Akamai Technologies (AKAM) has long been a pioneer in the content delivery network (CDN) space, helping businesses efficiently deliver digital content to their customers. However, in recent years, the company has undergone a remarkable transformation, evolving from a CDN provider to a cybersecurity and cloud computing powerhouse that powers and protects business operations worldwide.
Company Background
Founded in 1998 by a group of MIT researchers who pioneered the concept of content delivery networks, Akamai Technologies, Inc. was incorporated in Delaware and established its headquarters in Cambridge, Massachusetts. The company's innovative approach to efficiently delivering digital content over the internet quickly gained traction, leading to rapid growth in its early years. Akamai went public in 1999, capitalizing on the growing demand for its services.
By the early 2000s, Akamai had solidified its position as the leading CDN provider, serving many of the world's top websites and online businesses. The company's globally distributed network of servers allowed it to cache and deliver content closer to end-users, reducing latency and improving the user experience. Over time, Akamai expanded its offerings, providing solutions for media streaming, software downloads, and more.
Evolution into Cybersecurity
As the digital landscape evolved, Akamai recognized the growing importance of security and began investing in this area. The company leveraged its extensive network visibility and threat intelligence to develop cloud-based security solutions that protect against distributed denial-of-service (DDoS) attacks, web application vulnerabilities, and other cyber threats. This strategic shift has paid off handsomely, as security solutions now account for the majority of Akamai's revenue.
Akamai's security portfolio includes market-leading offerings such as web application firewalls, DDoS protection, and API security. The company's Guardicore segmentation solution, acquired in 2021, has been particularly successful, helping customers enhance their zero-trust security posture and defend against ransomware attacks. In the third quarter of 2024, Akamai's security annual revenue run rate exceeded $2 billion, a significant milestone for the company.
Expansion into Cloud Computing
Concurrent with its security push, Akamai has also made a concerted effort to expand its cloud computing capabilities. The 2021 acquisition of Linode, a leading provider of cloud computing services, has been a game-changer, allowing Akamai to offer a comprehensive suite of edge computing, storage, and networking solutions. In the third quarter of 2024, Akamai's compute revenue grew by 28% year-over-year, and the company remains on track to exit the year with an annualized revenue run rate of over $100 million for its enterprise compute solutions.
Product Segments
Akamai operates in three main product segments: Security, Delivery, and Compute.
Security Solutions have been a significant contributor to Akamai's revenue growth, with revenue increasing 13.8% and 16.5% for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year. Key drivers of this segment include growth in sales of Akamai's segmentation and web application security products.
Delivery Solutions have faced challenges, with revenue declining 15.9% and 13.3% for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year. This decline was primarily due to economic and geopolitical headwinds faced by Akamai's customers, resulting in moderating traffic growth rates and continued downward pricing pressure on contract renewals. Additionally, a large social media customer has taken steps to reduce reliance on U.S. providers, negatively impacting traffic on Akamai's network.
Compute Solutions have seen strong growth, with revenue increasing 28.0% and 25.4% for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year. This growth is attributed to increased sales of Akamai's compute products, including cloud optimization solutions, to new and existing customers.
Financials
Akamai's financial performance has been solid, with the company reporting quarterly revenue of $1.005 billion in Q3 2024, up 4% year-over-year. The company's non-GAAP operating margin was 29% during the quarter, reflecting its ability to effectively manage costs and drive profitability. Akamai's net income for the quarter was $57.91 million, or $1.59 per diluted share on a non-GAAP basis.
For the most recent fiscal year (2023), Akamai reported revenue of $3.81 billion, net income of $547.63 million, operating cash flow of $1.35 billion, and free cash flow of $618.4 million.
In Q3 2024, Akamai's operating cash flow was $392.542 million, and free cash flow was $207.425 million. Revenue grew 4.1% year-over-year as reported and in constant currency. The increase in revenue was primarily due to continued growth in sales of security and compute solutions, partially offset by a decline in revenue from delivery solutions.
Geographically, revenue derived in the U.S. was $524.61 million, up 5.2% year-over-year, and represented 52.2% of total revenue in Q3 2024. International revenue was $480.07 million, up 2.8% year-over-year as reported and 3.3% in constant currency, and represented 47.8% of total revenue. No single country outside the U.S. accounted for 10% or more of revenue.
Liquidity
Akamai's debt/equity ratio was 0.969 as of September 30, 2024. The company had $569.75 million in cash and cash equivalents and $1.13 billion in marketable securities, for a total of $2 billion in cash, cash equivalents and marketable securities. Akamai also has a $500 million five-year revolving credit agreement that was entered into in November 2022, of which there were no outstanding borrowings as of September 30, 2024.
The company's current ratio and quick ratio were both 3.14 as of September 30, 2024, indicating a strong liquidity position.
Guidance and Future Outlook
For Q4 2024, Akamai is projecting revenue in the range of $995 million to $1.020 billion, which is flat to up 3% as reported and in constant currency over Q4 of 2023. The company expects Q4 2024 non-GAAP operating margin of approximately 27% to 28% and non-GAAP EPS in the range of $1.49 to $1.56.
For the full year 2024, Akamai now expects revenue of $3.966 billion to $3.991 billion, which is up 4% to 5% year-over-year as reported and up 5% in constant currency. The company expects security growth of approximately 15% to 17% in constant currency and compute revenue growth of approximately 25% in constant currency for the full year 2024. Akamai is estimating non-GAAP operating margin of approximately 29% and non-GAAP earnings per diluted share of $6.31 to $6.38 for the full year 2024.
Industry Trends
The content delivery network (CDN) industry has seen moderate growth in recent years, with a CAGR of around 8-10% as the adoption of cloud computing and online media/streaming has continued to increase. However, the industry has faced pricing pressure and competition from larger cloud providers entering the market. Akamai has been shifting its focus towards higher-growth areas like security and cloud computing solutions to offset these industry headwinds.
Challenges and Opportunities
While Akamai's delivery solutions have faced headwinds due to industry-wide macroeconomic pressures, the company has remained disciplined in its approach, focusing on maintaining profitability in this segment. Akamai's scale and cost structure enable it to remain a viable and profitable player in the delivery space, even as traffic growth has moderated.
Looking ahead, Akamai is well-positioned to continue its transformation. The company plans to shift more investment into the development of its cloud computing capabilities and new security products, as well as into expanding its go-to-market resources and partner ecosystem. This strategic focus on the faster-growing areas of the business, while maintaining discipline in the delivery segment, should enable Akamai to capitalize on the significant opportunities in the cybersecurity and cloud computing markets.
Akamai's success has not gone unnoticed, with the company facing increased competition from both new entrants and established players. However, Akamai's extensive network, deep security expertise, and strong customer relationships position it well to fend off these challenges and maintain its leadership in the markets it serves.
Conclusion
In conclusion, Akamai Technologies has evolved from a content delivery pioneer into a cybersecurity and cloud computing powerhouse that is powering and protecting businesses worldwide. The company's strategic shift into security and cloud computing has paid significant dividends, and Akamai is poised to continue its growth trajectory by capitalizing on the massive opportunities in these fast-growing industries. With strong financial performance, a healthy liquidity position, and a clear strategy for future growth, Akamai remains well-positioned to navigate the challenges and opportunities in the dynamic digital landscape.