Akamai Technologies Inc (AKAM) — Q3 2021 Earnings Call Transcript

Thank you, operator. Good afternoon, everyone. And thank you for joining Akamai's third quarter 2021 earnings conference call. Speaking today will be Tom Leighton, Akamai's Chief Executive Officer, and Ed McGowan, Akamai's Chief Financial Officer. Before we get started, 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. These factors include uncertainty stemming from the COVID-19 pandemic, the integration of any acquisitions, and any impact from unexpected 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 will represent the Company's view on November second, 2021. Akamai disclaims any obligation to update these statements to reflect future events or circumstances. 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. And with that, let me turn the call over to Tom.

Thanks, Tom. And thank you all for joining us today. I'm pleased to report that Akamai delivered excellent financial results in the third quarter, coming in at or above the high end of our guidance ranges for revenue, operating margin, and earnings per share. Q3 revenue was $860 million, up 9% year-over-year, and up 8% in constant currency. Non-GAAP operating margin in Q3 was 32%, which reflects our continued focus on operational efficiency even as we've continued to invest for future growth. Q3 non-GAAP EPS was $1.45 per diluted share, up 11% year-over-year. Akamai's strong performance in Q3 was largely driven by our security business, which is now one of our leading cloud security businesses in the world, with an annualized revenue run rate of more than $1.3 billion, up 26% year-over-year, and up 25% in constant currency. Over the last several years, we've grown our security portfolio from point solutions into a comprehensive platform that provides defense in depth to address our customers' biggest threats. The unique breadth of our defenses is important to our customers who want more security capabilities from fewer vendors. Our security solutions are highly differentiated and recognized as best-in-class by our customers, who see us as a leading provider of services to protect our most critical assets, including enterprise websites, applications, data, and access. We routinely earn top rankings in multiple categories for major industry analysts. For example, Akamai disrupted the web apps security market when we launched Kona Site Defender in 2012. Since then we've continued to extend our leadership position and the web app firewall sector with Gartner recently naming Akamai as a market leader for the fifth year in a row. Akamai has been the market leader in DDoS protection since we acquired Prolexic in 2014. Forrester recently said, 'Large enterprise clients that want an experienced, trusted vendor to make their DDoS problem go away, should look to Akamai.' As new threat vectors have emerged, we've extended our platform to defend against them. For example, we created the first comprehensive bot management solution to protect our customers from sophisticated bot operators who try to steal content, disrupt operations, or penetrate user accounts. According to Forrester, Akamai is best for companies wanting to mitigate bots off the edge. Bloomberg Businessweek even quoted a hacker calling Akamai's bot defense the hardest to crack. More recently, we released Akamai Page Integrity Manager to identify malicious code of third-party scripts and websites designed to steal end-user data. Page Integrity Manager helps to address a major threat that's been costing businesses hundreds of millions of dollars in fines, as well as serious reputation damage. We plan to extend our web app protections further in the coming months with the release of Account Protector and Audience Hijacking Prevention. Account Protector is designed to reduce fraud by ensuring that the entity logging into an account is the true owner of that account. Audience Hijacking Prevention can help businesses protect sales by preventing malware that diverts a customer just before the completion of a transaction. Since founding Akamai over 20 years ago, our vision has always been to help our customers solve their toughest Internet challenges, and today that includes stopping ransomware. Ransomware is a huge problem for enterprises around the world, with a new attack striking every 11 seconds. The damage resulting from ransomware is expected to amount to over $20 billion this year alone. Guardicore is critical to stopping the spread of ransomware, and that's a key reason why we acquired the company. Akamai is already selling solutions such as Enterprise Application Access that help prevent attackers from gaining access to enterprise infrastructure and applications. But