AKAM

Akamai Technologies, Inc. (AKAM)

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Akamai Technologies (AKAM)

Q3 2010 Earnings Call

October 27, 2010 4:30 pm ET

Executives

Natalie Temple -

Paul Sagan - Chief Executive Officer and Executive Director

J. Sherman - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Sitikantha Panigrahi

David Hilal - FBR Capital Markets & Co.

Donna Jaegers - D.A. Davidson & Co.

Derek Bingham - Goldman Sachs Group Inc.

Sterling Auty - JP Morgan Chase & Co

Katherine Egbert - Jefferies & Company, Inc.

Kerry Rice - Wedbush Securities Inc.

Richard Fetyko - Merriman Curhan Ford & Co.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC

Jennifer Swanson - Morgan Stanley

Tim Klasell - Stifel, Nicolaus & Co., Inc.

Michael Olson - Piper Jaffray Companies

Mark Mahaney - Citigroup Inc

Scott Kessler - S&P Equity Research

Michael Turits - Raymond James & Associates

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Akamai Technologies, Inc. Earnings Conference Call. My name is Melanie, and I'll be your coordinator today. [Operator Instructions] I would now like to turn the call over to Ms. Natalie Temple, Investor Relations. Please proceed.

Natalie Temple

Good afternoon, and thank you for joining Akamai's Investor Conference Call to discuss our third quarter 2010 financial results. Speaking today will be Paul Sagan, Akamai's Chief Executive Officer; and J.D. Sherman, Akamai's Chief Financial Officer.

Before we get started, please note that today's comments include forward-looking statements, including statements regarding revenue and earnings guidance. 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 filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking statements included in this call represent the company's view on October 27, 2010. Akamai disclaims any obligation to update these statements to reflect future events or circumstances.

As a reminder, we will be referring to some non-GAAP financial metrics during today's call. A detailed reconciliation of GAAP and non-GAAP metrics can be found under the News & Events portion of the Investor Relations section of our website.

Now let me turn the call over to Paul.

Paul Sagan

Thanks, Natalie, and thank you, all for joining us today. Akamai performed very well in Q3. Revenue growth accelerated for the fourth consecutive quarter, and we delivered strong results across the entire business.

Revenue was a record, nearly $254 million, up 23% from the same period last year. We generated fully taxed normalized net income of $64 million, or $0.34 per diluted share. That was up 23% from Q3 of last year. Cash flow generation in Q3 was very strong with $118 million cash from operations in the quarter and $292 million year-to-date. We continue to leverage our profitability to make investments that are designed to help our customers expand their online businesses into the cloud.

I'll be back in a few minutes to talk more about some of the key trends we're seeing in the marketplace but first, let me turn the call over to J.D. for details on Q3. J.D.?

J. Sherman

Thanks a lot. As Paul just highlighted, our business performed very well in the third quarter. We grew revenue $8 million sequentially and 23% year-over-year to $253.6 million, coming in just above our expected range for the quarter.

We delivered solid growth across all of our key verticals. Media and Entertainment remained our fastest-growing vertical for the second quarter in a row. We, again, saw strong traffic growth, especially among the largest most strategic accounts. During the quarter, Media and Entertainment grew by 26% over Q3 of last year, and 6% over Q2 of this year.

The E-Commerce revenue growth accelerated to 24% compared to Q3 of last year and grew 3% sequentially, driven by continuing adoption of our value-added solutions. With new product introductions in the mobile and online security markets in the past few months, we continued to add to our portfolio of solutions targeted at this customer base.

Revenue from our high-tech customers grew 13% year-over-year, down 2% sequentially. We have a very strong software delivery business at the core of this vertical, and we also saw increased demand for Application Performance Solutions from Software-as-a-Service customers.

Public sector revenue was up 28% from Q3 of last year and up 5% from last quarter, continuing the solid performance we've seen for the past several quarters from government contracts.

Across-the-board, we are pleased with the continued growth of our value-added solutions. In Q3, 55% of our revenue came from value-added solutions, up from 50% in Q3 of 2009. And 78% of our customers are buying at least one of our value-added solutions.

During the third quarter, sales outside North America represented 28% of total revenue, consistent with the prior quarter. International revenue grew 20% year-over-year and 3% sequentially. Foreign exchange had a negative impact on revenue of just over $1 million on a year-over-year basis but a positive sequential impact of about $2 million. Excluding the impact of currency, international revenue grew 22% on a year-over-year basis but declined 1% sequentially.

Revenue from North America grew 24% year-over-year and was up 4%, sequentially. Resellers represented 18% of our total revenue, down a point from the prior quarter.

As expected, cash gross margin of 81% was down a point from last quarter and from the same period last year. GAAP gross margin, which includes both depreciation and stock-based compensation, was 69% for the quarter, down two points from the prior quarter and down a point from last year.

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