Akamai Technologies AKAM reported third-quarter 2020 adjusted earnings of $1.31 per share that beat the Zacks Consensus Estimate by 6.5%. The figure surged 19.1% year over year (up 18% after adjusting for forex).
The year-over-year growth in earnings can be attributed to continued increase in revenues owing to strong demand for Cloud Security Solutions, and high traffic levels as more enterprises moved their operations online due to the coronavirus outbreak and operational efficiency.
Revenues of $792.9 million outpaced the Zacks Consensus Estimate by 2.2% and increased 11.7% year over year (up 11% after adjusting for forex).
Excluding Internet Platform Customers, revenues rose 11.5% year over year (up 11% after adjusting for forex) to $742.2 million. Revenues from Internet Platform Customers were $50.6 million, up 14.6% year over year.
Akamai Technologies, Inc. Price, Consensus and EPS Surprise
U.S. revenues were $437.4 million, up 5.9% year over year. International revenues were $355.5 million, up 19.8% year over year (up 18% after adjusting for forex).
Continued Strength in Cloud Security Solutions
Cloud Security Solutions revenues were $265.9 million, up 23.1% year over year (up 23% after adjusting for forex).
Amid increased DDoS attacks, Akamai clinched several security deals from banks, insurance companies and travel websites for its Prolexic services. Management added that Bot Manager services thwarted double the number of malicious logins efforts in the third quarter compared with second-quarter levels.
Akamai blocked more than 53 billion credential abuse attempts in the second quarter of 2020. The increased instances of cyber-attacks are driving adoption of Bot Manager service, which is currently used by more than 600 of the world’s major enterprises.
Also, management stated that Page Integrity Manager security solution is seeing incremental adoption. The purpose of the solution is to protect websites and end users from malware-infected content that resides on third-party sites.
Further, to boost revenues from Cloud Security solutions, Akamai announced the acquisition of Asavie in an all cash deal. A privately-funded company, Asavie specializes in Internet of Things (IoT), mobile and security solutions. Asavie will be integrated with Akamai’s Security and Personalization Services ("SPS") product portfolio.
Asavie’s software solutions help mobile operators to offer organizations better connectivity and improved secure communication between mobile phones and various IoT devices. It also eliminates the need for installing client software on the device.
The acquisition is expected to help Akamai add more subscribers to its Edge platform. The company’s security offerings are poised to gain from higher demand for data computing at the edge, triggered by rapid deployment of 5G and IoT devices proliferation.
Revenues from CDN and other solutions of $527 million increased 6.7% on a year-over-year basis year (up 6% after adjusting for forex).
Web Division revenues increased 7.8% year over year (up 7% after adjusting for forex) to $418.1 million, owing to strong growth in the security business.
Media and Carrier Division revenues of $374.8 million rose 16.3% (up 16% after adjusting for forex) year over year. The segment’s top line was driven by higher traffic video streaming and gaming software downloads.
Per Akamai, increased traffic at one of its largest video-on-demand service customer boosted traffic on Akamai’s platform by a factor of four. Akamai supports more than 220 of the world’s largest OTT and broadcasting companies as well as with 24 of the world’s 25 most popular video game publishers. Year to date, Akamai had received more than 100 trillion API requests for the Edge Platform.
Non-GAAP cash gross margin contracted 200 basis points (bps) on a year-over-year basis to 76%.
Adjusted EBITDA margin of 44% expanded 200 bps on a year-over-year basis.
Cash operating expenses as a percentage of revenues contracted 340 bps from the year-ago quarter’s levels to 31.8%.
Non-GAAP operating margin expanded 300 bps on a year-over-year basis to 32% higher than management’s expectation of 30%.
The company expects to exceed its goal of operating margins of 30% for 2020 owing to impressive financial performance so far in the year.
Balance Sheet & Cash Flow
As of Sep 30, Akamai’s cash and cash equivalents and marketable securities were $1.44 billion compared with $1.37 billion as of Jun 30, 2020.
The company generated cash flow from operations of $402 million, up 34.6% sequentially and 35.2% year over year.
In the reported quarter, Akamai repurchased 0.1 million shares for $13 million. The company has approximately $644 million remaining in its previously-announced share repurchase authorization.
For fourth-quarter 2020, Akamai expects revenues between $812 million and $837 million, suggesting 4-8% year over year growth in constant currency. The Zacks Consensus Estimate for revenues is currently pegged at $823.4 million, which indicates growth of 6.6% from the year-ago quarter’s reported figure.
Revenues are expected to be negatively impacted due the assumption of ban on 59 China-based apps in India (Akamai delivers traffic for nearly 30 of those) to remain in place for remainder of 2020. Also, management noted that U.S. is planning a similar ban for those 59 Chinese apps commencing from mid-November, which might dent the top line by $4-$5 million, in the fourth quarter, on a sequential basis.
However, the acquisition of Asavie is expected to contribute $4 million to the fourth quarter top line. Notably, forex is expected to have a $2-million positive impact on a sequential basis.
Cash gross margin is expected to be approximately 76% in the fourth quarter. Non-GAAP operating expenses are projected between $268 million and $279 million, suggesting improvement on a sequential basis. EBITDA margin is expected to be nearly 43%.
Akamai expects non-GAAP operating margin of roughly 30% for the fourth quarter.
Non-GAAP earnings are envisioned in the range of $1.28-$1.32 per share, which indicates 2-5% growth in constant currency. The Zacks Consensus Estimate is pegged at $1.30 per share, which calls for a rise of 5.7% from the year-ago quarter’s reported figure.
Akamai revised 2020 guidance. The company currently expects revenues between $3.164 billion and $3.189 billion as compared with the previous range of $3.125 billion to $3.175 billion. The Zacks Consensus Estimate for revenues is currently pegged at $3.16 billion, which indicates growth of 9.2% from the year-ago quarter’s reported figure.
Non-GAAP operating margin is expected to be 31% compared with earlier range of 30-31%.
Non-GAAP earnings are expected between $5.16 and $5.20 per share, indicating year-over-year growth of 15-16%. Earlier, Akamai expected earnings in the range of $5.02-$5.12 per share. The Zacks Consensus Estimate is pegged at $5.11 per share, which calls for a rise of 13.8% from the year-ago quarter’s reported figure.
Zacks Rank & Stocks to Consider
Currently, Akamai carries a Zacks Rank #4 (Sell).
Some better-ranked stocks in the broader technology sector are Fortinet FTNT, Activision Blizzard ATVI and Everbridge EVBG. All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Fortinet and Activision Blizzard are set to release quarterly results on Oct 29, while Everbridge is scheduled to report earnings on Nov 5.
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