Dean Morel's  Instablog

Akamai, the web content delivery and application gorilla, will report Q3 2009 on 28-Oct-09 AMC. Consensus forecasts is for $0.35 eps on $199.8M revenue. AKAM has excellent cash flow, a strong balance sheet and reasonable potential for growth for years to come. While competition continues to increase in the CDN space, Akamai continues to differentiate itself with higher value added services. Forward earnings forecasts in the internet information provider industry offer no reliability, but the overall growth in data and applications being served should provide enough market for several winners. Akamai remains the company to catch.

Q2 2009 Conference Call Transcript

Edited snips: Financial highlights for the second quarter include revenue of $204.6 million, an increase of 5% over the same period last year.
Normalized net income of $75.3 million or $0.40 per diluted share, down $0.01 or 2% from Q2 of last year, and we had very strong cash generation with a record $105 million of cash flow from operations in Q2. This increased our balance of cash equivalents to $927 million even after $17 million was used for share repurchase during the quarter.

value-added services increased strongly, especially late in Q2. We signed almost 200 brand new accounts to Akamai in the quarter, the highest number since the early days of the company, with a significant portion of these for our value-added services.

saw churn at above 5% in the quarter as compared to the 3% to 4% rates we saw in most of 2008. Churn continued to come primarily from smaller customers

Outlook: making significant investments for our future growth.... In this context, we expect cash gross margins will decline by about a point sequentially in Q3, as we continue our aggressive pricing strategy. We expect GAAP gross margins to decline by about 2 points sequentially, driven by increased depreciation. ... Based on this, we expect normalized earnings per share for Q3 in the range of $0.33 to $0.36.

Analysts Earnings Estimates

Earnings Est	Current Qtr Sep-09	Next Qtr Dec-09	Current Year Dec-09	Next Year Dec-10
Avg. Estimate	0.35	0.38	1.56	1.59
Low Estimate	0.34	0.36	1.54	1.43
High Estimate	0.36	0.42	1.59	1.77
Year Ago EPS	0.40	0.44	1.66	1.56

The estimates have been falling all year, as Akamai faces strengthening competition. Zacks who use change in earnings forecasts as part of investment criteria maintains a Neutral recommendation of 3. Akamai traditionally under-promise and over-deliver, with actual earning beating consensus in 12 of the last 18 quarters. Financial Reports

• Akamai's Q2 2009 Statement of Cash Flows at SEC Interactive Data highlights the 23% YoY increase in cash flow from operations, see chart below for summary.
• Q2 2009 Financial Results
• Q4 and 2008 Financial Press Release
• 2008 10K Annual Report
• More financial reports at Akamai

Not only is Akamai generating excellent and growing cash flow, they have a superb balance sheet with $927 Million in cash, equivalents and marketable securities. Their only debt is $199,855k of 1% convertible notes with a conversion price of $15.45 per share. Akamai has good earnings albeit with slowing growth due to strong competition.

	2004	2005	2006	2007	2008
Shareholders Equity	-125.93	624.21	954.69	1,358.55	1,568.77
Revenue	210.02	283.12	428.67	636.41	790.92
Income Before Taxes	35.14	70.4	98.47	168.21	234.54
Net Income	34.36	42.2*	57.4	100.97	145.14
Net Cash Flow from Operating	51.24	82.8	131.97	235.39	343.49

* Adjusted for $285.8 million income tax benefit. All figures in millions.

Fusion Outlook

AKAM has been in a uptrend since the Nov 20 2008 low of $9.25. Having traded above the 50 day MA for March through mid June, AKAM has since had two brief sorties below the 200DMA. The first drop to $15.86 in late July was due to Q2 miss and lowered guidance. Although the 50 dMA recently closed below the 200 dMA, it is turning up and the P&F remains in the uptrend which began a year ago. Technically AKAM has been performing strongly for the last two months, despite an onslaught of the negative articles from Dan Rayburn, the Akamai bear.

