What's In Store For Akamai (AKAM) This Earnings Season?

Akamai Technologies Inc. (NASDAQ:AKAM) is set to release first-quarter 2017 earnings on May 2. Notably, the company has a mixed record of earnings surprises in the trailing four quarters, with an average surprise of 1.50%.

Last quarter, the company posted a positive earnings surprise of 3.77%. 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.

Revenues of $616.1 million beat the Zacks Consensus Estimate of $606 million. Further, it rose almost 6.4% from the year-ago quarter (up 7% adjusted for foreign exchange) and 5.5% from the previous quarter.

Despite the earnings and revenues beat, shares of Akamai have underperformed the Zacks Internet Services industry on a year-to-date basis. While the industry gained 11.2%, the stock lost 6.7%.

The decline apparently reflects conservative management guidance, which expects margins to remain under pressure in the near term, due to continuing investments on new growth avenues like Enterprise Solution portfolio.

Moreover, Akamai anticipates foreign exchange to remain a headwind due to strengthening of the U.S dollar in the first quarter. 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–$610 million.

Reported gross margin is 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%. Finally, non-GAAP earnings are projected in the range of 66–69 cents per share.

Let’s see how things are shaping up for this announcement.

Factors to Consider

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 Amazon.com (NASDAQ:AMZN) , Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Google (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), and Netflix (NASDAQ:NFLX) remain a concern for the company’s media delivery business.

Moreover, new 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.

Furthermore, the dilutive impact of the recently announced SOASTA acquisition is also a concern in our view. (Read More: Akamai Set to Acquire SOASTA, Stock Falls on Dilutive Impact)

Earnings Whispers

Our proven model does not conclusively show that Akamai is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: Akamai’s Earnings ESP is -3.85%. This is because the Zacks Consensus Estimate of 52 cents is higher than the Most Accurate Estimate of 50 cents per share. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Akamai carries a Zacks Rank #3, which when combined with a -3.85% ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies that, as per our model, have the right combination of elements to post an earnings beat this quarter:

AMETEK Inc. (NYSE:AME) with an Earnings ESP of +1.79% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Avid Technology Inc. (NASDAQ:AVID) with an Earnings ESP of +160.00% and a Zacks Rank #2.

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