) announced a mixed Q4 2012 earnings on February 6. Revenues for
the quarter came in at $378 million, a 17% jump over the prior year
quarter, but it missed its guidance at the high end. The company
missed its target due to weak online holidays sales traffic. Gross
margins improved by 2% on year-over-year basis while EBITDA margins
adjusted for one time non-cash items came in at 46%. Cash
generation from operations declined to $136 million in the fourth
quarter from $141 million the previous year and at almost 36% of
its total revenues for the quarter.
The company has guided revenue range of $352 million to $362
million for Q1 2013, versus revenues of $319 million in Q1 2012.
However, the guidance is less than what the Wall Street had
hoped for, and the stock sank 15% in after market trading. The
company also announced a $150 million extension to its share
See our complete analysis for Akamai stock here
Weak Online Holiday Sales
Akamai experienced weaker than expected online holiday sales,
leading to slower revenue growth in the fourth quarter. This
coupled with the management announcing winding down of contracts of
few media accounts in the first quarter sent the stock tumbling in
after market trading. Media companies accounted for nearly 42% of
revenues in 2012, and this segment experienced a 10% decline in
growth rate in the fourth quarter from a staggering 26% in Q3 2012.
We are concerned that the slower growth rate will impact the
company, especially since the market has come to expect Akamai to
consistently post 20%+ growth every quarter.
The commerce segment picked up the slack by growing nearly 24%,
but below company expectations again due to weak online holiday
sales. This was unexpected since U.S. online holiday sales
experienced a 22.4% jump from last year, according to IBM
Digital Analytics Benchmark. If Akamai's weak online shopping sales
trend persists, we expect it be a huge headwind for the company in
2013 as it could be an indication that big online retailers are
taking their business to Akamai's competitors.
Share Buy Back
Akamai announced an additional $150 million towards its share
buy back program for the next 12 months. While this is a good thing
for investors, we believe the management could do more given its
cash flow from operations grew by 17% for the year to $530 million.
We expect more buy backs and a possible dividend reinstatement to
calm investor concerns as growth slows.
CDN Deals To Offset Slower Growth
The company is extremely bullish on its content delivery network
(CDN) partnership with AT&T. In December 2012, AT&T and
Akamai entered into a partnership under which all AT&T's CDN
services would be transferred to Akamai's network. In this regard,
the acquisitions of Cotendo and Blaze will serve to bolster gross
margins in the coming years. However, the first half of the year
will be the investment phase and this may have an impact on
operating margin. We believe the potential success with AT&T
will allow Akamai to pursue other big deals and help offset slower
growth in other segments.
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