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Akamai Technologies (AKAM) Down 6.9% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Akamai Technologies (AKAM - Free Report) . Shares have lost about 6.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Akamai Technologies due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Akamai Beats on Q3 Earnings and Revenues, Ups '18 View

Akamai Technologies delivered non-GAAP third-quarter 2018 earnings of 94 cents per share beating the Zacks Consensus Estimate of 83 cents.. The figure also surged 51.6% from the year-ago quarter and came ahead of management’s guided range of 80-86 cents per share.

Better-than-expected year-over-year growth can be attributed to robust increase in revenues, lower tax rate and favorable impact of the cost reduction initiatives.

Revenues of $670 million outpaced the Zacks Consensus Estimate of $663 million and increased 7% from the year-ago quarter (up 8% adjusted for foreign exchange). Further, revenues were near the top end of management’s guided range of $656-$668 million.

The top line benefited from robust performance of security products and growth in Media and Carrier Division.

Excluding Internet Platform Customers, revenues increased 9% year over year (up 10% adjusted for foreign exchange) to $627 million. Revenues from Internet Platform Customers were $43 million, down 15% year over year.

Robust Cloud Security Solutions Growth

Cloud Security Solutions (25% of total revenues) revenues were $169 million, surging almost 37% year over year (up 39% adjusted for foreign exchange). Solid growth was driven by strong demand for Kona Site Defender, Bot Manager and Prolexic Solutions. The traction gained by Enterprise Application Access and Enterprise Threat Protector also aided growth.

Management remains optimistic over the growing influence of its security solutions during the reported quarter among media customers, in particular.

Notably, Akamai is one of the largest cloud security providers. It exited the quarter at a run-rate of around $700 million for security business.

Segment Details

Web Division (almost 53% of total revenues) revenues increased 8% year over year (up 9% adjusted for foreign exchange) to $357 million. Solid cloud security solutions growth as well as strong performance from Image Manager, mPulse and Digital Performance Management solutions drove growth.

Management noted that revenues from the new solutions have more than tripled on a year-over-year basis and revenue run-rate is well over $220 million per year.

Media and Carrier Division (47% of total revenues) revenues of $313 million increased 6% (up 7% adjusted for foreign exchange) from the year-ago quarter. Akamai stated that growth was primarily aided by the successful integration of Nominum and initiatives to improve traffic growth across its top 250 global media accounts.

Traffic growth was especially strong in OTT and gaming sectors. Management also remains elated on the recent record download of Epic Games’ new game,Fortnite.  The game registered traffic of over 22 terabits per second on the company’s platform.

U.S. revenues were $413 million (61.6% of total revenues), flat year over year. International revenues (38.4% of total revenues) were $257 million, up 21% year over year (up 24% adjusted for foreign exchange) primarily driven by strong growth in Asia Pacific and EMEA region.

Management stated that foreign exchange volatility negatively impacted revenues by $5 million from the year-ago quarter. Further, the foreign exchange movement negatively impacted revenues by $6 million sequentially.

Operating Details

Adjusted EBITDA margin of 41%, registered an expansion of 400 basis points (bps) on a year-over-year basis. This can primarily be attributed to higher revenues and improving operational efficiency.

Non-GAAP cash gross margin expanded over a point from the year-ago quarter to 77%.

Non-GAAP operating margin expanded 300 bps from the year-ago quarter to 27%, exceeding management’s guided range on the back of improving operating efficiency.

Balance Sheet & Cash Flow

As of Sep 30, 2018, Akamai’s cash and cash equivalents (and marketable securities) were $1.80 billion as compared with $1.86 billion recorded at the end of the previous quarter.

The company generated cash flow from operations of $310.5 million as compared with $219.7 million in the previous quarter.

In the quarter under review, Akamai repurchased around 6 million shares for $440 million. Further, the company announced authorizing of a new $1.1 billion share repurchase program.

Guidance

For fourth-quarter 2018, Akamai envisions revenues between $692 million and $709 million (mid-point at $700.5 million). Management anticipates unfavorable foreign exchange and seasonal summer traffic care to impact revenues.

Non-GAAP operating expenses are projected between $254 million and $259 million, up sequentially due to higher compensation expenses.

Adjusted EBITDA margin is anticipated to be 42%. Non-GAAP operating margin is projected to be 28% for the fourth quarter.

Non-GAAP earnings are envisioned in the range of 97 cents to $1.03 per share.

Akamai had updated guidance for 2018 during the third quarter. Owing to currency headwinds, the company expects full-year 2018 revenues between $2.693 billion and $2.71 billion as compared with the previous guidance in the range of $2.68 billion and $2.71 billion. The Zacks Consensus Estimate is pegged at $2.7 billion.

Non-GAAP earnings are now projected in the range of $3.53 per share to $3.59 per share, up from the previously updated outlook of $3.26 per share to $3.38 per share.

Adjusted EBITDA margin is anticipated to be around 40%. Non-GAAP operating margin is projected to be 26%.

Akamai anticipates further improvement in margins by the end of 2018 backed by the additional cost reduction initiatives that it undertook in the second and third quarters.

Management maintains its plans to achieve non-GAAP operating margin of 30% in 2020.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 12.92% due to these changes.

VGM Scores

At this time, Akamai Technologies has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Akamai Technologies has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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