Akamai Technologies Q3 2026 Earnings Call Transcript

Akamai Technologies (NASDAQ:AKAM) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Akamai Technologies secured an $11.6 billion, seven-year commitment with Anthropic, bolstering its Cloud Infrastructure Services (CIS) segment and contributing to $14 billion in multi-year commitments signed this year.

Despite minor supply chain delays, Akamai anticipates CIS revenue to more than double in 2027, reaching $1.1 to $1.3 billion, with overall company revenue growing 17-22% over 2026 and further acceleration expected in 2028.

The company reports strong security revenue growth of 9% year-over-year, driven by demand for its web app firewall, API security and Guardicore segmentation solutions.

Akamai’s strategy involves leveraging its globally distributed platform to support AI workloads with CPUs, which it claims offer cost and power efficiency advantages over GPU-centric neo clouds.

The company provided detailed financial guidance, including a projected Q4 revenue range of $1.145 to $1.170 billion and a full-year 2026 revenue expectation of $4.44 to $4.465 billion, marking a 6% growth.

Management expressed confidence in its ability to meet future revenue targets, citing secured power, space and substantial hardware for ongoing and future contracts.

Akamai highlighted its strategic focus on cross-selling opportunities between its compute, security and delivery solutions, emphasizing the competitive advantage of its integrated platform.

Full Transcript

OPERATOR

Good afternoon and welcome to the Q3 2026 Akamai Technologies earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded.

I would now like to turn the conference over to Mark Stoutenberg, Head of Investor Relations. Please go ahead.

Mark Stoutenberg (Head of Investor Relations)

Good afternoon everyone and thank you for joining Akamai’s third quarter 2026 earnings call. Speaking today will be Tom Leighton, Akamai’s Chief Executive Officer, and Ed McGowan, Akamai’s Chief Financial Officer. Please note that today’s comments include forward-looking statements that include 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 November 5, 2026 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 GAAP to non-GAAP reconciliation is available in the Investor Relations section of akamai.com under Financials. With that, I’ll now hand the call off to our CEO, Dr. Tom Leighton.

Thomson Leighton (Chief Executive Officer)

Thanks Mark. Akamai continued to make outstanding progress in the development of our Cloud Infrastructure Services, or CIS, in the third quarter. Most notably, we signed an $11.6 billion commitment over seven years with Anthropic to support their CPU workloads with our distributed infrastructure and software. This brings the total of multi-year commits for CIS signed this year to more than $14 billion. The total includes an earlier large contract with Anthropic, two large deals with leading AI companies and numerous multimillion-dollar deals with major enterprises around the world.

I’m pleased to report that we’re making good progress in delivering on these contracts. Two of the first three large deals are now generating revenue and we anticipate that the third will begin generating revenue later this quarter. We did encounter some modest supply chain and third-party data center delays with two of the deals and so our revenue outlook for Q4 will be less than expected. These issues have since been resolved, and they won’t impact our outlook for 2027.

In fact, we now anticipate that our CIS revenue will more than double in 2027 to $1.1 to $1.3 billion, and that Akamai’s overall revenue growth rate will dramatically accelerate as a result, with total 2027 revenue growing 17 to 22% in constant currency over 2026 levels, and we expect further acceleration in 2028, with our overall revenue growing beyond $7 billion. As CIS becomes a larger portion of our revenue, we expect it to have a strong positive impact on our margins and EPS growth.

In particular, we believe that the large deals we’ve signed this year will contribute at an aggregate adjusted EBITDA margin of about 75% and a non-GAAP operating margin of approximately 30% when they’re fully ramped. There are several reasons why we think we can operate our CIS business with strong margins at scale. First, it’s important to understand that we’re not talking about bare metal here. In fact, we don’t even offer bare metal as a service. We sell compute capacity through our infrastructure-as-a-service platform, which consists of virtual machines, managed Kubernetes, storage and networking. This keeps our capacity elastic across customers and generates substantially more revenue per megawatt or dollar of capex than a bare metal contract.

In particular, we expect to generate about $22 million of revenue per megawatt of contracted power for the large deals we signed this year. Moreover, we’re seeing that as we’ve grown our presence in the market, the pricing we can command has improved. In fact, the unit pricing in recent deals is much higher than in comparable deals we signed earlier in the year. We also have several cost advantages because of our expertise and the unique nature of our cloud platform. For example, we operate one of the world’s largest backbones, larger even than many Tier 1 carriers, which reduces our networking costs and allows us to leverage scarce data center space that may not be accessible to others. Our globally distributed platform enables us to deploy compute into a multitude of smaller locations instead of just a few large data centers.

This is another factor in helping us get the power and colo we need to grow, and at a lower cost than using very large footprints in expensive core data centers. We’ve spent many years optimizing our software and operations so that we can more efficiently handle large volumes of customer data. We’re one of the largest when it comes to moving data on the Internet, since most of the world’s largest brands, including several hyperscalers, use Akamai to secure and deliver their content.

An even more important reason that we can sustain good margins at scale is the types of servers we use in our cloud. While we support a variety of GPUs for our customers, the vast majority of servers that we’re deploying, well over 90%, are CPUs — in fact, mostly the same type of CPU that we use for our security and delivery services. This is important because CPUs are becoming much more widely used for AI. That’s because they tend to be more versatile, more cost effective and longer lasting than GPUs.

