Akamai (AKAM) Q3 Earnings Shine On Revenue Strength

Shares of Akamai Technologies Inc. (NASDAQ:AKAM) surged 8.4% in after-hour trading following the company’s impressive third-quarter 2016 results.

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 51 cents per share beat the Zacks Consensus Estimate by 3 cents but decreased 3.8% on a year-over-year basis.

The decline was primarily due to lower operating margin which fully offset an improvement in revenues. On a sequential basis, earnings increased 8.5% due to better operating margin.

Revenues of $584.1 million beat the Zacks Consensus Estimate of $574 million and rose almost 6% from the year-ago quarter (up 5% adjusted for foreign exchange) and 2.1% from the previous quarter.

Excluding Internet Platform Customers, revenues increased 15% year over year (also 15% adjusted for foreign exchange). Revenues from Internet Platform Customers were $58 million, plunging 39% year over year (down 40% adjusted for foreign exchange) primarily due to their do-it-yourself (DIY) initiatives of building CDN.

Amazon.com (NASDAQ:AMZN) , Apple (NASDAQ:AAPL) , Facebook (NASDAQ:FB) , Google (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), and Netflix (NASDAQ:NFLX) are the six large customers in the Internet Platform group. Collectively these six companies accounted for 10% of the Akamai’s third-quarter 2016 revenues down from 17% in the year-ago quarter.

Notably, Amazon sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Segment Details

Effective second-quarter 2016, Akamai 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 declined 4.3% year over year (down 5% adjusted for foreign exchange) and 1.5% sequentially to $284.1 million. Excluding Internet Platform customers, revenues advanced 12% from the year-ago quarter.

Web Division – Revenues surged almost 17% year over year (up 16% adjusted for foreign exchange) and almost 5% sequentially to $284.6 million. Growth was driven by a strong customer base, especially with regard to the cloud security business.

Enterprise and Carrier Division – Revenues of $15.3 million soared 42.6% from the year-ago quarter (43% adjusted for foreign exchange) and on sequential basis the growth was almost 24%.

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 revenues were up 19.4% year over year (19% adjusted for foreign exchange) to $345.1 million. Of it, $95 million was generated from Akamai’s cloud security solutions, which surged 46% on a year-over-year basis.

Service & support system revenues rose 17.1% year over year to $50.9 million whereas Media Delivery solutions sales declined roughly 14% year over year to $188.1 million. Excluding the six large Internet platform customers, Media Delivery revenues were up 5% year over year.

On a sequential basis, Performance & security and Service & support system increased 5.7% and 5.1%, respectively. While Media Delivery solutions fell 4.6%.

Operating Details

Reported gross margin contracted 180 basis points (bps) from the year-ago quarter but expanded 110 bps to 65% in the quarter.

Akamai reported adjusted EBITDA margin of 41%, up 100 bps each both on a year-over-year and sequential basis.

As percentage of revenues, reported research & development (R&D) expense increased 30 bps year over year and 70 bps sequentially. General & Administrative (G&A) expense also increased 130 bps from the year-ago quarter and 60 bps from the previous quarter.

Increase in these expenses were partially mitigated by lower selling & marketing (S&M) expense, which declined 190 bps on a year-over-year basis and 50 bps sequentially.

Reported operating margin contracted 190 bps on a year-over-year basis and 10 bps sequentially to 19.1%. Adjusted operating margin declined 160 bps from the year-ago quarter but increased 20 bps from the previous quarter.

Balance Sheet & Cash Flow

As on Sep 30, 2016, Akamai’s cash and cash equivalents (and marketable securities) were $911.2 million compared with $868.7 billion as of Jun 30, 2016. The company generated cash flow from operations of $251.4 million as compared with $242.9 million in the previous quarter.

In the quarter, Akamai repurchased 1.8 million shares for $95 million. At the end of the quarter, management had approximately $773 million remaining under its current share repurchase authorization.

Guidance

For fourth-quarter 2016, Akamai continues to expect foreign exchange to remain a headwind due to strengthening of the U.S dollars. The company now expects revenues in the range of $593 million to $613 million.

Reported gross margins are expected to be 66%. Adjusted operating expenses are anticipated in the range of $222 million–$227 million, up $20 million sequentially.

Further, EBITDA margin is anticipated to be approximately 39–40%. Management forecasts EBITDA margins to decline to high 30% range in 2017.

Depreciation is expected to be in the range of $74–$76 million. Adjusted operating margin is anticipated to be in the range of 27% -28% for the quarter.

Non-GAAP earnings are projected in the range of 65–70 cents.

In terms of capital expenditure, Akamai expects to spend approximately $82 million–$87 million in the quarter. For the full year of 2016, capital expenditure would equate to 15% of revenues, slightly under the company’s long-term model of 16–18% of revenues.

Our Take

Akamai is likely to benefit from the rising demand for cloud infrastructure solutions, security, mobile products and online video. Additionally, it is likely to gain from its strong foothold in the web applications domain. Upcoming new products like the Kona Site Defender 5.0, Bot Manager 2.0 and the Enterprise Threat Protector (ETP) service will expand customer base going ahead.

However, DIY initiatives by the large Internet companies remain a concern for the company’s media delivery business. Apart from foreign exchange impact on revenues, intense competition from the likes of Level 3 Communications and Limelight Networks is a major headwind.

Currently, Akamai carries a Zacks Rank #3 (Hold).

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