阿卡邁科技 (AKAM) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 Akamai Technologies, Incorporated earnings conference call.

My name is Angela and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session, at which time you may (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

And now, I'd like to turn the conference over to your host for today, Natalie Temple, Investor Relations.

Please proceed.

Good afternoon, and thank you for joining Akamai's conference call to discuss our second-quarter 2011 financial results.

Speaking today will be Paul Sagan, Akamai's Chief Executive Officer, and J.D.

Sherman, 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 July 27, 2011.

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 and Events portion of the Investor Relations section of our website.

Now let me turn the call over to Paul.

Thanks, Natalie.

And thank you all for joining us today.

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.

Normalized EPS would have been about $0.03 higher in the quarter but for a change in our tax rate, that J.D.

will explain in a moment.

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 highest expectations that we have for the business, and I suspect that many of you have as well.

So I'll be back in a few minutes to talk about the steps we're taking to re-accelerate topline growth to capture the massive opportunity that we believe is ahead of us on the Internet.

But first, let me turn the call over to J.D.

for the details on Q2.

J.D.?

Thanks, Paul.

And as Paul just highlighted, 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.

Also, as Paul mentioned, these results include a higher tax rate than we anticipated at the time of our last quarterly earnings call.

The higher 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 US decreased, and our US 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.

We believe our willingness to invest in our network assets is a strong sign about the market opportunities we see for Akamai.

We've talked about the opportunity to grow the business faster in Asia-Pac, Europe, and Latin America.

Our investment in these regions recognizes the need to invest in the platform ahead of new business to capture future customer demand.

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 US continues to grow in the coming year.

Now, 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 Meeting 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 revenues.

The 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 resellers 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 2 points for the same period last year.

GAAP gross margin, which includes both depreciation and stock-based compensation, was 68% for the quarter, which is consistent with the prior quarter and down about 3 points from last year, driven by depreciation growth as we continue to invest in our platforms.

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 for $94.9 million, up about $4 million from Q1.

This was slightly below our guidance range, as some investments slipped from the second quarter to Q3.

Adjusted EBITDA for the second quarter was $126.2 million.

That's up 13% from the same period last year and down about 2% from Q1 levels.

Our adjusted EBITDA margin came in at 46%, down a point from the prior quarter and consistent with Q2 of last year.

The second-quarter total depreciation and amortization was $41.3 million.

These charges include $33.1 million of network-related depreciation; $3.9 million of G&A depreciation; and $4.3 million of amortization of intangible assets.

The net interest income for the second quarter was $3 million, roughly flat with the first quarter levels and Q2 of last year.

Moving on to earnings, GAAP net income for the quarter was $47.9 million or $0.25 in earnings per diluted share.

As a reminder, our GAAP net income includes several primarily non-cash items, including $13.6 million of stock-based compensation, including amortization of capitalized equity-based compensation; and $4.3 million from amortization of acquired intangible assets.

We are including GAAP taxes in our normalized earnings, and that tax charge was $28.3 million, based on a full-year GAAP tax rate of 35%.

And as I mentioned, this tax rate is higher for the year than previously estimated, due to increased costs attributable to investment in our network outside North America.

Again, this was about a $5 million, or $0.03 per share impact, relative to our forecast coming into the quarter.

Based on this methodology, our normalized net income for the second quarter was $65.8 million, up 1% from Q2 of last year and down 9% from Q1 of this year.

In the second quarter, we earned $0.35 per diluted share on a normalized basis -- that's up $0.01 from Q2 of last year and down $0.03 from Q1.

Our weighted average diluted share count for the second quarter was 190.2 million shares.

Our cash generation continue 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.

Capital expenditures, excluding equity compensation, were $42.7 million, below our forecast coming into the quarter, due mostly to the timing of investments.

This number includes both investment in our network as well as capitalized software development.

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.

From program inception in April 2009 through last quarter, we have spent a total of $251.5 million buying back 8.3 million shares at an average price of just over $30.

Finally, days sales outstanding for the quarter were 57 days.

We delivered record first-half performance and have seen continued strong demand for our Value-Added Solutions, which made up 58% of our revenue in the first six months of the year.

As we began 2011, we set an objective to achieve 15%-plus revenue growth.

We talked about the three elements needed to get there -- a good start to the year; continued solid growth in Value-Added Solutions; and traffic growth in the back half of the year.

We experienced a good start to the year, and we are pleased with the traction we saw in our Value-Added Solutions.

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.

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.

