Q3 2024 Earnings Summary
- 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.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +4% | Security and Compute segments drove revenue upward while Delivery declined. Market pressures, including customer cost optimization and macro headwinds, challenged growth, but robust demand for solutions like Guardicore helped offset these impacts. |
Security | +14% | Increased demand for Zero Trust, API security, and bot management solutions, along with acquisitions bolstered results. Continued market concern over advanced threats underpins strong future potential. |
Compute | +28% | Growth from new customer wins, expanding use cases (e.g., AI and media workflows), and partners delivering low-latency workloads all drove revenue. Investments in a distributed architecture support further expansion. |
Delivery | -16% | Economic and geopolitical uncertainties pressured traffic volumes, and a large social media client opted for do-it-yourself solutions. Pricing headwinds are expected to persist, though Akamai focuses on profitable workloads. |
U.S. Revenue | +5% | Gains in security and compute offerings outpaced slower delivery demand. Despite stiff competition, the U.S. market remains a core contributor to overall growth, reflecting strong sales execution and enterprise adoption. |
Operating Income | -60% | Higher cost of revenue, elevated R&D and amortization expenses, plus Delivery declines eroded margins. Continued focus on cost optimization and prioritizing profitable segments may stabilize operating income going forward. |
Net Income | -64% | Rising operating expenses, including intangible amortization, offset growth in security and compute. While interest income provided some relief, sustained cost management is critical to improve net profitability. |
EPS (Basic) | -64% | The sharp net income drop and higher expenses curbed EPS gains. Ongoing restructuring and targeted product investments could help restore EPS growth in future quarters if revenue momentum in security and compute continues. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | FY 2024 | $3.970B to $4.010B (4%-5% as reported, 5%-6% in cc) | $3.966B to $3.991B (4%-5% as reported, 5% in cc) | lowered |
Foreign Exchange Impact | FY 2024 | -$20 million | -$22 million | lowered |
Security Revenue Growth | FY 2024 | 15%-17% in cc | 15%-17% in cc | no change |
Compute Revenue Growth | FY 2024 | 23%-25% in cc | 25% in cc | raised |
Non-GAAP Operating Margin | FY 2024 | 29% | 29% | no change |
Non-GAAP EPS | FY 2024 | $6.34 to $6.47 | $6.31 to $6.38 | lowered |
Non-GAAP Tax Rate | FY 2024 | 19%-20% | 19% | lowered |
Fully Diluted Share Count | FY 2024 | 154M | 154M | no change |
CapEx | FY 2024 | 16% of total revenue | 17% of total revenue | raised |
Revenue | Q4 2024 | no prior guidance | $995M to $1.020B (flat to up 3% in cc) | no prior guidance |
Cash Gross Margins | Q4 2024 | no prior guidance | 72%-73% | no prior guidance |
Non-GAAP Operating Expenses | Q4 2024 | no prior guidance | $321M to $327M | no prior guidance |
EBITDA Margin | Q4 2024 | no prior guidance | 40%-41% | no prior guidance |
Non-GAAP Depreciation Expense | Q4 2024 | no prior guidance | $131M to $133M | no prior guidance |
Non-GAAP Operating Margin | Q4 2024 | no prior guidance | 27%-28% | no prior guidance |
CapEx | Q4 2024 | no prior guidance | $184M to $192M (18%-19% of revenue) | no prior guidance |
Non-GAAP EPS | Q4 2024 | no prior guidance | $1.49 to $1.56 | no prior guidance |
Non-GAAP Tax Expense | Q4 2024 | no prior guidance | $54M to $57M | no prior guidance |
Fully Diluted Share Count | Q4 2024 | no prior guidance | 153M | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q3 2024 | $988 million to $1.008 billion | $1,004.679 million | Met |
CapEx | Q3 2024 | $166 million to $174 million | $185.117 million | Missed |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Growing the compute business | Mentioned across all previous periods (Q2, Q1, Q4) with a consistent focus on growth, despite scaling costs. | Still in the scaling phase, limiting profitability due to investments; once scale is reached, margins expected to expand. | Consistent theme across all periods, highlighting investment phase and growth potential. |
Decline in the delivery segment | Q2, Q1, and Q4 calls all cited slow traffic growth and pricing pressures, with double-digit YoY declines in delivery. | Continued weakness with slow traffic growth and pricing pressures. Delivery revenue down 16% YoY in Q3. | Ongoing challenge as pricing pressures and weak traffic growth persist. |
Emphasis on security offerings | Q2, Q1, and Q4 calls consistently highlighted API security, Zero Trust, WAF, and DDoS solutions as key growth drivers. | Security revenue run rate exceeds $2B; API Security, Guardicore, and DDoS cited as major drivers. | Continued importance of security as a major revenue contributor and strategic priority. |
Ongoing concern about margins | Reiterated in Q2 (compute is more capital-intensive, offset by delivery CapEx decline) , Q1 (colocation costs pressuring margins) , and Q4 (balancing growth investments with 30% margin). | Limited margin expansion due to scaling compute and investing in security; plan to reach 30% operating margin near term. | Consistent caution about near-term margin pressure, with optimism for future expansion. |
Internal workload migrations | Q2 did not highlight new updates. Q1 mentioned being more than halfway complete with $100M+ savings. Q4 cited significant cost savings from migrating internal apps but no new major references. | No mention of new internal migrations in Q3. | Previously important, now not highlighted, indicating less recent focus. |
Gecko initiative | Not mentioned in Q2 or Q1 [no references]. In Q4, described as a full-stack compute deployment across many locations, enabling workloads like AI inferencing. | No mention of a Gecko initiative in Q3. | New in Q4, absent in subsequent quarters, unclear current status. |
AI inferencing opportunities | Mentioned in Q2 (smaller, more focused models for specific use cases) , Q1 (customers already using inference AI) , and Q4 (real-time personalization, data analytics). | Q3 call discussed image generation, speech recognition, analytics on Akamai’s platform. | Increasingly referenced: a growing use case for Akamai’s evolving compute platform. |
Advanced security packages | No references in Q2, Q1, or Q4. | High penetration now, with less upside for upselling due to maturity. | Newly noted saturation, implying limited incremental upsell. |
Compute profitability | Q2: Not explicitly noted as slower-than-expected, but recognized as capital-intensive. Q1: Build-out costs hamper margin expansion. Q4: Balancing growth investments with 30% margin. | Strong revenue growth (28% YoY) but slower margin contribution; still investment phase. | Evolving viewpoint: solid revenue gains but margin lag still emphasized. |
Transformative investments | Q2 referenced two-thirds of revenue from compute+security; AI workloads growing. Q1 noted a fundamental shift to these segments. Q4 less explicit about AI but emphasized continued compute and security investment. | Compute, security, AI seen as key to Akamai’s long-term evolution, with strong growth expected. | Major strategic focus underpinning Akamai’s shift toward cloud and security leadership. |
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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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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.
Research analysts covering AKAMAI TECHNOLOGIES.