Analyst Conference Summary

conference date: May 1, 2014 @ 1:30 PM Pacific Time
for quarter ending: March 31, 2014 (Q1, first quarter)

Forward-looking statements

Overview: Solid quarter, good y/y revenue growth, but less profit growth.

Basic data (GAAP) :

Revenue was $453.5 million, up 4% sequentially from $436.0 million and up 23% from $368.0 million in the year-earlier quarter.

Net income was $72.8 million, down 9% sequentially from $80.3 million, and up 2% from $71.5 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.40, down 9% sequentially from $0.44, but up 2.5% from $0.39 in the year-earlier quarter.

Guidance:

Q2 revenue expected between $464 to $478 million. Cash gross margin 77% to 78% due to increased network investments. Cash op expense $166 to $170 million. Resulting non-GAAP EPS of $0.53 to $0.57. Capital expenditures up to $90 to $95 million.

Conference Highlights:

Revenue growth was "driven by traffic acceleration in Media Delivery Solutions and strong traction across our Security portfolio," per Tom Leighton, CEO. Revenue and earnings exceeded the high end of Akamai's guidance range.

Non-GAAP numbers: net income was $105 million, up 5% sequentially from $100 million, up 14% y/y. EPS was $0.58, up 5% sequentially from $0.55. Adjusted EBITDA was $204 million up 23% y/y. Non-GAAP numbers exclude $53.5 million in amortization and depreciation, $25.1 million in stock-based compensation, $3.4 million acquisition costs, $1.7 million in provision for deferred income taxes, and other misc. charges. 78% cash gross margin.

Prolexic acquisition closed on February 18 and accounted for $7 million of revenue in the quarter. Raised $690 million in convertible debt in February.

GAAP gross margin was 69%, flat sequentially and up 2 points y/y.

Media delivery revenue was $215 million, up 4% sequentially from $207 million and up 19% from Q1 2013. Very pleased with growth and new pricing terms with the largest customer. Software download and gaming drove growth, while live events had a slight positive impact. "People often underestimate how hard it is to deliver high-quality video at scale."

Performance and security revenue was $198 million, up 3% sequentially from $192 million and up 26% y/y. Includes Prolexic. Kona signings were strong. 867 security customers at the end of Q1.

Service and support revenue was $41 million, up 11% sequentially from $36 million and up 48% y/y. Service attachment rates were good, as were event-driven revenues.

28% of revenue was from international markets, up 24% y/y. Changed methodology for determining U.S. vs. international share.

24% of revenue was through resellers, up 4 points from year-earlier, mainly from carrier partners..

Cash and securities balance ended at $1.4 billion. Cash from operations was $89 million. $116 million was spent on share repurchases. Depreciation and amortization was $54 million. Capital expenditures $84 million. Convertible senior notes issued in February 2014 for Prolexic acquisition were $591 million.

Cost of revenue was $139.6 million. R&D expense $28.2 million. Sales and marketing $81.1 million. General and administrative was $76.2 million. Amortization $6.8 million. Restructuring $0.7 million. Leaving operating income of $120.8 million. Interest and other expense was $1 million. Income tax provision $46.9 million.

$55 million in non-GAAP taxes.

Expects EBITDA margins between 40% and 42% in the second half.

Q&A:

Media delivery volume going forward? We had a strong Q1. There is variability by quarter due to traffic. Large unplanned software downloads and gaming releases were the key drivers in the quarter. The guidance range partly reflects possible fluctuations in media.

Security and performance signings? Where strong across Kona and Prolexic solutions. Our sales organization is getting more comfortable at selling security. We continue to add sales reps and they are getting good productivity.

Do you see customer interest accelerating when there are security threats like the heartbleed bug? Yes, it shows why you want to have your defenses in place with Akamai. We patched that bug for our customers 3 days before the public release. It shows why you want your secure traffic on our platform.

Usually media traffic does not grow as fast in Q3 as in other quarters, but our expense growth will be relatively stable through the year.

Visibility into Q2 growth? We have a good idea what our large customers are going to do in a 3 month window. But sometimes they do unplanned patches. The strong Q2 revenue is partly due to having a full quarter for Prolexic. Our visibility is reasonable across the board; we are confident in the range given.

Net neutrality effects? It is not yet clear if the laws or rules will be changed. Akamai works closely with both content providers and carriers. We enable high quality video at scale, reducing costs for the ecosystem. We are in a position to supply the technology needed at affordable price points.

Services is a lower margin business, but it is growing and still has attractive margins, plus the services are necessary for product enablement and customer satisfaction.

Internationally, we price based on local market conditions and costs of delivering services.

We have had some traction in getting business through carriers, and other resellers, but we have seen some customers move from being direct customers to being our customers through the carriers.

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