Excellent. let's get kicked off here. Welcome to the Morgan Stanley TMT Conference. My name is Keith Weiss. I run the U.S. Software Research effort here. very pleased to have with us my first presentation of the TMT conference, Tom Leighton, CEO and Co-founder of Akamai. Tom, thank you for joining us.
Mm-hmm.
Before we get started, a brief disclosure. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. All right, with that out of the way, let's kick into what has been a really exciting year for Akamai. It's always an exciting year, but I think this year in particular, we're talking a lot more about a connected cloud service. This is something that you guys have really brought into the forefront of the Akamai story over the past year. I think it was last month you unveiled the Connected Cloud Service, integrating Linode, which you acquired into the broader Akamai 4,000+ edge computing locations.
Can you talk to us about why this is so exciting from your perspective? I mean, Akamai's always been kind of your baby and sort of what you've been growing. I can tell you're very excited about this opportunity, probably more so than other ones that we've seen in the past. What is it that you see here? What's the unique opportunity for Akamai to really in a differentiated way, address this market?
It is exciting. It's a chance to provide a complete cloud service to our customers. My excitement is derived from our customers' excitement. You know, think about it, is you've got 4,200 edge locations. These locations deliver content. They do edge computing, JavaScript, Function as a Service right near the end user in the last mile. They also do the first layer of security, so they intercept the attack traffic before it gets anywhere near the data center. There's two stages inside of that. At the very core, we now have core cloud compute and storage, so that you can run VMs, containers, monolithic object storage, block storage, everything you could do in a hyperscaler. We're building out an intermediate layer we call distributed computing.
Think containers as a service where today you can't get that from a hyperscaler 'cause it'll be, you know, initially in multiple dozen locations, ultimately in maybe a couple hundred locations, all connected with the Akamai backbone. A lot of people don't think about Akamai as a backbone, but we run one of the largest backbones in the world, which can also integrate directly to our large customers. Now they'll be able to do everything on Akamai. They'll be able to build their apps on Akamai, have their storage on Akamai, run the apps, distribute them, get great performance, and of course, have security, have it all protected by Akamai. Having it all on one platform makes it a lot more efficient. The users get a better experience, and the costs are a lot less.
This is a time when, cost actually, I think, matters, more than usual. Our customers are very excited about this opportunity.
Got it. Makes a lot of sense, so sort of that one platform perspective. You're right, everybody does push for kind of lower cost options, particularly with some parts of the equation, like core infrastructure, like compute and storage and the like. Are there specific use cases and workloads that you think Akamai is uniquely suited to address with the Connected Cloud service? Maybe what are they?
Yeah. Workloads where scale matters, locality matters, performance matters. Think about this in some of our large verticals like media, gaming, commerce, you know, those companies, performance matters a ton. With this capability, we'll be able to give the utmost in performance. In fact, our first early adopters of the cloud service are, you know, big media companies.
Okay
W here you need to do the transcoding and special stuff for an individual as they're watching a video to make it really high performance. You wanna do that close to the end user. It's a lot more efficient that way, and you get better performance. Could be transcoding, could be uploading. One example is, you know, you just created a video, you wanna upload it so all your friends can see it and do that in real time, and that's something you wanna do close to the edge, either in containers in the distributed edge or actually right on the edge server. Commerce, same thing. You know, think about a commerce site. You've got a massive amount of data that's stored in the core. You're doing data processing on that.
A user comes to interact with your site, and what you wanna do is you wanna take the data specific to that user and get it out closer to the end user. To make a decision, you don't have to come all the way back to the core and enter this monolithic, you know, database. You can do that now in a container much closer to the end user. Of course, on the edge, you wanna be doing quick processing of what that user is doing right now. Maybe some of that comes back to the middle region to do some compute based on the past history of that user to make sure you tailor the content and get a great experience for the end user.
Having this all together in one platform just makes it a whole lot easier, faster, and of course, when it's fast, you buy more. Our customers are happier.
Got it. I'm gonna go a little bit off script here, but when I hear that kind of dynamic, it's really hard to go through these presentations without sort of trying to understand sort of the AI context.
Mm-hmm
A s kind of what we're speaking about. You talked about a little bit on the last conference call about this platform could be good for supporting those AI workloads. When I hear you talking about sort of what would work well on the edge, it seems like yes, maybe you're gonna train the model in a centralized location, but you're gonna want to run those models close to the edge and do that inference of where you could have that fastest response time.
That's exactly right. Your big monolithic processing that's asynchronous or offline, done in the core, that's great. Massive data there. When the user's interacting with the site, you want that local.
