Networking Stocks: Akamai, Level 3, Polycom

I recently put together a list of top 10 networking stocks. Akamai, which was featured on this list, reported its results yesterday. In this post I discuss their results and those of two other networking companies on the list that recently reported, Level 3 and Polycom.

Akamai reported third quarter results that beat analyst estimates. Revenue was up 22% y-o-y and 2% q-o-q to $197.3 million while net income grew 37% y-o-y to $74.2 million or $0.18 per share led by demand for new products. Adjusted earnings were $74.2 million or $0.40 per share. Analysts estimated earnings of $0.39 per share on sales of $195.2 million. Cash from operations was $93 million in the third quarter of 2008. Gross margin declined to 71%.

Akamai added 83 long-term customers to take the total up to 2,808. Churn was 3%, slightly down from the last few quarters. ARPU grew by 14% y-o-y to $23,500, driven by the company’s diverse enterprise class customer base.

By region, revenue in North America grew 18% y-o-y and 2% q-o-q. International sales, which accounted for 26%, grew 36% but decreased by $2 million sequentially due to a stronger dollar. The strengthening dollar could take off about $4 to $6 million from Q4 revenue. 

For the fourth quarter, Akamai expects revenue of $202 to $210 million and EPS between $0.39 and $0.41. Analysts estimated earnings of $0.43 on revenue of $210 million. While online advertising and consumer spending trends are softening, Akamai continues to innovate. It recently collaborated with Microsoft to create a technology that allows video quality to adjust based on the user speed. It is also acquiring Acerno, leading online shopping data co-operative, to improve its Advertising Decision Solutions.  

Its shares have shot up by 6% to about $14. The stock hit a 52-week low of $11.69 on October 28, before the earnings results.

Akamai’s main rival, Level 3 Communications (Nasadaq: LVLT), released its Q3 results on October 23. Read how Level3’s aggressive pricing strategy impacted Akamai last year. 

Level3’s Q3 revenue increased marginally by 1% y-o-y but declined by about 2% q-o-q to $1.07 billion. Net loss narrowed to $120 million, or $0.08 per share, compared to a net loss of $174 million, or $0.11 per share. Q2 net loss was $33 million, or $0.02 per share, including a gain of $96 million, or $0.06 per share on the sale of the company’s Vyvx Advertising Distribution business.

Core Communications Services revenue, which includes Core Network Services and Wholesale Voice Services, grew 6% to $964 million. Core Network Services revenue grew 4.6% $791 million. Within this segment, Content Markets Group, where Level 3 competes with Akamai, had revenue of $97 million, up by 6%.

In the Content Markets Group, Level 3’s sales have been sluggish from companies that depend on external credit, but there has been more sales activity from large enterprises. For 2008, the company has narrowed its outlook of revenue growth from 8% to 7.5%. Its shares are trading around $1, and it has a market cap of about $1.5 billion.

Polycom, which along with Akamai, is on my list of long-term hold stocks, reported its third quarter results on October 15. Revenue grew 15% y-o-y and 2% q-o-q to $275.8 million versus street estimate of $279.5 million. Net income was $17.9 million, or $0.21 per share compared to $19.8 million or $0.21 last year. Non-GAAP net income was $31.7 million, or $0.71 per share versus analyst earnings estimate of $0.35 per share. 

Gross margin improved by 170 points sequentially to 60.2% driven by better mix, cost reductions, and some ASP improvements. At the end of Q3, it had a record $61.8 million in backlog, up 22% y-o-y and deferred revenues were up 37% to $109.6 million.

Revenue missed estimates mainly due to weakness in the voice business, which accounts for 35% of the revenue. Voice communications revenue in the quarter was $97.7 million, up 4%y-o-y but down 5% q-o-q. Video solutions revenue grew a solid 21% y-o-y and 5% q-o-q to $178.1 million. Within video solutions, video communications grew 27% y-o-y and 2% q-o-q to $144.2 million. After some weak performance last quarter, network systems business returned to growth in Q3- helped by the launch of RMX 1000 HD video conference media server targeting the small and medium enterprises. Revenue was $33.9 million, up 4% y-o-y and 21% q-o-q, 

By region, North America revenues were up 5% y-o-y and 2% q-o-q, EMEA grew by 27%% y-o-y but declined 3% q-o-q, Asia grew 31% y-o-y and 4% q-o-q, and Latin America grew 46% y-o-y and 13% q-o-q.

In this uncertain economic environment, Polycom’s unified collaboration solutions are mostly likely to attract more business. Plus it has a strong cash balance of $287.4 million with no debt. It repurchased shares for about $80 million. It is trading around $21 with a market cap of about $1.75 billion. The stock hit a 52-week low of $18.16 on October 15 on the day its earnings were announced.

One of the areas I would like to see Polycom get into aggressively is the small-medium business market. The company is very strong in the enterprise, and also sells its voice products to SME customers. But the hunger to get travel charges under control in SME is enormous right now. Telepresence-as-a-Service – may be conference rooms for rent – could fill the needs to this segment. On its own, or in partnership with others, it would be great if Polycom could build a comprehensive grid of Telepresence conference rooms across the world that businesses can go to for meetings instead of having to travel for several days.

This segment is a part in the series : Networking Stocks