Analyst Conference Summary

conference date: April 24, 2013 @ 1:30 PM Pacific Time
for quarter ending: March 31, 2013 (Q1, first quarter)

Forward-looking statements

Overview: Revenue and profits continue to ramp, topped guidance.

Basic data (GAAP) :

Revenue was $368.0 million, down 3% sequentially from $377.9 million, but up 15% from $319.4 million year-earlier.

Net income was $71.5 million, up 5% sequentially from $68.3 million and up 65% from $43.2 million year-earlier.

EPS (earnings per share) were $0.39, up 2% sequentially from $0.38 and up 63% from $0.24 year-earlier.

Guidance:

Expects another strong quarter in Q2, with revenue $368 to $378 million. Includes expected negative $2 million foreign exchange impact. 66% GAAP gross margin, 42% to 43% EBITDA margin. Will increase investments in business, with cash op ex up $9 to $10 million sequentially. Non-GAAP EPS $0.44 to $0.46. Cap ex $75 to $80 million spend, mainly for facility related buildouts and to stay ahead of traffic growth.

Conference Highlights:

"A great quarter for Akamai." Exceeded high end of guidance range due to higher than expected media traffic, particularly towards to the end of the quarter. Growth was solid in all segments.

If adjusted for the ADS divestiture, revenue would have been up an additional 3% y/y.

Non-GAAP numbers: net income $93 million, EPS $0.51, up 43% y/y, but up 19% y/y if tax and depreciation changes (see below) are subtracted out. Adjusted EBITDA was $166 million, down sequentially from $173 million but up from $143 million year-earlier. Stock based compensation excluded was $22.9 million.

$15 million or $0.08 per diluted share benefit in quarter (both GAAP and non-GAAP) from retroactive R&D tax credit and a change in depreciation methodology.

Cash flow from operations was $103 million. Cash balances, securities and equivalents ended over $1 billion. $40 million was used to repurchase shares. Capital expenditures were $66.4 million. Depreciation and amortization $42 million.

ADS accounted for less than $3 million of revenue in the quarter before it was sold. Currency headwinds reduced y/y revenue by $3 million.

New solution categories:

Media delivery revenue was $181 million, up 17% y/y and up 4% sequentially. Strong traffic and revenue growth more than compensated for winding down of a few contracts. Sola Vision new product allows ads to be inserted into video.

Performance and security revenue $157 million, up 17% y/y, but down 4% sequentially due to seasonality. Seeing strong demand for web experience and security solutions. Aqua Ion signings were good. Will continue to invest in this category. Believes security in particular will be a growth sector going forward. Had 130 Kona clients at end of quarter, with over 500 total security customers. Web experience solutions are particularly desirable for delivery to multiple device types on cellular networks.

Service and support revenue was $27 million, up 35% y/y and up 3% sequentially.

Reseller revenue was 20% of total. International revenue was 30% of total and was up 22% y/y despite stronger dollar.

Gross margins expanded due to good cost controls. 76% cash gross margin. 67% GAAP gross margin, with 4% positive impact from depreciation methodology change.

Cost of revenue was $120.4 million. R&D expense $21.9 million. Sales and marketing $62.7 million. General and administrative is $55.4 million. Amortization $6.1 million. Restructuring $0.4 million. Leaving operating income of $101.2 million. Interest income was $1.6 million. Income tax provision $31.2 million.

Akamai has made good progress in carrier relationships, notably Orange and AT&T.

Q&A:

What drove the traffic upside? Was particularly strong among largest and most strategic accounts. The quarter started fine, but really accelerated in March. We are benefiting from trends in social media and gaming.

Media contracts wound down as expected and had the impact we expected, except one customer opted to remain through the end of Q2.

Has traffic strength continued into Q2, is that the reason for the higher-than-expected guidance? Yes, traffic strength has continued and is expected to continue, the variance will drive the revenue range.

Hiring plans? We are making progress, we did not hire as many or as fast in Q1 as we had hoped. Most of the additions are outside North America, particularly in Asia.

AT&T impact? We are beginning to see traction in this strategic alliance, but it is just beginning to impact revenue. Security offerings in particular look good.

RPU (revenue per unit customer) has continued to grow.

Federal government sequester impact? That is incorporated into our guidance. There are some impacts, but the most important long term contracts have not been impacted so far.

The Riverbed partnership has not been successful. The Qualcomm partnership is successful and we are embedding our technology into their solutions. We'll talk more about that later in the year.

We tend to be at 13% to 16% of revenue for cap ex. We are going to drive down cap ex as a percent of income, particularly on the network side. As we finish our facility and IT related buildout to accommodate new employees, it should not be part of a long term run rate.

Service and support revenue? It is a small percent of total, it will continue to grow, but not as fast as a percentage rate. When we sell a lead product we are getting a very good attach rate for services. It does not just produce revenue, it makes customers stickier.

Asia? 26% as reported, more if adjusted for exchange rates. We saw very good growth in Japan. Guidance for Q2, exchange headwind is largely from weakening yen. But we see Japan as a very good place for us to invest in headcount.

March Madness effect? No one event can move the needle in the quarter. It was a good media event. The strength was across the board, not a particular traffic driver.

Carrier relationships will not have a significant impact on revenue, but will in the long run. Some services will become embedded in their systems and provide a revenue stream.

Resellers down as a % y/y? ADS business went through channel, but largely because direct business large strategic accounts grew so fast. Over time, carrier relationships will cause reseller mix to increase over a period of time greater than a quarter.

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