-- Akamai Technologies' (AKAM) new $1.8 billion customer contract for computing services should help accelerate revenue growth, UBS Securities said in a note on Friday, even though the brokerage is skeptical about the deal's impact on margins and profitability.
The seven-year contract with an unnamed "leading frontier model company" is the largest customer deal in the cloud services provider's history, Chief Executive Tom Leighton said during an earnings conference call on Thursday, according to a FactSet transcript.
Akamai expects to start recognizing revenue against the contract in the fourth quarter, at $20 million to $25 million, Chief Financial Officer Ed McGowan told analysts. The company will spend $800 million to $825 million in capital expenditures over the next 12 months to support the new deal.
Bloomberg News identified that customer as Anthropic, citing people familiar with the matter.
Shares of Akamai soared about 27% at market close on Friday, and are up nearly 70% year to date.
"While we appreciate the large deal momentum and (revenue) growth acceleration, we're less confident in corresponding bottom-line growth," UBS analyst Roger Boyd wrote in the note.
Akamai late Thursday raised the lower end of its full-year revenue guidance to $4.445 billion from $4.40 billion, leaving the top end of the outlook unchanged at $4.55 billion. The company raised the cloud infrastructure services outlook to at least 50% year-over-year growth at constant currencies. Analysts polled by FactSet expect $4.49 billion in consolidated revenue.
Akamai lowered its full-year adjusted operating margin guidance to 26% from a prior outlook that called for 26% to 28%. UBS attributed that to upfront scaling costs and lower-margin new mega deals.
The company is willing to accept cloud infrastructure services deals that are below its 30% medium-term margin target, Boyd said. Meanwhile, additional capital spending will push free cash flow close to breakeven or into negative territory in 2026, he said.
The brokerage raised its price target on Akamai's stock to $160 from $110 and reiterated its neutral rating.
The company said late Thursday its first-quarter adjusted earnings per share declined to $1.61 from $1.70 a year earlier, while revenue increased 6% to $1.07 billion. These were largely in line with consensus estimates on FactSet.
"Investor enthusiasm around the cloud infrastructure space could outweigh margin concerns (near term)," Boyd said.