:54:42Yes, sure. Great question. So let me see if I can pick that all at once here. So in terms of the major renewals, we don't have nearly as many major renewals as we had last year. So that's going to be one thing that works in our favor. Speaker 500:54:55We are not anticipating in our guidance any significant increase In traffic, in terms of levels of growth that we saw last year, we're anticipating slight increase, but nothing significant. We're anticipating that and we're starting to see that price declines are moderating a bit. They're not nearly as steep as they've been in the past. And then we will continue our posture in terms of being a little bit more selective with some of the spiky traffic. Once we start seeing Volumes get back to the historical Internet growth rates and beyond, then maybe that posture may change, but that's the way we're going to play it for now. Speaker 1300:55:32I appreciate that. And just the delineation between your U. S. Business and the international business, anything you can point to by way of Geographical differences in procurement, is there more sensitivity on budgets in the U. S. Speaker 1300:55:48Versus international, any characterization there because international continues to be a stronghold for you versus Some of the maybe some of the malaise on the U. S. Side, but would love to get a little bit more granular on what's continuing to drive that strength and if some of that budgetary pressure that you alluded to on The security side is maybe showing up more pronouncedly in U. S. Versus international. Speaker 1300:56:09That's it for me. Thank you. Speaker 500:56:11Sure. Yes, I would say, just kind of general macro Across all regions, I'd say new customer acquisition is more challenging in an environment like this. And I think you hear a lot of companies talk about that. We're seeing that as well. In terms of geographic, obviously, the European economy is struggling a bit more than we are in the U. Speaker 500:56:31S, slightly higher inflation, etcetera. I expect that area to be a bit more weaker than what I'm seeing in the U. S. Asia still I've been pretty strong. Latin America has been pretty strong. Speaker 500:56:44U. S. Has been kind of holding Firm here, but I would expect the European business in particular to be the most impacted by the macroeconomic factors. Operator00:57:01Our next question will come from Frank Louthan with Raymond James. You may now go ahead. Speaker 900:57:07Great. Thank you. So with the significant number of pops that you have already, what is it about the cloud platform you need to expand these sites? And what is about the location and the capabilities that they bring for expanding the compute platform that you already have? And then you touched on possibility for M and A. Speaker 900:57:24What do you consider significant and what are the what size M and A do you think you might be looking at if you do any in the next 12 months? Thanks. Speaker 200:57:34Yes. So on the Akamai Connected Cloud architecture, we already have 4,100 Edge Regions. And these regions do delivery and security. They're the first line of defense. They also do what we call edge Computing, which is function as a service, JavaScript at the edge. Speaker 200:57:56Now in the core, where the node had 11 data centers We're going to more than double that. You have very large scale storage object and block storage. You've got VM as a service, container as a service, Kubernetes, core cloud compute. Now we're adding also an intermediate layer, we call the The distributed compute layer and this would have not the monolithic storage, but you'd have containers as a service, Kubernetes, VMs as a service, so you could do compute there. And so what you do and where you want to do it Depends on the application. Speaker 200:58:38Things that are a lot of back and forth with the end user that are Lighter weight, it could be handled in JavaScript. You want to be doing that in the 4,100 Edge regions. Something like transcoding, You're doing some data processing, you've got an app in a container, but performance matters, you want to be close to the end user Or say a gaming application that you'll want to do in our distributed edge platform. And the reason you have that is, there's a lot of Cities and places in the world that don't have a giant cloud data center there, and they can't really take advantage of the cloud for locations that have where the proximity to the user is important. And so that's something that we want to be able to provide. Speaker 200:59:27So there's 3 sort of levels here of compute, and you want to be actually using Generally, all 3 for a major company, but the specific application dictates where you want to be doing it And what combination of that you want to use? Speaker 900:59:50Okay. Great. What's the potential for M and A and thoughts on what you would consider significant versus more tuck in? Speaker 200:59:58Yes, good. So I think tuck ins are a team that has the beginnings of a product For technology that we can scale on behalf of our customers, we've done a lot of acquisitions like that. More substantial would be something like Gardicore that had at that time the number 2 product in the marketplace and we've invested around that. They're now number 1, which is great to see, and a more significant cost associated with that. And they had a developed product already Go back farther, Prolexic is another example of that, where they had a developed product, they're already at $40,000,000 $50,000,000 in ARR, and those are we do occasionally and we're always looking, but we do those occasionally, but more you'll see the tuck ins and then redevelop from there. Speaker 901:00:55All right. Thank you. Operator01:00:59Our next question will come from Rudy Kessinger with D. A. Davidson. You may now go ahead. Speaker 