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Akamai Tops in 1Q; Outlook Dull

Zacks Equity Research

Akamai Technologies, Inc. (AKAM) reported earnings of 30 cents per share in the first quarter of 2012, beating the Zacks Consensus Estimate by a couple of cents. However, earnings remained flat on a year-over-year basis. Reported earnings include stock-based compensation expense, but exclude amortization of capitalized stock-based compensation, amortization of other intangible charges and restructuring charges.

Quarter Details

Total revenue increased 15.8% year over year to $319.4 million and was also higher than the Zacks Consensus Estimate of $311.0 million. Total revenue also surpassed the higher end of management’s guided range of $305.0 million to $313.0 million. The better-than-expected result was primarily driven by continued solid growth across its business segments.

Commerce was the fastest-growing (up 21.0% year over year) segment in the quarter, followed by Enterprise (up 16.9%), High Tech (up 15.5%), Media & Entertainment (up 13.8%) and Public sector (up 8.9%). Akamai continued to benefit from higher adoption of cloud infrastructure services (57% of the total revenue), increased demand for optimization, performance and security solutions and strong traffic growth on a year-over-year basis.

Region wise, revenue from North America climbed 18.0%, while international revenues jumped 10.0% on a year-over-year basis in the quarter. Revenue for the quarter witnessed robust growth across Europe and other economies, except for Japan.

Gross profit increased 16.1% year over year to $216.9 million in the reported quarter. Gross margin expanded 20 basis points (bps) year over year to 67.9% in the same period due to lower depreciation expense.

Total operating expenses increased 27.9% year over year to $140.5 million. The year-over-year growth in expenses was primarily attributable to higher general & administrative expense (up 26.9% year over year), research & development expense (up 38.8% year over year) and sales & marketing expense (up 26.1% year over year).

Operating income on a non-GAAP basis was $76.4 million versus $77.0 million in the year-ago quarter. Operating margin in the quarter was 23.9% compared with 27.9% in the year-ago quarter. Adjusted EBITDA increased 10.0% year over year to $143.0 million in the quarter. EBITDA margin stood at 45% in the quarter.

Akamai exited the quarter with cash and cash equivalents (including marketable securities and restricted marketable securities) of $404.5 million compared with $849.2 million in the prior quarter. Akamai generated cash flow from operations of $92.5 million in the reported quarter versus $135.9 million in the previous quarter.

During the first quarter, Akamai repurchased approximately 223,000 shares at an average price of $35.45 per share, totalling $8.0 million. Akamai’s board of directors authorized an additional $150 million for share repurchase, which is expected to begin from May, 2012.


Akamai expects revenue in the range of $322.0 million to $330.0 million for the second quarter of 2012. Akamai expects gross margin to decline on a sequential basis. Akamai expects adjusted EBITDA margin within the range of 41% to 42.0%. Operating expense is expected to increase by approximately $11.0 million from the first quarter due to higher costs related to acquisitions.

Earnings is expected to be between 36 cents and 38 cents per share, including tax charge of $22 million to $27 million, based on a GAAP tax rate of about 40% to 41%. Currently, the Zacks Consensus Estimate (including stock-based compensation) for the second quarter is pegged at 29 cents per share.

Akamai forecasts capital expenditure (excluding equity-based compensation) of approximately $65.0 million to $70.0 million for the forthcoming quarter.

Our Take

We believe that Akamai’s first quarter result reflects growing pressure on margins, particularly due to intense competition Level 3 Communications Inc. (LVLT), Limelight Networks, Inc. (LLNW) and carriers such as AT&T Inc. (T) and Verizon Communications (VZ), who are developing their own content delivery network. Moreover, increasing operating expenses due to higher costs related to acquisitions also remains a concern in the near term. These are expected to hurt revenue growth going forward.

During the first quarter conference call, Akamai also announced the retirement of its current Chief Executive officer (CEO) by the end of 2013. We believe this transition will remain an overhang over the stock going forward.

However, we believe that strong demand for cloud infrastructure solutions, security products, aggressive share repurchase and strategic partnerships are positives for the stock over the long term. Thus, we maintain our Neutral recommendation on a long-term basis (6-12 months). Currently, Akamai has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.

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