- Akamai reported its Q4 2014 earnings after the market close on February 10, beating analyst estimates on revenue as well as earnings.
- We expect the earnings growth to continue over the long term led by increased demand for media delivery services and internet security services.
- Our Akamai stock analysis reiterates our positive long term outlook on Akamai.
Akamai Technologies (NASDAQ: AKAM) earnings for Q4 2014 were reported after the market close yesterday (February 10). Akamai beat analyst estimates on both topline as well as bottomline, which was along our expectations as stated in our Akamai earnings preview. The strong result saw Akamai stock price move up by 4.9% in after-hours trade, following the earnings announcement. The stock has been among our top stock picks for over a year, gaining 36% since its addition. We today update our outlook post the latest Akamai earnings release and review our outlook on the stock.
Analyst earnings v/s analyst estimates
Akamai beat analyst estimates on both the topline as well as bottomline. The company reported non-GAAP earnings of 70 cents on revenue of $536.3 million, higher than the analyst consensus estimate of 64 cents earnings on $526.2 million revenue. The company delivered a 9.5% earnings surprise on a revenue beat of 1.9%. Akamai earnings were in line-line with its recent earnings history, delivering a sixth consecutive earnings surprise.
Akamai earnings summary Q4 2014
Akamai reported yet another quarter of solid growth in revenue as well as earnings. The company reported a 22% YoY growth in GAAP earnings accompanied by 23 % YoY growth in topline. The revenue growth was marginally lower than the 25% average growth reported through the first 3 quarters of 2014. However, forex adjusted revenue growth of 25% was in-line with revenue growth through 2014. The Q4 2014 revenue and earnings performance is summarized in the table below.
|Q4 2013||Q3 2014||Q4 2014||QoQ growth||YoY growth|
|Revenue (in millions of $)||435980||498042||536295||7.7%||23.0%|
|GAAP EPS diluted ($)||0.44||0.50||0.54||6.6%||21.8%|
Akamai revenue growth was driven largely by broad based growth across all the three operating segments of ‘Media Delivery Solutions’, ‘Performance and Security Solutions’ and ‘Service and Support Solutions’.
- Media Delivery Solutions: 21% YoY growth contributing 46.6% of total revenue
- Performance & Security Solutions: 25% Y/Y growth contributing 44.7% of total revenue
- Service & Support Solutions: 28% Y/Y growth contributing 8.7% of total revenue
The impact of the fastest growing ‘Service & Support Solutions’ segment continued to be marginal due to the relatively small revenue base of the segment.
Akamai Q4 2014 profit margin analysis
The gross profit margin came in at a high of 69.6%, a 30 basis point expansion over the year ago quarter and a 150 basis point expansion on a QoQ basis. However, the operating income margin and net income margin continued to contract for the third straight quarter in a row.
|Q4 2013||Q3 2014||Q4 2014||QoQ change||YoY change|
|Gross profit margin||69.3%||68.1%||69.6%||1.5%||0.3%|
|Net Income margin||18.4%||18.3%||18.1%||-0.2%||-0.3%|
The gross profit margin continued to expand on a YoY basis, which was also seen in the preceding two quarters. However, the gross margin expansion was offset by a 27% YoY growth in operating expenses, driven by a 34% growth in sales and marketing expenses. The growth in operating expenses outpaced topline growth, leading to contractions in profit margins at the operating and net levels.
The profit margin contractions were in line with the management’s commentary in the earlier quarters. The planned ramp up in operational expenses drove margin contractions, leading to a slower growth in earnings as compared to revenue growth.
Akamai Q1 2015 guidance
Akamai management issued the following guidance for Q1 2015.
|High end||Low end||Average|
|Revenue (in Millions of $)||534||517||525.5|
|Gross profit margin||68%||68%||68%|
|Non-GAAP depreciation (in Millions of $)||60||59||59.5|
|Non-GAAP operating margin||31%||30%||30.5%|
|Non-GAAP tax rate||32%||32%||32%|
|Non-GAAP EPS ($)||0.63||0.60||0.62|
Using the midpoints of the management guidance, historical performance and management’s commentary, we modelled Akamai’s Q1 2015 performance as shown in the table below.
|Q1 2015 (in millions of $, except per share numbers)||Non-GAAP|
|Number of shares (in millions)||181|
AKamai: A positive long term investment
The Q1 2015 guidance midpoint implies a 11% growth in earnings on a revenue growth of 16 % YoY. The revenue growth is lower than Q1 2014 on account of tougher comparable numbers and forex headwinds. The profit margins will continue their minor decline with the management reiterating its long term EBITDA margin range of 41%-42%. The declining margins will slow earnings growth as compared to the topline growth. The consistent profitability, strong growth and reasonable valuations (LTM PE ratio of 33.8) make Akamai an attractive stock for the long term. Our Akamai stock analysis reflects our positive long term outlook on the stock, which was strengthened by the latest earnings report.
