Analyst Conference Summary

conference date: February 6, 2013 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2012 (Q4, fourth quarter)

Forward-looking statements

Overview: Revenue and profits continue to ramp.

Basic data (GAAP) :

Revenue was $377.9 million, up 9% sequentially from $345.3 million and up 17% from $323.7 million in the year-earlier quarter.

Net income was $68.3 million, up 42% sequentially from $48.2 million and up 14% from $60.1 million year-earlier.

EPS (earnings per share) were $0.38, up 41% sequentially from $0.27, and up 15% from $0.33 year-earlier.

Guidance:

ADS divestiture will lower Q1 revenue. Verivue acquisition will add no significant revenue but $3 million in operating expense. Will also wind down some low-margin media delivery businesses in the quarter. For Q2 and awhile EBITDA margin will drop to low 40s.

$352 to $362 million Q1 revenue. Cash gross margin 82%. EBITDA margin 42 to 43%. $0.50 to $0.52 normalized EPS. Taxes lower due to R&D tax credit reinstatement.

Conference Highlights:

Top and bottom line results were both records. E-commerce holiday traffic was strong, but did not set a record. The forces growing the internet are aligning with Akamai's strength. Growth opportunities over the next 3 to 5 years are significant.

Revenue was near midpoint of guidance.

Non-GAAP "normalized" net income was $98 million, up 24% sequentially from $79 million and up 18% y/y. EPS was $0.54 up sequentially from $0.43 per share and up 20% y/y. EBITDA was $173 million, up sequentially from $157 million and from $148 million year-earlier.

Will talk more about details of Akamai's businesses. Media delivery is dependent on pricing, traffic volumes, and costs, and still has considerable potential for growth due to video traffic. Video traffic could increase 100 or more times from today's level.

Web performance business is not traffic driven, but insures mission-critical performance. Includes Kona site defender, which successfully defended banks against DoS attacks recently. Akamai will continue to invest in security solutions. Another growth area is services for carriers. A new opportunity is services inside the enterprise firewall, which is important as enterprise applications move into the cloud and to mobile devices.

Security solutions revenue was up over 5 times y/y. Cloud infrastructure 60% of total revenue.

Media and entertainment vertical up 6% sequentially and 15% y/y.

Enterprise vertical up 11% sequentially and 28% y/y.

Commerce vertical up 17% sequentially and 21% y/y.

High Tech vertical 6% sequentially and 13% y/y.

Public sector was down 6% sequentially but up 14% y/y. Sequential drop was due to a few large projects in Q3.

70% GAAP gross margin.

Akamai had near $1.1 billion of cash and equivalents at the end of the quarter. $55 million depreciation and amortization. $147 million cash from operations. Cap ex was $61 million. $40 million was used for share repurchases. $150 million new share repurchase authorization was announced.

23% of revenue was from resellers.

Cost of goods sold was $111.9. Research and development expense was $20.4 million; sales and marketing $86.3 million; general and administrative $58.8 million; amortization $5.4 million. Restructuring $0.4. Leaving operating income of $96.7 million. Interest income was $1.6 million. Income taxes $29.2 million.

Tax rate was lower than projections due to shift to foreign revenue, resulting in a $0.04 tax benefit. Will also change depreciation time for network equipment from 3 years to 4 years.

Employment force expanded by 700 during 2012 and will continue to increase in 2013.

Q&A:

Accounting change details? We implemented a bunch of hardware and software initiatives. The useful life of servers is now 4 years rather than 3. Impact has a 4 point impact on GAAP gross margins, or about $14 million for the quarter. GAAP EPS after taxes is a benefit of about $0.05.

Specific enterprise wins? Security solutions did great. Good penetration with web performance solutions. Showing results of investments we made in products and sales force. Companies often buy both security and performance solutions together.

Cash balance use, overseas balance? Only about $100 million is overseas. A major cash use is acquisitions. We will continue to be active but disciplines shoppers. We will continue buy backs to offset dilution.

Demand for front-end optimization, Ion? We launched in Q4 and initial results are positive, particularly for mobile environment. Customers are upgrading from DSA to Ion.

Customers are very concerned about mobile performance, which can be very bad today.

Lower EBITDA margins for most of year? We increased R&D in 2012 and will continue that going forward, focused on new targets. Also increasing sales capacity.

AT&T is dropping their own content acceleration service and will be selling ours. The first half of the year will be mainly an investment period. We will begin to see revenue in the second half. By 2014 they should be a very signicant channel partner for Akamai. Products sold will include advanced solutions.

Competitive landscape and pricing? It varies by business. Media is highly competitive and always has pricing pressure, so it is a volume business. In web performance the competition is do-it-yourself, and we are the fastest, most reliable, and most secure. Security has a different set of competitors and solutions. We have unique ability to do packet detection and filtering at the edge. The banks that did not have Kona made headlines. We also are uniquely positioned to serve the hybrid cloud.

Verivue profitability timeline? We see a penny dilution to 2013 earnings. The dilution would be in the first half, then break-even in the second half.

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