Akamai Technologies, Inc. Rating: Buy

Transcription

1 COMMUNICATIONS TECHNOLOGY Erik Zamkoff Company Update / Price Target Change December 21, 2005 Key Metrics AKAM - NASDAQ $19.66 Pricing Date 12/20/2005 Price Target $ Week Range $22.25-$10.64 Shares Outstanding (mm) Market Capitalization ($mm) $3, Mo Average Daily Volume 2,424,872 Institutional Ownership 60% Debt/Total Capital NM ROE 17.9% Book Value/Share $2.35 Price/Book 8.4x Dividend Yield NM LTM EBITDA Margin NM EPS($) FY: December Prior Curr. Prior Curr. 2005E 2006E 2006E 2007E 2007E 1Q-Mar 0.10A 0.15E 0.16E E 2Q-Jun 0.11A E E 3Q-Sep 0.14A E E 4Q-Dec 0.15E 0.19E 0.18E E FY 0.50E E E P/E 39.3x 29.3x 24.0x Revenue($mm) Prior Curr. Prior Curr. 2005E 2006E 2006E 2007E 2007E 1Q-Mar 60.1A E E 2Q-Jun 64.6A E E 3Q-Sep 75.7A 89.0E 89.5E E 4Q-Dec 79.0E 94.0E 94.5E E FY 279.4E 349.5E 350.5E E Year Price History for AKAM Q1 Q2 Q3 Created by BlueMatrix Company Description: Akamai Technologies, Inc. ( is the leading provider of outsourced distributed Internet content and applications delivery services. Its EdgePlatform is the world's largest distributed computing network, consisting of over 18,000 edge servers in approximately 1,000 networks in 69 countries around the world. This network overlays the Internet and allows customers to offload content and applications from source servers to Akamai's edge servers. This frees up source server capacity and improves end-user Web experience by moving content closer to end users Akamai Technologies, Inc. Rating: Buy Raising Price Target; Adjusting 2006 Estimates; Introducing 2007 Estimates Investment Highlights: Fundamentals for Akamai continue to improve as availability of broadband Internet content accelerates. Our investment thesis is based on our view that the increasing proliferation of dynamic broadband content will drive a new growth cycle for Akamai's core CDN (content delivery network) business while it will also benefit from the initial sales ramp for its new application accelerator product. Given recent positive developments on both fronts, we view the recent pullback in the stock as a buying opportunity. The video-enabled Apple ipod headlines the increasing proliferation of dynamic broadband content. On October 12, 2005, Apple (AAPL - $ NASDAQ) launched its video-enabled ipod. Since then, the library of video content for the new ipod has been highlighted by a number of significant content deals with major networks, which are providing attractive content for on-line downloads. We believe these announcements highlight Akamai's growing strategic importance to its customers, given its contracts with five of the top six on-line music download vendors. We expect continued growth in the availability of broadband content to drive accelerating CDN revenues for Akamai. We believe the initial sales ramp for Akamai's Web application accelerator could drive revenue upside in 2H06. In particular, we believe the company is seeing traction across its traditional business verticals, a development we find particularly encouraging. Early checks with potential Web application accelerator customers indicate that enterprises are receptive to Akamai's new application acceleration network offering. During its 4Q05 earnings call, we expect the company to provide further insight into the timing and scale of the initial sales ramp. We are adjusting our 2006 EPS estimates and introducing 2007 estimates. We are increasing our 2006 revenue estimate to $350.5mm from $349.5mm, reflecting strength in Akamai's core CDN business. We have increased our 2006 share count to include the company's recent 12.0mm share secondary offering. The increased share count is offset by slightly higher revenues and a $4.0mm increase in interest income. Therefore, our 2006E cash EPS remains $0.67. Finally, we are introducing 2007 revenue and EPS estimates of $412.0mm and $0.82, respectively. We are raising our price target to $24.50 from $ Akamai currently trades at a PEG ratio of 79.4%, and our target of $24.50 represents a PEG ratio of 99.0% based on a 30% EPS growth rate. Our target represents 30.0x our 2007 EPS estimate of $0.82. The Disclosure section may be found on pages 8-9 of this report. The Valuation section may be found on page 8 of this report.

