Analyst Conference Summary


conference date: October 26, 2011 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2011 (Q3, third quarter 2011)

Forward-looking statements

Overview: Good revenues.

Basic data (GAAP) :

Revenue was $281.9 million, up 2% sequentially from $277.0 million and up 11% from $253.6 million in the year-earlier quarter.

Net income was $42.3 million, down 12% sequentially from $47.9 million, but up 7% from $39.7 million year-earlier.

EPS (earnings per share) were $0.23, down 8% sequentially from $0.25, but up 10% from $0.21 year-earlier.

Comparisons: Q2 2011 AKAM summary; Q3 2010 AKAM summary


Q4 revenues $303 to $315 million on expected strength of online retail and advertising. Gross margins flattish. Operating expenses up $10 million sequentially. Normalized EPS $0.37 to $0.41. Taxes $25 to $30 million. Capital expense around $50 million.

No guidance for 2012 yet.

Conference Highlights:

"Akamai performed very well in Q3... our revenue came in at the high end of our guidance range." David Kenny resigned as president. Paul Sagan is now president, as well as CEO.

Online video growth remains below expectations set at the beginning of the year, but saw some positive signs heading into Q4.

Non-GAAP, normalized net income was $63.4 million [$0.34/diluted share], down 4% sequentially and down 1% from $64.2 million year-earlier. Adjusted EBITDA was $122.4 million, down 3% sequentially but up 7% y/y. Non-cash stock based compensation excluded was $16.7 million.

Cash and equivalent balances ended at $1.2 billion. Cash flow from operations was $116.3 million. Cash gross margin 79%. $155.1 million was used to repurchase common stock. Capital expenditures were $47 million.

Value added solutions had solid growth in Q3. Enterprise, the fastest growing vertical, grew 30% y/y and 3% sequentially.

The commerce vertical increased 23% y/y and 5% sequentially. DSA (dynamic site acceleration) solutions drove demand. Almost 100 DSA signings in the quarter across all verticals. Over 30 new security solutions customers.

Media and Entertainment segment grew 5% y/y and 1% sequentially. Traffic growth was consistent, but did not see acceleration.

High tech vertical up 3% y/y and flat sequentially. SaaS (Software as a Service) customers drove growth, but there was continued downward pressure on software downloading revenue.

Government sector grew 5% y/y and declined 1% sequentially.

Reseller revenues were 19% of total.

International revenues were 29% of total, growing 15% y/y, but declining 1% sequentially. Europe and Japan were drags, but other areas had strong growth.

GAAP gross margin was 67%, a decline.

Cost of revenues was $93.3 million. Research and development expense $13.5 million, sales and marketing $54.5 million, general and administrative $50.8 million, amortization $4.2 million, restructuring $0.2 million. Leaving operating income of $65.3 million. Interest income was $3.0 million. Other loss was $0.2 million. Income taxes $25.9 million.

$41.8 million depreciation and amortization in the quarter.


Online video growth factors? It is growing, just below our expectation. Questions include the business model and licensing. We see more usage and more business models, but an inflection point would come from content providers' willingness to put new hit content online quickly.

Value added services growth rate? 58%, growing faster than the value added solutions. We saw strong signings, but not from any particular cause. Enterprise is still serious about moving online.

DSA? DSA did well, as did security solutions. The power is in the platform, then layering on value services.

Competition from carriers? Edge equipment maintenance? We have record numbers of partners, now over 1000. Networks need our help. We have expanded into new countries. We provide a cross-network, cross-geography solution, which is what businesses need. We are seeing network partners want to sell our value-added solutions to their customers.

Will you have a separate President? No plans for that at present.

Share repurchase capacity? We have $200 million in authorization still in place. We at least want to offset dilution. We made a major purchase when the stock price went down.

Pricing competition in content? We always have to compete with do-it-yourself technology. Then there are the large full service content accelerators and specialists. But no one has our breadth and scale. Many managed service providers just resell our services. We compete every day, quarter in and quarter out.

Cap ex? 13 to 16% of revenue, and it looks like we will be at the high end of that. We are adding capacity at the edge, especially in emerging markets.

Bandwidth and colocation costs? Those input costs trend down in our business, so it has been normal. As our costs go down, we can decrease costs for our customers.

Software development costs? We capitalize software development costs for new software, but then amortize it over two years. Depreciation starts when we start delivering the product.

Japan and Europe? We don't expect much from Eastern Europe, it is a new market, not large enough to affect the numbers. Softness was is southern Europe. Japan is a well known story. We are continuing to invest in east Asia, but it will take a while for returns to ramp up.

Hiring? We continue to hire, especially great engineers and sales people.

Volume business is now only about 40% of revenue. If content sees a positive inflection, it could become a tailwind rather than a headwind. But will become less important if we can continue to grow value-added services faster.

Verizon relationship? They are one of our best resellers. They have a global footprint. We are very pleased with the relationship.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2011 William P. Meyers