Conference Transcript - AKAM 2026-09-09

Fatima Boulani, Analyst — Citi

Good, everyone. I'm Fatima Bulani. I jointly head up the software research team here at Citi, and I'm very excited to host my next fireside chat session with Dr. Tom Layton, CEO and founder of Akamai. Thank you so much for being here.

Tom Leighton, CEO

Oh, thank you. Nice to be here.

Fatima Boulani, Analyst — Citi

I appreciate it. Well, we've got a lot to talk about, and where I want to start the conversation is Akamai's strategic evolution. The business has undergone a substantial change and transformation You know, certainly in the last three years, but I'd even narrow the scope and say in the last year, having essentially evolved from a predominantly content delivery services business to, you know, majority of compute and security business. So in your view, as we think about the evolution and some of the milestones you've hit in the last 12 to 18 months, what comes out most sharply in your mind as things that have been most salient in that evolution?

Tom Leighton, CEO

You know, I think there's been a big advance with our cloud capabilities. You know, we bought Linode several years ago now, huge investment to make that be of a caliber that big enterprises can use for big mission-critical applications. And now we're to the point where we can sign up these very large cloud customers and support their AI needs, you know, end-to-end, training all the way through inference and get their compute applications close to users so they can take advantage of low latency and also high throughput for video, you know, kinds of situations. Maybe you're in robotics and the robot is seeing a lot of things around it or it's a car or something and you need to process those videos at scale really quickly. And it's really been the last, you know, 12 to 18 months where, you know, we've gotten to that level. We can go out there and compete, you know, head-to-head with the hyperscalers, the neoclouds, whoever it might be, and succeed.

Fatima Boulani, Analyst — Citi

Dr. Tom, I wanted to take a step back and actually ask you maybe a little bit more of a bigger picture question. As a founder of the company, you've been at the helm and seen this business, you know, see massive evolutionary leaps, right? You were at literally the front seat guiding and architecting uh the role you would play in democratizing the internet right if we go all the back all the way back into the late 90s uh so seeing that transition and the explosion of the value that you created in the content delivery uh then you pivoted to providing security around all this traffic that was being created and now we're in the ai era where compute is really shining so uh can you maybe juxtapose or compare contrast for us with the benefit of having watched and witnessed these paradigm shifts in the past, how would you compare where we are from, you know, the AI native and AI adoption era relative to, you know, these past other cycles or computing evolutions that we've seen? You know, what's different? What's more dramatic? And maybe what's the same? And maybe history is rhyming again. So we'd love to get your perspective.

Tom Leighton, CEO

Yeah, it's a great question. I think there are a lot of parallels. What we're seeing today and what we saw in the late 90s as the internet, you know, exploded onto the scene. A fabulous new technology is going to change everything. A lot of great use cases, also some bad use cases. You know, there's...

Fatima Boulani, Analyst — Citi

Solution for that.

Tom Leighton, CEO

We're working on it, yeah. You know, I think a lot of bubble kind of, you know, excitement in a way, but also a lot of reality. This is going to be here and change our lives. So that's all very similar. You know, in terms of Akamai and what we can do, there's similarities there. You know, back in the start when the internet came on the scene with the web, you know, with a website, it was hosted in one spot, one data center, maybe east and west coast. Well, you see that today with some of the first AI use cases, all one big data center. That doesn't scale well. It didn't work in the web. You had the worldwide weight. And of course, that's where Akamai helped by being distributed and getting the content closer to users and staged there so you get faster delivery and scalability. Same thing's happening with AI. You know, to scale these applications so you can handle and process lots of videos or create a lot of individual videos for users that are personalized or to have conversations in real time, you need to be distributed. And we're just at the start with that. And we're using the same kinds of capabilities we developed back then, you know, now, you know, for AI. Initially, costs were very high back then, and then a lot of work was done to decrease cost. I think you're going to see that in AI. You know, even the notion of caching back then, which made it a lot more effective, we're at the early stages now with things like semantic caching. So, you know, two people ask, really, they're asking the same question, but in a different way. You don't want to go back to the expensive model to answer it the second time you want to realize hey i've answered that question and here's what it is and to be able to do that we've got some partners now starting to do that with video where instead of generating the video from scratch which is expensive you've already got a frame 40 you tweak it a little bit you change how the lips move as you change what they're saying you know the avatar is saying so there's just i think a lot of a lot of parallels there. And what we do is it's amazing how similar it is. Same with, you know, with security. Again, you know, back then you'd have your WAF in your data center, which at the time was fine. But then you got these bigger attacks. The WAF's overwhelmed and you couldn't do it anymore. And so, of course, we built the cloud WAF. So it's fully distributed. And now you can absorb all that attack traffic because you are distributed. And just in the last year, the size of the attacks has gone up a factor of 10 because the bad guys have ai they can go take over a lot more devices to launch these attacks so it's striking you know the similarities we're seeing today i know we're going to talk a lot about the compute business aka the artist also known as the cis business but before we focus on that you know while delivery is only a third of your business.

