Yahoo Finance Akamai Technologies, Inc. (NASDAQ:AKAM) Q4 2023 Earnings Call Transcript
Akamai Technologies, Inc. (NASDAQ:AKAM) Q4 2023 Earnings Call Transcript February 13, 2024
Akamai Technologies, Inc. beats earnings expectations. Reported EPS is $1.69, expectations were $1.59. Akamai Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the Akamai Technologies. Inc. Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tom Barth, Head of Investor Relations. Please go ahead.
Tom Barth: Thank you, operator. Good afternoon, everyone, and thank you for joining Akamai's fourth quarter 2023 earnings call. Speaking today will be Tom Leighton, 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. The 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-K and quarterly reports on Form 10-Q.
The forward-looking statements included in this call represent the company's view on February 13, 2024. 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. A detailed reconciliation of GAAP and non-GAAP metrics can be found under the financial portion of the Investor Relations section of akamai.com. Before I turn the call over to Tom, I’d like to let everyone know that I have transitioned to Head of Akamai’s investor roles to Mark Stoutenberg. Many of you have met Mark over the past year, and I'm confident you will find him extremely helpful about all things Akamai.
I'll be moving into another role internally, and want to thank Tom personally for bringing me into the Akamai culture 10 years ago. It's been a privilege to work with so many wonderful people, both here at Akamai, and of course, all of you externally. I wish you all happiness and good fortune. And now I'd like to turn the call over to Tom.
Tom Leighton: Thanks, Tom. And thank you very much for the terrific job that you've done over the last 10 years at Akamai. It's truly been a pleasure working with you. And I'd like to join you in welcoming Mark as your successor. Turning now to our Q4 results, I'm pleased to report that ACMI delivered a strong finish to a very successful 2023. Fourth quarter revenue grew to $995 million, and non-GAAP operating margin was 30%. Non-GAAP earnings per share in Q4 was $1.69, up 23% year-over-year, and up 22% in constant currency. For the full year, revenue was $3.81 billion, and non-GAAP operating margin was 30%. Full year non-GAAP earnings per share was $6.20, up 15% year-over-year, and up 16% in constant currency. Security revenue in Q4 grew 17% year-over-year, and was up 18% in constant currency, contributing nearly half of our total revenue in the quarter.
Security growth was driven in part by continued strong demand for our market-leading Guardicore Segmentation Solution, as more enterprises relied on Akamai to defend against malware and ransomware. Customers who purchased Segmentation in Q4 included one of the largest global tech firms in India, and a leading payment systems company based in Hong Kong that handles 15 million transactions a day. We've also seen strong interest in our new API Security Solution that we announced in August. Early adopters of this new solution include three major financial institutions, several major retail brands in Europe and North America, and a leading industrial automation company in Europe. Our customers are seeing the value of this new capability with several already paying over half $0.5 million per year for the service.
Akamai’s API Security Solution also earned recognition from industry analysts in Q4. KuppingerCole named Akamai an overall industry leader in their API security and management leadership compass report. And Gartner validated our strong and expanded API capabilities in its market guide for cloud, web application and API protection. Turning now to cloud computing, I'm pleased to say that we accomplished what we set out to achieve last year in terms of infrastructure deployment, product development, jumpstarting our partner ecosystem, onboarding the first mission critical apps from some major enterprise customers, and achieving substantial cost savings as we moved our own applications from hyperscalers to the Akamai Connected Cloud. After launching Akamai Connected Cloud.
After launching Akamai Connected Cloud last year, we rolled out 14 new core computing regions around the world, giving us a total of 25 overall. We also enhanced our cloud compute offering by doubling the capacity of our object storage solution and adding premium instances for large commercial workloads that are designed to deliver consistent performance with predictable resource and cost allocation. Also, our Akamai Global Load Balancer is now live. This integrated service is designed to route traffic requests to the optimal data center to minimize latency and ensure no single point of failure. Last year, we also amplified our go-to-market approach with our cloud computing partner program. The collaborative nature of the program provides a unique model for Akamai to engage with customers at a consultative level to deeply understand their requirements and pain points and to provide a complete solution leveraging the combined strength of the partner’s technology and Akamai's distributed compute platform.
