AKAM

Akamai Technologies, Inc. (AKAM)

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Akamai Technologies, Inc. (AKAM)

Q2 2009 Earnings Call Transcript

July 29, 2009 4:30 pm ET

Executives

Noelle Faris – IR

Paul Sagan – President and CEO

J.D. Sherman – CFO

Analysts

Michael Turits – Raymond James

Mark Kelleher – Brigantine Advisors

Brian Thackray – Deutsche Bank

Kerry Rice – Wedbush

Sterling Auty – JP Morgan

Colby Synesael – Kaufman Brothers

Katherine Egbert – Jefferies

Mark Mahaney – Citi

Tim Klasell – Thomas Weisel Partners

Sri Anantha – Oppenheimer

Chad Bartley – Pacific Crest

Michael [ph] – FBR Capital Markets

Jeff Van Rhee – Craig-Hallum

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Akamai Technologies Incorporated earnings conference call. My name is Eva [ph] and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator instructions) I would now like to turn the call over to Ms. Noelle Faris. Please proceed.

Noelle Faris

Good afternoon and thank you for joining Akamai’s investor conference call to discuss our second quarter 2009 financial results. Speaking today will be Paul Sagan, Akamai’s, President and Chief Executive Officer, and J.D. Sherman, Akamai’s Chief Financial Officer.

Today’s presentation contains estimates and other statements that are forward-looking under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements.

Additional information concerning these factors is contained in Akamai’s filing with the SEC, including our annual report on Form 10-K and quarterly report on Form 10-Q. The forward-looking statements included in this call represent the company’s views on June 29, 2009. Akamai disclaims any obligation to update these statements to reflect future events or circumstances.

During this call, we will be referring to some non-GAAP financial measures that we believe are helpful to better understand our financial results and operations. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. You can find definitions of these non-GAAP terms and reconciliations of these non-GAAP metrics to the most directly comparable GAAP financial measures under the news and publication portion of the Investor Relations section of our website.

Now let me turn the call over to Paul.

Paul Sagan

Thanks, Noelle. And thank you all for joining us today. Akamai performed well in the second quarter in what remained a difficult environment for many of our clients. Financial highlights for the second quarter include revenue of $204.6 million, an increase of 5% over the same period last year.

Normalized net income of $75.3 million or $0.40 per diluted share, down $0.01 or 2% from Q2 of last year, and we had very strong cash generation with a record $105 million of cash flow from operations in Q2. This increased our balance of cash equivalents to $927 million even after $17 million was used for share repurchase during the quarter.

As we come up on the first anniversary of the global economic downturn of 2008, we believe we are seeing the delayed impact of the recession on our business. Our recovering revenue model makes us somewhat of a lagging indicator while the recession began to impact the IT industry last year with dramatically slowed product sales, we continued to grow our revenue and profitability based in part on long-term contract relationships covered by ongoing contracts with our clients.

Now we are seeing a bit of a reverse. The impact on us of new contracts and pricings signed over the months since the downturn of last fall. Fortunately, more recently, we’ve begun to see traffic growth pick back up a very positive sign. We’ve become even more aggressive on pricing to support and encourage positive volume growth with key customers.

With the tremendous scale enabled by our massively distributed architecture, we’ve been able to leverage these volumes to further drive down our own costs. You can see the results in our strong bottom line. While the strategy has impacted our revenue growth in the short-term, we believe it will pay off over time as we strive to grow the volumes on our network and demonstrate Akamai’s ability to performance scale.

At the same time, sales of our value-added services increased strongly, especially late in Q2. We signed almost 200 brand new accounts to Akamai in the quarter, the highest number since the early days of the company, with a significant portion of these for our value-added services.

I’ll be back in a few minutes with some more comments. Now let me turn the call over to J.D. J.D.?

J.D. Sherman

Thanks, Paul. As Paul just highlighted, our business performed well in the second quarter, reacting to what is continued to be a challenging environment for our clients. Revenue came in at $204.6 million in the second quarter, down 3% of a strong Q1 and up 5% from Q2 of last year.

Growth in sales of our value-added solutions remained strong in the quarter and even accelerated in June. We saw an encouraging increase in new signings, both in terms of new customers and sales of advanced solutions in key industry verticals. However, this revenue was just below our expected range for the second quarter, driven by several factors.

First, and as Paul mentioned, we’ve become even more aggressive in pricing, particularly for some key strategic deals in our media vertical. While we are pleased with the traction we are getting, the short-term pricing impact was slightly larger than we expected. Our strategy is to leverage our low cost structure, and we believe that we can drive profitable deals to secure growth with our existing clients and also win business from accounts where we previously had only a small share of the business. While traffic growth remained promising, in the short-term it did not offset the impact of pricing on our top line.

In addition, we again saw churn at above 5% in the quarter as compared to the 3% to 4% rates we saw in most of 2008. Churn continued to come primarily from smaller customers, and most losses were from clients who cut back our Internet initiatives or went out of business.

Finally, while the performance of our new advertising decision solutions were solid in a very difficult advertising environment, we did not achieve the growth we expected in this business, primarily due to the financial distress of one particular ADS customer. This one issue resulted in a total impact of $1.4 million to the bottom line in Q2, including both lost revenue and an increase in bad debt reserves.

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