Fatima Boulani, Analyst — Citi

It is also still a third of your business. I know you've worked very, very hard to diversify from the content delivery, building adjacent product capabilities and security and on the connected cloud vision. But, you know, as you talked about the explosion of the internet, you know, the internet is exploding again by way of AI traffic and traffic growth. So the surface area of the internet is just expanding and metastasizing because of AI. You have bots, you have AI bots, you have machine generated traffic. So can we unpack a little bit of that in terms of, because you see so much of the internet traffic essentially flowing through your pipes, how should investors get a handle on what the complexion of internet traffic looks like today than what it did even, let's say three years ago, chat GPT came out, you know, back half of 23, right? So that composition and complexion of internet traffic today and how it defers or contrasts traffic patterns from three years ago even.

Tom Leighton, CEO

Yeah, good question. And I think there's probably a lot of misconceptions out there. You know, already for probably most of our customers, most of the entities that were coming to their sites and apps weren't human. They were bots of various kinds. And of course, now the variety of those bots or agents that are coming to their site is proliferating. And this does present challenges for our customers in terms of what they want to do in response. And the good news is we have the market-leading solution for bot and agent management. And so when our customer decides how they want to treat any particular kind of agent, we can make that happen for them. And of course, with the proliferation of agents, they aren't all secure, and you've got a big security challenge there. I was talking to a banking customer yesterday, and they're going to block agents, user agents, just because they don't have the level of security, and the bank's on the hook if user data gets out through them. You know, so there's a lot more entities out there, but it was already mostly automated, you know, interactions. Now, in terms of traffic and the revenue for our delivery business, You know, that's based largely on the number of bytes we deliver. And that's not yet changing because of AI. You know, when the agent is having, you know, transmitting text back and forth, that is, you know, tiny. The bytes come from video watching. So if everybody watches more video online or watches in a higher quality, that can make a difference. And for software downloads, you know, gaming releases or all the stuff you put on your devices. and AI is not really changing that yet. Now, someday it might. If our agent manifests itself as a human and we're talking to it all the time, it's like our personal shopper. We become buds with our AI personal shopper. Well, now video is going. Or if really all the devices out there are recording what's happening, and video is being processed. Okay, that makes more bites. You know, I was in China recently and saw some cool AI glasses that are recording everything that's going on that the person sees, and sending it into the cloud real time, and then information comes back and is displayed on the glasses in real time. In this case, they were using the glasses to translate my talk. So I've got, you know, English up on my PowerPoint, and they're seeing Chinese on their glasses. If you start having that at scale, that can generate more traffic. But today, those things really haven't started happening yet at scale. But you're right, there's a zillion agents out there, and they're only increasing. That's a big security challenge, helps with our security revenue, and of course, helps with our compute revenue, because that kind of stuff runs on our cloud. That's where we're seeing the big growth.

Fatima Boulani, Analyst — Citi

So is it fair to characterize that the way you win AI dollars and AI budgets, so to anoint you an AI winner, let's say, would it be as a manifestation of your security business outperforming expectations? That's actually where you would be capturing a lot of this value from AI? Because it doesn't seem like geographically it would land on the delivery side.

Tom Leighton, CEO

Yeah, I don't think it's going to change our delivery business anytime soon. It's helping our security business, which obviously is important, but really it's our CIS, our cloud business. We're talking next year that revenue overall for the company is going to get into the low teens, which is a big acceleration. That's being driven by the cloud business, the compute business.

