Akamai had a strong Q1, and revenue and earnings came in right where the Street wanted them. The news got better during the company’s earnings call: It insists it’s seeing no signs of an economic slowdown and isn’t having to lower prices to fight low-end competitors. It also raised earnings guidance for the year by 29% to 32%, and said revenue would come in at the mid-to-high range of previous predictions.
Revenues: $187 million, up 34% y/y vs consenus of $188.2M
EPS: 41 cents, beating consensus by 2 cents.
Operating Income: $53.3 million, up a whopping 96%.
The growth this quarter was driven by surprising strength in e-commerce in what’s supposed to be a seasonally weak time. Application acceleration is also growing rapidly and is becoming a revenue and profit driver.
The company says they’re still waiting for the push from High Definition that will drive revenue in the media sector, much the way increased broadband access did over the last couple of years.
4:34: Call starts. Standard disclaimers.
4:36: Paul Sagan, CEO: Q1 was another solid quarter. Record revenue, 2% increase over seasonally strongest 4Q last year.
4:37: JD Sherman, CFO: Achieve or exceed financial goals for 2008. Primarily organic growth becuase not much benefit from acquisitions. No customer accounted for more than 10% of revenue, again. ARPU up 22%. Average customer spends $300K+.
4:39 Churn was up 4% this quarter, again driven by smaller customers.
4:40: Operating expenses down slightly from prior quarter. Spent a little less than expected in first quarter but that spending will come in current quarter.
4:44: Cash generation continues to be very strong. 1Q raised $88 million, 66% gain y/y.
4:46: Revenue wil meet guidance grow between 26-32% this year, and will be in mid-to-high end of that range. Raising earnings guidance to 1.68-1.71 of normaizled EPS 29-32% increase y/y.
4:48: Sagan back on
4:49: When two undersea cables were cut in the Mediterranean Sea, Akamai customers were able to stay online. International growth is becoming more and more important.
4:50: Successful support of March Madness. Very difficult for companies to match Akamai’s performance without incurring significant and uneconomic costs.
4:51: 1/3 of customers come from dynamic services.
Q: Has pricing environment changed for the better, cause for a slower decline in gross margins?
A: Couple of things, really gotten great traction on scale and efficiency. Not just simply selling commodity bandwith. Not a major shift in the pricing. AKAM has just been able to differentiate itself.
Q: Where does the Akamai value proposition end? When do you go to a third-party?
A: Draw the line on highly regional or customisable. We’ll look for a partner to do that kind of work.
Q: Churn improve in second quarter?
A: I think we’ve had churn for a long time in the 3.5%-4% range and I wouldnt be upset if we were in that range.
Q: What are the expenses that you’re moving to second quarter?
A: We added 65-70 people in the quarter, but that was slower than we thought so that’s where a lot of expenses will come from.
Q: E-Commerce stronger than media for the quarter?
A: Media growth still very robust but it’s not growing as fast as it was over the last couple of years. Because broadband growth is slowing. Next inflection point will be with HD. E-commerce may be getting some help from macroeconomic climate (gas prices are high, so shop online).
Q: Hitting expectations for ability to upsell value-added products?
A: Yes. Some sectors off the economy there’s real hesitation about spending but we’re not seeing that on the Internet.
Q: What would it have taken to meet high end of revenue estimates?
A: We were pleased. It was hard to estimate because of the seasonality of Q4. No surprises in any of the verticals except for that e-commerce continued to be strong in seasonally slow time.
Q: Status of NOL. When will you become a full-cash tax payer?
A: Very significant NOL ($250 million range) that will last us through the next decade. Someday we’ll be a taxpayer.
Q: How does legal victory affect future/relationship with MSFT?
A: We’re waiting on judge’s final ruling.
Q: Net customer count — will new customers start to trend up?
A: Not something we concentrate on, concentrate on getting revenue from existing enterprise class.
Q: Competitive environment?
A: Remains sophisticated. Customers don’t say “hey I’ve heard of the Internet, can you help us find it?” Not one specific thing that drives people to us
Q: The gaming vertical? What are you seeing happening there? More valu-added services being sold with move to online gaming?
A: Lot of growth but it’s a new market, so in terms of value-add we’re still selling the basic services. That’s where our sales really excel. Gaming has been a nice area for us in the last year. Lot of industry marketing efforts in gaming.
Q: Is any one sector responsible for slower net adds?
A: Not really, but ARPU is significantly higher on new net adds.
Q: App acceleration?
A: Will be one of the fastest segments of growth if not the fastest. Becoming major driver for us.
Q: Legal expenses?
A: We don’t break it out, but expenses will continue from the trial, but they’ll be a little less in Q2 or Q3.
Q: Headcount adds — techies or sales?
Q: When will app accelerations be a reportable segment?
A: Not a separate business unit, but it’s well on track to becoming a significant driver to revenue and profit growth.
Q: Any significant verticals using app acceleration?
A: Across all the enterprise customers
Q: Lot of strength internationally, where specifically? Is international going to become more important?
A: Strength in Europe and Asia. Internet is growing fast in both. Expect more growth, far more people will eventually be on the Internet outside of the U.S. (25% of revenue this quarter was international).
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