2 We believe fundamentals for Akamai continue to improve, driven by the increased availability of broadband content and a pending new product cycle. Our investment thesis is based on our view that the increasing proliferation of dynamic broadband content will drive a new growth cycle for the company's core CDN business while at the same time the company will benefit from the initial sales for its new application accelerator product. Given, recent positive developments on both fronts we view the recent pullback in the stock as a buying opportunity. We are adjusting our 2006 projections to include the additional 12.0mm shares from a secondary offering completed on November 1, 2005, and introducing 2007 revenue and EPS estimates of $412.0mm and $0.82, respectively. We also note that Akamai's convertible bond holders have the right to convert $200.0mm of the company's outstanding convertible should the shares trade above $18.54 for 20 consecutive days. Post the close of trading yesterday, this criteria has now been met, and we expect convertible bondholders to gradually convert. These shares are already reflected in our diluted share count. Finally, based on our new 2007 earnings estimate, we are raising our price target to $24.50 from $ See our valuation section below for more information. The video-enabled Apple ipod headlines the increasing proliferation of dynamic broadband content. On October 12, 2005, Apple launched its video-enabled ipod and the related itunes Music Store updates giving consumers the ability to buy and download video content over the web to their ipods. Since that time, the library of video content for the new ipod has been expanded by some significant content deals. At the time of the launch, consumers could view and purchase over 2,000 music videos and six short films from Pixar (PIXR - $ NASDAQ) for $1.99 each. In addition, Disney (DIS - $ NYSE) and Apple announced that consumers could purchase episodes of "Desperate Housewives," "Lost," "Night Stalker," "That's So Raven," and "The Suite Life of Zack & Cody" for $1.99 per episode. Following the launch of the video-enabled ipod, Apple said on October 31, 2005 that it had sold over 1.0mm videos in under 20 days. Subsequently on December 6, 2005, NBC Universal (GE - $ NYSE) and Apple announced a partnership to make available 11 programs for download. These include "Law & Order," "The Office," "Surface," "The Tonight Show with Jay Leno," "Late Night with Conan O'Brien," "Monk," "Battlestar Galactica," "Alfred Hitchcock Presents," "Dragnet," "Adam-12" and "Knight Rider." We believe these announcements highlight Akamai's growing strategic importance to its customers, given its contracts with five of the top six on-line music download vendors (including MSN Music [MSFT - $ NASDAQ] and itunes). We expect continued growth in the availability of dynamic broadband content from Akamai's customers to drive accelerating CDN revenues for Akamai. The increasing popularity of the podcast is also driving growth in dynamic web content. Apple has also moved solidly into the podcast arena, posting well over 25,000 individual podcasts on its itunes website. Podcasts, based essentially on a publisher/subscriber model where a customer can subscribe to a podcast and automatically receive updates when they are posted, have given small radio shows an audience and have expanded to encompass big media as well. Today, podcasts are available from people and media outlets such as Rush Limbaugh, Air America, ABC News, ESPN, Disney, NPR, The Wall Street Journal (DJ - $ NYSE), and NBC News. We believe this new content form has the potential to disrupt, if not eclipse, the size of the music download market given the attractive price points (most podcasts are free) and the ease of use. We believe the initial sales ramp for Akamai's Web application accelerator could drive revenue upside in 2H06. In particular, we believe the company is seeing traction across its traditional business verticals, a development we find particularly encouraging. While enterprise users can use this platform to deliver dynamic, interactive applications to their customers, they can also create business-to-business portals which should save money by streamlining increasingly complex operations. We believe management understands this and is looking to use the problems customers have with latency and slowness in their Web applications as 2 MORGAN JOSEPH & CO. INC.

