Akamai Technologies Inc (AKAM)

• Strong Growth in Compute Services: Akamai is experiencing substantial growth in its compute services, with a significant increase in customers across various verticals beyond its initial focus on media workflow. The company is on track to achieve a $100 million annual revenue run rate in enterprise compute by year-end. - - -
• Rapid Expansion of Security Offerings: Akamai's security products, particularly API Security and Guardicore, are showing impressive momentum. API Security is expected to reach an ARR of $50 million by year-end, up from near zero last year, indicating strong market demand. -
• Market Consolidation Benefits: The consolidation and shakeout in the delivery market are expected to benefit Akamai. The company's disciplined pricing strategy and market leadership position it to capitalize on market stabilization and potential business growth in the medium to long term. -

• Akamai's delivery solutions are facing macroeconomic headwinds, with slowed traffic growth in streaming and gaming verticals, which could impact overall revenue growth. - -
• Despite strong performance in compute, Akamai has not yet achieved operating leverage in this segment, as they are still scaling up and haven't reached scale, potentially affecting profitability in the near term. -
• Increased investments in sales personnel and channels may lead to higher operating expenses before contributing meaningfully to revenue, putting pressure on margins. -

1. Delivery Revenue Decline
   Q: Why is delivery revenue down over 20% despite traffic growth?
   A: Ed McGowan explained that although traffic is growing very slowly, in low single digits, delivery revenue is declining due to tough year-over-year comparisons from last year's acquisitions and modest price declines of 5–10%. This results in revenue contraction despite traffic growth. -

2. Compute Profitability
   Q: Why isn't compute outperformance leading to higher profitability?
   A: Ed McGowan noted that Akamai is still scaling up the compute business and hasn't reached scale yet. Consequently, despite strong revenue growth, they don't yet see significant operating leverage or margin expansion, which they expect to improve as the business grows. -

3. Competitor Bankruptcy Impact
   Q: How will competitor bankruptcies affect Akamai's business?
   A: F. Leighton stated that consolidation in the delivery market, including competitors entering Chapter 11, is long overdue. He believes this shakeout will stabilize the market, reduce unsustainable pricing practices, and benefit Akamai in the medium to long term. -

4. CapEx Trajectory
   Q: What is the outlook for CapEx through 2025?
   A: Ed McGowan indicated they aim to maintain CapEx at current levels over the next couple of years unless large deals necessitate additional investment. Large data center builds from prior years are not anticipated going forward. -

5. Go-to-Market Investments
   Q: Why is Akamai shifting investments in go-to-market strategies now?
   A: F. Leighton explained they're experiencing strong traction with products like Guardicore and API Security, expecting API Security ARR to reach $50 million by year-end, up from near zero last year. This success has prompted increased investment in sales hunters, specialists, and channel partners to capitalize on a broader enterprise market. -

6. Advanced Security Package Penetration
   Q: How penetrated is the advanced security package across the install base?
   A: Ed McGowan mentioned that penetration is high, especially with early adopters, and they are at the end of significant upsell opportunities. As a result, year-over-year comparisons now reflect sales in both periods, affecting growth rates. -

7. Security Performance ex-Guardicore
   Q: How did security products perform excluding Guardicore and Noname?
   A: Ed McGowan reported strong demand across all security products, including WAF and DDoS protection. DDoS saw acceleration due to increased attacks, leading to new customer sign-ups, though revenue from these will materialize over time. -

8. Use of GenAI in Security
   Q: How is GenAI impacting Akamai's security offerings?
   A: F. Leighton explained that Akamai has long used AI and ML in security products for anomaly and bot detection. They are now incorporating GenAI into two security products, enhancing customer management and visibility, while noting that attackers also use GenAI to create sophisticated malware, increasing the need for defenses like Guardicore. -

9. Lumen CDN Acquisition and AI Collaboration
   Q: Did Akamai acquire network elements with Lumen CDN, and are there AI collaborations?
   A: Ed McGowan clarified that no network assets were acquired from Lumen, only customer contracts, and he did not disclose any specifics about partnerships regarding AI traffic delivery with Lumen. -

10. Compute Use Cases and Verticals
    Q: What are the early compute use cases and verticals?
    A: F. Leighton highlighted strong adoption in media workflows but noted that compute sales span all verticals, including new customers. Use cases include database partners, observability, live encoding, AI inferencing, and more, indicating broad traction across various industries. -

11. CapEx Increase vs. Compute Guidance
    Q: Why is CapEx increasing without a significant raise in compute guidance?
    A: Ed McGowan stated that the CapEx increase is due to investments not only in compute but also in delivery where there is outsized demand, as well as infrastructure services. Timing differences between quarters also affect the numbers, and he cautioned against reading too much into it. -

Quarterly guidance for Q4 2024:

• Revenue: $995M to $1.020B - (raised from $988M to $1.008B - )
• Foreign Exchange Impact: Negative $7M - (lowered from Positive $2M - )
• Cash Gross Margins: 72% to 73% - (lowered from 73% - )
• Non-GAAP Operating Expenses: $321M to $327M - (raised from $307M to $312M - )
• EBITDA Margin: 40% to 41% - (lowered from 42% - )
• Non-GAAP Depreciation Expense: $131M to $133M - (raised from $129M to $131M - )
• Non-GAAP Operating Margin: 27% to 28% - (lowered from 29% - )
• CapEx: $184M to $192M (18% to 19% of revenue) - (raised from $166M to $174M, 17% of revenue - )
• Non-GAAP EPS: $1.49 to $1.56 - (lowered from $1.56 to $1.62 - )
• Taxes: $54M to $57M, 19% rate - (lowered from $59M to $60M, 19%-20% rate - )
• Fully Diluted Share Count: 153M - (lowered from 154M - )

Annual guidance for FY 2024:

• Revenue: $3.966B to $3.991B - (lowered from $3.970B to $4.010B - )
• Foreign Exchange Impact: Negative $22M - (lowered from Negative $20M - )
• Security Growth: 15% to 17% - (no change from 15% to 17% - )
• Compute Revenue Growth: ~25% - (no change from 23%-25% - )
• Non-GAAP Operating Margin: 29% - (no change from 29% - )
• Non-GAAP EPS: $6.31 to $6.38 - (lowered from $6.34 to $6.47 - )
• Non-GAAP Effective Tax Rate: 19% - (lowered from 19%-20% - )
• Fully Diluted Share Count: 154M - (no change from 154M - )
• CapEx: ~17% of revenue - (raised from ~16% of revenue - )