Fatima Boulani, Analyst — Citi

And then just to kind of round out on the delivery side, you know, another sort of monumental change in the delivery market is it's a much more rational competitive or competitor and peer landscape. Right. You yourselves have been in a position to consolidate some of these assets from these companies that are no longer around. Right. So can you give us a state of the union in the classic delivery realm, how much of that has influenced the stabilization you've seen in the business, your ability to capture more traffic growth in the classic sense with the live events and the software downloads, and then relatedly, the influence that's had on pricing, because I think there is generally a view that, you know, this business has had to fight or circumnavigate, you know, commoditization effects and price deflation, right? So I'm wondering if you can just characterize the health of the core delivery business from the price side of the equation, and we've discussed the volume, but the volume side of the equation, especially in light of the fact that the competitor and peer landscape has changed so dramatically.

Tom Leighton, CEO

Yeah, delivery is a good business, you know, know, really important for our customers. You know, we're the leader at that by far. You know, pricing is still very competitive, and we walk away from deals where we don't like the price. You know, and also spiky stuff that we don't like. We're not getting paid enough. We won't do it. We do have competitors that will go out there at any price to win business still, even though at least several of them went broke in the last few years doing that. There's still others that that do that. And, and okay, we, we don't operate the delivery business to go get all the traffic or to drive revenue growth. We, you know, we operate it strategically and to drive cashflow. And so in some cases we'll, you know, say you got to pay us more or we're not going to do it. And in some cases we won't, we won't take it. Uh, for most of the major players out there, we'll do the majority of their delivery. Um, but we, we really do care about the price there.

Fatima Boulani, Analyst — Citi

I want to shift gears into the security business. You know, I would say GuardaCore on the micro segmentation side and API security have just been all stars in that portfolio. Wondering if you can help bifurcate kind of the health of the segment by way of some of these, you know, newer kids on the block, so to speak, and, you know, some of your more mature, mature growth businesses where you have a tremendous amount of market share on the DDoS and WAF side. If you can kind of walk us through some of the dynamics, because, you know, we talked earlier about, hey, security is going to be the landing zone for you to win AI wallet share, right, for the most part. So is there, are you starting to see maybe a little bit of a renaissance on some of the older products in the security portfolio? You know, what has been coming up in your conversation?

Tom Leighton, CEO

Yeah, the majority of the security revenue is the more mature products where we've got, you know, huge customer penetration, WAF and DDoS. And we are seeing some tailwinds there. As I mentioned, in the post-mythos world, the bot networks are 10 times as big, and that's helped our DDoS business. And with WAF, you know, a lot of like the world's major banks, you know, emergency programs to make sure all their apps are behind Akamai's WAF. So they'll be protected from the zero days. and bought an agent manager getting tailwinds. In fact, there's all these agents out there. So no question the security business as a whole is benefiting from these trends. That said, I think the big excitement from AI in terms of driving revenue growth at Akamai is on the cloud side. You know, like we talked next year, we're going to have dramatically accelerated revenue growth, you know, going forward. And it'll be faster than the security business even is growing. So security is great. You know where it is today. But cloud is a much bigger market. And we have a compelling value proposition. And we're seeing incredible growth there, enough to take the whole company into a different zip code with growth.

Fatima Boulani, Analyst — Citi

Good segue into talking about CIS and compute. You know, initially there were aspirations to compete with the hyperscalers, but now the opportunity has become more multifaceted, right? So can you help walk us through sort of the vision for the compute hyperscaler, which was kind of the first step or the first kind of foray in scaling the cloud business by way of Linode and kind of your rationale to acquire Linode? Your aspirations to be a specialized edge cloud, and then also your aspirations to be a quasi-neo cloud as it relates to being a destination for model training and distillation. I'm wondering if you can sort of go a layer deeper on, you know, where you think and feel and believe your most killer advantage is going to be between those opportunity sets inside CIS.

