Q1 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- Akamai's compute business is experiencing rapid growth, with enterprise compute revenue growing over 300% year-over-year to a $50 million run rate, now serving over 200 enterprise customers using their cloud computing solutions.
- The company is aggressively investing in expanding its compute platform, having built out 25 core locations last year, which is expected to drive future margin expansion as utilization increases.
- Akamai's shift towards higher-margin security and compute services is progressing faster than expected, contributing to a quicker-than-expected mix shift, and is anticipated to drive future growth and profitability.
- Declining delivery revenue due to lower traffic growth and competitive pressures is negatively impacting Akamai's overall revenue and margins. Executives acknowledge that delivery volumes are lower than expected, and they haven't seen the usual uptick in traffic following renewals. , ,
- A significant customer, a large social media company, is reducing spending with Akamai due to cost optimization and potential geopolitical challenges, leading to an expected revenue shortfall of $40 million to $60 million for the full year. ,
- Higher investments in R&D, acquisitions, and building out the compute platform are increasing costs, affecting margins despite the shift to higher-margin security and compute businesses. The company is experiencing higher colocation costs and accounting impacts from long-term agreements. ,
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Delivery Business Decline
Q: How confident are you that delivery declines are factored in?
A: CEO Tom Leighton acknowledged that the delivery business is declining due to lower traffic levels, especially in media and gaming, and the impact of cost-cutting by large customers, including a significant social media company. They have adjusted guidance based on the best available information and believe the business will return to growth, though they can't predict exactly when. Their focus remains on profitable business and investing in higher-growth areas like security and compute. -
Social Media Customer Cutbacks
Q: Is the social media customer's reduction due to cost cuts?
A: Yes, the large social media customer is reducing costs by optimizing usage, doing less prefetching, and potentially increasing their use of DIY solutions. This has been factored into Akamai's lower guidance for this customer. -
Margin Guidance Lowered
Q: What caused the margin guidance reduction?
A: CFO Ed McGowan explained that margin guidance was lowered due to the Noname acquisition impacting margins by 50 basis points, 30 basis points from FX, and the remainder due to lower delivery revenue. Investments in R&D and building out the compute platform also affect margins. They expect margins to improve as compute grows faster. -
Noname Acquisition Impact
Q: How will the Noname acquisition impact Akamai?
A: CEO Tom Leighton stated that Noname is a market leader in API security with capabilities Akamai doesn't have, including on-premise and hybrid solutions. The acquisition is strategic, enhancing their security offerings and providing strong growth potential. They expect Noname to contribute about $20 million in revenue, with opportunities for revenue synergy as they introduce it to their customer base. -
Compute Growth and Potential
Q: Can you expand on compute growth and customer adoption?
A: Akamai is seeing significant growth in compute, starting with small engagements and expanding over time. They have customers spending $100,000 a year, six at $1 million, and one at $10 million a year. Akamai itself is a $100 million a year customer on their platform, having migrated over half of their workloads, resulting in substantial cost savings and performance improvements. They foresee substantial use of the platform for AI inference and expect continued strong growth. -
Gross Margins and Investments
Q: Why aren't gross margins expanding with the mix shift?
A: Gross margins are impacted by investments in building out compute locations, including colocation costs and non-cash expenses from long-term leases. While higher-margin security and compute are growing, these investments are masking margin expansion. They expect margins to improve over time as they fill these locations and benefit from economies of scale. -
CapEx and Free Cash Flow
Q: Any changes to CapEx and free cash flow expectations?
A: CFO Ed McGowan indicated no significant changes expected for fiscal '24. Q1 free cash flow was strong, and the year should progress similarly to previous years. CapEx is expected to remain at similar levels as a percentage of revenue, with compute CapEx roughly at $1 of CapEx for $1 of revenue. -
Zero Trust Platform Reception
Q: How are customers reacting to your Zero Trust platform?
A: Customers are positive about the integrated Zero Trust platform, which simplifies their security infrastructure by combining capabilities like microsegmentation, Zero Trust Network Access, MFA, DNS security, and threat hunting into one solution. This eases management, and new AI-driven capabilities provide better insights into enterprise infrastructure. -
Compute Go-to-Market Leadership
Q: What's the impact of new leadership on compute go-to-market?
A: CEO Tom Leighton stated that hiring Dan brings solid experience and expertise, enhancing their go-to-market efforts in compute. It's about deepening the bench to accelerate the compute business, with no major changes anticipated.