Right.
You know, on the fly and really quick. More and more of the APIs today are very chatty, the round trip time matters because you're doing a lot of that.
Right
Y ou know, to present something to the user and conduct a transaction.
Got it. When you started to talk about the use cases, you started with media and gaming. I'm assuming that you're having these conversations with your core customers and customers that have been with Akamai for years, if not decades. Can you talk a little bit about their initial response? How interested are they in augmenting what I'm sure they're already doing in other cloud services with what you're bringing to the table with the Connected Cloud?
Yeah, there's a lot of excitement. You know, those companies already trust us to be reliable, to scale for security. They trust us with their secret keys, and they've known us for a long time, and now we're in a position to offer the last piece, which is, you know, the core cloud compute, and put it all together in a way that makes a lot of sense, and also to save money. You know, you think about it, today we're the front end for those sites by and large. All the data is passing through us. You know, today, we end up passing it off to either their own data centers or to a hyperscaler, which involves a lot of cost and some inefficiency.
Then of course when you wanna get something back out of, you know, a hyperscaler, that's even more cost. Now that goes away, so it makes it not only faster and more efficient, but really much less expensive. You know, in media in particular, you know, we're seeing the big customers, they're in a lot of pain right now in terms of their cloud bills. They're actually, you know, rising quite a bit and taking a bigger bite out of the budget, we can help with that problem. There's just a lot of interest. In fact, I think one of the firms did a study of 50 of our customers saying, "Hey, would you buy this service, Akamai Connected Cloud?" I think the vast majority said yes. We're pretty excited about the prospects.
Got it. Can you talk to us a little bit about the pricing strategy? 'Cause lower cost is definitely a part of the equation. I think you guys just recently made an announcement about egress fees within Linode. I guess the overall question is how are you guys thinking about pricing strategy? Is it specifically meant to be this is a lower cost alternative to the hyperscalers?
Yeah. I think generally it will be lower cost. You just look at our list pricing, and it's substantially less than what the hyperscalers would charge. Of course, if you are a big egress, kind of entity like commerce or media or, you know, gaming companies would be, there's even more savings to be had. It's substantial. Our typical customer in those verticals today will spend 10x in, you know, cloud cost than they'll spend with us. It, it makes a big difference when we can, you know, include that as part of our capabilities.
Got it. Do you see a response from the hyperscalers? Cause it When you talk to whether it's AWS or Azure or GCP, they all talk about the edge as well, right? They talk about it in various forms, whether it's AWS talking about telco partnerships and outposts, or Azure just being a more distributed network themselves, or talking about the on-premise environments being kind of part of the edge. What do you think the competitive response, not just to like Linode and Akamai in this marketplace, but there's other vendors, whether it be Cloudflare or whether it be DigitalOcean, who are trying to sort of push on this edge. Do you see any like real competitive response from the hyperscalers?
You know, in the last few years, everybody's been talking about edge.
Mm-hmm
marketing term. I think only Akamai is really at the edge. I mean, nobody has thousands of locations that do, you know, Function as a Service, that do delivery, and that do security. We're really unique there. You know, it's not easy to create that. Everybody talks about it, but nobody really does it. In terms of the hyperscalers in competing there, you know, a couple of the hyperscalers are among our biggest customers-
Okay
B ecause we offer the best when it comes to, you know, delivery and performance and security. Even though we compete with their own services there, they're big Akamai customers. Also, you know, Akamai has a little bit of an advantage in that I think we are much smaller as a company than they are, and so, you know, it's like we'd like to get a few percent market share in cloud compute, which is enormous for us. That's billions of dollars that we'd add. You know, it doesn't matter to them. You know, because they're growing at a very rapid rate, and if we're successful and over a period of a, you know, few years can get 1% or 2% of market share, they don't even notice that.
Got it.
I would say.
Got it. On the flip side of the equation, I won't press too hard on the margin side of the equation 'cause you're the CEO, not the CFO here.
No, no, that's all right. Margins are really important.
When building out networks overall, as you know, is expensive and building out kind of a new network with the network is going to take more investment on the CapEx side than the OpEx side. Can you talk about the investments upfront necessary to kind of build out this network and how investors should think about the CapEx intensive the business on a going forward basis? Does this fundamentally change it from what we were talking about two, three years ago when it was more so sort of a CDN business and a security business?
