Analyst Conference Summary

conference date: February 5, 2014 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2013 (Q4, fourth quarter)

Forward-looking statements

Overview: Seasonally strong Q4 with good y/y revenue gains.

Basic data (GAAP) :

Revenue was $436.0 million, up 10% sequentially from $395.8 million and up 15% from $377.9 million in the year-earlier quarter.

Net income was $80.3, up 1% sequentially from $79.8 million, and up 18% from $68.3 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.44, flat sequentially from $0.44, but up 16% from $0.38 in the year-earlier quarter.

Guidance:

Guidance includes the new pricing terms for Akamai's largest media customer. Since the Prolexic acquisition has not closed, it is not included in guidance.

Q1 revenue estimated between $426 to $442 million, which would be 17% to 21% y/y growth when adjusted for the ADS divestiture and foreign exchange rates. Cash gross margin 78%, GAAP gross margin 68%. Non-GAAP operating expenses between $145 and $150 million.

Q1 non-GAAP EPS expected between $0.51 and $0.55. Share count, diluted, 182 million. Capital expense planned for $72 to $77 million.

Conference Highlights:

Record quarter with revenue and earnings exceeding the high end of guidance. Revenue exceeded expections in every geography and service category.

Revenue growth would be up 20% y/y if adjusted for the ADS divestment.

Renegotiations with largest media customer did not affect the quarter. Seasonal increases in media delivery were better than expected.

Non-GAAP numbers: net income was $100 million, up 11% sequentially from $90 million. EPS was $0.55. Adjusted EBITDA was $192 million. Non-GAAP numbers exclude $50.0 million in amortization and depreciation, $23.7 million in stock-based compensation, $27.3 million in provision for deferred income taxes, and other misc. charges.

Both GAAP and non-GAAP net income (and EPS) include a $6 million or $0.03 per share benefit from a change in depreciation methodology.

GAAP gross margin was 69%, up 6 points from Q4 2012, expanding from network efficiencies.

Media delivery revenue was $207, up 10% sequentially from $189 million and up 19% from Q4 2012.

Performance and security revenue was $192 million, up 11% sequentially from $174 million and up 18% y/y.

Service and support revenue was $36 million, up 11% sequentially from $33 million and up 36% y/y.

29% of revenue was from international markets. Revenue was up 12% sequentially and 20% y/y, excluding exchange rate adjustments.

21% of revenue was through resellers.

Cash and securities balance ended at $1.2 billion. Cash from operations was $171.7 million. $48 million was spent on share repurchases. Depreciation and amortization was $50.0 million. Capital expenditures $63 million, slightly above guidance.

Cost of revenue was $134.0 million. R&D expense $26.5 million. Sales and marketing $82.1 million. General and administrative is $71.9 million. Amortization $4.9 million. Restructuring less than $1 million. Leaving operating income of $115.8 million. Interest and other income was $1.1 million. Income tax provision $36.5 million.

Intends to operate in the low 40s EBITDA margin over time.

Prolexic acquisition is in regulatory review process, so there is no data certain. Current revenue run rate is $5 million per month. Will be dilutive to earnings in the first 12 months.

Akamai management believes the amount of Internet traffic will continue to grow rapidly. This quarter Akamai provided streaming for the Super Bowl and will also deliver streaming from the Winter Olympics. Securities solutions are also expected to be an area of rapid growth for Akamai, with 800 customers by the end of the quarter.

Q&A:

Is the major contract renewal in force? We agreed to pricing, but their are details that need completion before the contract is signed.

Productivity in performance and security? There was a need to get the reps productive. The sales force began ramping in the 2nd half of 2012. Reps are now tracking as expected by tenure class. Bookings were strong in Q4 and we expect strong growth in 2014.

Q1 seasonality, what offsets the price decline at the large customer? The business in general is strong across the board. The price reduction will have a significant impact.

Investment in sales in 2014? We will continue to invest, but have no specific guidance. The rate could be expected to be similar to the 2013 rate.

Net neutrality? The controversy has had no meaningful impact on our business. There might be a deal or two in Germany that may take longer. CDNs were excluded from net neutrality regulations. We have deep partnerships with the carriers, so anything favorable to them is likely to be favorable to us.

E-commerce in Q4? Holidays have more than a commerce effect. New device sales drive a lot of traffic, including software downloads. Game releases too. We saw strong growth in social media, downloads, gaming, and media. We had a strong commerce season as well.

Our plan is to grow the company at an 18% compounded annual growth rate.

Verizon, Edgecast relationship? The digital group within Verizon purchased Edgecast. They were a competitor in the past and will remain so. Akamia has a relationship with Verizon through their Enterprise Services. That relationship is stable. However, it is a situation Akamai is closely monitoring.

How many sales people? 310 at end of year, 2 above plan. That is up 95 in the year. We will add reps at a similar pace in 2014. Expansion is weighted to international markets.

The Olympics will be immaterial to revenue in Q1, but it is a proof of capabilities.

Our acquisition strategy is to help our customers and grow Akamai. We may buy a company that has no significant revenue if we see potential in its technology.

Carrier business progress? Excellent. We focus on leading global carriers. I hope you will see an impressive group of new carrier relationships with Akamai this year.

Hybrid cloud optimization? We have our technology deployed in stores on a trial basis. Feedback has been good. We are in the early stages of this technology, not forecasting meaningful revenue this year.

Akamai has no 10% customers. One customer was close to that.

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