A month has gone by since the last earnings report for Akamai Technologies, Inc. (AKAM - Free Report) . Shares have lost about 13.3% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Akamai Q2 Earnings Miss Estimates, Revenues Beat
Akamai reported adjusted earnings of $0.62 which 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. However, it beat the Zacks Consensus Estimate of $0.60 per share.
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, Apple, Facebook, 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%.
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 $0.57–$0.60 per share.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimate. There has been one revision higher for the current quarter compared to eight lower.
Currently, the stock has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is more suitable for value investors than those looking for growth and momentum.
Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #4 (Sell). We are expecting a below average return from the stock in the next few months.