The CPUs we’ve deployed in the past are continuing to provide value across our platform even seven to ten years later. Indeed, the largest cloud contracts we signed this year guarantee revenue for these CPUs for seven years. Being able to use the same servers for compute, security and delivery further increases their useful lifespan and makes our platform more efficient. At the same time, CPUs generally require much less power than GPUs, and so the number of megawatts we need to power our cloud is much less than providers like the neo clouds who rely more heavily on GPUs.

This means that we spend more capex per megawatt than the neo clouds, and that’s a good thing for Akamai shareholders. Power is scarce and expensive, and we need less of it in relation to our capex spend than others need for their infrastructure. There are many reasons why we think our rapidly growing CIS business will be very profitable for Akamai, but probably the most important reason is that we have a compelling and highly competitive solution in the cloud marketplace. Not only does this help with profitability, but it helps ensure that Akamai will have enduring growth even if resources that are in short supply today, like power equipment and data center space, become more plentiful in the future.

There are many reasons why the world’s most important companies are choosing Akamai for their AI and cloud computing needs. One of the most important is that with more than 4,000 points of presence in 130 countries, we can get our customers’ compute workloads closer to users and devices wherever they are in the world. And being closer means that we can provide lower latency and higher throughput, which is important for a wide range of use cases such as interactive video, avatar rendering, conversational voice agents for customer service, speech recognition, translation, robotics, video processing, and real-time alerting.

This is a key reason why even the hyperscalers use Akamai cloud for some of their latency-sensitive applications. Another big advantage for Akamai is that we can package our compute solutions together with our market-leading solutions for security and delivery, so enterprises can use one platform to power, protect and deliver their most important applications with great performance and vast global scale. This also helps with cross-sell. We can sell compute into our large base of security and delivery customers and, vice versa, we can sell our security and delivery solutions to new cloud customers.

Being able to secure our customers’ workloads is especially important in the age of AI. Not only can we help protect our customers from AI-enabled attacks, but we can also help keep our customers’ agents from going rogue and causing unintended harm. Reliability is another key advantage for Akamai when enterprises are choosing a cloud provider. As a great proof point, we help the world’s largest financial institutions achieve five nines of uptime, which means less than 10 minutes of downtime in a span of two years. This is not easy to do — in fact, it’s very hard and takes extraordinary expertise, dedication and experience to achieve. Akamai also provides world-leading professional services and customer care with thousands of incredibly knowledgeable and experienced technical experts to help our customers solve their most difficult challenges.

The support we offer customers is a key reason why we win business from customers who leave competitors. And finally, Akamai has built a very strong reputation over 25 years as being an innovative and trustworthy company to work with. We’re not a newcomer. We have decades of experience in helping the world’s largest and most demanding companies navigate the rapidly changing technology landscape. Speaking of innovation, just last week we expanded our cloud portfolio with the launch of Akamai Inference and Akamai Agent Sandbox. These new services enable enterprises to build and tune open-weight models based on their proprietary data and run agents within strictly enforced boundaries, all secured and powered on Akamai’s AI-optimized cloud platform. They add the inference and execution layers that turn our AI infrastructure into a full AI stack to support training, real-time inference and agentic workloads across the world.

Akamai Inference and Agent Sandbox are also integrated with our Firewall for AI and new agent security services to make sure that our customers’ AI stays safe. Turning now to security, I’m pleased to report that security revenue in Q3 grew 9% year over year as reported and 10% in constant currency. Growth was led once again by strong demand for our market-leading web app firewall, API security and Guardicore segmentation solutions. We were especially pleased to see Akamai recognized as a leader in each of these three product areas in reports last quarter from industry analysts at IDC and Forrester.

AI continues to be a tailwind for our security solutions as more AI agents act on behalf of users and enterprises, as more employees put sensitive data into AI tools, as more attacks use AI to grow in scale and sophistication, and as more AI agents and bots get better at appearing to be human. Akamai security solutions help companies protect their applications, infrastructure and workforce from AI-related vulnerabilities and attacks. For example, our web app firewall stops malicious traffic before it can reach an application and it patches exposure points automatically.

Our bot and agent control solution unmasks agents to discover their true origin and intent and then takes the appropriate action on behalf of our customers. Our API security solution finds and defends Shadow AI and APIs before sensitive data can be stolen, and our Guardicore segmentation solution contains the damage if and when something bad does get in. In summary, we believe that Akamai has a unique offering in the cloud marketplace with superior performance and security, global scale and strong financials. Our unique cloud platform enables enterprises to build and scale the next generation of AI applications from model training in the core to fast inference at the edge, all protected by Akamai’s world-leading security solutions and scaled with Akamai’s world-leading delivery services. As a result, we believe that we’re ideally positioned to benefit as businesses adopt AI at scale.

Already this year we’ve closed deals to power and protect mission-critical applications for the world’s leading frontier model companies, leading AI equipment companies, major open-source model companies, companies building the next generation of AI applications and the world’s leading enterprises. Regardless of who ultimately become the dominant AI players and how the AI landscape evolves, we believe that the breadth of our AI customer base combined with our very strong enterprise relationships and our unique cloud platform will drive substantial growth for Akamai well into the future.

I’ve never been more confident in Akamai’s ability to power and protect an AI-driven world. Now I’ll turn the call over to Ed, who will go through our financial model and outlook.

