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Akamai Tech (AKAM +11%) delivered a decent enough Q2 report to help its shares break free from recent sideways action and fill the gap from last quarter's sell-off. The content delivery network (CDN) provider was coming off a weak showing in Q1, plagued by slowing traffic across the industry. As a CDN provider, AKAM benefits from healthy internet traffic as companies distribute their content across a global network of edge servers, those closest to the end user, to keep load times quick.

In Q2, traffic remained weak, leading to a 13% drop in delivery revenue yr/yr to $329 mln. However, AKAM already warned that the current environment would produce lackluster near-term results last quarter when it projected bearish Q2 guidance. As such, investors are not stuck on a relatively underwhelming performance in Q2. Rather, the market is liking several improving dynamics.

• For instance, AKAM anticipates a modest uptick in yr/yr traffic in Q3, mainly supported by the Olympic Games, which should drive around $3-4 mln in incremental revenue. Furthermore, content delivery comprises just a third of overall revenue, down from around two-thirds roughly five years ago, allowing AKAM to benefit from robust demand across its cloud and security businesses.
  • Security revs climbed by 15% yr/yr to $499 mln, comprising over half of AKAM's total revenue of $979.6 mln, a 4.7% jump yr/yr, for the first time. Cloud computing revs grew even quicker at 23% yr/yr to $151 mln.
• AI is also generating tailwinds, albeit likely modest. AKAM is implementing several AI-powered tools, such as a chatbot application, to improve customer experience. AKAM believes AI is making up only a small fraction of its total annualized recurring revenue (ARR). However, management is optimistic about the technology's growth potential.
• Shining brightest was AKAM's guidance. Following the company's first downbeat outlook since 2022, AKAM needed to return to form in Q2. The company projected Q3 adjusted EPS ahead of consensus and revs in-line, expecting growth of +2-4%, similar to Q2. For FY24, AKAM raised its previous outlook, although not back to its initial targets. The company expects FY24 adjusted EPS of $6.34-6.47, up from $6.20-6.40, and revs of $3.97-4.01 bln, up from $3.95-4.01 bln.
  • AKAM only lifted the low end of its FY24 revenue outlook because of how muted Q4 was last year despite being the company's typically strongest quarter.

After such a messy Q1 report in early May, AKAM's Q2 performance and subsequent Q3 and FY24 guidance were a relief. We mentioned ahead of AKAM's report that stabilization could be enough to alleviate broader concerns over the current economic climate. While Q3 forecasts do not translate to much sequential improvement, they also do not show further weakness, an encouraging sign that perhaps the worst is behind AKAM.