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    Akamai Technologies Inc (AKAM)

    Q2 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$108.77April 1, 2024
    Final Price$89.53July 1, 2024
    Price Change$-19.24
    % Change-17.69%

    What went well

    • Enterprise compute revenue is expected to more than double from $50 million to over $100 million ARR by the end of 2024, demonstrating strong early momentum in Akamai Connected Cloud and significant future growth potential. ,
    • Akamai is expanding into new market verticals beyond traditional media customers, with new customer additions growing very rapidly and observability capabilities spanning across all verticals, opening up whole new markets.
    • Akamai is not capital constrained in scaling its compute business and is building out distributed compute capabilities in more locations, providing competitive advantages in performance and data sovereignty. ,

    What went wrong

    • Delivery revenue is expected to deteriorate in the back half of the year, with a more muted Q4 seasonality due to weaker traffic in gaming and retail verticals and tough year-over-year comparisons from previous acquisitions. This suggests ongoing challenges in their traditional business segment.
    • Security revenue growth is slowing down, with organic growth (excluding the Noname acquisition) projected at 11% to 12% in the second half, compared to higher growth rates in previous quarters. This indicates potential hurdles in maintaining high growth in this segment.
    • There are concerns about margin and CapEx efficiency as the delivery business declines and the compute business, which is more capital-intensive, grows. This could lead to deleveraging effects and impact overall profitability.

    Q&A Summary

    1. Compute Revenue Growth
      Q: When will Akamai Connected Cloud revenue accelerate further?
      A: Akamai is pleased with the rapid early adoption of Akamai Connected Cloud, aiming to reach $100 million ARR by year-end. They started selling in earnest this year and will provide guidance for next year in February. They're optimistic about strong compute growth driven by enterprise customers, tapping into an enormous market.

    2. Delivery Business Headwinds
      Q: Are current delivery headwinds cyclical or structural?
      A: Akamai believes the delivery headwinds are not long-term. Traffic will continue to grow, albeit slower than during COVID. Delivery remains profitable and synergistic with security and compute businesses. They don't see these headwinds persisting over the long term, though geopolitical considerations are a concern for next year.

    3. Margin Expansion from Hyperscaler Savings
      Q: When will hyperscaler savings boost operating margins?
      A: Akamai has been reinvesting the $100 million savings from moving in-house. As they continue to add compute and security customers, margins will improve. While new security products are initially dilutive, each new customer enhances margins. Over time, they see potential to exceed their 30% operating margin goal.

    4. Noname Security Acquisition Impact
      Q: Is guidance adjusted for Noname Security's $20M revenue?
      A: Noname Security was included in guidance last quarter, so there's no change. The business has slightly improved, and guidance has increased to reflect that.

    5. Guardicore Zero Trust Strategy
      Q: How does Guardicore fit into Zero Trust and channels?
      A: Segmentation is essential for Zero Trust, and Guardicore provides software-based, fine-grained controls. They combined Guardicore with other security features into a single platform with a single agent, which is important for customers. Guardicore is sold entirely through channels, allowing partners to add value and generate revenue.

    6. AI Workloads on Compute Platform
      Q: What AI models run on your cloud platform?
      A: Akamai sees AI workloads as a small but growing fraction of ARR. Customers run smaller, focused models rather than giant ones like GPT. These applications include deep learning for security, chatbots, tailored content, and recommendation engines.

    7. Compute Growth Drivers
      Q: Where is compute growth coming from?
      A: Growth is from both existing and new customers. The biggest users are large media customers by design. They're also seeing non-media enterprises adopt compute services, with observability being a significant capability. The pipeline is growing globally, and new workloads are emerging.

    8. Delivery Guidance Factors
      Q: Why is delivery business worsening in H2?
      A: Akamai doesn't expect the usual Q4 traffic spike due to lower traffic growth. Tough comparisons from last year's acquisitions of StackPath and Lumen affect year-over-year growth. There's also an expected impact from one large social media customer.

    9. CapEx Constraints in Compute Growth
      Q: Are you capital constrained in compute expansion?
      A: Akamai is not capital constrained. They produce significant free cash flow and can support growth. While compute is more capital-intensive, they've reduced CapEx in the core business and remain efficient.

    10. Pricing Pressure in Delivery
      Q: Are you seeing increased pricing pressure in delivery?
      A: Akamai sees typical pricing pressure, nothing significantly worse. The issue is slower traffic growth, not a shift to lower-cost providers. They have been selective with peak traffic to maintain efficiency.

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