AKAM
Akamai

conference date: February 7, 2007
for quarter ending: December 31, 2006 (4th quarter)
Forward-looking statements

Overview: Strong growth and increased revenue guidance for 2007.

Basic data:

Revenues were $125.7 million, up 13% sequentially and up 52% year-over-year from $82.7 million.

GAAP net income wa $20.6 million, up 47% sequentially. Earnings per share were $0.12, also up 47% sequentially.

"Normalized" net income was $47.5 million or $0.27 per share, up 14% sequentially, up 82% year-over-year.

Cash and equivalents ended at $434.5 million. $22.6 million was generated from operations in the quarter.

Guidance:

2007 revenue to grow to $610 to $625 million. Normalized EPS of $1.26 to $1.30. Same directional trends to margins (lower) due to increased depreciation and larger deal sizes with higher discounts. Expects Capital Expenditures to keep same 16 percent of revenues as in 2006. Equity compensation around $0.36 per share.

Q1 revenue expected at $136 to $140 million. Normalized EPS $0.28.

Conference Highlights:

Nine Systems Corporation acquisition closed December 13, and 18 days of income from Nine, about $800,000.00 was included in figures. Implies $15 million annual revenue run rate for Nine. Expects to be accretive to earnings for full year, but not materially impact earnings in Q1.

Agreed to acquire Netli. Expects annual run rate from them at about $15 million as well. Completion expected around March.

Announced expanded relationship with MySpace.

Part of growth was from strong holiday shopping season.

International sales were 23% of revenue. Resellers represented 19%.

Strong demand from continuing customers. Average revenue per customer (ARPU) was $18,900 up 8% sequentially.

Added 78 new customers for total of 2,347. No customer accounted for 10% or more of revenue.

GAAP gross profit margin was 77%, about 1/2 point lower than prior quarter. Cash gross margin 84%, also down 1/2 point.

Operating expenses were $70.7 million (cash portion was $53 million). Cost of revenues was $28.6 million; R&D $9.1 million; sales and marketing $34.3 million; general and administrative $25.2 million; amortization $2.0 million. Total depreciation and amortization was $11.8 million. Capital expenditure was $22.9 million.

Book tax rate is 42%, but cash tax rate is 2% due to carryovers.

Equity-related compensatino expense was $14.9 million.

Operational efficiencies helped drive strong results.

Seven of top ten user content sites on Web use Akamai. Software distribution also very strong contributor to growth, including Sony, Nintendo, and Adobe. E-commerce demand for Akamai also grew strongly; over 50 new customers in last six months.

We believe consumer demand for online content, including video, will grow rapidly for the forseeable future.

Q&A:

ARPU improvement source? 7% ARPU growth prior quarters, 8% this quarter. Momentum across all segments. Netli and Nine are likely to be slightly dilutive to ARPU.

Guidance $610 to $625 million include Nine and Netli? Yes. Growing faster than previously expected. Seems to be continuing in this direction. They were surprised by pace of application growth.

Netli? Expect not to have to add capital expenditures for them. Will transfer their protocol to Akamai's existing platform. Will drive incremental revenue but be neutral to earnings until 2008. Like Akamai, Netli saw importance of network layer performance.

Vertical revenues? Will not break out each quarter. Media and entertainment a big contributor. Software distribution strong growth was a surprise. Strong growth in application space, flood of activity business to business and business to consumer. Realizing value of Akamai services for quality improvements.

Competition pricing? Advantages in marketplace are that Akamai represents quality and differentiated service, so competitors have to compete on price. Our advantages are pronounced.

Vista effects? Doing both online and hard copy. Akamai has great relationship with Microsoft.

Affect sell space v. box vendors? Not in a shootout. Backend applications were put on Web, but then does not work well. They find us. Need to control quality of service. Piling on hardware does not solve all problems.

E-commerce and software download market? Faster pipes to homes is a driver. Fine tuning of web pipeline can save millions of dollars for downloads. More robust advertising driving people to sites.

Gross profit margin may be impacted by investments going forward, but will keep costs low aside from necessary investments.

What was competitive situation between Akamai and Netli? Sometimes, but not often, because it is a new, big space. They could not work in combination.

Bursting effects? Been consistent for years. Superbowl is a few hour event. Q4 had an upside because of sustained bursting of holiday shopping traffic. 70/30 ration has been normal.

Web 2.0 technology is not a cluster of companies, but is being implemented across the board. Takes new social networking startups a while to see Akamai's service is worth the cost.

Traffic growth? Strong growth, which is driving bigger deals and allows for better pricing, but sees no major shift.

Capital expenditure model? About the same as last year, Netli should not add to cap ex demand. But pace of growth on Internet keeps surprising us. Keeping server and storage capacity just ahead of demand. Mostly won't be using Netli's network; they have a much smaller one. Bought for their technology, not their physical structure.

What do acquisitions mean generally? Validates that we can innovate but are not married to just what we invented. But never backed off our own R&D. Feel the acquisitions were compatible in culture and business practices, so they will contribute quickly.

Winding down Internet reseller relationship. Won't have a material impact. Direct customer growth was faster and better quality.

Netli pricing? Still a separate company. From our end application acceleration business will allow us to sell per corporate customer, not per client. Expecting longer deals than in content space.

Is price paid for acquisition an indication of the value of their protocol? Also, we get great personel. We will break even this year and acrete next year, so that make for a very fair price.

Gross margin drop in 2007? Nothing to due with Flash streaming effects. Streaming market has been taking off last couple of years. Akamai supports all the major streaming formats out there.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2007 William P. Meyers