Edward McGowan (Chief Financial Officer)

Thanks, Tom. Before I begin reviewing Q3 results and covering Q4 guidance, I want to add to some of Tom’s commentary regarding Cloud Infrastructure Services, and more specifically the $14 billion of multi-year CIS commitments signed and announced this year. First, I’ll start by addressing some questions we have heard from investors regarding the profitability and return on investment related to these customer wins. Today we posted a slide on the quarterly results section of our Investor Relations website that illustrates the expected aggregate returns when the full $2.2 billion of annual revenue from these $14 billion of signed contracts is fully ramped and being recorded in our results. In addition, the slide shows our calculations for the expected after-tax internal rate of return of approximately 13% and expected non-GAAP average annual adjusted return on invested capital of approximately 15% from these deals.

As you can see from the slide, we expect the aggregate total revenue once fully ramped to be approximately $2.2 billion a year and to deliver an aggregate of approximately 75% adjusted EBITDA margin and approximately 30% non-GAAP operating margin. As stated previously, we expect this revenue to begin ramping in Q4 2026 and to be fully ramped by the end of 2028. Second, as Tom mentioned, we have begun recognizing revenue from two of the first three major CIS contracts representing $2.8 billion in total contract value. We are in the final testing phase on the third contract and we expect it to start generating revenue soon. As Tom mentioned, revenue for two of these deals has been delayed due to some supply chain and third-party data center delays. I’m happy to report these issues have been resolved. As a result of these delays, we expect approximately $30 million of revenue will shift from Q4 into 2027.

I want to be very clear, any timing delays do not impact the total revenue over the contract period or result in any penalties. They simply adjust the revenue recognition timing across periods. Next, regarding the recent $11.6 billion deal announced a few weeks ago, we are pleased to confirm that we have secured and contracted for all the necessary space and power, or colocation, required to deliver the full contract value, with these sites expected to be available to us throughout the revenue ramp period previously outlined. In addition, we’ve secured approximately 70% of all the necessary hardware, memory, and other components needed to deliver on this contract, including $1.7 billion of memory and other critical items in Q4 2026.

As a reminder, this $11.6 billion contract has a pricing adjustment mechanism that is designed to address any possible price changes in the hardware, memory, and other components not ordered. Therefore, our margin is protected if prices happen to rise between now and when we place the orders for the remaining hardware and other components. Finally, looking ahead, we expect CIS revenue of $1.1 to $1.3 billion in 2027, which will help drive total company revenue growth in the range of 17% to 22% in constant currency year over year, and we expect total company revenue growth to further accelerate the following year, surpassing $7 billion in 2028. It’s important to point out the $7 billion expectation in total company revenue in 2028 assumes no additional orders from Anthropic beyond the $11.6 billion we announced in late September, meaning we do not assume any revenue from the $9 billion option related to the Anthropic relationship.

In conclusion, we are very confident in our ability to deliver on the revenue we outlined today. While quarterly revenue may fluctuate slightly against the initial schedule for some of these large contracts, any shifts in timing will have no impact on the total revenue or profitability over the life of these agreements. Now, moving on to Q3. Total revenue in the third quarter was $1.122 billion, up 6% year over year as reported and up 7% in constant currency. Cloud Infrastructure Services, or CIS, revenue was $109 million, representing 34% year over year growth as reported and 35% in constant currency. Security revenue maintained strong momentum with revenue of $622 million, up 9% year over year as reported and 10% in constant currency. The strength in the third quarter continued to be driven by our fast-growing API Security and Guardicore segmentation solutions.

Moving to Delivery and Other Cloud Applications, revenue was $391 million, down 3% year over year as reported, and in constant currency. International revenue was $563 million, up 7% year over year, or up 9% in constant currency, representing approximately 50% of total revenue in Q3. Foreign exchange fluctuations had a negative impact on revenue of $1 million on a sequential basis and negative $7 million on a year over year basis. Moving to profitability, in Q3 we generated non-GAAP net income of $262 million for $1.77 of earnings per diluted share, down 5% year over year as reported and down 2% in constant currency. Non-GAAP operating margin for Q3 was 25%, in line with our expectations, and Q3 capex was $464 million, or 41% of revenue. Third quarter capex came in slightly below guidance, primarily due to the timing of equipment deliveries shifting into the fourth quarter.

Moving to cash and our capital allocation strategy, in Q3 we did not repurchase any stock. Year to date, we have repurchased roughly 5 million shares for a total of approximately $616 million. We ended the third quarter with approximately $565 million remaining on our current repurchase authorization. As of September 30th, we had approximately $4.2 billion of cash, cash equivalents, and marketable securities. I’d like to touch on our current capital plan and funding outlook.

Based on our current plan, we currently expect to fund our CIS expansion and broader growth investments through 2028, as well as address our 2027 convertible note maturity primarily through our existing cash balance and expected operating cash flows, which may be supplemented by measured incremental financing activities as appropriate. We remain highly disciplined in our approach to capital allocation. To the extent we access external capital, we will evaluate flexible, cost-effective structures with a clear focus on preserving shareholder value.

As our CIS customer commitments ramp, we expect a meaningful increase in our operating cash flow beginning in 2028, which we expect will enhance our ability to fund our operations and investments from internally generated cash and reduce leverage over time. Before providing our fourth quarter and full-year 2026 guidance, I’d like to touch on a few housekeeping items. First, as a reminder, our Q4 2025 results included an unusually high $18 million contribution from Security license revenue. We expect this year will return to a normal level of $4 to $5 million of license revenue in the fourth quarter. Second, regarding Q4 operating expenses, as is typical for our business, we expect them to be higher than in Q3.

