Akamai (NASDAQ:AKAM) Q3 Sales Beat Estimates, Next Quarter Growth Looks Optimistic
Web content delivery and security company Akamai (NASDAQ:AKAM) announced better-than-expected results in Q3 FY2023, with revenue up 9.5% year on year to $965.5 million. The company also expects next quarter's revenue to be around $995 million, in line with analysts' estimates. Turning to EPS, Akamai made a non-GAAP profit of $1.63 per share, improving from its profit of $1.26 per share in the same quarter last year.
Is now the time to buy Akamai? Find out by accessing our full research report, it's free.
Akamai (AKAM) Q3 FY2023 Highlights:
Revenue: $965.5 million vs analyst estimates of $943.4 million (2.3% beat)
EPS (non-GAAP): $1.63 vs analyst estimates of $1.50 (8.8% beat)
Revenue Guidance for Q4 2023 is $995 million at the midpoint, above analyst estimates of $987 million
Free Cash Flow of $206.8 million, down 30.6% from the previous quarter
Gross Margin (GAAP): 60.3%, in line with the same quarter last year
"We are very pleased with our excellent third quarter performance on both revenue and profitability," said Dr. Tom Leighton, Akamai's Chief Executive Officer.
Founded in 1999 by two engineers from MIT, Akamai (NASDAQ:AKAM) provides software for organizations to efficiently deliver web content to their customers.
Content Delivery
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.
Sales Growth
As you can see below, Akamai's revenue growth has been unimpressive over the last two years, growing from $860.3 million in Q3 FY2021 to $965.5 million this quarter.
Akamai's quarterly revenue was only up 9.5% year on year, which might disappoint some shareholders. However, we can see that the company's revenue grew by $29.8 million quarter on quarter, re-accelerating from $20 million in Q2 2023.
Next quarter's guidance suggests that Akamai is expecting revenue to grow 7.2% year on year to $995 million, improving on the 2.5% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 6.3% over the next 12 months before the earnings results announcement.
The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.
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 60.3% in Q3.
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 could be considered low for a SaaS business and we'd like to see it start improving.
Key Takeaways from Akamai's Q3 Results
With a market capitalization of $16.5 billion, a $939.3 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 good to see Akamai beat analysts' revenue expectations this quarter. We were also glad next quarter's revenue guidance came in higher than Wall Street's estimates and free cash flow was still solid, despite the drop. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is up 3.9% after reporting and currently trades at $113 per share.
So should you invest in Akamai right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 50% year on year and best-in-class SaaS metrics it should definitely be on your radar.
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The author has no position in any of the stocks mentioned in this report.