to be secure in today's world, you also need a second layer of defense to lock the spread of malware that has gained a foothold in the enterprise. And that's where Guardicore comes in. Guardicore helps detect when a breach occurs by identifying anomalous data flows within enterprise networks. Guardicore also helps prevent the malware from spreading through a capability known as micro-segmentation. Guardicore's micro-segmentation solution limits access within the enterprise to only those applications that are authorized to communicate with one another. Denying communication as the default greatly limits the spread of malware and protects the flow of enterprise data across the network. And that's the key to stopping ransomware. We believe Guardicore's best-in-class micro-segmentation solution is the perfect addition to our Zero Trust portfolio, enabling Akamai to offer customers a comprehensive solution to stop the damage being caused by ransomware and malware. During the call we held on September 29, we spoke about the parallels between our acquisition of Guardicore and our acquisition of Prolexic in 2014. Just as the acquisition of Prolexic propelled us to a leadership position in helping to stop DDoS attacks, we believe that the acquisition of Guardicore will establish Akamai as a leader in helping to stop the damage caused by ransomware, as well as other forms of malware. Customers see Akamai as a strategic partner in security, not only because of the strength and breadth of our solutions, but also because of the depth of our security expertise in threat intelligence and the scale of our platform. The same platform that underpins our world-leading CDN. Akamai's CDN handles over 5 trillion requests every day. In addition, we resolve more than 3 trillion DNS queries each day. This gives us unmatched real-time insight into the world's Internet traffic, which we analyze to provide best-in-class threat intelligence, protection, and support. We also have one of the industry's largest and most experienced teams of security professionals with thousands of engineers and consultants working on security for our customers. Our security solutions are tightly integrated into the world's largest and most distributed Edge platform. And that provides unmatched global scale to defend customers against not only the largest DDoS attacks but also against the best bot armies that are waging attacks from the edge. The integration of our security solutions with our CDN solutions also provides benefits to our customers in terms of improved performance and ease of use. With Akamai, security and performance go hand in hand. You can buy them together as a single protection and performance package, which makes purchasing and integration easy for the customer. And when you buy security from Akamai, your performance is automatically improved. That's because we apply the security layer as we're delivering the content from the world's true Edge platform. This means that the processing needed for security stays close to the end-user, which results in much better performance. Akamai's unique combination of security and delivery provides a powerful offering in the market, which is one reason we are the market leaders in both security and CDN. Our CDN business also generates substantial cash that we can use to invest in future growth, as we've recently done with the Guardicore acquisition. For example, our CDN business generated revenue of $526 million in Q3 and contributed substantially to our overall free cash flow of $273 million, enough to cover almost half of what we spent to acquire Guardicore. We believe that having the world's largest and most distributed Edge network also provides a great foundation for the growth of our Edge applications business. As 5G rolls out, as IoT applications proliferate, and as more data is created and processed at the edge, Akamai's Edge compute platform is very well-suited to support the high throughput and low latency applications that are not well served by traditional cloud providers today. From delivery and performance to compute and security, the world's leading brands want our help. That's because the internet is getting more complicated with more traffic, higher user expectations, and more cyber threats every day. And the world's leading enterprises know that Akamai can help keep their digital experiences close to their end-users and the threats further away. They know that what we do makes life better for billions of people, billions of times a day, and that nobody powers and protects life online like Akamai. I will now turn the call over to Ed to provide further details on our Q3 results and our outlook for the rest of the year. Ed.

