Akamai Beats on Q1 Earnings, Revs; Outlook Strong - Analyst Blog

Akamai Technologies, Inc. AKAM reported first-quarter 2014 earnings of 47 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 14.2% year over year and beat the Zacks Consensus Estimate by 3 cents.  

The year-over-year growth was primarily driven by robust revenue and margin expansion in the quarter. Management provided strong revenue outlook driven by anticipated healthy performance from Akamai's media and security business segments.

Revenues

Revenues jumped 24.1% year over year to $453.5 million, well ahead of the Zacks Consensus Estimate of $439.0 million. Revenues were higher than management's guided range of $426.0 to $430.0 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 18.6% year over year to $214.8 million. The growth was driven by robust traffic growth due to high amount of software download and gaming patches by customers.

Performance & security solutions revenues jumped 26.4% year over year to $198.0 million. Prolexic (acquisition completed in February) contributed approximately $7.0 million to revenues. The strong year-over-year performance was driven by robust demand for website and application acceleration solutions, as well as security product offerings.

At the end of first quarter, Akamai's security solutions were used by 867 customers, including 100 leading banks. More than 260 customers bought Akamai's flagship Kona site defender solution. Including Prolexic, Akamai had 1250 customers at the end of first quarter.

Service & support systems witnessed the strongest year-over-year revenue growth in the quarter, up 48.2% to $40.7 million. Strong service attachment rates and demand for major live events drove revenues in the quarter.

Region-wise, revenues from North America (72.0% of revenues) jumped 23.0% year over year. International revenues (28.0% of revenues) jumped 24.0% on a year-over-year basis in the quarter. Resellers represented 24.0% of the revenues in the quarter.

Margins

Gross margin expanded 220 basis points (bps) year over year to 69.2%. 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 130 bps on a year-over-year basis to 38.3%. 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 20 bps, 50 bps and 30 bps, respectively.

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin decreased 60 bps on a year-over-year basis to 44.9%, due to higher operating expenses. Operating margin expanded 90 bps from the year-ago quarter to 30.9%. The year-over-year growth was due to higher revenue base and modest growth in operating expenses.

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 $82.8 million or 55 cents per share compared with $74.7 million or 50 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 $698.1 million compared with $673.9 million in the prior quarter. The company generated cash flow from operations of $89.0 million in the reported quarter versus $171.7 million in the previous quarter.

Akamai repurchased 2.0 million shares for approximately $116.0 million in the quarter. The company raised $655.0 million from convertible debt offering in February.

Guidance

Akamai expects revenues in the range of $464.0 to $478.0 million for the second quarter of 2014. This represents 22.8% to 26.5% year-over-year growth. 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 and be in the range of 68.0% to 69.0%. Operating expenses are projected to be in the range of $166.0 to $170.0 million.

Management expects adjusted EBITDA margin of approximately 42.0% to 43.0% for the second quarter. Akamai expects to hire additional sales representatives in the second quarter and the latter half of the year.

Although this along with continued investments in Prolexic is expected to negatively impact EBITDA margin for the rest of the 2014, management reiterated its long-term EBITDA margin outlook of 40.0% to 45.0%.

EPS is expected to be between 53 cents and 57 cents, including tax charge of $50.0 to $55.0 million. Akamai forecasts capital expenditure to be in the range of $90.0 to $95.0 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 AT&T T, International Business Machines IBM, 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 is also expanding its sales force through new appointments, which will hurt margin for the rest of 2014. This remains a major concern.

Currently, Akamai has a Zacks Rank #3 (Hold).