Akamai, the leading source of "intelligent Internet content delivery services," reported its fourth quarter earnings late yesterday. The company continued to grow at a fast clip, operating efficiency increased dramatically, and financial guidance for the coming year also improved. While Akamai is still a young company with plenty of risk, its positive direction is noteworthy.
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Rather than comparing fourth quarter 2000 with the previous year's fourth quarter, since the company did not have any meaningful revenue in the fourth quarter of 1999, it is better to look at how Akamai is performing in each sequential quarter. In the fourth quarter of 2000, Akamai had revenue of $37.2 million, up an impressive 37% over the third quarter's $27.2 million. Annualized, this growth rate is well over 300%.
Akamai's growth was powered by an expanding customer base of Internet companies of all types, and the company's growth is even more impressive when looked at against the backdrop of the dot-com meltdown. At the end of the quarter, Akamai had recurring, long-term contracts with some 1,337 customers, up from 1,115 customers in the third quarter.
Not only is Akamai attracting new customers, but it is also increasing its revenue per customer by offering a wider selection of content delivery services. The fact that Akamai's customers like Apple (Nasdaq: AAPL) and Yahoo! (Nasdaq: YHOO) are staying with and even increasing use of Akamai's services speaks volumes about the attractiveness of the services that greatly enhance the speed at which Internet content is delivered.
Losses smaller than expected
Backing out the non-cash charges related to amortization of intangibles and stock-based compensation, Akamai's fourth-quarter loss was $0.61 per diluted share. This easily bested the $0.68-a-share loss that was expected of the company by the average analyst.
Improving efficiency
Part of the reason for this lower-than-expected loss is because Akamai made some great strides towards improving its operational efficiency in the fourth quarter. The sequential margin improvement was quite large, as the table below shows:
Akamai Q3 '00 Q4 '00
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Gross Margin 33.0% 35.5%
Development Expenses/Sales 67.6% 46.7%
SG&A Expenses/Sales 183.9% 154.5%
Pro-Forma Operating Margin (218.5%) (165.7%)
Earnings before interest, taxes, depreciation and amortization (EBITDA) also came in at a smaller loss than expected. EBITDA for the fourth quarter was negative $47.7 million, a slight improvement on an absolute basis from the third quarter's negative $48.1 million.
While Akamai still has quite a long way to go before it reaches profitability, it made more than a few leaps towards that goal over the past three months. Overhead costs are growing much slower than sales and are starting to be spread over a larger revenue base. Capital expenditures related to expanding Akamai's network were down in the fourth quarter ($35.2 million versus $40.5 million), and the company's cash burn is also slowing significantly.
Guidance also improved
Akamai guided many analyst expectations higher with these earnings. Akamai said to expect EBITDA losses in the $140-$145 million range, much better than its previous guidance of a $150-170 million EBITDA loss. Clearly, the company expects operational efficiencies to continue to improve as overhead expenses get spread out over a quickly growing revenue base.
Capital expenditures are also expected to slow in the coming year. Total capital expenditures are expected to be in the $100-$120 million range, lower than the current spending rate and also down from previous guidance of $160 million.
Overall, Akamai is still a very young company with many challenges ahead of it. Nevertheless, if Akamai can continue to make progress like it did in the fourth quarter, black ink and positive cash flow may -- like the Internet content it serves -- come faster than expected.
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