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Akamai Technologies, Inc. (AKAM - Analyst Report) reported third quarter earnings of 27 cents per share, up 17.4% from 23 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 30 cents per share that beat the Zacks Consensus Estimate by a penny.

Quarter Details

Total revenue jumped 22.5% year over year to $345.3 million, which was well ahead of the Zacks Consensus Estimate. Total revenue also surpassed management’s guided range of $332.0 million to $342.0 million. The better-than-expected result was primarily driven by continued solid growth across its business segments.

Cloud infrastructure solutions increased 22.0% year over year, while content delivery solutions jumped 23% year over year in the reported quarter. 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.

Media & Entertainment was the fastest-growing (up 23.1% year over year) segment in the quarter, followed by Enterprise (up 21.6%), Commerce (up 20.5%), Public sector (up 19.6%) and High Tech (up 17.4%).

Region wise, revenue from North America climbed 23.0% while international revenues jumped 30.0% on a year-over-year basis in the quarter. Europe and Asia-Pacific registered solid revenue growth during the quarter.

Gross profit surged 24.8% year over year to $235.3 million in the reported quarter. Gross margin expanded 110 basis points (bps) year over year to 68.1%.

Total operating expenses surged 26.1% year over year to $150.0 million. The year-over-year growth in expenses was primarily due to higher general & administrative expense (up 7.2% year over year), research & development expense (up 42.9% year over year) and sales & marketing expense (up 39.3% year over year).

Operating income soared 22.5% year over year to $85.4 million. Operating margin in the quarter remained flat on a year-over-year basis at 24.7%. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 27.9% year over year to $156.5 million in the quarter. EBITDA margin stood at 45% in the quarter.

Net income increased 14.1% year over year to $48.2 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 increased 15.6% year over year to $53.9 million.

Akamai exited the quarter with cash and cash equivalents (including short-term marketable securities) of $465.2 million compared with $496.6 million in the prior quarter. Akamai generated cash flow from operations of $141.5 million in the reported quarter versus $149.6 million in the previous quarter.


Akamai expects revenue in the range of $373.0 million to $385.0 million for the fourth quarter of 2012. Akamai expects GAAP gross margin of approximately 70.0%. Akamai expects adjusted EBITDA margin of 45.0%. Operating expense is expected to be in the range of $14.0 million to $16.0 million.

Earnings are expected to be between 48 cents and 52 cents per share, including tax charge of $34 million to $38 million, based on a GAAP tax rate of about 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 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 going forward.

However, intense competition from 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, remains the major concern.

Thus, we maintain our Neutral recommendation on a long-term basis (6-12 months). Currently, Akamai has a Zacks #2 Rank, which implies a Buy rating on a short-term basis.

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