Akamai Technologies Inc. reported better-than-expected first-quarter 2016 results. Adjusted earnings (including stock-based compensation expense and amortization of capitalized stock-based compensation but excluding all other non-recurring items and related tax impact) of 52 cents per share beat the Zacks Consensus Estimate by a penny. On a year-over-year basis, adjusted earnings rose 4%.
The company reported non-GAAP earnings of 66 cents a share, up 8% year over year.
Quarter Details
Revenues of $568 million also beat the Zacks Consensus Estimate of $563 million. In addition, it grew 7.8% year over year primarily driven by robust performance across most of its solutions.
From the first quarter onward, the company has reorganized its business into three main divisions - Media, Web and Enterprise and Carrier. This marks a shift from the earlier product-focused structure to a new customer-focused one, which reports revenues derived from customers that are managed by the division.
Media Division - Revenues in the quarter declined 1% year over year to $292 million. The business was impacted because by the loss of two big players, Netflix and Apple , which have developed their own CDN. Excluding the loss from these two clients, the division reported revenue growth of 11% from the prior-year quarter.
Web Division - Sales increased 18% year over year to $264 million. Growth was driven by a strong customer base, especially with regard to the security business, which surged 51% year over year (on a constant currency basis).
Enterprise and Carrier Division – Revenues of $12 million increased 45% from the year-ago quarter. The company also revealed that henceforth the division will be led by Dr. Robert Blumofe, a long-time Akamai executive.
However, in order to give a better perspective to its investors, the company will also be reporting the results per its old structure till the end of this year.
The company’s performance & security solutions sales increased 16% year over year to $316 million. Of it, $81 million was generated from Akamai’s cloud security solutions, which surged 46% year over year. This apart, the company’s service & support system revenues increased 16% year over year to $46 million whereas media delivery solutions sales declined 4% year over year to $206 million.
Margins
Akamai reported non-GAAP operating margin of 29%, down from 31% in the year-ago quarter.
The company reported adjusted EBITDA of $234 million, an increase of 5% year over year. Adjusted EBITDA margin was 41%, down 100 basis points from the first quarter of 2015.
Balance Sheet & Cash Flow
As on Mar 31, 2016, Akamai’s cash and cash equivalents (and marketable securities) were $8.38 billion compared with $7.49 billion on Dec 31, 2015. The company generated cash flow from operations of $190 million in the reported quarter.
In the quarter, Akamai repurchased 2.2 million shares for $109 million.
Guidance
For the second quarter of 2016, Akamai expects revenues in the range of $566 million to $582 million.
Further, EBITDA margin is anticipated to be approximately 40% to 41%. Non-GAAP earnings per share are projected in the range of 62 cents to 65 cents.
Our Take
Akamai is likely to benefit from the rising demand for cloud infrastructure solutions, security, mobile products and online video. This apart, the other positive factors for the company are growing mobile data traffic and demand for wireless broadband, growth in performance-driven advertising and dynamic transactions in the cloud. Akamai is also likely to benefit from its strong foothold in the web applications domain. Additionally, the company has been re-evaluating its growth strategy, which is a positive for the long run.
However, the setbacks in the company’s media delivery business can pose some concerns going ahead. In addition, the over-the-top (OTT) video market is seeing some sluggishness as though consumers continue to shift from traditional videos, the rate of conversion has been lower than expected. Also, intense competition from the likes of Level 3 Communications, Inc. remains a concern.
Currently, Akamai has a Zacks Rank #4 (Sell). However, this can change following estimate revisions, considering the quarterly performance.
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