TV is Dead Long Live the Internet

HD online is coming your way. HD with interactivity, simplicity and served to you from the edge, then transmitted to your screen of choice.
Check this out, Tipping point of HD/IP, High definition video over the internet. HD with interactivity will revolutionise the TV industry. Same thing that happened to media and print is about to happen to TV.

Which amongst the pipe owners, the pipe improvers, content and service providers and subscriber database owners will outperform? Who will get the lions share of TV advertising revenue coming online? What will happen to the current TV companies? I hope they have a transition plan.

Yes, it’s going to take years to work through the technology adoption cycle, but the consequences over the next five years are huge, as Paul Sagan outlines.

Disclosure: Long Akamai and Harmonic. Pick your own company to profit from this digital online sea change.

Akamai Accelerates Its Earnings in Q3 2009

Akamai Q3 2009 – For the Record

  • Revenue of $206.5 million, up 5 percent year-over-year beat estimates of $199.40M
  • GAAP net income of $32.7 million, or $0.18 per diluted share, down 2 percent year-over-year
  • Normalized net income of $70.8 million, or $0.38 per diluted share, down 5 percent year-over-year, but beat estimates of $0.35
  • Cash flow from operations of $105.2 million, up 13 percent year-over-year

Earnings Announcement

As I highlighted in my earnings preview Akamai traditionally under-promise and over-deliver, this results means Akamai has beaten consensus forecasts in 13 of the last 19 quarters. Though I won’t get too excited as let’s face it, who hasn’t beaten forecasts this quarter?

Guidance

Guidance topped analyst Q4 expectations of $0.39. Akamai expects earning to range between 39 cents and 41 cents per share in the fourth quarter of 2009.

Conference Call

Transcript Snips

  • strong results show the early renewed traction in driving profitable volume growth
  • Our new contract signings in the quarter were very encouraging, particularly with our newer value-added solution, continuing the trend we began to see in late Q2. We added 208 gross new customers in the quarter, the highest number we’ve seen in quite a while. We were particularly pleased with the quality of the signings, with over 50% of our new customers purchasing at least one value-added solution and over 75% of the dollar value coming from value-added solutions.
  • Churn improved somewhat from Q2 but remained at higher than normal levels at above 5%
  • Our consolidated ARPU, or average revenue per customer, was $22,700 for the quarter, roughly consistent with the second quarter and down 4% year over year.
  • This marks our ninth straight quarter that cash gross margins [non-GAAP] have been in the range of 81% to 82%. [Note: My chart below is GAAP margins.]
  • only about 1% to 2% of total video viewing in the home is done over the Internet, but that number is increasing and we believe it is poised to at least double and double again in the next few years.

Some Perspective

The following chart shows Akamai’s sales and GAAP margins for the last six years (2009 is only three quarters). Gross margins have dipped from their heady 80% levels of the mid naughties, yet Akamai have managed to improve their net margins over that time frame. Net margins dipped to 15.9% this quarter due to increased R&D and sales and marketing costs. Gross margins of 78% this quarter highlight that Akamai are continue to perform in what is now a highly competitive landscape.

akam-gross-net-margins

With Akamai raising guidance for Q4 investors should expect analysts to raise their forecasts which often begets further strength in the share price.

Akamai future is bedazzled with opportunities. While CDN is now highly competitive the opportunities in value added services, video growth and cloud computing should enable Akamai to continue their growth for many years.

Akamai Technologies Inc. (AKAM) Q3 2009 Preview

Akamai, the web content delivery and application gorilla, will report Q3 2009 on 28-Oct-09 AMC. Consensus forecasts is for $0.35 eps on $199.8M revenue. AKAM has excellent cash flow, a strong balance sheet and reasonable potential for growth for years to come. While competition continues to increase in the CDN space, Akamai continues to differentiate itself with higher value added services. Forward earnings forecasts in the internet information provider industry offer no reliability, but the overall growth in data and applications being served should provide enough market for several winners. Akamai remains the company to catch.

