AKAMAI TECHNOLOGIES INC Q2 2025 earnings call

Thanks, and good afternoon, everyone, and thank you for joining Akamai's second quarter 2025 earnings call. Speaking today will be Dr. Tom Leighton, Akamai's Chief Executive Officer, and Ed McGowan, Akamai's Chief Financial Officer. Please note that today's comments include forward-looking statements, including those regarding revenue and earnings guidance. These forward-looking statements are based on current expectations and assumptions that are subject to certain risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied. The factors include, but are not limited to, any impact from macroeconomic trends, the integration of any acquisition, geopolitical developments, and other risk factors identified in our filings with the SEC. The statements included on today's call represent the company's views on August 7th, 2025, and we assume no obligation to update any forward-looking statements.

As a reminder, we will be referring to certain non-GAAP financial metrics during today's call. A detailed reconciliation of GAAP to non-GAAP metrics can be found under the financial portion of the Investor Relations section of akamai.com. With that, I'll now hand the call off to our CEO, Dr. Tom Leighton.

Thanks, Mark. I'm pleased to report that Akamai had an excellent second quarter, with results coming in above our guidance for revenue, margin, and earnings per share. Revenue grew to $1.043 billion, up 7% year-over-year as reported, and up 6% in constant currency. Non-GAAP operating margin was 30%, and non-GAAP earnings per share came in at $1.73, up 9% year-over-year as reported and in constant currency, and $0.15 above the high end of our guidance range. Our strong performance was enabled by the stabilization of revenue from our delivery product line, combined with the solid growth of our security and compute product lines as we continue to reposition Akamai to take advantage of the tailwinds in these markets and the substantial opportunities associated with AI. I'm especially excited about the growth and opportunity we're seeing for our Cloud Infrastructure Services portfolio.

CIS revenue in Q2 was $71 million and grew at 30% year-over-year as reported, and 29% in constant currency. We're projecting even faster growth throughout the remainder of the year as we start recognizing revenue from some large deals signed earlier this year. As a reminder, our Cloud Infrastructure Services portfolio consists of the compute and storage solutions that we've developed based on Linode, along with our EdgeWorkers product and the ISV offerings running on our cloud platform. It's the high-growth portion of our cloud computing product line, and it's where we're focusing our investments. Our rapid growth in Cloud Infrastructure Services is driven in part by our customers' desire to get their compute instances closer to end users for improved scalability and performance, and by their need to reduce cost.

This is particularly true for new GenAI applications, which are increasingly being used to drive real-time decisions, shape user experiences, and power operations. To attract and retain customers, businesses are developing a variety of AI-based apps and agents for personalization, support, search, inference, and other tasks. Akamai's globally distributed platform, spanning more than 4,300 points of presence across 130 countries, offers unique advantages for deploying such AI applications, bringing business logic and data to within milliseconds of end users globally and operating at a scale that provides a petabyte per second of throughput capacity. Already, customers have deployed AI-powered applications on Akamai Cloud for tasks such as image classification, image optimization, speech-to-text and speech-to-image, chatbots, inference engines, virtual fitting rooms, to name a few. Last month, we introduced our new AI Gateway solution to customers at an event in London.

This new solution is designed to address three of the biggest challenges that businesses encounter when they deploy large language models: AI that's too slow, too vulnerable to attack, and too expensive to run at scale. AI Gateway acts as a smart traffic controller that sits between users and the AI services deployed by our customers. Now, instead of every AI request having to travel all the way to a centralized server, Akamai makes it possible to handle many of these requests closer to the user, at the edge. Moving AI closer to the action makes each interaction faster, makes our customers' systems more energy and cost-efficient, and ultimately allows our customers to deliver a vastly better experience for their users.

The edge is also where Akamai deploys our security solutions, including our new Firewall for AI that fights prompt abuse and model compromise, as well as our bot and abuse solutions that help our publishing customers monetize their content by monitoring and controlling access by AI scraper bots. AI Gateway and Firewall for AI are prime examples of how we're bringing our expertise at the edge to the cloud to make AI faster, more secure, and significantly more affordable. They're also good examples of the synergy between our new cloud computing capabilities and our security and delivery product lines, as customers buy cloud computing from Akamai alongside security and delivery.