Thank you, Tom. As Tom just outlined, Akamai delivered another excellent quarter. Q3 revenue was $860 million, up 9% year-over-year, or 8% in constant currency. Revenue was again driven by very strong results in our security business. Revenue from our security technology group was $335 million, up 26% year-over-year, or 25% in constant currency. Security now accounts for 39% of our total revenue. Revenue from our Edge technology group was $526 million, flat year-over-year and down 1% in constant currency. Foreign exchange fluctuations had a negative impact on revenue of $5 million on a sequential basis and a positive $4 million on a year-over-year basis. International revenue was $412 million, up 16% year-over-year, or 15% in constant currency. Sales in our international markets represented 48% of total revenue in Q3, up 3 points from Q3, 2020, and up 1 point from Q2 levels. Finally, revenue from our U.S. market was $449 million, up 3% year-over-year. Moving now to costs, cash gross margin was 76%, in line with our expectations. GAAP gross margin, which includes both depreciation and stock-based compensation, was 63%. Non-GAAP cash operating expenses were $261 million. Now moving on to profitability, adjusted EBITDA was $396 million. Our adjusted EBITDA margin was 46%, non-GAAP operating income was $277 million, and non-GAAP operating margin was 32%. Capital expenditures in Q3, excluding equity compensation and capitalized interest expense, were $129 million. This was below our guidance range, primarily due to continued progress on network capex efficiency projects. GAAP net income for the third quarter was $179 million, or $1.08 of earnings per diluted share. Non-GAAP net income was $239 million, or $1.45 of earnings per diluted share, up 11% year-over-year, up 10% in constant currency, and $0.04 above the high end of our guidance range. Taxes included in our non-GAAP earnings were $39 million based on a Q3 effective tax rate of approximately 14%. Moving now to cash and our use of capital. As of September 30th, our cash equivalents and marketable securities totaled approximately $2.8 billion after accounting for the $2.3 billion of combined principal amounts of our two convertible notes. Net cash was approximately $452 million as of September 30th. During the third quarter, we spent approximately $97 million to repurchase shares, buying back approximately 800 thousand shares. We ended Q3 with approximately $321 million remaining on our current repurchase authorization, which runs through the end of this year. As noted in today's press release, our Board authorized a new buyback program of up to $1.8 billion beginning January 1st, 2022, and running through the end of 2024. As we've previously discussed, our primary intention is to buy back shares to offset dilution from employee equity programs over time. However, our repurchase authorizations also allow us to opportunistically deploy capital if or when we believe there is a valuation disconnect in the market based on business or market conditions. Combining the two authorizations, we currently have more than $2 billion available for share repurchases through the end of 2024. We believe our strong balance sheet and significant free cash flow generation, which totaled $273 million or 32% of total revenue in Q3, also provides us with significant financial flexibility to pursue a balanced capital deployment strategy. As such, we plan to continue to invest organically in R&D and product development, expand our capabilities through M&A as you saw with our most recent acquisition of Guardicore, and return capital to shareholders via share repurchases. Moving onto Q4 guidance, there are two factors to consider as you update your models for the fourth quarter. First, we closed the acquisition of Guardicore on October 20th. Our guidance assumes Guardicore will contribute approximately $6 to $7 million of revenue in Q4. It also assumes that Guardicore will be approximately $0.05 dilutive to our total non-GAAP earnings per share in Q4. Second, as in prior years, seasonality plays a large role in determining our fourth quarter financial performance. We typically see higher-than-normal traffic for our large media customers and from seasonal online retail activity for our e-commerce customers, which are both difficult to predict. With that in mind, we're projecting Q4 revenue in the range of $883 million to $908 million, or up 4% to 7% as reported, or 5% to 8% in constant currency over Q4 2020. Foreign exchange fluctuations are expected to have a negative $3 million impact on Q4 revenue compared to Q3 levels, and a negative $6 million impact year-over-year. At these revenue levels, we expect cash gross margins of approximately 76%. Q4 non-GAAP operating expenses are projected to be $290 to $297 million. We anticipate Q4 EBITDA margins of approximately 43% to 44%. We expect non-GAAP depreciation expense to be between $120 to $121 million. Factoring in this guidance, we expect non-GAAP operating margin of approximately 30% for Q4. Moving on to capex, we expect to spend approximately $128 to $133 million excluding equity compensation in the fourth quarter. This represents less than 15% of anticipated total revenue. And with the overall revenue and spend configuration I just outlined, we expect Q4 non-GAAP EPS in a range of $1.37 to $1.44. The EPS guidance assumes taxes of $38 to $39 million based on an estimated quarterly non-GAAP tax rate of approximately 14.5%. That also reflects a fully diluted share count of approximately 164 million shares. Looking ahead to the full year, we are raising our guidance. We now expect revenue of $3.439 billion to $3.464 billion, which is up 8% year-over-year as reported, or up 7% in constant currency. We now expect security revenue growth to be in the mid-20% range for the full year 2021. We are estimating non-GAAP operating margin of approximately 31% and non-GAAP earnings per diluted share of $5.63 to $5.69. And this non-GAAP earnings guidance is based on a non-GAAP effective tax rate of approximately 14.5% and a fully diluted share count of approximately 164 million shares. Finally, full-year capex is anticipated to be approximately 16% of revenue, consistent with our prior guidance. We are very pleased to deliver another quarter of excellent financial results, and we look forward to closing out a strong 2021. Thank you. Tom and I will be happy to take your questions.

