Thank you, everyone, for joining us this afternoon. My name is Keith Weiss. I run the software, U.S. software research practice here at Morgan Stanley. Very pleased to have with us from Akamai, CEO and Co-founder, Tom Leighton. Tom, thank you so much for joining us.
Nice to be here.
Before we get started, for important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. Excellent. So with that out of the way, again, Tom, welcome to the TMT conference this year. And it's, I think, a really exciting year to have you at the conference. You guys have been great at coming every year. 25-year history, but it seems like the rate of change, if anything, is accelerating at Akamai, with the investments that you've made, particularly in Linode, particularly like in security, in expanding the purview of the company. So can you talk us a little bit through that journey over the last couple of years of how really the purview of Akamai has really expanded?
Yeah. Well, obviously, we started as a content delivery company. We started that marketplace, about 25 years ago. Last year was significant because it was the first year that security became our largest product line.
Right.
So big shift for what was known as the content delivery company. The lead, you know, products there, Web App Firewall, is a cloud service. Also a market that we started a little over 10 years ago. And, today, as we look to the future, very excited about security, a lot of new capabilities there, but now also with the investments in cloud computing. That, that, you know, we're hopeful is a big source of revenue and growth for us in the future. We have the 25 cities with core compute data centers. And, we talked about recently with Project Gecko adding 75 more cities, with our edge POPs to support VMs and containers. And ultimately, fully serverless and automated cloud computing.
Right.
Which is, I think, a very exciting concept.
Right. In that evolution, and one of the things that's, I think, always been really interesting about Akamai is how natural kind of, like, the expansions have been, right? So you started as a CDN service. You were pushing content down. And then DDoS is basically just everything going the other way, right? Like, utilizing the existing network. You have all the data on what's going on, on these networks. Performance becomes a really obvious, maybe obvious is the wrong word, but natural area to extend into, a lot of the security products the same way. Can you talk to us about that natural extension? What made Linode? What makes this compute side of the equation, that similar kind of natural evolution of the story?
Yeah. Well, we've always been interested in compute. You know, we started edge computing under that name over 20 years ago.
Right.
And, you know, have supported function as a service on our edge platform in 4,000 POPs for a long time now. The big recent shift is being able to support VMs, containers, Kubernetes, full stack compute and storage. And that was, of course, aided by the acquisition of Linode. And now what we're doing is taking that base and applying all our know-how with delivery and security to make it be really scalable, really local, and fully automated. You know, today in the cloud, you've got to pre-provision how many instances you want in each data center. And that doesn't scale so well, especially if you're doing a commerce or media event where you get a spike crowd. And if you haven't provisioned it just right, you've got an outage. You've got a situation.
You know, with Akamai, of course, we do all that in a serverless way, historically, with delivery and security. It's what made the internet scale. And now we're applying that to compute, which I think's a really exciting place, the next generation, you know, cloud computing.
Right. So given your expertise in security, your expertise in performance, being able to understand loads and balancing loads, you could take an asset like Linode and push it further up market into your more sort of higher-end customer base.
Yeah. No. You know, the Linode serviced, you know, small and medium enterprise developers. Very popular, easy to use, very inexpensive. But wasn't really suitable for mission-critical apps or big enterprise. And that's what Akamai's all about. So we've gotten that to the point now where it really is much more reliable, a lot better capabilities. And now we're scaling it out into our edge regions. So we'll be in 100 cities, you know, by the end of the year. And then next step is fully automated. So we'll spin up your containers and VMs based on user demand, on demand. You know, we do that for function as a service today, have for a long time, but never been done before for real compute, which is where we're going.
All right. So I got ahead of myself a little bit. We're gonna dig into the cloud business. But I wanted to start with kind of, like, a state of the union, like where we are in terms of demand trends across the various businesses. And maybe start with sort of the core delivery business. Traffic has been volatile, to say the least, over the past couple of years. You had a traffic spike during COVID. And then there was the sort of overhang from that. How are you feeling about the current demand environment, when it comes to the delivery side of the equation?
Yeah. The traffic growth rates are up this year compared to last year, a modest amount. Not a lot.
