Akamai Technologies Inc (AKAM) — Q4 2021 Earnings Call Transcript

Thank you, operator. Good afternoon, everyone, and thank you for joining Akamai's Fourth Quarter 2021 and Acquisition of Linode Conference Call. Before we get started with the Linode acquisition that we just announced, today's earnings call format will be a bit different than normal. We will be presenting slides and associated content, and the link to the webcast can be found in the Events section of our Investor Relations website. We plan to post the full slide deck following the call, and I am now on Slide 2. As you can see from our agenda, speaking today will be Tom Leighton, Akamai's Chief Executive Officer; Adam Karon, Akamai's Chief Operating Officer and General Manager of the Edge Technology Group; and Ed McGowan, Akamai's Chief Financial Officer. Moving to Slide 3. Please note that today's comments include forward-looking statements, including statements regarding revenue and earnings guidance. While I don’t intend to read this slide, 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 represent the company's view on February 15, 2022. 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 at akamai.com. And with that, let me turn the call over to Tom, and he'll start on Slide 4.

Thanks, Tom, and thank you all for joining us today. Today is a very exciting day for Akamai. This afternoon, we announced that we've signed a definitive agreement to acquire Linode. We see this as a tremendous opportunity for Akamai and we believe that it will be transformational as we expand our business into adjacent markets, become more strategic for our customers, and accelerate our growth and evolution as a company. We'll talk more about Linode in a few minutes. But first, I'd like to review some of the highlights from a very strong Q4 and 2021. Turning to Slide 5. Q4 revenue was $905 million, up 7% year-over-year. Our revenue growth was driven by the continued strong demand for our security products as well as our fast-growing Edge applications business. Non-GAAP operating margin in Q4 was 31%, up 1 point over Q4 in 2020. Q4 non-GAAP EPS was $1.49 per diluted share, up 12% year-over-year. For the full year, revenue was $3.46 billion, up 8% over 2020. We expanded non-GAAP operating margin to 32% last year, and we achieved this result while investing for future growth. Non-GAAP EPS last year was $5.74, up 10% over 2020. 2021 was also a very strong year for cash generation at Akamai. We generated $859 million in free cash flow last year, an increase of 78% over 2020. I think it's important to note that our excellent cash generation has allowed us to make strategic acquisitions like Guardicore in Q4 and now Linode to fuel our future growth while also returning capital to shareholders. In Q4, we spent $271 million to buy back just over 2.4 million shares of stock. Over the course of the full year, we spent $522 million to buy back approximately 4.7 million shares. Our primary use of cash is for M&A and offsetting the dilution from our equity compensation programs. Over the past 10 years, Akamai has also engaged in opportunistic buybacks that have resulted in a reduction of our fully diluted share count by about 12%. Last quarter, security products continued their rapid growth, generating revenue of $365 million, up 23% year-over-year. For the full year, security revenue reached $1.33 billion and grew 26% over 2020. Security represented 39% of our revenue last year, up from 33% in 2020. In recent years, Akamai has built one of the world's leading cloud security businesses. Our security solutions are highly differentiated and recognized as best in class by our customers, who rely on Akamai to protect their most important digital assets from very determined and highly capable attackers. Results in Q4 were especially strong for our Bot Manager solution, which helps to defend against a wide range of automated attacks. Our new Account Protector solution, which provides account takeover protection, also performed very well in Q4 in only its second quarter of availability. Our web app firewall offerings also posted excellent results in Q4. And Akamai was recognized as a leader in Gartner's 2021 Magic Quadrant for web application and API protection, scoring the highest of 11 vendors in ability to execute. In October, we acquired Guardicore to extend our Zero Trust solutions to help stop the spread of ransomware. As a part of Akamai, Guardicore has continued its strong growth momentum and closed major deals last quarter at one of the largest freight railways in the U.S. and at one of the largest telecommunication companies in South America. We're very excited about the value that Guardicore's micro-segmentation capabilities bring to our customers. And as Ed will talk about shortly, we now believe that Guardicore will drive significantly more revenue this year than we had initially forecast when we announced the transaction last fall. Our CDN business generated revenue of $541 million in Q4, down 2% from Q4 in 2020. Traffic on our platform continued to be strong in Q4, peaking at over 200 terabits per second. Our Edge application solutions had a great Q4, exiting the year with an annualized revenue run rate of more than $200 million and growing 30% for the full year. Our Akamai EdgeWorkers solution was adopted by a top sporting equipment company, a