Tom Leighton, CEO

Yeah, great. I'd say we're the first two, very relevant, competing with the neoclouds, not so much. You know, most of the neocloud revenue is training the big foundation models, gigawatt data centers. That's not us, not where we're going. We are doing the end-to-end AI for our big enterprise customers, training all the way through inference. And now today, a big data center for us is tens of megawatts. But that's fine for training enterprise-grade models. And, of course, we already have the Edge platform where we now can deploy containers, function as a service, so you get really close to end users, all on one platform connected by one of the world's largest backbones. In fact, all the hyperscalers are using our compute service today. Obviously, we compete with AWS, Azure, and Google, but their parent companies are using, for applications where latency really matters, using our cloud to do that, and two of the three are very large Akamai customers. So, yeah, we compete with the hyperscalers. We have for a long time. Now we compete also on cloud, where we didn't before. We don't compete so much with the neoclods. I think, you know, one of the big deals we did, they were in there, you know, competing. But generally, you know, we're not head to head with them like we are with the hyperscalers.

Fatima Boulani, Analyst — Citi

I think what's captured everyone's excitement for the business and the opportunity is just the edge inferencing use cases. Those are absolutely lighting up. I wanted to ask you at a very technical level and feel free to go in the technical nuts and bolts, Professor. You know, the edge latency and the use cases you've built, you know, over a $2.8 billion book of business in signing some very marquee transactions that absolutely validate what you're doing. But can you help in plain terms express why you've been winning these very watershed deals for you and why investors should be paying attention to the use cases here?

Tom Leighton, CEO

Yeah, well, the Edge platform enables us to get the compute logic closer to the user or the data or the bot or the robot or the sensor. And, you know, that's important for applications where the latency matters. You know, driving a car or a robot that's doing things in a factory. You're talking to the agent. You're getting a personalized video from a commerce site showing you're wearing some clothes. You're talking to your personal shopper. and you know before ai wasn't to the point where the ai could generate something like that in real time now it is and so now the last barrier is okay if the ai is running across the company or across the world it's still going to be too slow just to be able to have that conversation because of the latency or if you've got a you know sensor kind of a robot kind of application and you got to process a lot of videos, you don't have the bandwidth in the central location to do that. It's just like you can't broadcast the World Cup game from a data center. You don't have the bandwidth out. And it's the same problem in reverse. Or if you're doing video applications for commerce sites that are personalized at scale, you're not watching the World Cup, you're watching yourself wearing the sweater. Can't do that at scale if it's all coming from of the Central Data Center. You just can't get it out. Same problem we solved, you know, 20 plus years ago with delivery. You need to be distributed. And, you know, and so that's what we do. And I think now is really the time where that's just starting to see a big runway ahead. And of course, we do it end to end. You don't have to do your training somewhere else and then use us. It all works on the same platform connected by one of the world's top 10 backbones.

Fatima Boulani, Analyst — Citi

Dr. Tom, what about the data center architecture and your point of presence footprint is extremely advantageous in this environment and a lot of peers talk about maybe having a different network topology you know uh you know some kind of difference is an opinion on again uh network architecture but you've got the 4 000 pops uh you have been very assertive on the capital expenditure uh and been very front-footed about that to support these growth opportunities. But can you help investors understand what about your distributed footprint is very advantageous and where you are just actually rolling out racks of GPUs to be able to immediately support this demand in your compute and CIS pipeline?

Tom Leighton, CEO

Yeah, there's a bunch of reasons, but we probably deal with all the world's data center companies, probably more than anybody. We're in 700 cities, and as you said, 4,000 pops. And so we have good relationships there. We have good relationships with all the hardware vendors. You know, we've been buying from them for a long time. And so, you know, there's, it's tight market for both, but we're in a great position to get what we need in both cases, you know, in a reasonable timeframe. And then you've got the platform where we have large, for us large, small compared to, you know, the hyper clouds, but plenty big for us in hundreds of cities around the world. And then smaller locations in hundreds more in a platform connected by one of the world's largest backbones. So we can communicate very efficiently and quickly. It allows us to have a lot lower egress costs than the hyperscalers charge. So, you know, for a lot of applications, we're head to head with the hyperscalers, you know, competing for a deal will be less expensive because of that. And also on top of this, we've got the world's biggest and best delivery network. And a lot of the applications ultimately need delivery and security. And that's going to be super important for these agents in AI that you actually have really good security. You know, the hyperscalers, most of them use us for security, even though we compete with them. They do have security offerings, you know, in their clouds, but they'll use us, you know, for ours because they're stronger.