Right.
They are not back yet to the growth rates we experienced pre-COVID. So we're not assuming that they're gonna return to that level. And the other component to revenue besides traffic growth is unit pricing. And so we are being, you know, more judicious in unit pricing. And as we've talked about, you know, not taking on all the spiky traffic, which is not as economical for us.
Right.
Areas that cost more or the really low-priced stuff, you know, we're not taking, as we might have before. I think that's the benefit of the company as a whole, especially as we put more investment into compute and security, which have much better ROI.
Right.
We'll see how the market, you know, shakes out over the course of the year. We have seen two of the major players, you know, give up. You know, you've got another one out there today, more or less in free fall. And so we'll see. Maybe at some point we'll get some rationalization in the pricing in that market, which would be a great thing to see. Long term, of course, we'd love to see delivery stabilize.
Got it. Historically, we'd always looked to specific catalysts like elections and Olympics, which are both coming up in 2024, as a good sort of driver for the delivery business. Any reason that wouldn't be the case this year?
Well, Olympics is better than the normal event 'cause it's over a few weeks. And so you get a little bit more revenue. But think about it as millions. So it's not a huge swing. I think the election season really depends on what happens, you know, hopefully, we're not in some, you know, crazy, drawn-out thing, where we're all glued to the news every day for months. But you can see traffic increases associated with an election season, depending what happens.
Got it. And then you recently acquired customers from StackPath and Lumen, not the companies, but just the customers and sort of the contracts that you wanted. How should investors think about that as a sort of addition to the growth paradigm in delivery as we go into FY24?
Yeah. You know, purely opportunistic, you know, financial benefit to the company. We integrated the customers we wanted within a couple of months.
Right.
We didn't buy all the contracts, just the ones that we wanted. And we did add on a bunch of new customers that we're looking now to cross-sell our other capabilities, security and compute, too. And we get a very rapid return on the investment there.
Got it. Shifting gears, I wanna talk a little bit about the security demand environment. We were hearing from Nikesh Arora from Palo Alto earlier. And he was talking about a little bit of security fatigue, that there's been a lot of security buying over time. Security obviously remains a high priority, because of the threat environments out there. But perhaps we've acquired a lot of solutions. They're not giving, getting us as safe as we had hoped. What are you seeing out there? Are you seeing that type of dissolution, if you will, in terms of the security solutions? Or is this still a pretty robust environment for you?
No. It seems like a strong market. You know, we've guided 14%-16% growth in constant currency. Last year, we did 15%. So, you know, pretty stable guidance on a bigger number. What, you know, we are seeing is that the penetrations are rampant and increasing, and no matter what you buy. And it seems like it's getting worse because of Gen AI, where you can more easily train up, you know, malware, bots to do really bad things and get around the defenses. So I think the ability of the attacker is a lot stronger than it was before. And in a way, that really does, you know, help us with our Guardicore sales, where we're the market leader, because attacks are gonna get in. It's just the way it is now.
It really is important that you identify when you've been penetrated quickly and that proactively you block it from spreading.
Right.
You know, ransomware is really only dangerous when it spreads to everywhere and locks everything down. And data exfiltration malware, if it only got to your HVAC system, is not a problem. It's when it gets all your data and exfiltrates it, you've got a, a big problem then.
Right.
That's what Guardicore is great at doing, identifying when you got a problem and proactively keeping it from spreading. And yeah, you're right 'cause I think enterprises have bought all this stuff. And they're still getting penetrations.
Right.
But that's, I think, gonna keep happening.
Right. So you guys have been actually really good at sort of your acquisitions seem to be very well-timed to kind of what's going on in the threat environment. You talked about ransomware has become a really big problem. And really, the prophylactic for that is microsegmentation. And that's where Guardicore comes in. I was reading over the weekend, APIs, they're becoming, like, the new threat vector for stuff coming on. And you guys have been doing more in API security as well. Can you talk to us a little bit about the offering there, and sort of what you're seeing in terms of that uptake?