Q2 2009 Conference Call Transcript

Edited snips: Financial highlights for the second quarter include revenue of $204.6 million, an increase of 5% over the same period last year.
Normalized net income of $75.3 million or $0.40 per diluted share, down $0.01 or 2% from Q2 of last year, and we had very strong cash generation with a record $105 million of cash flow from operations in Q2. This increased our balance of cash equivalents to $927 million even after $17 million was used for share repurchase during the quarter.

value-added services increased strongly, especially late in Q2. We signed almost 200 brand new accounts to Akamai in the quarter, the highest number since the early days of the company, with a significant portion of these for our value-added services.

saw churn at above 5% in the quarter as compared to the 3% to 4% rates we saw in most of 2008. Churn continued to come primarily from smaller customers

Outlook: making significant investments for our future growth…. In this context, we expect cash gross margins will decline by about a point sequentially in Q3, as we continue our aggressive pricing strategy. We expect GAAP gross margins to decline by about 2 points sequentially, driven by increased depreciation. … Based on this, we expect normalized earnings per share for Q3 in the range of $0.33 to $0.36.

Analysts Earnings Estimates

Earnings Est Current Qtr
Sep-09
Next Qtr
Dec-09
Current Year
Dec-09
Next Year
Dec-10
Avg. Estimate 0.35 0.38 1.56 1.59
Low Estimate 0.34 0.36 1.54 1.43
High Estimate 0.36 0.42 1.59 1.77
Year Ago EPS 0.40 0.44 1.66 1.56

The estimates have been falling all year, as Akamai faces strengthening competition. Zacks who use change in earnings forecasts as part of investment criteria maintains a Neutral recommendation of 3.  Akamai traditionally under-promise and over-deliver, with actual earning beating consensus in 12 of the last 18 quarters.

Financial Reports

Not only is Akamai generating excellent and growing cash flow, they have a superb balance sheet with $927 Million in cash, equivalents and marketable securities. Their only debt is $199,855k of 1% convertible notes with a conversion price of $15.45 per share. Akamai has good earnings albeit with slowing growth due to strong competition.

2004 2005 2006 2007 2008
Shareholders Equity -125.93 624.21 954.69 1,358.55 1,568.77
Revenue 210.02 283.12 428.67 636.41 790.92
Income Before Taxes 35.14 70.4 98.47 168.21 234.54
Net Income 34.36 42.2* 57.4 100.97 145.14
Net Cash Flow from Operating 51.24 82.8 131.97 235.39 343.49

* Adjusted for $285.8 million income tax benefit. All figures in millions.

Akamai's Growth 2004 to 2009 Q2

Fusion Outlook

AKAM chart

AKAM has been in a uptrend since the Nov 20 2008 low of $9.25. Having traded above the 50 day MA for March through mid June, AKAM has since had two brief sorties below the 200DMA. The first drop to $15.86 in late July was due to Q2 miss and lowered guidance. Although the 50 dMA recently closed below the 200 dMA, it is turning up and the P&F remains in the uptrend which began a year ago. Technically AKAM has been performing strongly for the last two months, despite an onslaught of the negative articles from Dan Rayburn, the Akamai bear.

At Friday’s close of $20.31 AKAM is trading at a forward 2009 P/E of 12.77. That is low for a company with Akamai’s growth potential. However, despite growing eps 72% per annum and revenue 37% for the last five years analysts see competition from Limelight (LLNW) and other CDNs slowing Akamai’s growth considerably. Analysts forecast less than 12% growth in earnings per annum for the next five years, giving AKAM a PEG of 1.1.

Akamai appears finally balanced over the short term. Good earnings and guidance should see prices in the mid twenties while a miss and lowered guidance would naturally see a tumble and indicate time to look for a better investment. I continue to hold a full position of AKAM and thus will not be buying more.

BehavioralThe computer says yes. TMF CAPS players rank Akamai a 5 Star Stock.

For more details see my earlier posts on Akamai.

Akamai Reports First Quarter 2009 Financial Results, Announces Share Repurchase

Akamai Technologies, Inc. (NasdaqGS: AKAM)

After Hours: 21.08 Up 1.02 (5.08%)

  • Revenue of $210.4 million, up 12 percent year-over-year [and a one percent decrease under fourth quarter 2008 revenue of $212.6 million]
  • GAAP net income of $37.1 million, or $0.20 per diluted share
  • Normalized net income* of $80.5 million, or $0.43 per diluted share, up 7 percent year-over-year
  • Akamai Board of Directors authorizes $100 million share repurchase program
  • Cash from operations $90.5M

Net GAAP income was $37.1 million, or $0.20 per diluted share, a slight increase from 2008 first quarter GAAP net income of $36.9 million, or $0.20 per diluted share, and a 9 percent decrease from fourth quarter 2008 GAAP net income of $40.5 million, or $0.22 per diluted share.