The main driver is the seasonal jump in sales commissions as most of our successful reps achieve their annual quota accelerators. In addition, in Q4 this year, we expect additional margin pressure this quarter driven by the ramping of CIS expense, mainly colocation costs ahead of revenue. Third, we remain on track to spend approximately $1.7 billion in Q4 2026 to secure and pre-purchase critical supply chain components, notably memory, to support our large Anthropic contract we announced a few weeks ago.

This will substantially increase our capex spend in Q4 and lower our interest income for the quarter. As a reminder, depreciation of this equipment will begin when we start to recognize revenue throughout 2027 and in 2028. And finally, going forward, we do not plan on announcing every large CIS transaction unless mandated by SEC disclosure rules. We will continue to highlight notable commercial wins as part of our regular quarterly narrative, and we will keep investors updated as our capital deployment priorities and revenue dynamics continue to evolve.

Moving now to guidance for the fourth quarter, we are projecting revenue in the range of $1.145 to $1.170 billion, up 5% to 7% as reported, and in constant currency over Q4 2025. At current spot rates, foreign exchange fluctuations are expected to have a negative $4 million impact on Q4 revenue compared to Q3 levels and a negative $5 million impact year over year. At these revenue levels, we expect cash gross margin of approximately 70%. Q4 non-GAAP operating expenses are projected to be $368 to $378 million.

We anticipate Q4 adjusted EBITDA margin of approximately 38%. We expect non-GAAP depreciation expense of $165 to $167 million. We expect non-GAAP operating margin of approximately 24%. With the overall revenue and spend configuration I just outlined, we expect Q4 non-GAAP EPS in the range of $1.5 to $1.7. The EPS guidance assumes taxes of $48 to $54 million based on an estimated quarterly non-GAAP tax rate of approximately 18%. It also reflects a fully diluted share count of approximately 149 million shares.

Moving to capex, for the reasons I highlighted earlier, we expect to spend approximately $2.445 to $2.645 billion in the fourth quarter. Looking ahead to the full year 2026, we expect revenue of $4.44 to $4.465 billion, which is up 6% as reported and up 5% to 6% in constant currency. For Cloud Infrastructure Services, we are now expecting revenue growth of 40% to 42% year over year in constant currency. We continue to expect Security revenue growth in the high single digits on a constant currency basis in 2026. And for Delivery and Other Cloud Apps, we continue to expect a decline in the mid-single digits year over year on a constant currency basis.

At current spot rates, our guidance assumes foreign exchange will have a positive $5 million impact to revenue in 2026 on a year over year basis. Moving to operating margins for 2026, we are estimating a non-GAAP operating margin of approximately 25% as measured in today’s FX rates. Turning to capex, at this time, we anticipate that our full-year capital expenditures will be in the range of $3.462 to $3.662 billion. Moving to EPS for the full year 2026, we expect non-GAAP earnings per diluted share in the range of $6.47 to $6.68. This non-GAAP earnings guidance is based on a non-GAAP effective tax rate of 18.5% and a fully diluted share count of 148 million shares.

With that, I’ll wrap things up, and Tom and I are happy to take your questions. Operator.

OPERATOR

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. In the interest of time, please limit yourself to one question and one follow-up. At this time, we’ll pause momentarily to assemble the roster.

The first question will come from John Difucci with Guggenheim. Please go ahead.

John Difucci (Analyst)

Thank you. So thanks for all the information, Ed and Tom. This is great. It’s really helpful. I think you made it clear last quarter not to expect acceleration of CIS in 3Q, and it was nice of you to see, not to rub it in our faces, but somehow the consensus was above, did show acceleration. But you pretty much did what you said you were going to do this quarter. But now you lowered ’26 revenue, which you talked about due to the supply chain issues.

Can you give more detail on the near-term bottlenecks here? And related, we appreciate the long-term outlook, but how confident are you in that 2027 CIS revenue, and can you help a little on how that ramps through the year? Assuming we all listen to what you’re telling us. Thanks.

Thomson Leighton (Chief Executive Officer)

Yeah, good question. These were minor kinds of things with the data centers. You can think of it like a punch list on a construction project. Not uncommon. And we normally plan for some delays. They were worse in this case than we planned for. Not a big deal, couple months of delay, no loss of revenue. It just pushes to next year. We are very confident in, in our estimates next year. And you can see from the ranges that we’ve accounted for pretty substantial delays if they were to take place.

And there’s upside, you know, if that doesn’t happen, but very confident next year. And ramping, you want to think about it ramping, you know, heavily through the year. And Ed, do you want to talk a little bit more about that?

Edward McGowan (Chief Financial Officer)

Yeah. Hey, John, thanks for the questions. Yeah. The way to think about it, I’ll break it in half for you because again, quarters, you may have a little shift from quarter to quarter, but think about 25 to 30% in the first half, 70 to 75% in the back half. As you’re thinking about sort of the ramping, you know, take the total amount and just sort of spread it out that way. But I think it’s important you asked the question about how confident we are.

We made some commentary here. A, we’re starting to recognize revenue already. That’s a big step. Number two, we have all of the colo that’s needed for the large transaction we announced a couple of weeks ago. That’s pretty significant because as you know, colo is a tight market, but we’ve got it all signed up and ready to go. We’re just waiting for it to be delivered to us over the ramp period.

John Difucci (Analyst)

That’s great.

Edward McGowan (Chief Financial Officer)

We have all the approvals needed so we don’t get caught up in some of the issues people are worried about with the politics. That’s not an issue for us.