Examples of the many contracts we signed in Q2 that included a large commit for our Cloud Infrastructure Services are a three-year, $16 million renewal and expansion agreement with one of the largest companies at the forefront of the AI revolution, a two-year, $28 million agreement with one of the world's leading travel companies, a three-year, $18 million deal with a leading internet platform in South Korea, a $19 million deal with an internet company in Japan, and a three-year, $10 million agreement with one of the world's leading media companies. Turning now to security. Security growth was driven in part by the continued strong demand for our market-leading Guardicore Segmentation solution, as more enterprises relied on Akamai to meet compliance requirements and to defend against ransomware and data exfiltration malware.

Ransomware remains a top financial and reputational risk for enterprises, as illustrated by the highly publicized attacks that took down several major retailers in Q2. According to news reports, one attack in April on a British retailer impacted operations for at least three months, costing the company an estimated $400 million in lost revenue. A retailer in the U.S. reported $20 million in lost sales when a cyber attack took down its e-commerce platform during their Memorial Day weekend sale. In a world where attacks are finding new ways to penetrate traditional perimeter defenses, segmentation is the last and most important line of defense for major enterprises. Our market-leading segmentation solution is making a big difference for our customers. With our sophisticated threat intelligence, we've detected a wide variety of malicious ransomware attacks on commerce companies.

Customers who use our segmentation solution were able to identify these attacks and protect themselves from operational harm and financial loss. In fact, Akamai is the only vendor to be named customer favorite in the new Forrester Wave Zero Trust Platforms report, receiving perfect scores in three categories: segmentation and control, pricing flexibility, and supporting services. Our segmentation wins in Q2 included a $9 million contract for Guardicore with one of the world's leading consumer and commercial insurance providers, after Akamai demonstrated the fastest time to policy across their on-prem, AWS, and Azure environments. A $5 million contract with one of the world's largest financial services companies that selected Guardicore after struggling to modernize their environment for Zero Trust to protect aging networks for which they had no visibility. A $3 million contract, two-thirds of which is for Guardicore, with one of Japan's leading financial institutions.

Wins in other industries included deals with a leading manufacturer in the U.S., a major steel producer in Asia, and a large holding company in Latin America. In Q2, we also continued to see strong interest in our market-leading API Security solution, which earned Akamai recognition as a leader in KuppingerCole's Leadership Compass API Security and Management report released last month. Our API Security solution combines very well with our market-leading WAF and bot management solutions to provide a compelling platform for app and API protection for major enterprises. Major API Security wins last quarter included a $15 million agreement with one of North America's largest real estate fintech companies, which included $2 million for API Security. A $4 million expansion contract with one of the largest managed care organizations in North America, which included $2 million for API Security.

A $2.3 million agreement with one of the largest life insurance providers in India, which included $1.4 million for the protection of their API ecosystem as they migrated away from their previous provider. A $20 million five-year contract renewal with one of the leading fashion and home retailers in Europe included seven Akamai security solutions in addition to compute and delivery. We're very pleased to see customers increasingly utilize the full breadth of our security platform across applications, APIs, infrastructure, and enterprise Zero Trust security. We believe this illustrates the strength of Akamai's security defenses, the depth of our threat intelligence, and our close relationships with enterprise customers who rely on us as a strategic partner in security, helping them consolidate their security spending with a major vendor they trust most to protect their businesses and reputations.

Before I turn the call over to Ed, I'd like to say a few words of welcome to the two new directors on Akamai's board: Janaki Akella and Bas Burger. Janaki has held several executive roles at Google, including as Lead for Digital Transformation for Google Cloud and Chief of Business Operations. Prior to that, she was a Partner at McKinsey & Company. She brings deep expertise in cloud computing, cybersecurity, and AI, as well as general management and strategy consulting experience. Bas Burger is the CEO of BT International, the division of the U.K. Telco company that delivers global data, voice, security, and cloud connectivity solutions to multinational organizations. Bas brings expertise in leading complex global organizations, executing go-to-market initiatives focused on driving customer acquisition, retention, and expansion, and building strategic partnerships with major technology, infrastructure, and cybersecurity providers.

