Web content delivery and security company Akamai (NASDAQ:AKAM) missed analyst expectations in Q1 FY2022 quarter, with revenue up 7.23% year on year to $903.6 million. Akamai made a GAAP profit of $119.1 million, down on its profit of $155.6 million, in the same quarter last year.
Akamai (AKAM) Q1 FY2022 Highlights:
- Revenue: $903.6 million vs analyst estimates of $904.8 million (small miss)
- EPS (non-GAAP): $1.39 vs analyst expectations of $1.42 (2.23% miss)
- Free cash flow of $91 million, down 74.9% from previous quarter
- Gross Margin (GAAP): 63.1%, in line with 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 year, growing from quarterly revenue of $842.7 million, to $903.6 million.
Akamai's quarterly revenue was only up 7.23% year on year, which would likely disappoint many shareholders. But the revenue actually decreased by $1.71 million in Q1, compared to $45 million increase in Q4 2021. Akamai's sales seem to have a seasonal pattern to them.
Ahead of the earnings results the analysts covering the company were estimating sales to grow 11% 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 63.1% in Q1.
That means that for every $1 in revenue the company had $0.63 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 dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.
Cash Is King
If you follow 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 $91 million in Q1, down 43.9% year on year.
Akamai has generated $1.04 billion in free cash flow over the last twelve months, an impressive 29.6% of revenues. This robust FCF margin is a result of Akamai asset lite business model, scale advantages, 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 $18 billion, more than $506.8 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.
We struggled to find many strong positives in these results. On the other hand, it was less good to see that the revenue growth was quite weak and it missed analysts' revenue expectations. Overall, this quarter's results were not the best we've seen from Akamai. The company is down 6.8% on the results and currently trades at $106.07 per share.
Is Now The Time?
Akamai may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although Akamai is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been very weak, but at least that growth rate is expected to increase in the short term. 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 4.8x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. In the end, beauty is in the eye of the beholder. While Akamai wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.
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