John Difucci (Analyst)

And Tom, that was going to be my second question. There’s obviously right now a lot of fear in the market, especially when it comes to the build out of AI infrastructure. So thanks for that ROIC slide. That’s really helpful. But math aside, and to be clear, you’re pretty much doing inference only at colo facilities. I say only, you’re not building these huge data centers out in the world. So this can be done a lot more quickly than the large data centers used for training.

So I guess, I think, anyway, tell me what’s right or wrong. It seems that the risk would be lower. There’s still risk in execution, but risk you can’t control is lower. Like you’re talking. Tom, the permitting, can you talk a little bit more about any risk outside your control, including power, real estate and permitting, and how that comes into your business versus others doing mainly training and building out large data centers?

Thomson Leighton (Chief Executive Officer)

It’s a great point. And they’re very, very different businesses with very, very different risk profiles. We have secured the power and space. It is already permitted. Not only that, we’re not talking about one or two locations, so that if something unexpected did happen, you got a big hit. With Akamai’s approach and architecture, we’re in a lot of spaces that are much smaller. And so if, yes, some location has some small delay, not going to impact us in the big picture.

Also makes it a lot easier for us to get the space because it’s small chunks. It’s not caught up in some permit for a nuclear power plant next door. And you’re right, we are not in the business of training the big frontier models. We don’t buy that kind of equipment. It’s a totally different approach. As I said, we’re doing mostly CPUs. We do training for enterprise-size models and post-training and inference. And, you know, as much, most of the time you’re not even using GPUs for that.

And this is where I think a lot of the future market is going to be, which is why we’re focusing on it. So it’s much more profitable for us. Much lower risk profile and I really don’t see a lot of execution risk in what we’re projecting for next year. This is stuff that, that we know how to do. And yeah, we had a couple months, okay. You know, of a push, not really a big deal. And I don’t think that’s any impact on next year.

OPERATOR

The next question will come from Samik Chatterjee with JPMorgan. Please go ahead.

Samik Chatterjee (Analyst)

Hi. Thanks for taking my questions. I know you said you won’t announce sort of the incremental maybe deals or wins going forward for the CIS business, but maybe if you can comment on the pipeline of demand that you’re seeing right now and when you sort of tie that together with your comments about capital raise. Should we expect a capital raise only if that’s associated with more incremental wins, or maybe if you can clarify sort of how to think about pipeline conversion vis-à-vis capital raise, that will be helpful and have a follow up.

Thomson Leighton (Chief Executive Officer)

Yeah, we have a very strong pipeline, you know, with hundreds of customers, including, you know, some pretty substantial accounts. And we’re very optimistic about being able to close that business. And we have contracted for the power and data center space to accommodate that. And I think we are in a very good position, as Ed said, with our capital, our ability to raise a modest amount of capital if we find that we need that and to do that, in a way as we’ve always done, that is very cognizant of shareholder interest.

Samik Chatterjee (Analyst)

And I think in the prepared remarks you did mention you’re seeing the recent deals at a much stronger premium than the 22 million per megawatt that you had signed some of the earlier recent deals on. Can you just help us think about sort of the magnitude of the premium we are seeing and how does that sort of change the returns that you are putting sort of showing us in the slides today? What are the sort of magnitude or difference that you’re seeing in the market?

How does that change the difference between the IRR to the cost of capital that investors should expect? Thank you.

Thomson Leighton (Chief Executive Officer)

Yeah, I’ll start and then Ed will get into the details on this. But yeah, apples to apples, we are seeing improved pricing and I think part of that is because we’re getting a lot better known in the marketplace, which is very helpful. And Ed, do you want to talk about the details on the IRR and the economics?

Edward McGowan (Chief Financial Officer)

Yeah, sure. I mean, we gave you those numbers just because I know there’s been a lot of debate on terms of how you would calculate it. So we provided more information so you can calculate it and, you know, those are good returns for us, obviously. Now I want you guys to keep in mind these are for the largest volume and the longest term. And the standard in the industry today is if you were to go buy something uncommitted, you’re going to pay the highest rate.

So the no commitment, low volume, you have the highest rate. So these are the lowest prices you’re going to see on a unit economic basis. So look at that as sort of your floor as far as what pricing is. So if somebody’s going to commit to half the amount or a third of the amount and a tenth of the volume, they’re not going to get anywhere near those prices. So that’s pretty good to see. Like for the largest possible deal to lock in that kind of return for seven years is a very, very good business for us and for our shareholders.

And the deals that are coming in are coming in higher. Now keep in mind this business, a lot of what drives the unit pricing at the other side, like on the sort of buy side, is based on the component cost. So as component costs are going up, the market accepts higher prices. So the margins are insulated in the fact that if we see colocation costs go up or if we see component costs go up, we can raise our pricing for the next deals we lock in. As we talked about these long-term deals, we’ve got mechanisms in place to deal with any pricing, but usually what happens is we’ve got the colo locked up for a long period of time and we’ve got the equipment purchased.

So we’re doing a really good job of securing margins and what you see there on those big deals is the lowest you’re going to typically see.

OPERATOR

The next question will come from Jackson Ader with KeyBank. Please go ahead.

Jackson Ader (Analyst)

Great. Thanks for taking our questions, guys. Ed, if I can follow up just on the margin, you know, I appreciate the first half, second half look for revenue build next year. But what is, you know, is the margin going to lag like it is here in the fourth quarter? Before that revenue really takes a step up, any direction would be helpful.

Edward McGowan (Chief Financial Officer)

Yeah, sure. So just to give you a little bit more picture, generally when you do these big build-outs, you’re going to have your colocation cost come in ahead of revenue. And the other issue is when you’re doing the long-term colo commitments, they do come with price escalators. So you do have to put, you know, the straight-line effect of that. So what ends up happening is you end up taking a non-cash charge because you’re actually booking a cost higher than what you’re paying for with colocation.