3 a way to drive awareness for this product suite. Early checks with potential Web application accelerator customers indicate that enterprises are receptive to Akamai's software-driven application acceleration network vs. hardware-based competitive offerings. We are adjusting our 2006 EPS estimates and introducing 2007 estimates. We are increasing our 2006 revenue estimate to $350.5mm from $349.5mm reflecting strength in the company's core CDN business. We have also increased our 2006 share count to include the company's recent 12.0mm share equity offering. The increased share count is offset by slightly higher revenues and a $4.0mm increase in interest income. Therefore, our 2006E cash EPS remains $0.67. We also note that Akamai's convertible bond holders have the right to convert $200.0mm of the company's outstanding convertible should the shares trade above $18.54 for 20 consecutive days. Post the close of trading yesterday, this criteria has now been met, and we expect convertible bondholders to gradually convert. These shares are already reflected in our diluted share count. Finally, we are introducing 2007 revenue and EPS estimates of $412.0mm and $0.82, respectively. 3 MORGAN JOSEPH & CO. INC.

4 Quarterly and Annual Income Statements E ($ in millions) E 2005E 2006E 2006E 2007E 2007E 1Q 2Q 3Q 4Q Year 1QA 2QA 3QA 4QE Year 1Q 2Q 3Q 4Q Year 1Q 2Q 3Q 4Q Year Total Revenue $48.4 $50.8 $53.3 $57.6 $210.0 $60.1 $64.6 $75.7 $79.0 $279.4 $81.5 $85.0 $89.5 $94.5 $350.5 $97.0 $100.0 $105.0 $110.0 $412.0 Cost of Revenue $7.7 $ $ Gross Profit $40.7 $ $ Operating Expenses: R&D S&M G&A Total Operating Expenses Adjusted EBITDA $14.9 $17.7 $17.9 $18.6 $69.1 $20.4 $22.7 $26.3 $30.1 $99.6 $31.5 $32.8 $35.0 $37.2 $136.5 $38.5 $40.2 $42.8 $45.4 $166.9 D&A Other Non-Cash Expenses Operating Income $8.3 $12.6 $13.5 $14.6 $49.0 $16.3 $17.2 $17.4 $21.0 $71.9 $23.5 $24.8 $27.0 $29.2 $104.5 $30.5 $32.2 $34.8 $37.4 $134.9 Other Income, (Expense) Net (3.3) (2.1) (1.4) (0.1) (7.0) (1.7) (0.7) (1.1) Pretax Income Income Taxes (0.1) Extraordinary Gain, (Loss) (2.0) (3.3) (0.7) (0.9) (6.8) Net Income (GAAP) $2.9 $6.8 $11.2 $13.4 $34.4 $14.1 $15.9 $272.3 $21.3 $323.5 $14.7 $15.5 $16.8 $18.1 $65.1 $18.9 $19.9 $21.5 $23.0 $83.3 Net Income (Normalized) $5.5 $10.4 $12.2 $14.5 $42.5 $14.3 $17.1 $21.9 $25.1 $78.4 $27.0 $28.3 $30.5 $32.6 $118.3 $33.9 $35.5 $38.1 $40.6 $148.1 Fully Diluted Shares Outstanding EPS (GAAP) $0.02 $0.05 $0.08 $0.09 $0.25 $0.10 $0.11 $1.70 $0.13 $2.06 $0.08 $0.09 $0.10 $0.10 $0.37 $0.11 $0.11 $0.12 $0.13 $0.46 EPS (Normalized) $0.04 $0.08 $0.09 $0.10 $0.31 $0.10 $0.11 $0.14 $0.15 $0.50 $0.16 $0.16 $0.17 $0.18 $0.67 $0.19 $0.20 $0.21 $0.22 $ E 2005E 2006E 2006E E Margin Analysis 1Q 2Q 3Q 4Q Year 1QA 2QA 3QA 4QE Year 1Q 2Q 3Q 4Q Year 1Q 2Q 3Q 4Q Year Gross Margin 84.1% 85.5% 83.8% 85.3% 84.7% 85.7% 85.6% 85.6% 85.6% 85.6% 85.5% 85.5% 85.5% 85.5% 85.5% 85.5% 85.5% 85.5% 85.5% 85.5% R&D 5.5% 5.6% 6.0% 5.8% 5.7% 6.0% 7.0% 6.5% 6.5% 6.5% 6.4% 6.5% 6.5% 6.5% 6.4% 6.5% 6.4% 6.3% 6.3% 6.4% S&M 28.3% 26.7% 24.2% 25.7% 26.2% 27.5% 27.4% 26.2% 24.6% 26.3% 24.3% 24.2% 23.9% 23.7% 24.0% 23.5% 23.3% 23.0% 22.7% 23.1% G&A 19.5% 18.3% 20.0% 21.6% 19.9% 18.1% 16.2% 18.1% 16.5% 17.2% 16.2% 16.2% 16.0% 16.0% 16.1% 15.8% 15.6% 15.4% 15.3% 15.5% Adjusted EBITDA Margin 30.8% 34.9% 33.5% 32.2% 32.9% 34.0% 35.1% 34.8% 38.1% 35.6% 38.6% 38.6% 39.1% 39.4% 38.9% 39.7% 40.2% 40.7% 41.2% 40.5% Operating Margin 17.2% 24.9% 25.3% 25.3% 23.3% 27.2% 26.6% 23.0% 26.6% 25.7% 28.8% 29.1% 30.2% 30.9% 29.8% 31.5% 32.2% 33.1% 34.0% 32.7% Pretax Margin 10.4% 20.7% 22.6% 25.1% 20.0% 24.3% 25.5% 23.9% 27.5% 25.4% 30.0% 30.3% 31.3% 32.0% 30.9% 32.5% 33.2% 34.1% 34.9% 33.7% Tax Rate 1.7% 4.1% 0.6% 1.3% 1.8% 3.6% 3.5% -0.8% 2.0% 2.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% Net Margin 11.3% 20.4% 22.9% 25.2% 20.3% 23.8% 26.4% 28.9% 31.8% 28.0% 33.1% 33.2% 34.0% 34.5% 33.8% 35.0% 35.5% 36.2% 36.9% 35.9% Revenue Growth (Yr/Yr) 32.3% 34.5% 27.6% 27.5% 30.2% 24.3% 27.3% 42.1% 37.2% 33.1% 35.6% 31.5% 18.2% 19.6% 25.4% 19.0% 17.6% 17.3% 16.4% 17.5% EPS Growth (Yr/Yr) % % % 663.9% % 137.7% 46.8% 50.0% 50.0% 61.1% 59.6% 41.8% 26.8% 24.8% 34.9% 22.8% 22.9% 22.2% 21.8% 22.4% Revenue Growth (Sequential) 7.1% 5.0% 4.9% 8.1% N/A 4.4% 7.6% 17.1% 4.4% N/A 3.2% 4.3% 5.3% 5.6% N/A 2.6% 3.1% 5.0% 4.8% N/A EPS Growth (Sequential) Fully Taxed 217.6% 89.7% 17.3% 8.1% N/A -1.2% 17.1% 19.8% 8.2% N/A 5.1% 4.1% 7.2% 6.4% N/A 3.4% 4.2% 6.5% 6.0% N/A Source: Company reports and Morgan Joseph & Co. Inc. estimates 4 MORGAN JOSEPH & CO. INC.

