Akamai (NASDAQ:AKAM) announced record results for Q4 2011 after the markets closed on Wednesday blowing away its own revenue guidance for the quarter and sending its shares up by almost 13% in after-hours trading. Revenue for the quarter grew 14% year-over-year and 15% sequentially, the company’s largest quarter-over-quarter growth ever, to $324 million and exceeded the high end of the revenue guidance they had given during the previous earnings call. With this, the company has now enjoyed double-digit y-o-y percentage growth in revenues for five consecutive quarters. Moreover, the company also saw its net income rise 14.4% over the year earlier quarter to $60.1 million.
These are good signs for the company as it heads into 2012, and we expect the Cotendo and Blaze acquisitions to help Akamai increase its top-line and protect its margins for its value-added offerings. However pricing pressures that Akamai has been facing from competitors such as Limelight Networks (NASDAQ:LLNW), Edgecast and Level 3 (NASDAQ:LVLT) for its core content delivery network (CDN) service may continue to be a deterrent.
An exceptionally strong holiday season
In our earnings preview, we talked about how a seasonally strong fourth quarter should help Akamai meet its revenue guidance. And, as it turns out, the quarter was exceptionally strong as a spurt in online retail and advertising spending during a solid holiday season saw its commerce vertical increase 20% compared to last year and 25% sequentially. At almost 35% of Akamai’s total value, this division is the most important to our price estimate for the company.
The next largest business is the M&E, or the media and entertainment vertical, which grew 11% year-over-year and 17% sequentially, as traffic growth accelerated through the quarter. The two other verticals, the high-tech and the public sector, also posted good revenue growth over Q4 2010. Increased customer adoption of the company’s value-added solutions contributed to the strong performance of all the verticals. This segment grew 20% y-o-y and now make up 58% of the total revenue, up from 55% last year.
Continued growth in Akamai’s value-added offerings helped the company stem the sequential decline in gross margins, which have of been under pressure by the pricing declines seen in the overall CDN industry. The company’s gross margin for the quarter improved more than 200 basis points over the previous quarter and was the highest for the year.
Heading into 2012, this is a very good sign for the company which has also made two crucial acquisitions that will bolster its value-added service portfolio.
While the Cotendo acquisition was announced towards the end of last quarter, Akamai also announced that it has now completed the acquisition of another value-added service provider, Blaze. Both of these acquisitions will not only reduce pricing pressures but also allow Akamai to strengthen its value added portfolio and help it gain share within the broader CDN market.
Having a strong value-added service portfolio to augment its core CDN business will enable it to price its combined services at higher price points, and the company may also see an increase in its average revenues per customer (ARPU) over time. (see Akamai’s Cotendo Deal Would Add Margin Upside & Growth to Current $33 Value)