Summary
- The company's cybersecurity segment is now growing faster than its content delivery networks ("CDN") business.
- For 2020, cybersecurity related revenue could approach $1 billion.
- As a result of continued growth in cybersecurity and a strong comeback in CDN, Q2 results were very strong.
- While the transition from the stagnating CDN segment to faster-growing cybersecurity seems rational, it opens the door to competition.
Akamai (AKAM) had a blowout Q2 as its content delivery network ("CDN") segment made a comeback and its cybersecurity business continued to rapidly expand. However, the CDN business that Akamai has dominated for years is stagnant at best and declining at worst while network security - whether accomplished in the cloud, in hardware, or both - is a highly competitive market. So far, management has been able to exploit its existing edge network to rapidly advance its cybersecurity business. Going forward, AKAM will have to wall off its existing network security business from competitors while working hard to gain new customers.
Earnings
Akamai's Q2 EPS report was a blowout and soundly beat expectations on both the top and bottom lines. Revenue of $795 million was up 13% yoy and cost controls helped push EBITDA margin up to 32.7% vs. 31.1% in Q1. As a result, EPS of $0.98/share was up 42% from Q2 of 2019. It was a great quarter but the stock actually closed down a tad the day of the report.
As the graphic below shows, AKAM's cloud security business grew 27% in Q2 - continuing a trend that stretches back more than a year. What was surprising in Q2 was an uptick in what had been a rather stagnate CDN business (revenue up 7% yoy), likely due to customers scrambling to provide solutions to handle a massive surge in internet traffic due to the global pandemic:
Source: Q2 EPS Report
Going Forward
Note from the above graphic that AKAM's Cloud Security Solutions segment has grown to be ~1/3 of total revenue. But that means CDN is still responsible for ~2/3 or revenue. And that's the problem.
AKAM was a pioneer in CDN and really the first company to build a widely dispersed CDN. Akamai's CDN is still one of the largest, if not the largest, in the world:
A quarter of a million edge servers, deployed in thousands of locations around the world ingest 2.5 exabytes of data per year and interact with 1.3 billion devices and 100 million IP addresses every day. Residing within one network hop of over 90% of the world’s Internet users — it is the only global, massively distributed, intelligent edge platform, with the scale, resiliency and security that businesses demand.
As a result, Akamai has an advantage today because of the scale and resiliency of its existing network (more than 240,000 servers in over 130 countries) and its existing customer base:
