AKAM

Akamai Technologies, Inc. (AKAM)

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Akamai Technologies (AKAM)

Q3 2012 Earnings Call

October 24, 2012 4:30 pm ET

Executives

Natalie Temple

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

James Benson - Chief Financial Officer and Executive Vice President

Analysts

Jennifer A. Swanson - Morgan Stanley, Research Division

Mark Kelleher - Dougherty & Company LLC, Research Division

Rob Sanderson - ABR Investment Strategy LLC

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

Gray Powell - Wells Fargo Securities, LLC, Research Division

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

Mark S. Mahaney - Citigroup Inc, Research Division

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

Colby Synesael - Cowen and Company, LLC, Research Division

James D. Breen - William Blair & Company L.L.C., Research Division

Sameet Sinha - B. Riley & Co., LLC, Research Division

Scott H. Kessler - S&P Equity Research

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

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

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Chad Bartley - Pacific Crest Securities, Inc., Research Division

Donna Jaegers - D.A. Davidson & Co., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the 2012 Akamai Technologies Inc. Third Quarter Earnings Conference Call. My name is Kim, and I will be your operator for today. [Operator Instructions] We will conduct a question-and-answer session toward the end of the conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Natalie Temple with Investor Relations. Please proceed.

Natalie Temple

Good afternoon, and thank you for joining Akamai's Investor Conference Call to discuss our third quarter 2012 financial results. Speaking today will be Paul Sagan, Akamai's President and Chief Executive Officer; and Jim Benson, 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 24, 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. Thank you all for joining us today. Q3 was Akamai's best quarter ever. We delivered record revenue of $345 million, up 23% from the same period last year, making it our fourth consecutive quarter of accelerating revenue growth.

The top line was strong across all key verticals in all major geographies and for both cloud infrastructure and content delivery solutions. Gross margins also expanded in the quarter, sequentially and year-over-year. Further, we grew the bottom line even faster than revenue, generating normalized EPS of $0.43 per diluted share, up 26% from Q3 of last year. Finally, we had another solid quarter of cash flow generation with $141 million of cash from operations in the quarter and $384 million year to date. I am extremely pleased with the company's performance and the team's continued execution.

I'll have more to say in a few minutes about the trends we're seeing in the marketplace. But first, let me turn the call over to Jim for detail on Q3. Jim?

James Benson

Thank you, Paul. As Paul just highlighted, we had a great third quarter. Revenue came in above our guidance range at $345 million, up 23% year-over-year and up 4% or $14 million sequentially, our best Q2 to Q3 sequential growth ever with solid growth across the board.

Fundamentally, we saw a continued strong performance in our cloud infrastructure solutions, which grew 22% year-over-year, and we saw acceleration in our content delivery solutions, which grew 23% year-over-year. This growth was aided by the timing of significant software releases that have historically occurred in Q4, as well as some onetime sporting events and the completion of some large custom government projects. Overall, cloud infrastructure solutions made up 58% of our total revenue in the quarter.

Turning to our key verticals. Media & Entertainment was our fastest-growing vertical, benefiting from particularly strong traffic and revenue growth for some of our largest, most strategic accounts. In the quarter, Olympics was a 2-week marquee event for us, demonstrating the potential of HD video over the Internet scale. Broadcasters around the globe leveraged our HD Network to deliver a high-quality interactive experience and relied on our Kona Security Solutions to protect their websites from attacks. Revenue from our Media & Entertainment vertical grew 26% over Q3 of last year and 7% sequentially. This was a particularly strong performance in what is generally a seasonally slower quarter driven in part by the large traffic-related events I just mentioned and was a key driver to our revenue overachievement.

Revenue from our enterprise vertical grew 22% year-over-year and 6% sequentially. This growth were driven by company's leveraging the reliability and performance of the Akamai Intelligent Platform as they shift their content and applications from private data center environments to hybrid and public clouds.

Our commerce vertical grew 21% over Q3 of last year and 4% sequentially. Commerce customers continue to show strong demand for both newer products introduced in the last year like security and mobile solutions, as well as our flagship Web acceleration solutions.

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