Akamai (AKAM) Down Despite Q4 Earnings & Revenue Beat

Shares of Akamai Technologies Inc.AKAM fell 3.7% in after-hour trading following the company's fourth-quarter 2016 results. The decline apparently reflects conservative management guidance, which now expects margins to remain under pressure in the near term, due to continuing investments on new growth avenues like Enterprise Solution portfolio.

However, Akamai believes that these investments will drive top-line growth in the long term. Management plans to re-accelerate the top-line growth back into double-digit levels in the long term.

Adjusted earnings (including stock-based compensation expense and amortization of capitalized stock-based compensation) of 55 cents per share beat the Zacks Consensus Estimate by 2 cents.

Adjusted earnings (excluding stock-based compensation expense and amortization of capitalized stock-based compensation but excluding all other non-recurring items and related tax impact) of 72 cents remained flat on a year-over-year basis but increased almost 6% sequentially.

Akamai Technologies, Inc. Price, Consensus and EPS Surprise

Akamai Technologies, Inc. Price, Consensus and EPS Surprise | Akamai Technologies, Inc. Quote

Revenues of $616.1 million beat the Zacks Consensus Estimate of $606 million and rose almost 6.4% from the year-ago quarter (up 7% adjusted for foreign exchange) and 5.5% from the previous quarter. The revenues were better than management's guided range of $593-$613 million. The growth was driven by strong holiday season media traffic.

Excluding Internet Platform Customers, revenues increased 14.4% year over year (also 15% adjusted for foreign exchange) and 6% quarter over quarter.

Revenues from Internet Platform Customers were $58.4 million, plunging 36.3% year over year (down 40% adjusted for foreign exchange) primarily due to the company's do-it-yourself (DIY) initiatives of building CDN. Sequentially, revenues from Internet Platform Customers inched up 0.6%. AMZN , Apple AAPL , Facebook FB , Google, Microsoft, and Netflix are the six large customers in the Internet Platform group. Collectively these six companies accounted for less than 10% of the Akamai's fourth-quarter 2016 revenues down from almost 16% in the year-ago quarter.

Adjusted earnings were $2.70 per share, up 7.1% driven by revenue growth of 6.5%, which totaled $2.34 billion in full year 2016. Revenue excluding Internet Platform Customers was $2.09 billion, up 15% from 2015. Cloud Security Solutions revenue was $365 million, up 43% on a year-over-year basis (up 44% when adjusted for foreign exchange).

Segment Details

Effective second-quarter 2016, Akamai started reporting its business under three main divisions - Media, Web and Enterprise and Carrier. This marks a shift from the earlier product-focused structure to a customer-focused structure.

Media Division - Revenues declined 0.5% year over year (flat when adjusted for foreign exchange) but up roughly 5.9% sequentially to $300.8 million. Excluding Internet Platform customers, revenues advanced 15% from the year-ago quarter.

Web Division - Revenues increased 13.4% year over year (up 14% adjusted for foreign exchange) and 5.5% sequentially to $300.3 million. Growth was driven by strong customer base, especially with regard to the cloud security business.

Enterprise and Carrier Division - Revenues of $15 million surged 26.2% from the year-ago quarter (43% adjusted for foreign exchange) but declined 2.1% on sequential basis.

However, in order to give better perspective to its investors, the company continued to report results per its old structure (solution category-wise).

Performance & security solutions revenues were up 16.7% year over year (19% adjusted for foreign exchange) to $367.4 million. Of it, $102 million was generated from Akamai's cloud security solutions, which surged 41% on a year-over-year basis.

Service & support system revenues rose 14.4% year over year to $52.6 million while Media Delivery solutions sales declined 10.2% year over year to $196.1 million. Excluding the six large Internet platform customers, Media Delivery revenues were up 8% year over year.

On a sequential basis, Performance & security, Media Delivery solutions and Service & support system increased 6.5%, 4.3% and 3.5%, respectively.

Operating Details

Reported gross margin expanded 30 basis points (bps) from the year-ago quarter and 200 bps to 67% in the quarter.

Akamai reported adjusted EBITDA margin of 41%, down 100 bps each both on a year-over-year and sequential basis.

As percentage of revenues, reported research & development (R&D) expense increased 110 bps year over year and 30 bps sequentially. General & Administrative (G&A) expense also increased 170 bps from the year-ago quarter but declined 40 bps from the previous quarter.

The year-over-year increase in these expenses were partially mitigated by lower selling & marketing (S&M) expense, which declined 120 bps on a year-over-year basis. However, on a sequential basis S&M increased 170 bps.

Reported operating margin contracted 110 bps on a year-over-year basis but expanded 90 bps sequentially to 20%. Adjusted operating margin declined 130 bps from the year-ago quarter but increased 40 bps from the previous quarter.

Balance Sheet & Cash Flow

As on Dec 31, 2016, Akamai's cash and cash equivalents (and marketable securities) were $837 million compared with $868.7 billion as of Sep 30, 2016. The company generated cash flow from operations of $181.8 million as compared with $251.4 million in the previous quarter.

Free cash flow was $106 million in the fourth quarter. In 2016, free cash flow soared 72% year over year to $550 million.

In the quarter, Akamai repurchased 1.3 million shares for $79 million. In full year 2016, the company spent $374 million on buying back approximately 7 million shares.


For first-quarter 2017, Akamai continues to expect foreign exchange to remain a headwind due to strengthening of the U.S dollar. Further, revenues are expected to decline sequentially due to seasonal weakness particularly in the Media business. The company expects revenues in the range of $596 million to $610 million.

Reported gross margins are expected to be 65%. Adjusted operating expenses are anticipated in the range of $217-$222 million, down sequentially.

Further, EBITDA margin is anticipated to be approximately 39-40%. Management forecasts EBITDA margins to remain in the high 30% range in 2017.

Depreciation is expected to be in the range of $74-$76 million. Adjusted operating margin is anticipated to be in the range of 27-28% for the quarter.

Non-GAAP earnings are projected in the range of 66-69 cents per share.

In terms of capital expenditure, Akamai expects to spend approximately $90-$96 million in the quarter. For full year 2017, capital expenditure would equate to 16-18% of revenues, in line with the company's long-term model of 16-18% of revenues and better than 14% in 2016.

Our Take

Akamai is likely to benefit from the rising demand for cloud infrastructure solutions, security, mobile products and online video. Additionally, it is likely to gain from its strong foothold in the web applications domain. New products like Enterprise Application Access (EAA) and the Enterprise Threat Protector (ETP) service will expand customer base going ahead.

However, DIY initiatives by the large Internet companies remain a concern for the company's media delivery business. Moreover, recently launched products like Bot Manager and Image Manager will take some time to fully penetrate the market. Hence, we don't expect revenue growth to accelerate at least in the near term.

Further, faster increase in capital expenditure and increasing headcount investment will keep margins under pressure in full year 2017.

Despite the headwinds, we believe that the company has significant growth prospect in 2017. We note that Akamai has outperformed the Zacks Internet Services industry in the last one-year. While the stock has gained 79.8%, the industry returned 18.5% over the same period.

Currently, Akamai carries a Zacks Rank #3 (Hold).

You can see the complete list of today's Zacks #1 (Strong Buy) Rank stocks here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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