We expect gross margins to come down by about a point sequentially, with cash gross margins at about 79% and GAAP gross margins at about 57%.

We expect Q3 operating expenses to increase by about $7 million from the prior quarter, as we catch up on some of the hiring and other expenses that slipped from Q2.

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%.

In CapEx, we expected to spend about $55 million in the quarter, excluding equity compensation, as we catch up a bit from Q2.

For the full year, we still expect CapEx to be at the high end of our model of 13% to 16% of revenue or slightly above.

In summary, we had a solid performance in the first half, but we're not satisfied with our slower growth rate.

We remain confident in the long-term growth potential across our entire business, and we are continuing to invest worldwide for the opportunities ahead that we think can fuel our growth in the future.

Now let me turn the call back over to Paul.

Paul?

Thanks, J.D.

Through the first half of this year, we produced solid and even record operating results -- revenue of $553 million; normalized [at] income of $138 million; and cash flow from operations of $200 million.

These are the best January through June period in the Company's history.

However, we are not satisfied with this performance.

I want to underscore that -- we are not satisfied, even with this record level of performance.

We've seen our topline 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 US where we operate, due primarily to the tougher macroeconomic headwinds in those markets.

Even on slightly slower than planned revenue growth, we believe the long-term outlook for Akamai is as promising as ever.

We continue to see strong proof points of the potential for even greater expansion across the business, particularly around four key drivers where we are focusing our strategy and our investments.

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.

An emerging area in cloud computing that we believe has great promise for Akamai is the development of hybrid clouds, where enterprises are seeking to use some of their own IT resources in combination with third-party data centers.

Here we're leveraging Akamai's intelligent platform and unique solutions through partnerships with other industry leaders to effectively create new Network-as-a-Service capabilities.

One example is our recently-announced partnership with Riverbed to create products that help accelerate applications across hybrid networks.

While we believe this alliance will lay the groundwork for a solution coming in 2012, another partnership that we announced earlier this year -- or that we announced earlier is already showing signs of success.

Our Rackspace partnership began last year when we began integrating Akamai's basic content delivery services with Rackspace's cloud file service.

Building on our early success, we expanded our joint offering to include Akamai's application acceleration solutions, and that has also ramped up very quickly on our platform, with strong growth in Q2.

Together, we've already closed a dozen new deals with Rackspace, combining their hosting with our acceleration capabilities in the Akamai cloud.

As cloud adoption increases, the way people are using the Internet is changing as well.

Websites are becoming richer, more interactive, and more mission-critical.

They're being accessed across multiple connected devices, with new demands for increased performance and security as a result.

This is part of what's been driving demand for our flagship performance solution, Dynamic Site Accelerator.

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 US, 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.

This means with Akamai's help, online businesses will be able to meet an even higher performance standard in the near future.

One growing priority for Web businesses is improving security in addition to just performance at their site.

Our customers are looking for a way to do this in an integrated fashion as part of a total offering.

The Akamai intelligent platform provides a security solution in the cloud where many of the threats exist.

We believe that Akamai's approach provides more robust protection for our customers, and our customers are understanding this.

For example, we signed more than two dozen new deals in the second quarter for our web application firewall service.

Customers are also facing new challenges from the rapid growth connected devices that are, in turn, driving an explosion of new applications and online media.

Again, customers are looking for an integrated solution that encompasses the best performance and reliability; addresses security concerns; and provides an optimal experience based on the end user's device and connection.

We're working with our customers and partners to build advanced solutions to meet the unique demands created by mobile connectivity.

And in media, we continue to invest, because we see the Web driving ever-larger audiences online for video.

One highlight in Q2 was the Royal Wedding, which set a record on the Akamai HD network with 1.7 million concurrent viewers across multiple broadcasters.

The Akamai HD network goes beyond basic video delivery, by making it easier for our customers to reach multiple device types with advanced features, such as adapted bit rate streaming; support for multiple camera angles in a single player, with built-in DVR functionality.

Essentially, this brings the interactive capabilities of the Web together with TV-quality video to provide an enhanced TV experience.

We've seen strong adoption of the Akamai HD network with customers such as MTV, IFC, CBS Sports and the NFL, among others, using it regularly for live and on-demand video content.

So, overall, our business has continued to grow, but not as rapidly as we believe it can, given the opportunities in the markets where we're a leader.

Our game plan is simple -- respond to our customers' expanding need for online scale, performance, and security, through accelerated product and engineering-led innovation.

