Akamai Technologies (NASDAQ:AKAM), a provider of online content delivery solutions for enterprises, has been one of our top stock picks for over three months now. Following Verizon’s acquisition of Edgecast, Akamai’s competitor, the company saw a momentary dip in stock price, which was an entry point for investors keen to take long term positions in the stock. The company is all set to report its Q4 2013 results on Feb 5 after market hours. We take a look at the company’s performance in 2013 and what to expect in the Q4 results.
The company has registered topline growth close to 15% in the first three quarters of 2013. The table below represents the company’s Y/Y and Q/Q growth over the last four quarters.
As mentioned in Q3 2013 conference call, Akamai will see a potential slowdown in revenue growth, in Q4 2013 or Q1 2014, on account of a renegotiation with its largest customer. However, the quarter also saw the company win new customers in IBM and Cisco, apart from a new CDN contract with AT&T. We feel, the new contracts could compensate or reduce the impact of the renegotiations on revenue in the coming quarters and beyond.
The company maintained healthy profit margins over the first three quarters of 2013. The company saw operating profit margins of greater than 25% in each of the last four quarters and we expect the company to report operating margins close to 25% in Q4 2013. The Net Income margin over the last four quarters has been in the range of 16.4% to 20.2%. The profit margins could be negatively impacted depending on the renegotiations expected to happen over this quarter or Q1 2014.
The company’s profit margins over the last four quarters are displayed in the table below.
|all values in %||2012 Q4||2013 Q1||2013 Q2||2013 Q3|
|Operating income margin||25.3||27.5||25.8||25.1|
|Net income margin||18.1||19.4||16.4||20.2|
Cash flow analysis
The company has maintained a healthy free cash flow (FCF) margin in each quarter for over a decade, irrespective of the competitive challenges faced. While the average FCF margin over the last four quarters has declined Y/Y, the FCF margins stayed healthy at average margins of 23%, inspite of a 22% increase in the Capex over the same period. The fall in FCF margins is largely due to the increased investment in Capex (Capital expenditure), which the company has undertaken over the last four quarters. However, the average FCF margin is healthy at its current rate. In the coming quarters, we expect the FCF margin to stay in the range of 25% to 30%.
Akamai Q4 2013 guidance
The Q4 2013 revenue guidance provided by the management in its Q3 2013 earnings call was in the range of $413 to $430 million, putting the Y/Y growth in the range of 14% to 19%, adjusting for the ADS divestiture in Q1 2013. The earnings per share guidance of 49-53 cents per share, at its midpoint, represents a drop of 3 cents over Q4 2012.
Earnings surprise history
According to streetinsider.com, Akamai beat revenue and earnings guidance in seven out of the last eight quarters, missing once on topline estimates and equaling earnings estimates in one quarter. The average revenue beat over the last four quarters was 1.3%, and combined with an average earnings surprise of 6.3% over the same period, the company has a very strong track record of trumping analyst estimates.
We expect that the company will report revenues above the guidance or at the top end of the range. On the earnings front, the Y/Y drop in the EPS is along expected lines as the Op-ex has increased on account of hiring and other related investments. On a cautionary note, investors will be better off by including any negative impact of renegotiation agreements into their investment decisions. We will of course update you with our post earnings analysis of this favourite stock of ours. Do check our other top stock picks.
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