Akamai Continues To Be Critical To Net’s Future

Akamai (NASDAQ:AKAM), the leading web acceleration provider with annual revenue of $790.9 million, reported first quarter results on April 29. The increasing use of online video and IP connected mobiles are the trends driving Akamai’s growth even during the current economic conditions. An interesting read to understand these trends is my discussion with Tom Leighton, co-founder of Akamai. In this post, let’s look at the performance of Akamai and its rival, Level 3.

Q1 revenue at Akamai increased 12% to $210.4 million but decreased slightly by 1% q-o-q. Net income was $37.1 million, or $0.20 per share, up slightly from last year’s $36.9 million, or $0.20 per share, and down 9% q-o-q from $40.5 million, or $0.22 per share last quarter. Adjusted net income was $80.5 million, or $0.43 per share, beating analyst estimates of $0.40 per share on revenue of $208.5 million. Q4 analysis is available here.

Gross margin was 71%, consistent with Q4 and down one point from Q108. Cash from operations in the quarter was up 3% to $90.5 million and the company ended the quarter with $848.5 million in cash, cash equivalents and marketable securities. Its board also authorized a $100 million share repurchase program for the next few quarters.

Including customers from its recent Acerno acquisition, Akamai’s long-term services customers increased 10% to 2,950. Churn was 5%, slightly higher than 4% in the past few quarters, with most of the churn coming from smaller customers. ARPU increased to $23,600 per customer from $23,200 last year as its bigger customers such as Apple, Microsoft, and News Corp’s MySpace bring in more revenue despite the recession. ARPU from churning customers was less than $3,000.

For Q2, Akamai expects revenue between $207 and $213 million. Adjusted EPS is expected between $0.40 and $0.42. Analysts expect earnings of $0.41 on revenue of $212.6 million. Even though the company recently lost a patent suit to Limelight Networks, Akamai shares hit a 52-week high of $22.49 on April 30. It is currently trading around $23 with a market cap of about $4 billion.

I continue to be extremely bullish on the company, and as the Internet gets further stressed, routing optimization and related networking algorithms continue to be crucial.

Akamai’s main competitor, Level 3 Communications (NASDAQ:LVLT) with annual revenue of $4.3 billion, reported a decline in its first quarter revenue while losses narrowed, in line with estimates. Q1 revenue declined 10% to 980 million, missing analyst estimates of $1.03 billion. Net loss decreased to $132 million or $0.08 per share from a loss of $190 million or $0.12 per share last year. Analysts expected loss of $0.08 per share on revenue of $1.026 billion. Q3 analysis is available here.

Core Communications Services revenue was $899 million, down from $949 million in Q108. Within this segment, Core Network Services revenue declined 5% to $729 million. Communications gross margin improved to 59.5%, compared to 56.9% last year.

Level 3 ended the quarter with $886 million in cash including $220 million in senior secured debt. Consolidated free cash flow improved to -$82 million in the quarter compared to -$160 million last year. Level 3 expects to be free cash flow positive for the year.

Level 3 expects to continue its focus on cost improvements with a headcount reduction of 3% or 150 people during the second quarter. As a result, it expects to incur severance charges of $6 million to $7 million in Q2.

Level 3 observed its churn trend improved late in the quarter. It also said that trends point to stabilization in its core communications services revenue base. Based on its performance, the company reiterated its 2009 guidance. It expects adjusted EBITDA in 2009 to grow from $988 million in 2008. The stock is currently trading around $1 with a market cap of about $1.8 billion.