Yeah. API security is really a new area. It's the last few years, a lot of attacks coming through APIs that are exposed and have vulnerabilities. And I think the state of any major enterprise today is they've got a lot of APIs that are exposed, some of which that have vulnerabilities. And the CISO and the CIO has no idea they exist. I think we're to the point now, and most of my conversations with CISOs is they now realize they've got a lot of exposed attack landscape.
Right.
They need something to help them with it. And so the first thing that our solution does is tell them all the APIs they've got.
Right.
Then it tells them known vulnerabilities in some of those APIs. Ultimately, it can be used to block it. We've integrated it with our web app firewall. So easy one integration, literally, that's flip a switch. We're having great proofs of concept and early traction. You know, a product that we just announced in Q3. Just last week, we did a proof of concept with one of the largest commerce companies in North America. They knew that they had exposed APIs. They wanted to know which APIs they got to go lock down. So not only did we do that, but we discovered that the most important API they had, which was involved with, you know, the user reward dollars, you know, for using the site and buying stuff, and they build up cash balance, they can buy stuff for free, was being exploited actively.
Okay.
So that was a very successful proof of concept. You know, not only is it exposed, not only does it have a vulnerability, but, you know, it's they're being ripped off.
Right.
Currently.
Yeah. You can see the dollars flowing out.
You can see the dollars going out the door. You know, but that's so it's a great, you know, time for API security. And, you know, the competitors are startups. And, you know, they actually were a little bit larger in their revenue than the company we bought. But we really like the team and the company we bought. And we're investing a lot around it so that now we're in a great position with competitive bake-offs. You know, I think over the longer term, API security should be a market like web app firewall. It has become so a large market over time.
Right.
We wanna be the market leader there.
Right. In terms of web application firewall and DDoS, those were the original security markets that you guys had gotten into. What's the, like, how much remaining market opportunity is there on that side of the equation? 'Cause I think that's one of the investor concerns, is that web application firewall, and particularly DDoS, is it's pretty well-penetrated.
Yeah. So DDoS, if you think about it, like Prolexic and protecting DNS, a relatively small fraction of our total security revenue and modest growth. And it's, you know, you're right. It's been around 15 years.
Yeah.
You know, so not a lot of future growth projected there. But web app firewall and all the products we built on top in it to create our app and API security segment.
Mm-hmm.
You know, that's the majority of our revenue growing at a good clip. And the WAF itself growing. But you're right. That's been we created that market over 10 years ago. WAF itself not growing so much. But all the things we built on top doing very well. You know, Bot Management now over $250 million a year, growing at a good clip, market leader. Account Protector, new product, but it tells that if a person coming into a bank account with the right credentials, is it the right person or a crook that stole the credentials? You know, maybe it's a human, but not the right human.
Okay.
Client-Side Protection, you know, so that you protect we protect our customers and users from malware that got into their digital supply chain. You know, and the big examples of where that's happened. And now we're a requirement for PCI Compliance starting next year and had the leading solution there. API Security we talked about, I think, sits parallel to WAF, but it's in that pillar. Just starting, but I think has potential for a lot of growth. So that's, I think, a very strong segment for Akamai. And then the third is inside the firewall, you know, Zero Trust, led by Guardicore. And, you know, this year, now we're putting that on the same pane of glass and control with, you know, Enterprise Application Access.
Right.
Those are the North-South and East-West, as they're called, of, you know, protecting an enterprise. We'll be unique in having market-leading products in both and now on the same pane of glass.
Right. So I'd love your view on an industry debate that we've been having within security: that of best-of-breed versus platforms. You have pulled together a lot of best-of-breed solutions to put together an East-West platform and a North-South platform, if you will, right? Do you think the industry purchasing behavior is starting to move more towards buying a platform? Or are your customers still looking for, like, we're just going to buy the best-of-breed solution to protect this channel? We have a problem with APIs. We're gonna buy the API security channel.
Well, it's both. They'd like to have two or three vendors, not 100.
Right.
That they have today for a major enterprise. That trend to wanting to have a few trusted vendors helps us, because we are the leading platform play for App and API Security.
Right.
The leading, you know, web app firewall by far. Early days in API security, but we have the potential to be the leader there. All the things we talked about, we built on top of the WAF. We're the market leader. And that is viewed as the platform.
