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Akamai Technologies, Inc. (AKAM - Analyst Report) reported earnings of 51 cents per share, which jumped 41.7% from the year-ago quarter and 2.0% from the previous quarter. Earnings met the mid-point of management’s guided range of 50 cents to 52 cents per share.

Including stock-based compensation expense and amortization of capitalized stock-based compensation, earnings were 42 cents per share, much better than the Zacks Consensus Estimate of 34 cents. The positive surprise was primarily driven by strong revenue growth and margin expansion in the quarter.

Revenues

Revenues jumped 15.2% year over year but declined 2.6% quarter over quarter to $368.0 million, slightly ahead of the Zacks Consensus Estimate. Revenues were also ahead of management’s guided range of $352.0 million to $362.0 million. Excluding Akamai’s Advertising Decision Solutions (“ADS”) business, divested in late January, revenues increased 18.1% year over year but remained flat on a sequential basis.

The strong growth in revenues was primarily driven by better performance from most of the solutions. Revenues from Media delivery solutions grew 16.9% year over year and 3.6% quarter over quarter to $181.2 million, primarily driven by higher traffic.

Performance & security solutions revenues jumped 16.9% year over year but declined 3.9% on a sequential basis to $156.6 million. The year-over-year growth was due to higher demand for Akamai’s security solutions. Service & support systems achieved the strongest revenue growth in the quarter, up 34.8% year over year and 2.9% sequentially to $27.5 million.

Region wise, revenues from North America (70% of total revenue) jumped 12.0% year over year but decreased 4.0% sequentially. International revenues (30% of total revenue) jumped 26.0% on a year-over-year basis and 3.0% sequentially in the quarter. Resellers represented 20% of total revenue in the quarter.

Margins

Gross margin expanded 330 basis points (bps) year over year and 90 bps sequentially to 75.6%. 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 250 bps on a year-over-year basis but declined 390 bps sequentially to 36.7%. The year-over-year growth in expenses was primarily due to higher sales & marketing (S&M) expense, up 170 bps in the quarter. Both research & development (R&D) and general & administrative expenses (G&A) increased 50 bps in the quarter.

Sequentially, the strong decline in operating expenses was due to lower S&M expense, which decreased 560 bps and fully offset a 60 bps increase in R&D and 120 bps surge in G&A expense.

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin increased 50 bps on a year-over-year basis but decreased 70 bps sequentially to 45.1%. Operating margin expanded 80 bps from the year-ago quarter and surged 480 bps sequentially to 38.9%. The strong growth was driven by higher revenue and gross margin base.

Net income as percentage of revenues was 20.4% compared with 15.5% in the year-ago quarter and 19.3% in the previous quarter.

Balance Sheet & Cash Flows

Akamai exited the quarter with cash and cash equivalents (including short-term marketable securities) of $513.2 million compared with $437.6 million in the prior quarter. Akamai generated cash flow from operations of $103.0 million in the reported quarter versus $146.9 million in the previous quarter. Akamai repurchased 1.1 million shares for $40.0 million in the quarter.

Guidance

Akamai expects revenues in the range of $368.0 million to $378.0 million for the second quarter of 2013. This represents 15.0% to 18.0% year-over-year growth. Akamai expects gross margin of approximately 76.0%. Operating expenses are projected to be up about $9.0 to $11.0 million sequentially. Akamai expects adjusted EBITDA margin to be in the range of 42.0% to 43.0% for the second quarter.

Earnings are expected to be between 44 cents and 46 cents per share, including tax charge of $40 million to $43 million. Akamai forecasts capital expenditure (excluding equity-based compensation) of approximately $75.0 million to $80.0 million for the forthcoming quarter.

Our Take

We believe that strong demand for cloud infrastructure solutions, security, mobile products and online video will drive top-line growth going forward. Akami’s products such as the Aura network solutions have been chosen by the likes of AT&T (T - Analyst Report), Orange, Swisscom and Korea Telecom.

Moreover, Akamai’s superior content delivery platform has been selected by the likes of Apple (AAPL - Analyst Report) and News Corp. (NWS - Snapshot Report) due to its ability to provide high-quality service at a much lower rate compared to its peers. Additionally, Akamai’s dominance in the web application business is a significant growth catalyst going forward.  

Akamai continues to manage its server networks in an efficient way, which is expected to reduce depreciation expense going forward. This will further boost gross margins. Moreover, aggressive share repurchase ($119.0 million remains under the current program) will boost its profitability in 2013.

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 #3 (Hold).

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