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    Akamai Technologies Inc (AKAM)

    Q4 2023 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$106.73October 1, 2023
    Final Price$118.35December 31, 2023
    Price Change$11.62
    % Change+10.89%

    What went well

    • Strong growth in security products with high customer adoption: Akamai's security business continues to deliver strong performance, with exceptional growth in products like Guardicore segmentation solution and the new API security solution. The company sees robust demand and high average revenue per user (ARPU) in these areas, contributing to their confidence in sustaining mid-teens growth in security revenue for 2024.
    • Launch of Project Gecko differentiates Akamai in edge computing: Akamai is expanding its cloud computing capabilities to the edge with Project Gecko, embedding compute power into their edge network across 100 cities by the end of the year. This offers a unique value proposition compared to competitors like Cloudflare, which do not offer full-stack cloud computing with support for virtual machines or containers at the edge. Early customer feedback has been very positive, positioning Akamai for significant growth in this area.
    • Disciplined focus on profitability while investing in growth areas: Akamai is optimizing its delivery business by shedding less profitable traffic and focusing on higher-margin opportunities, which is expected to enhance profitability. Despite significant investments in new growth areas like security and compute, the company maintains a healthy operating margin of around 30% and continues to generate strong free cash flow, reflecting disciplined management and operational efficiency.

    Q&A Summary

    1. Delivery Revenue Decline
      Q: Why is delivery revenue guidance down 6% for 2024?
      A: Ed McGowan explained that the decline is due to the timing of customer renewals, with seven out of eight major customers (each over 1% of revenue) renewing in the first half of the year, impacting the delivery business. Additionally, Akamai is shedding less profitable traffic by being more stringent on peak-to-average ratios, which may reduce traffic but improves profitability.

    2. Gross Margin Outlook
      Q: What are the factors affecting gross margins in 2024?
      A: Positive factors include a higher mix of security business and cost savings from moving third-party cloud costs onto Akamai's own platform. Negative factors are additional co-location costs from building out Gecko sites, leading to higher expenses before revenue generation.

    3. Compute Business and Gecko Expansion
      Q: How will the new Gecko compute capability impact growth?
      A: Tom Leighton described Gecko as a new capability offering full-stack compute in 100 cities by year-end, enabling better performance and scalability at lower costs. It's not a repackaging but adds significant functionality, positioning Akamai uniquely in the market.

    4. Security Revenue Growth
      Q: How confident are you in sustaining mid-teens security revenue growth?
      A: Ed McGowan expressed confidence, noting strong performance in Guardicore and API security, with no significant deal pushouts. He highlighted broad strength across security products and minimal macroeconomic challenges affecting demand.

    5. CapEx Investments in Compute
      Q: Are you overbuilding compute capacity given the current growth rates?
      A: Ed McGowan stated they are investing responsibly, with the majority of CapEx geared toward customer demand. He emphasized optimism in the compute business and noted that sales reps are now incentivized to sell compute, which could drive growth.

    6. Competition and Differentiation
      Q: How does Gecko differ from competitors like Cloudflare?
      A: Tom Leighton pointed out that Gecko supports full-stack compute with virtual machines and containers, capabilities that competitors like Cloudflare do not offer. He emphasized that this positions Akamai uniquely in offering full-stack cloud computing at the edge.

    7. Currency Impact on Guidance
      Q: How does currency fluctuation affect your 2024 revenue guidance?
      A: Ed McGowan explained that at current FX rates, revenue growth would still be within the 6%–8% range provided in constant currency. He noted that currency movements could introduce headwinds or tailwinds, but the core business remains strong.

    8. Demand Trends and Sales Cycles
      Q: Are you seeing elongated sales cycles or challenges in new customer acquisition?
      A: Ed McGowan acknowledged that acquiring new customers is more challenging but noted robust performance in security sales. He mentioned that security budgets are typically protected and that optimizing cloud spend is a trend benefiting Akamai.

    9. Compute Revenue Contribution from Gecko
      Q: Is Gecko expected to contribute significantly to compute revenue in 2024?
      A: Tom Leighton stated that significant revenue from Gecko is expected more in 2025, as they will be in 100 cities by year-end 2024. The 2024 guidance does not factor in substantial revenue from Gecko.

    10. Security Product Growth Excluding Guardicore
      Q: How are security products performing excluding Guardicore?
      A: Ed McGowan revealed that their App & API Security segment grew over 20% in Q4. Infrastructure and services grew below 10%, and Guardicore, normalized for one-time deals, grew around 6%.

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