Right.
The go-to platform. And so, you know, that's, I think, very helpful for us.
Right. Is there anything you're doing from a go-to-market perspective to incent that platform buying behavior?
Yeah. Sure. Packaging together, cross-sell. Yeah. Absolutely.
Got it. And then finally, on the, like, security is always incorporated or the indirect channel partners have been a big part of the security buying for a while. Can you talk a little bit about your current relationships and investments that you're making to sort of broaden out that channel community?
Yeah. Channel's really important, especially in security. You know, for example, we, you know, within the enterprise and segmentation, it's channel only.
Yeah.
API Security, channel first, be very heavily, heavily channel. You know, it's more in content delivery that was more direct. But security has, has always been heavy channel and increasing, I would say.
Got it. Got it. Shifting gears to digging in on the cloud side of the equation. Last quarter on the Q4 earnings conference call, you announced a new initiative called Gecko. Can you talk to us about what Gecko is all about? I think you phrased it as one of the most exciting announcements that you've made at the company in a decade. What makes this so exciting?
Well, we're gonna take the compute stack, VMs, containers, Kubernetes. And we're moving a lot closer to the end user. It's not just gonna be in 24 cities. And by the end of this year, the goal is to be in 100 cities. We're gonna be in a lot of cities where there's no hyperscaler presence. In fact, you know, our early adopters of our cloud platform, you know, had a big say in a lot of those cities because they want their VMs and containers in those cities so they can get closer to their user base. And there's no hyperscaler there. They can't get it with a hyperscaler.
Right.
They'll be able to have that on Akamai.
Got it. So last year, we were talking about Connected Cloud. Can you talk to us about the evolution? Like, how has the solution evolved from Connected Cloud to Gecko?
Well, Gecko is part of the evolution of Connected Cloud.
Okay.
So the vision for Connected Cloud has always been this. And of course, there'll be more and more cities. It gets more and more distributed. And then the next phase, you know, starting it won't be this year, but starting in next year, is to make it truly automated. You know, and one of the barriers, I think, for the hyperscalers to be in a lot of cities is 'cause you've got to provision every city separately.
Okay.
And it's one thing to think, how many do you want in U.S. East? How many instances? It's another thing, oh my goodness, there's 100 different cities. How many instances will I plan? And do I have the right number? That's a nightmare.
Right.
You know, and our goal is it's just automated, like we do already for JavaScript apps. We spin those up in a few milliseconds based on user demand. So instant scalability, you don't have to think about it. You know, you just give us the JavaScript app. And wherever you need it, it pops up and does the job for you. And compute should be that way.
Got it.
and that's what, you know, we're excited about doing.
Got it. So just to dig down to that a little bit because we hear a lot about edge compute from a lot of different vendors, right? Like, when we're talking to hyperscalers, like an AWS or an Azure, AWS is talking about local zones, or Azure is talking about edge zones or stack edge. What's the differentiation between sort of Gecko and that Connected Cloud versus what the hyperscalers are trying to do with those offerings?
Yeah. You know, Akamai's different. We come at it from edge first. I mean, you know, we've been architected really at the edge since the beginning.
Okay.
Using the term edge. We coined the term 24, 25 years ago, and the hyperscalers have started at the core. So even as they build out, you know, their local instances, it's in a hierarchical fashion. You know, it's so, and it's controlled by the parent in the local core.
Okay.
It's not something that you think about as just there's all these instances, you know, in a distributed fashion. The whole architecture and ease of use is different. Of course, once it's serverless, that totally changes the game.
Right.
You know, the way it is today, you know, with our JavaScript applications.
Got it. So the hyperscalers are more almost like a hub-and-spoke model where you're truly distributed.
Yeah. That's right.
network. And what does that enable for your customers? Like, what are the customer benefits or what are the use cases that would be a lot better served by the truly distributed network versus that hub-and-spoke?
You get a lot closer to the end user, to where the data is, where the devices are. That translates to better performance, better scalability, and also lower cost.
Got it. We made it 25 minutes without talking about Generative AI. But.
That must be a record.
