Akamai Technologies, Inc. (AKAM) reported second-quarter 2014 earnings of 46 cents per share (including stock-based compensation expense and amortization of capitalized stock-based compensation but excluded all other non-recurring items and related tax impact), which increased 27% year over year and were in line with the Zacks Consensus Estimate.
The year-over-year growth was primarily driven by robust revenue growth in the quarter. Management provided strong revenue outlook driven by anticipated healthy performance from Akamai’s media and security business segments.
Revenues
Revenues jumped 25.9% year over year to $476.0 million, slightly ahead of the Zacks Consensus Estimate of $469.0 million. Revenues were within management’s guided range of $464.0 to $478.0 million. The strong year-over-year growth in revenues was primarily driven by robust performance of most of the solutions.
Media delivery solutions revenues grew 20.5% year over year to $216.2 million driven by robust traffic growth across gaming, video and social customers.
Performance & security solutions revenues jumped 29.5% year over year to $217.4 million. The strong year-over-year performance was driven by robust demand for web performance and cloud security product offerings.
At the end of second quarter, Akamai’s security solutions were used by 1500 customers. More than 800 customers bought one or both of Kona Site Defender and Prolexic Solutions.
Service & support systems witnessed the strongest year-over-year revenue growth in the quarter, up 35.1% to $42.4 million. Strong service attachment rates drove revenues in the quarter.
Region-wise, revenues from North America (72% of revenues) jumped 25% year over year. International revenues (28% of revenues) jumped 27% on a year-over-year basis in the quarter. Resellers represented 25% of the revenues in the quarter.
Margins
Gross margin expanded 160 basis points (bps) year over year to 68.6%. The strong growth was primarily attributable to improving server network efficiency that continues to pull down costs.
Total operating expenses as a percentage of revenues surged 350 bps on a year-over-year basis to 43.1%. The year-over-year rise in expenses was primarily due to higher research & development (R&D) and general & administrative (G&A) expenses, both increasing 130 bps. Sales & marketing (S&M) expense increased 100 bps on a year-over-year basis.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin decreased 90 bps on a year-over-year basis to 42.9%, due to higher operating expenses. Operating margin contracted 140 bps from the year-ago quarter to 25.7%.
Net income (excluding stock-based compensation, amortization of capitalized stock-based compensation, amortization of acquired intangible assets, restructuring charges, acquisition related costs and related tax effect) was $105.6 million or 58 cents per share compared with $84.0 million or 46 cents in the year-ago quarter.
Balance Sheet & Cash Flow
Akamai exited the quarter with cash and cash equivalents (including short-term marketable securities) of $756.8 million compared with $698.1 million in the prior quarter. The company generated cash flow from operations of $200.2 million in the reported quarter versus $89.0 million in the previous quarter.
Akamai repurchased 1.3 million shares for approximately $71.0 million in the quarter. At the end of second quarter, Akamai had $550 million remaining under its current share buyback program.
Guidance
Akamai expects revenues in the range of $484 to $496 million for the third quarter of 2014. This represents 22% to 25% year-over-year growth. Revenue guidance is much better than the Zacks Consensus Estimate of $482.0 million for the upcoming quarter.
Akamai expects gross margin (excluding stock-based compensation and depreciation and amortization) to remain flat sequentially at 78%. Operating expenses are expected to increase $11 to $15 million sequentially.
Management expects adjusted EBITDA margin of approximately 41% to 42% for the third quarter. Akamai expects to hire additional sales representatives in the third quarter. Management reiterated its long-term EBITDA margin outlook of 40% to 45%.
Operating margin is forecasted to be in the range of 31% to 32% for the third quarter.
Earnings per share are expected to be between 55 cents and 58 cents, including tax charge of $51.0 to $53.0 million. The Zacks Consensus Estimate is currently pegged at 45 cents. Akamai forecasts capital expenditure to be in the range of $86 to $91 million for the second quarter.
Our Take
We believe that strong demand for cloud infrastructure solutions, security, mobile products and online video will drive top-line growth. Akamai’s partnership with the likes of Microsoft (MSFT), Cisco (CSCO), AT&T, International Business Machines, Orange, Swisscom, Korea Telecom and Türk Telekom is expected to boost top-line growth, going forward.
Moreover, Akamai’s superior content delivery platform has been selected by the likes of Apple (AAPL) due to its ability to provide high-quality service at a much lower rate compared to its peers. Additionally, the company’s dominance in the web application business is expected to be a significant growth catalyst, going ahead.
However, intense competition has kept pricing under tremendous pressure, which is a significant headwind, going forward. In order to differentiate its products, Akamai is significantly investing in R&D and expanding its sales force through new appointments, which will hurt margin for the rest of 2014, which continues to remain a concern.
Currently, Akamai has a Zacks Rank #3 (Hold).
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