It's 11:25 p.m. here in the Rocky Mountains as I write this in my basement office. And I'm blasting my most obnoxious music through iTunes on my PowerBook. I need adrenaline. I've a deadline to meet.

Yet, tired as I am, I find myself surprisingly charged up by the news from Motley Fool Rule Breakers pick Akamai Technologies (NASDAQ:AKAM). For the third quarter of fiscal 2005, sales were up 42% year over year and net income was up 80%, after excluding a one-time tax benefit of $255.3 million. Hard to believe that only met Street estimates, isn't it?

Yeah, well, that's not what we care about. More important is that Akamai is well on its way to accomplishing all three things I asked of it when the deal to acquire rival Speedera closed in June. Shall we review?

1. Strong evidence of increasing cash flow. Back in June, I wrote that full-year revenue should be at least $272 million and structural free cash flow (SFCF) should come in at $54.4 million over the same period. We now know that at least one of those estimates was conservative. CEO Paul Sagan said on the earnings call that 2005 sales are expected to come in at between $277 million and $280 million.

As for cash? Akamai is generating loads of it. My calculations put SFCF at $36.9 million so far in 2005 -- just $17.5 million short of my goal with one quarter left to go. I think my goal is achievable. Let's run the numbers.

Sagan says that fourth-quarter net income should come in at $0.15 per share. We also know from history that Akamai typically adds about 1 million stubs to its diluted share count each quarter. And, finally, we know that Q3's total was 160.362 million diluted shares. That gives us enough to do the math needed to estimate SFCF for the final quarter and full year. Here's how it shakes out:

  • First, we estimate our diluted share count to 161.4 million for the fourth quarter.

  • Then we multiply that by $0.15, which equals $24.21 million in net earnings.

  • Then we add $8 million in depreciation, which is slightly above the current quarter's total.

  • And finally, we subtract $10.4 million in capital expenditures, which is derived from guidance of capital expenditures being 12% to 13% of total revenue (estimated at about $80 million for Q4).

That's $21.8 million. Add in $36.9 million, and you're at $58.7 million in SFCF for 2005.


2. Revenue growth north of 25% for 2006. Speedera was growing sales at 40% annually when it was acquired. I surmised in June that growth should continue near that pace, which would help Akamai boost overall revenue by more than 25% in 2006, and potentially beyond.

Management seems to agree. Sagan announced during the earnings call that sales would grow by at least 25% and that net income would improve by roughly 40%. It's also worth mentioning that the company raised its current-year earnings-per-share estimate for the second time, to $0.51, which was up from $0.50 in July.


3. A customer retention rate north of 75%. Akamai dominates the content delivery market, and Speedera was its closest rival. Those facts, among other things, had me thinking in June that Speedera customers wouldn't look far and wide for alternatives after the deal closed.

And it seems they haven't. Sagan said during the earnings call that Akamai had already successfully navigated one-third of the re-ups with its inherited clients. Moreover, customer churn -- a benchmark that measures turnover in the customer base -- fell to 3% as 94 net new customers were added to the roster. So we end up with a pair of killer stats. First, the churn rate is as low as it's ever been over the past five years, according to Sagan. And second, Akamai added 71 net new customers last quarter, which was considered a major accomplishment at the time. We might not know the exact retention rate at the moment, but every indication is that my 75% benchmark is safe.


Where to go from here?
So, all of my metrics for Akamai have either been right on target or woefully conservative. That's very encouraging. But there's more to this company than strong financial performance and competitive dominance in its core market: It's also cheap.

Think about it. Akamai expects $0.51 per share in 2005 net income. Factor in 161.4 million diluted shares, and total earnings would be $82.3 million. Were that figure to grow by 40% as planned, then we're looking at $115.2 million in 2006 net income. Apply a conservative figure of 165 million diluted shares at that time, and EPS would be $0.70. And that's a conservative estimate.

More important is that Akamai -- a proven high-growth stock if ever there was one -- trades for no worse than 24 times next year's earnings. That'd be high if the company weren't expecting to grow earnings by 40%. But it is. And that's why I still believe I'll see a double on my initial investment over the next three years.

Get fully Akamaized Foolishness with these tidbits:

  • We recently interviewed CEO Sagan for Motley Fool Rule Breakers. Take a risk-free trial, and find out what he had to say about the future of the Web, bandwidth prices, and his kids' investing.
  • Who knew Akamai would help Apple (NASDAQ:AAPL) save the world again?
  • What do Sirius (NASDAQ:SIRI), Rule Breakers pick CNET (NASDAQ:CNET), Stock Advisor recommendation Netflix (NASDAQ:NFLX), and Akamai have in common? They're all part of your $99 portfolio.
  • Still confused about Akamai? Go back to the beginning.

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Fool contributor Tim Beyers is too tired to think of anything pithy for this space as he writes, but he does own shares of Akamai. You can find out what else is in his portfolio by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.