It is. I made it 27 minutes in the presentation yesterday. But it does seem like the Gecko initiative and edge AI could have some, or the edge compute could have some interesting generative AI use cases.
Mm-hmm.
Is that true? And, sort of what's the work being done to help to enable that?
Yeah. So, you know, most of the cycles with AI and, and Generative AI are the actual application of a trained model. And, many of those you wanna do locally. You get better performance. No need to truck everything back to a core data center. The training of a big model, that you wanna do in a core data center, massive data, big compute. But it's the use cases where you deliver the value. And so already today, you know, we are running that on our compute platform, and to do all sorts of things with inferencing. You know, so content the content you get when you go to some sites, you know, is based on a an inference engine based on there is a model that's trained, but then what you're, you know, how you're interacting with it, you know, ad targeting.
You know, with our bot manager solution, there we wanna know, are you a bot or a human? With our Account Protector, are you the right human? AI, very important for that. And, you know, the implementation of those things runs on our edge platform today. And we do it by and large it's CPU-based, much more cost-effective. GPUs very important for the core, for training and the heavy use there. We do support GPUs. We're buying more. Most of that actually today is for graphics, for the gaming customers.
Okay.
But for us, the focus is, you know, other people's AI engines running on our compute platform.
Got it. Got it. I wanna talk a little bit about competition across all kind of three buckets. Maybe we could start on the delivery side of the equation. You mentioned earlier some of the competitors dropping out of the marketplace. And perhaps another one kinda rationalizing in the near term. The question that I've always got from investors is why the hyperscalers aren't gonna be kinda natural competitors to you guys on the delivery side of the equation.
Well, they are.
And they are. So how's that competitive dynamic kind of evolved?
Yeah. Well, they've been.
They're also customers, right?
Yeah. They're. Yeah. So two of them are huge customers, use us for delivery and security. One of them even uses us for compute. You know, and that's we differentiate ourselves with better performance at a better price. But they are big competitors. And in particular, you know, if you give them your compute business, often they will give you delivery at a much lower price or free in some cases.
Right.
That's because the compute usually 10 times the delivery, you know, value at a higher margin.
Right.
We are in discussions now with some of the big media players and doing the same thing. We haven't closed any deals that way, you know.
Right.
Our compute revenue today doesn't have anything to do with delivery. But that might happen this year. You know, a big media renewal, they wanna save money 'cause they all gotta save money. We say, well, we got a great way to save a lot of money.
Right.
You know, give us, you know, a bunch of your compute. Yeah. And we'll give you discounts in delivery then, you know, 'cause it's much better for us. We grow revenue better for them. They save money.
Right.
you know, better overall margin for us.
Got it. Got it. And then on the compute side of the equation, I mean, what I've heard you talk about, what you guys are trying to do with Gecko and connected computing, it's not necessarily going straight after the hyperscalers, right? But it's more so. There's a lot of use cases for which the distributed network or a smaller vendor or something more cost-effective could be much better. So, like, one, is that a correct characterization of how you think about competitive dynamics versus the hyperscalers? And two, who do you compete with for more of those, like, niche use cases, if you will?
It's a pretty big niche.
Yeah.
That we're going after. You know, it helps to care about performance. And it helps to care about price. And we can give the biggest price reductions for apps that are data-intensive. So, data moving around or a lot of hits, you know, 'cause that's where you get huge bills from the hyperscalers. And we have much bigger price reductions in those models. So our focus has been, you know, our big media customers, big gaming, big commerce. And those guys are spending a fortune on the hyperscalers. It's easier to migrate to our platform, especially in big media 'cause we already have a good media ecosystem on our Connected Cloud.
Yeah.
That you may think you're locked into, you know, that workflow on a hyperscaler, but we have replacements for it. So it's not flip the switch and you've migrated or lifted and shifted. It takes effort. But it's pretty well set up there. So, you know, we would aspire for big media, commerce, gaming to go grab a lot of that cloud spend, which is a significant amount of revenue today.
Right.
You know, big media, the $hundreds of millions, many cases $1 billion a year with their arch-rival.