Yeah. It is more CapEx intensive. This year you really notice it because we're doing the initial build-out. There's $several hundred million there. Now, a big chunk of that is for our own use of the cloud, which is gonna save us a ton in OpEx going forward. You know, we're gonna spend ballpark $100 million this year. Already that's less than we would've spent without our own cloud capability, but the vast majority of that we wanna have go away next year.
Okay.
This year you see us spending the initial build-out in CapEx, and we don't really get the benefit of that in revenue or OpEx savings until really starting next year.
Okay.
That's very noticeable, you know, to investors this year. After that, it's a much better situation because, you know, you don't spend a lot more CapEx until you filled the CapEx you had, and by then you're generating a lot of revenue at very good margin. Now it's all about growing the business.
Got it. Got it. Then just one last question on Linode, there's a couple other parts of the business we wanna get to as well. Can you talk about that growth expectation of what have you guys kind of templated as kind of initial growth out of the gate for Connected Cloud? Where do you think it could go to over time?
Yeah. Linode, of course, was targeting small and medium business and the developers, we're maintaining that business, you know, growing, say, mid-teens, what we're really focusing on is adding large enterprises. That means upgrading Linode's capabilities, both in terms of what they can do and also the scale and distribution. That's what we worked on last year and are working on this year so that we can go after the world's biggest enterprises for their mission-critical applications. The goal is by the end of this year that we can be signing, you know, large deals with major enterprises, and that would, you know, generate revenue going to next year. Now, in terms of overall the business, you know, last year we did $400 million in compute, roughly. This year, roughly, you know, $500 million.
The growth is really gonna be driven by business we don't have a lot of yet.
Mm-hmm
W hich is big enterprise, mission-critical applications, and that's where we're going after ultimately billions of dollars of revenue. That's something we wanna be growing very rapidly, you know, really starting, I think, with revenue next year, and that drives the whole compute business going forward.
Got it. That makes a ton of sense. I wanna shift gears to the security business. Security is now a $1.6 billion run rate business for Akamai, accounts for about 40% of your overall revenues. You guys have done a remarkable job of building this business both organically and inorganically, leveraging sort of assets you have out there to both get into customers, but also sort of utilize the underlying network that you have in place.
From an investor perspective, while there's a ton of excitement on the cloud side of the equation, does that necessarily mean that the security side of the equation has to take something of a back seat, that this is now kind of like the secondary growth driver for Akamai, and not as sharp of a point of focus in terms of where you're gonna be driving growth from?
No, we got a ton of focus on security. In fact, this year, pretty remarkable in a sense, security will be our biggest source of revenue, bigger than delivery and CDN, which is a remarkable shift for a company that, you know, started the CDN space and, you know, has major presence there. Security, incredibly important and very strong growth driver for us. I think, you know, works well in conjunction, you know, with the compute business and the delivery business. Now, in terms of the growth drivers there, we've got the biggest is really the Web Application Firewall. That market, you know, we penetrated it pretty well. There's room for growth there, but where we're really seeing the growth is the capabilities on top, things like Bot Management.
You know, today, for a lot of our customers, most of their interactions are with bots. Most of those interactions aren't a good thing. You know, the extreme example would be like a Taylor Swift concert, you know, which is an example of, you know, what can happen if you're not using Akamai Bot Management. You know, on top of that, Account Protector, that's all about identifying that somebody's trying to access an account, a bank account, commerce account, media account even, where they have the right credentials, the login and the password, but they're not the right entity. You know, maybe it was stolen or something else. We're really good at identifying that's a product that now is getting very strong ARPUs and adoption, which is great to see.
Things like Page Integrity Manager, which is all about identifying and blocking the bad effects from malware in the digital supply chain, things that impacted, for example, British Airways, Magecart-like attacks. Now it's a requirement in the PCI standard. If you wanna be PCI compliant, starting in early 2025, you've got to have something like that, and we're in a really good position to help customers there. You know, most recently, Brand Protector, you know, all the phishing sites that are out there and, you know, commerce sites, bank sites are pretty helpless trying to find them all. We had a, you know, a recent test with a large bank in Japan, and in one week we found 250 phishing sites. Not one or two, 250. They knew they had a problem.
Right.
They had no idea how bad it really was. There's a lot of capabilities we're building on top of the Web Application Firewall. API protection is another one. A lot of the transactions today are API-based. You need to have special protections there. I think a lot of room for growth with services that are relatively new that we're bringing to market, areas that we're creating, you know, the first to provide real defenses for.
Okay.
growing rapidly on a smaller number, so it takes a little while for them to raise the whole base.
