Networking Sector: AKAM, F5 Strong, ALU Weak

Here’s more on the Networking sector, to finish up the series. We’ll cover Akamai, Alcatel-Lucent and F5 in this piece.

On February 4, Akamai (NASDAQ: AKAM), the leading web acceleration provider, also reported Q4 and fiscal year 2008 results. Q4 revenue grew 16% y-o-y and 8% q-o-q to $212.6 million versus Street estimates of $205.46 million. Net income increased 22% q-o-q to $40.5 million, or $0.22 per diluted share. Non-GAAP net income was $82.2 million, or $0.44 per diluted share versus analyst estimates of $0.40. Cash from operations in Q4 was $92 million. By all accounts, stellar performance.

Gross margin was 71%, the same as last quarter and down two points from Q407, driven mostly by an increased depreciation. At the end of Q4, it had $772 million in cash, cash equivalents and marketable securities.

For the fiscal year 2008, revenue grew 24% y-o-y to $790.9 million. Net income increased 44% to $145.1 million, or $0.79 per diluted share. Full-year cash from operations was $343.5 million, or 43% of revenue, up 45%. GAAP gross margin came in at 72%, two points lower than 2007 levels. At year-end, Akamai had approximately $771.6 million of cash, cash equivalents and marketable securities. In Q4, it reduced its headcount by 110 people, generating an estimated $15 million of annualized savings.

Akamai completed its acquisition of ad targeting network Acerno on November 3, 2008 and Q4 results include two months of activity from the company, during which it contributed approximately $6.9 million of revenue.

Akamai added 50 customers under long-term service contracts in the quarter, taking the total to a record 2,858 customers, an 8% increase y-o-y. Churn was just under 4%, consistent with the past few quarters. Excluding the impact of Acerno, consolidated ARPU was $24,000, up 2% q-o-q and 4% y-o-y.

By region, North American sales excluding Acerno grew 9% y-o-y and 4% sequentially, and resellers represented 17% of total revenue, consistent with the prior quarter. International business performed very well, growing 25% y-o-y and 5% q-o-q. Excluding the negative impact of the stronger dollar, business outside the US grew 38% y-o-y and 16% q-o-q. For the year, revenue from sales outside North America grew 37%, increasing to 26% of its total revenue. US revenue grew 21%.

For Q1, Akamai expects revenue of $205 to $212 million, representing the 11% y-o-y growth and a slight sequential decline. It expects non-GAAP EPS between $0.39 and $0.41.

The stock is currently trading around $17 with market cap of about $3 billion. It hit a 52-week low of $10.61 on November 19. I remain a big fan of Akamai. If you haven’t read my discussion with Tom Leighton, MIT Professor and co-founder of Akamai, I strongly recommend it.

Yesterday, Alcatel-Lucent (NYSE:ALU) reported its Q4 and fiscal year 2008 results. The 2006 merger with Lucent has not gone well, and the downturn has only added to the company’s troubles. Its new CEO, Ben Verwaayen, has said Alcatel-Lucent will be profitable in 2010.

Q4 revenue was €4.954 billion, in line with the company’s expectations. Net loss was €3.892 billion ($5.1 billion) or €1.72 per share, impacted by an intangible assets impairment charge of €3.910 billion. Operating cash flow was €658 million, the highest since the close of the merger. Net debt was €389 million as of December 31, 2008, down from €600 million last quarter and €415 million at the end of June 2008. Cash and marketable securities were €4.6 billion, and the company seems to be safe from a Nortel-type situation. It also expects to benefit from the divestiture of the stake in Thales for €1.6 billion.
 
For the full fiscal year 2008, revenue was down 4.5% to €16.98 billion and net loss was €5.2 billion or €2.31 per share. Adjusted gross margin was 34.1% for the full year after a slight sequential improvement in the fourth quarter.

As we saw in the Networking Sector Overview, Alcatel’s carrier segment is the weak link in its business. Carrier revenues declined 11.8% y-o-y and increased 20.5% q-o-q to €3.295 billion, benefiting from an upgraded product portfolio. Enterprise revenues declined 0.4% y-o-y but grew 11.7% q-o-q to €433 million, led by double-digit growth in data networking and slight growth in the large enterprise voice telephony market. Services revenues grew 6.4% y-o-y and 24.8% q-o-q to €1.086 billion.

Alcatel-Lucent expects the global telecommunications equipment and related services market to be down between 8% and 12% at constant currency in 2009. It expects adjusted operating profit break-even in 2009. It has plans to reduce costs by €750 million annually in 2009. Finally, in December it announced plans to reduce the number of managers by 1,000 and contractors by 5,000.

The stock is currently trading around $2 with market cap of about $4 billion. It hit a 52-week low of $1.74 on November 21.

My problem with Alcatel-Lucent remains this that the company is signaling an operational turn-around, without much of a strategic turnaround gameplan. In my experience, this can only go so far, and it is critical for ALU to put a crisp strategic plan together.

On January 21, F5 Networks, Inc. (NASDAQ: FFIV), a leader in the niche of application delivery networking with annual revenue of $650 million, announced first quarter results that met analyst estimates. Bucking the trend this season, its outlook was above analyst estimates.

Q1 revenue was up 7.4% y-o-y but down 3.3% to $165.6 million. Net income was $21.4 million ($0.27 per diluted share) compared to $17.8 million ($0.21 per diluted share) last year. Non-GAAP net income was $32.3 million or $0.40 per diluted share. In early January the company had preannounced that its revenue would fall below its guided range of $172-174 million due to a sudden decline in sales in North America during the last week of December as budgets were frozen or withdrawn completely and deals have been pushed out a quarter or two or delayed indefinitely.

GAAP gross margin, however, was 78.2%, above guidance of 77-78%. Deferred revenue was up 7.5% over Q4 to $155.9 million. F5 bought back shares worth $20 million and ended the quarter with $487 million in cash and investments.

Cash flow from operations was $57.9 million. Capital expenditure was $3.9 million and it increased headcount by 15 in Q1, ending the quarter with 1,710 employees.

Revenue from the core application delivery networking business was $155.6 million and accounted for 94% of total revenue. ARX revenue was $3.7 million or just over 2% of total revenue. Revenue from FirePass was $6.3 million, or about 4% of total.

For the second quarter of fiscal 2009, F5 has set a revenue target of $157 to $164 million and GAAP gross margin target in the 77-78% range. It expects to reduce headcount by 5-7% by the end of the quarter. Non-GAAP earnings target is $0.36 to $0.38 per diluted share. Analysts expected Q2 revenue target of $162 million and EPS of $0.37.

The stock is currently trading around $23 with market cap of about $2 billion.

This segment is a part in the series : Networking Sector