Akamai Technologies Inc. (AKAM - Free Report) reported adjusted second-quarter 2017 earnings (including stock-based compensation expense and amortization of capitalized stock-based compensation) of 43 cents per share, which missed the Zacks Consensus Estimate by a penny.
Adjusted earnings (excluding stock-based compensation expense and amortization of capitalized stock-based compensation but excluding all other non-recurring items and related tax impact) of 62 cents were down 3% on a year-over-year basis (up 4% adjusted for foreign exchange and the dilutive effect of the Soasta acquisition, which was completed in Apr 2017). The figure also decreased 10.1% on a sequential basis.
Revenues of $609 million beat the Zacks Consensus Estimate of $604 million and increased almost 6% from the year-ago quarter (up 7% adjusted for foreign exchange) but declined 1% from the previous quarter. Revenues matched the top end of the guided range of $597–$609 million.
Excluding Internet Platform Customers, revenues increased 9% year over year (also 10% adjusted for foreign exchange). Revenues from Internet Platform Customers were $51 million, plunging 17% year over year. The revenue contribution from large customers in the Internet Platform group namely Amazon.com (AMZN - Free Report) , Apple (AAPL - Free Report) , Facebook (FB - Free Report) , Google, Microsoft and Netflix has been declining for the past few quarters primarily due to their CDN do-it-yourself (DIY) initiatives. Sequentially, revenues from Internet Platform Customers declined 0.4%.
We note that Akamai has underperformed the industry on a year-to-date basis. While the stock lost 20.1%, the industry has gained 20.8% over the same time frame.
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 decreased 2.1% year over year (down 1% when adjusted for foreign exchange) and 3.3% sequentially to $276.1 million.
Web Division – Revenues increased 15% year over year (up 16% adjusted for foreign exchange) and 3.4% sequentially to $315 million. In the second quarter, the web division, for the first time, was the biggest contributor to revenues.
Enterprise and Carrier Division – Revenues of $18 million rose 9% (up 10% adjusted for foreign exchange) from the year-ago quarter but were down 6.8% sequentially.
However, in order to give better perspective to its investors, the company continued to report results per its old structure (solution category-wise).
Performance & security solutions revenues (almost 61.7% of total revenue) were up 15% year over year (16% adjusted for foreign exchange) to $376 million. Of this, $115 million was generated from Akamai’s cloud security solutions, which surged 32% on a year-over-year basis (34% adjusted for foreign exchange). On a sequential basis, Performance & security increased 1.8%.
Service & support system revenues rose 12% year over year (13% adjusted for foreign exchange) to $54 million while Media Delivery solutions sales declined 9% year over year to $179 million. On a sequential basis, Media Delivery solutions declined 4.5%, while Service & support system increased 2.9%.
During the quarter, Akamai launched two products after successful beta tests with customers, namely, phishing and malware protector, Enterprise Threat Protector and Bot Manager Premier, that features machine learning technology which Akamai acquired from Cyberfend. Management also noted that Ion 3.0 and Image Manager are also gaining accelerated adoption rate.
Adjusted EBITDA margin declined 300 basis points (bps) from the year-ago quarter and 200 bps from the previous quarter to 37%. Adjusted operating margin decreased 300 bps from the previous quarter as well as the year-ago quarter to 24%.
As on Jun 30, 2017, Akamai’s cash and cash equivalents were $352.5 million. The company generated cash flow from operations of $224.6 million compared with $143 million in the previous quarter.
In the quarter, Akamai repurchased 2 million shares for $105 million.
For third-quarter 2017, Akamai expects revenues in the range of $604 million to $616 million. The high-end reflects year-over-year growth of 6% in constant currency.
GAAP gross margin is expected to be 64%. Adjusted operating expenses are anticipated in the range of $241–$246 million, up $5 million sequentially at the mid-point, pertaining to planned investments in the web and enterprise divisions.
EBITDA margin is anticipated to be approximately 36%. Management remains confident about maintaining EBITDA margins in the mid-30s range in the long-term.
Non-GAAP depreciation is expected to be in the range of $80–$82 million. Adjusted operating margin is anticipated to be 22% to 23% in the third quarter.
Non-GAAP earnings are projected in the range of 57–60 cents per share.
Akamai is likely to benefit from rising demand for cloud infrastructure solutions, security, mobile products and online video. With enterprise data centers adopting cloud services on a large scale, Akamai has significant growth opportunity.
We think that the recent acquisition of Soasta is a positive for the company. The acquisition saw Akamai’s product portfolio being enriched with the addition of mPulse, and CloudTest. The acquisition is expected to add to its top line and help in further market penetration.
Management quoted TGG stating that over-the-top (OTT) viewing will exceed traditional broadcast viewing in four years. This implies that Akamai has some scope in this segment with video accounting for the majority of the media traffic. Management also noted that the company is looking to work with leading broadcasters and video customers.
Moreover, the company has a newly appointed management person, Adam Karon, to look after the media business, and the management is actively looking into the cost effective ways of delivering large volumes of traffic. However, decelerating media traffic growth remains a concern.
Currently, Akamai carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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