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Akamai Technologies (AKAM) Up 0.1% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Akamai Technologies (AKAM - Free Report) . Shares have added about 0.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Akamai Technologies due for a pullback? 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 Beats on Q2 Earnings & Revenues

Akamai Technologies delivered second-quarter 2019 non-GAAP earnings of $1.07 per share beating the Zacks Consensus Estimate by 6 cents. The figure also surged 29% from the year-ago quarter (up 32% adjusted for foreign exchange).

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

Revenues of $705.07 million outpaced the Zacks Consensus Estimate of $696 million and improved 6% from the year-ago quarter (up 8% adjusted for foreign exchange).

The top line benefited from robust performance of cloud security business, strong traffic witnessed in OTT video vertical and media business, and operational efficiency.

Excluding Internet Platform Customers, revenues increased 6% year over year (up 8% adjusted for foreign exchange) to $659 million. Revenues from Internet Platform Customers were $46 million, up 5% from the year-ago quarter.

Solid Growth in Cloud Security Solutions

Cloud Security Solutions (29% of total revenues) revenues were $204.8 million, surging almost 32% year over year (up 34% adjusted for foreign exchange).

Solid growth was driven by strong demand for Kona Site Defender, Bot Manager and Prolexic Solutions. Further, the traction gained by Enterprise Application Access and Enterprise Threat Protector is enabling the company to enhance its competitive position against Zscaler.

Moreover, Akamai is gaining from synergies from the buyout of Janrain, which is aimed at enhancing the company’s security solutions portfolio amid growing data traffic. In fact, in the reported quarter, Janrain contributed approximately $5.5 million to security revenues.

Management remains optimistic over the growing influence of its new security solutions, including Akamai Enterprise Defender and Akamai Identity Cloud (formerly Janrain Identitiy Cloud).

Revenues from CDN and other solutions (almost 71%) of $500.3 million declined 1% on a year-over-year basis (remaining flat when adjusted for foreign exchange).

Segment Details

Web Division (53.9% of total revenues) revenues increased 8% year over year (up 10% adjusted for foreign exchange) to $380.4 million, primarily on account of solid cloud security solutions growth.

Media and Carrier Division (46.1% of total revenues) revenues of $324.7 million improved 4% (up 6% adjusted for foreign exchange) from the year-ago quarter. Management stated that growth was primarily aided by strong OTT video traffic growth and other global media accounts of Internet platform users.

Traffic growth was especially strong in video downloads, and OTT and CDN verticals. The company witnessed lower traffic in gaming compared with the first quarter.

Robust Growth in International Revenues

U.S. revenues were $416.9 million (59.1% of total revenues), inched up 1% on a year-over-year basis. International revenues (40.9% of total revenues) were $288.2 million, up 15% year over year (up 20% adjusted for foreign exchange) primarily on account of robust performance in Asia Pacific and EMEA region.

Management stated that foreign exchange volatility negatively impacted revenues by $11 million from the year-ago quarter. Further, the foreign exchange movement deterred revenue growth by $2 million sequentially.

Tight Spending Favors Margin Expansion

Adjusted EBITDA margin of 42%, registered an expansion of 300 bps on a year-over-year basis. This can primarily be attributed to higher revenues and improving operational efficiency.

Cash gross margin remained flat on a year-over-year basis at 77%.

Cash operating expenses (as a percentage of revenues) contracted 140 bps from the year-ago quarter to approximately 36%.

Consequently, non-GAAP operating margin expanded 300 bps to 29%.

Balance Sheet & Cash Flow

As of Jun 30, 2019, Akamai’s cash and cash equivalents (and total marketable securities) were $1.33 billion as compared with $1.22 billion reported at the end of the previous quarter.

The company generated cash flow from operations of $318 million as compared with $161 million in the previous quarter.

Free cash flow came in at $184.6 million, compared with $18.4 million reported in the previous quarter.

In the reported quarter, Akamai repurchased around 1.1 million shares for $81 million. Further, the company had 163 million shares outstanding as of Jun 30, 2019.

Guidance for Q3

For third-quarter 2019, Akamai envisions revenues between $692 million and $706 million.

Management anticipates unfavorable foreign exchange and seasonal summer traffic care to impact revenues in the third quarter.

Non-GAAP earnings are envisioned in the range of 98 cents to $1.02 per share.

Raised 2019 View Holds Promise

Akamai revised guidance for 2019 on growing clout of streaming services and increasing adoption of security solutions.

The company expects full-year 2019 revenues in the range of $2.84-$2.87 billion, compared with previously predicted range of $2.82-$2.86 billion. Management anticipates Janrain to contribute $20 million to total revenues in 2019.

Non-GAAP earnings are now projected to be between $4.23 and $4.30 per share, compared with earlier guided range of $4.05-$4.20.

The company is optimistic regarding its plans to achieve non-GAAP operating margin of 30% in 2020. Management anticipates accelerated deployment of 5G to be a tailwind over the longer haul.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

Currently, Akamai Technologies has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, 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 B. 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. Notably, Akamai Technologies has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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