Akamai gains despite analyst skepticism

Akamai Technologies' shares were gaining ground despite lowered revenue expectations and downgrades which questioned the company's ability to meet its target for break-even results.

Wednesday night the company said it would report a narrower-than-expected loss, but revenue would be lower than expected. It will also reduce 14 percent of its work force in an effort to reach break-even results earlier than expected.

The company blamed the usual suspects: failing dot-com customers. Rival Inktomi Corp. (Nasdaq:INKT) recently had a similar fate; the company said just this Monday it would post a fiscal second-quarter loss larger than previously forecast and that revenues would be far short of First Call's expectation.

Shares in Akamai (Nasdaq:AKAM), which makes software to speed the delivery of Web content over the Internet, were up 18 cents to $6.19 Thursday, despite the bad news.

Akamai now sees first-quarter revenue to be in the range of $39 million to $41 million, compared with previous guidance of $45 million. Earnings before interest, taxes, depreciation and amortization (EBITDA) are expected to be a loss of $35 million to $38 million, compared with previous guidance of a loss of $45 million.

The company also revised 2001 numbers. Revenue is expected to be lower--in the range of $175 million to $190 million, compared with the previously expected $240 million to $250 million. The loss is expected to be narrower though--the company now projects a loss of $110 million to $120 million compared with the previous loss of $140 million to $145 million.

The company also moved up its EBITDA break-even date by a quarter--it now expects to breakeven in the second quarter of 2002.

Many analysts doubted that number, and downgraded the stock Thursday.

"We do not believe that Akamai can add enough customers in the first two quarters of 2001 to reach EBITDA breakeven by its target," wrote Lazard Freres & Co. analyst Luke Fichthorn, who also downgraded the stock.

Fitchthorn dropped his rating to "hold" from "outperform" and also expressed doubts over management's statement that it intends to secure more vendor financing. The company had outlined a cash flow model whereby it will likely require no outside financing, or at worst, need some vendor financing.

Fitchthorn said his "lack of confidence in management's 2002 revenue and EBITDA estimates," have also caused him to put his current $19 price target under review. He's awaiting an explanation on the company's conference call on April 18th.

Merrill Lynch's Thomas Watts also didn't buy management's predictions.

"Our lower revenue expectation slates Akamai to turn EBITDA positive in the fourth quarter of 2002, two quarters later than management expectations," Watts wrote.

The analyst downgraded his long-term rating on the stock to "accumulate" from "buy" based on the uncertainty.

Another potential negative for Akamai was its announcement that Earl Gallagher, executive vice president and head of sales, is leaving the company. We "believe that he was an integral part of AKAM management--he will be difficult to replace," wrote Fitchthorn.

However, analysts did find some positives. Watts maintained his intermediate term rating on the stock at "accumulate," citing three potential positives: the company's EdgeSuite service is expected to drive revenue growth and higher margins; the company has successfully cut costs, ensuring its business is fully funded and "management and R&D at AKAM are one of the market's best." Watts expects the company will continue to "innovate and offer new, high margin services" as a result.

Lehman Brothers Harry Blount maintained his "buy" rating and said that Akamai's warning has eliminated two of the biggest concerns that have been overhanging the stock. Investors have been fretting over how badly the company will miss estimates, and whether or not it will have enough cash flow. Now that the company has answered those concerns, it has only to answer one last question--"what is up with Apple?"

Blount pointed out that the company hasn't indicated whether Apple (Nasdaq: APPL)--Akamai's largest customer in 2000--will renew its contract, which expired last week.

"We expect Akamai will renew this contract, but at a lower level than the previous agreement," Blount predicted.