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Akamai Technologies, Inc. (AKAM - Analyst Report) 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 - Analyst Report) 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 - Analyst Report), Qualcomm (QCOM - Analyst Report), 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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