At the same time, continue to expand our reach with investments in new business partnerships and greater geographic coverage.

We're confident in our ability to execute against this plan.

We look forward to updating you on our progress.

Now J.D.

and I would be happy to take your questions.

Operator, the first question, please.

(Operator Instructions).

Mark Kelleher, Dougherty and Company.

Thanks for taking the question.

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 that -- 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 explain the dynamic there?

Well, I think if you look on a year-over-year basis, Mark, that's -- our value-added services are growing faster.

They're growing at about a 20% rate.

Last 2Q, value-added services were 53% or 54% of our revenue.

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 better growth on the value-added solution 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.

Okay.

Thanks.

Mark Mahaney, Citi.

I just wanted to ask a question about 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 in that, just in the commerce vertical?

Thanks a lot.

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 is taken down -- its loss is 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 start and say, what do we need help with?

And then they turn to Akamai and I think they find a platform approach, the holistic approach, very appealing.

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 it continues to be very strong category for us, Mark.

Thank you, Paul.

Phillip Winslow, Credit Suisse.

(multiple speakers) It's actually Phil Winslow, thanks.

I just had a question actually on colocation and bandwidth costs.

Just what trends are you seeing there this last quarter?

And when you think about just the outlook, what are your expectations?

And obviously, this relates back to the gross margins.

Thanks.

But you're not asking us to comment on the hosting marketplace, though?

Correct, no.

Just your cost that flow through the COGS line there.

No -- okay, so, sure.

I mean, we're still seeing in the bandwidth market consistent price -- cost declines, if you will, from our perspective, with the cost of bandwidth driving that down.

And we're starting -- you can see some -- it depends on the market, really, on colocation prices.

There's some places -- you know, it's like a real estate market.

There's some places where prices are holding; there are other places where there are very aggressive price declines.

And we try to take advantage of that gain, in terms of how we deploy our network assets and try to leverage that.

The other lever we have on colocation costs, of course, is to make our servers more efficient and get effectively more throughput for our footprint in the colo facilities.

A lot of our buildout, though, has been outside of the US.

And as we've added to footprint, that has driven some colocation costs up this year.

I think that's a normal thing you should expect as we build out for what we think is future investment.

Hopefully, we scale over that over time and get some further leverage on that point.

Does that answer your question, Phil?

Angela, I think we lost Phil, so let's move to the next question.

Absolutely, sir.

And your next question comes from the line of Tim Klasell with Stifel Nicolaus.

Please proceed.

Just wanted to maybe reconcile the slower growth internationally with the faster investment.

Is it carrying traffic from -- accelerating traffic from North America, internationally?

Is that what you're investing in?

Or maybe you could help us get our arms around the strategy there.

Yes.

Tim, I think part of it is that -- as I was just answering on the other question, that we're building footprint outside of the US as we expand into new markets.

I think this quarter alone or within the last six months, we've opened up five new markets that we're going to sell in.

And obviously that requires some buildout.

We are seeing more growth outside of our traditional markets in the Asia-Pac area, which is driving some additional growth.

And I think just this year, in general, most of our -- a majority of our network investment has been outside of the US.

So what that does is it shifts both the depreciation and the cost of running the network outside the US versus inside the US.

As far as international growth, it hasn't sort of met our expectations.

I think we are facing some headwinds there.

There's probably -- we're focused on what we can do better to drive more opportunity there.

We've made investments in international that we believe are going to pay off, in terms of market reach, in terms of building new partner channels, in terms of getting our products tailored for the markets outside the US.

And we believe that that's going to drive growth in the future, and we want to make sure that we have the capacity and the capability and the footprint in place to meet those needs.

And I'd just add a little color to that.

Tim, I think maybe what was implied in there is that all media traffic that's coming -- and that's certainly part of the expectation, but it's also application acceleration as businesses go more global and need to reach end users up in the B2B applications and even more places.

And to connect all the ends and do the acceleration that we do, we need to be close to either the source data or the end-user.

So that's driven some of our growth.

And on the macro headwinds in some markets, you know, two places that would be just anecdotal examples would be Japan and the impact that we've seen slowing down a little bit, the enterprise business growth as a result of all of the turmoil that they went through in the first half of the year -- one issue.

Another would be, just anecdotally, some of what we've seen in Spain with the economic malaise and uncertainty there has slowed down some of the enterprise investment.

And I think those are the headwinds we're seeing in some of the more mature markets where we've operated for a while.

Okay.

Great.

And then just a quick follow-up, Paul.

