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 Akamai (AKAM) posted a mixed Q2: Revenues came in light, profit was in-line, and subscriber growth was better than expected. But the content delivery network also cut full-year guidance and issued a disappointing Q3 outlook; shares are down 16% in after-hours trading to $26.10.
Why the grim outlook? On the company's earnings call, CEO Paul Sagan outlined two trends:
- The soft economy means customers in some verticals aren't spending as much on Akamai projects as they might otherwise.
- Growth is slowing for media companies' Web sites, including streaming video. Eventually, Akamai will get to push higher-quality video to consumers, which they'll get to bill more for. But right now, Sagan says, most Americans don't have the bandwidth to watch HD video over their home Internet connections.
Key Stats:
Revenue: $194.0 million vs. $196.7 million consensus, $194-$199 million guidance
Normalized EPS: $0.41 vs. $0.41 consensus, $0.41-$0.42 guidance
Net new customers: 53 vs. 26 (AmTech) 30 (Canaccord Adams)
Guidance:
Q3 Revenue: $193 million-$198 million, vs. $206.6 million consensus
Q3 EPS: $0.39-$0.40, vs. $0.42 consensus
2008 Revenue: $785 million-$800 million, vs. $817.1 million consensus
2008 EPS: $1.63-$1.69, vs. $1.70 consensus
LIVE Conference Call Notes:
4:33 Conference begins. Standard disclaimers.
4:35 Sagan joins. Record revenue, etc. Going over key stats. Impact of a "more challenging economic environment" in some customer verticals.
4:36 JD Sherman going over stats from release. Revs at low end. Media and ent. vertical roughly in line with overall business. Media growth has moderated from pace we saw for several years. Commerce vertical continued to be very strong. More than 50% y/y increase. Progress with newer, value-added solutions, including higher margin.
4:37 International 26% of total revenues. Grew 8% sequentially, 45% year-over-year. North America grew 2% sequentially, 22% y/y. ARPU up 19% to $23,700.
4:38 170 gross customer adds. Churn just over 4%, primarily due to churn of smaller customers. New customers' ARPU well above ARPU of churned customers. GM stabilized as app performance, other GM businesses grew.
4:41 Balance sheet. Cash generation very strong. Cash from ops $70 million. $158 million ytd.
4:43 Pressures being felt by customers via economy will not let up. Based on trends we're seeing, expect full year at low end of previous revenue guidance. $785-$800 million FY, 23-26% growth. Earnings: cash gross margins to trend down. Full year ebitda margins rougly 2 points. Also likely to be at low end or below EPS guidance $1.63-$1.69 normalized EPS. 23-28% growth. Q3 tends to be seasonally slowest for customers, especially those most sensitive. $193-198 million, midpoint 21% growth over Q3. Normalized EPS 39-40 cents.
4:46 Explosion in traffic growth has moderated. Look forward to future of media and entertainment online. Higher quality video unmatched. Many of conversations go beyond quality, but how can help with monetization. Dynamic site accelerator.
4:50 Q&A begins. Competitive environment in media and entertainment market? Got to broadband adoption drove number of users, how much users are consuming. Pace at which they can consume it is fixed. As pipe gets bigger, can consume more video, believe adoption up to HD. What we're seeing isn't a slowing in that market. Win rates good, great relationships. They aren't seeing the pace of traffic growth that they saw a few years ago. Rate at which an average site is growing in the media space isn't growing as much as it was 18 months ago. Bursting at low site, got us to low end of guidance.
4:53 Any effect on pricing? Any worse than it has been? Why guiding down on margins sequentially if revs about the same? Why adding more gross but still churning? JD: Pricing environment has been pretty competitive, no major changes. We got to the point in media space several quarters ago, commodity benchmark for every deal. Don't really see any difference there. Don't see natural growth in traffic that we saw with broadband explosion. We'll see a modest decline in margins, even with revs roughly flat, because depreciation going to grow. Continue to grow headcount to manage larger and larger network. Churn: 170 new adds was sort of consistent. No major difference; really pleased with them. A lot at larger ARPU levels and are buying value-added services. Churn is from smaller customers where we've really turned focus toward enterprise-class customers.
4:56 Where customers coming from? New to CDN industry? Other companies? Clarify how economic impacts business? Inability to get pricing? Traffic from end consumers? Quality of adds has been very good worldwide. Focused on quality customers; that's who we're targeting. Not that consumers are hurting and therefore aren't consuming as much. Consumption issue is really "how much can people consume"? Limits how much traffic growth. Nothing to do with economic situation. Economic issue is either in verticals where people are feeling strong pressure and may be slowing down purchases, how much they buy, how many features they add online. In media, pressure on advertising, online and offline; where media companies are feeling squeezed, fewer dollars to spend on new online initiatives. As a whole, a little more headwind at the middle part of the year; made us more conservative about back half of 2008.
5:00 If economy were to recover, where would money go? New applications? FCF: Anything in future that could interrupt FCF trends? General economic issue really is vertical specific for us. Commerce: Automotive really a hammered sector which was trying to make a digital difference. A little more conservative in canceling projects.
5:03 Rationalization of ad-supported businesses? Bigger trend? Slowdown? Certainly seeing one of the areas where traffic is growing strongly is social networking. But q/q for a year now, some of those models more suspect than others, and would be rationalization of that market. Not sure that ties directly to affecting traffic growth. If tougher times come, VC funding probably would go away. Most across the board of the limitation on broadband consumption. Rate of increase has slowed. Imperative to improve monetization. Having conversations about ways to better, more effectively monetize sites.
5:05 Any big internet traffic trends? Trends in commerce very, very strong. Some of macro things may be influencing: Shopping online instead of the mall? Continue to see stronger growth internationally.
5:07 Media entertainment 40%-45% of business, grew slightly below 27% overall. What assuming for bursting around media/ent? A lot of what's happening is seeing longer term volume commitments rather than standard monthly deal. For customers, realize usage is more seasonal. People go outside for the summer. Bursting relationship stays the same; that dynamic is changing a bit.
5:09 Competitive differently internationally? Pleased with intl performance over the last year. Given domestic busines has grown very strongly, means intl catching up. Making an investment in international -- opening new offices, expanding staff. See some u.s. competitors in some intl markets, in some countries there are domestic local competitors; some try to mix in production, professional services. I think we compete effectively; also we have global scale.
5:13 GM just greater mix of higher margin verticals? Certainly the major driver; something we've talked about for a while. Start to see benefit. Video gaming? Large growth in gaming space. Any notable benefit from NBC's olympic partners? Working for first time with partners inside China, delivering in Europe, UK, domestically working with NBC to deliver site. Never know how exciting going to be until we see how good games are; time zones, etc.
5:21 Color on app performance solutions? Ticked up and helped margins. $40 million run rate? Will update once a year. Very pleased with what we're seeing in not just dynamic sites but app performance too.
5:24 IT budgets get scrutinized. Sales challenge there.
5:27 Outlook for net customer adds? Don't really forecast that. What we do is focus on signings we're delivering are high-quality customers.
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