AKAM

Akamai Technologies, Inc. (AKAM)

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Akamai Technologies (AKAM)

Q4 2011 Earnings Call

February 08, 2012 4:30 pm ET

Executives

Natalie Temple -

Paul L. Sagan - Chief Executive Officer, President and Executive Director

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

Jim Benson -

Analysts

Scott H. Kessler - S&P Equity Research

Mark Kelleher - Dougherty & Company LLC, Research Division

David M. Hilal - FBR Capital Markets & Co., Research Division

Gray Powell - Wells Fargo Securities, LLC, Research Division

Jennifer A. Swanson - Morgan Stanley, Research Division

Mark S. Mahaney - Citigroup Inc, Research Division

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Colby Synesael - Cowen and Company, LLC, Research Division

Michael Turits - Raymond James & Associates, Inc., Research Division

Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Rob Sanderson

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

Philip Winslow - Crédit Suisse AG, Research Division

Ben Z. Rose - Battle Road Research Ltd.

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Akamai Technology Earnings Conference Call. My name is Derek, and I'll be your operator for today. [Operator Instructions] At this time 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 fourth quarter and full year 2011 financial results. Speaking today will be Paul Sagan, Akamai's President and Chief Executive Officer; J.D. Sherman, Akamai's Chief Financial Officer; and Jim Benson, Senior Vice President of Finance. 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 February 8, 2012. 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 L. Sagan

Thanks, Natalie, and thank you all for joining us today. Akamai posted record revenue in Q4 with our largest quarter-over-quarter revenue growth ever. Financial highlights for the fourth quarter include: Revenue of $324 million, a 14% year-over-year increase and a 15% increase over the third quarter of 2011; and normalized EPS of $0.45, up 13% from Q4 of last year and up 32% sequentially. For the full year, we grew revenue to $1.16 billion, up 13%. We generated normalized EPS of $1.52, an increase of 6% over 2010, and we continued to generate strong cash flow, with full year cash from operations of more than $450 million. I'll be back with some additional comments on what we're seeing in the market. I'll also have a few comments about our new product rollouts in 2012 and the planned transition we announced today in the role of CFO with Jim Benson taking over from J.D. Sherman after we close the books on 2011. But first J.D. and Jim are going to review our 2011 results in detail and look ahead to the start of 2012.

J.D.?

J. D. Sherman

Thanks, Paul. With Q4 revenue of $324 million, up 14% year-over-year and up $42 million or 15% sequentially, we exceeded the high end of our guidance with solid growth across the board. Our commerce vertical increased 20% compared to last year and 25% sequentially, driven by a significant increase in online shopping activity. We typically experience strong online retail and advertising seasons in Q4, but this was the best holiday season in company history. Enterprise, our fastest growing vertical, once again grew 23% year-over-year against a very strong Q4 of 2010, and grew 6% sequentially. We also saw revenue growth accelerate in the high-tech vertical, which grew 9% compared to Q4 of 2010 and 10% sequentially. This was driven by adoption of our cloud infrastructure solutions, and these solutions now make up 55% of our sales in the high-tech vertical.

Revenue from our media and entertainment vertical grew 11% year-over-year and 17% sequentially as we saw traffic growth accelerate in the quarter. And public sector revenue grew 3% year-over-year and declined 2 points sequentially due to the timing of some of our custom projects. Across all our verticals, cloud infrastructure solutions grew 20% over Q4 of 2010 and now make up 58% of our total revenue, up from 55% last year. International revenue growth accelerated from Q3 levels on a constant currency basis. Foreign exchange was a slight benefit compared to Q4 of 2010, but a $3 million negative impact on revenues on a sequential basis. Revenue from outside of North America grew 11% sequentially and 15% on a year-over-year basis. And we saw accelerated growth in Europe and all major economies outside the U.S. except Japan, where we continue to face macroeconomic headwinds.

Revenue from North America grew 13% on a year-over-year basis and 17% sequentially. During the fourth quarter, sales outside North America were 28% of total revenue, that's down 1 point from the prior quarter, primarily due to the strong U.S. commerce season. And resellers represented 19% of total revenue and that's consistent with the prior quarter. Our cash gross margin for the quarter was 79%, consistent with last quarter and down 2 points from the same period last year. GAAP gross margin, which includes both depreciation and stock-based compensation, was 68% for the quarter, up 1 point sequentially and down 2 points from last year. Our GAAP operating expenses were $142 million in the fourth quarter. These GAAP numbers include depreciation, amortization of intangible assets and stock-based compensation. Excluding these non-cash charges, our operating expenses for the quarter were $109 million, up $9 million from Q3 and up 8% on a year-over-year basis.

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