Fatima Boulani, Analyst — Citi

I wanted to spend a little bit of time on, you know, you are spending a lot of effort, energy, and executive focus on scaling up what is structurally a very attractive franchise in your compute business, right? It is going to be the power source for the acceleration that you're anticipating in total revenue growth next year. But so far, you know, you've been in the mode of winning the beachheads with, you know, the very large Frontier Lab customer that you sort of referenced earlier in the year as a big win, the $1.8 billion deal. You know, subsequent to that, there's been a couple of $100 million deals, excuse me, that you've bagged. So these are very consequential wins. But at the same time, they have come with increased CapEx intensity, right? So how can you help investors get comfortable with the medium and long-term unit economics of this business? Because you are in investment mode, right? So we are seeing gross profit and gross margin compression as you tackle these opportunities. We are seeing operating margin compression as you chase these and execute on these opportunities. But how should investors get comfortable around, you know, deals from here against the CapEx footprint that you have and that you will continue to build to support this demand are going to come at better unit economics for Akamai at large?

Tom Leighton, CEO

Yeah, the economics on these deals are pretty good. You know, we've talked about the very biggest ones, which would have, I guess, the least good economics, but still very good. Gross margins, mid-60s to mid-70s. Operating margins, low to mid-20s to low-30s. You know, very profitable deals for us. In terms of the CapEx investment, we've talked about, you know, a dollar of CapEx generating 50 cents to a dollar a year in revenue. The biggest deals, you know, down at the lower end. Other deals up at the high end or beyond. These particular deals are four to seven years. The biggest deal was a seven-year commitment, and it's not that we're upgrading the hardware during those seven years. It's those servers for seven years. These are great deals for us financially. Now, where you see it and you can say, ah, that's going to hurt your cash flow up front. Yeah, you put the cash in up front, and then six to nine months later, well, now you're generating a ton of cash going forward. And as you do a lot of these deals to jumpstart the business, well, you notice it with your, hey, your cash flow is much worse. Yeah, but the generation of cash going forward is huge, you know, really good. And yeah, when you do these deals up front, it hits your margins because you're locking down and paying for the data center space, take another six months to get the revenue for it. And yes, we've said margins, you know, we're taking down about five points to operate in the mid 20s but we're going to become a growth company now okay and we were not that before you know growth not going to be in the mid single digits anymore you know we're talking about much much bigger growth for the company going forward and so I think very attractive proposition you know for investors and yeah we start with some big deals and I we're going to try to sign more big deals like that and then take that through our large enterprise customer base you know a typical customer today will spend 10x, you know, doing cloud than what they would spend in security or delivery with us. And that's a great value proposition.

Fatima Boulani, Analyst — Citi

You know, Edin, you have been very disciplined about managing the cost structure in the business, very rigorous. So is there an opportunity to continue to drive efficiencies in other parts of the business at large to essentially mitigate some of the dilution impacts as you pursue growth and accelerate growth by way of compute?

Tom Leighton, CEO

Yeah, we're always looking to be more efficient. You know, AI is actually a little helpful there. You know, so there's positions we aren't backfilling or not hiring into because we are going to be gaining more and more efficiencies going forward with AI. Our software base, we're always working on to make it be more efficient so that we get more bytes delivered or more computations done per kilowatt hour or square foot of colo space. That's always an ongoing effort.

Fatima Boulani, Analyst — Citi

You know, one of the other sort of elements that's unfurled since the last earnings call is, hey, you're really getting good at, you know, deploying the CapEx and building more capacity for, let's just call them bluebird inbound demand, right? So, you know, correct me if that's, that characterization is not quite precise. But when you think about the pipeline for the compute business and the pipeline for the CIS business, we've clearly seen you bring down the whale size deals, aka the $1.8 billion. But we've also seen you do the $250 million deal that you did in 4Q of last year. And then you just did the $600 million. So it's quite a wide range and a wide spectrum. What does that normal distribution look like for that 66% of deals kind of in the middle? What's that sweet spot and zone of deal size? And do you believe that the CapEx that's been deployed thus far and that's on target to be deployed can support, without incremental push, you know, better revenue leverage, let's say, on that deployed CapEx?