Hey, guys, nice quarter. Thanks for the questions. A couple of your competitors are starting to get a little bit louder on the security side with getting a foot in the door with government and zero trust architectures. So, I guess my question is, how was the federal vertical for you this quarter, and what will it take for Akamai to become more part of those conversations, especially when you guys already do service some government stuff?

Our government business is very strong, especially in security. We support nearly all major government agencies and almost every branch of the military. Therefore, I would say our business in this area is quite robust.

All right. And then on Guardicore, how long until the 100-plus reps are likely selling the entire security portfolio? And really also any update to the go-to-market onto security standalone sales with channel partners, as well as what you guys are doing to target developers better with Edge applications. Thanks, guys.

Yeah, hey Jim, it's Ed. I'll take the first one and then maybe Tom can follow up on the developers. But in terms of the sales force, we're going to maintain the sales force that we acquired from Guardicore. This is pretty typical of what we do with our acquisitions. They will be primarily in an overlay function. It's a little bit different of a sale. Very similar to some of our enterprise sales and we just will build out that team a bit. Probably takes maybe a year or so as the reps start to introduce Guardicore into their accounts that they begin to get comfortable with selling Guardicore. That's been our typical model, so I think we've acquired a great team from Guardicore and we just combine that with our existing enterprise sales team. And then as far as channels go, we did pick up a few channel partners as a result of Guardicore, and we're still actively recruiting for more channel partners.

And in terms of the developer-focused question, we've done a lot of work to make our platform very accessible to developers. A lot of efforts there and strong progress. In fact, on a daily basis, we're now spinning up about 5 billion applications on Edge workers, and that’s every day. So strong adoption of our capabilities in terms of Edge computing.

Operator, next question.

Yes. Thanks. Hi, guys. You gave us the security growth on a constant currency. But can you give us a sense of what it was on an organic constant currency basis? And Tom, you had highlighted a number of different areas and strengthened DDoS, etc. What was the tip of the sphere that drove the growth, this quarter in particular?

So, the organic security growth in constant currency should be about 22%, so odds will be added about 3 points of growth. Tom, you want to take the other part?

Yeah. And the strength was really across all of our product categories. All of them growing at close to 20% or more. Infrastructure doing well, app and API protection. Fraud, well into close to 30% growth, and access, the best of all. And of course, that will get a lot stronger now with Guardicore and the ransomware solution. So, it's across-the-board in security.

That's great. And maybe one really quick one. Given the contribution you're expecting from Guardicore in Q4, does that mean that the run rate in terms of what the contribution in '22 might actually be better than what you thought at the time of the acquisition?

Yeah. Hey, Sterling, two points on that, so yes, I think we should see better contribution from Guardicore and also, we've been off to a pretty good start here in the first couple of weeks since we closed the acquisition rate. They finished very strong. I was very impressed to see several multimillion-dollar deals in several different verticals across the different geos. We saw a couple in the U.S., a couple in EMEA and APJ, we saw deals in transportation which isn't really a huge vertical for Akamai as well as other verticals were strong in finance and insurance. So, off to a pretty good start, pretty optimistic so far, and I do think they'll contribute a bit more next year. We'll give you a full guidance on our next call for next year, but so far off to a pretty good start.

Excellent. Thank you.

Hi, this is Michael on for Colby. Two questions if I may. First, as you think about the incremental security offerings that could make sense to add via M&A moving forward, what comes to mind? And then the second, what are you seeing from the customer verticals that have been more heavily impacted by the pandemic as we go into the holiday season? Thank you.

Yes, we are actively pursuing and investing in new security capabilities, both through internal development and acquisitions. Recently, we launched Page Integrity Manager, which is an exciting technology. Next, we have Account Protector, and there is significant customer interest in that. Early next year, we will introduce Audience Hijacking Protection, which many customers have requested. This feature prevents malware plug-ins from stealing or hijacking audiences right before a transaction is completed. In the access segment, I believe this area has significant growth potential. I am also enthusiastic about the Guardicore acquisition, which fits well with our Zero Trust solutions and enhances enterprise application access, providing a comprehensive approach to security. We are continuously investing in all areas and enhancing existing solutions to incorporate new features that can counter evolving attack vectors. This means we are not just building a web application firewall but are consistently adding new capabilities to stay ahead of attackers and ensure the safety of our customers.