At Friday's close of $20.31 AKAM is trading at a forward 2009 P/E of 12.77. That is low for a company with Akamai's growth potential. However, despite growing eps 72% per annum and revenue 37% for the last five years analysts see competition from Limelight (LLNW) and other CDNs slowing Akamai's growth considerably. Analysts forecast less than 12% growth in earnings per annum for the next five years, giving AKAM a PEG of 1.1.

Akamai appears finally balanced over the short term. Good earnings and guidance should see prices in the mid twenties while a miss and lowered guidance would naturally see a tumble and indicate time to look for a better investment. I continue to hold a full position of AKAM and thus will not be buying more.

Behavioral - The computer says yes. TMF CAPS players rank Akamai a 5 Star Stock.

For more Fusion perspective see my earlier posts on Akamai at Fusion Investing.


Disclosure: Long AKAM.

Julian Robertson is concerned, you should be too.

There is so much constant noise in markets that it sometimes hard to develop a clear picture of what's most likely to transpire. Tiger Management Chairman, Julian Robertson, is among the people whose long term views rightly rise above the sea of noise.

In this CNBC interview Robertson views inflation as a huge risk and a second leg down in the market a question of when not if. Here are my notes.

• In for some real rough sledding. The recession is temporarily over, but haven't addressed many of our [US] problems and borrowing so much money can't possibly pay it back unless China and Japan buy US bonds.
• Terrible position that present and past leadership has put US in. If Chinese and Japanese don't buy US debt it's Armageddon, the US is totally dependent on those countries.
• Can grow and save way out it, but leadership does not have the guts to tell people to slow down and that it's going to take a while to put the economy back on track.
• Inflation is the risk, it could wipe out so many people.
• Fed preaching their own book when they say deflation is the risk.
• If Chinese and Japanese stop buying US bonds could see 15-20% interest rates. Crazy that the US is now so dependent.
• Believes Chinese do not want to stop buying US bonds, but circumstances could force them to stop.
• Japan could be forced to sell US bonds, which is worse than simply stop buying.
• They are buying short term debt, US can't sell long term. History shows that people who borrow short term get burnt.
• We are going to pay the piper, it's a question of when not if. Interest rates are going to go up putting breaks on the economy and earnings will go down.
• Looking at shorting copper again.
• If you wanted to divest US dollars and had to put your money somewhere he suggests Norway as richest country with safest currency.
• Stimulate is a synonym for spend and borrow and we need to break that cycle.
• New Zealand is beautiful and will always be beautiful. [Clearly a very smart guy!]

Disclosure: Short position in USD.

Following my analsyis Telstra, the number one Australian Telco, I'm now going to do a first pass on three growth Telcos; M2 Telecommunications Group Limited (ASX:MTU), Pipe Networks Limited (ASX:PWK) and iiNet Limited (ASX:IIN). Two of them rank in the top ten Austalian Telcos, the third's growth could see it in that group within a few years.

Why these three?

• Hunter Hall disclosed a large position in MTU back in April, topped up in May and again in June taking their holding to 12.3%.
• A telco lawyer friend mentioned Pipe Networks to me when the price was around $1.80. I've checked my notes and my cursory look was encouraging, but Pipe slipped through to the keeper. The stock in now up 200%, so I'm hoping it's better late than never.
• iiNet is my ISP so I'll call this a Lynchian idea. In reality is was this analysis at PazzoMundo that made me consider iiNet as an investment opportunity.
• All three have high growth rates, outstanding management and excellent growth prospects.