We've already partnered with several leading SaaS and PaaS providers and cloud data and processing platforms. We're very pleased with the progress that we've made thus far and are looking forward to adding more new partnerships in 2024. We've also begun to gain traction with some of our largest customers as they migrate mission-critical apps onto our cloud platform. For example, one of the world's best-known social media platforms spent approximately $5 million on computing services with us last year and they're already on a run rate to do more than double that this year. Two of the world's best-known software companies recently signed on and are already spending about a quarter of a million dollars per month on cloud computing with Akamai.
In Q4, we also signed up a major global media measurement and analytics company and we displaced a hyperscaler when we signed Blu TV, the largest VOD streaming company in Turkey. The streaming customer told us that they found our platform to be simple to use, automated and intuitive, cloud agnostic for a smooth multi-cloud migration and affordable with very low egress cost, all backed by a trusted and reliable partner. In addition to exceeding our full-year cloud computing revenue goal of $500 million last year, we also derived significant cost savings by migrating several of our own applications from hyperscalers to Akamai Connected Cloud. Our bot manager and enterprise application access solutions were among the first to migrate. Together, these products are used by over 1,000 customers and they generate over $300 million in annual revenue for Akamai.
But all that is just the beginning. Today, we're excited to announce the next phase of our multi-year strategy to transform the cloud marketplace, taking cloud computing to the edge by embedding cloud computing capabilities into Akamai's massively distributed edge network. Akamai's new initiative, codenamed Gecko which stands for “Generalized Edge Compute”, combines the computing power of our cloud platform with the proximity and efficiency of the edge to put workloads closer to users than any other cloud provider. Traditional cloud providers support virtual machines and containers in a relatively small number of core data centers. Gecko is designed to extend this capability to our edge pops, bringing full stack computing power to hundreds of previously hard-to-reach locations.
Deploying our cloud computing capabilities into Akamai's worldwide edge platform will also enable us to take advantage of existing operational tools, processes, and observability, enabling developers to innovate across the entire continuum of compute and providing a consistent experience from centralized cloud to distributed edge. Nobody else in the marketplace does this today. In the latest implementation phase that we're announcing today, Akamai aims to embed compute with support for virtual machines into about 100 cities by the end of the year. We've deployed new Gecko-architected regions in four countries already, as well as in cities that lack a concentrated hyperscaler presence. These initial locations are listed in today's press release.
Following that, we plan to add support for containers. And then, we plan to develop automated workload orchestration to make it easier for developers to build applications across hundreds of distributed locations. We've been conducting early trials of Gecko with several of our enterprise customers that are eager to deliver better experiences for their customers by running workloads closer to users, devices, and sources of data. Their early feedback has been very encouraging, as they evaluate Gecko for tasks such as AI inferencing, deep learning for recommendation engines, data analytics, multiplayer gaming, accelerating banking transactions, personalization for e-commerce, and a variety of media workflow applications, such as transcoding. In short, I'm incredibly excited for the prospects of Gecko as we move full stack compute to the edge.
Turning now to content delivery, I'm pleased to report that Akamai remains the market leader by a wide margin, providing the scale and performance required by the world's top brands as we help them deliver reliable, secure, and near flawless online experiences. Our delivery business continues to be an important generator of profit that we use to develop new products to fuel Akamai's future growth. And it's an important driver of our security and cloud computing businesses, as we harvest the competitive and cost advantages of offering delivery, security, and compute on the same platform as a bundle. As we've noted in past calls, we're selective when it comes to less profitable delivery opportunities. And this is a discipline that we intend to maintain, and in some cases, increase in 2024.
To be clear, we still aim to be the best in delivery for our customers. And we believe that our disciplined approach will benefit our business by allowing us to focus more of our investment in security and cloud computing, which are now approaching two thirds of Akamai's revenue and growing at a rapid rate. In summary, we're pleased to have accomplished what we said we would do in 2023. Our cloud computing plans are taking shape as we envisioned. Our expanded security portfolio is enabling us to deepen our relationships with customers. And we continue to invest in Akamai's future growth while also enhancing our profitability. Now I'll turn the call over to Ed for more on our results and our outlook for Q1 and 2024. Ed?
