Akamai Technologies, Inc. (AKAM -Analyst Report) reported third-quarter 2014 earnings of 56 cents per share (including stock-based compensation expense and amortization of capitalized stock-based compensation but excluded all other non-recurring items and related tax impact), which increased 22% year over year and beat the Zacks Consensus Estimate of 46 cents.

Akamai Technologies Inc - Earnings Surprise | FindTheBest

Revenues

Revenues jumped 26% year over year to $498 million, ahead of the Zacks Consensus Estimate of $489 million. The strong year-over-year growth in revenues was primarily driven by robust performance of most of the solutions.

Media delivery solutions revenues grew 22% year over year to $230.6 million driven by robust traffic growth across gaming, video and social customers.

Performance & security solutions revenues jumped 29% year over year to $224.2 million. The strong year-over-year performance was driven by robust demand for web performance and cloud security product offerings.

Service & support systems witnessed the strongest year-over-year revenue growth in the quarter, up 32% to $43.3 million. Strong service attachment rates drove revenues in the quarter.

Margins

The company reported adjusted EBITDA of $213 million in the third quarter, up from $173 million in the year-ago quarter. Adjusted EBITDA was down 100 basis points (bps) to 42.8%.

Adjusted operating margin for the third quarter of 2014 was 32%, down 100 basis points year over year. Total operating expenses as a percentage of revenues surged 200 bps on a year-over-year basis to 42.3%. The year-over-year rise in expenses was primarily due to higher sales & marketing (S&M) expense which increased 220 bps on a year-over-year basis.

Balance Sheet & Cash Flow

Akamai exited the quarter with cash and cash equivalents of $214.3 million compared with $235 million in the year-ago quarter. The company generated cash flow from operations of $173 million in the reported quarter versus $157.9 million in the year-ago quarter. Akamai repurchased 0.6 million shares in the quarter for approximately $39 million.

Our Take

We believe that strong demand for cloud infrastructure solutions, security, mobile products and online video will drive top-line growth. Akamai’s partnership with the likes of Microsoft (MSFT - Analyst Report), Cisco (CSCO - Analyst Report), AT&T (T), IBM (IBM), et. al. is expected to boost top-line growth.

Moreover, Akamai’s superior content delivery platform has been selected by Apple (AAPL - Analyst Report) due to its ability to provide high-quality service at a much lower rate than 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 expanding its sales force through new appointments, which will hurt margin in the rest of 2014, which continues to remain a concern.

Currently, Akamai has a Zacks Rank #4 (Sell).

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