Akamai Rises on Revenue Gains – Analyst Blog

Akamai Technologies (AKAM) reported strong first quarter 2010 revenue. Following the company’s first-quarter results, shares rose 8.95% in after-hours trade due to increased revenue growth and higher margins, which offset some of the decline in earnings. The company also provided robust revenue guidance for the second quarter of 2010.

 

 

The March quarter was the largest revenue quarter in the company’s history and grew double-digit year over year in the quarter. Revenue of $240.0 million grew 14.1% from the year-ago period and 0.7% from the previous quarter.

 

Revenue exceeded the company’s own guidance of $224.0 million to $233.0 million. During the fourth quarter earnings call, management expected first revenue to grow 6% to 11% year over year and decline 4% sequentially due to currency headwinds. However, the revenue growth in the quarter was quite impressive, indicating that the company has started to benefit from the recovery in the economy and improving demand for its services in all verticals.

 
Growth came from the media and entertainment space, driven by increased traffic and traction from high-margin value-added solutions, particularly web application firewall solutions. Further, Akamai witnessed strength in software distribution, HD video distribution over the Internet and cloud computing initiatives and also recorded decent online advertising revenue growth in the quarter.

 

Revenue increased due to growth across all verticals, particularly the e-commerce business, which increased 19% year over year, but declined 5% from the previous quarter. The sequential decline was due to normal seasonality in the advertising decision solutions, partially offset by growth in the dynamic and application performance solutions.

 

Revenue from the media and entertainment vertical grew 10% year over year and 5% sequentially, exceeding the company’s expectations, driven by healthy growth in HD video traffic during the quarter.

 

The high tech vertical also performed well, growing 15% on a year-over-year basis, but flat on a sequential basis, due to higher volume of software downloads, as well as increased traction from Software-as-a-Service (SaaS) providers. The company now has over 100 SaaS providers. The public sector vertical grew 21% year over year and 11% from the last quarter due to increased government contracts.

 

Revenue from North America grew 13% from the prior-year quarter and was up 1% sequentially, while International revenue, representing 28% of total revenue, grew 16% year over year and 1% sequentially. The stronger dollar had a negative sequential impact on revenue of about $2.5 million, while on a year-over-year basis the currency impact was favorable by about $5 million. Sales through resellers accounted for 18% of total revenue in the quarter.

 

Signings in the quarter, both from new customers and from existing customers were  significantly strong. New customer signings for value-added solutions were up nearly 40% from the year-ago period. Approximately, 54% of total revenue in the quarter came from value-added solutions, up from 41% in the first quarter of 2009, with 77% of the total customer base using at least one value-added solution.

 

Customer churn was about 3.0% in the first quarter, resulting in 132 net new customers in the quarter to a record 3,254, a 10.3% increase year over year and 4.2% quarter over quarter.

 

 

Excluding one-time charges, but including stock-based compensation expense, non-GAAP (normalized) earnings per share of 25 cents decreased 30.6% from 36 cents in the previous quarter and 28.6% from 35 cents in the year-ago quarter. Moreover, earnings missed the Zacks Consensus expectation of 26 cents per share by a penny.

 

It is to be noted that the company expects to pay cash taxes at a rate of about 6% for 2010 due to the end of NOLs. Therefore, to facilitate comparisons, the prior period results exclude the previously reported utilization of tax NOLs/credits.

 

Adjusted EBITDA of $118.1 million in the quarter was a record and the highest in the company’s history, up 17.7% from the same period last year and 5.8% from the prior quarter. Adjusted EBITDA margin in the first quarter was 49.0%.

 

Strong top-line growth enabled the company to grow its cash gross margins to 83.0%, up 1% from both the year-ago and previous quarters.

 

Higher year-over-year revenue was offset by higher year-over-year operating expenses in the quarter. Operating expenses increased 13% year over year, but fell 5% sequentially in the quarter. Excluding amortization and restructuring charges, operating margin improved to 29.2% from 27.8% in the previous quarter and 28.9% in the year-ago quarter.

 
Balance Sheet

 

Akamai’s balance sheet remained strong with $1.1 billion in cash and marketable securities, having generated $87.8 million cash from operations or 37% of total revenue in the quarter.

 

 

The company announced that its Board of Directors had extended the share repurchase authorization by $150 million. Akamai repurchased 834,000 shares for $21.9 million in the quarter. As of March 31, 2010, the company had repurchased a total of 4.2 million shares for an aggregate of $88.2 million at an average price of $21.20 per share under the share repurchase program that was approved by the Board of Directors in April 2009.

 

 

Better-than-expected first-quarter revenue led the company to raise its revenue guidance for 2010. Management now expects to generate double-digit top-line growth in 2010. The company plans to make continued key investments in 2010 that will drive growth in 2011 and beyond.

 

Second quarter revenue is expected in the $236.0 million to $246.0 million range, which represents a year-over-year growth of 15% to 20%. However, currency headwinds are expected to have a $1.5 million negative impact on the second quarter revenue on a sequential basis.

 

Normalized earnings per share are expected in the range of 32 cents to 34 cents in the quarter.

 

GAAP gross margins are expected to be approximately 71%  while cash gross margin is expected to be approximately 82% in the second quarter. Adjusted EBITDA margins are expected to be about 46%. The company expects operating expenses to increase by about $7 million to $8 million on a sequential basis due to continued investment in R&D.

 

The company expects to increase capital spending to approximately $65 million in the second quarter. For the full year, capital spending is expected to be at the high-end of the company’s long-term model range of 13% to 16% of revenue.