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Akamai Technologies' (AKAM) CEO F. Thomson Leighton on Q1 2014 Earnings - Call Transcript

Stocks in this article: AKAM

This transcript originally appeared on Seeking Alpha.

Title: Akamai CEO Discusses Q1 2014 Results - Earnings Call Transcript

Symbol: AKAM

Call Start: 16:30

Call End: 17:40

Akamai Technologies (AKAM)

Q1 2014 Earnings Call

May 01, 2014 4:30 pm ET

Executives

Tom Barth - Head of IR

F. Thomson Leighton - Co-Founder, Chief Executive Officer and Director

James Benson - Chief Financial Officer, Chief Accounting Officer and Executive Vice President

Analysts

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

Jennifer Swanson Lowe - Morgan Stanley, Research Division

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

Justin Rowley - Goldman Sachs Group Inc., Research Division

Aaron Schwartz - Jefferies LLC, Research Division

Colby Synesael - Cowen and Company, LLC, Research Division

Richard Fetyko

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

Edward Maguire - CLSA Limited, Research Division

Sameet Sinha - B. Riley Caris, Research Division

Rob Sanderson - MKM Partners LLC, Research Division

Timothy K. Horan - Oppenheimer & Co. Inc., Research Division

Philip Winslow - Credit Suisse AG, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter Akamai Technologies, Inc. Earnings Conference Call. My name is Philip, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Tom Barth, Head of Investor Relations. Please proceed, sir.

Tom Barth

Well, thank you, and good afternoon and thank you for joining Akamai's first quarter 2014 earnings conference call. Speaking today will be Tom Leighton, Akamai's 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 May 1, 2014. 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 financial portion of the Investor Relations website at akamai.com.

And with that, let me turn the call over to Tom.

F. Thomson Leighton

Thanks, Tom, and thank you, all, for joining us today. Q1 was another excellent quarter and a great start to the year for Akamai, with revenues and earnings both exceeding the high end of our guidance range.

Q1 revenue was $454 million. That's up 23% over Q1 of 2013. Our excellent performance was driven by continued strong traction across all of our major product lines and geographies, with especially strong growth for our security products. The overachievement compared to guidance was driven by greater-than-expected traffic for our media delivery solutions.

Non-GAAP net income for the first quarter was $105 million or $0.58 per diluted share, which is up 14% over Q1 of 2013. Our overachievement on the bottom line was primarily driven by the better-than-expected revenue.

As most of you know, we completed 2 major transactions during the first quarter. First, we closed the Prolexic acquisition on February 18. And then 2 days later, we raised $690 million through our convertible debt offering, further strengthening our balance sheet for additional strategic flexibility.

I'll be back in a few minutes to talk more about our security products and some of the other achievements from the first quarter. But first, let me turn the call over to Jim to review our financial results in detail and to provide the outlook for Q2. Jim?

James Benson

Thank you, Tom. As Tom just highlighted, Q1 was another strong quarter for Akamai on both top and bottom lines. As I walk through the details of our Q1 financial results, I'll provide you with the consolidated numbers that include roughly 6 weeks of the Prolexic acquisition, and where appropriate, I'll also provided you with Akamai's results for Q1 excluding Prolexic.

As Tom outlined, Q1 revenue came in above our guidance range at $454 million, up 23% year-over-year with strong growth across the business. Prolexic accounted for approximately $7 million in revenue for the quarter. Excluding the impact of Prolexic and also adjusting for the ADS divestment and foreign exchange headwinds, revenue was still up 23% year-over-year. Revenue growth was strong across every solution category, but the overachievement was primarily driven by better-than-expected traffic growth in our media business.

Turning specifically to our media delivery solutions. Revenue was $215 million in the quarter, up 19% year-over-year and up 4% sequentially. We are very pleased with the growth in media coming off a very strong fourth quarter and absorbing the impact of new pricing terms for our largest media customer that became effective on January 1.

Traffic and revenue growth accelerated across most of the customer base, with particularly strong growth within our software download and gaming customers, driven by unplanned patches and gaming releases. Additionally, there were several large live events in the quarter that also had some modest contributions to the revenue overachievement. And while events like the Winter Games in Sochi and the NCAA Basketball Championships do not materially move the needle on revenue within the quarter, they do highlight our unique ability to deliver high-quality video over the Internet at scale.

Turning now to our performance in Security Solutions. Revenue was $198 million in the quarter, up 26% year-over-year and up 3% sequentially. Excluding the impact of Prolexic, revenue was up 22% year-over-year and roughly flat sequentially.

Within this solution category, we saw solid growth in our Web Experience Solutions, and as Tom mentioned, we saw a nice uptick in growth rates in our Web security solutions. Net signings were particularly strong for both our Kona and Prolexic security offerings, an important proof point of early traction with our Prolexic integration.

Finally, revenue from our services and support solutions was $41 million in the quarter, up 48% year-over-year and up 12% sequentially. We continued to see solid traction in service attachment rates across all of our solutions, and we saw an uptick in event-driven revenues as customers relied on Akamai service professionals to help them execute the notable live media events I mentioned earlier.

Turning now to a review by geography. Effective this quarter, we revised our method for splitting out U.S. and international revenues. Previously, revenues were split based on the invoicing location. Starting in Q1, revenues are split based on the location in which the sale originates. Prior period amounts have been recast under this new method, and the historic growth rate trends are very similar under both methods and a reconciliation of the 2 methods for fiscal years 2012 and 2013 can be found under the Quarterly Earnings Release section of our Akamai website.

Sales in our international markets represented 28% of total revenue in Q1, flat from the prior year and up 1 point from the prior quarter. International revenue grew 24% year-over-year and 7% sequentially, with currency fluctuations having a negative impact on revenue of approximately $2 million on a year-over-year basis and negligible impact on a sequential basis. Excluding the impact of currency fluctuations, international revenue grew 26% year-over-year and 7% sequentially. We continued to see strong growth in our Asia Pacific geography, and we were very pleased with the improved performance in our EMEA markets.

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