Sector: Internet Infrastructure

Transcription

1 Akamai Technology, Inc. (AKAM) 1290 Reckson Plaza Uniondale, NY Sector: Internet Infrastructure Date:4/17/2006 Speculative Buy Analyst: Charles Giaquinto Tel: 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: EV/Sales and Px/Sales ratios have expanded dramatically and recently traded at aggressive levels when the stock hit its high of near $34 on 4/3/06. The EV/Sales ratio (at 18X) was at its highest level since the market correction of 2000, while the Price/Sales ratio (at 17X) was at its highest level since Q We believe expanding profit margins and sales growth is driving shareholder value, but the aggressive multiples may be a stumbling block for greater stock price appreciation in the short term. We recommend investors buy Akamai on any pull-back in price and believe 2006 Sales and earnings growth will justify a $34.50 price target by year end. Based on Akamai s growth and business environment we are assigning a 13.5X EV/Sales, and 13X Px//Sales multiple based on 2006 DCF year end projections DISCLAIMER: Please read the required disclosures and Regulation AC certification found on pages 8-9 Key Points: We are initiating coverage of Akamai Technologies with a Speculative Buy rating and a price target of $34.50 per share We believe the growth prospects for the company remain strong and expect top line sales growth to remain in excess of 30% in 2005 Gross profit margins continue to expand and the company has reported net income for the past 8 quarters Expanding net margins and the scalability of Akamai products will support 2006 expected valuation multiples. We believe the acquisition of Speedera supports corporate initiatives, increases Akamai s customer base and gives Akamai a foothold in India Positive net income growth and a brighter outlook has opened the door for Akamai Technology to take advantage of its $1.1 billion net operating tax assets Strong broadband demand and internet retail sales net are positive conditions for continued demand of Akamai s services Key Data Year 2005 E2006 Price (4/17/06) and 2006 Price Target $31 $34.50 Sales $283 MM $382 MM Earnings per Share $0.51 $0.71 Market Cap Enterprise Value Debt/Equity ratio 32% $4.77 Billion $4.66 Billion Enterprise Value/Sales 16X E13.5X Price/Sales 15..2X E14X

2 Business Description Akamai Technology, 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 EdgePlatform Akamai s EdgePlatform is the worlds' largest distributed computing network, consisting of more than 18,000 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 18,000 servers in more than 950 networks located in over 69 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 seemless 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 E-Business sales growth trends on the internet are expected to remain very strong for some time. We expect a combined 35% growth rate for Akamai s EdgePlatform and related services in 2006 based on current trends in media content, advertising and the need for e-business to improve the customer experience 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 The scalability of Akamai s business platform is taking effect. Akamai has steadily improved gross margins and the company has recently stated that they see limited capacity constraints. This will continue to increase cash flows and strengthen their already improved balance sheet Gross profit and net profit margins continue to grow and are 80% and 31%, respectively. Akamai has turned a profit for the last 8 quarters and the underlining business trends remain strong. Akamai has a broad customer base (1,900 customers) with no one customer representing 10% of revenue. Akamai has a low churn rate and has reported higher revenue growth for the past 12 quarters We believe Akamai s acquisition of Speedera will be an excellent fit for Akamai and will support the growth targets as well as help increase Akamai s market share, and global reach. Key aspects of acquisition: 2

3 Speedera has a 50 person operation in Bangalore, India, and has 350 customers Akamai hopes to sell additional products and services to. Paul Sagan, Akamai s President said a major incentive in buying Speedera was to gain access to its customers and sell new services and increasing revenue. Some of Speedera s largest customers include Advanced Micro Devises, Double Click, Lowes, and Macromedia The acquisition also solves Akamai s desire to expand its operations infrastructure. Akamai gets 125 trained personnel, an operation in India, 350 new customers, and new technology that is related to Akamai s core business. While this acquisition can also be considered good old fashion industry consolidation, it looks to be a good fit 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 then use Akamai s technology and services Akamai s stock price has made a tremendous run, appreciating about 50% from a price of $22 to a near $34 per share high since its last earning release on February 8 th 2006 If Akamai misses estimates or doesn t meet top line and bottom-line growth expectations, expanding valuation multiples will be in question Valuation We believe Akamai is a Speculative Buy and we initiate a price target of $34.5 per share based on revenue growth, the companies expected profitability, and current market conditions Improving profit margins, good liquidity ratios, positive cash flow, and solid demand for broadband and media content should allow Akamai to execute its business model in the next 12 months. EV/Sales and Price/Sales ratios have expanded dramatically and recently traded at aggressive levels when the stock hit a 5-year high of near $34 on 4/3/06. The EV/Sales ratio (at 18X) was at its highest level since the market correction of 2000, while the Price/Sales ratio (at 17X) was at its highest level since Q Currently, at a price of $31 the EV/Sales ratio and Px/Sales ratio are at 15.6X and 15.5X, respectively. While these level are still historically high, we believe they are justified given Akamai s turn-around and leadership in content delivery We believe expanding profit margins and sales growth is driving shareholder value, but the aggressive multiples may be a stumbling block for greater stock price appreciation in the short term We believe investors should look to buy Akamai Technology on pull-backs and price dips moving into what looks to be a strong quarter. We believe Akamai has strong growth potential and a positive long-term outlook. Akamai is expected to release Q earnings on 4/29/06 Price Target We set our price target at $34.50 per share based on a DCF model. We also believe a valuation of 13.5X for EV/Sales and a 14.5X Px/Sales multiple is justified. 3