The Company generated normalized net income* of $80.5 million, or $0.43 per diluted share, in the first quarter of 2009, a 7 percent improvement over 2008 first quarter normalized net income of $75.6 million, or $0.41 per diluted share, and down slightly from the fourth quarter 2008 normalized net income of $82.2 million, or $0.44 per diluted share. 

“We are pleased with our strong start to the year,” said Paul Sagan, president and CEO of Akamai. “The Company’s first quarter results demonstrate the power of Akamai’s business model, which is based on providing differentiated, value-added solutions to our clients worldwide. Further, our scale provides us with tremendous operating advantages that are clear in our bottom line results.”

The Company also announced that its Board of Directors has authorized a $100 million share repurchase program to be funded by cash from operations. The Company plans to use this program over the next several quarters to roughly offset dilution created by ongoing equity compensation programs.

via Akamai Reports First Quarter 2009 Financial Results, Announces Share Repurchase Program.

The Fusion View

The results were excellent, with eps beating both analysts consensus and the high estimate. Revenue also beat the consensus of $208.5M, though fell short of the high estimate of $212M. Read Akamai earning preview for more details.

While I wait for Seeking Alpha to publish the conference call transcript [Update: Transcript now available] I’ve decided to dig deeper into the announced  share repurchase program. To their credit Akamai announced the repurchase was to offset their equity compensation. Grappling with the real cost of options is often difficult for investors, but these share repurchases make it a lot easier. Jim Gillies from TMF wrote this great post on the topic of employee options and GAAP vs non-GAAP.

 AKAM Dilution 2008 2007 2006 2005 2004 2003
Issued 169,371,675 166,212,638 160,298,922 152,992,092 126,771,799 122,154,517
Outstanding 166,212,638 166,212,638 160,298,922 152,992,092 126,771,799 121,875,286
Repurchase 0 0 0 0 0 0
Acquisitions (stock)   3,550,000 2,700,000 12,300,000    
Note   Netli,
Red Swoosh
Nine Systems Speedera    
Stock Offering       12,000,000    
Dilution  0 2,363,716 4,606,830 1,920,293 4,896,513  
Stock based comp expenese ($M) $57.9 66.6 49.6      

 

Average annual dilution 2.76 Million. The above table is my first pass/quick look so errors may exist. With AKAM at $21 the $100M will buy 4.76M shares or around 1.7 years worth of dilution. Which is almost exactly the same as the current stock based compensation, i.e. the average of the last three years options multiplied by 1.7 is $100M.

For Akamai it appears the annual options expense is a very good proxy for the actual cost to the business and shareholders. Just in case that is not 100% clear to anyone, employee options are a real cost and the current stock based compensation is a fairly accurate proxy for that cost. As Jim Gillies said, ignore the GAAP and non-GAAP and look at cash flows. I congratulate Akamai for honestly stating that the share purchase is simply to offset dilution. I also like that they publish their cash flow with each quarter’s announcement.

I will continue to update this post with more details later today. (Sorry RSS readers, but if you’re interested in AKAM, I’m sure checking for an update isn’t to onerous.) 

Here is the conference call for those who prefer to listen http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=75943&eventID=2149894

and simplistically part of why I invest in Akamai

Web Traffic

Update: WOW! Seeking Alpha pump those transcripts out fast. Here is the Q1 2009 Akamai Conference Call Transcript.
SNIPS

  • e-commerce continued to be our fastest growing vertical
  • with the acquisition of acerno, [November 2008 for $90.7 million in cash] we now have a strong predictive advertising solution for e-commerce as well as other verticals
  • Media & Entertainment vertical grew 8%
  • High-Tech vertical was also flat on a sequential basis, as well as year-over-yea
  • During the first quarter sales outside North America, represented 28% of total revenue, up 3 points from fourth quarter levels. International revenue grew 10% sequentially and 25% year-over-year
  •  total customer count is now 2,950 [gross up 160 for quarter, with churn of 5%. Net 92 of which Acerno was 74]
  • performed extremely well on cost and gross margins… cash gross margins in the range of 81% to 82% for the seventh straight quarter [GAAP GMs 71%, same as Q4, down 1 point YoY]
  • over 40% of our revenue, now comes from Value Added Solutions
  • Adjusted EBITDA for the first quarter was $100.3 million. That’s up 15% from the same period last year and consistent with Q4 level, and our adjusted EBITDA margin of 48% was up one point from the same period last year