Tom Leighton, CEO

Yeah, good question. You know, before the big deals, it was all small deals, you know, coming out of the Linode business that became our cloud business. You know, when the billion-dollar whales jump into the pool, you know, they take up a lot of it. They take up all the water. Well, yeah, you know, you notice that. They become a big part of it. And so now we're very quickly transitioning to where a large fraction of the revenue is going to be large customer deals. And I think you'll see that for the next couple of years. We're signing up, you know, the full spectrum as we go. It's just when you have very large ones, if you measure by revenue, they're going to be a big part of it. And I think over the next couple of years, it'll be these large tranche deals that, you know, grab the headlines. And then, you know, there's a part that's going to be, I think, growing and become important in the long term, which isn't reserving GPUs of a certain type in a certain city. It's a model as a service, you know, which we're, you know, beginning to do. and the customer doesn't even specify what the hardware is. We take care of that. And, you know, we're developing the capability to do these things in a serverless way. So they're not even saying, I want, you know, 10 models in this city. It just, it spins up and on demand. And I think that's where the future goes. And it's a lot more customers, not all obviously at the billion dollar a year level or even a hundred million dollar a year, probably more in the tens of millions a year that are signed and brought onto the platform. But for the next year or two, the spectacular growth that I think we're looking forward to will be large, large customer deals that you notice.

Fatima Boulani, Analyst — Citi

Dr. Tom, just in terms of CapEx utilization, how do we get comfortable that you're not going to be on this CapEx treadmill, so to speak, for the next three years, right? And is there a distinction you can draw between kind of latent CPU capacity to power these edge AI and inferencing use cases? And is that something you believe maybe is not well understood in the investor community? Because maybe the sense is, hey, you need the Ferrari GPUs for every AI and edge use case, right? And is that what you're seeing in the trenches?

Tom Leighton, CEO

Yeah, we don't even buy the Ferraris, right? The NeoClouds will buy the Ferraris and they need them to train the next amazing frontier model. That's not our business. You know, we are buying at least a stage down GPUs that are really good at what our customer base wants to be.

Fatima Boulani, Analyst — Citi

The Toyota or the Lexus?

Tom Leighton, CEO

Yeah, maybe some Toyotas and Lexus and, you know, and a bunch of CPUs too. In fact, you know, before these big deals, today the majority of inference in AI on our platform is done on CPU. And, you know, and there's the next generation CPUs coming out and AI is going to get a lot more efficient. And so I think a good portion of it is going to be done on CPU. Now, we'll have CapEx to drive the CIS business. It's that kind of a business. It's not like security where it's the world's best developers developing the latest product and not much CapEx. This is not so much that as the CapEx for CIS. And we will have that, but you will see, I think, very strong growth on the top and bottom lines. It's not like margins keep deteriorating. I think margins, we've said as best, we haven't given guidance for next year, but ballpark where we are today, but big increase in revenue. And as you get a big increase in revenue growth and your margins are pretty consistent, you see that now on the bottom line, good increases in your bottom line growth, which is pretty exciting.

Fatima Boulani, Analyst — Citi

That brings me to capital allocation. You have been a voracious buyer of your own stock, but we have put a pin in the share buyback program. You know, how is the philosophy around capital allocation going to change and, you know, give us sort of the current state of where you are, what you're focused on?

Tom Leighton, CEO

Yeah, so we said we paused, you know, for this year, for now. Doesn't mean we wouldn't do something, but we paused for now because we already bought back a lot more than we ever have in one year this year. You know, so we bought back all the dilution we, you know, incurred with equity programs for our employees, and then some. And so it seemed like, hey, we don't need to do more than that this year, especially when we've got these really compelling opportunities, you know, in terms of the CapEx investments.

Fatima Boulani, Analyst — Citi

Last question I have for you. what's one thing that with a magic wand you could wish away in terms of or educating or disabusing the investor community on whether they're underappreciating something or something that you believe is very severely misunderstood about the Akamai story?

Tom Leighton, CEO

I think we're going through an interesting transition where we're going to have some pretty exciting growth. We've got a great security business doing very well. Delivery, okay, not exciting, obviously, in terms of the growth, but a very, very good business. And now we've got just CIS is exploding and you're going to see some real excitement there.

Fatima Boulani, Analyst — Citi

Great. Well, thank you so much, Dr. Tom. And this was a fantastic conversation. I appreciate it.

Tom Leighton, CEO

Very good. Thank you.