global business travel service, and one of the largest banks in the U.S. Overall, we're very pleased with our performance last year on both the top and bottom lines. We achieved our goals in 2021 and then some. And I want to thank our employees for delivering such strong results as they continue to cope with the challenges of the pandemic. I'll now move on to Slide 6. As many of you know, Akamai's mission is to power and protect life online. And our purpose in doing that is to make life better for billions of people, billions of times a day. Akamai has been doing this for more than 20 years, enabled in part by a series of market-defining innovations, starting with the invention of content delivery networks in the late 1990s. As you can see on the next slide, #7, we follow this breakthrough in Internet technology with fundamental advances in video streaming, application acceleration, and web security. In each of these areas, Akamai was a major pioneer in enabling new capabilities, and in each of these areas, we're still the market leader today by far. Throughout the past 20 years, we've also been a pioneer and a leader in edge computing, beginning with the invention of Edge Side Includes in the early 2000s, a technology that's still used by thousands of our customers today. And now turning to Slide 8. We're taking the next major step in our evolution by creating the world's most distributed compute platform from cloud to edge, making it easier for developers and businesses to build, run, and secure their applications online. As you can see in this afternoon's press release, we've entered into a definitive agreement to acquire Linode. It's a privately held company that makes cloud computing simple, affordable, and accessible. Linode is known for its developer-friendly services, the quality of their support, and as a trusted Infrastructure-as-a-Service platform provider. By combining Linode's developer-centric cloud advantages with Akamai's deep enterprise strengths, we believe that we can provide tremendous value to developers and enterprises as they build cloud applications on Akamai. We see plenty of opportunity for a differentiated offering among customers who desire ease of use, wider reach beyond just a few POPs, lower latency, stronger security, and greater resiliency, all from a single platform and all at an affordable price point. Akamai's highly distributed edge platform has the global reach to enable any cloud application to deliver the best end-user experience anywhere that users or services consume apps, from the cloud to the edge, where more compute services will live as 5G and IoT take hold and expand. The Akamai platform is uniquely suited for workloads that require high throughput, low latency, and instant scalability on demand. Akamai has been perfecting this capability for many years, and it's very hard to do. Akamai also has the capabilities needed to integrate seamlessly with both DIY cloud apps and third-party cloud vendors as part of the larger cloud ecosystem. We believe that this flexibility will appeal to enterprises that want a multi-vendor cloud strategy to mitigate their vendor concentration risk and to ensure resiliency and seamless availability in case one vendor service experiences an outage. And with Akamai's category-leading security solutions, customers will be able to secure their apps from their point of origin to the edge, all under Akamai's protective umbrella. Security delivered at the edge offers unique advantages since it enables customers to manage security policies across all their apps and infrastructure wherever they're located. We believe that such an end-to-end security approach will appeal to customers who want increased efficiency and greater resiliency along with lower security risk. The net of all this is that we believe that Akamai and Linode can solve customers' needs in ways that are not addressed in the market today, forming a powerful winning combination that will enable customers to build, deliver, and secure their apps on the platform that powers and protects life online. Moving to Slide 9. We see the acquisition of Linode as a transformational opportunity for Akamai. This slide shows the way that we presented our business at our Investor Day last year. With Linode, Akamai will expand beyond security and delivery into the world's most distributed cloud services provider with leading solutions for security, delivery, and compute, as shown here on Slide 10. We'll offer customers a breadth and depth of services uncommon in the cloud space today, a massive content delivery platform, the best application performance, easy-to-use cloud and edge compute, and category-leading security solutions, all backed by expert services and support professionals to help power and protect life online. Given that we're announcing this acquisition at the same time as our earnings, I thought it would be helpful to have Adam Karon join us on the call today to talk more about Linode. Adam is our COO, and he's responsible for running our compute and delivery businesses. Later this year, we'll also plan to hold an Investor Day, when you'll be able to hear from Mani Sundaram, who leads our security business, as well as from other Akamai executives. After Adam speaks, Ed will cover the financial aspects of the acquisition and provide our outlook for 2022. Adam?

