Analyst Conference Summary


conference date: July 25, 2012 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2012 (Q2, second quarter)

Forward-looking statements

Overview: Continued revenue growth, but GAAP earnings not keeping up.

Basic data (GAAP) :

Revenue was $331.3 million, up 4% sequentially from $319.4 million and up 20% from $277.0 million year-earlier.

Net income was $44.2 million, up 2% sequentially from $43.2 million but down 8% from $47.9 million year-earlier.

EPS (earnings per share) were $0.24, flat sequentially from $0.24, but down 4% from $0.25 year-earlier.


Q3 revenue $332 to $342 million. Foreign exchange impact negative $2 million. Cash gross margin 79 to 80%. Operating expenses up a couple of million sequentially. Fully taxed, normalized (non-GAAP) EPS from $0.40 to $0.42.

Conference Highlights:

Cloud infrastructure solutions drove revenue growth. Revenue was a record. Demand was strong across all key verticals and markets.

Non-GAAP, "normalized net income" was $78 million or $0.43 per share, up 3% sequentially and 23% y/y. EBITDA was $143 million, flat sequentially and up 13% from year-earlier.

Non-cash, stock-based compensation was $25.6 million.

Cloud infrastructure solution revenue was up 22% y/y. Made up 58% of total revenue. 75% of new customers purchased a cloud solution.

Media and Entertainment vertical revenue grew 4% sequentially and 19% y/y. Traffic growth was strong

Commerce vertical revenue declined 1% sequentially, aligned with typical seasonality, but was up 21% y/y. Dynamic site acceleration solution demand and early traction for security solutions led the vertical.

Enterprise vertical was up 5% sequentially and 18% y/y.

High-tech vertical was up 4% sequentially and 18% y/y driven by software downloads and SaaS providers migrating to cloud infrastructure solution.

The public sector was strong, with revenue up 18% sequentially and 23% y/y. Several custom projects were completed in the quarter.

27% of revenue was from outside North America. Strong dollar had a negative impact. 21% of revenue was from resellers.

Scaling of network has lowered costs and increased margins. Cash gross margin 80%, up 1% sequentially and flat y/y.

Cash and securities balance was just over $1 billion. Cash from operations was $150 million. $67 million was spent in the quarter to repurchase stock. Capital expenditures were $56 million.

Kona Site Defender saw 40 new customers since February. Total 74 new security signings in the quarter.

Cost of revenues was $107.5 million, leaving gross revenue of $223.8 million. Operating expenses were: research and development $17.5 million, sales and marketing $75.9 million, general and administrative $58.0 million, amortization of intangible assets $5.5 million, with a small restructuring benefit. Leaving operating income of $67.0 million. Interest and other income was $2.7 million. Income tax provision $25.5 million.

Four trends are driving growth: mobile devices, cloud computing, security and video.

Terra Alta introduced in late March for enterprise clouds. Aqua Mobile accelerator introduction also going well as users expect high performance from cellular networks. Working with Ericson and Qualcomm on mobile capabilities.

Akamai is supporting many of the world's major broadcasters for their online support of the Olympics.


Riverbed and Qualcomm partnerships? We are starting to close deals on enterprise solutions with Riverbed technology. The Qualcomm technology partnership announcement was recent. We will embed some of our technology in their mobile chips.

Margins? We are seeing earlier dividends that we expected from our capital expenditures on our network infrastructure. We will continue to invest in innovation.

Pricing dynamics and margins? The market has always been competitive. We continue to drive high value solutions that our customers will pay for. The accelerating media traffic shows our customers are depending on Akamai to deliver.

Cloud side product revenue drivers? Most of Cotendo is on the cloud side, we don't break that out. Security is the newest revenue area. Terra products allows us to add our products seamlessly to other people's portals.

Can you keep up 20% y/y revenue growth? In 2008 the global meltdown threw us off. We won't guide beyond Q3, but the trends are strong.

What we now call Cloud solutions we used to call value-added solutions.

Cotendo acquisition? We are shifting from integration to new development. We intend to do a lot of hiring in our Israeli office. It will take a total of 18 months to move their customers over to our network. We can upsell to them once they are our customers.

Blaze acquisition? They brought functionality to improve web sites. They did not bring in a major customer base. Product announcements will be made over the next few quarters.

The security opportunity in the cloud is so big that it is possible Akamai could, over time, come to be seen primarily as a security provider. But at present it is a relatively small part of our cloud infrastructure business.

We added 115 employees in the quarter. That is less than Q1, but in that quarter we counted the Blaze and Cotendo employees as adds.

Europe in guidance? We saw growth even in Europe in Q2. Southern Europe growth opportunities are not as strong as northern Europe. We also see growth opportunities in Asia-Pacific.

Managed CDN service for carriers? Verizon is still a great reseller partner. Managed CDN, we have been doing that for a while. The new area is OCDN, or Operating CDN, in which we supply the software and they can deploy it themselves. We are talking to customers, but it is not a revenue producer yet, it is a long-term initiative.

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Copyright 2012 William P. Meyers