Got it. So prior to the acquisition, you were to look at Linode as a potential competitor for, like, a DigitalOcean. But it sounds like you're gearing towards a different kind of.
Oh, totally different.
Competitive state.
So we like the Linode business. It's growing modestly. We most care about it over the long term because we want developers to know it and like it and feel it's easy to use. But it's not because of the revenue, which, you know, today we don't want $150 million to go away. We'd like to see it grow. But all the investment is about big enterprise mission-critical apps, which is not what Linode could do before. But now with what we've added to it, it can. And that's our focus.
Got it. And that becomes a more interesting market opportunity. And then finally, in terms of the competitive environment and security, who do you see most often in sort of that security competitive environment?
We talked about sort of three pillars and they're different competitors in the pillars.
Okay.
You know, you've got the oldest and most mature is the scrubbing. That's the Prolexic service and DNS. There we'd see carriers that bought Arbor or Radware. Occasionally we'll see Cloudflare there. You know, the big pillar for us, you know, is WAF and all the things on top. There we're the market leader by a wide margin.
Okay.
Imperva, probably closest number two. But they don't have a lot of the capabilities built on top. You know, F5 a little bit with a legacy approach. And at one point they bought Shape. We see them less now in the marketplace. And then on the inside the firewall with segmentation, Illumio would be an example. The probably the number two, enterprise application access, that product probably a ZPA with Zscaler.
Okay.
you know, is who we'd see there.
Understanding. Got it. I wanna take a moment and see if there's any questions from the audience before I keep going. All right. I wanna turn to capital allocation strategy on a go-forward basis. You haven't been shy about doing M&A in the past. You've built out the security portfolio that way. Linode came through M&A. How should we think about the M&A appetite for Akamai on a go-forward basis? And maybe more broadly, how do you think about that buy versus build decision?
Yeah. I think the strategy's been pretty consistent and will remain as it's been. We don't do many large acquisitions. We're really careful about it. We did do two in pretty rapid succession with Guardicore and Linode.
Right.
You know, and both for very strategic reasons. It's not impossible you'd see another security acquisition sort of like that. But we're very careful with what we spend. So we gotta be really convinced that it's gonna be, you know, get the return on the investment. And today still, I think a lot of those companies are still in a big bubble. They've come down in valuation, but they got a long way to go.
Right.
Before it would make sense for us to do an acquisition at a larger scale. Compute, you know, we have the big pieces we need by and large. And tech tuck-ins are possible, you know, technology hires, that kinda thing. Security you might see other adjacencies. But we're careful about the larger spends there.
Got it. So it sounds like we'd be more likely to see talk tech tuck-ins to, like.
Tech tuck-ins.
To put in functionality.
Product adjacencies that make a lot of sense.
Okay.
Synergistic with the platform that we have.
Got it. Got it. So, you guys repurchased $650 million in stock in FY23. You're gonna be generating more cash flow in FY24 versus FY23. How should we think about the allocation between increasing shareholder return, either vis-à-vis shareholder stock repurchases? We saw Salesforce initiated dividends. So, like, who knows? Or just increasing sort of investment in the business?
Yeah. No change in strategy with capital allocation, which is, we do some acquisitions. We do tend to repurchase the equity we've given in employee equity programs.
Right.
And then there's occasional opportunistic additional buyback. You know, last year there were some, you know, the stock got down to, you know, a what I would consider a very, you know, unnaturally low place. And so we bought back more.
Right.
The algorithm we have to buy back every day in the market, embedded in it is that it buys back more in a nonlinear way when the stock price is low. And so on balance, on average over the last 10 years, we've bought back an extra 1% per year.
Okay.
So you think of the total number of shares outstanding today, ballpark 10% less than the outstanding shares 10 years ago.
Got it. Got it. I wanna shift gears a little bit to margins. Gross margins came in a little bit in FY23, the Linode acquisition being a part of that. Can you help us understand the, like, the puts and takes on that gross margin line on a go-forward basis, in terms of, like, if we think about the cloud hosting costs and colocation costs and versus maybe a higher mix of, like, high-value solutions like security, like, where does it net out for us on a go-forward basis?
