Company Overview: Akamai Technologies, Inc. (NASDAQ: AKAM) provides solutions for securing, delivering, and optimizing content and business applications over the internet. The company offers its solutions through its globally available Akamai Intellectual Edge Platform, designed to help customers leverage the power and reach of the internet while protecting them from threats to their business. The company has deployed its servers and technology in more than 130 countries and around 1,500 networks around the world. The company’s offerings include cloud security, enterprise security, web and mobile performance, media delivery, carrier, services and support, etc.


AKAM Details


 
Growth Through Higher Contribution from Security Solutions & Increased Traffic: Akamai Technologies, Inc. (NASDAQ: AKAM) is a company providing solutions for securing, delivering, and optimizing content and business applications over the internet. Some of its key customers include Adobe, Airbnb, Capital Group, The Coca-Cola Company, Fidelity Investments, Philips, Spotify, Viacom, etc. AKAM is uniquely positioned to assist its customers to capitalize on the opportunities and mitigate the risk arising from the present dynamic environment. The Akamai Intelligent Edge Platform secures and accelerates customer’s cloud base activities and workloads on a global scale with the help of 250,000 servers at 3,900 locations around the world.

The company recently announced its quarterly earnings for the first quarter of FY20 and reported robust results despite external challenges, supported by continued strength in its security solutions and stronger than expected traffic growth. The company reported an uplift in both the top and bottom lines, that continued to benefit from operational efficiencies. Despite the cancellation of major events in the wake of coronavirus, traffic across the platform increased by ~30% over the month of March. In light of the performance during the first quarter, the company is optimistic about the continued strength of the business, even during challenging times. With a strong platform supported by resilient employees, diversified revenue, customer relationships, and a strong balance sheet, the company remains well-positioned to continue the provision of the best digital experiences around the world.

Over the period of FY15-FY19, the company has reported revenue CAGR of 7.1%. Revenue, over the same period, demonstrated an upward movement on the back of a strong market position. Net income over the same period witnessed a CAGR of 10.7%.


5 Years Financial Data (Source: Company Reports)

As the contribution from security solutions increased, the company is now aiming for continued investment in the area with a focus on enhancing its product portfolio and extending its go-to market capabilities. Moreover, with continued efforts to improve the efficiency of operations, the company is targeting a higher growth rate in revenue than expenses, which will result in overall profitability improvement in 2020 as compared to 2019. The company believes that its Intelligent Edge Platform has unique capabilities to help the internet scale quickly and offers essential support to large organizations during these challenging times.

Key Highlights of FY19 Performance: During the year ended 31^st December 2019, the company reported revenue amounting to $2.89 billion, as compared to prior corresponding revenue of $2.71 billion. Net income for FY19 came in at $0.48 billion, as compared to a net income of $0.30 billion reported in the prior corresponding year. In recent years, the company has seen a significant contribution from an increase in sales of its security solutions. The amount of traffic delivered for customers using its solutions for video, gaming and software downloads, also contributed to an increase in FY19 revenue. On the international front, revenue has been growing at a faster pace than the U.S operations, particularly in terms of new customer acquisition and cross-selling of incremental solutions. An improvement in profitability can be partly attributed to higher revenue, with the remainder coming from cost savings and efficiency initiatives undertaken during the year. The company managed to lower the rate of increase in Network bandwidth costs that represent a significant portion of cost of revenue, by reducing the network bandwidth costs per unit and investing in internal-use software development to improve network performance. As of 31^st December 2019, the company reported cash and cash equivalents of $255.4 million held in accounts outside the U.S. Net cash provided by operating activities stood at $1.06 billion, as compared to $1 billion reported in FY18, on the back of increased profitability partially offset by the timing of cash collection from customers, increase in cash paid for income taxes and timing for collections and payments of other working capital items.

1QFY20 Highlights: During the quarter, the company reported robust results on the back of increased traffic across the networks, cost efficiencies, and increased contribution from security solutions. Revenue for the period came in at $764 million, witnessing an increase of 8% on the prior corresponding quarter. When adjusted for foreign exchange, revenue went up by 9%.  Cloud Security Solutions revenue witnessed a rise of 26% on pcp basis and stood at $240 million, as the company continued to invest in developing its capabilities in this area. Adjusted EBITDA for the period stood at $327 million, up 9% on 1QFY19, with adjusted EBITDA margin up by 1 percentage point to 43%. GAAP and Non-GAAP net income stood at $123 million and $196 million, respectively, representing a rise of 15% and 8% from pcp. EPS for the period came in at $0.75, representing a rise of 15% from the same quarter last year. As of 31^st March 2020, the company reported cash, cash equivalents and marketable securities amounting to $2.2 billion and cash from operations amounting to $223 million.


