LLNW Limelight Networks Inc

Akamai Technologies Inc.(AKAM) is scheduled to announce its first quarter 2011 results today, after the market closes. We do not see any movement in analysts’ estimates in the run up to the earnings report.

Prior Quarter Highlights

Akamai reported fourth quarter 2010 earnings per share (EPS) of 30 cents, beating the Zacks Consensus Estimate by 2 cents. Akamai achieved its top-line guidance of more than $1.0 billion in fiscal 2010.

Revenues in the quarter escalated 19.5% year over year and 12.3% sequentially to $284.7 million, surpassing the Zacks Consensus Estimate of $283.0 million. The year-over-year growth was attributed to strong performance across all key verticals.

Operating income on a non-GAAP basis was $76.6 million, up 15.4% year over year versus $66.4 million in the prior-year quarter. Operating margin declined 90 basis points (bps) to 26.9% in the quarter compared with 27.8% in the prior-year quarter.

We believe a significant increase in costs negatively affected margins in the quarter. Total costs and operating expenses increased 20.6% year over year to $212.3 million. As a percentage of revenue, total costs and operating expenses increased 70 bps to 74.6% from 73.9% in the comparable prior-year quarter.

Current Quarter Expectations

Akamai expects normal seasonality in the first quarter of 2011. Akamai forecasts sequential decrease in revenue in the Commerce and Advertising vertical for the first quarter of 2011. Akamai projects revenue in the range of $265.0 million to $275.0 million, up 10.0% to 15.0% from the first quarter of 2010. However, on a sequential basis, revenue is expected to dip 5.2% in the quarter. The current Zacks Consensus Estimate is pegged at $274.0 million, at the high end of the company’s guided range.

Akamai estimates earnings of 35 cents to 37 cents per share for the first quarter of 2011. Currently, the Zacks Consensus Estimate is pegged at 27 cents for the first quarter.

Akamai expects gross margin in the range of 80.0% to 81.0% for the first quarter of 2011. Further, the company expects operating expense to decline sequentially and adjusted EBITDA margin to be in the 45.0% to 46.0% range, roughly flat with the prior quarter.

Akamai expects capital expenditure of $50.0 million for the first quarter. On a long-term basis, the company expects capital expenditure to be at the upper end or slightly above the long-term revenue model of 13% to 16%. Akamai continues to maintain its objective of more than 15.0% growth for fiscal 2011.

Estimate Revision Trend

Out of the eighteen analysts providing estimates for the upcoming quarter, none made any changes in their estimates in the last thirty days.

Similarly, for fiscal 2011, none of the analysts covering the stock revised their estimates in the last thirty days. Thus the EPS estimate for fiscal 2011 remained at $1.20.

Conclusion

Increased penetration in broadband and the momentum gained in online media and entertainment fueled growth at Akamai and we believe this trend will continue going forward.

We believe that the growing popularity of   High Definition (HD) quality video over the Internet should help drive bandwidth requirements going forward, thereby enhancing demand for Akamai’s services. We expect HD video to emerge as a new growth driver for Akamai in the coming years.

Akamai’s broad services offerings and collaboration with large vendors such as Microsoft Corp. (MSFT), Apple Inc. (AAPL), Netflix Inc. (NFLX), Hulu and Adobe Inc. (ADBE) to provide HD quality experience, will help the company capitalize on  the growth in HD content and media in the near term.

Akamai is a leader in content delivery networks with over 60% market share and currently delivers 15.0% to 30.0% of all Internet traffic worldwide with the largest web content delivery and acceleration platform in the world.

However, the company is facing stiff competition and pricing pressure, as new competitors including AT&T Inc. (T) and Level 3 Communications Inc. (LVLT) enter the market, joining traditional players like Limelight Networks Inc. (LLNW) and Packeteer.

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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