Thanks, Tom. I'll start on Slide 12. Tom just spoke about the 3 core product pillars we have at Akamai: security, delivery, and compute. I’m going to focus a bit deeper into the compute portfolio and what we think it will look like after the integration of Linode. Turning to Slide 13. I'll start with the existing Linode product portfolio, which is split into 4 product groupings, the first being compute, which has offerings like dedicated and shared CPUs, BareMetal, GPUs, and Kubernetes; the next being storage, which provides services like block storage, object storage, and a managed database service in beta; next, cloud orchestration; and finally, an award-winning set of developer tools that make it really easy for developers to use their platform. Their products are sold in traditional cloud models using online trials and online purchases. Turning to Slide 14. After the acquisition closes, the Akamai compute product portfolio we envision would consist of 5 product groupings: the first being compute inherited from Linode, containing shared and dedicated CPUs, GPUs, and Kubernetes; storage, which would contain the block and object storage that came from Linode but would also now include Akamai's net storage; we have cloud optimization that would include Akamai's Global Traffic Manager, Cloud Wrapper, and Direct Connect solutions; next, the developer tools we get from Linode, as well as the existing Akamai developer tools, which now make the Akamai compute platform easy and accessible to developers all over the world; and last, but certainly not least, our Edge applications, which contain our EdgeWorkers and EdgeKV products that execute compute right at our edge. It will also include our Cloudlet's image and video manager and, of course, our API acceleration product. One of the exciting synergies would be in go-to-market. Akamai's compute products would not only be sold online, but because our current globally located enterprise sales force works closely with the buyers for cloud compute, they have the right relationships, and we would not need to create an overlay sales force. Another exciting go-to-market synergy would be our existing robust and global channel ecosystem that could also take these cloud compute offerings to market. And in both cases, new wallet share within the customer base could be open for future growth. Turning to Slide 15. Now let's talk about how we think about compute. Now computing at the edge or near end users and devices brings unique benefits for critical use cases that are in many locations and where data is in motion or ephemeral, whereas computing in the cloud brings other benefits that are usually for applications running in a smaller number of locations and where data is stored and persistent. Our combined platform would have both edge and cloud computing. And since modern applications are built as a collection of services, each with differing compute needs and data needs, only by combining the edge and cloud can we fulfill the varied needs of our customer base like data localization and low-latency containerized compute, as well as more typical compute needs that are persistent and in fewer locations. The unique capabilities can come together when we are able to combine Akamai's Edge platform with Linode's cloud computing capabilities and then add in our Global Traffic Manager product to route across multiple clouds and cloud locations on our global large private network that efficiently connects cloud and edge locations and messaging, bringing it all together, coordinating cloud and edge services. You end up with the world's most distributed compute platform from cloud to edge, making it easier for developers and businesses to build, run, and secure applications. Now on Slide 16. While Linode and Akamai can solve a number of customer use cases separately, I thought it would be useful to cover just a few examples of the use cases we believe we can help fulfill for our customers with this unique combination of products. In the sports vertical, you could imagine a sports league could leverage the new Akamai platform to deploy WebRTC services to enable a watch-along app that allows a group of friends to watch a game in sync while communicating with each other in real time. And they would be able to do that using our distributed VMs, load balancing, and high-throughput egress. When you think of IoT and fleet management, you could see a shipping company building a distributed app to collect and pairs video and telemetry data from trucks and route before backhauling the data to their data warehouse. And they'd be able to do that using our support of MQTT, our distributed VMs, and direct connect capabilities. An e-commerce site can leverage Akamai to dynamically personalize their site based on the user's previous and current browsing activity without having to go back to their data lake, all using our managed database services, Kubernetes, and Functions as a Service. In the metaverse, we can help create a persistent virtual experience when a game studio needs to connect users from across the globe in a fully immersive VR experience from any console, mobile device, or browser, all using our distributed GPUs, low-latency and private backbone. And in health care, a hospital could leverage Akamai to create a platform that captures and archives videos of surgical procedures to help train doctors on new and emerging techniques using Bare Metal and our Object Storage. Now turning to Slide 17. The combination of Akamai and Linode can be a truly unique offering in the market. We plan to combine the ease of use and developer-friendliness Linode is known for with the wider reach, lower latency, strong security, and greater resiliency that are Akamai's hallmarks. We expect our new combined offering to appeal to developers by offering core cloud compute functionality, ease of use, and tools they need to appeal to enterprises with security, uptime, and reliability and drive future use cases as new applications can take advantage of the throughput performance and distribution of a market-leading global network. Turning to Slide 18. So with Akamai and Linode, we can have highly secure, elastic compute along with storage capabilities on the world's largest edge network, category-leading security, an edge computing platform for latency-sensitive workloads, all on Akamai's large global private network with a globally located enterprise sales force and robust channel ecosystem, all setting us up to win in the marketplace. And now I'll pass it to Ed to discuss the transaction details.