END SNIPS

Outlook

  • No full year outlook provided
  • Q2 revenue $207 to $213 million
  • normalized earnings per share of $0.40 to $0.42
  • diluted share count will grow by about 2 to 2.5 million shares sequentially, due to the timing of equity compensation program

Other comments from Q&A

  • At 5% churn was slightly higher than usual, but it was mainly is small customers with ARPU of $3,000 while Akamai’s average  customer ARPU is $23,600, which was down slightly this quarter due to Acerno customers. 
  • 3/4s of customers buying valued added, looking to increase as it is the main growth driver. 
  • Bandwidth usage increases are offset by pricing declines. Traffic growth moderating.
  • see network indepedence as advantage,“we’re not saddled by owning a network that we’re trying to figure out how to make use of, because we’re sitting inside a thousand different partners.”

Previous Posts on Akamai

    Akamai Technologies Inc. (AKAM) Q1 Preview

    Akamai, the web content delivery gorilla, will report Q1 2009 29-Apr-09 AMC.

    Q4 2008 Conference Call Transcript

    Edited snips: Akamai performed very well in Q4 capping another record year of significant revenue and earnings growth. Financial highlights for the fourth quarter includes, record revenue of $212.6 million, a 16% year-over-year increase and an 8% increase over the third quarter of 2008. Normalized net income of $82.2 million, or $0.44 per diluted share, that’s an 8% increase year-over-year and up 11% from Q3.

    For the full year we grew revenue 24% year-over-year to $791 million. … normalized net income of $308.5 million or $1.66 per diluted share in 2008, that’s a 26% increase over 2007 and … $343 million of cash flow from operations, 43% of revenue during the year a testament to the strength of our business model

    because of our significant deferred tax assets, we are paying cash taxes at an annualized rate of only about 2%

    Outlook:  expect revenue of $205 to $212 million for Q1. [Analyst’s current consensus in $208.25M] At the midpoint this represents the 11% year-over-year…expect normalized earnings per share for the first quarter of $0.39 to $0.41

    Analysts Earnings Estimates

    Earnings Est Current Qtr 
    Mar-09
    Next Qtr 
    Jun-09
    Current Year 
    Dec-09
    Next Year 
    Dec-10
    Avg. Estimate 0.40 0.41 1.67 1.75
    Low Estimate 0.39 0.38 1.45 1.08
    High Estimate 0.42 0.45 1.78 1.95
    Year Ago EPS 0.41 0.41 1.66 1.67

    No change in 2009 estimates for the last sixty days. Akamai has traditionally underpromised and overdelivered, with actual earning beating consensus in 11 of the last 16 quarters.

    Financial Reports

    Q4 and 2008 Financial Press Release
    2008 10K Annual Report

    Akamai has a strong balance with $768,014k in cash, equivalents and marketable securities. Their only debt is $199,855k of 1% convertible notes with a conversion price of $15.45 per share. Akamai has excellent earnings and even stronger cash flow generation due to net operating losses and depreciation.

      2004 2005 2006 2007 2008
    Shareholders Equity -125.93 624.21 954.69 1,358.55 1,568.77
    Revenue 210.02 283.12 428.67 636.41 790.92
    Income Before Taxes 35.14 70.4 98.47 168.21 234.54
    Net Income 34.36 42.2* 57.4 100.97 145.14
    Net Cash Flow from Operating 51.24 82.8 131.97 235.39 343.49

    * Adjusted for $285.8 million income tax benefit. All figures in millions.

    Akamai's Growth 2004 to 2008 More financial reports http://www.akamai.com/html/investor/financial_reports.html

    Fusion Outlook

    AKAM chart

    AKAM has been in a strong uptrend since the Nov 20 2008 low of $9.25 and has traded above the 50 day MA since Feb 30. The 50 dMA is close to crossing the 200 dMA . Technically AKAM is performing well and currently appears to be consolidating.

    At yesterday’s close of $19.71 AKAM is trading at a forward 2009 P/E of 11.80. That is low for a company with Akamai’s growth potential. However, despite growing eps 72% per annum and revenue 37% for the last five years analysts see competition from Limelight (LLNW) and other CDNs slowing Akamai’s growth considerably. Analysts forecast less than 11% growth in earnings per annum for the next five years.

    Despite the more than doubling in share price since November AKAM has considerable upside potential. I continue to hold a full position of AKAM and thus will not be buying more.