1QFY20 Income Statement (Source: Company Reports)

Revenue by Division and Geography: The company reports its revenue in two divisions namely, the Web Division and the Media and Carrier Division. During the quarter, Web Division revenue stood at $406 million, up 8% on the prior corresponding quarter. Media and Carrier Division revenue came in at $358 million, representing an increase of 8% on pcp. Revenue from the U.S operations stood at $429 million, up 3% year-over-year, that benefitted from a contribution by some large Internet platform customers in the region. International revenue continued to be a key contributor and stood at $335 million, up 16% on the prior corresponding quarter. The company continued to witness strong growth across the international markets, with offshore sales representing 44% of the total revenue during the quarter, up 3 points on 1QFY19 and 2 points on 4QFY19.


Revenue Growth Segment-wise (Source: Company Report)

COVID-19 Impact: Due to the rising uncertainty surrounding the impact of coronavirus on the business, the company has withdrawn the guidance for FY20. While the company anticipates a positive Q2 impact from elevated traffic in the media division arising from increased shelter-in-place orders due to COVID-19, traffic levels may begin to moderate as the situation begins to normalize. In the Web Division, the travel and hospitality vertical is expected to witness a setback, due to a decline in demand which is expected to continue throughout 2020. On the other hand, the commerce and retail vertical will be suffering from financial pressure amid the rising impacts of the pandemic. Despite the above scenario, revenue in Q2 is expected to report YoY growth in the range of 6% - 12%, as the business remains resilient with a leading position in the market.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 40.93% of the total shareholding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. hold the maximum interests in the company at 10.78% and 5.14%, respectively.


Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: During 1QFY20, the company reported a gross margin of 64.9%, which is higher than the industry median of 47.3%. EBITDA margin for the quarter stood at 36.5%, higher than the industry median of 18% and pcp margin of 35.9%. Net margin stood at 16.2%, higher than the industry median of 6.1%. The above margins seem well-aligned with the company’s objective to improve overall profitability by attaining a higher rate of growth in revenue than costs. Short-term liquidity remained strong in relation to the broader industry, with a current ratio of 3.2x as compared to the industry median of 1.39x.


Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The company's revenue growth in recent quarters has been mainly inclined towards its international operations. Hence, there are risks relating to foreign operations that are required to be addressed time to time. These may include, uncertainty regarding liability for content or services, loss of revenues due to possible limitations imposed by the government on doing business with significant customers, theft of intellectual property in high-risk countries, reliance on channel partners that are difficult to control on a day-to-day basis, potential tax adversities, etc. 

Outlook & Guidance: As the technology landscape is evolving rapidly, driving the organizations to enhance their digital capabilities, Akamai remains one of the best players to support these businesses in capitalizing on the opportunities and mitigating the risks in the dynamic environment. With a rising need for new technologies to process transactions, digital transformation and improved cost management, organizations are relying more on servers and networks comprising the cloud to improve scale. Increased usage of internet across industries complement the company’s business model and support its objective of delivering superior user experiences and maintaining a leading position in the market through its unique technology, intellectual property portfolio and industry-leading security capabilities.

For Q2FY20, the company expects revenue to be in the range of $752 million - $778 million, representing growth in the range of 6% - 12% over Q2FY19. Given the impacts of COVID-19 on Q2 performance, the company expects to report a sequential decline in Web Division revenue and continued sequential growth in Media Division revenue. While the company could not predict the anticipated impact of COVID-19 on financial performance, it is optimistic about maintaining its financial well-being even in the light of the pandemic.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodologies: 
Method 1: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Method 2: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)
 

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of AKMA closed at $97.87 with a market capitalization of ~$15.90 billion. The stock made a 52-week low and high of $73.19 and $108.25, respectively. The company remains well-positioned to serve its customers in the current challenging environment and is aiming for growth through cost efficiencies across the platform. With a strong business model and unique capabilities, the company is optimistic about its long-term growth prospects in the continuously evolving technology space. Considering the robust results for 1QFY20, resilience of the business, modest industry outlook and growth prospects, we have valued the stock using P/E and P/CF multiples based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like VMware Inc (NYSE: VMW), Fortinet Inc (NASDAQ: FTNT), and F5 Networks Inc (NASDAQ: FFIV). Hence, we recommend a “Buy” rating on the stock at the closing price of $97.87, down 3.98% on 29^th April 2020.
 

AKAM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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