Analyst Conference Summary

conference date: October 29, 2014 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2014 (Q3, third quarter)

Forward-looking statements

Overview: Continued rapid revenue increases.

Basic data (GAAP) :

Revenue was $498.0 million, up 5% sequentially from $476.0 million and 26% from $395.8 million in the year-earlier quarter.

Net income was $91.2 million, up 25% sequentially from $72.9 million, and up 14% from $79.8 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.50, up 25% sequentially from $0.40, but up 14% from $0.44 in the year-earlier quarter.

Guidance:

Expects the usual holiday seasonality in Q4, plus foreign exchange negative impact of $6 million sequentially.

Q4 revenue expected between $515 to $535 million. Gross margins should increase slightly, to 69% GAAP. Operating expense will increase. EBITDA margin 42% to 43%, mainly depending on revenue range. Depreciation (non-GAAP) $56 to $57 million. 32-33% non-GAAP operating margin. $0.61 to $0.66 non-GAAP EPS. $90 to $95 million capital expense.

Conference Highlights:

Media revenue drove the top and bottom line growth in the quarter, but results were strong across categories and geographies. Revenue was above the high end of prior guidance.

Non-GAAP numbers: net income was $111 million, up 5% sequentially from $106 million, and up 23% y/y from $90 million. EPS was $0.62, up 7% sequentially from $0.58 and up 24% from $0.50 year-earlier. Adjusted EBITDA was $213 million, up sequentially from $204.1 million. Non-GAAP numbers exclude $28 million in stock-based compensation, $37.5 million other operating adjustments, $4.5 million debt issuance cost, and an income tax benefit of $21.8 million.

Non-GAAP EPS had a $0.02 benefit from an improved tax rate that had not been expected in the prior guidance. GAAP EPS benefited by $0.09.

Non-GAAP operating margin was 32%, down 1 point sequentially and from year-earlier.

GAAP gross margin was 68%, up 1 point sequentially. GAAP operating margin was %.

Media delivery revenue was $230.6 million, up 7% sequentially from $216.2 million and up 22% from $189.1 million year-earlier. Traffic growth was better than expected in the quarter, which is usually lighter during the summer quarter.

Performance and security revenue was $224.2 million, up 3% sequentially from $217.4 million and up 29% y/y from $173.9. Web performance growth including Ion was solid, and Cloud Security growth was very strong. Akamai now has over 1600 security customers.

Service and support revenue was $43.3 million, up 2% sequentially from $42.4 million and up 32% y/y from $32.9 million.

There is a growing problem with video congestion, especially in cellular networks. In addition web pages have grown far more complex recently, causing slow downloads when consumers expect faster downloads. Attacks on web sites are also growing rapidly in size and sophistication. Akamai is focused on solving these problems for customers.

27% of revenue was from international markets, or $135 million. Currency had slight y/y positive impact. Growth was strongest in Asia, but EMEA did well too.

25% of revenue was through resellers, up 4 points from year-earlier. This was driven by carrier partnerships. A new China Telecom partnership was announced recently.

Cash and securities balance ended at $1.6 billion. Cash from operations was $173 million. $39 million was spent on share repurchases. Capital expenditures were $83 million, below expectations. $102 million free cash flow. Factoring in convertible debt, net cash is about $900 million.

Cost of revenue was $158.8 million. R&D expense $32.6 million. Sales and marketing $96.2 million. General and administrative was $81.9 million. Amortization $8.4 million. Restructuring benefit $0.1 million. Leaving operating income of $120.2 million. Interest and other expense was $2.6 million. Income tax provision $26.4 million.

Hiring was lighter than planned during the quarter. Employees ended at , up sequentially from 4,558.

Q&A:

Remark about Do-it-yourself large Internet players? DIY is our biggest competitor. Almost all the biggest media companies have tried DIY. Akamai tries to do it at a bigger scale and a lower cost.

Media growth drivers, long term vs. seasonal? There is good reason to believe media traffic will continue to grow, and price per bit will continue to go down. There will always be some lumpiness due to big software downloads, media events, etc. Don't be distracted by the lumpiness. There is tremendous potential for traffic growth.

Performance and Security segment competition? In security we are competing with the traditional way of doing things, buying a box to protect your servers. But the attackers can generate more traffic than a box can handle. In Performance we compete with CDNs, our goal is to remain faster than these competitors. We are paying more attention to mobile and cellular devices and transaction handling. Carrier partnerships are becoming increasingly important to us, but they may sell our service under their own brand name.

Prolexic contribution? Security is our fastest growing product category, but will only break it out separate from Performance once a year.

Your multiples [p/e] shrank despite your high growth rate, could you do more share buy backs? We want to maintain cash in case we want to do an acquisition. The minimum for stock buy backs is to compensate for share dilution, but we buy more when the stock price is lower.

World Cup? It contributed in Q2 and Q3, but no one event is a major factor in Media sector. More important were Social Media, Gaming, and video delivery; all had strong growth that exceeded expectations.

China Telecom partnership? It gives us better deployment in China. It is a significant step forward for us.

Renewals in Q4? Nothing unusual coming up.

Below target in operating expense? We have been aggressive in trying to hire sales and technical employees, we just came up short in hiring. We we actually above the low end of our op ex guidance.

A fundamental shift that has been helpful to Akamai has some telecoms have become partners rather than competitors. But there are still plenty of competitors out there.

Prolexic, doesn't it have on premise software? No, Prolexic is mainly off-premise, scrubbing before packets get to customers. We have been taking a leadership role in the community, for instance by releasing patches.

Capital expense uptick in Q4 will favor the network side, to support all the traffic we can. But we believe we can stay within our model for cap ex as a percent of revenue, though we were a bit higher this year because of the acquisition.

Cisco router with Akamai pre-installed? Called Akamai Connect. We have our first sales, but it is in the very early stages.

The percentage of transactions being made from mobile devices is growing rapidly. In some countries it is already a majority, but not yet in the U.S. We don't have a separate mobile offering, the Ion product is focused on it, but serves all types of end users. We have also made Ion a lot easier to integrate and use, compared to when it was first released.

OpenIcon Analyst Conference Summaries Main Page
Akamai Investor Relations page
More Akamai conference summaries

Search

More Analyst Conference Pages: