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Akamai Technologies (AKAM) Lags on Q2 Earnings, Sales

Zacks Equity Research

Akamai Technologies Inc. AKAM reported lower-than-expected second-quarter 2016 earnings and revenue numbers. Adjusted earnings (including stock-based compensation expense and amortization of capitalized stock-based compensation but excluding all other non-recurring items and related tax impact) of 47 cents per share lagged the Zacks Consensus Estimate of 50 cents. On a year-over-year basis, however, adjusted earnings rose 6.8%.

Quarter Details

Revenues of $572 million also missed the Zacks Consensus Estimate of $574 million. Nevertheless, it grew 5.7% year over year.

Effective second-quarter 2016, the company started reporting its business under three main divisions – Media, Web and Enterprise and Carrier. This marks a shift from the earlier product-focused structure to a customer-focused structure.

Media Division – Revenues from this division declined 2% year over year to $288 million. The business has been adversely impacted by the loss of two big players, which have developed their own CDN.

Web Division – Sales increased 15% year over year to $271 million. Growth was driven by a strong customer base, especially with regard to the cloud security business, which surged 42% year over year (on a constant currency basis).

Enterprise and Carrier Division – Revenues of $12 million increased 22% from the year-ago quarter.

However, in order to give a better perspective to its investors, the company will continue to report results per its old structure (solution category-wise) as well till the end of this year.

Performance & security solutions sales increased 16% year over year to $327 million. Of it, $87 million was generated from Akamai’s cloud security solutions, which surged 42% year over year. Service & support system revenues increased 18% year over year to $48 million whereas media delivery solutions sales declined 9% year over year to $197 million.

AKAMAI TECH Price, Consensus and EPS Surprise

AKAMAI TECH Price, Consensus and EPS Surprise | AKAMAI TECH Quote

Margins

Akamai reported non-GAAP operating margin of 27%, down from 28% in the year-ago quarter.

The company reported adjusted EBITDA of $231 million, an increase of 8% year over year. Adjusted EBITDA margin was 40%, flat on a year-over-year basis.

Balance Sheet & Cash Flow

As on Jun 30, 2016, Akamai’s cash and cash equivalents (and marketable securities) were $8.69 billion compared with $7.49 billion as of Dec 31, 2015. The company generated cash flow from operations of $242.9 million in the reported quarter.

In the quarter, Akamai repurchased 1.7 million shares for $91 million.

Guidance

For the third quarter of 2016, Akamai expects revenues in the range of $566 million to $578 million.

Further, EBITDA margin is anticipated to be approximately 39% to 40%. Non-GAAP earnings per share are projected in the range of 59 cents to 62 cents.

Our Take

Akamai is likely to benefit from the rising demand for cloud infrastructure solutions, security, mobile products and online video. It is also likely to benefit from its strong foothold in the web applications domain. Additionally, the company has been re-evaluating its growth strategy, which is a positive for the long run.

However, the setbacks in the company’s media delivery business can pose some concerns going ahead, especially because of the do-it-yourself efforts of some of its bigger CDN clients. This apart, intense competition from the likes of Level 3 Communications, Inc. LVLT and Limelight Networks, Inc. LLNW remains a concern.

Currently, Akamai carries a Zacks Rank #3 (Hold). A better-ranked stock in the same space is MeetMe, Inc. MEET, which sports a Zacks Rank #1 (Strong Buy).

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