Thank you, Adam. I will start my remarks with brief highlights of our very strong Q4 results, then provide some insight into the financial aspects of the Linode acquisition and then close with our Q1 and full year 2022 guidance. So moving to Slide 20. Starting with the Q4 highlights. We are very pleased with our strong Q4 results, capping off an excellent year for Akamai. Q4 revenue was $905 million, up 7% year-over-year or 8% in constant currency. Revenue was led by another quarter of very strong growth in security as well as strength in our edge applications business. Security revenue growth in Q4 was 23% year-over-year or 25% in constant currency, with Guardicore contributing revenue of approximately $10 million. We are very pleased with the initial momentum we've seen from Guardicore, as well as the continued growth of the pipeline. It is also worth noting that our Edge Applications business surpassed a $200 million annual revenue run rate in Q4 and grew 30% for the full year in 2021. International revenue growth was another bright spot, with revenue increasing 13% year-over-year or 16% in constant currency. Sales in our international markets represented 47% of total revenue in Q4, up 2 points from Q4 2020. These strong results were despite foreign exchange fluctuations, which had a negative impact on a year-over-year basis. Non-GAAP net income was $243 million or $1.49 of earnings per diluted share, up 12% year-over-year, up 14% in constant currency and $0.05 above the high end of our guidance range. Finally, as Tom mentioned, we had an exceptional year from a cash flow perspective. Moving to capital deployment. During the fourth quarter, we spent approximately $271 million to buy back approximately 2.4 million shares. Our intention is to continue to buy back shares to offset dilution from employee equity programs over time and to be opportunistic in both M&A and share repurchases. Turning now to Linode on Slide 21. As you heard from Tom and Adam, we believe the combination of Akamai and Linode will create the world's most distributed platform for developers and businesses to build, run, and secure their applications. Under the terms of the agreement, Akamai has agreed to acquire Linode in exchange for approximately $900 million in cash. The transaction will be treated as an asset purchase for tax purposes. And as a result, we anticipate significant cash income tax savings over the next 15 years. While this benefit will not impact our non-GAAP effective tax rate, we estimate the present value of these savings to be approximately $120 million. Turning to Slide 22. We believe that Linode currently has a very attractive financial profile and that there are considerable revenue and cost synergy opportunities in the future. Assuming a late Q1 close, in 2022, we expect the acquisition to add revenue of approximately $100 million, have no material impact on our non-GAAP operating margin, and be accretive to non-GAAP EPS by $0.05 to $0.06 per share. Looking beyond this year, we expect Linode to be additive to our non-GAAP operating margin as we continue to capitalize on revenue and cost synergies, including leveraging our go-to-market channel and marketing organizations to accelerate revenue from enterprise customers, realizing significant cost savings by utilizing our very large global private network that Adam previously talked about as well as leveraging our significant scale and supply chain along with our network deployment expertise. From a CapEx perspective, we expect Linode to add approximately 2 points to CapEx as a percentage of revenue in 2022 as we plan to expand Linode's capacity and locations to meet anticipated customer demand. However, over the long term, we do not expect the acquisition to meaningfully change our previously communicated goal of CapEx being in the mid-teens as a percentage of revenue. Turning to Slide 23. As Tom and Adam previously mentioned, upon closing the acquisition, we plan to update our revenue reporting to reflect 3 separate business groups: security, delivery, and compute. The first revenue grouping, security, will remain unchanged from the existing reporting of our Security Technologies Group. The second revenue group will be delivery. Delivery will be comprised of edge delivery and services portion of our existing ETG organization but will exclude our net storage and edge application businesses that were previously