What percentage of your media customers or of your media traffic is on the HD network right now?

We don't give that number.

I don't actually know that number today.

It's been growing rapidly more and more events and users, but I don't happen to know the percentage.

Yes, off the top of my head, I don't know either.

But what we've seen is that sort of the traditional streaming format growth is not -- really hadn't seen any -- much growth at all in the traditional formats.

And most of the growth has been on the HDP side, which is where our HD network is.

So I think, as you look forward, that's where we're driving all the growth and certainly, where all of the marquee events leverage the HD network.

And one of the opportunities that we see is -- our customers, they need scale, for sure, and quality, but they're also looking for simplification.

Because in some ways, while things like HTML 5 and HDP delivery has simplified some aspects, the proliferation of networks and devices and screen sizes is driving a different kind of complexity and, frankly, cost for media customers.

And one of our goals with the HD network is massive simplification.

Give us one copy of the asset and let us transform it on the fly to the right user, in the right format, with the right bit rate, to the right screen size, with the right player.

And that level of simplification, ease-of-use and then unified data back, we believe, is very valuable to our customers and one of the things that is resonating with them.

Okay.

Great.

Thank you very much.

Jennifer Swanson, Morgan Stanley.

I just wanted to drill in a little bit on some of the commentary around traffic.

And in particular, I think, when we talked about patterns, seasonal patterns in traffic, this summer has always been a slower period and it's really fall when you see the acceleration, which obviously, is still ahead of us at this point.

What are you seeing out there that's making you a little more conservative at this point, even with some of the seasonally stronger periods for traffic ahead of us?

And to the extent that you are moving a little more conservative, is it just a rate of content moving online that's happening a little more slower?

Consumption that's been a little slower?

Where sort of are the deltas in the demand drivers that may be changed from when you initially said that 15% a couple of quarters ago?

Yes, I think that -- we certainly talked about the pricing dynamics, the reset of large customer contracts at the beginning of the year, the expectation that traffic would grow -- and it has.

Sometimes people think we're saying it's not growing.

That's not the case at all; it's really the rate.

And we've seen the rate of growth later in Q2 start to accelerate, but it is not at the level that we saw acceleration from '09 to '10 last year.

And that's making us be more conservative.

We certainly still have an objective as a company to meet the growth targets; but I think at this mid-point, realistically, as we look at the three things that we said we needed to have happen to happen, and we had a very strong first half of the year, but we aren't seeing the rate of acceleration that will give us the confidence and the objectives we said before.

So we're being, we think, realistic.

We're not backing off and we're not continuing to push with our customers.

We see them adding and building their plans to go online.

And we certainly expect and have seen the normal seasonality.

And I think we expect to see it, which will be an uptake and an uptick in the second half of the year.

But I just think being more realistic about it, the figures we're giving out today are probably more likely.

They're not the only scenario, but I think they're much more likely, and we're trying to be practical and very direct about that.

Jennifer, your line is open.

Oh, that's it for me.

Thank you.

Scott Kessler, Standard & Poor's Equity.

Thanks a lot.

Paul, I think you alluded to some efforts to accelerate growth.

And I'm wondering if you could provide some specifics related to strategies and/or initiatives?

And J.D., could you possibly explain a little bit further some of the dynamics related to the international network investment increasing the tax rate?

Thanks.

Do you want me to take that first?

Yes, I would just do the tax rate.

It's a very straightforward calculation.

Yes, so.

Yes, Scott, basically, as you probably know, how you -- a portion your cost impacts where you earn your profit.

And a big driver for us of cost, of course, is our network.

What we've seen is we've increased the amount, the percentage, basically of our investment in the network has moved outside of the US.

And so as a result, the percentage of our depreciation in colo costs -- colocation costs, which go with the network, has moved outside of the US as well.

And that's based on the relative growth we've seen and the relative investment we've made in footprint outside the US.

So as we look at that and as we make an estimate going forward of what we think those costs are going to look like for this year, that's basically shifted where we're going to earn our income during the year by a couple of points on the tax rate.

And really, that's the impact that we're seeing.

And if I could just also follow-up on that.

So, you obviously provided some guidance for this year in terms of the tax rate, presumably accounting for this kind of shift.

Is it fair to say that you're going to continue to make comparable investments in the international network in, say, the next year or two as well?

I think we're going to have to continue to invest in the network.

I hope we are, because that will mean that our business is growing outside the US.

I do believe, continue to believe, as we've talked about externally that over time, more and more of our revenue and profit are going to be earned outside of the United States.