Ed McGowan: Thank you, Tom. I would also like to thank Tom Barth for his incredible service for 10 years as our head of investor relations. Now moving on to our results, let me start by saying that I'm very pleased with our fiscal 2023 year results, delivering $6.20 of non-GAAP earnings per share, capping off a year of double-digit earnings growth for our shareholders. Today I'll cover our Q4 results, provide some color regarding 2024, including some items to help investors better understand a few factors that will impact our upcoming results, and then close with our Q1 and full year 2024 guidance, starting with revenue. Q4 revenue was $995 million, up 7% year-over-year as reported and in cost and currency. We saw continued strong growth in our compute and security businesses during the fourth quarter.
Our compute business grew to $135 million, up 20% year-over-year as reported and in constant currency. We continue to be very pleased with the feedback regarding our cloud compute offerings, and we are very optimistic about the early traction we are seeing from enterprise customers. Moving to security, revenue was $471 million, growing 18% year-over-year and up 17% in constant currency. Our security revenue continues to be driven by strong growth in our Guardicore Segmentation Solution, in our industry leading web app firewall, denial of service, and bot management solutions. In addition, and as Tom mentioned, we are encouraged by the early traction of our new API security solution. During the fourth quarter, we signed 17 API security customers, including 4 with annual contract values in excess of $500,000 per year.
Our delivery revenue was $389 million, including approximately $20 million from the contracts we recently acquired from StackPath and Lumen. International revenue was $479 million, up 8% year-over-year, or up 6% in constant currency, representing 48% of total revenue in Q4. Finally, foreign exchange fluctuations had a negative impact on revenue of $4 million on a sequential basis and a positive $6 million benefit on a year-over-year basis. Moving to profitability. In Q4, we generated strong non-GAAP net income of $263 million, or $1.69 of earnings per diluted share, up 23% year-over-year or 22% in constant currency, and $0.07 above the high end of our guidance range. These stronger-than-expected EPS results were driven primarily by continued progress on the cost-saving initiatives we have previously outlined, and approximately $6 million in lower-than-expected transition services, or TSA costs, associated with the StackPath and Lumen contracts, as our services organization migrated the customers onto our platform much faster than we expected.
Q4 CapEx was $143 million, or just below 15% of revenue. We were very pleased with our continued focus on lowering the capital intensity of our delivery business. This effort, along with our very strong profitability, enabled us to deliver very strong free cash flow results in Q4. Moving to our capital allocation strategy, during the fourth quarter, we spent approximately $55 million to buy back approximately 500,000 shares. For the full year, we spent approximately $654 million to buy back approximately 8 million shares. We ended 2023 with approximately $500 million remaining on our current repurchase authorization. Going forward, our intention is to continue buying back shares to offset dilution from employee equity programs over time, and to be opportunistic in both M&A and share repurchases.
Before I move on to guidance, there are several items that I want to highlight in order to give investors some greater insight into the business. The first relates to our delivery revenue. In the first half of 2024, seven of our top 10 CDN customers' contracts come up for renewal. As we've discussed in the past, this type of renewal generally leads to an initial drop in revenue, and then we typically see revenue grow again as traffic increases over time. We have factored the expected outcome of these renewals into our Q1 and full year 2024 guidance. In addition, as Tom mentioned, we plan to continue to optimize our delivery business by focusing on how we charge certain high-volume traffic customers for their usage on our network, all with an eye on profitability.
For example, we plan to start charging a premium for higher-cost delivery destinations. We expect to continue to optimize the ratio of peak to day-to-day traffic, and we plan to negotiate different pricing for API traffic versus download traffic. Choosing to shed some less profitable traffic will result in a more balanced and profitable approach to pricing, which we believe is the right strategy for the company. Second, OECD member countries continue to work toward the enactment of a 15% global minimum corporate tax rate. And in particular, in December 2023, the Swiss Federal Council declared the rules in effect for Switzerland beginning in 2024. As a result, we anticipate that our non-GAAP effective tax rate will increase by roughly 1.5 to 2 percentage points, to approximately 18.5% to 19%.