And then on your second question? Yes. Sure. On the second question regarding the verticals that were impacted and if you recall we mentioned e-commerce and travel. I would say in travel we're starting to see a bit of improvement there, we're starting to see traffic pick up a little bit. As a reminder, that's above 4% of our total revenue, so it doesn't have a huge impact in terms of what we're seeing as far as improvement, but it's good to see that that's starting to pick up a little bit. E-commerce, I would say is pretty mixed. We're seeing good strength in security, but still seeing some pressure, especially in the U.S. Commerce vertical. That's a much bigger vertical. That's around 15% of total revenue. So, we're not quite out of the woods yet with commerce, again, especially in the U.S. That's the area that we're probably seeing the most weakness, and that's still persisting from the pandemic.

Thank you.

I appreciate you taking my question. I wanted to explore two areas. Firstly, can you explain the difference in growth between the U.S. and international markets? Initially, I thought the slower growth in the U.S. was due to platform customers not performing well, but they seem to be doing quite well now. I’m curious about why the U.S. is still lagging behind the international regions. Secondly, regarding operating margins, could you provide any insight on how to approach calendar year 2022? Are there many companies engaging with us, and is there a possibility of increased spending on travel, office returns, and marketing events? On the other hand, it appears that you've been spending less on CapEx compared to the original target, which is decreasing as a fraction of revenue. This might result in some gross margin improvements for calendar year 2022. Can you share your thoughts on how to consider margins for that year?

Sure. Well, I'll start with the second part on margin. So yes, you're correct. Next year, we'll be expecting that we should start traveling again, so it'll be a little bit more OpEx there. You're right to call it CapEx as I think the team is doing a fantastic job on a lot of CapEx efficiency projects that we've got going with both software and hardware. Being able to drive that down you would expect that CapEx to be back to those normal levels that we've seen, maybe even a touch lower. So that impacts your depreciation, but it takes a while for that to flow through the model. I'm sure you won't get a ton of benefit right away, but certainly down the road you will. I have given some prior guidance when we had the Guardicore call about operating in the 29% to 30% range for next year. And then hopefully getting back, or we will get back to over 30% in '23. Obviously, we'll update you. I mentioned earlier to Sterling that Guardicore contribution will probably be a bit better than what we said earlier on. I don't have a number to call out yet, so that'll obviously help out the operating margins a touch there. And then you asked about U.S. and international and the disparity between the two. I sort of flip it around and say that it's not so much the U.S. being weak, but really just strong international growth. U.S. is low single-digit. I mentioned on the previous question that's where we're having the most trouble with our U.S. commerce vertical, which is a pretty significant vertical in the U.S. and then we also have a lot of large media customers that are in the U.S. and that's where you tend to see more of the splitting of traffic and pricing pressure. So those things combined sort of put a little bit of pressure in terms of the growth rate in the U.S. but, really the strength outside the U.S. is something that I think is a significant advantage for us. We've made a lot of investments both in the network and the sales teams, etc., and we've been able to drive pretty significant growth. Very happy with what I'm seeing in terms of participation, or as strong growth in countries like Korea, Spain, Brazil, Mexico, Hong Kong, Singapore, Taiwan. I mean across-the-board, we're seeing very strong growth. Latin America, in particular, has been very strong. We made an acquisition there a couple of years ago, and we're starting to get some good scale out of that. A little bit of a mixed picture in the U.S. with some challenges in commerce. But really, I have looked at it as just very strong international presence and growth.

Got it. Should the takeaway be that the growth in the U.S. and international markets is more balanced on the security side than it is on the Edge Tech side?

Yes, I think that's a good way to look at it, Keith. If I look at in the web performance, especially in commerce, that's where the primary challenge is right now. But if I look at security, obviously the U.S. was the first to adopt. We're still seeing very, very strong growth, and as a matter of fact, 67% of our customers are buying 1 security product, 34% are buying 2. If you put that into perspective in a year, we've gone up 6 points in terms of security adoption for the customer base. That's adding over 600 customers. So, we're seeing good broad-based strength in security, both here in the U.S. and also internationally. But I think you're thinking about it in the right way in terms of having strong security growth in both regions.

