Why Is Akamai Technologies (AKAM) Up 7% Since Its Last Earnings Report?

A month has gone by since the last earnings report for Akamai Technologies, Inc. AKAM. Shares have added about 7% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is AKAM 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.

Recent Earnings

Akamai delivered adjusted first-quarter 2018 earnings of 79 cents per share that beat the Zacks Consensus Estimate by 9 cents and surged 21.3% from the year-ago quarter.

Revenues of $668.7 million outpaced the Zacks Consensus Estimate of $654 million and increased 11.4% from the year-ago quarter (up 8% adjusted for foreign exchange). The revenues were towards the top end of management’s guided range of $596-$610 million.

Excluding Internet Platform Customers, revenues increased 13.7% year over year (up 11% adjusted for foreign exchange) to $624.3 million. Revenues from Internet Platform Customers were $44.4 million, down 13.6% year over year.

Robust Cloud Security Solutions Growth

Cloud Security Solutions (22.3% of revenues) revenues were $149 million, up 36% year over year (up 32% adjusted for foreign exchange). Solid growth was driven by strong demand for Kona Site Defender and Prolexic Solutions, as well as new Bot Manager Premier and Nominum Services.

Management stated that out of 500 financial institutions which the company serves, over 400 enterprises uses its security solutions, including all top 25 U.S. banks and 22 of the top 25 in Europe.

Akamai stated that with the addition of Nominum, it now processes 1.7 trillion domain name system (DNS) queries per day for over 100 million domains. Management stated that cloud security business revenue run-rate is now $600 million per year.

Segment Details

Web Division (52.8% of total revenues) revenues increased 16.3% year over year (up 13% adjusted for foreign exchange) to $352.8 million. Solid cloud security solutions growth as well as strong performance from Buyon solution, new Image manager and Digital Performance Management solutions drove growth.

Akamai now have 1000 customers using the new solutions. Revenues from these new solutions have tripled on a year-over-year basis and revenue run-rate is well over $100 million per year.

Media and Carrier Division (47.2% of total revenues) revenues of $315.9 million increased 6.4% (up 4% adjusted for foreign exchange) from the year-ago quarter.

Traffic growth was especially strong in OTT and gaming sectors.

U.S. revenues were $423 million, up 6% year over year. International revenues were $245 million, up 22% year over year (up 14% adjusted for foreign exchange) primarily driven by strong growth in Asia Pacific region.

Operating Details

Adjusted EBITDA margin remained flat on a year-over-year basis at 38.4%, better than management’s guidance range, primarily due to higher revenues and improving operational efficiency.

Non-GAAP research & development (R&D) and general & administrative (G&A) expenses as percentage of revenues increased 100 basis points (bps) and 20 bps on a year-over-year basis, respectively. This was partially offset by 60 bps decline in selling & marketing expenses.

As a result, Non-GAAP operating margin declined 90 bps from the year-ago quarter to 25%.

However, operating margin was better than management’s guidance range due to improving operating efficiency.

Balance Sheet & Cash Flow

As of Mar 31, 2018, Akamai’s cash and cash equivalents (and marketable securities) were $1.32 billion as compared with $1.28 billion as of Dec 31, 2017.

The company generated cash flow from operations of $192 million as compared with $197.4 million in the previous quarter.

In the quarter, Akamai repurchased 0.3 million shares for $20 million.

Guidance

For second-quarter 2018, Akamai envisions revenues between $658 million and $670 million. Management stated that unfavorable foreign exchange is likely to impact revenues by roughly $2 million.

Non-GAAP operating expenses are projected between $249 million and $254 million,

Adjusted EBITDA margin is anticipated to be approximately 39%. Adjusted operating margin is anticipated to be in the range of 25-26% for the quarter.

Non-GAAP earnings are projected in the range of 79-83 cents per share.

For full-year 2018, Akamai expects revenues between $2.69 billion and $2.72 billion.

Adjusted EBITDA margin is anticipated to be approximately 39%. Adjusted operating margin is anticipated to be 25%.

Akamai expects further improvement in margins by the end of 2018 due to the additional cost reduction initiatives the company undertook in the first quarter.

Non-GAAP earnings are projected in the range of $3.15-$3.25 per share.

Management plans to achieve non-GAAP operating margin of 30% in 2020.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been 13 revisions higher for the current quarter. In the past month, the consensus estimate has shifted by 16.9% due to these changes.

VGM Scores

At this time, AKAM has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was also 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is equally suitable for value, growth and momentum investors.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise AKAM has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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