4 Income Statement (Mil) Year Year Year Period Ending Total Revenue Service Software and Software related Service & Software from related parties Cost of Revenue Research & Development Sales and Marketing General and Administrative Amortization of other intangible assets Restructuring (benefit) charge (8.52) - - Other Operating Cost Total Cost and Operating Expense Income from Operations (11.11) Interest Income Interest Expense (18.32) (10.21) (5.33) Other Income (0.04) 1.06 (0.51) Gain (loss) on investment, net 1.62 (0.07) (0.03) Loss of early extinguishment of debt (2.10) (6.77) (1.37) Income before (benefit) provisions for tax (28.65) Provision for income tax (257.59) Net Income From Cont. Operations (29.28) Preferred Dividend Net Income (29.28) Net Income per share Basic (0.25) Diluted (0.25) Shares used in calculation Basic Diluted

5 Balance Sheet (Mil) Year Year Year Period Ending Cash Restricted Cash 5.00 Marketable Securities Receivables Due Related Parties - Inventories: Other Current Assets Notes Receivables Total Current Assets Property Plant Equipment Marketable Securities Restricted Marketable Securities Long Term Investments Goodwill Intangible Assets Deferred Tax Assets Other Non-Current Assets Other Assets Total Non-Current Assets Total Assets Notes Payable Accounts Payable Accrued Expenses Deferred Revenue Capital Lease Obligation Accrued Restructuring /2 % Convert Sub. Notes Total Current Liabilities Capital Lease Obligation Accrued Restructuring Other Non-Current Liabilities % Convert Bonds /2 % Convert Sub. Notes Total Non-Current Liabilities Total Liabilities Redeemable Preferred Stock Common Stock ($0.01 par value) Additional Paid-In Capital 3, , , Deferred Stock Compensation (1.55) (0.94) (7.54) Notes Receivable for Stock Accumulated comprehensive income Accumulated deficit (3,613.60) (3,579.23) (3,251.23) Total Stockholder Equity (175.36) (124.54)

6 Millions Actual Forecast Period (Year) Total Revenue , , , COGS Gross Profit , , R & D SGA EBITDA , Depreciation & Amortization EBIT Tax Credit (1,100.00) (1,062.79) (921.37) (742.50) (413.07) Net Tax Earnings 1, Federal and State Tax Net Operating Profit after Tax Provision for Tax Add (Dep & Amt) Sub ( CapEx) (36.16) (49.18) (65.90) (79.08) (94.89) (109.13) (120.04) (132.04) (plus)/minus New W.C Free Cash Flow Terminal Value, , PVFCF Total PV of DCF &TV 4,974 PLUS: Current Assets Total PV of Co. Assets 5,329 Variables: WACC 11.7% Cost Equity 15.4% Cost Debt 1.0% %Equity 76.0% %Debt 23.0% RF Rate 5.0% Risk Prem. 7.4% Beta 1.36 Valuation Metrics: PV of DCF $ 1,695 PV of TV $ 3,279 Plus: Current Assets $ 355 Sum of DCF $ 5,329 Shares Outstanding Price Target $

7 Period Ending Mar-06 Jun-06 Sep-06 Dec-06 E2006 Mar-06 Jun-06 Sep-06 Dec-06 E2007 Total Revenue Service Software and Software related Service & Software from related parties Cost of Revenue Research & Development Sales and Marketing General and Administrative Amortization of other intangible assets Restructuring (benefit) charge Operating Cost Total Cost and Operating Expense Income bf provisions for tax Provision for income tax Net Income From Cont. Operations Preferred Dividend Net Income Net Income per share 0.70 Basic Diluted Shares used in calculation - - Basic Diluted

8 Market Making and Investment Banking Disclosures At the time this report was published, Henley and Company did not make a market in Akamai (AKAM), or any other company mentioned in this report including: N/A 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. 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. Rating % of Companies that are ranked under the rating Buy Speculative Buy 1 100% Neutral Under-perform Sell % of Companies in each ranking that we do investment banking services for 8

9 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. 9