5 Quarterly and Annual Revenue Mix E ($ in millions) E 2005E 2006E 2006E 2007E 2007E 1Q 2Q 3Q 4Q Year 1QA 2QA 3QA 4QE Year 1Q 2Q 3Q 4Q Year 1Q 2Q 3Q 4Q Year Revenue by Segment ($) Services $47.4 $49.9 $52.2 $56.6 $206.1 $59.1 $63.6 $74.7 $78.0 $275.4 $80.5 $84.0 $88.5 $93.5 $346.5 $96.0 $99.0 $104.0 $109.0 $408.0 Software & Other Total Revenue $48.4 $50.8 $53.3 $57.6 $210.0 $60.1 $64.6 $75.7 $79.0 $279.4 $81.5 $85.0 $89.5 $94.5 $350.5 $97.0 $100.0 $105.0 $110.0 $412.0 Revenue Mix (%) Services 98% 98% 98% 98% 98% 98% 98% 99% 99% 99% 99% 99% 99% 99% 99% 99% 99% 99% 99% 99% Software & Other 2% 2% 2% 2% 2% 2% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Total Revenue 100% 100% 200% 300% 100% 100% 100% 200% 300% 100% 100% 100% 200% 300% 100% 100% 100% 200% 300% 100% Revenue Growth (Yr/Yr) Services 33% 35% 26% 30% 31% 25% 27% 43% 38% 34% 36% 32% 18% 20% 26% 19% 18% 18% 17% 18% Software & Other -7% -4% 310% -41% 1% 7% 18% -11% 0% 2% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Total Revenue 32% 35% 28% 27% 30% 24% 27% 42% 37% 33% 36% 31% 18% 20% 25% 19% 18% 17% 16% 18% Revenue Growth (Sequential) Services 9% 5% 4% 8% N/A 4% 8% 17% 4% N/A 3% 4% 5% 6% N/A 3% 3% 5% 5% N/A Software & Other -45% -10% 33% -11% N/A 0% 0% 0% 0% N/A 0% 0% 0% 0% N/A 0% 0% 0% 0% N/A Total Revenue 7% 5% 5% 8% N/A 4% 8% 17% 4% N/A 3% 4% 5% 6% N/A 3% 3% 5% 5% N/A Incremental Revenue Growth ($) Services $4.0 $2.5 $2.2 $4.4 N/A $2.5 $4.6 $11.1 $3.3 N/A $2.5 $3.5 $4.5 $5.0 N/A $2.5 $3.0 $5.0 $5.0 N/A Software & Other (0.8) (0.1) 0.3 (0.1) N/A N/A N/A N/A Total Revenue $3.2 $2.4 $2.5 $4.3 N/A $2.5 $4.6 $11.1 $3.3 N/A $2.5 $3.5 $4.5 $5.0 N/A $2.5 $3.0 $5.0 $5.0 N/A Source: Company reports and Morgan Joseph & Co. Inc. estimates 5 MORGAN JOSEPH & CO. INC.

6 Quarterly and Annual Balance Sheets E ($ in millions) E 2005E 2006E 2006E ASSETS 1Q 2Q 3Q 4Q Year 1QA 2QA 3QA 4QE Year 1Q 2Q 3Q 4Q Year Current Assets: Cash & Investments $177.0 $122.1 $119.8 $108.4 $108.4 $118.0 $130.7 $86.5 $98.8 $98.8 $110.3 $122.1 $134.7 $148.0 $148.0 Net Receivables Other Current Assets Total Current Assets $210.8 $157.6 $155.5 $146.5 $146.5 $158.6 $179.8 $139.6 $143.8 $143.8 $157.3 $171.1 $185.7 $201.0 $201.0 Property and Equipment, (net) Goodwill Other Assets Total Assets $245.2 $190.4 $189.0 $182.7 $182.7 $201.6 $364.7 $647.0 $651.0 $651.0 $665.7 $681.1 $697.9 $716.1 $716.1 LIABILITIES & EQUITY Current Liabilities: A/P & Accrued Other Current Liabilities Total Current Liabilities $46.3 $47.5 $45.7 $46.8 $46.8 $50.4 $62.0 $57.9 $47.0 $47.0 $47.0 $47.0 $47.0 $47.0 $47.0 Long Term Debt Other Long Term Liabilities Total Liabilities $414.9 $347.1 $332.6 $308.7 $308.7 $312.1 $323.8 $269.4 $252.1 $252.1 $252.1 $252.1 $252.1 $252.1 $252.1 Total Shareholders' Equity ($169.7) ($156.7) ($143.6) ($125.9) ($125.9) ($110.5) $40.9 $377.6 $398.9 $398.9 $413.6 $429.0 $445.8 $464.0 $464.0 Total Liabilities & Sh. Equity $245.2 $190.4 $189.0 $182.7 $182.7 $201.6 $364.7 $647.0 $651.0 $651.0 $665.7 $681.1 $697.9 $716.1 $ E 2005E 2006E 2006E 1Q 2Q 3Q 4Q Year 1QA 2QA 3QA 4QE Year 1Q 2Q 3Q 4Q Year Book Value per Share ($) ($1.27) ($1.17) ($1.07) ($0.85) ($0.85) ($0.75) $0.27 $2.35 $2.35 $2.35 $2.38 $2.45 $2.53 $2.62 $2.62 Tangible Book Value per Share ($) ($1.31) ($1.21) ($1.11) ($0.89) ($0.89) ($0.79) ($0.66) $1.48 $1.53 $1.53 $1.58 $1.65 $1.74 $1.83 $1.83 Working Capital per Share ($) $1.23 $0.82 $0.82 $0.68 $0.68 $0.73 $0.79 $0.51 $0.57 $0.57 $0.63 $0.71 $0.79 $0.87 $0.87 Cash per Share ($) $1.32 $0.91 $0.89 $0.74 $0.74 $0.80 $0.87 $0.54 $0.58 $0.58 $0.63 $0.70 $0.77 $0.84 $0.84 Current Ratio Accounts Receivable Turns Days Sales Outstanding (QE A/R) Days Sales Outstanding (Reported) Long-Term Debt to Capital -217% -191% -200% -208% -208% -237% 640% 56% 51% 51% 50% 48% 46% 44% 44% ROA (ttm) -3% 7% 16% 23% 23% 25% 16% 10% 12% 12% 14% 15% 16% 17% 17% ROE (ttm) 4% -9% -21% -34% -34% -47% 142% 18% 20% 20% 22% 24% 25% 25% 25% Source: Company reports and Morgan Joseph & Co. Inc. estimates 6 MORGAN JOSEPH & CO. INC.

7 Quarterly and Annual Cash Flow Statements E ($ in millions) E 2005E 2006E 2006E 1Q 2Q 3Q 4Q Year 1QA 2QA 3QA 4QE Year 1Q 2Q 3Q 4Q Year Operating Net Income $2.9 $6.8 $11.2 $13.4 $34.4 $14.1 $15.9 $272.3 $21.3 $323.5 $14.7 $15.5 $16.8 $18.1 $65.1 Depreciation & Amortization Other Adjustments (252.8) 1.0 (249.7) Gross Operating Cash Flow $10.9 $13.3 $15.9 $18.1 $58.2 $19.2 $22.0 $27.3 $31.4 $99.9 $23.7 $24.5 $25.8 $27.1 $101.1 Change in Current Assets (0.9) (1.7) (0.0) (2.9) (5.5) (4.0) (1.8) (1.6) (2.0) (2.0) (2.0) (2.0) (8.0) Change in Current Liabilities (1.4) 0.9 (1.3) 0.3 (1.5) 3.4 (3.2) (6.2) (10.9) (16.9) Net Cash Flow - Operating $8.6 $12.5 $14.5 $15.6 $51.2 $18.7 $16.9 $19.5 $28.6 $83.7 $21.7 $22.5 $23.8 $25.1 $93.1 Capital Expenditures (3.0) (4.6) (5.3) (7.1) (20.1) (9.7) (9.8) (8.5) (9.9) (37.9) (10.2) (10.6) (11.2) (11.8) (43.8) Other Investing Activities 55.3 (34.5) (5.3) Net Cash from Investing Activities $52.3 ($39.0) ($0.9) ($3.3) $9.1 ($15.1) ($9.4) $18.7 ($9.9) ($15.6) ($10.2) ($10.6) ($11.2) ($11.8) ($43.8) Net Cash from Financing Activities ($37.1) ($62.2) ($11.8) ($19.6) ($130.7) $0.9 $3.6 ($55.1) ($6.4) ($57.0) $0.0 $0.0 $0.0 $0.0 $0.0 Change in Cash $23.8 ($88.8) $1.9 ($7.3) ($70.3) $4.6 $11.1 ($16.9) $12.3 $11.0 $11.5 $11.8 $12.6 $13.3 $49.3 Beginning Cash $105.7 $129.5 $40.7 $42.6 $105.7 $35.3 $39.9 $51.0 $34.1 $35.3 $46.4 $57.9 $69.7 $82.3 $46.4 Ending Cash $129.5 $40.7 $42.6 $35.3 $35.3 $39.9 $51.0 $34.1 $46.4 $46.4 $57.9 $69.7 $82.3 $95.6 $95.6 Restricted Cash & Mrkt Securities $47.6 $81.4 $77.2 $73.1 $73.1 $78.1 $79.7 $52.4 $52.4 $52.4 $52.4 $52.4 $52.4 $52.4 $52.4 Total Cash & Equivalents $177.0 $122.1 $119.8 $108.4 $108.4 $ $130.7 $86.5 $98.8 $98.8 $110.3 $122.1 $134.7 $148.0 $148.0 GAAP Free Cash Flow $5.6 $7.9 $9.2 $8.4 $31.1 $9.0 $7.1 $11.0 $18.7 $45.8 $11.5 $11.8 $12.6 $13.3 $49.3 Source: Company reports and Morgan Joseph & Co. Inc. estimates 7 MORGAN JOSEPH & CO. INC.