701:01:06Hey, guys. Thanks for taking my questions. Speaker 1201:01:09I guess I'm curious, how did the macro trend in the quarter just with deals lengthening and how many deals did you see push, That's relative to Q3. And the guide assumes no positive or negative change in the macro. Just Why make that assumption? Why not be a bit more conservative maybe assume it gets a little worse? Speaker 501:01:32Yes. So this is Ed. So in terms of the biggest impact on the quarter, I would say, coming in, we were expecting potentially a weak commerce Season, we actually saw a pretty decent commerce season. We saw a decent video traffic. We saw obviously we talked about the World Cup being better than our expectations. Speaker 501:01:50I would say gaming was noticeably weak. We didn't see as much activity as you typically see in the Q4. And then from a sales side, A couple of deals pushed, there's a few large Gardacore deals we tracked that pushed and then also new customer Those are really the big things. Then as far as the macroeconomic conditions, it's tough when you Sit in the seat to try to play economist. And with us, obviously, AXA is probably the biggest impact on us more than anything, given our we've got longer term contracts. Speaker 501:02:25But It's hard to say that, look, things can change and get dramatically worse. I'm just expecting what I see right now in front of us in terms of The macroeconomic environment is challenging, but I think we can navigate it pretty well. So that's what we base our guidance on. If things change, we'll obviously update the guidance. But was just trying to a lot of times people ask me what was what were you thinking as you put your guidance that are you expecting things to get dramatically worse? Speaker 501:02:52In this case, no. Do I expect things Dramatically better know it's kind of roughly the time and if things do change, we'll obviously update you as we get more information. Speaker 1201:03:03Yes, okay. That's fair. And then at a higher level, I mean, obviously, it sounds like compute has kind of slotted into growth priority 1, you will, kind of ahead of security. And just at the high level, I'm curious what really has given you conviction to invest so much in compute? Is it The early customers that you've signed, is it just conversations? Speaker 1201:03:23Is that the pipeline growth you've seen over the last few quarters since you made the acquisition? What's given you so much Conviction to make such a large investment, go all in on compute? Speaker 201:03:33Well, it's all of the above plus the compelling logic You know of the situation, as I mentioned, I do have the opportunity to meet with the few most executives at A lot of the world's largest companies, especially you think media, commerce, gaming and so forth, and there is a lot of interest there And our ability to help them. They're in a situation where they're spending a ton on third party cloud. It's growing rapidly. Many of them describe it as being out of control and it's even hard to know How big it will get? In some cases, they're spending this with a competitor and on top of it, they've got major company initiatives to cut cost Because of the challenging global economic conditions. Speaker 201:04:25And so when we can offer them A service with at least as good, better performance at a lower price point, that's very attractive. Now on top of it, these companies, they know us Well, they already trust us with scale and performance and security because we provide The vast majority of their delivery and security. So we are a very logical choice. It's not like we're just somebody coming along here Saying, hey, we got a cloud service, it's not like that at all. We've got a lot of credibility with these companies and They are pretty clear that they think this could be very attractive for them. Speaker 201:05:06In fact, I think one of the analysts on this call did a survey of 50 of our Larger customers have found the same thing. The same thing was reported to them. So we see that, that our customers need that and would like to shift business to us, but we want to get ready for that and help them. And that means building out the capacity, building out the new distributed architecture and Getting the functionality to the level that they're going to be comfortable putting mission critical applications at very large scale on our platform. Of course, Akamai will be one of the first examples of that. Speaker 201:05:47We're going to place our services that are used by pretty much all the major enterprises, A lot of the major enterprises out there for example security onto our platform and that will be another great proof point That Akamai Connected Cloud is really going to work for them. Operator01:06:11Our next question will come from Ray McDonough with Guggenheim. You may now go ahead. Speaker 1401:06:17Great. Thanks. Tom, maybe just to ask the M and A question in a slightly different way. As we think about the Strategic plan going forward, do you feel the organization has enough operational capacity to continue to expand Linode right now and do another acquisition in security At this point to help you reaccelerate growth, and is 20% long term growth including acquisitions in the security business something you're still targeting after this year? Speaker 201:06:43Yes, good question. First, the work on Linode, which is extensive, It uses different teams by and large than our security technology group. And so yes, we're in a position that we can continue that work and also do security acquisition. There's I don't think there's any challenge there. Now we have, as we talked about, retasked a lot of the positions, either people or positions From our platform and delivery organizations to the compute effort. Speaker 201:07:20So there is a lot of effort there And that will