Their insights and counsel will be invaluable to us as we continue to innovate and expand our cloud computing and cybersecurity offerings and advance our go-to-market transformation to best capture future growth opportunities. Now, I'll turn the call over to Ed to say more on our Q2 results and our outlook for the rest of the year. Ed?

Thank you, Tom. As Tom just mentioned, we delivered very solid second quarter results with total Q2 revenue of $1.043 billion, which was up 7% year-over-year as reported and 6% in constant currency. We also had another quarter of very strong bottom-line performance with non-GAAP EPS outperforming our guidance range by $0.15. This strong non-GAAP EPS performance was driven by a combination of higher-than-expected revenue, lower-than-expected bandwidth costs, higher interest income related to the convertible debt issuance in May, and lower share count as a result of our stock buyback activity in the first half of the year. It's also worth noting that we received an unusually high amount of bandwidth and colocation credits during the quarter, resulting in a one-time positive benefit of approximately $5 million to gross margin in the second quarter. Moving now to revenue.

Compute revenue was $171 million, up 13% year-over-year as reported and in constant currency. Compute revenue was driven by continued strength in our Cloud Infrastructure Services, or CIS. CIS revenue was $71 million, up 30% year-over-year as reported and 29% in constant currency. As Tom noted, we expect the growth rate of our CIS business to accelerate throughout the rest of this year and into next year, driven by some large contracts signed earlier this year that will start generating revenue late this year and into 2026 and beyond. We continue to expect CIS ARR year-over-year growth in the range of 40%-45% in constant currency at the end of the year. Revenue from other cloud applications, or OCA, was $100 million, up 4% year-over-year as reported and up 3% in constant currency.

As we mentioned on our Q4 call in February, OCA includes many of our more mature compute products such as Image & Video Manager, Cloudlets, and LegacyNet Storage. We expect the revenue from OCA to remain relatively flat quarter over quarter for the rest of this year. However, as a result of a $7 million one-time benefit included in Q3 2024's results, we anticipate that the year-over-year revenue growth rate for OCA will take a one-time dip in Q3. As a reminder, this one-time benefit was related to the release of some deferred revenue in conjunction with the expiration of a long-term legacy compute contract. Putting this all together, we remain very excited about our opportunities for compute.

Based on the timing of revenue recognition for the larger deals I mentioned earlier, our compute growth for 2025 could be a little less than our goal of approximately 15% in constant currency for the full year. Security revenue was $552 million, up 11% year-over-year as reported and 10% in constant currency. Within security, the combined revenue for API Security and Zero Trust enterprise security was $67 million, up 48% year-over-year as reported and 49% in constant currency. These results include approximately $8 million of inorganic revenue from Noname Security. Excluding this inorganic contribution, year-over-year revenue growth would have been approximately 32%. We continue to expect security revenue growth of approximately 10% in constant currency in 2025, and we continue to expect the combined ARR for our Zero Trust enterprise and API Security solutions to increase by 30%-5% year-over-year in constant currency for 2025.

Delivery revenue was $320 million, down 3% year-over-year as reported and down 4% in constant currency, well above our expectations. We're very encouraged by the continued improvements in both pricing and traffic growth we observed during the first half of the year. International revenue was $516 million, up 10% year-over-year or 8% in constant currency, representing 49% of our total revenue in Q2. U.S. foreign exchange fluctuations had a positive impact on revenue of $17 million on a sequential basis and a positive $8 million impact on a year-over-year basis. Moving now to profitability. In Q2, we generated non-GAAP net income of $251 million, or $1.73 of earnings per diluted share, up 9% year-over-year as reported and in constant currency, and $0.15 above the high end of our guidance range based on the items I mentioned earlier. Finally, our Q2 CapEx was $214 million, or 21% of revenue.

Moving to cash and our capital allocation strategy. As of June 30, our cash, cash equivalents, and marketable securities totaled approximately $1.6 billion. As a reminder, during the second quarter, we used cash on hand and funds available under our revolving credit facility to fully repay $1.15 billion of our outstanding convertible senior notes that matured on May 1, 2025. Following this repayment, we issued $1.725 billion in senior convertible notes with the maturity date of May 15, 2033, and with a coupon of 25 basis points. As part of the offering, we incurred net cost of $275 million from note hedging and warrant transactions while concurrently spending $300 million on stock buybacks. It's worth noting that in the second quarter, we used approximately $250 million of the proceeds from this offering to pay off prior borrowings on our revolving credit facility.

