Akamai Earnings: Results and Updated Guidance Outpace a Low Bar

After spooking the market with its initial 2023 guidance last quarter, when it called for significant margin contraction and a huge jump in capital spending, Akamai AKAM offered a rosy update to its full-year outlook while also outpacing its first-quarter sales and EBITDA guidance. While capital spending in 2023 won’t be as prohibitive as management initially anticipated, and cost controls may now result in full-year margin expansion, the firm still faces a declining delivery business and slowing growth in its security business. We are raising our fair value estimate to $87 from $85 and believe the stock is roughly fairly valued.

In constant currency, total revenue grew 4% year over year, though we estimate it may not have even been flat after adjusting for last year’s Linode acquisition and some other nonrecurring revenue. The legacy delivery business, which declined 9% year over year in constant currency, continues to deteriorate, and we don’t expect much improvement in the rate of decline, considering deflationary pricing for that service. Fortunately, delivery now makes up less than half of Akamai’s total revenue, but the fast-growing security business has decelerated a bit, and compute remains small, at just over 10% of total revenue.

A better-than-anticipated cost profile was the quarter’s highlight. The adjusted operating margin was about 29%, down about one percentage point from last year’s first quarter. However, management had expected 1-2 more percentage points of contraction, and cost controls instituted in the quarter will carry over to the full year. Akamai has cut headcount, reduced its real estate footprint, and tightened discretionary spending. Capital spending the firm is undertaking to reduce cloud costs by bringing more workloads onto its own platform should allow for more significant margin expansion next year. Despite the project, lower server costs and other efficiencies will result in lower capital spending than management initially anticipated.