Got it. Excellent. That's very helpful. Thank you, guys.

Thank you for the question. Regarding cash flow, it appeared to be a very strong quarter considering the improvements you've made, the network, and overall expense management. How should we view cash flow moving forward? Was this a particularly strong quarter, or is it likely to decline over time? Will it be inconsistent, or are we seeing a new baseline for cash generation? Thank you.

Yes, great question, Jim. Q1 tends to be the lower quarter from a cash flow perspective just because of working capital. That's when you see your bonuses hit. But I think if you peg your CapEx to that 15% range, you're looking at pretty significant improvements. I think if you use that as your guide, working off the operating margins we gave you and think about Q1 as probably being a low point as you're modeling out your free cash flow. But yeah, very, very strong free cash flow generation this quarter for sure.

Great, thanks. And then just one other one. As you look at the revenue growth, excluding the platform customers, the platform customers were down about 3 million sequentially. Is there a range now where you feel like in the sort of low 60's range where that revenue is going to hover for those companies given the amount of growth you've seen in the last 12 to 18 months from that?

Yeah, I think that's probably not a bad place to peg it, Jim. Q4 always tends to be a bit of a stronger quarter in that verticals, a little bit of seasonality there. You always have renewals. So, whenever you have a renewal, you'll see it pull back a couple of million dollars depending on the timing and that sort of stuff. But I think it's been low 60's; it’s probably a decent place to peg it.

Yeah. Great. Just wanted to talk a little bit about the buybacks you said you'd opportunistically use that to take advantage of the market valuation. What levels seem appropriate here? It's kind of the first question and I've got a follow-up.

Primarily, we've used the equity buyback to offset the equity dilution from employee grants. From time to time, we do buy back additional shares, and we've seen that over the years. We use that approach such that as the stock price declines, we will buy back more.

And I do feel that in this market, Akamai has a very strong presence, both in CDN and security. Our security business is growing at 25% on a very big number. And I do feel that Akamai is undervalued in this market. And so, you may see us buy back additional shares, especially depending on how the stock price fluctuates.

Alright, great. And then, you've done a good job adding together some M&A for the security side, any other tools do you think you need to make yourself more competitive in the market? Do you feel like you've got kind of the right mix here for that product set?

Yeah, we're always looking at new capabilities as I mentioned. And of course, the attackers are always innovating with new forms of attack. But I am very excited about the Guardicore acquisition, and I think it really does fill out and complete our access story, our ability to stop ransomware and malware. As I mentioned, we already have capabilities that prevent the malware from getting in. Enterprise Application Access in particular governs what employees can touch and access, and even then, it has to come through Akamai's application firewall, so we're making sure that malware doesn't come in. We also have multi-factor authentication which makes sure that the employee is who they say they are. And now with Guardicore, we stop the spread of the malware if it does get in. And there are a lot of ways the malware can get into the enterprise today. It is really – despite all the defenses you put in place, somebody for example, in the Capital Pipeline case, a password could potentially get out there. Now we still have ways of catching that somebody is using a stolen credential, but malware does get in still, and so the real key there is stopping the spread, and that's what Guardicore does. And so now I think it's really nice because you stop the ransomware with Guardicore, but we've got the whole package in the whole solution now. And I think that's really unique in the marketplace and very exciting.

Alright, great. Thank you very much.

Thanks a lot. And good evening, everyone. I have two questions as well. The first one I was hoping you could talk about. As I look at the midpoint of the guide for December of, is there a way to think about how are you thinking about seasonality in Edge and security? In the bottom, are you going to get through the security numbers may imply a much more severe deceleration than what people are modeling. So, I just love to understand how are you assuming those two segments stacking up in the December quarter.

Sure, I'll address that. Starting with Edge, Q4 is a busy quarter for us. As I mentioned, we have seasonality from e-commerce, which makes this quarter challenging to predict due to supply chain disruptions. This raises questions about whether this will drive more or less Internet traffic and what the holiday season will look like. Typically, it's a strong media quarter with new devices, games, and sporting events, alongside back-to-school activities and multiple game releases, making it a potentially robust season for us despite the challenges in forecasting. The events calendar is quite packed, so if we can generate good traffic, there is potential for significant growth, as we've seen in previous years. Regarding security, it remains consistent with seasonal trends. While some of our bundles may see an impact from traffic fluctuations, we have been conservative in our security guidance and consistently over-delivered each quarter. Guardicore is performing well, so I wouldn't characterize our security growth as experiencing any seasonal downturn.