By the numbers

	IIN	MTU	PWK
Price	2.13	1.24	5.46
Revenue $M	420.8	202.5	49.7
Rev. YoY	66.8%	85.8%	45.1%
Expenses $M	353.5	189.4	31.2
EBIT $M	38	11	14.1
Net $M	25.6	7.5	10.5
Net YoY	28.8%	45.0%	45.9%
EPS	0.169	0.0856	0.199
Gross	9.1%	5.4%	28.5%
Net	6.1%	3.7%	21.1%
Div (TTM)	0.08	0.055	0.08
OCF Ratio	0.60	0.113	1.07
Div Cover	2.417	1.729	2.943
Int. Cover	>10	>10	<-10
Liab. To Asset	0.357	0.657	0.424
ROA	12.7	15.4	11.3
ROE	8.8	5.6	6.6
P/E	12.60	14.49	27.44
Yield	3.8%	4.4%	1.5%
PEG	0.49	0.21	0.54
P/B	1.59	2.64	3.39
P/S	0.77	0.51	5.96
Fwrd. 2Yr Growth	24.5%	56.6%	44.4%

Diving Deeper
M2 Telecommunications Group Limited (ASX:MTU)
M2 is a provider of a full suite of telecommunication services to small and medium enterprises and wholesale customers in Australia and New Zealand. Founded Dec 1999, listed on ASX in 2004 it has grown quickly to become the seventh largest Australian telco. The MD Vaughan Bowen sold 19% of his holdings in early September for $2.5M. With the share price rising so quickly this year, from mid 40c to over $1.20 it's not surprising that the MD has decided to take some play money, but I'd still like to know why he decided to sell.

This investor presentation of the full year results is a good starting point.

• Excellent year on year growth, though with NPAT up 45% and EPS only up 37% there must have been some heavy dilution, that's worth looking at. Strong balance sheet with modest debt. Strong and growing cash flows, thought they only grew 13% YoY, so need to check why.
• Eight consecutive years growth in EPS and DPS.
• Ont the retail side MTU has $250M recurring revenues (I like those) from 100,00 customers. From wholesale $110M recurring revenues from 250 customers.
• Acquired People Telcom and Commander in April and June 2009 respectively. People Telcom $2M + 28.6M MTU shares (hence the aforementioned dilution), Commander $19M cash plus inventories.
• 2010 guidance: EPS growth 55% to range of 13.3-14.3 cents, while NPAT up 100%. Difference due to People Telecom acquisition.
• Dividend policy is 70% of NPAT, which is forecasted in range of 14.5-15.5cents. Consequently dividend should be around 10.5 cents giving MTU a tasty forward yield of 8.5%

BRR Presentation

• Good organic growth in wholesale business and slightly positive on retail.
• Good integration of recent acquisitions.

2009 Annual Report

• Acquired Orion Telecommunications in October 2007 and Unitel Australia in Feb 2008. The 86% revenue growth came from combination of organic growth in wholesale and those acquisitions. Anyone know the breakdown?
• 3 cent franked final dividend record date 15 October 2009.
• Revenue run rate now $360M
• $70.3M intangibles and goodwill from their acquisition strategy. Backing those out, net assets fall from $48.5M to -$21.8M. I must check if M2 are actually creating value.

While the P/E ratio is overused by investors and of questionable merit it does provide a quick snapshot of the prices investors have been willing to pay. In the above example, if we take the mid point of FY10 forecasts, 13.8 cents we can multiple that by 20 for a quick and dirty one year upper target price of $2.8, the current P/E will see a price of around $2. Those rough figures point to potential capital gains of 60-125%. I stress these are rough figures and only intended as part of a super quick impression for how much analysis effort I should put in.

The other reason I like this chart is it quickly tells me whether the share is likely to have ratio expansion on top of the growth opportunity. It is the double bang of expanding multiples and growth that most often leads to significant outperformance over one to two years.

iiNet Limited (ASX:IIN)
iiNet is a fast growing ISP and pips M2 by one place in the Telco league, coming in at sixth largest behind Telstra, Optus, Vodafone Hutchison, AAPT and SP Telemedia. iiNet's 2009 Results Presentation

• Strong balance sheet, gearing at 7% and 18x interest cover
• Growing customer base, up 10% YoY, naked customers up 123%.
• Access to lower cost bandwidth from FY10
• Churn down 25 bps to 1.83% per month. As an existing customer I am very happy with their service and new products.
• $20.9M in FCF
• Broadband market share now 8%

