Analyst Conference Summary

conference date: October 23, 2013 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2013 (Q3, third quarter)

Forward-looking statements

Overview: Continued strong revenue growth.

Basic data (GAAP) :

Revenue was $395.8 million, up 5% sequentially from $378.1 million and up 15% from $345.3 million in the year-earlier quarter.

Net income was $79.8 million, up 29% sequentially from $61.9 million and up 66% from $48.2 million year-earlier.

EPS (earnings per share) were $0.44, up 29% sequentially from $0.34, and up 63% from $0.27 year-earlier.

Guidance:

Q4 is typically driven by holiday traffic. Revenue $412 million to $430 million. Renegotiating with largest media customer, which may lower prices if it takes place before the end of Q4. Cash gross margins 77% to 78%. GAAP gross margin 68%. Increased expenditures will lead to EBITDA margins of 43% to 44%. Non-GAAP EPS $0.49 to $0.53.

Conference Highlights:

Revenue was up 18% y/y adjusted for the ADS divestiture. Revenue exceeded the high end of guidance and was a record, but included two nonrecurring deals.

Non-GAAP numbers: net income $90 million, up 7% sequentially from $84 million, and up 31% from $69 million year-earlier. EPS was $0.50. Adjusted EBITDA was $173 million, up 5% sequentially, and was 44% of revenue. Non-GAAP numbers exclude $4.9 million in amortization of acquired intangibles, $24.5 million in stock-based compensation, $2.2 million in amortization of capitalized stock-based compensation, a $1 million gain related to a divestiture, and other misc. charges.

Both GAAP and non-GAAP results included an $8 million or $0.04/share benefit from a change in depreciation methodology. Another $17 million or $0.09/share came from the retroactive adoption of a tax deduction (Section 199) related to software development costs for GAAP numbers, but $5 million or $0.03 for non-GAAP numbers.

GAAP gross margin was 67%, flat sequentially and up 6 points from year-earlier.

Media delivery revenue was $189 million, up 6% sequentially from $179 million and up 15% y/y. Growth was faster than had been anticipated, partly due to a large software release. There was also strong growth in the largest, most strategic accounts.

Performance and security revenue was $174 million, up 4% sequentially from $168 and up 19% y/y. Growth was driven by two non-recurring engagements.

Service and support revenue was $33 million, up 5% sequentially from $31 million and up 34% y/y. Service attachment rates are strong.

28% of revenue was from international markets. Asia was strong, EMEA weak.

21% of revenue was through resellers.

Cash and securities balance ended at $1.2 billion. Cash from operations was $158 million, or 40% of revenue. $30 million was spent on share repurchases. A new $750 million share repurchase program was authorized in October. Depreciation and amortization was $48 million. Capital expenditures $61 million, below guidance.

Cost of revenue was $132.0 million. R&D expense $24.9 million. Sales and marketing $67.8 million. General and administrative is $66.6 million. Amortization $4.9 million. Restructuring less than $0.1 million. Leaving operating income of $99.5 million. Interest income was $1.5 million. Income tax provision $20.9 million.

EBITDA margins are expected to decline to the low 40s over time.

Conversations with customers indicate vast quantities of high-quality video is poised to move online over the next few years, at much higher-resolution, high-bandwidth formats. Fast TCP was released to speed video delivery.

A top concern of customers continues to be security, and Akamai's Kona Site Defender has become the fastest growing product, with over 700 customers. Yesterday IBM announced it would integrate Kona into its security solution.

Q&A:

Reset pricing of the major customer, compared to past major reset quarters? In Q1 of 2011 we had 8 of largest 10 media customers renewing. This is our largest media customer and has not renewed in a few years, so their pricing is dated. Timing as to Q4 or Q1 will determine impact. But that is the nature of the media business: prices drop over time. The media business in general has very strong growth potential. We think it will happen in Q1.

Stock repurchases? Our prior repurchase programs were to offset dilution from employee stock compensation programs. Only once did we do a buyback based on the low price of our stock. Our objective now is that given the cash balance and cash flow, we can opportunistically buy back more shares, not just offset dilution. We also have an M&A pipeline, and large acquisitions would moderate the share buyback program.

Partnerships with IBM and Cisco, size of? The long term potential of these partnerships is sizeable. IBM is in the very early stage, as is Cisco, which is router-based and is in development.

Orange partnership? That is going very well. It is a flagship account with our carrier strategy. It gives us a chance to get into many countries around the world.

Hybrid cloud optimization product? We are in beta with a small amount of customers. Trial results were very successful for stores. That is the technology that would be embedded in the Cisco routers.

Security product, is there a slowdown in customer acquisition? The competition levels are steady. Kona has good traction, with 180 customers, 40 new in the quarter. What Google offers is different, it is not direct competition.

Is customer concentration increasing or decreasing? There has been no change from year to year.

Sales hiring? We are very pleased, we are a little ahead of plan now. It takes a while for new hires to become productive.

Competitor's service outage with media delivery? It does help go to our value proposition, since we provide the best value and performance. But any single outage is not likely to make a material difference.

Software downloads in Q2? If there was a robust season for downloads, that would contribute to our getting to the high end of our guidance range.

Media delivery pricing erosion? It is roughly the same as it has been the past few years.

We have been having success with Aqua Ion, with customers seeing performance benefits. It has features to optimize mobile transactions, which is a complex problem for clients.

One-time setup of managed CDN customer? In this case there were one-time setup fees. Going forward revenue will be a shared model based on traffic over the contract life. We have more than one of these deals, but this was a particularly large one so we wanted to call it out.

Margins going forward? We are operating at higher-than-plan margins. We have been controlling cost of goods sold. Think of high 70s cash gross margins. If margins were better we would spend more to drive future growth.

We don't expect a turnaround in EMEA any time soon, but we think in the long run we can penetrate those markets better.

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