Akamai posted a mixed set of Q4 2023 results. While revenue missed estimates and rose 7.2% year-over-year to $995 million, adjusted earnings came in at $1.69 per share.
Akamai has been increasingly doubling down on the cloud computing space in recent quarters, taking on the likes of Amazon, Alphabet, and Microsoft. Akamai could see an upside if it executes well in the computing market which is sizeable and lucrative. Akamai has a network of 350,000 edge servers, across 4,100 locations, which are located away from metropolitan centers, giving the company considerable geographic scale.
Akamai Technologies is a global content delivery network (CDN) and cloud services provider, focused on improving the speed, reliability, and security of online content and applications. The company is estimated to deliver between 15-30% of the global web traffic. Many popular websites 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 servers.
We believe the Security Division is the more valuable segment within Akamai given its higher revenue base ($1.77 billion in 2023, compared to $1.54 billion for the Delivery business). Moreover, the division has also been growing faster, averaging a growth rate of about 15% over the last two years, compared to the delivery division which is declining.
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-service 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 its web content. However, the company is increasingly competitive on pricing, particularly on video content, 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.
