Akamai Catches Profit Wave

(Cue Jeff Spicoli voice.) Whoa, dude.

Akamai Technologies (Nasdaq: AKAM  ) , which speeds up the delivery of Web content through its network of servers, yesterday delivered what can only be described as a killer earnings report. Third-quarter revenue was up 5% sequentially and 28% over the same period a year ago, to $53.3 million. Net income was up more than $15 million from last year's loss, wading in at $0.08 per diluted share.

Most impressively, the gross margin, at 78%, was 12 points better than last year. Net margin was 21%. Think about that: $0.21 of every dollar of sales surfed through the system to the bottom line. For context, consider that tech titans Microsoft (Nasdaq: MSFT  ) and Oracle (Nasdaq: ORCL  ) reported gross margins of 84% and 53% and net margins of 29% and 23%, respectively, in their most recent quarters.

How did investors react to these stellar results? They hammered the stock, which is down 9% since the opening bell.

Business is nevertheless going well. Among its 44 net new customers signed during the quarter, there were some awfully big names, including Mr. Softy's MSN Music store. (Akamai serves five of the top six music download stores, including Apple Computer's (Nasdaq: AAPL  ) iTunes, though Microsoft contributes roughly 10% of the firm's total revenue.) Ford (NYSE: F  ) and the National Archives also made the list. Plus, the firm inked deals to support live Web coverage of both the Democratic and Republican national conventions over the summer.

Yet investors should also be aware of the potential downside. The company bluntly stated in its conference call with analysts yesterday that operating costs could go higher as the firm boosts research and development and hires more people. Plus, debt remains a concern. $281 million in convertible notes remains on the books, while total cash assets are only $71.6 million.

The good news, however, is that Akamai's free cash flow for the third quarter alone exceeded its total interest expense this year by almost $3 million. The company shows no signs of being unable to handle its obligations.

Dude, that's just gnarly. But it gets better when you consider management's guidance. Executives said that fourth quarter sales should come in between $54 million and $56 million and diluted per-share net income should be $0.09 per share. That would be slight improvement on the very fine third quarter results.

So instead of heading for the exits, investors should heed the words of Jeff Spicoli, that eminent sage and slacker: Hey, dude! Let's party.

For radically related Fool coverage:

  • Fellow Fool Bill Mann wondered where a few of the titans of the bubble are now. Unsurprisingly, Akamai made the list.
  • Last quarter investors fled after good earnings news. How silly.
  • Sometimes it pays to go inside a proxy statement. See what I found in Akamai's.

Does the idea of surfing the serious waves of the tech world appeal to you? Then David Gardner'sMotley Fool Rule Breakersis for you. A free, 30-day trial is yours for the asking.

Fool contributor Tim Beyers owns shares of Akamai and Oracle. You can view his Fool profile and other stock holdings here.


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