Akamai technologies (NASDAQ:AKAM), one of our top stock picks for over three months, announced its Q4 2013 and full year 2013 results yesterday (Jan 5) after market close. The company reported a record quarter in terms of growth as well as margin expansions at the gross levels. The company’s quarterly performance is summed up perfectly by the post-hours trading activity following the Q4 2013 conference call. AKAM stock gained 17.84% in after-market hours trade following the release of the latest quarterly numbers by the company. We update our outlook based on the Q4 numbers and also review the Q4 2013 performance.
Q4 2013: Performance highlights from a record quarter
Akamai reported a record quarter both in topline growth and margin expansions. The company came ahead of analyst estimates on both the topline as well as earnings per share (EPS) estimates. The actuals v/s guidance v/s estimates is summarized in the table below.
Akamai Q4 2013 Earnings
|Revenue ($ in millions)||421.5||422.39||436|
|Earnings per share (EPS in $)||0.51||0.52||0.55|
*As per consensus estimates on Streetinsider.com
The company beat the revenue guidance by a mile, with actual Q4 2013 revenues coming in higher than $430, the high end of the management’s guidance. The actual revenue came in 3.2% higher than the analyst estimates and the reported EPS 5.8% higher than analyst’s consensus estimate. We now view the revenue and earnings numbers from another angle, the Y/Y growth rate.
|Q4 2012||Q3 2013||Q4 2013||QoQ Growth||YoY Growth|
|Revenue (in millions USD)||378||396||436||10.1%||15.3%|
|Earnings (EPS in $)||0.54||0.50||0.55||10.0%||1.9%|
The company registered solid topline growth of 15.3% Y/Y and 10.1% on a sequential basis. The growth in EPS was 10% Y/Y and sequential growth of 2%.
The topline growth jumped ahead of management guidance as the price renegotiation with the company’s largest customer did not impact Q4 revenues. Also the strength of holiday season exceeded prior expectations. The revenue growth was driven by growth across all the segments with media delivery solutions, up 19% Y/Y, performance and security solutions up 18% Y/Y and services and support growing 36% on a Y/Y basis. The overall revenue growth, adjusted for the ADS divestiture in early 2013, was healthy at 21% Y/Y.
Let’s take a look at the profit margins of the company. Akamai has a strong history of profitability and this quarter was no different. The company saw a 7% expansion in gross margins over Q4 2013. The increase in operating margin and net Income margin was, 1.4% and .4% over Q4 2013. The gross margin expansion was mainly on account of operating leverage resulting from the company’s co-location facilities. The company improved its platform efficiency which saw the number of servers increase by 50% without any resultant increase in co-location expenses. Going forward, the company is expected to operate at 70% gross margin levels on account of the current platform efficiency in place will enable scaling up operations at these margins.
The gross margin expansion did not result in operating margin expansion as the company continued to hire and invest while maintaining healthy profit margins. The selling, general and admin expenses kept pace with the company’s hiring, up 33% on a Y/Y basis. The table below shows the companies profit margins over the last few quarters.
The operating margins have been stable even as the company has improved its gross margins on account of improved platform efficiency.
Akamai continued to generate significant amount of cash with the cash flow from operations up 12.5% Y/Y. The free cash flow margin was healthy at 25.1%, a 1 point expansion over the Q4 2012 margin. The company ended the quarter with cash, cash equivalents and marketable securities of $2 billion, a Y/Y increase of 13%.
Q1 2014 guidance
While the past performance is good, past is what has been. The market values future potential which is, more often than not, the deciding factor in a company’s valuation. The company will continue to grow at a rate of 20% - 22% with Prolexic acquisition likely to impact the company’s numbers in Q2 2014. The company will continue to see immediate growth across segments and geographies, apart from potential long term growth driven by its Hybrid cloud option. The company guided Q1 2014 revenue in the range of $426 - $442 million, representing a 19% Y/Y growth at its midpoint, after adjusting for the ADS divestiture. EPS guidance was 51-55 cents per share in earnings per share, representing a 4% Y/Y growth at its midpoint.
Considering the current operating metrics of the company and the lower than expected negative impact of price negotiations on future revenue, we reiterate our long term positive outlook on Akamai Technologies. We expect the company to grow at a rate of 20% - 22% in 2014 after accounting for the acquisition of Prolexic. Keep reading to see our updated valuation of Akamai Technologies post the Q4 2013 numbers. Happy investing!!
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