Highlights From AKAM's Q2 Conference Call: Revenues Up 13% Year-Over-Year; Guidance Light

Akamai Technologies, Inc. (NASDAQ: AKAM) reported Q2 EPS of $0.35, $0.01 worse than the analyst estimate of $0.36. Revenue for the quarter came in at $277 million versus the consensus estimate of $277.98 million. Shares are down over 19% going into the close

Highlights From AKAM's Q2 Conference Call:

• (Paul L. Sagan) 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.
  
• 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 six 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 high expectations that we have for the business and, I suspect, that many of you have as well.
  
• (J. Donald Sherman) Our revenue came in toward 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.
  
• The higher (TAX) 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 a GAAP and normalized basis.
  
• So 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 years.
  
• 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 eCommerce, 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 signings.
  
• Revenue from our Media and Entertainment customers grew 11% year-over-year and declined 1% sequentially in the second quarter. We did see signs of accelerating traffic growth in what tends to be a more modest growth quarter.
  
• However, we have not yet seen a return to the accelerated rate of traffic growth that we experienced last year.
  
• The High-Tech vertical was up 1% year-over-year and up 2% on a sequential basis, as demand for our application performance solutions by software-as-a-service customers offset declines in software download revenue.
  
• Public Sector revenue grew 5% sequentially and 11% year-over-year in Q2, off a very strong 2010.
  
• During the second quarter, sales outside North America were 30% of total revenue, consistent with the prior quarter. International revenue grew 20% year-over-year and was flat sequentially in Q2. The weaker dollar had a positive sequential impact of about $2.6 million, and on a year-over-year basis, the currency impact was favorable by about $9 million, which is about $1 million less of a benefit than we anticipated during our call last quarter.
  
• Excluding the impact of currency, International revenue grew 7% on a year-over-year basis. We had very strong growth in Asia-Pacific outside of Japan, but a more difficult macro environment in Japan, as well as in Europe, continues to weigh somewhat on our growth in these regions.
  
• Revenue from North America grew 10% on a year-over-year basis and was flat sequentially. And re-sellers represented 19% of total revenue, up a point from the prior quarter.
  
• Our cash gross margin for the quarter was 80%, consistent with last quarter and down two points from the same period last year.
  
• GAAP operating expenses were $114.1 million in the second quarter. These GAAP numbers include depreciation and amortization of intangible assets and stock-based compensation. Excluding non-cash charges, our operating expenses for the quarter were $94.9 million, up about $4 million from Q1.
  
• Our cash generation continued to be very strong, with cash from operations for the second quarter at $111.8 million, and year-to-date we've generated $200.4 million in cash from operations. At the end of Q2, we had $1.3 billion in cash, cash equivalents, and marketable securities on the balance sheet.
  
• During the quarter, we spent $50.5 million in share repurchases, buying back about 1.5 million shares, at an average price of about $32.90.
  
• We've started to see some positive signs on traffic growth, but so far we have not seen a significant enough uptick in the rate of growth to offset the typical unit pricing declines in our industry and support achievement of our 15% revenue growth objective for 2011.
  
• And while we generally don't give guidance beyond the current quarter, at this point, we think the most likely range for revenue growth for the full year is 10% to 13%. Specifically for Q3, we expect revenue in the range of $273 million to $283 million, or 8% to 12% year-over-year growth. (Consensus is $288.48M)
  
• At current spot rates, foreign exchange should have a small benefit on a sequential basis and about a $7 million benefit on a year-to-year basis.
  
• With these increased investments, we expect EBITDA margins to come in at about 42% to 43%. We expect normalized EPS for the quarter of $0.31 to $0.34. This includes a tax charge of $19 million to $23 million based on the higher full-year GAAP tax rate of 35%. (Consensus is $0.38)
  
• (Paul L. Sagan) We've seen our top-line growth slow down, driven primarily by the pricing and traffic dynamics in our media and software delivery businesses, and we've encountered a general slowdown in a few of the more mature markets outside of the U.S. where we operate, due primarily to the tougher macroeconomic headwinds in those markets.
  
• The first of these is the emergence of cloud computing in the enterprise, followed closely by the need for better IT security. Then there's the dramatic increase in the use of connected devices, a phenomenon that is driving new applications and new demand for rapid and reliable delivery of data, especially in mobile networks. And finally, more and more rich media - especially long-form video - is being consumed online, driving increases in the need for scale and quality.
  
• Most of our customers are being impacted by at least one, and in many cases all, of these trends. We see this as a tremendous opportunity for Akamai, so we're committed to bringing innovative new solutions to market built on Akamai's Intelligent Platform to help our customers capitalize on these trends.
  
• We had record signings for DSA last quarter, and we've been seeing an expansion of the market for this solution. Over 40% of those signings came from outside the U.S., and over 20% of the deals came from our media and entertainment customers, where more and more sites have continued to add dynamic content. We're investing to advance the industry-leading performance and functionality of our DSA offering.
  
• (Q&A) If you look at the traffic growth not outpacing the pricing declines, I can see why the CDN might be a little bit on the slow side, but the fact that you've got 58% of your revenue, which is flat from last quarter, coming from value-added services seems to imply that the value-added services is also seeing a little bit of a slowdown. I would have thought value-added services would be growing faster than CDN. Can you kind of explain the dynamic there? (A) Well, I think if you look on a year-over-year basis, Mark, our value-added services are growing faster, growing at about a 20% rate. Last 2Q, value-added services were 53% or 54% of our revenues, so on a year-over-year basis, they absolutely are. Much like we saw last 1Q to 2Q, the ratio stayed relatively stable between volume and value sort of on a sequential basis, and some of that has to do just with the seasonality, particularly in the commerce vertical where the revenue tends to level out and even decline just a tad from Q1 to Q2. So I think we're still seeing the better growth on the Value-Added Solutions side and not as much growth in the volume side, although we did see probably a little bit of volume growth sequentially year-over-year - a little bit of revenue growth on the volume side year-over-year.
  
• I just want to ask a question about the interactions with customers in the commerce vertical. Have you seen any changing in pricing in that vertical or any market share shifts that you think are interesting to call out just in the commerce vertical? Thanks a lot. (A) No, that continues to be one of our strongest. That's one of the verticals that's most interested in adding things like security capabilities because they feel so vulnerable, both as a target for theft but also that if their site's taken down, it's losses per second or per minute. It's not theoretical; it's real dollars because their end users simply will go to another site to make a purchase or book something. The largest competitive dynamic that continues to be do-it-yourself, these are large enterprises that first started to say what do we need help with, and then they turn to Akamai and I think they find the platform approach, the holistic approach, very appealing, and I think we see that in our ability to continue to grow in that space. So I would say that dynamic is really relatively unchanged and continues to be a very strong category for us, Mark.

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• BJ's Wholesale Club (BJ) Tops Q2 EPS by 19c, Beats on Revenue; Offers FY27 EPS Guidance
• TJX Cos. (TJX) Tops Q2 EPS by 3c, Beats on Revenue; Offers FY27 EPS Guidance
• The Buckle (BKE) Tops Q2 EPS by 7c, Beats on Revenue