February 19, 2015 Akamai Technologies Inc. Current Recommendation Prior Recommendation Outperform Date of Last Change 12/22/2013 Current Price (02/18/15) $70.29 Target Price $74.00 NEUTRAL SUMMARY (AKAM-NASDAQ) Akamai reported better than expected fourth-quarter 2014 results with earnings and revenue beating the Zacks Consensus Estimate. We believe that strong demand for cloud infrastructure solutions, security, mobile products and online video will drive the company s top-line growth going forward. In addition, Akamai s partnership with the likes of Microsoft, Cisco, AT&T and IBM, will generate financial synergies over the long term. However, intense competition has kept pricing under tremendous pressure, particularly in media segment, which is a significant headwind. We maintain our Neutral recommendation and set a price target of $74.00. SUMMARY DATA 52-Week High $70.36 52-Week Low $51.14 One-Year Return (%) 16.14 Beta 1.05 Average Daily Volume (sh) 1,914,821 Shares Outstanding (mil) 178 Market Capitalization ($mil) $12,511 Short Interest Ratio (days) 3.22 Institutional Ownership (%) 87 Insider Ownership (%) 4 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) 17.2 Earnings Per Share (%) 13.9 Dividend (%) N/A using TTM EPS 34.6 using 2015 Estimate 31.5 using 2016 Estimate 25.6 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Below Avg., Type of Stock Large-Growth Industry Internet-Servcs Zacks Industry Rank * 88 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 368 A 378 A 396 A 436 A 1,578 A 2014 454 A 476 A 498 A 536 A 1,964 A 2015 527 E 550 E 573 E 617 E 2,265 E 2016 2,638 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.42 A $0.37 A $0.35 A $0.47 A $1.71 A 2014 $0.47 A $0.46 A $0.54 A $0.56 A $2.03 A 2015 $0.51 E $0.53 E $0.56 E $0.64 E $2.23 E 2016 $2.74 E Projected EPS Growth - Next 5 Years % 16 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
RECENT NEWS Akamai (AKAM) Tops Q4 Earnings & Revenues, Guides Well Akamai Technologies, Inc. reported fourth-quarter and full year 2014 results. Quarterly earnings of $0.56 per share (including stock-based compensation expense and amortization of capitalized stock-based compensation but excluding all other non-recurring items and related tax impact) increased 19.1% year over year and beat the Zacks Consensus Estimate of $0.53. Revenues Revenues jumped 23% year over year to $536.3 million, ahead of the Zacks Consensus Estimate of $526 million. The strong year-over-year growth in revenues was primarily driven by robust performance of most of the solutions. For 2014, the company s revenues came in at $1,964 million, an increase of 24% compared with the prior year figure. Media delivery solutions revenues grew 20.6% year over year to $250.1 million driven by robust traffic growth across video and social customers. Additionally, the segment benefited from strong holiday traffic in the quarter. Performance & security solutions revenues jumped 24.7% year over year to $239.7 million. The strong year-over-year performance was driven by robust demand for the company s cloud security product offerings. Service & support systems witnessed the strongest year-over-year revenue growth in the quarter, up 28% to $46.5 million. Strong service attachment rates continued to drive revenues in this quarter as well. Margins The company reported adjusted EBITDA of $232 million in the quarter, up from $192 million in the yearago quarter. Adjusted EBITDA margin was down 100 basis points (bps) to 43%. Non-GAAP operating margin for the quarter was 33%, down 100 bps year over year. Balance Sheet & Cash Flow Akamai exited the quarter with cash and cash equivalents of $238.6 million compared with $333.9 million in the year-ago quarter. The company generated cash flow from operations of $195.5 million in the reported quarter versus $171.7 million in the year-ago quarter. Akamai repurchased 0.7 million shares in the quarter for approximately $42 million. In 2014, the company repurchased 4.6 million shares for about $269 million. Guidance For the first quarter of 2015, the company expects revenues to be in the range of $517 million to $534 million, representing a growth rate of 17% to 21% after adjusting for foreign exchange movements. The Zacks Consensus Estimate for the same is currently pegged at $527 million. Non-GAAP operating expenses are expected to be between $189 million and $193 million. Non-GAAP operating margin is forecast to be in the range of 30% to 31%. Akamai expects first-quarter non-gaap earnings per share in the range of $0.60 to $0.63. Equity Research AKAM Page 2
