Akamai Technologies, Inc. (AKAM) reported earnings of 27 cents per share in the second quarter of 2011, in line with the Zacks Consensus Estimate, but 17.4% higher than the 23 cents per share reported in the prior-year quarter.
The year-over-year growth was primarily driven by stringent cost-cutting efforts, which led to a significant improvement in operating margin during the quarter.
Operating Performance
Adjusted EBITDA (including stock-based compensation) increased 12.6% year over year to $126.2 million in the quarter. Adjusted EBITDA margin was 45.6% compared with 45.7% in the year-ago quarter.
Operating income on a non-GAAP basis was $77.5 million, up 24.7% year over year from $61.0 million in the prior-year quarter. Operating margin in the quarter was 28.0% compared with 24.9% in the prior-year quarter.
We believe a significant decrease in costs positively affected margins in the reported quarter. Total costs and operating expenses declined 2.4% year over year to $109.8 million.
Research & development expenses decreased 19.1% year over year. Sales & marketing expenses also plunged 4.3% year over year, while general & administrative expenses increased 4.3% year over year in the quarter.
Net income was $52.2 million, up 23.0% year over year. Net income margin expanded 160 basis points (bps) on a year-over-year basis to 18.8% in the quarter.
Revenue
Total revenue in the quarter was $277.0 million, up 13.0% year over year but below the Zacks Consensus Estimate of $278.0 million. Reported revenue was, however, within management’s guided range of $270.0 million to $280.0 million.
Revenue from Akamai’s fastest growing Enterprise vertical grew 28% year over year to $37.7 million, as more customers adopted cloud services for their businesses.
Commerce increased 21.0% year over year to $58.5 million, Public sector climbed 11.3% year over year to $15.7 million and Media & Entertainment jumped 10.7% to $117.0 million. Revenue from the High Tech vertical grew 1.3% year over year to $48.2 million in the reported quarter.
During the first half of 2011, Akamai witnessed strong demand for value-added services (58% of the total revenue) across all verticals. Sales through resellers were 19.0% of the total revenue in the second quarter.
Region wise, revenue from North America climbed 10.0% year over year. Sales outside the United States contributed 30.0% to the total revenue in the quarter. International revenues jumped 20.0% year over year.
Balance Sheet
As of June 30, 2011, cash and cash equivalents (includes Marketable Securities and Restricted marketable securities) were $497.3 million compared with $563.5 million, as of March 31, 2010.
Cash from operations increased to $111.8 million from $86.4 million in the previous quarter.
During the first quarter, Akamai repurchased approximately 1.5 million shares for $50.5 million, at an average price of $32.90 per share.
Guidance
Akamai expects revenue in the range of $273.0 million to $283.0 million (8% to 12% year-over-year growth) for third quarter of 2011. Favorable foreign exchange is expected to have an impact of approximately $7.0 million on a year-over-year basis.
Akamai expects cash gross margins to remain roughly stable at about 79% while GAAP gross margin is estimated to be 57.0%.
For the third quarter, Akamai expects operating expenses to increase approximately $7 million year over year, including the annual impact of budgeted salary increases. Akamai expects adjusted EBITDA margin in the range of 42% to 43%.
Normalized EPS is expected to be between 31 cents and 34 cents, including tax charge in the range of $19 million to $23 million based on a full-year GAAP tax rate of about 32% to 35%.
Currently, the Zacks Consensus Estimate for the third quarter is pegged at 28 cents per share, well below management’s guided range.
For fiscal 2011, Akamai expects revenue growth in the range of 10.0% to 13.0%., slightly lower than its prior expectation of 15.0%.
Akamai forecasts capital expenditure (excluding equity-based compensation) of approximately $55 million for the forthcoming quarter. For fiscal 2011, capital expenditure is expected to be at the upper end or slightly above the company’s long-term model of 13% to 15% of revenues.
Recommendation
We believe that the increasing usage of cloud computing technology, higher adoption of value-added solutions, aggressive share repurchase, strategic partnerships, commerce security and online video are positives for the stock over the long term.
However, weak traffic growth remains a concern, as Akamai continues to face intense pricing pressure due to stiff competition from Level 3 Communications Inc. (LVLT), Limelight Networks, Inc. (LLNW) andcarriers such as AT&T Inc. (T) and Verizon Communications (VZ), who are developing their own content delivery network. We believe this will hurt revenue growth going forward.
We maintain our Neutral recommendation on a long-term basis (6-12 months). Currently, Akamai has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.
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