Analyst Conference Summary

conference date: July 30, 2014 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2014 (Q2, second quarter)

Forward-looking statements

Overview: Strong revenue growth, but earnings continue to grow slower than revenue. Good revenue guidance, weak EPS guidance.

Basic data (GAAP) :

Revenue was $476.0 million, up 5% sequentially from $453.5 million and 26% from $378.1 million in the year-earlier quarter.

Net income was $72.9 million, flat sequentially from $72.8 million, and up 18% from $61.9 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.40, flat sequentially from $0.40, but up 18% from $0.34 in the year-earlier quarter.

Guidance:

Q3 revenue estimate $484 to $496 million. Gross margins flat sequentially. Operating expense will increase $11 million to $15 million on a non-GAAP sequential basis. 31% to 32% non-GAAP operating margin. Non-GAAP EPS range $0.55 to $0.58.

Long term EBITDA model range remains at 40% to 45%. In the near term it will be in the low 40s.

Conference Highlights:

"Revenue growth remained solid across each geography and every solution category, with particularly strong performance in our Security and Media Delivery offerings." Revenue set a record and was near the high end of guidance. Continuing to invest for the future.

Non-GAAP numbers: net income was $106 million, up 1% sequentially from $105 million, and up 26% y/y from $84 million. EPS was $0.58, flat sequentially from $0.58 but up 26% from $0.46 year-earlier. Adjusted EBITDA was $204.1 million, flat sequentially and up 23% y/y from $165.8 million. Non-GAAP numbers exclude $31.7 million in stock-based compensation, $ 11.8 million other operating adjustments, $4.5 million debt issuance cost, and an income tax benefit of $15.7 million.

Non-GAAP operating margin was 33%, down sequentially from 35% and down from 34% year-earlier.

GAAP gross margin was 69%, flat sequentially from 69% and up 2 points y/y. GAAP operating margin was 24%.

Media delivery revenue was $216.2 million, up 0.6% sequentially from $215 million and up 21% from $179.4 million in Q2 2013. Traffic and revenue growth accelerated across most of Akamai's customer base, led by gaming, video, and social media customers. World Cup set peak traffic records.

Performance and security revenue was $217.4 million, up 10% sequentially from $198 million and up 29% y/y from $167.9. This is the first time this segment delivered more revenue than media delivery segment. Cloud security solutions showed very strong growth. New signings were strong for security offerings. Over 1,500 security customers at end of quarter. Prolexic is now fully integrated.

Scale and sophistication of cyber attacks set records in Q2.

Service and support revenue was $42.4 million, up 4% sequentially from $40.7 million and up 35% y/y from $31.4 million.

28% of revenue was from international markets, up 27% y/y. Currency had a $3 million y/y positive impact. Growth was strongest in Asia.

25% of revenue was through resellers, up 5 points from year-earlier, mainly from carrier partners and Prolexic strong channel relationships.

Cash and securities balance ended at $1.5 billion. Cash from operations was $200.2 million. $71 million was spent on share repurchases. Capital expenditures were $79 million, below expectations. $130 million free cash flow. Factoring in convertible debt, net cash is about $800 million.

Cost of revenue was $149.3 million. R&D expense $32.1 million. Sales and marketing $91.5 million. General and administrative was $81.9 million. Amortization $8.4 million. Restructuring $0.6 million. Leaving operating income of $112.4 million. Interest and other expense was $3.3 million. Income tax provision $35.8 million.

Employees ended at 4,558, up sequentially from 4,290.

Q&A:

Sales productivity in the quarter? We continue to ramp well with the sales hiring and making the reps productive. Reps sell the entire portfolio, not just performance and security. Tenure classes are tracking to historical levels.

Media business competition? It is similar to how it has been for years. There are a lot of competitors and we anticipate that continuing.

Q3 revenue guidance, is it less than usual seasonal increase? We believe it is in line with our Q2 to Q3 seasonality. At the midpoint it would be a solid quarter. There are a couple of large software releases planned for the back half of the quarter; if they are delayed into Q4, it could push us to the lower end of the range.

Security competition from Verizon? Our relationship with Verizon continues, but we don't see much competition from them with Edgecast in the marketplace.

Second half investments? It is not just security, it includes media, cloud performance. We are building out our network to support security. We try to build in advance of traffic increases. If traffic is lighter than expected in a quarter, you can always grow into the infrastructure in the next quarter.

We had few custom government projects in Q2; that was the only weak area.

Partnership with Microsoft in securities in Israel? That is an investment in very early stage startups. Israel is a great place for hiring security talent. The payoff would be long term. We already have security development in Israel.

Prolexic's run rate was about $15 million per month. We were very pleased with our security customer adds, it was likely the most ever. Demand is very strong.

Ion is a strong product, with plenty of room for growth, and good performance capabilities.

We are seeing a very rapid penetration of mobile devices, with about half the transactions done by mobile, but much of it is Wi-Fi. Bit rates, like video, are less for mobile.

We have a rich roadmap for security features we can add; more than just denial of service attacks.

Who are your main security competitors? The dominant players are device builders for the data center. But the attacks are so large the connectivity gets compromised, the the device defense does not get a chance to work. Carriers also provide security solutions, but some resell our products. Their solutions often can't inspect the packets and hurt site performance. There are also a lot of startups out there, including CDNs. For state of the art attacks we provide something special that really works. We defend without performance degradation; we have enormous scale to defend web sites.

Relationship with Cisco? Tomorrow Cisco is making a new router with Akamai software on board available. We are very optimistic about the product. There is a rich road map beyond the first product.

If and when 4K displays become widespread that will increase traffic. We already support it, but there is little demand in the field. Pricing will need to come down again for video transmission.

We don't compete with Google. For large media companies "do it yourself" is our largest competitor. But we do a very good job of accelerating their content at an attractive price: there are examples of former Akamai customers trying that for a few years and then returning to Akamai.

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