Akamai Technologies, Inc. (AKAM) reported fourth-quarter 2013 earnings of 55 cents per share, which increased 10.0% on both year-over-year and quarter-over-quarter basis. Earnings were above the higher-end of management’s guided range of 49 cents to 53 cents per share.
Shares jumped 17.8% ($8.46) in after-hours trading, as Akamai provided a better-than-expected outlook for the first quarter of 2014. According to Bloomberg, the company also put to rest investors’ fears regarding Apple’s (AAPL) plan of building its own content delivery network.
Revenues
Revenues jumped 15.4% year over year and 10.2% quarter over quarter to $436.0 million, well ahead of the Zacks Consensus Estimate of $422.0 million. Revenues were higher than management’s guided range of $412.0 to $430.0 million.
Excluding Akamai’s Advertising Decision Solutions (ADS) business, divested in Jan 2013, revenues increased 19.6% on a year-over-year basis. The strong growth in revenues was primarily driven by robust performance of most of the solutions.
Media delivery solutions revenues grew 18.6% year over year and 9.7% sequentially to $207.5 million. The growth was driven by robust traffic growth.
Performance & security solutions revenues jumped 17.9% year over year and 10.5% on a sequential basis to $192.2 million. The strong year-over-year performance was driven by robust demand for website and application acceleration solutions, as well as security product offerings.
Service & support systems achieved the strongest year-over-year revenue growth in the quarter, up 36.1% to $36.3 million. On a sequential basis, revenues increased 10.6% in the reported quarter.
Region-wise, revenues from North America (71% of revenues) jumped 15.0% year over year and 9.0% sequentially. International revenues (29.0% of revenues) jumped 17.0% on a year-over-year basis and 13.0% on a sequential basis in the quarter. Resellers represented 21.0% of the revenues in the quarter.
Margins
Gross margin (including stock-based compensation but excluding depreciation and amortization expense) expanded 310 basis points (bps) year over year and 210 bps sequentially to 77.8%. 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 320 bps on a year-over-year basis but declined 30 bps sequentially to 37.8%. Total operating expenses include stock-based compensation expense but exclude amortization of intangible assets, depreciation & amortization, restructuring charges and acquisition related costs.
The year-over-year rise in expenses was primarily due to higher research & development (R&D), general & administrative (G&A), and sales & marketing (S&M) expenses, which increased 70 bps, 220 bps and 220 bps, respectively.
Sequentially, the modest decrease in operating expenses was due to lower R&D and G&A expenses, which declined a respective 20 bps and 30 bps in the quarter. S&M expense increased 170 bps in the reported quarter.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin decreased 180 bps on a year-over-year basis but increased 20 sequentially to 44.0%.
Operating margin contracted 20 bps from the year-ago quarter but increased 240 bps sequentially to 40.0%. The year-over-year decline was due to higher operating expenses, while the sequential improvement was due to a slight decline in the costs.
Net income margin contracted 90 bps from the year-ago quarter but improved 10 bps from the previous quarter to 22.9%. Net income excludes stock-based compensation, amortization of capitalized stock-based compensation, amortization of acquired intangible assets, restructuring charges, acquisition related costs, gain and other activity related to divestiture and related tax effect.
Including stock-based compensation and amortization of capitalized stock-based compensation but excluding all other non-recurring items, net income margin was 19.2%, which remained flat on a year-over-year basis but declined 150 bps on a quarter-over-quarter basis.
Earnings, including stock-based compensation and amortization of capitalized stock-based compensation but excluding all other non-recurring items were 46 cents per share compared with 40 cents reported in the year-ago quarter and 45 cents in the previous quarter. Earnings beat the Zacks Consensus Estimate by 3 cents.
Balance Sheet & Cash Flow
Akamai exited the quarter with cash and cash equivalents (including short-term marketable securities) of $673.9 million compared with $584.3 million in the prior quarter. The company generated cash flow from operations of $171.7 million in the reported quarter versus $158.1 million in the previous quarter.
Akamai repurchased 1.1 million shares for approximately $48.0 million in the quarter.
Guidance
Akamai expects revenues in the range of $426.0 to $430.0 million for the first quarter of 2014. This represents 17.0% to 21.0% year-over-year growth, but almost flat on a sequential basis, reflecting seasonal trends. However, revenue guidance is much better than the Zacks Consensus Estimate of $414.0 million for the upcoming quarter.
Akamai expects gross margin (excluding stock-based compensation and depreciation and amortization) to remain flat sequentially at 78.0%. Operating expenses are projected to be in the range of $145.0 to $150.0 million.
Management expects adjusted EBITDA margin of approximately 44.0% for the first quarter. However, the Prolexic acquisition is expected to negatively impact EBITDA margin. The acquisition is also expected to be slightly dilutive to non-GAAP earnings, with a negative impact 6 cents to 8 cents in the first 12 months.
Earnings are expected to be between 51 cents and 55 cents per share, including tax charge of $48.0 to $52.0 million. Akamai forecasts capital expenditure to be in the range of $72.0 to $77.0 million for the first quarter.
Our Take
We believe strong demand for cloud infrastructure solutions, security, mobile products and online video will drive top-line growth, going forward. Akamai’s partnership with the likes of AT&T (T), Qualcomm (QCOM), Orange, Swisscom, Korea Telecom and Türk Telekom is expected to boost its top-line growth, going forward.
Moreover, Akamai’s superior content delivery platform has been selected by the likes of Apple 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 is also expanding its sales force through new appointments. This may hurt margins, going forward.
Currently, Akamai has a Zacks Rank #2 (Buy).
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