In Akamai Technologies' (NASDAQ: AKAM) latest quarterly report, the company crushed Wall Street's estimates. Thanks to solid sales of cloud security services and a media delivery platform that's finding its feet again, Akamai's third-quarter sales rose 6% year over year to $621 million and adjusted earnings of $0.62 per share left the $0.59 analyst consensus far behind.
Don't call it a comeback, because Akamai never really went away. The data distribution and network security veteran has grown its top-line sales by 25% over the last three years while free cash flows increased by 17%. At the same time, Akamai shares fell 12% lower and are now trading at a significant discount to historical P/E and price to cash flow ratios.
Read on to get a closer look at three key quotes from Akamai's third-quarter earnings call, where management explained what's going on behind the headline numbers.
Akamai CEO Tom Leighton. Image source: Akamai Technologies.
1. Video streaming is a big traffic driver
Just last month, we supported a single media event that drove more than 17 terabits a second in traffic. And on that day, we delivered 60 terabits per second overall on the Akamai platform, establishing a new record for our business.
To put this number in perspective, 60 terabits per second is the equivalent of 12 million people watching a video streamed at 5 megabit per second at the same time. And 5 megabits per second is a typical bit rate for the over-the-top streams provided by major broadcasters today.
It's not hard to imagine audiences that are 10 or even 100x as large in the future and viewing media at even higher bit rates.
-- Akamai CEO Tom Leighton
For those keeping score at home, the big media event on September 12 was Apple's (NASDAQ: AAPL) introduction of three new iPhone models. Cupertino's iPhone releases are always big crowd-pleasers, and Akamai helped Apple fans keep up with the event in high-definition video streams this time.
As big as that event was, Leighton expects to be able to serve a global audience many times this size with streaming video of much higher quality. He called this "a key reason" for Akamai's long-term optimism over the media delivery market. That segment accounted for 29% of Akamai's total third-quarter revenues.
2. The evolving content market
Some of Akamai's largest clients have built their own content delivery platforms in recent years, reducing their need for independent traffic management platforms. But Leighton still sees plenty of room for his company's services, even as a handful of massive platforms go the do-it-yourself route:
The giant platform companies are going to do a lot of DIY. They are doing a lot of DIY now. We're seeing a stabilization in terms of percentage of our revenue, 8% being from those 6 large platform companies. I think as we look at [over-the-top video, or OTT,] in the future, those 6 companies are going to have a reasonable share of OTT.
And I think as we look forward, we see a world where there will be a lot of direct-to-consumer and other distribution mechanisms in addition to those 6 large platform companies, and that presents a very large opportunity for Akamai.
In other words, more business from small and mid-tier clients should be able to replace the lost revenue from the biggest names in media, such as Apple and Netflix (NASDAQ: NFLX).
Don't forget, content delivery networks only make sense when you're installing content servers in dozens of key network hubs around the world. That's neither easy nor cheap.
For companies with massive global scale and large financial resources, it can make sense to replace off-the-shelf content delivery services with a tailor-made, in-house alternative like the Netflix Open Connect service. But those are rare cases, where custom technologies and large economies of scale provide good reasons for reinventing the wheel. Almost every business can get the job done with Akamai or Limelight Networks' turnkey solutions, and that route is also much faster than investing time and money in a brand new system.
3. Enterprise-grade security
Cloud security products already play a starring role in Akamai's quarterly reports. In the third quarter, this division's sales rose 27% year over year to $121 million, as adjusted for currency exchange effects. And as it turns out, Akamai could ride security solutions right back into those large media clients who have built their own content networks. The company recently introduced a new range of cloud security tools designed specifically for enterprise-scale customers, and that effort should start moving the needle next year:
We've just released our first product, as we've talked about, and we'd like to see it start to make a difference at the end of 2018. So it's big enough that you'll start to notice, and we'll report it out separately.
Our goal is to have the same kind of growth trajectory we had for web security, which was nothing about 5 years ago and now is on a $0.5 billion a year run rate. So that's the goal, which would mean we'd start to see something meaningful by the end of next year.
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Anders Bylund owns shares of Netflix. The Motley Fool owns shares of and recommends Apple and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.