    Behavioral – The computer says yes.

    Previous Posts on Akamai

    Akamai Technologies Inc. (AKAM) Earnings Preview

    Akamai is due to report earnings between 30-Oct-08 and 9-Nov-08.

    AKAM’s stock price has been  hammered in the last four months, down from over $40 to $17. The masses are sure that competition will eat the lunch of this established leader and are pricing AKAM as if growth will be negative going forward.

    Fundamental View

    Cheap on all metrics. Watch for slowing in growth.

    • Lowest Price to free cash flow ever. FCF has increased every year since 2000.
    • Lowest Price to sales since 2002.
    • Slowing growth more than priced in.

    Worst case scenario growth slows, margins squeezed from both sides as competitors squeeze the topline and costs rise despite falling  fibre costs. No upside earnings suprise in the next year and price falls to high single digits.  20% chance

    Best scenario Good Q3 earnings and positive forward statements brings a super quick 50% return. 20% chance.

    As a recent Foolish article summarised

    …the Internet’s leading content delivery network, Akamai Technologies has colossal scale, legitimate intellectual property and a blue-chip roster of clients –

    I’ll add excellent balance sheet, dominate edge delivery and most likley to win the current CDN battle, just as they have won for the last ten years .
    Wiki Invest provides an excellent summary on AKAM.

    Why Invest? From Q2 2008 earnings release Cash from operations was $69.8 million in the second quarter of 2008. Year to date cash from operations was $157.8 million, up 78 percent over the first half of 2007 cash from operations of $88.6 million. At the end of the second quarter of 2008, the Company had approximately $745 million in cash, cash equivalents and marketable securities.

    Akamai Metrics
    Q2 2008 Conference Call

    Technical View

    Falling Knife showing no signs of landing. Price significantly below 50dMA. Technically should wait for signs of consolidation and upswing.

    Behavioral View

    All that is left are long term investors (believers/future sellers) and people underwater wishing to off load AKAM as close to their buy price as possible (resistance). Many, including me, thought AKAM was good value at $30 and very little has changed since back in July. Competitors are competing, which considering the margins AKAM has and will always occur. Motley Fool Rule Breakers removing AKAM from their core holdings flags a crisis in confidence amongst investors. If Q3 is OK to good then AKAM is off to the races with a lot of short term players likley to jump on such a high profile company.

    Q3 Preview

    From Q2 Conference Call

    “Looking more near term, the third quarter tends to be the seasonally slowest quarter for our customers, especially those that are most sensitive to the seasonal changes in traffic levels. And for the third quarter this year, we’re expecting revenue in the range of $193 million to $198 million. At the midpoint, that translates into 21% growth over Q3 of last year. But this revenue range, which is a bit wider than our typical guidance, we are expecting normalized earnings per diluted share for the third quarter in the range of $0.39 to $0.40. We expect gross margins to decline modestly by less than 1 point sequentially and EBITDA margins in the range of 46% to 47% for the quarter.”

    Analysts Expectations

    • 40 cents on $196M in sales
    • 21% growth over next five years
    • $1.65 for 2008 and $1.92 normalized eps for 2009

    Last Post on AKAM

    Akamai Technologies falls out of favour

    Akamai Technologies Inc. (AKAM)

    While Flight of the Choncords may be my current favourite purveyors of mirth, I do get a good laugh when I read “analysis” like this by Steve Biggs from Zacks.

    Akamai is currently trading at its 52-week low price. The company’s P/E ratio of 15.2x is based on our 2008 EPS estimate of $1.29 and 4.2x our 2008 revenue estimate of $4.69 per share. Although the valuation has fallen to the low-end of historic levels, we would not be the buyers of the stock given the risk of a decelerating growth rate. Revenue grew at 51.4% in 2006, slowing to 48.5% in 2007.

    Akamai’s 2008 guidance indicates revenue growth of 24.5%, well below historical levels. We therefore lower our six-month price target to $20.00. This represents a P/E multiple of 13.2x and a P/S multiple of 3.5x our 2009 estimates.

    With Akamai trading around $19-20 earlier this week when that analysis is published my impression is the author suffered from a nasty bout of anchoring and rather than working out a value for Akamai he simply worked out what multiples the current price and estimates indicated.

    At current prices Akamai is certainly worth a closer look. I own Akamai and will be taking that closer look.

    I won’t even mention the ludicrous notion of a six month price target, oh I just did.