Akamai (AKAM) Q3 2023: Security Revenue Jumps 20% as Edge Cloud Strategy Drives Mix Shift
Akamai’s security business accelerated sharply, now driving over 45% of total revenue, as the company’s edge-centric cloud and compute strategy continues to reshape its financial mix. Customer contract acquisitions from StackPath and Lumen add near-term delivery revenue, but management’s focus remains on scaling higher-margin security and compute offerings. Guidance was raised across all major lines, underpinned by strong execution in security and cost leverage from internal cloud migration.
Summary
- Security Portfolio Expansion: Integrated security solutions are deepening customer relationships and fueling double-digit growth.
- Cloud Migration Cost Leverage: Internal workload migration to Akamai Connected Cloud is driving sustained margin gains.
- Contract Acquisitions Upsell Opportunity: Recent CDN contract buys create a pipeline for cross-selling security and compute.
Business Overview
Akamai operates a global content delivery network (CDN), edge security, and cloud computing platform. The company monetizes three primary segments: security solutions (protecting enterprise applications and infrastructure), compute (cloud and edge computing services), and content delivery (accelerating and distributing web and media traffic). Security is now the largest revenue source, followed by delivery and compute.
Performance Analysis
Security revenue surged 20% year-over-year, now making up nearly half of Akamai’s total sales. This growth was led by GuardaCore, segmentation security product, which posted a 97% annual increase and now exceeds a $100 million run-rate. The web application firewall (WAF) suite also saw robust adoption, supported by new bundled offerings that increased average deal size and customer stickiness.
Compute revenue grew 19% year-over-year, reflecting early traction for Akamai Connected Cloud as new core regions went live globally. Delivery revenue, the legacy CDN business, declined 4% but was buoyed by recently acquired customer contracts from StackPath and Lumen. Margins improved on both revenue growth and a 26% reduction in third-party cloud spend, as Akamai migrated more internal workloads to its own infrastructure.
- Security Bundles Drive Upsell: New bundles with advanced entitlements are lifting renewal pricing and expanding wallet share within targeted verticals.
- Contract Wins Expand Customer Base: Acquisitions of over 200 CDN customer contracts provide both immediate revenue and a strategic upsell channel for higher-value offerings.
- International Outperformance: Revenue outside the U.S. grew 11% year-over-year, reflecting global demand for security and compute solutions.
Profitability exceeded guidance, with non-GAAP EPS up 29% and operating margin two points above forecast, reflecting both revenue outperformance and ongoing cost discipline.
Executive Commentary
"Our expanded security portfolio is deepening our relationships with customers. Our cloud computing plans are executing on schedule. And we continue to invest in Akamai's future growth while also enhancing our profitability."
Tom Layton, Chief Executive Officer
"We continue to reduce our third-party cloud spend by migrating internal workloads to our connected cloud platform. In Q3, our third-party cloud spend declined 26% year-over-year."
Ed McGowan, Chief Financial Officer
Strategic Positioning
1. Security as Primary Growth Engine
Security solutions now anchor Akamai’s revenue mix, with segmentation and WAF products outpacing legacy CDN growth. The company’s ability to deliver integrated, best-of-breed security—highlighted by rapid adoption of GuardaCore and new API security—positions Akamai as a trusted partner for enterprises navigating escalating cyber threats.
2. Edge-First Cloud Computing
Akamai Connected Cloud leverages the company’s 4,100+ edge locations, enabling differentiated compute closer to end-users. This distributed architecture appeals to customers needing low-latency, data-residency, or regulatory compliance advantages unavailable from centralized hyperscalers. Management sees ample opportunity to fill capacity with both internal workloads and third-party demand.
3. Cost Structure Transformation
Internal migration off third-party clouds is a structural margin lever. Management expects continued cost reductions as more workloads shift to Akamai infrastructure, supporting both profitability and competitive pricing for customers seeking alternatives to hyperscaler cost inflation.
