Web content delivery and security company Akamai (NASDAQ:AKAM) reported results in line with analyst expectations in Q1 FY2023 quarter, with revenue up 1.33% year on year to $915.7 million. Guidance for next quarter's revenue was $930 million at the midpoint, which is 1.06% above the analyst consensus. Akamai made a GAAP profit of $97.1 million, down on its profit of $119.2 million, in the same quarter last year.
Akamai (AKAM) Q1 FY2023 Highlights:
- Revenue: $915.7 million vs analyst estimates of $912.1 million (small beat)
- EPS (non-GAAP): $1.40 vs analyst estimates of $1.32 (6.01% beat)
- Revenue guidance for Q2 2023 is $930 million at the midpoint, above analyst estimates of $920.2 million
- Free cash flow of $11.3 million, down 95.9% from previous quarter
- Gross Margin (GAAP): 60.5%, down from 63.2% 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).
As you can see below, Akamai's revenue growth has been unimpressive over the last two years, growing from quarterly revenue of $842.7 million in Q1 FY2021, to $915.7 million.
Akamai's quarterly revenue was only up 1.33% year on year, which might disappoint some shareholders. But the revenue actually decreased by $12.1 million in Q1, compared to $45.9 million increase in Q4 2022. However, Akamai's sales do seem to have a seasonal pattern to them, and considering management is guiding for revenue to rebound in the coming quarter we wouldn't be too concerned.
Guidance for the next quarter indicates Akamai is expecting revenue to grow 2.95% year on year to $930 million, slowing down from the 5.92% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 4.56% over the next twelve months.
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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 60.5% in Q1.
That means that for every $1 in revenue the company had $0.61 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has been going down over the last year, which is probably the opposite direction shareholders would like to see it go.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Akamai's free cash flow came in at $11.3 million in Q1, down 93.4% year on year.
Akamai has generated $873.2 million in free cash flow over the last twelve months, an impressive 24.1% of revenues. This extremely high FCF margin is a result of Akamai asset lite business model and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.
Key Takeaways from Akamai's Q1 Results
Sporting a market capitalization of $12.4 billion, more than $751.9 million in cash and with positive free cash flow over the last twelve months, we're confident that Akamai has the resources it needs to pursue a high growth business strategy.
It was good to see Akamai provide next quarter revenue outlook exceeding analysts’ expectations. And we were also glad that the revenue guidance for the rest of the year exceeded expectations. Zooming out, we think this was a decent quarter, showing the company is staying on target. The company is up 5.12% on the results and currently trades at $83 per share.
Is Now The Time?
When considering Akamai, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Akamai we will be cheering from the sidelines. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there. And while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately 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 twelve months is 3.2x, 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, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.
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