We estimate that’ll put about a point or two of pressure on margins next year. That said, I think we’ll bottom out probably in the first half in terms of margins, maybe a point or so lower from where we are now. And we should be operating in the mid-20s, keeping in mind that you’ve got this one to two point non-cash pressure on the margin that sort of works itself out over time. The other thing is just some of these build-outs, there are other costs, what we call network build and support. We have some one-time costs for things like freight, small equipment, consulting contractors that go and build and stuff like that. So that can also put some near-term pressure. But as you can see with the slide we provide you, what you’re going to see happen here is margins sort of bottom out in the first half of next year, start to improve, and we’re going to really see a ton of leverage on the EBITDA margin that should expand pretty significantly through ’28.

Jackson Ader (Analyst)

Got it. Okay, great. That is really helpful. And then Dr. Tom, the capex per megawatt being higher than the neoclouds, but that’s a good thing. I just need a quick explanation of that. Thank you.

Thomson Leighton (Chief Executive Officer)

That is a great question. You know, and capex per megawatt is higher at Akamai because we use less megawatts for our capex. And so if your denominator gets smaller because you’re using less power, the ratio of capex to megawatt gets bigger. So the less power we use and the more efficient we are, the higher our capex per megawatt is. In fact, say we could power our servers with no power, we would have infinite capex per megawatt. And so the trouble people get into when they model based on per megawatt is that your capex per megawatt, you think, oh, that should be small.

In fact, you want it to be large because that means you’re using less power for your infrastructure. So it is a big advantage for us. Now, revenue per megawatt matters, capex matters and we have very good revenue per megawatt. Does that help?

Edward McGowan (Chief Financial Officer)

You tend to see higher revenue per megawatt in CPU deals than you do in GPU deals. So you could have two identical deals. One that’s, say, 15 million a megawatt with, say, 1 megawatt is going to cost you about 4 million in colocation. So you have 4 million in depreciation, a million of other costs that get you to a 40% margin. Well, you could be getting 25 million per megawatt on a CPU deal with, again, 4 million of colo costs, 10 million in depreciation, a million of other costs and that’s 40% margin.

So you got to keep in mind that you do get higher revenue per megawatt out of your CPUs than GPUs.

OPERATOR

The next question,

Jackson Ader (Analyst)

GPUs are more power efficient so you’re in a better position.

OPERATOR

The next question will come from Jeff Van Re with Greg Hallam. Please go ahead.

Vijay Homan

Hey guys, this is Vijay Homan on for Jeff. First one for me, it just looks like the decline in delivery and other cloud apps kind of moderated a little bit this quarter. Just any update on delivery, pricing or bit growth and then expectations for those two factors, how they’ll evolve over the next six to 12 months.

Thomson Leighton (Chief Executive Officer)

Yeah, good question. Really nothing on pricing? I’d say we’re probably holding pricing better now than we have for a long period of time. And actually if you look at the last four quarters, you see kind of the delivery in cloud apps is sort of stable, right? It’s within plus or minus a million or two every quarter. And that’s usually, you know, seasonality. There’s some, you know, seasonality in there. Maybe there’s a big renewal in there, but generally speaking it’s kind of flattish.

And I’d say going forward I think we’re sort of in that stable period, you know, down a point or two or three or whatever, but it’s, you know, it’s stabilizing. Pricing’s getting a little bit better and we are being very selective as we move forward here with our, especially in our big media business. Integration is going great and already a lot of sales, including with some big-name enterprises, including a leading satellite and streaming TV company in the US is using it. And I think there’s a very strong potential for growth there. And what LayerX does is it makes sure that your employee workforce is not uploading company secrets and data into prompts when they’re using AI, among other things. So it makes sure your workforce stays safe as they’re using AI.

And the feedback in the analyst community, very strong. And the customer feedback there. Recent report we came out very well with a score of 4.8 out of 5 in terms of customer satisfaction. So, you know, early days of course, but good integration and strong results so far.

OPERATOR

The next question will come from Sanjit Singh with Morgan Stanley. Please go ahead.

Abhishek Murley (Analyst)

Hi, this is Abhishek Murley on for Sandra Singh. Thanks for taking the question. Maybe one for Ed. Previously you’ve spoken to a willingness to drop below investment grade, and I understand some of that is kind of a mechanical thing as these deals ramp and the EBITDA disclosure is helpful for that. Curious how you’re thinking about that dynamic going forward, just given the recent uptick in scrutiny around financing and anything you can share around cost of debt or cost of equity.

Edward McGowan (Chief Financial Officer)

Yeah, sure. You broke up there a little bit. I didn’t quite hear exactly what you said. You said we made a comment about investment grade. Can you just repeat that part?

Abhishek Murley (Analyst)

Yeah, sure. Previously you’ve mentioned a willingness to potentially not or to drop below investment grade. So I’m just curious how you’re thinking about that around the broader scrutiny around financing and whether you guys are still open to that possibility.

Edward McGowan (Chief Financial Officer)

Yeah, I mean, just to be clear, I mean our goal would be to maintain investment grade as long as we certainly can. You know, if there is a time that you had to raise additional capital to go below investment grade, which we don’t think we’re in that position. But maintaining investment grade is helpful. It’s actually for our colo investments that we make with our colo providers. Having that is helpful for us to be able to get space and power. We’re more attractive as a customer to those customers.