included as part of ETG revenue. For context, our Edge applications business, which had revenue of approximately $196 million in 2021, and our net storage business, which had revenue of approximately $57 million in 2021, will move to our new compute business. The third and final revenue group will be called compute. Compute will include Linode, plus our Edge Applications and Net Storage businesses I just mentioned. We believe that with strong execution, we can deliver more than $500 million of annual compute revenue in 2023. Turning to Slide 24. Before I provide our Q1 and 2022 guidance, I wanted to highlight a couple of factors to consider for your models. First, the Q1 and full year 2022 guidance I am about to provide do not reflect the revenue and non-GAAP EPS contribution we anticipate from Linode that I previously mentioned, since the acquisition has not yet closed. We plan to update our full year guidance to include Linode on the first earnings conference call after the deal has closed. Second, international revenue now represents nearly half of our total revenue. And the dollar has continued to strengthen since we reported in early November. Therefore, we currently expect a meaningful foreign exchange headwind in 2022. At current spot rates, our guidance assumes that foreign exchange will have a negative $45 million impact on revenue on a year-over-year basis. Finally, similar to 2019, we have 8 of our top 10 customers renewing in the first half of the year. As a reminder, we define our top customers as anyone contributing revenue of 1% or more. And that customer group contributed approximately 19% of total revenue in 2021. Although we expect to see a negative impact to revenue growth in the near term, we expect to see incremental revenue over time as these customers' traffic grows with us. I'd also note that while the cluster timing of these renewals is unusual, the pricing, and contract terms are consistent with the broader trends in the market, and these renewals have been factored into our guidance. So with all that in mind, turning to our Q1 guidance on Slide 25. We are projecting revenue in the range of $896 million to $910 million or up 6% to 8% as reported or 8% to 10% in constant currency over Q1 2021. Foreign exchange fluctuations are expected to have a negative $2 million impact on Q1 revenue compared to Q4 levels and a negative $17 million impact year-over-year. At these revenue levels, we expect cash gross margins of approximately 76%. Q1 non-GAAP operating expenses are projected to be $292 million to $296 million. We anticipate Q1 EBITDA margins of approximately 43%. We expect non-GAAP depreciation expense to be between $123 million to $124 million, and we expect non-GAAP operating margin of approximately 30% for Q1. Moving on to CapEx. We expect to spend approximately $120 million to $124 million, excluding equity compensation and capitalized interest in the first quarter. This represents approximately 13% to 14% of anticipated total revenue, which is down approximately 4 points from Q1 2021 levels. And with the overall revenue and spend configuration I just outlined, we expect Q1 non-GAAP EPS in the range of $1.39 to $1.43. This EPS guidance assumes guidance taxes of $38 million to $39 million based on an estimated quarterly non-GAAP tax rate of approximately 14.5%. It also reflects a fully diluted share count of approximately 162 million shares. Moving to Slide 26. Looking ahead to the full year, we expect revenue of $3.673 billion to $3.728 billion, which is up 6% to 8% year-over-year as reported or 7% to 9% in constant currency. We expect security revenue growth to be at least 20% for the full year 2022. This includes an expected Guardicore contribution of approximately $50 million to $55 million. We are estimating non-GAAP operating margin of approximately 29% to 30% and non-GAAP earnings per diluted share of $5.82 to $5.97. And this non-GAAP earnings guidance is based on a non-GAAP effective tax rate of approximately 14.5%, a fully diluted share count of approximately 162 million shares. Finally, full-year CapEx is anticipated to be approximately 13% to 14% of revenue. In closing, we are very pleased with our 2021 performance and are excited to close on Linode and help customers build, run, and secure their applications. Now I'd like to turn the call back over to Tom to say a few words before we take your questions. Tom?

