AKAM

Akamai Technologies, Inc. (AKAM)

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Akamai Technologies (AKAM)

Q2 2011 Earnings Call

July 27, 2011 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

Gray Powell - Wells Fargo Securities, LLC

Jeffrey Rhee - Craig-Hallum Capital Group LLC

Sterling Auty - JP Morgan Chase & Co

Mark Kelleher - Dougherty & Company LLC

Rodney Ratliff - SunTrust Robinson Humphrey, Inc.

Chad Bartley - Pacific Crest Securities, Inc.

Jennifer Swanson - Morgan Stanley

Philip Winslow - Crédit Suisse AG

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

Michael Olson - Piper Jaffray Companies

Edward Maguire - CLSA Asia-Pacific Markets

Scott Kessler - S&P Equity Research

Mark Mahaney - Citigroup Inc

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Akamai Technologies, Inc. Conference Call. My name is Angela, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. And now, I'd like to turn the conference over to your host for today, Natalie Temple, Investor Relations. Please proceed.

Natalie Temple

Good afternoon, and thank you for joining Akamai's investor conference call to discuss our second quarter 2011 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 report on Form 10-Q. The forward-looking statements included in this call represent the company's view on July 27, 2011. 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 and 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 posted revenue of $277 million in Q2, up 13% from the same period last year. Results included normalized net income of $66 million or $0.35 per diluted share, up $0.01 from Q2 of last year. Normalized EPS would have been about $0.03 higher in the quarter but for a change in our tax rate that J.D. will explain in a moment. Cash flow continued to be very strong with $112 million of cash from operations in the quarter or $200 million year-to-date. In total, revenue, profit and cash flow performance for the first 6 months of the year were records for Akamai. We also saw solid progress in the field, setting a record for the most new customers signed in a single quarter in Q2.

However, while our results were in line with our guidance, they did not achieve the highest expectations that we have for the business, and I suspect that many of you have as well. So I'll back in a few minutes to talk about the steps we're taking to reaccelerate top line growth to capture the massive opportunity that we believe is ahead of us on the Internet.

But first, let me turn the call over to J.D. for the details on Q2. J.D.?

J. Sherman

Thanks, Paul. And as Paul just highlighted, our revenue came in towards the high end of our guidance range at $277 million, up 13% year-over-year and up $1 million sequentially. And we delivered $66 million of normalized net income or $0.35 per diluted share, roughly at the midpoint of our guidance.

Also as Paul mentioned, these results include a higher tax rate than we anticipated at the time of our last quarterly earnings call. The higher rate was primarily due to increased costs attributable to our investment in the network outside of North America. As a result, our full year projected taxable income outside the U.S. decreased and our U.S. projected taxable income increased, resulting in a higher overall tax rate. For the quarter, the impact on our taxes was about $5 million or about $0.03 per share on both the GAAP and normalized basis.

We believe our willingness to invest in our network asset is a strong sign about the market opportunities we see for Akamai, and we've talked about the opportunity to grow the business faster in Asia-Pac, Europe and Latin America. Our investment in these regions recognizes the need to invest in the platform ahead of new business to capture future customer demand.

Now for the year, we expect our tax rate to be approximately 35% compared to the 32% to 33% range that we forecast earlier. We still believe that the tax rate for our long-term financial model will be in the low 30s, assuming our business outside the U.S. continues to grow in the coming year.

Now moving back to revenue, during Q2, we saw continued solid growth for our value-added solutions. Enterprise, our fastest-growing vertical, grew 28% year-over-year and 4% sequentially, as our customers transitioned more of their businesses to the cloud. Our commerce vertical increased 21% over Q2 of last year and decreased 1% sequentially. In what is typically a slower seasonal quarter for e-commerce, we saw healthy growth driven by demand for our dynamic site solutions, particularly Dynamic Site Accelerator or DSA. We had a record quarter in terms of unit growth for new DSA signing.

Read the rest of this transcript for free on seekingalpha.com