F. Thomson Leighton
Director, President, Chief Executive Officer & Co-Founder at Akamai Technologies
Thanks, Mark.
I'm pleased to report that Akamai delivered a solid third quarter, in which we achieved 2 significant milestones. For the first time, Akamai's total annual revenue run rate exceeded $4 billion. And our security annual revenue run rate exceeded $2 billion. Our compute results were also very strong, growing 28% year-over-year in constant currency. Non-GAAP operating margin was 29%, and non-GAAP earnings per share was $1.59, in line with our guidance. On last quarter's earnings call, we reviewed how Akamai is undergoing a fundamental transformation from a content delivery pioneer into the cybersecurity and cloud computing company that powers and protects business online. Security now delivers the majority of Akamai revenue. And compute and security combined account for more than 2/3 of our revenue.
Since entering the security market a little more than a decade ago with web app firewall as a cloud service, we greatly expanded our security product set into an impressive portfolio, covering infrastructure, application and enterprise network security. We now offer market-leading solutions to help protect against DDoS and DNS attacks, application and API attacks, account abuse and fraud and ransomware and data exfiltration attacks. We're already leveraging generative AI to enhance the security and ease of use of our Guardicore and WAF solutions. And we set ourselves apart from the competition with our extensive threat visibility and intelligence and our expert managed services that customers rely upon to protect their businesses.
Customer interest in our security solutions remained strong in Q3, and we signed many significant contracts, including a $70 million agreement with one of the world's largest financial institutions, which included our Guardicore segmentation solution, API Security and Prolexic DDoS protection; a $6 million upgrade at one of the world's leading chemical producers that included Guardicore to increase visibility and better protect against ransomware; a $3 million expansion with one of the world's leading auto manufacturers that included Guardicore to protect their critical high-performance computing clusters; a $5 million upgrade from another of the world's largest financial institutions to protect their apps and APIs from malicious activity; and a competitive takeaway for our new API security solution at one of the world's largest multinational technology companies.
As a result of the strong early momentum, our new API Security solution is on track to achieve an annualized revenue run rate of more than $50 million by the end of the year. And our Zero Trust segment, led by Guardicore, is on track to achieve an annualized revenue run rate of more than $180 million by year-end. We're also seeing strong interest in our Prolexic service as a result of the large DDoS attacks that have been raging across Asia. Our State of the Internet report in September warned of how geopolitical tensions are increasing the risks of attacks. And we recently thwarted 2 of the largest DDoS attacks ever seen, one against a leading financial institution in the Middle East and the other against a popular generative AI service. In both cases, our customers didn't see any impact, thanks to our protection.
The GenAI customer, a well-known hyperscaler, told us that the enterprise-grade protection we provide to their business is a true differentiator, and it's why they partner with Akamai over competing vendors who have struggled when confronted with large attacks. As another example, a major financial institution in Australia called on us last month for emergency assistance when the competitor they were using for security failed in the face of an attack, resulting in a significant disruption to their business and painful news headlines. We also signed up one of the leading financial institutions in India as they sought to defend themselves from the increasing scale of DDoS attacks.
I think it's worth noting that enterprise-grade security is not just about scale and reach, which Akamai has plenty of. It's also about having the right people and expertise to partner with and support the most demanding enterprise accounts. And it's about having five 9s of platform reliability. These are critical areas where Akamai excels. And there are key reasons why customers trust Akamai to keep them operating normally during even the most challenging circumstances. We've also continued to advance our security capabilities through innovation. For example, last month, we announced the availability of our new behavioral DDoS engine for Akamai's App and API Protector solution. It leverages machine learning and intelligence from our global platform to analyze data from multiple sources to provide automated protection against application layer attacks.
Turning now to compute. The strong momentum that we achieved in the first half of the year accelerated in Q3, with compute revenue growing to $167 million, up 28% year-over-year. We continued to add new compute customers at a strong pace, and we remain on track for our new enterprise compute solutions to exit the year with an annualized revenue run rate of more than $100 million. In Q3, we saw enterprise compute wins in the US at one of the largest retailers, one of the world's largest SaaS platforms, a large e-gaming platform, a large sports gaming platform, a nationwide passenger railroad and a global weather forecaster. In Europe, we saw a large compute win with a major German travel platform. And a major telco doubled their prior commit for our enterprise compute solutions.
In Latin America, one of the largest private banks in Brazil expanded their reliance on Akamai to adopt an ISV observability solution that provides insights into data to help improve user experience. And in APJ, we signed up an international domain management platform that enables domain owners to optimize and manage their domains using our compute solutions. Across the world, we're seeing strong interest in our differentiated cloud computing platform for cloud-native apps, observability, better performance and lower cost. Retailers in particular have told us that they've achieved better performance and conversion rates for their mobile apps running on Akamai Connected Cloud, with one reporting $160,000 in additional revenue per day.
We're also seeing more opportunities for our platform to support the use of AI for tasks such as image generation and processing, speech recognition, consumer analytics and prediction and generation of short videos for advertising. In September, we introduced new video workflow capabilities from our ISV partners that integrate our compute and delivery platforms to give media customers unprecedented flexibility to tailor media experiences to meet their user demands. And over the past year, we've greatly expanded our object storage capabilities to help customers get reliable, scalable and low latency workload performance at a fraction of the cost charged by hyperscalers.
Customers have responded. For example, French premium television channel Canal+ expanded their use of our services last quarter, adding Akamai Cloud Computing and migrating their video assets to Akamai's Object Store. This enabled them to significantly reduce their costs while improving performance and reliability. And just this month, Akamai entered into a multi-year strategic partnership with a large video workflow ISV that includes a $17 million commitment for Akamai's enterprise compute services. In an evaluation of public cloud platforms released last quarter, Forrester named Akamai a strong performer and noted that Akamai offers a market-leading edge platform that provides businesses with a distributed platform to build, run and secure applications.
The vision to lead as an IaaS alternative by offering compute at the edge of networks for low latency workloads and strengths in edge development with a significant global fabric of edge locations and robust computing platform that developers can utilize to deploy applications closer to users. In summary, we're pleased with the momentum that we've achieved in compute this year, and we're very excited about the enormous opportunity ahead. Now turning to delivery. As we've noted on recent calls, our delivery solutions have been weathering macroeconomic headwinds that have been felt industry-wide. In the 25 years that we've been in the delivery business, we've seen numerous swings in traffic levels, such as when traffic slowed as the largest Internet companies adopted DIY a decade ago. And as when traffic boomed at the start of the pandemic. Most recently, we've seen traffic growth slow as the streaming and gaming verticals have faced their own headwinds.
Looking forward, we expect that traffic growth will eventually rebound, just as it has in the past. Catalysts for potential future traffic growth include the analysis by Nielsen that 59% of video consumption has yet to move online, along with a lot of advertising, which will presumably follow the audience. More advanced video games and the growth of online sports, which is still in the early innings, are also catalysts to watch. When traffic growth picks up, we believe that Akamai is in a much stronger position than competitors to capture it. Given our scale and cost structure, we can add traffic very profitably, while it appears that many of our competitors are struggling to even stay in business.
In the meantime, and as I've said before, our plan for delivery is threefold. First, we'll remain disciplined when it comes to the profitability of traffic that we choose to serve. Second, we'll continue to leverage our market leadership position and installed base of major enterprises to generate cross-selling opportunities. And third, we'll continue to take steps to retain our market leadership while also reinvesting most of the cash flow from our delivery product line into the fast-growing areas of the business. It's important to note that Akamai realizes strong synergies and competitive advantages by offering customers delivery in addition to security and compute. These synergies and advantages include improved performance and seamless integration, bundling for cross-selling and strong customer retention, increased margins for all of our services, unmatched visibility from seeing enormous volumes of traffic and the capacity to quickly detect and stop massive cyber attacks at the edge.
As you can see from our results, Akamai has come a long way in our evolution from the leading content delivery company into the cybersecurity and cloud computing company that powers and protects business online. We're very pleased to see our security business exceed $2 billion in annual revenue run rate, and we're very excited about the enormous potential for future growth in cloud computing. But we still have more work to do to fully realize the potential of the fast-growing areas of our business.
As our next step, we plan to shift more investment into the development of our cloud computing capabilities and new security products, as well as into the go-to-market resources and partner ecosystem to sell these services to a broader portion of the enterprise marketplace. With the success of our new solutions in API security, enterprise security and cloud computing, we're now selling to enterprises who were not in the sweet spot for our delivery or cloud WAF services. And so we plan to add go-to-market positions for hunting, as well as experienced specialists to support sales of the new products.
Our new offerings are also much more partner friendly than our traditional delivery and cloud WAF solutions. And so we're also continuing to strengthen our partner ecosystem. In order to help fund these investments in the fast-growing areas of the business, we've made the difficult decision to eliminate about 2.5% of the current roles across the company. This was a painful decision because it impacts our people, whose innovation and drive have been an important part of our success. We believe that redeploying these resources will enable us to grow while still maintaining our near-term operating margin target of about 30% and then be in a better position to climb above 30% as the fast-growing areas of our business expand our profitability.
Now I'll turn the call over to Ed, who will review the Q3 results in more detail and provide our outlook on Q4. Ed?