Thanks, Ed. I'll wrap up now on Slide 28. As I mentioned earlier, Akamai has had a rich and exciting history of innovation that has fundamentally enabled the Internet to provide enormous benefit to billions of people around the world. We are truly making life better for billions of people, billions of times a day. As incredible as Akamai's contributions to the Internet have been, I want you to know that I couldn't be more excited about Akamai's potential for the future as we expand our business with Linode and Guardicore, provide even greater value for our customers and shareholders, and make life even better for Internet users everywhere. Ed, Adam, and I will now be happy to take your questions.

I wondered if you could give us some context in terms of what kind of growth Linode was experiencing before the acquisition? And then when you talked about kind of 2023 and beyond, I want to make sure I understand that new compute area, the $500 million, what kind of growth rate do you expect out of that segment?

Sterling, this is Ed. Thanks for the question. So, before the acquisition, they were growing at about 15%, give or take. The bigger customers were growing faster. And they were sort of containing their growth a bit. It was a very closely held company. So they were holding back a bit on their investment in go-to-market and their build-out. So, obviously, that's one of the major synergies we bring. So we think we can accelerate that business pretty considerably. Now when I talked about the different components of the business, if you take the net storage business plus the edge applications business plus where Linode is, assume I talked about how we grew the edge applications business 30%. And if you remember back on Investor Day, that was our long-term target. Our net storage business, as it is today, is kind of a flattish business, kind of grows like the CDN. We expect that to obviously accelerate as we add new capabilities. And then the Linode business should accelerate quite a bit. So if you were to put those pieces together, and I talked about in '23 that I expected that we would be above $500 million in revenue, that sort of gets you to that 30% to 35% kind of growth rate in that business once you get through the acquisition.

Given those pieces, would you expect that growth to be sustainable at that level or return to more of a 15% to 20% range, just to understand the longer-term context? That's all from me.

Yes, that's a great question. I'll have Adam add some insights as well. We're entering a very large market driven by our customers' increasing requests for different use cases. We're currently investing significantly in third-party cloud services through acquisitions and IT projects. The growth potential in this market is substantial, and we believe there's more than enough opportunity to capitalize on. Adam can share more about our future integration plans and growth outlook. It's very possible that we could maintain a strong growth rate for that business moving forward.

Yes. I agree, Ed. I think we see that market growing very rapidly outside of what Akamai had before, and we see that with our customers in demand for our edge applications and asking us for this type of cloud computing as well. So we do expect it to be durable as that market continues to grow quite rapidly.

Maybe 2 questions. One on the Linode acquisition. I just want to kind of better understand kind of like the buy versus like a partner decision. Can you help us understand what's interesting about sort of buying this asset, what you could do owning sort of Linode versus partnering with Linode or other types of cloud computing platforms out there, number one? And then number two, for Ed, just in looking at FY '22 and the margins coming down. Nice margin performance in Q4 and all throughout 2021. Can you talk to us a little about what's going to be pressuring margins into 2022?

Yes. By owning Linode, we can really scale up that business. We have a lot of expertise in network deployment and doing that in a cost-effective way to get enormous scale. Also, we've got a large enterprise sales force and a customer base that is hungry for us to bring them this kind of capability. We know how to make large-scale systems be reliable and perform well. And we can bring it all together as part of an end-to-end solution so that our customers can take their major applications, build them easily on Akamai, and that's where Linode comes in, run them. Of course, we have the world's largest and best content delivery platform to deliver it, and then wrap it all together under our security umbrella to make sure it stays secure. And so that's a compelling reason for us to make the acquisition here and provide the end-to-end service versus just partnering with the various cloud providers. Ed, do you want to take the margin question?

Yes, Keith. To expand on that, when I examine the financial profile of the newly acquired business, I consider the scale of revenue to be achieved, the necessary investments, and the timeframe for reaching that scale. It's uncommon to find companies with profitability margins like ours. Thus, integrating this acquisition is immediately beneficial and accelerates our market entry. Their system is straightforward and user-friendly, and that expertise is something we are gaining as well. There’s a lot to appreciate about this acquisition. Regarding margins, there are several factors at play. One point I mentioned earlier relates to foreign exchange, which poses a significant challenge for us, especially since we are very profitable outside the U.S. This impacts our margins. Additionally, we are making investments and we only had a little over two months of the full Guardicore business in the fourth quarter. In the first quarter, we will fully incorporate Guardicore and its associated costs, alongside potential merit increases mid-year. However, I want to highlight two things. First, I previously mentioned we expect to achieve around 30% margins in Q1, and we have been effective in managing costs. Furthermore, we indicated at the time of the Guardicore acquisition that we anticipate margins to exceed 30% in 2023. While margins might be slightly below 30% this year, likely between 29% and 30%, we expect to surpass that threshold in 2023.

Just looking at the Edge Technology Group, growth this year has been flattish off of some pretty high numbers from 2020 as a result of the pandemic. As you think about that going forward and with some of the repricing this year, can you just talk about some of the puts and takes relative to repricing some of those contracts as well as some of the sectors that were hit most by the pandemic potentially improving?

This is Ed. I'll take that one. So yes, as far as the renewals go, as we've talked in the past, whenever we have a combination of renewals, we'll always call it out for you guys. Here's what I would expect with that group of customers: typical renewal pricing, nothing unusual in terms of anything in the market to call out there. I'd expect that group of customers to decline a bit in Q1, decline a bit in Q2 because like about half of the renewals are already done. I got about half coming up here in April. And then I would expect that revenue to start to grow again. It's pretty typical of what you see in the CDN business when you have a cluster of renewals. Now those customers have varying contracts. Some of them are 1 year, some of them are 2, some of them are 3, and some of them have revenue commitments that will be used up before the contract is over. So it's very unusual to have this sort of a cluster. So that will put some pressure on growth here for the next couple of quarters, but then I expect that customer group to grow. They've been very busy buying up our security products, our compute product. I expect now they're great targets for the new acquisition we just picked up here. So I expect to expand the wallet share within those group of accounts. And this is just something that's pretty typical in the CDN business. And where we're seeing the pricing pressure is on the delivery side. We're not seeing it in the Security side, not seeing it at Edge. We're seeing it just in delivery. As far as the pandemic, we are starting to see a little bit of improvement in travel and hospitality. And as a reminder, that group was about 4% of our total revenue. I think that will sort of ebb and flow with how the pandemic goes. As we start to have these waves of new variants, travel slows down, as it goes away, travel picks up. Retail is still a bit sluggish, not really seeing a significant improvement. And just remember, we had set up a 0 overage, and the biggest acquirers of that type of contract are the retailers, especially in the U.S. So you see a little bit of a muted seasonality here in Q4 related to retail. But still some way to go here on retail. Travel is improving a bit. And in general, as we get past these renewals, you'll start to see the delivery business improve a bit.

This is Michael on for Colby. Two questions, if I may. First, following this acquisition, you also did Guardicore. How would you describe the appetite for additional M&A? And as part of that, how does this acquisition impact the way that you're thinking about additional buybacks? I thought there was a pretty notable step up in the fourth quarter. And then on one other question, if I can squeeze it in. With this acquisition, $100 million of revenue coming in and you talked about 15% growth that seems durable, how does this change the way you're thinking about the long-term revenue growth profile for the company?

Yes. Good questions. Obviously, we've done 2 large deals, the largest deals we've done in about 20 years over the last several months. I wouldn't expect to see us continue at that rate, certainly. We probably will do more tech tuck-ins and smaller acquisitions. In terms of the buyback, our primary use of cash is for M&A and to buy back equity to offset the dilution from compensation programs. Now as I mentioned, that said, we do also opportunistically buy back additional stock. And if you look over the last 10 years, it's averaged a little more than 1% a year. And so I think our general approach to use of capital is not changing here. Just we saw 2 exceptional opportunities, first with Guardicore and now with Linode. Guardicore really is a huge boost to our enterprise security business, Zero Trust capabilities. We believe they have the best solution to stop the impact of ransomware. And that's a huge, huge deal. And you see that in the improved guidance we've given. And just we closed the deal a few months ago, and we're looking at this year then of doing $30 million to $35 million and now, as you heard from Ed, substantially more than that. And I can tell you from talking to many of our customers, many of the world's major banks are very interested in what Guardicore can do, both the visibility it gives customers into their own networks and the ability to mitigate the impacts of ransomware. Now in terms of the durability of revenue growth from Linode, in the past, they were doing 15%. I think Ed and Adam talked about we think we can do a lot more than that. Just consider that Linode doesn't really have a sales force, never mind a sales force like Akamai has going after major enterprises. And you combine that with the fact that our major enterprise customers have wanted us to have this capability for them. So we think we can really accelerate their growth and that it could well be that the 30% is sustainable. We're certainly going to try to do that. And if we're successful there, you can see Akamai as a whole back in double-digit revenue growth on a more sustainable basis, and that's certainly our goal.