So obviously we’ve been investment grade for a very long time. We’re going to try to keep it that way. If there was a reason and you were to go and raise capital, then you happen to get a notch down or something like that, we would work as quickly as possible to get back to investment grade. And you bring up a good point. The expansion of EBITDA is interesting because that’s the primary metric. And if you look at what our leverage ratio is now, just the EBITDA that we’re going to be adding in the next two years is going to substantially increase our ability to buy and remain in investment grade territory, so we get an enormous amount of flexibility.

So I think we’re in great shape.

Abhishek Murley (Analyst)

Super helpful.

OPERATOR

Thank you. The next question will come from James Fish with Piper Sandler. Please go ahead.

James Fish (Analyst)

Hey, guys, I did want to go back to Mr. Difucci’s earlier question around confidence here, just because, look, I get this is a new business for you guys, but you guys did talk about a deceleration on the last print for compute. But let’s face it, we’ve kind of missed compute or only been in line on virtually every quarter that you’ve had this business, and now you’re putting out a target that’s well above what we were all expecting. So what’s giving the confidence or why do you feel the need at this stage to put this out when, frankly, we haven’t seen you guys hit your corporate or your compute numbers really yet?

Maybe, Ed, walk us through why, what has to happen to hit the 1.1 versus the 1.3 next year and why and just help us help you?

Edward McGowan (Chief Financial Officer)

Yeah, sure. I mean, I’m not going to go litigate the past, so let’s just focus on going forward. If I look at the range that we’ve given you, obviously you have to look at a few things. One, do we have the contracts signed to be able to hit those numbers? The answer there is yes. Number two, do you have all the power that you need? The answer is yes. Do we have all the equipment that we need? We have the majority of it. And the remainder of it’s really more just a timing issue that we don’t want to be sitting on that for too long and carrying all that cost for everything.

So we can get all that, and we have a pricing mechanism to adjust for it. All that remains at this point, we’ll have three of these deals ramped up and generating revenue. And there’s a schedule of when equipment comes in and we put it into the data center, and once it’s made available, after it’s been tested and it’s up and running, the customer can start using it and we start billing. So there’s very little risk in terms of the big picture of what’s left to do.

Is there timing potential of having something be off our schedule? And that’s essentially what happened where we assumed we would be in the data center at a particular date and that we’d have all of our equipment at a particular date, and things slipped a couple weeks. That happens, right. So what we’ve done now is we’ve given you a wide range to show that, look, if we were to experience some delays from what we have as a fairly conservative view of the world, yeah, we’d be down close to the lower end.

If we do better in terms of getting things on time or even slightly better, we could do that higher end of the range. And also we’re not assuming a lot of incremental productivity in there in terms of giving out that range because that adds a lot more risk, right. If I were to put big deals in there that I haven’t signed, well, that’s something that I can’t control, the day I’m going to sign that. That’s more risky. So this is based on signed deals where we have the space already locked up and lined up and we’ve got the supply chain primed and ready to go.

James Fish (Analyst)

And so then the question we always get is, you know, obviously we have these large contracts in place now, over 14 billion. So congrats on that number. In terms of what you guys got to go execute on, what’s the willingness given the environment to do another large deal before executing on these at this stage?

Edward McGowan (Chief Financial Officer)

Yeah, you know, I’m glad you mentioned that, Jim, because in my prepared remarks I did say for that $7 billion number that we’re talking about, when we said we believe we’ll surpass that in 2028, I made the comment that we don’t anticipate us taking on any of those additional tranches from the Anthropic relationship. Not saying that we don’t want to or anything of that. We just think that way. We’ve got to execute on what we have in front of us and, B, there’s an incentive for them as our stock goes higher with the warrants that are attached.

So we just don’t assume they’ll be really pushing for those orders yet. But I think once we execute through that, our willingness to go and grow faster is there. We do plan to have capacity, both capital as well as data center space to do larger deals in terms of something in those several hundred millions and that sort of thing. But in terms of the multibillion-dollar deals, we don’t have that in our forecast or our plans. Let’s get through the execution here on next year and then we’ll talk more about it then.

OPERATOR

The next question will come from Param Singh with Oppenheimer. Please go ahead.

Param Singh (Analyst at Oppenheimer)

Hi. Thanks for taking my question. Firstly, I wanted to get a sense of the growth in security. It seemed a little bit light this quarter. How do you think that should translate over the next year or two as you talk more about this cross-sell with API security and other modules that you mentioned earlier in the call? And then I had a follow-up question. Thank you.

Edward McGowan (Chief Financial Officer)

Yeah, so if we’re talking about the quarter we just delivered, I think we came in slightly ahead of where you guys were, or are you talking more about the guide?

Param Singh (Analyst at Oppenheimer)

So I guess I was a little bit ahead of the street then for the security portfolio for this quarter. But I really want to think about the next two years and how that embeds into your 7 billion guide because we know the 2.2 that’s coming from CIS, so some color there would be helpful.

Thomson Leighton (Chief Executive Officer)

Yeah, sure. So we’re not going to give guidance on every different component. Certainly for 27 we’ll do that in the February call and then certainly for 28 we’ll give you the call guidance on that. But I think you can assume sort of normal business as usual. We’ve been pretty consistent. If I look at the sequential growth and I adjust for some of those anomalous licenses from last year, we’ve been adding, you know, 12 to 13-ish, maybe a little bit more every quarter of sequential additional security growth.