We estimate this increase in our tax rate will have a negative impact on Q1 non-GAAP EPS of approximately $0.02 to $0.03 per diluted share, and a negative impact on full year non-GAAP EPS of approximately $0.12 to $0.15 per diluted share. The impact of this tax rate change has been factored into our Q1 and full year 2024 guidance. Third, we expect to generate significantly more free cash flow in 2024 compared to 2023 levels. This is primarily due to much lower capital expenditures in 2024, along with our continued focus on profitability. Please note that the full cost to build out our Gecko compute sites we announced earlier today is included in our Q1 and full year 2024 capital expenditure guidance. Fourth, I want to remind you of the typical seasonality we experience on the top and bottom lines throughout the year.
Regarding revenue, the fourth quarter is usually our strongest quarter. Regarding profitability, in Q1 we incur much higher payroll taxes related to the reset of Social Security taxes for employees who maxed out during 2023, and from stock vesting for employee equity programs, which tend to be more heavily concentrated in the first quarter. It's also worth noting that in Q3, our annual company-wide merit-based salary increases go into effect, so we tend to see higher operating costs in Q3 compared to Q2 levels. Finally, for 2024, we anticipate heightened volatility in foreign currency markets, driven by the unpredictable timing and magnitude of Federal Reserve policy changes and their impact on interest rates. With this in mind, forecasting the trajectory of FX in the latter part of the year poses a formidable challenge.
Thus, for the full year, we plan to provide annual revenue growth, security and compute revenue growth, non-GAAP EPS growth, non-GAAP operating margin, and CapEx only in constant currency based on 1231-2023 exchange rates. However, for the coming quarter, we will provide both as reported and constant currency guidance. As a reminder, we have approximately $1.2 billion of annual revenue that is generated from foreign currency with the Euro, Yen, and Great British Pound being the largest non-U.S. dollar sources of revenue. In addition, our costs in non-U.S. dollars tend to be significantly lower than our revenue and are primarily in Indian rupee, Israeli shekel, and Polish Zloty. Moving now to guidance. Our guidance for 2024 assumes no material changes, good or bad, in the current macroeconomic landscape.
For the first quarter of 2024, we are projecting revenue in the range of $980 million to $1 billion, or up 7% to 9% as reported, or 8% to 10% in constant currency over Q1 2023. At current spot rates, foreign exchange fluctuations are expected to have a positive $2 million impact on Q1 revenue compared to Q4 levels and a negative $4 million impact year-over-year. At these revenue levels, we expect cash gross margin of approximately 73% as reported and in constant currency. Q1 non-GAAP operating expenses are projected to be $305 million to $310 million. We anticipate Q1 EBITDA margins of approximately 42% to 43% as reported and in constant currency. We expect non-GAAP depreciation expense of $127 million to $129 million. We expect non-GAAP operating margin of approximately 29% to 30% as reported and in constant currency for Q1.
And with the overall revenue and spend configuration I just outlined, we expect Q1 non-GAAP EPS in the range of $1.59 to $1.64, or up 14% to 18% as reported, and 16% to 19% in constant currency. The EPS guidance assumes taxes of $56 million to $58 million based on an estimated quarterly non-GAAP tax rate of approximately 18.5% to 19%. It also reflects a fully diluted share count of approximately 155 million shares. Moving on to CapEx, we expect to spend approximately $146 million to $154 million excluding equity compensation and capitalized interest in the first quarter. This represents approximately 15% of total revenue. Looking ahead to the full year for 2024, we expect revenue growth of 6% to 8% in constant currency. We expect security revenue growth of approximately 14% to 16% in constant currency.
We expect compute revenue growth to be approximately 20% in constant currency. And we're estimating non-GAAP operating margin of approximately 30% in constant currency. And full year CapEx is expected to be approximately 15% of total constant currency revenue, which again includes the Gecko compute buildup. We expect our CapEx to be roughly broken down as follows. Approximately 3% of revenue for our delivery and security business, approximately 4% of revenue for compute, approximately 7% of revenue for capitalized software, and the remainder for IT and facility related spend. We expect non-GAAP earnings per diluted share growth of 7% to 11% in constant currency. And as we mentioned earlier, this non-GAAP earnings guidance is based on a non-GAAP effective tax rate of approximately 18.5% to 19%, and a fully diluted share count of approximately 155 million shares.
In closing, we are very pleased with a strong finish to 2023. We continue to be excited about our growth prospects and driving profitability across the business. Now Tom and I would like to take your questions. Operator?
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