Got it. And then if I could follow-up the CapEx number for September quarter and really for December as well. I mean, capex as a percent of sales, I think will be 14, 15% for the back half of the year, versus 19%, 20% of the last several quarters prior to that up. I'm curious. Is capex coming down because you feel like there's enough capacity you have out there and you can see that lower, or is it more that you just can't get your hands on the supply chain and the products and need to drive capex. I'm trying to understand what's taking capex lower, and then how do I think about this as we go into 2022?

Yes, I believe it's a matter of good execution. We're not experiencing any supply chain disruptions because we proactively increased our capital expenditures during the pandemic to ensure we had ample extra capacity for potential traffic growth. We built up our inventory and invested in small equipment, so we feel confident about our supply chain situation at this point. This foresight in anticipating demand has been beneficial. Additionally, Adam and his team are identifying various capital expenditure efficiencies, including software improvements, network design, deployment optimization, and hardware upgrades, all aimed at reducing our capital expenditures. We also maintain strong relationships with networks and ISPs, enabling us to optimize within their networks as well. Overall, it's a testament to the team's excellent execution, and capital expenditures have decreased significantly, reflecting in our free cash flow results.

Does that sustain next year? This mid-teens CapEx as a percent of sales, is that the right way to model this out?

Yes. Right now, you see another pandemic or some major events and we see some crazy unexpected traffic growth, yeah, I think it's a sustainable number, certainly going into next year. I don't want to get into giving guidance, but I think that I talked about in the past that we'd be getting back to this level, and we're actually operating a little bit better than that.

Thank you for taking my questions. It's great to see that security growth is holding up and even accelerating this quarter. I have two questions. First, I'd like to delve deeper into the supply chain issues. I appreciate that you've over-invested in capacity due to the OTT launches and last year's pandemic. You seem to be relatively protected from rising costs, but at what point could this situation become a concern, prompting you to overspend to maintain capacity and avoid turning away business? Related to this, as we approach Q4, how do you see the environment shaping up, particularly since Q4 is typically a robust commerce season? Many companies are indicating they won't be able to meet demand for electronic goods. Is this a concern for you, and how are you incorporating this into your guidance? Thank you.

Certainly! Here’s the rewritten Earnings Call remark: I’ll address the second part first. That’s why we provide a broad range. It’s difficult to predict how the commerce season will unfold. When delivering Internet traffic, one possibility is that shelves are not stocked and people are browsing more to find products. Another possibility is that shopping is down and people are opting for cash and gift cards. It’s hard to determine, but we have put out a significant range. Additionally, about half of our commerce customers have chosen our zero overage option, which has somewhat flattened that initial impact. Thus, the surge in commerce may not have as large of an effect, if it has any at all. Regarding the device cycle, we do expect to see activity, especially in the last few weeks of the year as new devices become available and firmware updates occur. However, there are other elements at play, such as gaming releases and new video content that people can enjoy even on older machines. I still anticipate a strong immediate quarter, which is why I’ve provided a wide range to account for these factors. On the topic of supply chain concerns, I’ve posed similar questions to my team regarding our capital expenditure build-out. We’ve successfully built a robust inventory over several quarters and diversified our supply chain. The team has ensured that we’re not experiencing any significant price increases, with only minor freight issues that aren’t material. This situation should improve. However, if we see another substantial increase in traffic, we may encounter challenges, but for now, everything is going well. The team has done well preparing, not foreseeing this level of supply chain disruption but anticipating that pandemic-related effects would persist longer. We engaged in scenario planning, so we are in a solid position at present.

That's really helpful. Thank you so much.

Thanks. Looking at the guidance and the commentary, it does sound like your security businesses expected – if I add in some of the inorganic, that would imply even lower growth. Is it reasonable to think that the security business can sustain a 20% growth rate organically in '22, or is that too aggressive of an expectation for a billion three business?