So it’s continuing to grow at a very healthy clip. We have, you know, a long way to go with our API security and obviously LayerX is brand new. Guardicore is still, you know, growing at a very healthy clip and has relatively low percentage penetration in the base compared to some of our other products. We’re adding new customers at a faster clip. We’ve made an investment in adding customers. So we feel pretty good that security is going to continue to grow and we’ll give you more guidance on that in February in terms of exactly how fast next year.

Param Singh (Analyst at Oppenheimer)

Understood. And as my follow-up, now, I hate to beat a dead horse, but, you know, I understand your argument of why capex per megawatt is higher, and at the same time you’re talking about higher revenue. But let’s just take the middle part out. If you do revenue per capex, because you’re adjusting for the megawattage efficiency in that scenario, it’s still pretty light on the revenue per megawatt. It seems lower than a lot of the other tier 2 hyperscalers and definitely in line with some of the older contracts of the NEO cloud.

So I’m having a very difficult time understanding the dynamics behind this deal. And if you just kind of delineate from a revenue per capex perspective that would help me understand this better. Thank you.

Edward McGowan (Chief Financial Officer)

Yeah, so you’ve got to make sure you’re comparing like for like. If you’re comparing, say, the rental business for GPUs and what people are getting for short-term contracts and the dynamics of capex relative to a megawatt of power for GPU in that environment versus a seven-year commit for CPU, you can’t compare the two. They’re very, very different. I believe what I heard you say is that our revenue per megawatt is similar to what you see with hyperscalers.

I think that’s what you said. They’re a mix there, mostly primarily of CPU. I don’t know off the top of my head what their capex is from that perspective, but again, we’re showing you what the economics look like for the absolute best pricing you can get for significant volume for significant term. If I go to the big three hyperscalers today and I want to sign a one-year deal, no commit, versus a three- or five-year deal with a big commit, I’m going to get dramatically better pricing for the long-term, higher commit.

So it’s hard for me to answer comparing to these other guys because I’m not sure what you guys are looking at in terms of what the dynamics are you’re talking about: a short-term contract, long-term contract, et cetera. And I just don’t know their numbers off the top of my head. But, you know, we’re very pleased with the returns we’re getting on this business and you can see we’re in for a period of significant revenue growth and significant profit growth.

OPERATOR

The next question will come from Rishi Jaluria with RBC. Please go ahead.

Rishi Jaluria (Analyst)

Wonderful. Thanks so much for taking my question. You know, look, maybe I want to ask kind of a more technological infrastructure question. So as you’re continuing to build out this fleet, right, not just for these CIS deals that you’re signing, but I think for future contemplated demand—Tom, in your prepared remarks, you did hit on this a little bit—but, you know, there’s clearly a lot of other potential use cases that you can be going after, things like physical AI, presumably sovereignty, especially with the kind of growth in capabilities around open-weight models.

And can you maybe walk us through what are you doing to ensure that the fleet you’re building is fully fungible, that you can pivot in real time to kind of how adoption trends and intent shape, especially just given leadership in models tends to change? And maybe your thoughts on why you feel Akamai is uniquely positioned to benefit from both of those trends. Thank you.

Thomson Leighton (Chief Executive Officer)

Yeah. In fact, we’ve signed some very large physical AI deals, many physical AI contracts so far. Sovereign AI also makes a lot of sense for us with our distributed platform. We do have diversity in the hardware in our platform, in the servers. But as we talked about, we emphasize the CPUs—they’re very flexible and increasingly, for the kinds of enterprise applications that our customer base is doing, CPUs work very well for that. Again, we are not going after training the next frontier model.

We are interested in post-training of, say, open-source models on our platform now with our inference—Akamai Inference—capability and having agents on our platform with Agent Sandbox. And we will assign that to the hardware that is most efficient and capable of doing the particular workload, and we take that responsibility off our customers’ hands. So I think we’re really ideally positioned with our distributed platform that we can get these workloads on the right kind of server that makes it be efficient. We can get it close to the robot, if that’s what it’s being used for, the sensor or the alert sensor if it’s what it’s being used for, or the user if you’re trying to maintain some kind of dialogue or chat with the user, or some video with the user. And there proximity matters for latency and scale.

And we’re really unique at that. And that’s why even the hyperscalers use our compute platform today for the latency-sensitive applications. So I think, yeah, and you compare it to the neo-clouds, it’s an entirely different capability. And then, of course, with Akamai packaged also with the security you need—especially important for AI—and the delivery for a lot of these applications. If you’re doing some kind of, you know, video with a user or video with a robot or a car, you need that kind of scalability that you get from our Edge platform.

OPERATOR

The next question will come from Peter Levine with Evercore ISI. Please go ahead.

Peter Levine (Analyst)

Great, thanks for taking my questions here. Maybe just two quick follow-ups. The 13% IRR, I’m assuming that represents a blended, obviously, from your slide deck. But given the scale of Anthropic, is it fair to assume Anthropic received favorable pricing terms versus your other customers? So therefore we generate some lower returns. Just kind of help us—walk us through how we should think about the dispersion between some of your returns versus some of these larger customers.

Edward McGowan (Chief Financial Officer)

Yeah, no, I think you just summed it up well—that they’re going to get a better return from a pricing perspective because they’re, A, willing to commit for seven years and, B, they’re committing a lot more volume. So that would be the lowest type of return you would get. So other customers that are not committing to that term or not committing that volume are going to have higher IRRs.

Peter Levine (Analyst)

Maybe just a follow-up to John Difucci’s question, I guess more on the political side: do you