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    Akamai Technologies Inc (AKAM)

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    Akamai Technologies operates a massively distributed edge and cloud platform known as Akamai Connected Cloud, which supports their cloud computing, security, and content delivery solutions. The company's primary business activities are centered around these three areas, with security being the largest contributor to revenue. Akamai sells security solutions, including web application firewall, bot management, and Guardicore's micro-segmentation, as well as content delivery network services and compute solutions bolstered by the acquisition of Linode .

    1. Security Solutions - Provides web application firewall, bot management, and Guardicore's micro-segmentation services, contributing significantly to the company's revenue .
    2. Compute Solutions - Offers cloud computing services, enhanced by the acquisition of Linode, and plays a substantial role in the company's growth .
    3. Content Delivery Network (CDN) - Delivers content delivery services, which remain a profitable part of the business despite facing challenges from slower internet traffic growth and increased competition .
    Initial Price$90.17July 1, 2024
    Final Price$99.82October 1, 2024
    Price Change$9.65
    % Change+10.70%

    What went well

    • 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.

    What went wrong

    • 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.

    Q&A Summary

    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.

    Guidance Changes

    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 )
    NamePositionStart DateShort Bio
    F. Thomson LeightonChief Executive Officer, President, and Director (Principal Executive Officer)January 2013F. Thomson Leighton co-founded Akamai in 1998 and has served as CEO since January 2013. He was previously the Chief Scientist and is a Professor of Applied Mathematics at MIT (currently on leave). He chaired the Presidential IT Advisory Committee on Cybersecurity from 2003 to 2005 .
    Edward McGowanExecutive Vice President and Chief Financial OfficerMarch 2019Edward McGowan joined Akamai in 2000 and became CFO in March 2019. He oversees the global IT organization since December 2021. He has held various roles, including Senior Vice President, Finance, and is a certified public accountant .
    Aaron AholaExecutive Vice President, General Counsel, and Corporate SecretaryMay 2019Aaron Ahola joined Akamai in April 2000 and became General Counsel in May 2019. He previously served as Senior Vice President, General Counsel, and Corporate Secretary from October 2017 to April 2019 .
    Robert BlumofeExecutive Vice President and Chief Technology OfficerMarch 2021Robert Blumofe joined Akamai in 1999 and became CTO in March 2021. He previously served as Executive Vice President, Platform and General Manager of the Enterprise Division .
    Adam KaronChief Operating Officer and General Manager of the Cloud Technology GroupMarch 2021Adam Karon joined Akamai in February 2005 and became COO in March 2021. He has held various leadership roles, including Executive Vice President and General Manager of the Media and Carrier Division .
    Kim Salem-JacksonExecutive Vice President and Chief Marketing OfficerMarch 2021Kim Salem-Jackson joined Akamai in August 2017 and became CMO in March 2021. She previously served as Senior Vice President of Marketing and Corporate Communications .
    Paul JosephExecutive Vice President, Global Sales and ServicesMarch 2021Paul Joseph joined Akamai in January 2000 and became Executive Vice President, Global Sales and Services in March 2021. He gained additional responsibility for Global Services in December 2021 .
    Mani SundaramExecutive Vice President and General Manager of the Security Technology GroupDecember 2021Mani Sundaram joined Akamai in February 2007 and became Executive Vice President and General Manager of the Security Technology Group in December 2021. He previously served as Executive Vice President Global Services & Support and CIO .
    Anthony WilliamsExecutive Vice President and Chief Human Resources OfficerJanuary 2020Anthony Williams joined Akamai in April 2015 and became Chief Human Resources Officer in January 2020. He previously served as Vice President, Talent Acquisition and Diversity .
    1. Given the ongoing consolidation in the delivery market and the bankruptcy of competitors like EdgeCast and Limelight, how do you see this impacting Akamai's delivery business in the near and long term, and what strategies are you implementing to capitalize on potential market stabilization?
    2. With the increased investment in cloud computing capabilities and new security products, including the addition of go-to-market positions and specialists, how do you plan to manage the potential strain on operating margins, especially considering the elimination of 2.5% of roles and the need to maintain a 30% operating margin target?
    3. Despite strong growth in the compute segment, with a 28% year-over-year increase and plans to reach $100 million in ARR by year-end, why aren't we seeing greater evidence of operating leverage and improved profitability, given that compute commands better gross profit characteristics than the declining delivery segment?
    4. Can you elaborate on the challenges you're facing in the delivery business due to macroeconomic headwinds and slowed traffic growth, and how you plan to address these issues to sustain profitability and market leadership?
    5. Your strategy includes shifting investments toward hunters and sales specialists as well as strengthening your partner ecosystem to support the new compute and security products; how do you plan to balance this with your existing customer base and ensure that traditional services are not neglected while pursuing new markets?
    Program DetailsProgram 1Program 2
    Approval DateJanuary 2022 May 2024
    End Date/DurationDecember 2024 June 2027
    Total additional amount$1.8 billion $2.0 billion
    Remaining authorization amount$118.8 million $2.0 billion
    DetailsOffset dilution from employee equity compensation and provide flexibility to return capital to shareholders Offset dilution from employee equity compensation and provide flexibility to return capital to shareholders

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2024

    Q4 2024 Guidance:

    • Revenue: $995 million to $1.020 billion
    • Foreign Exchange Impact: Negative $7 million impact on Q4 revenue compared to Q3 levels and negative $5 million year-over-year
    • Cash Gross Margins: 72% to 73%
    • Non-GAAP Operating Expenses: $321 million to $327 million
    • EBITDA Margin: 40% to 41%
    • Non-GAAP Depreciation Expense: $131 million to $133 million
    • Non-GAAP Operating Margin: 27% to 28%
    • CapEx: $184 million to $192 million, 18% to 19% of projected total revenue
    • Non-GAAP EPS: $1.49 to $1.56
    • Taxes: $54 million to $57 million, 19% tax rate
    • Fully Diluted Share Count: 153 million shares

    FY 2024 Guidance:

    • Revenue: $3.966 billion to $3.991 billion
    • Foreign Exchange Impact: Negative $22 million impact
    • Security Growth: 15% to 17% in constant currency
    • Compute Revenue Growth: Approximately 25% in constant currency
    • Non-GAAP Operating Margin: 29%
    • Non-GAAP EPS: $6.31 to $6.38
    • Non-GAAP Effective Tax Rate: 19%
    • Fully Diluted Share Count: 154 million shares
    • CapEx: Approximately 17% of total revenue .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024

    Q3 2024 Guidance:

    • Revenue: $988 million to $1.008 billion
    • Foreign Exchange Impact: Positive $2 million impact compared to Q2, negative $5 million year-over-year
    • Cash Gross Margins: 73%
    • Non-GAAP Operating Expenses: $307 million to $312 million
    • EBITDA Margin: 42%
    • Non-GAAP Depreciation Expense: $129 million to $131 million
    • Non-GAAP Operating Margin: 29%
    • CapEx: $166 million to $174 million, 17% of projected total revenue
    • Non-GAAP EPS: $1.56 to $1.62
    • Taxes: $59 million to $60 million, 19% to 20% tax rate
    • Fully Diluted Share Count: 154 million shares

    FY 2024 Guidance:

    • Revenue: $3.970 billion to $4.010 billion
    • Foreign Exchange Impact: Negative $20 million impact
    • Security Revenue Growth: 15% to 17% in constant currency
    • Compute Revenue Growth: 23% to 25% in constant currency
    • Non-GAAP Operating Margin: 29%
    • Non-GAAP EPS: $6.34 to $6.47
    • Non-GAAP Effective Tax Rate: 19% to 20%
    • Fully Diluted Share Count: 154 million shares
    • CapEx: Approximately 16% of total revenue .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024

    Q2 2024 Guidance:

    • Revenue: $967 million to $986 million
    • Non-GAAP EPS: $1.51 to $1.56
    • Non-GAAP Operating Expenses: $302 million to $307 million
    • EBITDA Margins: 41% to 42%
    • Non-GAAP Depreciation Expense: $126 million to $128 million
    • Non-GAAP Operating Margin: 28% to 29%
    • Cash Gross Margins: 72% to 73%
    • Foreign Exchange Impact: Negative $5 million impact compared to Q1, negative $9 million year-over-year

    FY 2024 Guidance:

    • Revenue: $3.950 billion to $4.020 billion
    • Security Revenue Growth: 15% to 17% in constant currency
    • Compute Revenue Growth: 21% to 23% in constant currency
    • Non-GAAP Operating Margin: 28% to 29%
    • Non-GAAP EPS: $6.20 to $6.40
    • Non-GAAP Effective Tax Rate: 19% to 19.5%
    • Fully Diluted Share Count: 155 million shares
    • CapEx: Approximately 16% of total revenue
    • Foreign Exchange Impact: Negative $40 million impact, $0.12 negative impact on EPS
    • Non-GAAP Operating Margin Impact from FX: 30 basis points negative impact .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q1 2024 and FY 2024

    Q1 2024 Guidance:

    • Revenue: $980 million to $1 billion
    • Cash Gross Margin: 73%
    • Non-GAAP Operating Expenses: $305 million to $310 million
    • EBITDA Margins: 42% to 43%
    • Non-GAAP Depreciation Expense: $127 million to $129 million
    • Non-GAAP Operating Margin: 29% to 30%
    • Non-GAAP EPS: $1.59 to $1.64
    • Taxes: $56 million to $58 million, 18.5% to 19% tax rate
    • Fully Diluted Share Count: 155 million shares
    • CapEx: $146 million to $154 million, 15% of total revenue

    FY 2024 Guidance:

    • Revenue Growth: 6% to 8% in constant currency
    • Security Revenue Growth: 14% to 16% in constant currency
    • Compute Revenue Growth: 20% in constant currency
    • Non-GAAP Operating Margin: 30% in constant currency
    • CapEx: 15% of total constant currency revenue
    • Non-GAAP EPS Growth: 7% to 11% in constant currency
    • Non-GAAP Effective Tax Rate: 18.5% to 19%
    • Fully Diluted Share Count: 155 million shares .

    Competitors mentioned in the company's latest 10K filing.

    • AT&T - Mentioned as a channel partner, which implies competition in certain areas .
    • Avant - Mentioned as a channel partner, which implies competition in certain areas .
    • BV Tech - Mentioned as a channel partner, which implies competition in certain areas .
    • Carahsoft - Mentioned as a channel partner, which implies competition in certain areas .
    • Deutsche Telecom - Mentioned as a channel partner, which implies competition in certain areas .
    • Kyndryl - Mentioned as a channel partner, which implies competition in certain areas .
    • Microsoft Azure - Mentioned as a channel partner, which implies competition in certain areas .
    • Telefonica Group - Mentioned as a channel partner, which implies competition in certain areas .
    • Hyper-scaler cloud computing providers - Mentioned as competitors in cloud computing solutions .