Sector: Internet Infrastructure ANALYST: Charles Giaquinto (212)

Transcription

1 Research Report - August 17, 2006 Akamai Technologies, Inc. (AKAM) Rating: Sector: Internet Infrastructure ANALYST: Charles Giaquinto (212) cgiaquinto@henleyandcompany.com Speculative Buy Company Description Akamai Technologies, Inc. provides services for the delivery of content and business processes over the internet for businesses, government agencies, and other enterprises. It offers services and solutions for content and application delivery, application performances services, on demand managed services, and business performance services based on its technological platform, EdgePlatform. Akamai sells its services and software domestically and internationally through its direct sales offices and services organization, as well as, through its resellers. It has offices in the United States, Europe, and Asia. The company was incorporated in 1998 and is headquartered in Cambridge, Massachusetts. Valuation Based on a DCF valuation we believe shares of Akamai could appreciate to $40 a share in the next 6-12 months. The EV/Sales ratio (at 19.6X on 08/04/06) when AKAM made its recent high at $42.00 was at its highest level since the market correction of 2000, while the Price/Sales ratio (at 19.5X) was at its highest level since Q We believe profit margins and sales growth are driving shareholder value. We recommend investors buy Akamai Technologies, especially on any pull-back in price. We also believe cash flow and earnings growth will justify a $40 price target in the next 6-12 months. Key Investment Considerations We are maintaining a speculative buy rating on Akamai Technologies, but have increased our price target to $40 from $34.50 a share based on a DCF valuation. We believe broadband, consumer and enterprise trends remain strong and will sustain the current top-line revenue momentum Akamai Technologies is experiencing. While we expect top-line growth to slow next year to 37%, we believe Akamai s cash flows, and gross/net margins will remain strong. Akamai renegotiated a multi year contract with Microsoft and increased its customer base by 79 to 2,060 customers. Akamai increased 2006 guidance for both revenue growth and per share net income. Akamai s beta is cause for concern resulting from increased systematic risk in macroenvironment and improved guidance from management. Year Q32006 E2006 Price (8/16/06) and 2006 Price Target $39.77 $40 Earnings per Share (Q3 actual and 2006 Est.) $0.20 $0.83*** Market Cap $6.22 Billion Debt/Equity 28% Please see important disclosures at the end of this report 1290 Reckson Plaza Uniondale, NY (800) Toll Free (516) Main (516) Fax Member FINRA/MSRB/ SIPC

2 Business Description Akamai Technologies, Inc offers solutions for the delivery, load balancing, and storage of the application and Web content. It also offers application performance services to enhance the performance of content common on corporate extranets and wide area networks. Akamai s on demand managed services, include Akamai s Edge Computing and net storage offerings, which enable enterprises to handle internet traffic. The company s business performance managed services include its network data feeds and its Web analytics offering, which provide customers with data about the performance of their content applications over the Internet and on the Edge Platform. In addition, it provides custom solutions, including replicating its technology to facilitate content delivery behind the firewall, combinations of its technology with that of other providers to create solutions for specific customers, and support for applications that rely on the internet and intranets. The Edge Platform Akamai s EdgePlatform is the worlds' largest distributed computing network, consisting of more than 20,000 servers worldwide, which act as an optimized overlay to the public internet. By overlaying the existing internet with a network of secure, performance-optimized server hardware supported by one of the worlds preeminent software design and optimization processes Akamai is able to provide its customers with a predictable, scalable, and secure platform on which to run and deliver a wide variety of content and e-business applications. Akamai s Network Operations Command Center, located in Cambridge Ma, is the heart of its Network and business. From this command center Akamai is able to monitor their 20,000 servers in more than 1,000 networks located in over 71 countries, see and manage all customer networks, and can monitor real time conditions of the internet. Akamai s proactive stance and unique view ensures a seamless response to network conditions that enable Akamai to deliver rich media content and applications, regardless of network traffic volume. Based on the EdgePlatform system and internet overlay Akamai can provide a full line of Web and IP based application accelerators that deliver significant internet application performance gains to companies looking to optimize the delivery of Web based business applications. What we Like About Akamai Global broadband penetration is expected to remain strong. Broadband penetration in the U.S is expected to hit 80% in 2010 from its current level of 43% (Internet World Stats). Broadband customer demand is driving the e-business need to provide a better internet experience as internet retail competition increases. Akamai is the leader in merging the link between retailers and their potential customers. Technological advances are making VoIP, on-demand video, advertising, music and other services commercially competitive and marketable today. These technical Page 2 of 10

3 advances are important and significant because cable, telephone, VoIP and other service providers are forced to lower prices in an attempt to command market share and remain competitive. We are seeing this in bundled services offered by large Cable and Telephone companies. New technologies have forced larger companies to bundle and reduce prices to secure and prevent smaller independent players from competing and gaining a foothold in these burgeoning markets. Lower market prices for broadband and other related services are incentive for greater adoption. It s a self perpetuating circle; lower prices drive the margin propensity to consume and increase the substitution and adoption rate for broadband and other related services, while the increased shift in demand drives technical innovation, competition and ultimately lower prices. We believe the adoption of broadband is also driving consumer demand for products such as VoIP, streaming video, music and movie downloads, advertising and greater content. We believe this trend only helps Akamai as enterprises rush for market share and outsource the back-end customer experience to Akamai. Akamai has developed a who s who of clientele. This last quarter Akamai announced that it has renegotiated its multi-year contract with Microsoft (a relationship they have had for 10 years; Microsoft is also an investor). Other major clients are Google, Apple and 6 of the top 10 DJIA companies including IBM. We believe Akamai has officially shed the Tech Bubble s Scarlet Letter. Gross profit and EBITDA margins are strong at near 80% and 40%, respectively, and no customer accounts for 10% of revenue. In the last quarter Akamai reported a 7% ARPU increase and added 79 new customers, increasing its customer base to 2,060. In addition, Akamai reported that their churn rate for the Q remained constant at 4.00% Internet retail sales trends are expected to remain very strong for some time. This is good news that will support Akamai s future growth as internet retailers ramp up for the all important Christmas sales season. We expect a combined 50% growth rate for Akamai s EdgePlatform and related services for the remainder of 2006, and an over 35% growth rate for 2007 based on media content and advertising trends, technical improvements, and the need for e-business to improve the customer experience. Akamai s management increased its full year 2006 revenue guidance to $415- $420MM from $380MM, and increased its full year 2006 normalized earnings guidance to between $0.82 and $0.83 per share. Page 3 of 10

4 Business Model Risks and Valuation Concerns Technology competes in a fast paced and dynamic market. Akamai is constantly under threat of ever evolving and new proprietary technologies from competitors. Large e-business retail companies also have the resources to build their own server infrastructure. Akamai s main competitors are these large companies (e-business and others) who have the money and resources to support and build-out their own infrastructure rather than use Akamai s technology and services. While growth trends are strong, there is always risk that corporate guidance expectations or market conditions can change adversely. Valuation Based on our DCF analysis we believe Akamai is a Speculative Buy and have assigned a price target of $40 per share over the next 6-12 months based on revenue growth, the company s expected profitability, and positive cash flow outlook. We also believe valuation metrics could shift for Akamai in the future. Akamai is investing heavily in capital equipment and people, and has been profitable for over 2 years. If Akamai continues to mature as a dominant player in the content delivery space, shed the stigma of the tech bubble, improve its cash position, and maintain 80% margins, then the revolution of internet services and technologies provided using broadband applications could make Akamai a main beneficiary. We believe Akamai s beta at 1.56 will provide a buying opportunity as market uncertainty and volatility generate ebbs. We believe buying pull-backs within the July/August range ($30 to $42) is optimal as we expect good things from Akamai in the future. ***Earnings below on the income statement reflect 2006 and 2007 GAAP estimates (exhibit #1). Akamai Technologies only gives normalized guidance for 1 year so normalized estimates are only for 2006 (exhibit #2). Page 4 of 10

5 Income Statement (Mil) Period Ending Q3 Q4 FY05 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 FY06 FY07 Total Revenue $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Service Software and Software related Cost of Revenue Research & Development Sales and Marketing General and Administartive Amortization of other intangible assets Restructuring (benefit) charge Other Expenses Operating Cost Total Cost and Operating Expense Income from Operations Interest Income (2.218) Net Interest (income) Expense (1.383) (3.222) Other Income (63) (0.205) (0.917) Gain (loss) on investment, net (27) 00 (27) Loss of early extinguishment of debt (1.370) 00 (1.370) Income before (benefit) provisions for tax Provision for income tax (45%) ( ) (3.207) ( ) Accum Tax Net Income From Cont. Operations Prefered Dividend Net Income Net Income per share Basic Diluted Shares used in calculation Basic Diluted EBITDA Reconciliation: EBIT Plus: Depreciation and AMT EBITDA Page 5 of 10

6 NORMALIZED NET EARNINGS Q1 Q2 Q3 Q4 FY06 Net Income Amt of Intangible Assets Equity Compensation Amortization of capitalized equity comp Gain on Investments (neg) tax NOL carryforward Release of deferred tax asset allow. Total Normalized Net Income Interest (income) expense (2.659) (3.336) (3.416) (3.496) (12.907) Provision for Tax Dep and Amt Other (income) expenses (0.186) (0.475) (0.475) (0.475) (1.611) Total Adj. EBITDA Normalized Net Income per share Basic $0.19 $0.23 $0.24 $ Diluted $0.17 $0.20 $0.20 $ Shares Used in Calc. Basic Diluted Page 6 of 10

7 BALANCE SHEET (MIL) Historical Projected Period Ending Cash $ $ 167 $ $ $ $ $ $ $ 1, Restricted Cash 5.0 Marketable Securrities Receivables Due Related Parties 1.3 Prepaid Expenses and Other Current Assets Notes Recieavles Total Current Assets Property Plant Equipment Accumulated Depreciation Marketable Secruities Restricted Mareketable Securities Long Term Investments Goodwill Intangible Assets Deffered Tax Assets Other Non-Current Assets Total Non-Current Assets Total Assets Notes Payable Accounts Payable Accrued Expenses Deffered Revenue Capital Lease Obligation Accured Restructuring /2 % Convert Sub. Notes 15.0 Total Current Liabilities Capital Lease Obligation 1.0 Accured Restructuring Other Non-Current Liabilities % Convert Bonds /2 % Convert Sub. Notes Total Non-Current Liabilites Total Liabilites Redemable Prefered Stock Common Stock ($1 par value) Additional Paid-In Capital Deferred Stock Compnesation Notes Recievable for Stock Accumulated comprehensive income Accumulated deficit Total Stockholder Equity Page 7 of 10

8 FREE CASH FLOW CALCULATION Projected EBIT $116.1 $173.9 $249.7 $359.4 $475.1 Plus: Depreciation and Amortization EBITDA Less: Capex EBITDA Less Capex Less: Taxes on EBIT 40% Less: Changes in Working Capital Deffered Tax Credit Unlevered Free Cash Flow DCF Enterprise Value Calculation Terminal Value Calculation TV Growth Rate 5.0% Projected FCF Discount Rate (WACC) 11.7% Terminal EV 9,609.3 Implied TV EBITDA Muliple 15.4 Discounted Cash Flow at WACC Unlevered Cash Flow Terminal Value Total Discounted Cash Flows Summary DCF Valuation (Predeal) DCF Value per Share DCF Enterprise Value Terminal Less: Net Debt Growth 9.7% 11.7% 13.7% Equity Value % $42.6 $32.1 $25.5 Shares (predeal) % $48.9 $35.4 $27.5 DCF Value per Share $ % $57.9 $39.8 $3 6.0% $71.8 $45.6 $ % $95.9 $54.0 $37.2 Page 8 of 10

9 Market Making and Investment Banking Disclosures At the time this report was published, Henley and Company, LLC did not make a market in Akamai Technologies, Inc. (AKAM), or any other company mentioned in this report. Stock Rating System Henley and Company s stock rating system is designed to reflect the type of investment decisions customers make on a regular basis. The language of the rating system used is a specific action Henley and Company would take in regard to the specific stocks we cover. Below, are an overview and an explanation of each of the types of recommendations Henley and Company would assign to stocks covered. Please understand that the rating system and the assigned definitions are predicated purely based on the total return of the individual stock in absolute dollar terms and not based on a relative value to a specific index or industry group. Henley & Company s Stock Rating system Buy: Indicates stocks we believe have a market capitalization that is comparably undervalued to its market peers and offers a greater relative performance to the market. We believe stocks in this category offer excellent risk reward potential and we recommend purchase based on its current relative value. Note, as with all equities there is always downside risk. Speculative Buy: Indicates stocks we believe should be purchased based on its growth potential and long term outlook of its industry. We believe stocks in this category offer excellent reward potential but have a greater specific investment risk and are subject to greater volatility then our normal buy recommendation. Neutral: Indicates stocks we will not advocate a buy or sell recommendation based on current conditions. Under-Perform: Indicates stocks we believe are currently fairly valued and offer limited upside reward relative to its specific investment risk. Sell: Indicates stocks we believe are currently overvalued relative to its market peers, and/or is experiencing major operational challenges. We believe stocks in this category should be avoided and the specific investment risk outweighs any potential reward. Page 9 of 10

10 Rating % of Companies % of Companies in each that are ranked ranking that we do under the rating investment banking services for Buy 1 33% Speculative Buy 1 33% Neutral 1 33% Under-perform Sell Further Disclosures The information and statistical data contained herein have been obtained from sources, which we believe to be reliable but in no way are warranted by us as to accuracy or completeness. We do no undertake to advise you as to changes in figures or our views. This is not a solicitation of any order to buy or sell. Henley and Company is fully disclosed with its clearing firm, Pershing LLC, is not a market maker and does not sell to or buy from customers on a principle basis. The above statement is the opinion of Henley and Company and is not a guarantee that the price target for the stock will be met or that the predicted business results of the company will occur. There may be situations when fundamentals, technically, and quantitative opinions are not met. We, our affiliates, any officer, director or stockholder or any other member of their family may from time to time purchase or sell any of the above mentioned or related securities. Analyst or members of the Research Department are prohibited from buying or selling securities issued by the companies that Henley and Company has a research relationship with, except if ownership of such securities was prior to the start of such relationship, then the analyst or member of the research Department may sell such securities after obtaining expressed written permission from the Director of Research. As of the date of this report, we, our affiliates, any officer, director or stockholders, or any member of their families do not have a position in the stock of the company mentioned in this report. All research issued by Henley and Company is based on public information. Henley and Company does not currently have an Investment Banking relationship, nor do we receive compensation for any other services from the company mentioned in this report, and was not a manager or co-manager of any offering for the company within the last three years. The company mentioned in this report also does not pay for Henley and Company to disseminate any research reports. I, Charles Giaquinto, the research analyst of this report, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities and issues, and that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in the report. Page 10 of 10