Akamai Hangs Ten

As often as I've been wrong in life, I sure as heck like being right. That's why I'm feeling pretty good about Motley Fool Rule Breakers pick AkamaiTechnologies (Nasdaq: AKAM  ) this morning. This week the former dot-com refugee reported that sales increased more than 27% and earnings jumped more than 130% year-over-year during the second quarter. Investors took notice, sending the stock more than 6% higher since Tuesday's close.

There was good news in almost every line item of the company's financial statements; I say almost because there were three bits of bad news. First, gross and operating margins were both down sequentially for the first time in a while. Second, average revenue per customer declined to $14,700 from $14,900. It's expected to decline again between 2% and 3% in the third quarter. Finally, owner earnings appeared to fall short of $19 million through the first six months of the year, well below my initial estimates. (Get a more detailed explanation on our discussion boards.)

But I think each of these represent minor points. We already knew Akamai would be hiring more staff and building out its network to add services. Those expenses may have kept a lid on margins, but paid off with the addition of 71 net new customers in the quarter. And that total didn't include the 305 customers added with the acquisition of Speedera, which was completed in Q2. Management said new customers and Speedera clients billed less than the installed base, causing the net decline in average revenue per customer. I'd say that's forgivable, since margins remain high.

Besides, Speedera brought in $2.5 million in 20 days. That's a run rate of close to $9 million a quarter, well above my initial estimates. No wonder the company raised its revenue guidance to between $276 million and $280 million for fiscal 2005. (Earnings guidance was also bumped to $0.50 per stub from $0.46.)

Moreover, I like management's recent moves. Dilution has been rampant, but it may finally slow when all the shares issued to acquire Speedera are accounted for in Q3. Sure, shares outstanding will rise to roughly 160 million, but that total will also include the roughly 13 million shares that are likely to be converted from Akamai's $200 million in 1% notes.

What's so important about that? Akamai has $257 million on its books in debt. $200 million is already counted as if it will become stock, costing the company $2 million annually. That leaves $57 million in "real" debt.

Now think about Akamai's cash flow situation. The company appears on pace to generate $45 million in owner earnings this year. That total should jump in line with sales and earnings, which have been growing at 20% annually, putting next year's owner earnings at $54 million. Adding that to the $130 million in cash and securities Akamai already has on the books, I see a company that has a very good chance of being effectively debt-free by the end of 2006. Chalk it up to yet another advantage for a Rule Breaker that already dominates its market. Cowabunga, dude.

Surf through related Foolishness:

Akamai is a Motley Fool Rule Breakers pick. David Gardner and his Foolish band of analysts are already spanking the market by more than 8% in the short life of the portfolio. Want in on the action? Click here to take a risk-free trial. Or sign up today and let David buy you a copy of our Blue Chips Report, featuring 10 of our best picks for the decade ahead from our top analysts.

Motley Fool contributor Tim Beyers isn't a surfer, but he owns shares of Akamai anyway. You can find out what else is in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has an ironclad disclosure policy.


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