Yeah. The big hit last year was in the accounting rules for colo. So as we built out the big, you know, core, Linode regions or the new Akamai Connected Cloud regions, we secure colo contracts over an extended period, many years into the future, to allow for growth in the same facility.
Right.
'Cause that's more efficient. And we don't pay for the higher levels of colo until we actually use it, say, four years from now. But the accounting rules linearize it. So that hurt our gross margins by a point or two.
Right.
For expenses that we're not paying any cash for.
Right.
A little bit unnatural. We also have increased investment, which would show up on the OpEx line, which comes into operating margins. Favorable to us is we're reducing our cloud spend.
Right.
You know, because we're using our Connected Cloud. And, you know, we had a lot of cloud spend that was growing rapidly. And now a lot of that has moved onto Akamai Connected Cloud. So last year our third-party cloud spend went down instead of up 50%. And this year it's gonna go down a lot more. So pretty material difference. And so last year you see our operating margins actually improved a point, got back to 30, which is, you know, where we'd like to be. But even though we're doing a lot of investment in new security capabilities and a lot of investment in compute.
Right.
So, it's we're balancing those things out.
Got it. So some of the cost savings initiatives are particularly around cloud that were put into place this year, yield this year. But you're taking that excess, sort of the efficiencies, looking to keep operating margins flat and reinvest that into the business in terms of, and can you talk to us a little bit more, like, the nature of investments in security? The cloud side of the equation's more obvious. It's expanded capacities going into those 100 cities.
Yeah. For security, the investments are largely people. There's developers, both through the acquisition. And then we've added a lot more to develop the new capabilities. And, you know, the specialized go-to-market teams.
Right.
So our model is the rep owns the entire account for all the products. But we do have specialist teams for some of the security products and now for compute. On the compute side, we do have a lot of development, that's new and some operational folks. And also we have a new compute specialist team, by and large new. So there's increased OpEx there. And then as we talked about, as we're doing this build-out, you got a lot of, you know, indirect cost for colo or allocated cost. And of course, with the big CapEx build, the depreciation now comes into play on that.
Right. Got it. And that was the last question I was gonna ask was around sort of CapEx and free cash flows. With the increased investment in cloud, you saw CapEx intensity go up about seven points in FY23 as it was about 19% of revenues. The initial guidance seems to imply some stabilization in terms of the mid-teens. Can you help us, like, triangulate, like, where are we going in terms of a steady state? Like, is Gecko in the, it's Connected Cloud gonna make this an inherently more CapEx-intensive business over the next couple of years as you build that out? Or is the majority of that investment gonna get behind us sooner?
Yeah. Great question. It depends on revenue growth for, you know, our enterprise compute business.
Right.
Big tranche last year to get the core, you know, Linode capacity in place. This year, smaller but still meaningful investment. We're, you know, rebuilding and upgrading some of the original Linode data centers. In some cases that means a new data center in the same city, and we're doing Gecko.
Right.
Which, much less expensive. We are already in those locations.
Right.
The CapEx investment this year is less than a big number last year. Now we're using some of that capacity for our own, you know, compute usage. The rest is now available for customers to use.
Okay.
We're hoping to fill that up with revenue, and to fill that up is no extra CapEx cost. Once that happens, then there would be more CapEx for additional revenue. The faster we can take on more revenue, the faster we would have more CapEx.
Okay.
Spend. On balance, it's a very profitable business for us at anything like, you know, the current pricing environment. So we want that to happen. Ultimately, when it's at scale, the compute business is CapEx-intensive. You know, that's what it is. But the margins are accretive for Akamai as a whole.
Got it.
And now you know how you look at the accounting, you know, depends, you know, on how much you're spending depends on how fast the revenue is growing.
Got it.
On balance, you want it to grow fast.
Right. So there's been some catch-up investment in the past year, maybe a little bit this year. But on a go-forward basis, CapEx should be a good leading indicator of what you're seeing on the cloud demand side of the equation.
Yeah. And you'll see our revenue reported for cloud computing.
Right.
At the same time.
Excellent. Outstanding. Tom, thank you so much for joining us. This was a great conversation.
Okay. Thank you.
Excellent.