So curious, grew 22%, actually, I'm sorry, 25% constant currency. But it seems like new business slowed, and the normalized security number was slightly down versus last quarter. So really, why aren't we growing faster in this segment when the market has shifted directly towards SASE, and it's been as healthy of a security market as we've probably seen since 2014? Have we seen any increase in selling security outside of the existing CDN installed base? Also, what was the growth of our annual customer metrics that you typically provide in Q4 regarding the individual products and subsegments like access control?

I'll start with that and then hand it over to Ed. We're very pleased to see our security business grow 25% in constant currency. You talk about SASE, and that is a very small portion of our business today. In fact, SASE technically wouldn't even include micro-segmentation. I would imagine that's going to change in the near future because it's so important and it's going to become a requirement, I believe, for many of the world's major enterprises, certainly in the financial vertical. So the SASE framework is a small amount of Akamai revenue. And with Guardicore growing rapidly, the vast majority of our security revenue is the web security area, where we're protecting, think of it as B2C apps, from denial of service, from content corruption, from account theft, from data exfiltration, those kinds of attacks, which technically aren't part of the SASE framework. And so what you would think of is maybe more towards a SASE. We're getting very good growth on a small number. And of course the lion’s share of our security business is in the web security, API protection, where we're the market leaders and growing at a very fast clip on a good size number for us. And Ed, maybe you want to take the rest of the question.

Yes. So Jim, we don't break this out every quarter, but I'll just go back to the IR Day. We set targets for application security, network security, and security services. And as a reminder, those goals were for application security, 20% to 25%, 20% to 25% in network security and then security services of 10% to 15%. I can tell you that we achieved all of those and exceeded, in many cases, those metrics. Are there any other metrics that you were looking for? I think you mentioned something about customers?

Yes. I mean we used to kind of talk about penetration of number of customers that are on your WAF solution at this point. And I thought at the Analyst Day, we were going to get the annual update on those subsegments. Maybe you're saving that for the Analyst Day.

Yes. That's what we're going to do. At Analyst Day, we'll take a closer look at that. I previously shared the metric regarding the number of customers purchasing a security product, which has risen to 68.5%, representing an increase of about 6% year-over-year. Customers purchasing two or more products have increased to 34.5%, up about 3%. Those buying three or more products now stand at 20%. Additionally, we grew our customer base by approximately 6% over the year, and our total customer base has also risen by around 6%. Security penetration has increased by about 6% year-over-year.

Maybe a jump ball for you all just with respect to some of the new revenue classifications that we're going to be expecting in the next couple of months here. As I think back to your last Analyst Day, what was certainly helpful for us is to get a sense of what type of traffic mix you're expecting in the delivery franchise. So I'm curious with Linode in the family or soon to be, how you expect that mix of traffic to change relative to some of your expectations within the long and medium-term guide. And then I had a quick follow-up, if I could.

Well, the traffic measured by bytes delivered is 95-plus percent big media and software downloads, gaming downloads. That's the vast majority of the traffic. That won't change with Linode. In fact, I would expect we'd be selling compute services to those same big media customers. In fact, several of them have expressed interest in that capability. So Linode won't change our traffic mix. And when we get together at IR Day, we'll do the deep dive in each of these categories to get a better feel of how the revenue is breaking down.

Yes, that's a great question. There are a couple of things to highlight. Firstly, we had a strong performance in the security sector, which contributed positively to our margins. Additionally, on the cost of goods sold, our gross margins improved. The team has excelled in reducing our bandwidth costs. Looking ahead to next year, we anticipate traffic growth at typical rates, and our bandwidth costs are not expected to rise significantly. The important factor has been our ability to lower bandwidth costs. We're also starting to see a notable decrease in capital expenditures. While we won't see depreciation drop off immediately, we expect it to peak in the next 1.5 years before it begins to decline. Across all divisions, there is a strong emphasis on efficiency, and we are witnessing positive results when we experience a bit of revenue growth.

Okay. Well, thank you, everyone. In closing, we will be presenting at several investor conferences and road shows throughout the rest of the first quarter. Details of these can be found in the Investor Relations section of akamai.com. Thank you for joining us, and all of us here at Akamai wish you continued good health, and we wish you a happy evening. Thank you.