be increasing throughout the year. Now in terms of the 20%, what we're talking about is we're guiding this year into the low double digits and then we'll see where we are. Obviously, we'd like to be growing Faster than that, but there are very challenging conditions out there as we've talked about, and we'll have to see. So we'll update that guidance as we maybe we get to an Investor Day or get into next year. But right now, we're just guiding for this year in security in the low double digits. Speaker 501:08:00Great. And one more if Speaker 1401:08:02I could. The work we've done on Linode does suggest your customer base is interested in leveraging Linode. And when I think about sort of the lead times for capacity additions in the data center space that you've already leased, How long are the lead times to fill that data center space? And at what point would you expect it at least to get to a Somewhat full utilization of just the space that you've already contracted for? Speaker 201:08:32Yes. So good question. There's the contracting, there's Build out, there's getting it all turned on. And the way you want to think of it is, we would be doing Core data center build out, the focus of that is in the first half and we'll have a lot of that done then. We should finish that Early in the second half or get substantially more than we have today. Speaker 201:08:56And then late in the second half taking on the distributed Architecture, we should have a bunch of those regions turned on live later in the year. And at that point And also at the same time getting the certifications in place, virtual private cloud, other capabilities that the big enterprises need. So that when we get to the later part of the year, we're in a position that we can take on this business and it will just Happen all at once. A major enterprise will try it, use some applications and then some of the big ones you For some of the traffic over and so I think the major filling of it and use of it really comes more in 2024, not so much this year. We expect, as we talked about this year, to do about $500,000,000 in compute. Speaker 201:09:49But the real growth, I think, And the monetization of what we're building out now comes in 2024 and 2025. And also for our own use, this year we're in the process Supporting our own applications. As Ed talked about, we're going to save some this year, but really the big savings for us comes in 2024. So that's the way I think to think about it. Speaker 1401:10:13Great. That's helpful. Thanks for taking the questions. Speaker 201:10:16Well, it is Valentine's Day, so we're running a little Speaker 101:10:19bit over. But operator, why don't we take one more question? I know there's probably a few more, but let's just take one more and we'll end the call. Okay. Operator01:10:26Our last question will come from Michael Elias with Cowen and Company. You may now go ahead. Speaker 1501:10:31Thanks for squeezing me in here. Just Two questions for you. First is, you talked about some Gardacore deals slipping and last quarter there was commentary around elongating sales cycles. I was just wondering if you could give us some color on how sales cycles have evolved for not only Gardacor, but the broader portfolio. And then my second question for you is, maybe to phrase it a different or frame it a different way Is there a rule of thumb that we should use to think about the correlation between incremental revenue and incremental megawatts of data center capacity I. Speaker 1501:11:02E. To support an incremental $100,000,000 in compute revenue, you would need X amount of megawatts? Thanks. Speaker 501:11:11Right. I'll try the second one is going to be a little bit more challenging and maybe I'll come back with a metric on that one. I don't have the Exact metric down to the megawatt, but I'm sure somewhere in the business I can find somebody who does. But I've sort of used sort of a rule of $1 of CapEx is $1 of revenue roughly Speaking, that may change a bit, but sort of a good rule of thumb. In terms of sales cycles, The good news with the deals slipping is they're not going away. Speaker 501:11:39This is typically a big purchase that you make, especially with Gardacore that It could be something where the decision makers just pushing it off a quarter or 2 and it's not that the deals are losing. It just becomes In terms of just overall sales cycles, like I said, the biggest impact is new customers, It's a lot easier with your existing customers. You're going through renewal cycles. You're having upgrade conversations and things like that. Getting new customers to open up a new buying pattern is challenging. Speaker 501:12:12I do think one thing that will work in our advantage in all of this though is we talk about compute And the need to find a cheaper alternative, go multi cloud, I think that's going to work in our favor. So I think it's one thing this All the negatives that come with the macroeconomic backdrop that we have, I think that's one positive that will work in our favor. And we are starting to see our pipeline grow Pretty dramatically in that area. And as Tom talked about, we should start to see deals close towards the back half of the year and then really set ourselves up for the big 24. Speaker 1501:12:44Thanks for the color. Speaker 101:12:47Okay. Well, thank you, Michael. Thank you, everyone. And in closing, we'll be presenting at Several investor conferences and events throughout the rest of the Q1. Details of these can be found in the Investor Relations section at akamai.com. Speaker 101:13:00We want to thank all of you for joining us and we wish you a Speaker 501:13:03very good Speaker 101:13:06health and good health to your family. So have a nice evening. Take care. Operator01:13:13The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.Read morePowered by