Akamai Earnings Preview
-- Akamai Q4 2014 Earnings Preview (published on January 23, 2015)
- Akamai is scheduled to report its Q4 2014 earnings after the market close on Feb 10.
- The analyst consensus is for the company to report earnings per share of 64 cents on revenue of $526.5 million.
- We expect the company to beat the consensus estimates, and our Akamai stock analysis assigns the stock a buy rating.
Akamai Technologies (NASDAQ: AKAM), the global content distribution services provider is scheduled to report its Q4 2014 results after the market close on Feb 10th 2014. Solid eCommerce growth in holiday season 2014 along with a significant increase in video consumption will drive Akamai revenue in the holiday quarter. The current analyst consensus is for the company to report earnings per share (EPS) of64 cents on $526.5 million revenue. We look at the company’s Q4 performance, management guidance and analyst estimates and what more expect from the upcoming Akamai earnings release.
Akamai Operating Segments
Akamai reports its operations under three operating segments; media delivery solutions, performance and security solutions and service & support solutions. The media delivery solution segment, mainly compromising of Akamai’s content delivery network, is the largest contributor to Akamai topline, having contributed 47% of total last twelve month (LTM) revenue.
Akamai Q4 Earnings: Revenue Growth Drivers
Tom Leighton, CEO of Akamai, said on the Akamai Q3 conference call “the holiday season is largely impacted by traffic to Akamai’s e-commerce customers and traffic to their large media customers.” Let’s look at these two components in a greater detail.
In an earlier post, we had highlighted that eCommerce growth in holiday season 2014 will be robust. In our recent preview into Q4 2014 Amazon earnings, we had also highlighted the strong third party sales, which was a confirmation of our e-commerce expectations for Q4 2014. ChannelAdvisor, in its December same store sales report, also highlighted that the holiday season sales registered strong growth of 16.2% YoY. All the data points and reports lead to a single conclusion: e-commerce growth through the holiday season was strong. Akamai will be the indirect beneficiary of this growth as it has a number of e-commerce customers.
Moving over to the video consumption market, online video consumption could be driven by online video streaming viewers growth of 60% YoY, as highlighted in a reelseo.com post. The growth in online video consumption will once again be a driver of Akamai media delivery solutions segment, which will significantly drive Akamai topline.
Akamai Management Guidance
The management had issued the following guidance for Q4 2014, at the time of its Q3 earnings call.
|High end||Low end||Average|
|Revenue (in Millions of $)||535||515||525|
|Gross profit margin||69%||69%||69%|
|Non-GAAP depreciation (in Millions of $)||57||56||56.6|
|Non-GAAP operating margin||33%||32%||32.5%|
|Non-GAAP tax rate||34%|
|Non-GAAP EPS ($)||0.66||0.61||0.635|
In our Akamai Q3 2014 earnings review, we had modelled the management guidance to arrive at a Q4 EPS estimate of 64 cents on revenue of $525 million.
Akamai Earnings: Analyst Estimates
|Q4 2013||Q4 2014 Analyst Estimate||YoY growth|
The current analyst consensus estimate lies marginally higher than the midpoint of management guidance on both revenue as well as earnings, implying 21% YoY revenue growth and 16% YoY EPS growth.
Akamai Earnings History
Akamai has a solid track record of earnings surprises and revenue beats. The company has beaten the streets estimates in 8 out of 9 previous quarters, delivering an average revenue beat of 2% and average earnings surprise of 5%.
In conclusion, given the strong growth in the e-commerce and online video consumption, Akamai revenue growth for Q4 will be strong. However, the management’s focus on investing will once again see earnings growth trail revenue growth. Given the strong earnings history, the strong business dynamics and the management’s balance between profitability and growth, we expect the company to report ahead of analyst estimates in the upcoming earnings release. Our Akamai stock analysis assigns the Akamai stock a buy rating, with a current target price of $67, implying an upside 12% from the last closing price on October 27.