Akamai Technologies (AKAM, Outperform) could monetize nonstop growing internet traffic into larger revenue, was clearly reflected in its second quarter earnings results. Revenue increased by 26 percent to $476 million, was $3.1 million ahead of consensus expectations, driven by exceptional performance in Media delivery (accounted 45% of total revenue) and Performance & security solutions (accounted 46% of total revenue due to acquisition of Prolexic for enterprise security). The earnings of $0.58 per share were nearly in-line with our estimates.
Gross margin increased by 160 basis points to 68.6 percent in second quarter while total GAAP costs/expenses increased by 30% (which was more than revenue growth of 26%) due to major growth in sales/marketing and R&D expenditure.
We see moderate downturn in the media delivery business with revenues increasing 10 percent yearly till 2018 while total revenues increasing nearly 13 percent yearly. According to latest research, by and large industry traffic increment will largely compensated by pricing recession and ongoing capital investment will discourage free cash flows in coming days, yet company will able to transform at least 18 percent of revenues into free cash flow.
In our view, company is successfully trailblazing server management to improve bandwidth management which can lower its cost per bit of traffic transported at constant rate with the pricing attrition in the content delivery business. We still believe that Akamai is missing its pricing supremacy and competitors are likely to take over on delivering content ability or thrash it on pricing front. However we have no doubt on company’s entry and positive performance into the security market, especially in web and application security market providing contiguous solutions to its web and application delivery products.
As per our revised estimation, revenue is likely to range in $484 million to $496 million and EPS in $0.55 to $0.58 – which is ahead of consensus of $484.8 million and $0.55 per share in third quarter. An adjusted gross margin is likely to fall by 50 bps to 77.8 percent. We increase price target for Akamai stocks to $50 from previous $47 and rate it to ‘Outperform’ from ‘Neutral’.