Analyst Conference Summary


conference date: July 29, 2009 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2009 (2nd quarter)

Forward-looking statements

Overview: First sequential revenue decrease shows even Akamai is vulnerable to the recession.

Basic data (GAAP) :

Revenue was $204.6 million, down 3% sequentially from $210.4 million but up 5% from $194.0 million year-earlier.

Net income was $36.0 million, down 3% sequentially from $37.1 million but up 5% from $34.3 million year-earlier.

EPS (earnings per share) were $0.19, down 5% sequentially from $0.20 and flat from $0.19 per share year-earlier.


Q3 revenues $195 to $203 million. Aggressively pricing to continue, driving cash gross margins down about 1%. Normalized EPS $0.33 to $0.36. Will also increase capital spending on networks to $35 to $40 million to prepare for Q4 ramp of volume.

Conference Highlights:

Market conditions for many of Akamai's clients are difficult. Traffic growth has been accelerating in the media and entertainment vertical. Value-added solutions like application performance and dynamic site acceleration continue "to experience good traction." We are seeing a lagging impact from the recession. Since the quarter ended we have seen renewed activity. We have also decreased some prices to attract larger volume, which hurt revenues.

Non-GAAP normalized net income reported at $75.3 million or $0.40 per share, down 2% y/y.

Cash from operations was $105 million, a record. Cash and equivalents ended at $927 million. $15 million was used to repurchase stock. Adjusted EBITDA $97.4 million. $24.7 million was used for capital expenditures.

Customers with recurring contracts increased to 2,979, up 9% y/y. Reseller sales were 18% of revenues. International revenues were 28% of total.

Cost of revenues was $60 million. R&D expense $9 million. Sales and marketing $41 million. General and administrative $35 million. Amortization $4 million. Total costs and operating expenses were $150 million. Leaving operating income of $54 million. Interest income was $3 million. Income tax provision $22 million.

Gained 197 new accounts, a very high number, with many including value added solutions. But churn was 5%, above the normal 3% rate. $22,800 average revenue per customer, down both sequentially and y/y.

Advertising decision solutions was impacted by $1.4 million in lost revenue or bad debt reserves from a single customer.

Media and entertainment vertical revenue declined 8% sequentially and 4% y/y.

E-commerce vertical grew 2% sequentially and 25% y/y.

High tech vertical dipped 4% sequentially and flat y/y.

Cash tax rate remains far below book tax rate.

Stock based compensation $14.8 million.

High definition television over the internet is reaching a tipping point. Customers want to prepare to scale up delivery, but want to keep investments low during this recession.

Variable bit rate content for iPhones is a new, and popular, offering.

Half of our Q4 revenue may be due to advanced solutions.


Aggressive pricing plans? We can't give you numbers. One trend is turmoil is in advertising. Another is spikes in full HD volume. We had to reduce unit costs, and can do that through innovation.

Commerce customers? Pricing and signing in value-adds were very strong after a pause in Q3-Q4 2008. Our customers are looking at driving sales, partly because their mall sales are poor.

Value added services? We are not breaking it out by quarter, but we are tracking to 50% by year-end.

Average revenue per customer? Key driver downward is lower prices for largest media and entertainment customers.

Use cash for more aggressive buy back? We have just been trying to offset dilution by stock based compensation.

Margin bounceback, when? Value added solutions have higher gross margins. Volume driven solutions has short term issues, but we can drive down our costs long term. 48% EBITDA margin for 4 quarters now. We want to continue to execute on our investment strategies, which means dropping margins for Q3.

Most churn is not because customers find and alternate supplier, it is from economic pressure on smaller customers. It is likely to moderate when the economic environment moderates.

We are able to offer a price point for our HD video customers that works for them. These prices are under discussion, and should allow them to expand their volume as more users get bigger pipelines to their homes. Akamai shines where quality matters, and it matter when a new segment is taking off.

Competition for TV over internet? Our competitors, the large carriers, don't connect to very many end users. We have a growing advantage with our edge connectivity.

Operating expense increase in Q3? We are adding headcount to sell to and support our customer base, especially outside the U.S. Also for R&D.

Will other customers start asking for the same price concessions? We are always in pricing discussions. The decreases are only with customers who can scale.

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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 2009 William P. Meyers