VALUATION Akamai shares are currently trading at 34.6X TTM earnings. Historically, Akamai shares have shown great volatility, with s ranging from 17.8X to 48.8X. Therefore, it is currently trading slightly above the mid-point of its historical range which indicates a chance of limited upward movement. The shares are trading at 31.5X our forward earnings estimates for 2015, a discount to the peer group average of 190.2X. Akamai s earnings per share are expected to grow at 16.0% over the next 5 years, much lower than peer-group average of 18.8%. We note that Akamai s strong fundamentals, robust growth opportunity in the core business as well as security segment, and aggressive share buyback are the primary positives going forward. Thus, we remain Neutral and set a target price of $74.00 (33.2X 2015 ). Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Akamai Technologies (AKAM) 31.5 25.6 16.0 20.6 34.6 48.8 17.8 Industry Average 190.2 49.4 18.8 21.4 88.2 652.6 26.7 S&P 500 16.7 15.6 10.7 15.3 19.3 19.4 12.0 LinkedIn Corp (LNKD) 610.6 273.8 38.3 122.1 1482.8 22575.0 300.0 AOL Inc (AOL) 23.0 19.8 7.6 9.2 23.8 63.8 7.3 Rackspace Hosting, Inc. (RAX) 54.9 43.8 20.0 15.2 65.5 124.8 48.7 Sohu.com Inc (SOHU) 48.2 20.0 10.3 50.9 10.5 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Akamai Technologies (AKAM) 3.6 4.7 1.7 12.8 0.2 0.0 16.3 Industry Average 4.7 4.7 4.7-3.1-1.1 0.2 6.3 S&P 500 5.3 9.8 3.2 25.5 2.1 Equity Research AKAM Page 3
Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET Equity Research AKAM Page 4
OVERVIEW Headquartered in Cambridge, MA, Akamai Technologies, Inc. (AKAM) is a global provider of content delivery network (CDN) and cloud infrastructure services. The company s solutions accelerate and improve the delivery of content over the Internet, enabling faster response to requests for web pages, streaming of video & audio, business applications, etc. Its offerings are intended to reduce the impact of traffic congestion, bandwidth constraints and capacity limitations on customers. The company s solutions allow customers to operate their web transactions anywhere anytime with costeffective outsourced infrastructure and carry out predictable, scalable and secure e-business at low cost. These solutions are built on the Akamai EdgePlatform, which is the technological platform for its business solutions and hosts some of the world s best-known Internet brand names, such as itunes. Akamai s platform comprises more than 141,000 servers located in over 1,200 networks around the world. Akamai reported revenues of $1.58 billion in 2013, up 15.3% year over year. The company offers five core solutions to its customers namely Terra, Aqua, Sola, Kona and Aura. Through these solutions, the company provides application and cloud performance services (Terra), digital media, software distribution and storage services (Sola), website optimization services (Aqua), security tools (Kona), network operator solutions and other Internet-based offerings (Aura). Revenue by Core Solutions 2013 8% 0% 48% 44% Media Delivery Solutions Performance & Security Solutions Service & Support Solutions Advertising Decision Solutions and Other The company markets and sells its services and solutions both domestically and internationally through direct sales and more than 100 active channel partners, including AT&T, IBM, Verizon and Telefonica Group. Resellers accounted for 21% of total revenue in 2013. The company derived 71% of its revenues from the U.S., while the remaining 29% came from its foreign operations. Equity Research AKAM Page 5
REASONS TO BUY Akamai is a leading provider of content delivery network (CDN) services as its platform handles approximately two trillion web interactions on a daily basis. Its solutions help customers to address the challenges of bandwidth constraints and Internet traffic, and at the same time reduce the need for additional hardware to manage traffic loads. Software distribution plays an important role in bolstering the business as the company benefits from rapid growth in Internet-based distribution of applications, operating system software and online game software. We believe that strong growth in demand for online media and entertainment (High Definition video) over the Internet will drive bandwidth requirements, thereby accelerating demand for the company s solutions going forward. We believe that the increasing adoption of cloud computing technologies will be a major growth driver for Akamai going forward. The company s cloud optimization solutions help organizations to improve performance, increase availability and enhance the security of applications and key web assets delivered from data-centers to the end user. Since a large portion of the revenues is recurring in nature, the company is expected to boost its sales force as well as investments by developing new products to achieve its long-term annual revenue target of $5 billion by 2020. Cyber security is an area that holds a lot of promise in our view. With rapid adoption of cloud computing, security has become a major concern for enterprises. Hackers are using new and sophisticated techniques to take advantage of the security loopholes of the cloud. Large enterprises are expected to increase their security budgets to efficiently address security concerns and instill confidence in cloud computing. At the end of second-quarter 2014, the company had approximately 1500 customers using its security solutions. We believe that growing demand for Akamai s security solutions will translate into significant growth opportunities over the long term. We believe that Akamai is well positioned to gain from the huge growth of mobile data traffic. According to Cisco, global mobile data traffic will grow at a compounded annual growth rate (CAGR) of 61% between 2013 and 2018, reaching 15.9 exabytes per month by 2018. Global mobile data traffic was 3% of total IP traffic in 2013, and will be 12% of total IP traffic by 2018. Given this aggressive growth, mobile networks are likely to face significant congestion and will thus require technological advancements from content delivery networks. We believe that the company has significant growth opportunities in the mobile segment, based on its strong and innovative product portfolio. In the past, acquisitions & partnerships have played an important role in Akamai s growth. Most recently, the company acquired cyber security software developer Prolexic, which will help it to solidify its footprint in the distributed denial of service (DDOS) cyber solution market. In 2013, Akamai made two acquisitions Velocius and Prolexic amounting to a total of $61.9 million. Moreover, the company s partnerships with some of the leading firms such as AT&T, Orange, Cisco, IBM, Turk Telecom, Swiss telecom and KT are expected to expand its customer base and addressable market going forward. Akamai s strong balance sheet and cash flow generation ability enables it to pursue any growth strategy that includes acquisitions and further share repurchase. In Oct 2013, the board of directors authorized a new share repurchase program worth $750.0 million. Of this, approximately $550 million remains for further repurchase at the end of the first half of 2014. The company s strong and relatively stable cash flow and continuing share repurchase activity make the stock quite attractive, in our view. Equity Research AKAM Page 6
REASONS TO SELL Akamai is facing increasing competition and pricing pressure as new competitors and nontraditional players like Amazon, Netflix, Verizon and Comcast enter the market, joining traditional players like Limelight Network and Packeteer. Although the company has a strong foothold in the market, with rapidly changing technology, evolving industry standards and frequent introduction of products and services, competition has become intense, resulting in a decelerating growth rate. Meanwhile, we do not believe that barriers to entry are significant enough to keep out competition, since the market is becoming increasingly attractive and Akamai essentially provides a commodity like service. Moreover, Amazon s entry into the digital audio, video streaming and cloud computing lines of business is an added risk. We expect the company will continue to face significant competition and pricing pressure going forward. Growth in the mobile Internet market has created a period of uncertainty. Mobile traffic growth is both a result of higher Internet usage as well as the shift of some traffic from wireline to wireless networks. This shift in data usage could hurt Akamai's wireline CDN business if the company is unable to quickly adapt to the change. Moreover, we believe that the mobile Internet market is a relatively new field for the company, where it faces significant competition from wireless service providers including Verizon. Greater flexibility in managing data traffic could also prompt wireless service providers to incorporate their own CDN-like technologies, resulting in fresh competition for the company. Intense competition has forced the company to lower the price of its CDN services, particularly in the media segment. In order to capture market share from both larger players and smaller private CDNs, we expect price cuts to continue in 2014 and beyond, which in turn, will hurt margins. Akamai has traditionally charged a higher premium compared to what its competitors like Limelight, EdgeCast (acquired by Verizon) and Level3 charge for content delivery. This has helped it to maintain higher margins and earn more profits. However, the company is becoming more aggressive in terms of pricing, especially in case of video content, so as to attract more customers and traffic to its network. We believe this aggressive pricing will hurt profitability over the long term. Increasing total bandwidth costs remain a headwind for Akamai. The company believes that bandwidth costs will continue to increase as a result of expected rise in traffic levels, somewhat offset by anticipated reductions in bandwidth costs per unit. Moreover, higher level of sales representative hiring is expected to hurt margins in the near term. Akamai continues to acquire a large number of companies. While this improves revenue opportunities, it adds to the integration risks. Frequent acquisitions can negatively impact its balance sheet in the form of a high level of goodwill and intangible assets, which totaled $1.20 billion, or 31.8% of its total assets as of Jun 30, 2014. Repeated acquisitions are also a distraction for management and could impact organic growth, going forward. This may limit Akamai s future expansion and worsen the company s risk profile in the long run. Equity Research AKAM Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of AKAM. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform - 15.7%, Neutral - 75.9%, Underperform 7.5%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research AKAM Page 8