The major growth in 2009 came from the acquisition of Westnet. Though like all acquisitive companies they are quick to promote their organic growth. iiNet have began marketing in more states, Victoria and Queensland, and with the business processes in place to support growth they should be able to leverage their model. They should profit from the NBN.

iiNet are an innovative company and I have only heard glowing comments about the MD, Michael Malone. Interestingly he too has been selling shares; the release highlights the good reason behind the share sale. iiNet were buying shares back early this year and with the share price up over 80% they have been suitably rewarded for their capital management acumen. They regularly launch cool new services and products like BoB, the all in one doodacky for your communication needs.

Pipe Networks Limited (ASX:PWK)
PWK is all about the pipe. In their case 1,300km of the 'thickest' domestic network in Australia and their new Sydney to Guam cable, PPC-1, which will be operational in October. An investment in Pipe is an investment in the growth of the internet. I don't even need to dig into their numbers to know they have huge growth ahead, the question is, as always, the price. Let's start with Pipe's 2009 Results Presentation

• Stack of industry awards.
• Good growth across the board. Fibre utilisation up from 22% to 25%.
• Since 2005 they have achieved the following CAGRs; revenue 81%, NPAT 88%, EPS 62%, DPS 59%. According to them that "growth is underpinned by a diverse set of long term annuity customers".
• Over 370 customers across Telco/ISP, corporate and government. Top 20 account for less than half revenues.
• Domestic network expanded 18%, now 1,300km
• PPC-1 will generate FCF in FY10 and be operation 8 October.
• Guidance. Revenue $92 - 96M an 86% increase, NPAT $20.5 - 21.5M a 100% increase, maintain current dividend level while investing in PPC-1.
• Self funded PPc-1 increased debt to $35.2M and gearing to 38%. They say interest cover is 33.7, which greatly differs from my other figures, need to check that.

2009 Preliminary Annual Report 2008 Annual Report

Mo-mo is in the house. I wouldn't have been surprised to find Pipe's MD Bevan Slattery selling shares at these prices, but it appears he still hold his 8M shares, around 14% of PWK.

Conclusion
Pipe Networks looks like a fantastic story, but the price is a tad rich for me. iiNet and M2 look attractive at current prices and I will be digging deeper into their stories and valuation. The current yield of MTU and their growth send them to the top of the pack. I did email M2's MD Vaughan Bowen about his large share sale and why EPS growth will be considerably lower than NPAT in FY10, but as yet have had no reply. I've been told Mr Bowen is well respected in the industry and a nice guy who is smart with a fair amount of vision. I'll stick with that impression for now, but if he's not polite enough to reply to my email I'll be scrubbing nice off the list ;-). His $2.5M sale is the sort of figure he'd need if he was buying a new house, so maybe the story is as simple as that.

All three companies should continue to show impressive growth over many years. Owning the physical network asset gives Pipe the widest moat and if I get a better value point I'll be interested in buying. iiNet and M2 are building large satisfied customer bases, which should provide them some price strength in what is sure to become an even more competitive market. Finally here's the comparative performance of IIN, MTU and PWK since the start of 2008, FWIW. Disclosure: I currently have no positions in any of the above highlighted stocks. I do have a position in Telstra.

Motley Fool's  Matt Koppenheffer hit the investing mainstream last week with his article on looking at value not price appreciation. It's an easy yet worthwhile read, I've reprinted some highlights from the article below. Matt's main thrust was "our concern shouldn't be over how much the market has gone up or down, but rather whether its valuation is attractive or unattractive". Wise words, but I still can't get the wiggles out of my head.

Perhaps this chart from dshort is a Rorschach test and not manipulated data to present a negative view. Perhaps focusing through two beer bottles confused my addled brain when I looked at the chart earlier this week. To check, I decided to take a fresh look at Professor Shiller's data to see what pretty graphs and inferred meaning I'd see with a clearer head. Guess what, I still find a more positive picture than dshort painted and struggle to draw a really negative picture, though the mid-term could be rough. I look forward to finding out why dshort chose his mini-trough to misalign his chart with and why he decided to disregard time from peak and most other reference points. Upon a good explanation, I'll be happy conceed that it is I who is misaligned.