Yes, one thing to consider, Alex, is the anniversary of our growth rate lapse in Southern Europe during Q4 and our acquisition of Guardicore. During our analyst day, we indicated that we expected to achieve 20% growth for 3 to 5 years, with acquisitions being a key part of our strategy. The Guardicore acquisition aligns with our previous guidance, and we’ve seen a couple of points of growth beyond our expectations. Security has consistently outperformed each quarter, and we still feel confident in our 20% growth rate as discussed. In fact, coming out of this year, we're slightly exceeding that. While you could theoretically calculate a higher range, we anticipate solid growth from security in Q4.

Our strategy in security focuses on a mix of organic development and timely acquisitions, and we plan to maintain this approach. When we acquire a company, its growth is considered organic after a year, and we have a strong history of effectively integrating acquired businesses, starting with Prolexic in 2014. Guardicore is a key example of this, significantly enhancing our enterprise security offerings, similar to how Prolexic improved our DDoS capabilities, which continue to be very successful. As the market leader, our aim is to replicate this success in enterprise security by addressing threats like ransomware and malware. As we target over 20% growth in our security business for the long term, acquisitions will play an important role, providing valuable technology boosts. Guardicore has developed an advanced micro-segmentation approach, making it a leader in its field. Their years of effort come at an ideal time as many companies are focused on combating ransomware, allowing Akamai to assist them effectively. This aligns perfectly with our ongoing internal advancements, particularly around EAA. We will continue to pursue both strategies to drive our security growth.

Okay. I get it. Thanks. That's helpful. Can you talk a little bit about the pricing environment, whether there's been any change in competitive landscape? Have you seen more competition or less competition? How should we think about the environment? I think we're also seeing enterprises spending more this year. Do you think that that sustains into 2022 given the first half of the spike in an attack caused a flurry of spending intentions?

I think the competitive environment is very similar to what it's been in the past. It is a very competitive environment. Across-the-board from cloud giants who are also our largest customers, all the way down to startups. Obviously, CDN is a mature environment. competitively, and so I don't see there's any fundamental change there. Security is really a great environment for us. We're the market leader by far in the core areas of defending and protecting websites, applications, and APIs. The leader by far in DDoS prevention. And those are areas that have a lot of attacks taking place. And now, the new category for us where we're going to encounter new competition because we're moving into that space in a big way would be enterprise security. We already have a very strong access solution there, and now we have what we believe is the best solution to stop ransomware with micro-segmentation. And by adding that to Akamai, we now have a new set of competitors there because we're entering their space and we think there's a lot of potential gain for Akamai there and the ability to help major enterprises.

Great. Thank you very much.

Awesome. Thank you for taking the question. Could you unpack the growth in the Edge Technology Group, please? What was the growth in the quarter for Edge applications, and what does that imply for the growth in the Edge delivery business? And then how do you expect these two segments within that larger group to trend exiting the year? Thanks.

So, Brian, we won't be breaking out Edge applications every quarter. Last time we mentioned they were growing at over 30%, and we believe that this growth can be sustained. We expect to finish the year with a run rate exceeding $200 million, which indicates a strong growth rate. Additionally, we won't be disclosing details about the Edge delivery business this quarter, but we will provide that information at the end of the year.

If I could just follow up on that when you back out some of the one-time items that are affecting comparability and the Edge technology business specifically, I think India apps and you're still lapping. Is that business growing? And what's going to cause that business to return to growth next year? Thanks.

Yes. So, it's obviously just a tougher compare. This is the first quarter that we don't have that compare, and you saw that we were roughly flat in terms of total Edge Tech. I think as we get into next year, it's an easier compare. I think we're comfortable with our longer-term growth in low single-digits for the Edge business over time. Obviously, with the Edge applications business much faster growing as that becomes more material that could change the growth rate. I think it's just continued execution and traffic growth going into next year on a much easier compare; I think you'll start to see a bit of growth rate pick up a little bit there.

Okay, thank you, everyone. In closing, we'll be presenting at a number of investor conferences and road shows throughout the rest of the fourth quarter. Details of these can be found in the Investor Relations section of akamai.com. We appreciate you joining us, and all of us here at Akamai wish continued good health to you and yours, and have a great evening. Thank you.