Akamai’s Compute Upside Is Unprecedented

Akamai announced earnings on August 9, 2022, with mixed results. The company grew 6% y-o-y in Q2-2022; the culprit affecting growth was Delivery revenue.

However, it’s noticeable one product group is taking off. The real story is Compute, which grew 74% y-o-y.

Revenue is broken down into Delivery, Security, and Compute. Of total revenue, Delivery revenue represents 46%, Security 42%, and Compute 12%.

Delivery is a commodity business, and this quarter it went into negative territory. The turbulent economy, rising energy prices in Europe, and the strong dollar are partly to blame. We are witnessing that when times are tough, Delivery revenue suffers as media, gaming, and advertising businesses pull back spending.

Regardless, Delivery is a two billion business for Akamai. It’s profitable, and Akamai Delivery revenue is more than all other public CDNs combined. Hence, the Delivery business of the competition is not likely to be impacted as much as Akamai since they have a smaller revenue base.

Security is growing 17% depending on the quarter. That might not seem impressive, but Akamai is generating half the revenue of Fortinet, a global leader in cyber security. Akamai’s secret to growing the security business is acquisition. They’ll continue to hunt for startups like Guardicore and Cyberfend, and their global sales force can turn them into +$100M ARR products.

Growth Engine – Compute

Akamai’s new growth engine is Compute. In 2016, Akamai generated $365M in Cloud Security revenue. Today, it’s doing more than that every quarter. Compute is the new Security engine for Akamai. But in terms of the total addressable market, there is no comparison.

Compute is a behemoth. In apparently what is a recession, at least in some parts of the world, AWS clocked in $19.7B revenue for Q2, growing 33% y-o-y. It doesn’t take a genius to understand that Akamai sits in front of a lot of traffic destined for AWS. All they need to do is capture some of it.

Akamai Compute Product Growth @ 50%

  • 2022: $400M
  • 2023: $600M
  • 2024: $900M
  • 2025: $1.35B
  • 2026: $2B
  • 2027: $3B
  • 2028: $4.5B

Akamai’s Compute business generated $106M in Q2 (~$400M annualized). On the earnings calls, the CEO said the Compute stack would be scaled to hundreds of PoPs. The Compute product category includes the following:

  • Linode: bare metal, VMs, GPUs, containers, block storage, object storage, Akamai NetStorage, and databases
  • Serverless: EdgeWorkers and EdgeKV
  • Edge Applications: Cloudlets, Image and Video Manager
  • Optimization: Ion, mPulse, CloudTest, and Cloud Wrapper

Before we continue, here are Q2-2022 earning highlights:

  • Q2 revenue was $903M, up 6% y-o-y.
  • Security revenue: $381M, up 17% y-o-y
  • Delivery revenue: $417M, down 11% y-o-y
  • Compute revenue: $106M, up 74% y-o-y with Linode contributing $32M
  • Security and Compute represent 54% of total revenue
  • International sales are 47% of revenue. Impact on revenue $114 due to currency exchange
  • Security growth: WAF, Bot Manager, Account Protector, Page Integrity, and Guardicore.
  • Traffic declined in Q2 due to the macroeconomic climate
  • The global economy has impacted media, advertising, and gaming business, thus affecting Delivery revenue
  • Revenue and margins will be impacted in the short term, thanks to the economic climate
  • Three cost-saving initiatives 1) Migrate cloud spend from hyperscalers to Linode 2) Be more selective on types of customer traffic, which should lower CAPEX 3) Cut back on office space as
  • the remote workforce is in play
  • Expected Q3 revenue is $868M to $883M
  • Linode enables Akamai to close its first large deal (transcoding) worth several million.
  • Europe is a challenging region because energy prices have skyrocketed, which might impact the customers buying online.
  • The goal is to capture the compute workloads from hyperscalers using Linode.
  • Focused on scaling Linode capabilities across the footprint
  • Akamai spends $100M annually on cloud companies. All that will migrate to Linode
  • Guardicore annual revenue run rate is $60M, double the revenue before the acquisition
  • Security: EAA and Page Integrity are new products compared to WAF, and it has lots of upside potential

Compute Expansion

Akamai completed its acquisition of Linode five months ago, in March 2022. The first job at hand is to integrate the two companies. At the same time, the CEO stated that they plan to scale Linode globally and make it more enterprise-ready.

What’s interesting, Akamai execs said they spend $100M annually on the cloud with hyperscalers. They are shifting this spend entirely to Linode to reduce cost and beef up Linode.

Akamai is in an exciting position. It is well known they have the most interconnected network globally, and their caches are not only in the middle mile, but they are present in the last mile of carrier networks worldwide. Some caches have been in the last-mile networks before even some hyperscalers were born.

Just imagine the possibilities. Here is one. Akamai can take its serverless and Compute (Linode) stack, place them in those networks, and rent them out by the second, hour, day, month, etc.

Summary

The upside of Akamai’s Compute business is unprecedented. With the Linode acquisition, they have a full compute stack including serverless functions, VMs, containers, bare-metal, GPUs, support for multiple databases and storage options, and so on. Add to that several hundred locations, including those in the last mile, and Akamai has a more extensive offering than AWS did when it first started.

Although we are in a turbulent economy, that hasn’t stopped AWS from growing at an incredible rate, regardless if they met analyst expectations. For Akamai to grow the Compute business by 50% for the next decade, everything is in place. The technology, the global sales force, the channel program, PLG, SLG, billions in the bank, well-seasoned executive teams, etc. The only thing stopping Akamai is Akamai.

Disclaimer: Bizety is not a registered legal, tax, or investment professional. All content is for informational purposes only. Therefore, we are not soliciting, recommending, or endorsing any public company or security.

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