Akamai Technologies, Inc. Q2 FY2025 earnings call

• Akamai had an excellent second quarter with revenue growing to $1.043 billion, up 7% year-over-year as reported and 6% in constant currency. Non-GAAP operating margin was 30% and non-GAAP earnings per share came in at $1.73, up 9% year-over-year.
• Strong performance enabled by stabilization of delivery product line revenue, combined with solid growth of security and compute product lines. CIS revenue grew 30% year-over-year.
• Introduced AI gateway solution to address challenges in deploying large language models. Edge also deploys security solutions like firewall for AI and bot solutions.
• Security revenue up 11% year-over-year. Strong growth in Guardicore Segmentation, API security, and Zero Trust. Wins in various industries including insurance, financial services, and retail.
• Welcome of new directors Janaki Akella and Bas Burger, bringing expertise in cloud computing, cybersecurity, and general management.

Delivery: Revenue was $320 million, down 3% year-over-year as reported and down 4% in constant currency. Security: Revenue was $552 million, up 11% year-over-year as reported and 10% in constant currency. Within security, combined revenue for API security and Zero Trust enterprise security was $67 million, up 48% year-over-year as reported and 49% in constant currency. Compute: Compute revenue was $171 million, up 13% year-over-year as reported and in constant currency. CIS revenue in Q2 was $71 million and grew at 30% year-over-year as reported and 29% in constant currency. Revenue from other cloud applications (OCA) was $100 million, up 4% year-over-year as reported and up 3% in constant currency.

• Q3 2025 guidance: Revenue in the range of $1.035 billion to $1.050 billion, up 3% to 4% as reported and 2% to 4% in constant currency over Q3 2024. Non-GAAP EPS in the range of $1.62 to $1.66.
• Full year 2025 guidance: Revenue of $4.135 billion to $4.205 billion, up 4% to 5% as reported and 3% to 5% in constant currency. Non-GAAP earnings per diluted share in the range of $6.60 to $6.80.
• Compute growth for 2025 could be less than 15% constant currency due to timing of large deal revenue recognition. CIS ARR expected to grow 40% to 45% year-over-year by year-end.

• Impact from macroeconomic trends, integration of acquisitions, geopolitical developments, and other risk factors identified in SEC filings.
• Delays in revenue recognition from large compute deals affecting compute growth projections.
• Potential impact of QCP partner sales on gross margins.

Q: Just wanted to quickly touch on the delivery business. So you guys have been clear about the headwinds that you've been seeing for some time now. But it seems like the last 2 quarters, we've been ahead of where the Street was expecting it to be. So if we think about the competitive environment pre-pandemic and where it is now, do you think you're seeing an incremental benefit from the exit of some of your CDN peers in recent years and some of which that you've acquired assets from? And is this just an improvement in trends? And is this a sustainable improvement in trends? Any color there would be very helpful.

A: Yes, there's a substantial difference in the competitive landscape pre-pandemic and today, 4 of our biggest competitors pre-pandemic are gone. And we did pick up the contracts, the ones that we wanted from those customers. We've done a good job upselling and cross-selling there. On top of that, the traffic trends overall, I think, are improving, and we're seeing that. So you get a combination of a little bit better pricing environment. It's still competitive, of course, but not in a crazy way it was as 4 companies were on their death rows, just offering any price at all to get some business. And so as we look forward, as Ed talked about, we're looking at mid-single digits decline. And over the longer term, we want it to be stable and steady and not see declines there.

Q: This is Lawrence Vensko on for John DeFucci. I just wanted to quickly touch on the delivery business. So you guys have been clear about the headwinds that you've been seeing for some time now. But it seems like the last 2 quarters, we've been ahead of where the Street was expecting it to be. So if we think about the competitive environment pre-pandemic and where it is now, do you think you're seeing an incremental benefit from the exit of some of your CDN peers in recent years and some of which that you've acquired assets from? And is this just an improvement in trends? And is this a sustainable improvement in trends? Any color there would be very helpful.

A: Yes, there's a substantial difference in the competitive landscape pre-pandemic and today, 4 of our biggest competitors pre-pandemic are gone. And we did pick up the contracts, the ones that we wanted from those customers. We've done a good job upselling and cross-selling there. On top of that, the traffic trends overall, I think, are improving, and we're seeing that. So you get a combination of a little bit better pricing environment. It's still competitive, of course, but not in a crazy way it was as 4 companies were on their death rows, just offering any price at all to get some business. And so as we look forward, as Ed talked about, we're looking at mid-single digits decline. And over the longer term, we want it to be stable and steady and not see declines there.

Q: This is Jonathan Ho with William Blair & Company. I wanted to follow up on that last comment around the security business. Can you maybe speak to what's driving the demand for both API and micro segmentation and security? And maybe why are we not seeing stronger security revenue growth? I know there's some legacy security components that are tied to delivery. But just wanted to maybe parse this a little bit and help us understand how the other 2 segments are performing.

A: Yes. There's a lot of greenfield in both API security and micro segmentation. And customers are now realizing they need to have security solutions there. Most major enterprises literally have thousands of APIs exposed, and they don't have a good handle on what they are and what the vulnerabilities are. And that's what we provide, the visibility and also the security. And we have the market-leading solution to do that. And so there is a lot of demand. The same thing for micro segmentation and in some sense, even more important. The attack rates have gone up, the successful penetrations have gone up quite a bit. The damage from ransomware, as we talked about on the call, is extraordinary, incredibly expensive. And again, we've got the market-leading solution with Guardicore. And so we are seeing very strong demand there and strong growth. And off a nontrivial number, we're looking at 30% to 35% ARR growth coming off over $0.25 billion ending last year. And so yes, good reasons for the demand. And of course, if you think about the impact of Gen AI, one of the sort of bad impacts in general is that it really aids the attackers. And so I think that's part of why you're seeing so many more penetrations today. And micro segmentation is your last and best line of defense. And we've got an exceptional track record of protecting our customers there. And so I think that's why you're seeing the growth. Now those are decent-sized products now growing rapidly, but the overall security number running now at about $2.2 billion has a very large component from web app firewall, our Prolexic DDoS solution, bot management. WAF and the scrubbing solutions have been out there for a while. They are growing but at a slower rate. And so you have a slower rate of growth on a good-sized chunk of the $2.2 billion. And so that's why you don't see security as a whole growing at 20% or 30%. It's growing in double digits, but we're looking more like 10% for now. Now as you see API security and micro segmentation get bigger, then that 30% plus growth rate has more of an impact on the whole number.