I think you did give a indication on Bot Manager being one of the faster-growing sort of modules you guys have ever had. Any sense you can give us of the scale if we think about the sort of on top of solutions on top of the WAF? Like, what kind of scale are we talking about today, and, where could that go over time?
You know, one of those, you know, as it's been out a few years, $200 million growing from there. They won't all get that big. Some will get maybe bigger.
Got it.
It takes time, you know, to do that and to get the adoption. Also cross-selling with our enterprise security suite. You know, a lot of the Guardicore customers don't yet have our application, you know, protection services and vice versa. You know, most of our customers, you know, still have, you know, 1 security product. We're working on cross-sell. Security channel is a very important area, especially in enterprise security.
Got it. Can we switch gears and talk a little bit about the enterprise security side of the equation? Because that's the newer part of kind of the security portfolio, something you guys have been investing a lot in, both on the product side of the equation as well as the go-to-market. Maybe you could touch both sides of that. Like, what are the sort of the state of play on the product side of the equation? Where have you made the recent investments, and where are we in building out that more enterprise-focused sales force that could go in and do those enterprise security sales?
Yeah. The lead product is Guardicore, which is the micro-segmentation. You know, I think in a lot of ways, that's the most important defense an enterprise can have. You know, today you can buy everybody's products. You can buy ours, you can buy all our competitors. The problem is malware's still getting in. It's just really hard to keep all the doors and windows really locked. Just malware gets in, the key really is to quickly identify it and block it from spreading. That's what, you know, micro-segmentation does. Guardicore is now recognized by the analysts as the leading solution for that. It stops the damage from malware, stops the damage from data exfiltration attacks.
Basically, it puts a software agent, a little mini firewall, on every application, so you can see what's going on, and if an application starts doing something unusual, now you get alerted, and you go investigate it. You proactively block the communications. You know, you don't want your HVAC unit communicating with some data repository, as an example. So that keeps the malware from spreading, the ransomware from getting everywhere so it can lock everything down. Also gives you great visibility. You know, if a zero day comes out like Log4j, you know, we can tell our customers within hours everywhere they have the vulnerability. Without that, typically, you know, it took weeks or months to go find it.
I think Guardicore is the flagship product, and then around that, you know, we bring in other capabilities like Enterprise Application Access, which is often called the north-south to Guardicore's east-west, or app-to-app being what Guardicore does. Human device, employee device-to-app, being what Application Access does.
Got it. Guardicore's made a lot of good progress thus far. On the enterprise access side of the equation, that's a... I mean, they're both very competitive spaces, but that's a competitive space we hear a lot about, a lot of different vendors going after that sort of access side of the solution. Can you talk to us about who you're competing with there and sort of what's the Akamai advantage when it comes to the access side of the equation?
Yeah. There's With Guardicore, there's the classic approach to segmentation, which was physical. You would physically partition your network, and you'd put firewalls in between the partition, which was very inflexible. A lot of companies didn't do it. Those that had to have it by regulation made very big partitions because it was so inflexible. Of course, if you have a big segment, you're gonna have big damage when the malware gets in, because it can go across a large portion of the enterprise. You know, so that's not a very good approach. You know, using the agent-based approach and software like Guardicore does, much more flexible, easier to implement. There, I'd say the leading competitor is Illumio.
In fact, in the last year, we've overtaken Illumio in terms of, you know, being the recognized, you know, best-in-class capability.
Got it. Just on the distribution side of the equation, and I wanna make this a little bit broader than just security, but include security. If we think about Whenever I think about distribution from a specific company, I'm always thinking about how do they go across an organization? How do they effectively go across? The bread and butter of Akamai historically had been sort of the website operators and the people who are ensuring the performance and security of those websites. Security, and particularly enterprise security, seems to go further afield from that, especially when you get into access. How do you make that leap? On the cloud side of the equation, you need to talk to developers about where they want to deploy their software and the administrators who are gonna keep that up and going.
Can you talk to us about the go-to-market strategy and how do we make these hops from your traditional customer bases to the new buyers for the new solutions?
I think the biggest leap was when we went from delivery to web security. That was a big hop, which we've successfully done. The hop from web security to enterprise security is smaller, because we're already dealing with the CISO and the InfoSec organization.
Got it.
Different buyer at the low level, but roughly closer than going from delivery to security. Now, for cloud, delivery to cloud, smaller hop there. You know, the entity that You know, think big media and big commerce that's putting all their assets on us for delivery, we're dealing at a pretty high level there on the CIO generally organization, and the compute side is not far away. You know, we're a big enough spend with those folks that we're dealing with procurement, and suddenly now we're able to talk about, you know, helping them with 90% of their spend, or 95%, you know, compared to what they're spending on us, and that's a conversation that now is very timely.