The following charts of the S&P 500 use Shiller's monthly data, click the images to enlarge.

This first chart aligns The Great Depression and Great Bubble initial peaks. If we continue to follow the same pattern then we're likely to experience slim picking on stock markets for the coming years. These tea leaves are supported by plethora of fundamental reasons from over-leverage to printing presses and on to valuation levels. However, before you slash your wrists, or to be more in keeping with the theme jump out of an office building, let me say this. I have looked at hundreds of aligned graphs over the years and the one thing they all have in common is the alignment eventually breaks down.

So what do the tea leaves say lies ahead of us? When I zoom in on the data and align the initial major stock market troughs from the great depression and the great bubble I can't help but see a positive picture.

Could the S&P 500 pull ahead 500% over the next 15 years, just as the post depression market did? Could it happen even quicker? After all six of those post depression years were taken up by WWII and the bulk of those gains happened in around 12 years. As Professor Albert Bartlett said "the greatest shortcoming of the human race is our inability to understand the eponential function" or simply human brains aren't wired for big numbers. So let's break down 500% into a yearly figure. If you were excited by the thought of 500% in 12 to 15 years then look away now, as you may be disappointed by the yearly growth. 11% and 14% will return 500% over 12 and 15 years respectively. I'm not sure why I said you might be disappointed, as I'd settle for 11% and be estatic with 14% over those periods.

If we pull back five years before the peaks and align the peaks the déjà vu continues.

But if we pull back even further then a remarkable new picture appears. This time let's start from near the pre-bubble low in mid 1980 and peak align the data.

I knew the eighties and nineties were amazing, but wow! Com-pu-pu-pu-pu-pu-puter-puter-puter-puter, computer games. Did the computer deliver that growth? Or was it the Ponzi printing presses? Whichever, I enjoyed watching that Mi-sex video again and Computer vs Press is a topic for another day.

Here are the snips from Matt Koppenheffer's article, like me he has used Professor Shiller's data. We're all looking at the same data, the only thing that's different is us.

Don't Mind the 47% Stock market commentators tend to be a rather fearful bunch. When times get bad and the market is sinking, many of them seem to suffer from taphephobia -- a fear of getting buried alive -- and they want to run for the hills as quickly as possible. On the flip side, when the market is shooting up, acrophobia -- the fear of heights -- seems to come into play and, well, they're off running for the hills again. But if you ask me -- or really any fundamentals-oriented investor -- our concern shouldn't be over how much the market has gone up or down, but rather whether its valuation is attractive or unattractive. If a hot market with sky-high valuations rises 47% in a few months, that acrophobia is probably warranted. On the other hand, if a sorely undervalued market tacks on that same 47%, there could still be good reason to buy.

Do Mind the Valuation ...The long-term average for the P/E number that Shiller tracks is around 16.3. The current readout is 17.5, which is up from 13.3 in March and down from 27 prior to the market's crash. So today's valuation isn't nearly as attractive as March's, but it's much more attractive than what was available to us pre-recession. What's concerning though, is that earnings estimates for the S&P index from Standard & Poor's suggest that earnings will remain well below their pre-recession levels. This means that even if the market doesn't move up much more, its valuation will rise as average earnings fall. ...

So What Do You Do? ... If you're a long-term retirement investor and you want to keep it simple, you're still probably fine grabbing those index funds today. For investors who like to put on a hard hat and go prospecting for the best stock opportunities, though, now is a good time to start eschewing the index funds in favor of some individual stocks that are still undervalued. ...

