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Akamai Technologies, Inc. (AKAM - Analyst Report) reported earnings of 35 cents per share in the fourth quarter of 2011, which surpassed the Zacks Consensus Estimate of 31 cents. Earnings increased 16.7% from 30 cents per share reported in the year-ago quarter.

Reported earnings include stock-based compensation expense and amortization of capitalized stock-based compensation, but exclude amortization of other intangible charges and restructuring charges.

The year-over-year growth was primarily driven by strong revenues; partially offset by higher expenses, which dragged margins in the reported quarter.

Revenue Performance

Total revenue in the quarter was $323.7 million, up 13.7% year over year and surpassed the Zacks Consensus Estimate of $311.0 million. Total revenue also managed to achieve the higher end of management’s guided range of $303.0 million to $315.0 million. The better-than-expected result was primarily driven by continued solid growth across its business segments.

Revenue from Akamai’s fastest-growing Enterprise vertical grew 23.0% year over year to $41.2 million, as more customers adopted cloud services for their businesses.

Revenue from Commerce increased 20.0% year over year to $76.9 million, driven by an increase in the online shopping during the holiday season. Public sector climbed 3.4% year over year to $15.2 million and Media & Entertainment jumped 11.5% to $137.4 million. Revenue from the High Tech vertical grew 9.0% year over year to $53.0 million in the reported quarter.

Region wise, revenue from North America climbed 13.0% year over year. International revenues jumped 15.0% year over year. Revenue for the quarter witnessed robust growth across Europe and other economies, except for Japan.

Operational Metrics

Gross profit increased 11.5% year over year to $221.2 million in the reported quarter. However, gross margin contracted 140 basis points (bps) year over year to 68.3% in the same period due to unfavorable business mix.

Total operating expenses increased 12.9% year over year to $137.5 million. The year-over-year growth in expenses was primarily attributable to higher general & administrative expense (up 22.0% year over year) and research & development expense (up 10.1% year over year). However, sales & marketing expense remained flat when compared with the prior year quarter.

Operating income on a non-GAAP basis was $83.5 million versus $76.6 million in the year-ago quarter. Operating margin in the quarter was 25.8% compared with 26.9% in the year-ago quarter.

Balance Sheet

Akamai exited the quarter with cash and cash equivalents (including marketable securities and restricted marketable securities) of $849.2 million compared with $687.6 million in the prior quarter.

Akamai generated cash flow from operations of $135.9 million in the reported quarter versus $116.3 million in the previous quarter. During the fourth quarter, Akamai repurchased approximately 3.0 million shares for $76.0 million, at an average price of $26.38 per share.

Guidance

Akamai expects revenue in the range of $305.0 million to $313.0 million (11.0% to 13.0% year-over-year growth) for the first quarter of 2012. Management believes that seasonal pressure can possibly drag the revenues down in the upcoming quarter.

Akamai expects gross margins to remain flat on a sequential basis. Akamai expects adjusted EBITDA margin to be approximately 43.0%.

Earnings is expected to be between 36 cents and 39 cents per share, including tax charge of $25 million to $30 million, based on a GAAP tax rate of about 38% to 39%. Currently, the Zacks Consensus Estimate (including stock-based compensation) for the fourth quarter is pegged at 30 cents per share.

Akamai forecasts capital expenditure (excluding equity-based compensation) of approximately $50 million for the forthcoming quarter.

Our Take

We believe that increased usage of cloud computing technology ensures higher adoption of value-added solutions, which will drive strong top-line growth going forward. Moreover, strong demand for security products, aggressive share repurchase and strategic partnerships are positives for the stock over the long term. Moreover, the acquisition of Cotendo and Blaze is expected to strengthen Akamai’s dominant position in the dynamic site accelerator (DSA) market.

However, weak traffic growth remains a concern, as Akamai continues to face intense pricing pressure from competitors like Level 3 Communications Inc. (LVLT - Snapshot Report), Limelight Networks, Inc. (LLNW - Snapshot Report) and carriers such as AT&T Inc. (T - Analyst Report) and Verizon Communications (VZ - Analyst Report), who are developing their own content delivery network. We believe this will hurt revenue growth going forward.

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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