Troublesome Times Ahead For Akamai Technologies

| About: Akamai Technologies, (AKAM)

Shares of Akamai Technologies (NASDAQ:AKAM) will be in the spotlight today after the Internet content delivery company forecasted current quarter revenue below analysts' expectations as the company plans to wind down some media contracts. Revenue was lighter than expectations and growth decelerated quite a bit in the fourth quarter.

The company reported fourth-quarter sales of $378 million that were below $381 million predicted by analysts on average. Also for the first quarter, the company forecasted revenue of between $352 to $362 million, well short of the $371 million estimate.

The company's shares fell more than 15% in after-hours trading.

The results marked the first quarterly earnings report for Tom Leighton, a company co-founder who took the CEO job in January.

Akamai, whose competitors include Level 3 Communications (NASDAQ:LVLT) and Limelight Networks (NASDAQ:LLNW), helps companies, government agencies and other enterprises increase revenue and reduce costs by improving the performance, reliability and security of their internet-facing operations. The company's servers across the world carry content for clients ranging from Facebook (NASDAQ:FB) to Netflix (NASDAQ:NFLX). Akamai media clients include Apple (NASDAQ:AAPL), Sony BMG, News Corp (NASDAQ:NWS), Nintendo (OTCPK:NTDOY) and NBC.

Fourth quarter revenue missed expectations as the holiday selling season was down from the 2011 level. The results also showed signs of softening demand for Akamai's services, which help customers speed up their online offerings. Online activity also showed significant weakness from 2011.

Revenues for the first quarter will be even lower because of the deceleration in the media business and the higher expense growth related to the investment in sales force and research & development. Going forward, the company sees foreign exchange headwinds and tougher year-over-year comparisons, given it had the acquisition of Cotendo in 2012.

CFO Jim Benson had his own excuse for the disappointing revenue forecast:

What you're seeing us do is in a handful of cases where we're choosing to wind down a relationship and a contract with a customer because it doesn't have the economics that we're looking for and it isn't of strategic value long term for Akamai.

Source: Earnings Call Transcript @ Seeking Alpha

Though the company said it expects AT&T to become a very significant channel partner going into 2014, CFO during the call made it very clear that first half of the year will be nothing but an investment phase.

I can comment a little bit about the kind of the rate and pace. So obviously, beginning in Q1, I would say the first half of the year is going to be more of an investment phase where both companies are going to be making an investment in the partnership.

AT&T (NYSE:T) agreed to partner with Akamai on content delivery network (CDN) services in December, and transfer its existing CDN operations, customers and services to Akamai's platform. Our friend here at SeekingAlpha gave an excellent review of the deal, and why Akamai might have paid too much.

Akamai also said it has expanded its share repurchase authorization to an additional $150 million over the next 12 months, mostly to offset dilution from equity compensation programs. The company purchased 4.4 million of its shares last year, for ~$140 million, and had 178 million shares outstanding at year's end. In Q4, the company bought back 800,000 shares for $30 million.

I believe investors should now re-evaluate their stance on the company after this dismal revenue forecast. Net income can be manipulated and sometimes get significantly affected by the non-cash charges and share buyback tactics, but a sluggish revenue growth projection by Akamai is certainly an ominous sign of the troublesome times ahead.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.