So What Are You Going To Do? I'll go first, though I'm really writing this to hear from you. I'm going to continue to stick to my regularly updated investment plan. Specifically I'm going to continue to invest as much as possible like an emotionless Vulcan by acting to limit my greed and fear. The best way I know to do that is buy when I am fearful and sell when I'm feeling greedy. As I said last week I've started to feel greed misting my thoughts. I also agree with Matt Koppenheffe, Shiller's data, Grantham, Hussman and many other commentators that the market is currently slightly overvalued, nothing to get you knickers in a twist over, but also nothing to get excited by.

I'm more concerned about downside, as I have already achieved a relatively comfortable life there is little utility in the current potential upside. That's reinforced by rediscovering my mojo and totally kicking the market's arse again this year, after a narrow combined win last year and a loss in 2007. So I'm trimming my portfolios.

The other reason for my trimming is my continual seeking of alpha. In baseball you have to step up to the plate to get a swing at the ball. Similarly in markets you need to put yourself in a position to be able to outperform. I find it easiest to do that by cashing up when I sense greed is growing and valuations are unfavourable and investing when it makes me feel nauseous to do so. By trimming now I'm exchanging a low probability of performing in line with the market for a higher probability of outperforming the market. I know I'm really pushing this concept, but I think of it this way. What will annoy me most, missing out on some gains or not having cash if the indices fall 20%?

In short I see a higher probability of being able to buy at lower valuations sometime over the next five years than I do in this being the beginning of a new bull market and 1,000 never being seen on the S&P 500 again. So, as I said, I'll continue to trim and even watch for the opportunity to go short, though perhaps I'm simply suffering from acrophobia.

Disclosure: The author is net long North American, Australian and a couple other stock markets via equity and fund investments. He is currently raising his cash levels, though remains ambivalent to the market direction.

Kongzhong Corp. (KONG) keeps on climbing. I finds these valuation heights somewhat dizzying, but I'm sure enjoying the ride. Like exciting fair ground rides the trick is get off before you're sick. I thought KONG had climbed high when it was at eight, at $10 I almost headed for the emergency exit, today KONG closed at $12.04. For the record that's a 100% gain in three months, a triple in four months and a five bagger off the October 08 lows. I'm not claiming any genius on this one, all I've done is hold tight for a white knuckle ride. The hardest part of investing remains, the sale. Is KONG now at oxygen mask altitudes, is that blood dripping out my nose or jam from my donut?

Earnings Preview

KONG are scheduled to report between 8-12th August. Analysts are expecting $0.06 on $31.4M this quarter, $0.07 on $32.1M next and $0.28 and $0.36 for 2009 and 2010 respectively. In the Q1 press release KONG said it expects total revenues for the second quarter of 2009 to be between $30.5 million and $31.5 million. Analysts were expecting revenue of $25.32M with a range of $22.30M-28.33M for Q2 and eps of $0.03. So it comes as no surprise that analysts have steadily been raising their estimates since then; $0.03 to $0.04 to $0.05 to $0.06, respectively 90, 60, 30 and 7 days ago. This slow re-rating confirms what I said about KONG after Q1 earnings.

More »

I wrote about my approach to tech investing and my issues with LTBH investing a year ago. 'Issues' may be a tad mild as I wrote "I view the classic investing style of Long Term Buy to Hold or worse Long Term Buy and Hold, LTBH, as one of the most dangerous philosophies newbie investors can be exposed to." Read the post if you want to know why.

While I wasn't the first person to have fired a shot over the bow over the LTBH ship, many shots have since been fired. To me it seems the LTBH ship is now so full of holes that I should swim over and try to rescue a few survivors. While I won't recant my LTBH slamming ways, I now feel it has become so unpopular that it could be a great time to start some good old LTBH investing. No, I'm not simply being contrary and I'm not going to change my investment philosophy or strategy, but for many investors out there I think now is a great time to start pouring money back into equities for the long term. For any long term readers that may sound familiar. Yes, I began recommending averaging into the markets in October 2008 when I wrote The Bear is Dead - Long Live the Bull.

In the prematurely titled The Bear is Dead I presented the following spreadsheet and comments.

More »