Web content delivery and security company Akamai (NASDAQ:AKAM) reported results in line with analyst expectations in Q2 FY2021 quarter, with revenue up 7.31% year on year to $852.8 million. Akamai made a GAAP profit of $156.4 million, down on its profit of $161.9 million, in the same quarter last year.
Akamai (AKAM) Q2 FY2021 Highlights:
- Revenue: $852.8 million vs analyst estimates of $845.9 million (0.81% beat)
- EPS (non-GAAP): $1.42 vs analyst estimates of $1.38 (2.57% beat)
- Free cash flow of $223.5 million, up 162% from previous quarter
- Gross Margin (GAAP): 62.4%, down from 63.6% previous quarter
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.
Today, more people are moving their business online, which is placing a lot of demand on the global internet network. As the number of functionalities included in websites and apps also grows, so does the need for platforms that help to deliver a seamless website experience to users.
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 slow over the last year, growing from quarterly revenue of $794.7 million, to $852.8 million.
Akamai's quarterly revenue was only up 7.31% year on year, which would likely disappoint many shareholders. We can see that the company increased revenue by $10.1 million quarter on quarter accelerating on the $3.58 million decrease in Q1 2021.
Analysts covering the company are expecting the revenues to grow 6.22% over the next twelve months, although we would expect them to review their estimates once they get to read these results.
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, licences, technical support and other necessary running expenses was at 62.4% in Q2.
That means that for every $1 in revenue the company had $0.62 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.
Key Takeaways from Akamai's Q2 Results
Sporting a market capitalisation of $19.3 billion, more than $1.41 billion in cash and with positive operating 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.
Akamai topped analysts’ revenue expectations this quarter, even if just narrowly. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that the revenue growth was quite weak. Overall, this quarter's results were definitely not the best we've seen from Akamai. The company is down -3.96% on the results and currently trades at $115 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 5.6, 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.