LLNW Limelight Networks Inc

Akamai Technologies, Inc. (AKAM) reported first quarter 2011 earnings of 29 cents per share, beating the Zacks Consensus Estimate by two cents. The upside was driven by strong revenue and margin expansion in the quarter.

Operating Performance

Earnings per share (EPS), excluding non-recurring items of two cents, increased 20.8% year over year on the back of strong top-line growth.

Net income was $54.9 million, up 22.0% year over year. Net income margin expanded 120 basis points (bps) on a year-over-year basis to 19.9% in the quarter.

Adjusted EBITDA increased 9.3% year over year to $129.2 million in the quarter. Adjusted EBITDA margin was 46.8% compared with 49.2% in the year-ago quarter.

Operating income on a non-GAAP basis was $77.0 million, up 9.7% year over year versus $70.2 million in the prior-year quarter. Operating margin declined 130 bps to 28.0% 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 rose 17.1% year over year to $199.0 million. As a percentage of revenue, total costs and operating expenses improved 130 bps to 72.1% from 70.8% in the prior-year quarter.

Revenue

Revenues for the quarter escalated 15.0% year over year to $284.7 million, surpassing the Zacks Consensus Estimate of $274.0 million and Akamai’s guided range of $265.0 million to $275.0 million.

The year-over-year growth was primarily driven by strong performance across all key verticals, except High Tech.

Akamai, based on its Cloud Computing solutions, has gained strong momentum in supporting emerging online business trends such as mobile commerce, information technology (IT) security and online media. Akamai also launched a new suite of cloud defense solutions during the quarter.

During the quarter, Akamai entered into a strategic partnership with LM Ericsson Telephone Company (ERIC), focused on mobile acceleration. Akamai’s partnership with International Business Machines Corp. (IBM) resulted in the launch of IBM’s WebSphere Application Accelerator for Public Networks and Hybrid Networks, which integrates Akamai's application acceleration capability with IBM's WebSphere technologies.

Revenue from Akamai’s fastest growing Enterprise vertical grew 31% year over year to $36.4 million, as more customers adopted cloud services for their business.

Commerce increased 25.0% year over year to $59.1 million, Public sector was up 15.7% year over year to $15.0 million and Media & Entertainment spiked 14.6% to $118.2 million.

However, revenue from the High Tech vertical decreased 3.4% year over year to $47.2 million in the reported quarter.

During the quarter, Akamai experienced strong demand for value-added services across all verticals, which were approximately 60% of the total revenue in the first quarter, up 4.0% compared with the prior-year quarter.

Sales through resellers were 18.0% of the total revenue in the first quarter.

Region wise, revenue from North America climbed 12.0% year over year, aided by renewals at big customers. Sales outside the United States were 30.0% of  the total revenue in the quarter. International revenues jumped 22.0% year over year.

Balance Sheet

As of March 31, 2011, cash and cash equivalents (includes Marketable Securities and Restricted marketable securities) were $563.5 million compared with $606.9 million as of December 31, 2010.

Cash from operations decreased to $88.5 million compared with $110.4 million in the previous quarter.

During the fourth quarter, Akamai repurchased approximately 1.0 million shares worth $42.8 million, at an average price of $42.00 per share.

Akamai also announced that its board of directors has authorized a second expansion of its share repurchase program worth $150 million, which is expected to be funded by cash from operations. The company intends to offset the dilution created by its equity compensation program through this new 12-month authorization, effective May 2011.

Guidance

Akamai expects revenue in the range of $270.0 million to $280.0 million (10% to 14% year-over-year growth) for second quarter of 2011. Favorable foreign exchange is expected to have an impact of approximately $10 million on a year-over-year basis.

Akamai expects cash gross margins to remain roughly stable at about 80% and GAAP gross margins to come in at 67%–68%.

For the second quarter, Akamai expects operating expenses to increase by about $7 million to $8 million year over year, which will include the annual impact of budgeted salary increases. Akamai expects adjusted EBITDA margins in the range of 44% to 45%.

Normalized EPS is expected in the 34 cents to 37 cents range, including tax charge in the range of $17 million to $21 million based on a full-year GAAP tax rate of about 32% to 33%.

Currently, the Zacks Consensus Estimate is pegged at 28 cents per share, well below management’s guided range.

Akamai forecasts capital expenditure of approximately $50 million for the forthcoming quarter excluding equity compensation and expects capital expenditure for fiscal 2011 to be at the upper end or slightly above Akamai’s long-term model of 13% to 16% of revenue.

Recommendation

We maintain our Neutral recommendation on a long-term basis (6-12 months) due to higher capital expenditure and increasing competition from large companies, such as Level 3 Communications Inc. (LVLT) and Limelight Networks, Inc. (LLNW).

However, we believe 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.

Currently, Akamai has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.

 
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