Akamai Misses, Outlook Disappoints

Akamai Technologies (AKAM - Analyst Report) missed consensus expectation of $211.0 million in revenue and $0.41 in adjusted EPS for the second quarter of 2009. Results were weak with revenue below the Zacks Consensus Estimate of $211.0 million while non-GAAP EPS exceeding the optimistic Zacks Estimate of $0.33.
 
The company reported revenue of $204.6 million, down 2.7% from the previous quarter but up 5.5% from the year-ago period. This was below the company’s guided range of $207.0 million to $213.0 million. Revenue fell due to aggressive pricing and seasonality in the Advertising business and the Media & Entertainment vertical.
 
Despite a difficult consumer spending environment, growth was observed in the e-commerce space, driven by traction from high-margin value-added solutions, particularly application performance solutions and dynamic site solutions.
 
Higher year-over-year revenue base was offset by higher operating expenses in the quarter. Excluding one-time charges, non-GAAP (normalized) EPS was $0.40, versus $0.43 in the previous quarter and $0.41 in the year-ago quarter. Normalized EPS came in at the low-end of the company’s guided range of $0.40 to $0.42.
 
Despite weak top line growth, the company maintained its cash gross margins of 81.0% for the eighth consecutive quarter. New contract signings in the quarter were very encouraging, particularly with the newer value-added solutions. Akamai’s gross adds – brand-new customers, were about 197 this quarter, with over half of the dollar value of these signing coming from value-added solutions. Customer churn was above 5.0% for the second quarter slightly higher than the 3% to 4% rate in the last few quarters.
 
Following disappointing second quarter results, Akamai forecasted dismal third quarter guidance. It expects sequential decline in third quarter sales that are substantially below Zacks estimates of $214.0 million. Third quarter revenue is expected in the $195.0 million to $203.0 million range, which  represents 1.0% year-over-year growth but a 3% decline from the previous quarter – at the midpoint. Currency headwinds are expected to be moderate with a small positive sequential impact on revenue. Normalized earnings per share are expected in the range of $0.33 to $0.36, in line with the Zacks Consensus Estimate of $0.36.

Although we believe the company is well-positioned in the longer term with increased bandwidth requirement, new offerings and value added services, slowing growth in media due to the lack of improved broadband deployment, macroeconomic factors, and growing competition will lead to declining top-line growth in 2009.

Akamai’s balance sheet remained strong with $926.8 million in cash and marketable securities having generated record $105.2 million cash from operations in the quarter. We would like to see incremental growth before becoming more positive on the stock. Akamai is facing growing competition and pricing pressure as new competitors including AT&T Inc. (T - Analyst Report) and Level 3 Communications (LVLT - Snapshot Report) enter the market joining the traditional players like Limelight Network (LLNW - Snapshot Report).

We maintain our Hold rating on the stock.

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