Akamai reported net sales of $860 million in Q3 '21, up from $793 million in Q3 '20. Operating income grew from $181 million to $205 million over the same period, as the company was able to control operating expenses in terms of revenue growth. Combined with a roughly unchanged effective tax rate, EPS came in at $1.10, up from $0.97 in Q3 '20.
Akamai operates a worldwide network of over 200,000 servers, that help Akamai's customers deliver Internet content faster to their end users. The company estimates that it delivers 15-30% of the global web traffic. Websites like Apple, Yahoo!, NBC, ESPN, the NBA, and Verizon Wireless, use Akamai for content delivery, which means that some of the content you view when visiting these sites is delivered from a nearby Akamai server, rather than the company's own servers.
We believe the Web Division is the more valuable segment within Akamai for the following reasons:
Web and mobile performance business are to enable dynamic websites and applications to have instant response times. Value-added services, such as transaction security, is an important part of delivering content for websites. Akamai provides transaction security for commerce sites, such as Best Buy, Microsoft, and Travelocity.com. These services help Akamai retain customers in the commerce and financial services space.
Apart from security, other value-added services, like advertising decisions, dynamic site acceleration services, etc., have helped Akamai in winning and retaining a large number of online shopping customers. The company is also providing cloud security solutions (gained through the acquisition of Nominum).
Akamai's value proposition has evolved beyond being the fastest content delivery network. As competitors grow increasingly capable of fast content delivery at similar prices, Akamai has positioned itself as a full services provider -- touting its ability to offer multiple value-added services, such as the delivery of targeted advertising and cloud-based security for its customers.
Its acquisition of Nominum, Inc. has helped it bolster its security solutions portfolio and reduce competition in this area. Such acquisitions will help Akamai protect its margins and grow its business.
Media content is rising at a significant pace as a greater amount of video moves online and video quality increases (for example HD video). Some of the services that are stimulating this trend are Netflix, Hulu, and Youtube. Although growing media demand is an opportunity, it is also a source of gross margin pressure, since one of Akamai's largest costs is the cost of bandwidth to deliver data. Akamai passes on some of these costs to customers in the form of a bandwidth usage-based pricing structure; however, Akamai's pricing will be under pressure from volume discounts and competition from other content delivery networks.
Akamai has historically charged premium prices to its customers for fast and secure delivery of their web content. However, the company is increasingly competitive on pricing, particularly on video content, in an effort to attract more customers and traffic to its network. In several deals, it has even outbid its competitors on price. This is likely to win more customers for Akamai but may put pressure on margins.
The company is also taking steps to move into mobile networks. Mobile traffic growth is both a result of stimulation of higher internet usage, as well as the shift of some traffic from wireline to wireless networks. This shift of data usage has not only impacted its CDN business but also presented it with the opportunity to expand its services to mobile domain.