4. Contract Acquisitions as Upsell Catalyst
StackPath and Lumen contract buys add over 200 new customers, providing a pipeline for cross-selling security and compute. Management emphasizes that these deals were opportunistic, not a shift to active consolidation, but expects these customers to be receptive to broader Akamai offerings.
5. AI and Inference at the Edge
AI workloads represent a future demand driver, especially for inference engines that benefit from edge processing. Akamai’s edge presence and local compute capability are positioned to capture workloads requiring data residency and low-latency, while core data centers address heavier training needs.
Key Considerations
This quarter’s results underscore a strategic pivot from legacy CDN to security and compute. Investors should weigh the sustainability of security growth, the pace of compute adoption, and the integration of new customer contracts.
Key Considerations:
- Security Upsell Momentum: New bundles and segmentation solutions are expanding average deal size and renewal uplift, especially in targeted verticals.
- Compute Capacity Utilization: Early signs of enterprise adoption are promising, but sustained revenue growth will depend on filling new core regions and edge compute build-out.
- Margin Expansion from Cloud Insourcing: Ongoing migration of internal workloads is a durable driver of margin improvement and cost competitiveness.
- Contract Acquisition Integration: Success in converting acquired CDN customers to security and compute offerings will determine long-term accretion from these deals.
Risks
Legacy delivery remains in structural decline, and recent CDN contract acquisitions may face churn risk if customers seek multi-provider strategies or more aggressive pricing. Security growth is exposed to competitive intensity and evolving threat vectors, while compute adoption depends on Akamai’s ability to differentiate against larger hyperscalers and rapidly scale its partner ecosystem. Macroeconomic caution, including elongated enterprise sales cycles and bankruptcies in retail, could weigh on delivery and compute ramp.
Forward Outlook
For Q4, Akamai guided to:
- Revenue of $985 million to $1.005 billion (up 6% to 8% YoY)
- Non-GAAP operating margin of approximately 29%
For full-year 2023, management raised guidance:
- Revenue of $3.802 to $3.822 billion (up 5% to 6% YoY)
- Security revenue growth to ~15% for the year
- Compute revenue of approximately $500 million
Management highlighted:
- StackPath and Lumen contracts expected to add $60-70 million in 2024 with positive EPS accretion
- CapEx to moderate in 2024 as core compute build-out slows, with incremental spend focused on edge compute expansion
Takeaways
Akamai’s pivot to security and edge cloud is reshaping its revenue base and improving profitability, with structural cost advantages emerging from internal cloud migration and product bundling. The ability to cross-sell into newly acquired customer contracts and deepen wallet share with existing clients will be critical to sustaining double-digit growth in high-margin segments.
- Security and Compute Mix Shift: Security and compute now drive over 60% of revenue, with legacy delivery declining in relative importance.
- Margin Leverage from Cloud Insourcing: Internal workload migration is a durable source of cost savings and competitive differentiation.
- Watch for Compute Ramp: The pace of enterprise adoption and edge compute utilization will be a key determinant of long-term growth and capital efficiency.
Conclusion
Akamai’s Q3 results validate its strategy of pivoting toward security and distributed cloud, with strong execution reflected in both growth and margin expansion. Investors should monitor the company’s ability to scale compute, cross-sell into its expanded customer base, and sustain security leadership as industry dynamics evolve.
Industry Read-Through
Akamai’s results highlight the secular shift from traditional CDN to integrated security and edge cloud solutions, a trend likely to accelerate as enterprises seek to optimize for performance, cost, and regulatory compliance. The company’s success with internal cloud insourcing and edge compute deployment signals a broader industry opportunity for distributed architectures, especially as AI inference and data residency requirements rise. Legacy CDN providers without a robust security or edge compute portfolio may face accelerating erosion, while hyperscalers will encounter increasing competition for workloads that prioritize locality, latency, or neutrality. Security vendors should note the growing demand for bundled, integrated offerings and the importance of channel and partner ecosystems in driving adoption.