Akamai Technologies, Inc. ( AKAM - Analyst Report ) reported strong second quarter earnings of 43 cents per share, up 23.4% from 35 cents earned in the year-ago quarter. Earnings including stock-based compensation expense and amortization of capitalized stock-based compensation, but excluding amortization of other intangible and restructuring charges, came in at 26 cents per share that surpassed the Zacks Consensus Estimate by a couple of cents.

Quarter Details

Total revenue increased 19.6% year over year to $331.3 million and was higher than the Zacks Consensus Estimate of $326.0 million. Total revenue also surpassed the higher end of management’s guided range of $320.0 million to $330.0 million. The better-than-expected result was primarily driven by continued solid growth across its business segments.

Public sector was the fastest-growing (up 23.1% year over year) segment in the quarter, followed by Commerce (up 21.3%), Media & Entertainment (up 19.4%), Enterprise (up 18.3%) and High Tech (up 18.0%). Higher adoption of cloud infrastructure services (58% of the total revenue), increased demand for optimization, performance and security solutions and strong traffic growth on a year-over-year basis were the main revenue drivers during the quarter.

Region wise, revenue from North America climbed 23.0%, while international revenues jumped 11.0% on a year-over-year basis in the quarter. Europe and Asia-Pacific registered solid revenue growth during the quarter.

Gross profit increased 19.5% year over year to $223.8 million in the reported quarter. Gross margin remained flat on a year-over-year basis to 67.6% on higher depreciation expense.

Total operating expenses surged 37.9% year over year to $151.4 million. The year-over-year growth in expenses was primarily attributable to higher general & administrative expense (up 26.1% year over year), research & development expense (up 59.4% year over year) and sales & marketing expense (up 43.6% year over year).

Operating income declined 6.6% year over year to $72.4 million. Operating margin in the quarter was 21.9% compared with 28.0% in the year-ago quarter. Adjusted EBITDA increased 13.4% year over year to $143.1 million in the quarter. EBITDA margin stood at 43% in the quarter.

Net income increased 18.0% year over year to $77.6 million in the quarter. Including stock-based compensation expense and amortization of capitalized stock-based compensation, but excluding amortization of other intangible charges and restructuring charges, net income declined 4.2% year over year to $50.0 million.

Akamai exited the quarter with cash and cash equivalents (including marketable securities and restricted marketable securities) of $496.6 million compared with $404.5 million in the prior quarter. Akamai generated cash flow from operations of $149.6 million in the reported quarter versus $92.5 million in the previous quarter.

During the second quarter, Akamai repurchased approximately 2.0 million shares for an average price of $30.78 per share, totaling $67.0 million.

Guidance

Akamai expects revenue in the range of $332.0 million to $342.0 million for the third quarter of 2012. Akamai expects gross margin in the range of 67.0% to 68.0%. Akamai expects adjusted EBITDA margin of 43.0%. Operating expense is expected to increase by a couple of million from the second quarter.

Earnings is expected to be between 40 cents and 42 cents per share, including tax charge of $27 million to $30 million, based on a GAAP tax rate of about 38% to 39%. Akamai forecasts capital expenditure (excluding equity-based compensation) of approximately $60.0 million to $65.0 million for the forthcoming quarter.

Our Take

We believe that Akamai’s second quarter result continues to reflect growing pressure on margins, particularly due to intense competition 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.

However, we believe that strong demand for cloud infrastructure solutions, security and mobile products, online video along with 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.