The net proceeds of approximately $900 million from this offering have been invested in highly liquid marketable securities, currently yielding approximately 4% on a weighted average basis. As it relates to return of capital, as I just mentioned, we spent approximately $300 million to buy back approximately 3.9 million shares during the second quarter. We ended the second quarter with approximately $1.2 billion remaining on our current repurchase authorization. Year to date, we spent $800 million to buy back approximately 10 million shares. Going forward, our intention remains the same: to continue buying back shares to offset dilution from employee equity programs over time and to be opportunistic in both M&A and share repurchases when market and business conditions warrant. Before I provide our Q3 and full-year 2025 guidance, I want to touch on some housekeeping items.

First, despite initial concerns, the likelihood of a complete TikTok ban in the U.S. appears to be less likely. With this in mind, we are now including domestic revenue from TikTok in our Q3 and full-year 2025 revenue guidance. Second, regarding compute revenue, as I mentioned earlier, last year's Q3 results included a one-time $7 million benefit that will not reoccur in Q3 2025. Third, as it relates to gross margin, we are projecting an increase in colocation and related costs starting in Q3, as we anticipate additional compute capacity coming online during the quarter. This will result in roughly a 1% increase in cost of revenue in Q3 compared to Q2. In addition, for our qualified compute partner sales, or QCPs, we occasionally bundle third-party products as part of a total solution for customers.

In certain situations, we must record the gross revenue from these sales and the associated costs. The gross margin on the partner resales is typically lower than our company gross margin. Therefore, as qualified compute partner revenue increases, we expect it will lower our overall gross margin. We anticipate the sales of QCP partner solutions will impact gross margins by approximately 70 basis points this year. It's worth noting the primary advantage of working with QCP partners is their solutions do help drive additional higher margin CIS revenue. Fourth, as we previously discussed, we are investing to strengthen our go-to-market approach. We're increasing our sales rep hunting capacity to be more proactive in finding and securing new business, and we're adding experienced specialists to help support the sales of our new security and compute products.

In addition, we're also growing our channel organization to expand our partnerships and open up potential new revenue growth opportunities. These investments are crucial to our long-term success, but it will take time for the incremental headcount to ramp and start delivering results. As a result, we anticipate that our operating margin in the second half of the year will be lower than in the first half. Finally, on July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act. The Act includes significant provisions such as the permanent extension of certain existing provisions of the Tax Cuts and Jobs Act, modifications to the International Tax Framework, and the restoration of favorable tax treatment for certain business provisions. The new legislation has multiple effective dates, with certain provisions effective in 2025 and others implemented through 2027.

We are in the process of evaluating the Act, but we do not expect it will have a material impact on our tax rate in 2025. With those factors in mind, I'll move to our Q3 guidance. For Q3, we are projecting revenue in the range of $1.035 billion-$1.050 billion, or up 3%-4% as reported and up 2%-4% in constant currency over Q3 2024. Current spot rates foreign exchange fluctuations are expected to have a positive $3 million impact on Q3 revenue compared to Q2 levels and a +$6 million impact year-over-year. At these revenue levels, we expect cash gross margins of approximately 72%-73%. Q3 non-GAAP operating expenses are projected to be $327 million-$332 million. We expect Q3 EBITDA margin of approximately 41%.

We expect non-GAAP depreciation expense to be between $139 million-$141 million, and we expect non-GAAP operating margin of approximately 28% for Q3. Moving on to CapEx, we expect to spend approximately $227 million-$237 million. This represents approximately 22% of our projected total revenue. Based on our expectations for revenue and costs, we expect Q3 non-GAAP EPS in the range of $1.62-$1.66. This non-GAAP EPS guidance assumes taxes of $54 million-$55 million based on an estimated quarterly non-GAAP tax rate of approximately 19%. It also reflects a fully diluted share count of approximately 145 million shares. Turning to the full year, for 2025, we now expect revenue of $4.135 billion-$4.205 billion, which is up 4%-5% as reported and 3%-5% in constant currency.