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Akamai Curls Through Debt Wave

By Tim Beyers – Updated Nov 16, 2016 at 4:30PM

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Impressing investors, the firm retires nearly $100 million in debt.

The story keeps getting better at Akamai Technologies (NASDAQ:AKAM), the high-tech company that makes its money by speedily delivering Web content from Apple Computer (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Yahoo! (NASDAQ:YHOO), and others by using its own network to bypass Internet bottlenecks.

The company fulfilled what seemed to be the wish of many investors: using cash to buy back $99 million in convertible notes last week. The stock is up more than 9% since the announcement, cresting above $13.75 in today's trading.

Akamai signaled it might make such a move in mid-December, when executives announced they would issue as much as $200 million to pay a portion of its existing $300 million convertible notes, which pay investors 5 1/2% and come due in 2007. The new debt issue pays 1.0% and doesn't come due for 30 years. That leaves Akamai with $201 million total in long-term debt.

To be sure, the refinancing is good news, but it's also just more debt.

Back when the firm first went into hock in mid-2000, Akamai's stock was trading for more than $100 per share. The added capital was for handling the substantial cost of creating a network of more than 10,000 servers. Many firms take on some leverage now and then to fund expansion with the expectation that new operations will generate the cash to foot the bill.

Problem is, Akamai hasn't generated a single penny from operations since coming public in 1999. And yet the price of servicing the debt continues to be huge.

Akamai has paid more than $16 million in interest for each of the past two years. Its total liabilities were more than double its total assets as of the third quarter ended in September. Certainly some investors had to be asking how Akamai would ever generate enough cash to pay off its obligations. Some may still, even with last week's news. (Who could blame them?)

The good news is that the refinancing amounts to a quarterly savings on interest payments of a little better than $1 million. That should have a positive impact on the company's cash-generating efforts, but the harsh reality is that Akamai has been literally surfing a tidal wave of debt. If income and cash flow from operations don't turn positive soon, then another wipeout may be on the way.

Have a take on Akamai's strategy? Log on to the Akamai discussion board. Only on Fool.com.

Tim Beyers doesn't own shares of Akamai or any of the other companies mentioned. He welcomes your comments at [email protected].

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Microsoft Corporation Stock Quote
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