Got it. Then where do partners come into the equation? Because historically, when it was just a delivery business, it was very much a direct focus model and even with Web security. Now it seems like you're looking to engage partners more when it comes to enterprise security, engage partners more on the compute side of the equation. Can you talk to us about sort of the evolution of the go-to-market to now include partners and where we are in that evolution?
Yeah. Almost half our revenue is partner-driven today. You know, on the enterprise security side, it's all partner. Guardicore is 100%, you know, partner. You're right with core basic delivery, less so. I think with compute, there's a lot more room for partners to add value. You know, the effort involved in a lift and shift, for example, either out of a data center or out of a hyperscaler, that takes some effort. Also, you know, managed services going forward. I think that's, you know, Partners will be very important on the compute side.
Got it. Got it. I do wanna open up for questions just to see. I'll ask one more question while you get ready. If anyone has questions, feel free to raise your hand. I'm gonna sneak in one last one, and it's just about M&A and the... Akamai has used M&A to sort of expand out solution portfolios. Obviously, Linode and Guardicore were two of the larger acquisitions. How should we think about the potential for further M&A on a go-forward basis, and how do you guys think about what's a good target for Akamai, either from a sort of market perspective or sort of like the fit of the company that you're to acquire?
Well, I think Guardicore and Linode were transformational. They were larger scale and, you know, it's unusual we do one of those, let alone two. I don't see us doing something like that, you know, again in the near future. If we found the right opportunity, maybe, but I think less likely.
Mm-hmm.
More you'll see tech tuck-ins. Maybe, you know, from time to time, you know, something that's more of a roll-up nature if the economics are really attractive. Generally I think, you know, technology capabilities that we can incorporate into our platform, probably focused in security, maybe a little bit in compute, but you know, smaller scale acquisitions over the next, you know, couple of years.
Got it. That's super helpful. I think we had a question up front.
Yeah. Hey, Tom. Thanks for taking the time. My name is Chris. Can you talk a little bit more about the investment for AI at the edge? You talked a little bit about making the CapEx investment or that you'd be well positioned for it. Just given we've been hearing a lot about the kind of hardware required to run inference for some of these large language models, they require A100, those are back ordered, H100s might be good for it. Is that something that Akamai is looking into, or can you talk a little bit about that?
Well, yeah, we use it, of course, in our own services, or particularly around security, I think by and large, it's a driver of the need for compute. That's something that drives the whole industry for compute, which we would also benefit from, because it's just very compute intensive. We don't have our own special services around AI, if that's what you're asking.
Any additional questions?
Hey. Thank you, Tom. Appreciate the time. I just wanna connect maybe more so thinking about, I guess thinking about CapEx intensity and our success in compute, how should we be thinking about if we overachieve on compute, how that dials down the CapEx and also kind of just the relationship there?
Well, if we overachieve on compute revenue, that means we've filled up rapidly the servers we're buying now 'cause we're getting the initial footprint in place, and that means we'll then spend more to get on compute servers for, say, next year. That's the good news scenario. You know, the bad news scenario is it takes us longer to fill those servers, and then our CapEx costs, you know, go way down for next year. It's really a demand-driven situation. You know, for a dollar of, you know, CapEx spend today, you know, very high level, that's a dollar of revenue per year once we fill it up. The faster we fill it up, the more we would be buying more servers to grow the business, which is the scenario we wanna be in.
You'll see faster revenue growth and better margins, and the whole nine yards.
Oh, that's great. I guess bringing compute does seem very compelling from a lot of the stuff that we've discussed here. As we think about those large customers or even those large medium customers that want to move over, what I guess are they either looking from us in terms of a product perspective to like milestones they wanna see before they invest more meaning like put more compute onto the platform? How should we think about what they're trying to see first before they go into that?
Great question. Build out is number one, two, and three. That is more capacity and scale, which we're doing, in more locations to make it distributed so it's closer to, you know, their consumer or their end user. There are also some capabilities that we're integrating, you know, things like VPC, availability zones. We have database as a managed service, but you know, some capabilities there. You know, we're on a good path to getting a lot of that done, you know, this year, so that we'll be able to start really taking on that business towards the end of this year.
Thank you.
Got it. Unfortunately, that takes us to the end of our allotted time. Tom, thank you so much for joining us. Always an interesting conversation and very exciting stuff going on at Akamai right now.
Very good. Thank you.