Analyst Conference Summary

conference date: July 28, 2010 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2010 (second quarter)

Forward-looking statements

Overview: Continued revenue growth, but with the stock at a high multiple compared to other techs, sequential decline in net income was a disappointment.

Basic data (GAAP) :

Revenue was $245.3 million, up 2% sequentially from $240.0 million and up 20% from $204.6 million in the year-earlier quarter.

Net income was $38.1 million, down 7% sequentially from $40.9 million, but up 6% from $36.0 million.

EPS (earnings per share) were $0.20, down 9% sequentially from $0.22, but up 5% from $0.19 year-earlier.

Comparisons: Q1 2010 summary; Q2 2009 summary

Guidance:

Believes will generate $1 billion in revenues in 2010. Q3 estimated $242 to $252 million revenue. 81 to 82% cash gross margin. GAAP 69% gross margin. Modest operating expense increase. EBITDA margin 44 to 45%. $40 million capital expenditure in Q3. 17% of revenue for capital expense for full 2010. $0.32 to $0.34 normalized earnings per share.

Conference Highlights:

Revenue set a record. Demand for services grew for all verticals, with increasing signs of traction. Acquired Velocitude, which will help in mobile markets.

Non-GAAP fully normalized net income was $65.0 million (or $0.34/share), down 1% sequentially but up 18% from year-earlier. That was at top end of prior guidance.

Non-GAAP EBITDA was $112.1 million, down 5% sequentially but up 15% y/y. EBITDA margin was 46%, down 2 points from year-earlier.

Cash from operations was $86.4 million or 35% of revenue.

Cash balance ended at $1.1 billion. During the quarter 537,000 shares were repurchased for $20.4 million at average of $38.02 per share. [Comment by WM: given the high price of the stock, I'd rather get cash in the form of a dividend]

Sales through resellers accounted for 19% of revenue. Ex-North America revenues were 28% of total. Sequential impact of negative $3.5 million due to strong dollar.

Media and entertainment revenue up 22% y/y, 3% sequentially. World Cup was a demonstration, but no single event can have a significant impact on revenue at this point.

E-commerce revenue up 21% y/y, 4% sequentially, in what is generally a seasonally slower quarter

High-tech revenue was 3% down sequentially, but up 8% y/y due to timing of new software releases.

Public sector revenue was up 51% y/y, 9% sequentially.

There was 1 month of operating expense included from Velocitude acquisition.

GAAP cost of revenue was $71.8 million. Research and development expense $13.6 million; sales and marketing $55.2 million; general and administrative $43.7 million; amortization $4.2 million. Leaving GAAP operating income of $56.8 million. Interest income was $2.8 million. Loss on debt was $0.3 million. Other income $0.1 million. Income tax provision $21.3 million (but tax is mainly non-cash).

$64 million convertible bond balance after a chunk was converted to stock in the quarter.

Increasing capital expenditures to build out network and service capability in anticipation of increasing demand.

David Kenny was selected as President. He was already on the board of directors.

Q&A:

Capital investments? Aside from pure network buildout, we are adding features and functionality that make our products more useful to our customers. For instance, you can now delivery a HD file in any format and we will deliver the correct format for any device from mobile devices with their multiple formats to big screens. We are also making investments in sales and support, including in new verticals like financial services and healthcare.

In Q2 we did have a relatively large capital expense as we added new servers.

Pricing has stabilized as volume growth is accelerating, particularly with HD video.

International markets? Generalization requires caution, for instance Europe is not a single market. We see application acceleration services as a global leader. We did HD World Cup video for multiple broadcasters in numerous nations.

Value added solutions had a very solid signings quarter, with 36% growth; we don't expect that every quarter.

Some of World Cup was in June quarter, some in Q3. The real significance is the new customer experience sets a mark that typically becomes normal just a few months later.

Timing of software releases in Q3, Q4? Software releases do have a quarter-to-quarter effect. Software as a service is more steady growth in this segment. We don't give guidance on subsets of the space.

About half the global banks and half the top ten brokers are already on the Akamai platform.

Video growth was across the board, in older formats and HD, but the fastest growth is in HD. Pixel-free ad platform (a value-added solution) is doing well, no competition there. Only 1% of video in the home was over Internet in the past, this will double and double and double again.

Expense increases in the quarter? We are hiring rapidly, in particular to address new verticals with sales and support. Emphasis is international. We are seeing strong trends, which gives us confidence to make these expenditures, capital expenditures, and R&D.

What else do you need to flesh out mobile capabilities? We are working with mobile networks, we are doing organic engineering. We don't see more acquisitions because we are building a robust and full set of services.

Velocitude top line contribution near-term? It is an early stage company, revenues about $1 million in second half of year. Op ex from it higher, but believes will show significant revenue growth in 2011.

Some static delivery customers transitioned to value-added services, so while the revenue in that segment has dropped, the revenue overall from those customers has increased.

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