Web content delivery and security company Akamai (NASDAQ:AKAM) reported results in line with analysts' expectations in Q2 FY2023, with revenue up 3.59% year on year to $935.7 million. Guidance for next quarter's revenue was also better than expected $944.5 million at the midpoint, 1.33% above analysts' estimates. Akamai made a GAAP profit of $128.8 million, improving from its profit of $119.5 million in the same quarter last year.
Akamai (AKAM) Q2 FY2023 Highlights:
- Revenue: $935.7 million vs analyst estimates of $930.1 million (small beat)
- EPS (non-GAAP): $1.49 vs analyst estimates of $1.41 (5.94% beat)
- Revenue Guidance for Q3 2023 is $944.5 million at the midpoint, above analyst estimates of $932.1 million
- The company raised its revenue guidance for the full year to $3.78 billion at the midpoint
- Free Cash Flow of $234.3 million, up 155% from the previous quarter
- Gross Margin (GAAP): 60.1%, down from 61.8% in the same quarter last year
Founded in 1999 by two engineers from MIT, Akamai (NASDAQ:AKAM) provides software for organizations to efficiently deliver web content to their customers.
When streaming videos to a large number of viewers, operating a high traffic ecommerce site or a gaming portal, the server providing the content can get overwhelmed by the number of requests, resulting in a slow response time, dropped connections and frustrated customers. Using Akamai’s Content Delivery Network, organizations can provide quality and uninterrupted access to websites or applications to their customers, even at a really large scale.
Akamai operates a network of servers around the world and uses them to store copies of web content owned by its customers on servers closest to the user, to improve download speed. By moving web content closer to users, Akamai also helps to prevent cybercriminals from hijacking internet traffic, which is more vulnerable when transmitted over long distances.
For example, many customers visit online shopping sites during the holiday season to access exclusive offers on days like Black Friday. To cope with the enormous volume of traffic experienced during this period, Akamai works in the background to automatically check the location of every user accessing the shopping site and serves them the website from the Akamai server geographically closest to them, without the user noticing anything. This means users in the UK can enjoy the same web experience as users in the US when accessing a website located in the US.
The amount of content on the internet is exploding, whether it is music, movies and or e-commerce stores. Consumer demand for this content creates network congestion, much like a digital traffic jam which drives demand for specialized content delivery networks (CDN) services that alleviate potential network bottlenecks.
Akamai competes with content delivery network providers such as Cloudflare (NYSE:NET), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), and Microsoft (NASDAQ:MSFT) as well as innovators in edge computing such as Fastly (NYSE:FSLY).
Sales Growth
As you can see below, Akamai's revenue growth has been unimpressive over the last two years, growing from $852.8 million in Q2 FY2021 to $935.7 million this quarter.
Akamai's quarterly revenue was only up 3.59% year on year, which might disappoint some shareholders. However, its revenue increased $20 million quarter on quarter, a strong improvement from the $12.1 million decrease in Q1 2023. This is a sign of acceleration of growth and very nice to see indeed.
Next quarter's guidance suggests that Akamai is expecting revenue to grow 7.1% year on year to $944.5 million, improving on the 2.51% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 5.93% over the next 12 months.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Akamai's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 60.1% in Q2.
That means that for every $1 in revenue the company had $0.60 left to spend on developing new products, sales and marketing, and general administrative overhead. Akamai's gross margin is poor for a SaaS business and we'd like to see it start improving.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Akamai's free cash flow came in at $234.3 million in Q2, down 12.3% year on year.
Akamai has generated $920.8 million in free cash flow over the last 12 months, an impressive 25.2% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.
Key Takeaways from Akamai's Q2 Results
With a market capitalization of $14.5 billion, a $790.6 million cash balance, and positive free cash flow over the last 12 months, we're confident that Akamai has the resources needed to pursue a high-growth business strategy.
It was comforting to see Akamai beat analysts' revenue guidance expectations, even if just slightly. Additionally, the company raised its revenue and EPS guidance for the full year. That really stood out as a positive in these results. Zooming out, we think this was a decent quarter, showing that the company is staying on target. The stock is up 8.22% after reporting and currently trades at $102.8 per share.
Is Now The Time?
When considering an investment in Akamai, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in case of Akamai, we'll be cheering from the sidelines. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there. And while its bountiful generation of free cash flow empowers it to invest in growth initiatives, the downside is that its customer acquisition is less efficient than many comparable companies and its gross margins show its business model is much less lucrative than the best software businesses.
Akamai's price to sales ratio based on the next 12 months is 3.8x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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