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Akamai Stock Jumps On Q1 Beat, Despite Apple, Facebook Trend

Akamai Technologies ( AKAM ) stock jumped Wednesday after the CDN services provider late Tuesday reported Q1 earnings and revenue that topped analysts’ lowered expectations and gave in-line current-quarter profit guidance. Shares of Cambridge-based Akamai were up 23% in midday trading in the stock market today , near 49. Akamai is the biggest provider of content-delivery network (CDN) services to media and entertainment companies. Akamai said it earned 72 cents per share in Q4, up 3% from the year-earlier period, with revenue rising 8% to $579.2 million. Analysts had modeled EPS of 62 cents and revenue of $569 million. The beat included a 6-cent tax benefit. Akamai bought back $100 million in its own stock, lowering share count and boosting EPS. Even with Wednesday’s gain, Akamai stock is down 7% in 2016. The stock had plunged 47% through Tuesday’s market close since Oct. 27, when the company gave disappointing December-quarter guidance. For the current quarter, Akamai forecasts revenue of $562 million at the midpoint of its range, with adjusted EPS of 61 cents to 64 cents, vs. consensus estimates of $568 million and 63 cents. Full-year 2015 revenue rose 12% to $2.2 billion. On the company’s earnings conference call, management backed off of its 2020 revenue goal of $5 billion, said Colby Synesael, an analyst at Cowen & Co., in a research note. Akamai’s technology speeds up video streaming to mobile devices, e-commerce transactions and business software downloads. Akamai has expanded into higher-margin cloud-infrastructure services and security, aiming to offset price cuts in the CDN business that average 15% to 20% a year. “The security segment, now at a $300 million (annual revenue) run rate, provided the (Q4) upside,” said UBS analyst Steven Milunovich in a report. Akamai’s stock has been pressured as some big customers shift to their own internal CDNs. Apple ( AAPL ), believed to be Akamai’s biggest customer, and Facebook ( FB ) have been moving data traffic to their own CDNs. Akamai has renegotiated contracts and lowered prices in some cases, says Tim Horan, an analyst at Oppenheimer. “The top two customers (likely Apple/Facebook) represented an average of 13% of revenue and likely closer to 11% in Q4, but that should decrease to 6% by mid-2016,” wrote Horan in a report. “The next two (likely Microsoft ( MSFT )/Google) likely represent 5% and have likely re-priced. This should result in less revenue volatility in the second half of 2016, with upside if overall traffic volumes pick up.” Google is the main business of Alphabet ( GOOGL ). He says Akamai could gain from video streaming tied to the Olympics this summer, the presidential election and National Football League games. Aside from longtime rivals Level 3 Communications ( LVLT ) and Limelight Networks ( LLNW ), Akamai is facing increased competition from Amazon Web Services, part of Amazon.com ( AMZN ), as well as Verizon Communications ( VZ ).

Apple May Push Into Corporate Cloud Computing Vs. Amazon, Microsoft

Will Apple ( AAPL ) muscle in on Amazon Web Services? Apple’s huge data center build-out might be setting the stage for a jump into cloud computing services for enterprise customers, speculates Oppenheimer. Apple’s capital spending is expected to jump some 34% in 2016 to $15 billion, with about $4 billion going to warehouse-sized data centers packed with computer servers. Morgan Stanley this week said Apple might shift some cloud business away from AWS as competition in consumer products intensifies with parent Amazon.com ( AMZN ). Oppenheimer analyst Tim Horan, in a research report, goes a step further, saying Apple might start its own infrastructure as a service (IaaS) business as it targets the corporate market. IBM ( IBM ) and Apple have partnered for enterprise marketing. “Looking at Apple’s capex trajectory and recent continued data center builds, we believe there is a possibility the company is setting up an infrastructure as a service offering,” wrote Horan. “While we realize this is not Apple’s core competency, it is obvious it has built out its own CDN network and will continue to expand it. “It is also apparent to us that by building out an IaaS offering to businesses, Apple may be able to drive its hardware business into the enterprise. This would be an interesting development and is certainly a wild card.” Apple plans to open a massive data center in Mesa, Ariz. It also wants to expand a large data center in Reno, Nev. Amazon expanded into cloud computing by leveraging the massive Internet infrastructure that it had built to support its e-commerce business. Apple launched iCloud for consumers, but additional server capacity could be used for corporate cloud services. Aside from Amazon’s AWS, Microsoft ( MSFT ) and Alphabet ‘s ( GOOGL ) Google are the biggest providers of IaaS services. The other big investor in data centers is Facebook ( FB ), as it whisks more video to mobile devices. “From (Facebook-owned) Instagram/WhatsApp to Google Hangouts, Web-scale consumer-facing companies are leveraging cloud computing and superior network architectures to become de facto communications companies, and they are spending the capital to do so,” Horan said. Apple has also built its own content delivery network, making it less dependent on Akamai Technologies ( AKAM ), the leading provider of CDN services. Horan sees upside in data center expansion for companies such as Level 3 Communications ( LVLT ) and Zayo Group ( ZAYO ).

Level 3 Free Cash Growth: Fodder For Buybacks Or Acquisitions?

Level 3 Communications ’ ( LVLT ) stock jumped on stronger-than-expected free-cash-flow guidance after the telecom service provider early Thursday reported Q4 EPS that was a penny above Wall Street views, excluding a tax benefit. Revenue, though, just missed expectations. Some observers have speculated that Level 3 could announce a share repurchase program in 2016. Level 3’s guidance “suggests LVLT will be in a strong position to pursue strategic opportunities or buybacks,” said UBS analyst John Hodulik in a research report. Level 3 stock was up 6.5% in afternoon trading in the stock market today , near 50, but shares of the business service provider are still down 7% in 2016. Broomfield, Colo.-based Level 3 closed its $5.3 billion acquisition of TW Telecom in late October 2014. Thursday, Level 3 said it earned 53 cents in the December quarter, swinging from a 24-cent loss in the year-earlier period. Revenue rose 7% to $2.053 billion. Analysts polled by Thomson Reuters expected per-share profit of 52 cents and revenue of $2.06 billion. Level 3 said it expects 2016 adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) to rise 9% to 12%. It forecast 2016 free cash flow — net cash from operating activities minus capital expenditures — of $1 billion to $1.1 billion. “EBITDA and FCF guidance easily outpaced expectations, and likely reflects the accelerated pace of (merger) synergy realization,” said Jefferies analyst Scott Goldman in a research report. Prior to TW Telecom, Level 3 bought Global Crossing for $1.9 billion in late 2011. At a UBS conference in January, Level 3 executives said they were studying possible shareholder returns as well as possible acquisitions. Level 3 might pursue privately held XO Communications, Cowen & Co. analyst Colby Synesael said in a research note. Synesael says Level 3 could be a takeover candidate itself, with cable TV firm Comcast ( CMCSA ) the buyer. “2016 guidance including color around expected revenue growth acceleration and better than expected FCF are a positive,” Synesael wrote. In the content delivery network market, Level 3 competes with Akamai Technologies ( AKAM ). Image provided by Shutterstock .