8 Required Disclosures Rating and Price Target History for: Akamai Technologies, Inc. (AKAM) as of /22/05 Buy:$ Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q Created by BlueMatrix Price Target Our price target is $ Valuation Methodology We are raising our price target to $24.50 based on P/E/growth (PEG) and EV/sales analysis on our new 2007E estimates. With no direct comparable public companies to Akamai, we are using a basket of related companies in the Internet infrastructure and services marketplace for relative valuation purposes. Our peer group of stocks trade at a 2007E EV/sales multiple of approximately 4.9x vs. Akamai, which trades at 7.9x. On a P/E basis, the group trades at approximately 33.6x 2007E EPS, while Akamai trades at a multiple of 23.8x. Akamai currently trades at a PEG ratio of 79.4%, and our target of $24.50 represents a PEG ratio of 99.0% assuming a long-term EPS growth rate of 30%. Given the attractive market dynamics of the Internet content delivery space, and Akamai's track record and earnings momentum, we believe the stock should trade at a multiple at least in-line with its growth rate. Our $24.50 target represents a multiple of 30.0x our 2007 EPS estimate of $0.82. Risk Factors Akamai must maintain its high growth rate. Akamai has posted 11 consecutive quarters of sequential revenue growth and over 25.0% Y/Y revenue growth over the past four quarters. The acquisition of Speedera brings integration risk. Akamai acquired Speedera in 2Q05, and may also make future acquisitions. Should there be an issue with the integration process, it could adversely impact future results. Microsoft represents a significant part of revenues. Until 2005, Akamai's largest, and only 10%, customer was Microsoft. Until this year, Microsoft had accounted for between 10% and 20% of quarterly revenue. In the most recent quarter (3Q05), Microsoft revenue was below 10% of Akamai's total revenue, where they should remain going forward. Akamai faces strong competition on a number of fronts. The Internet content acceleration market has several different pieces with a full range of competitors. Declining bandwidth costs could lessen demand for Akamai's services. If Internet transport costs (and server expenses) went to zero, customers could over-provisioning their networks and reduce the need for Akamai's content delivery services. Network operational risk is inherent in Akamai's business. All networks present operational risks from events like natural disasters, viruses and security issues, power outages, technical problems, and other service outages. Customer churn may occur more frequently in the post-bubble world. Akamai saw tremendous customer churn several years 8 MORGAN JOSEPH & CO. INC.

9 ago, but has reduced it to less than 4% in the most recent quarter. Akamai has a long-standing goal to keep churn below 10%. I, Erik Zamkoff, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. intends to seek or expects to receive compensation for investment banking services from the subject company within the next three months. Rating Percent Percent Investment Banking Services/Past 12 Mos. BUY [B] HOLD [H] SELL [S] Meaning of Ratings A) Buy means reasonable outperformance relative to the market over months. B) Hold means market-type risk adjusted performance; potential source of funds. C) Sell means expected to underperform the market. Other Disclosures The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not considered to be all inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned herein. Morgan Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may have a position in the securities mentioned herein, and, before or after your receipt of this report, may make or recommend purchases and/or sales for their own accounts or for the accounts of other customers of the Firm from time to time in the open market or otherwise. Opinions expressed are our present opinions only and are subject to change without notice. Morgan Joseph & Co. Inc. is under no obligation to provide updates to the opinions or information provided herein. Additional information is available upon request. Copyright 2005 by Morgan Joseph & Co. Inc. 9 MORGAN JOSEPH & CO. INC.