And therefore, I do believe, as we've talked about with our long-term model, that our tax rate will be in the low 30s.

It's just not happening as rapidly as we anticipated, based on the upfront investments we're making now.

Thanks.

Sure.

And I'll talk to the strategy point.

I'd go back to the big drivers that we think are driving business on the Internet.

And our goal is to align with those macro drivers that our customers are most interested in, concerned in, and believe there's the biggest opportunity to grow their businesses.

And then we need to exploit our unique position and ability to provide value to them for better performance, scale, reliability, and security.

So without going into great detail again and I'm certainly happy to dive in on any one of your -- if you have a specific question -- one is this drive to cloud and the complexity of using your own ID resources, which most corporations are consolidating to fewer locations, and combine that with third party, whether that's a staff provider who's offering a Software-as-a-Service product, into your -- that your employees or customers or prospects use if you're a business; or just the idea of renting or using capabilities from a third-party cloud provider and combining it with your corporation resources creates a huge performance challenge of between the Company's resources as a third-party, and then out to the end users.

And we believe that our acceleration technology, particularly in these partner models, like we've done with our Riverbed, Rackspace, IBM and others, is a large growth opportunity for us.

Clearly, the rise of more and more malicious behavior online is driving the IP security market.

And what customers are and just users are figuring out is that the traditional model of defense at your backdoor isn't the only thing that you should be doing in defense in depth.

Where the old model was defend your desktop, defend your datacenter with a firewall, your desktop with antivirus, that's just not sufficient any more to handle the threats out there.

And effectively, our model says, part of your defense ought to start where the bad guys are operating.

Because our servers and our networks are deployed around the world, we can often identify traffic like a denial of service attack, where it starts not where it's going to terminate.

And we can see and bury that bad traffic there and completely shield our customers from the threat.

Our Web application firewall has a similar idea -- move the idea of the firewall from the edge of your datacenter, out to the perimeter, to the edge of the Internet where the bad request comes from.

So (technical difficulty) never let the [rogue] traffic get inside your computing environment.

So I think there's large room to continue to build that platform of security capabilities.

Talked about the proliferation of connected devices and what that's doing to drive complexity and demand, and our ability to accelerate traffic to landline connections and wireless connections within cellular connections by cooperating with cellular networks, we think is a dramatic capability.

And then this explosion of online video, which is still only 1% or 2% or 3% of video in the home over the Internet -- we believe that will -- it took 15 years to get to 1%.

It will double more quickly.

And we believe that's an opportunity for Akamai, especially if we can simplify the workflow and the challenge customers have of taking their video assets, and delivering them to so many users in so many forms across so many devices with good monetization.

So we believe if we execute in those categories with a focus on site performance above all, we'll continue to drive growth, and that we can drive faster growth over time in the business.

Hopefully, that's helpful, Scott.

Yes, thanks for the additional thoughts.

David Hilal, FBR Capital Markets.

Samad Samana here for David.

I was going to ask you a question -- we've heard that some of the major ISPs are cracking down on imbalanced pairing relationships.

One can make the argument that this helps and hurts you.

Could you give us a little more perspective on that?

Well, I think -- I can't comment specifically since you haven't given me a specific network example, and it probably has more to do with the relationship with other traditional telcos.

Our basic value proposition at one level to networks have been -- there are two things that you need to manage in your business -- great end-user performance and lowering your variable costs.

And we help them with both.

So when you move Akamai servers and Akamai technology into the network, and we use that deployment to serve their end users, their end users get a faster Internet.

Because most of the world's most popular content is coming from us close by, and that's a plus.

And then, because we can deliver the content locally over and over again, we're also lowering their variable costs.

And so we're helping them not worry about the balance of traffic out their backdoor; we're keeping it all resident inside their network and managing it in the most efficient way.

And that's why we've been able to partner with roughly 1,000 of the most important ISPs around the world.

And that's a very important part of our relationship model -- to continue to work with those networks to bring them value on a continuous basis.

And they see it, which is why I think we've had these relationships and grown them so effectively.

So I understand the challenge that they often have with pairing with other networks.

We have a very non-traditional approach that's very good for them and why I think we've been successful.

And that has continued.

And we have not seen that dynamic change for us.

Okay.

And if I could ask one more question.

Have you experienced any pricing pressure on the value-added services side with some of your smaller competitors partnering up and claiming that they offer similar services at lower costs?

Are you seeing any pressure on the value-added services side?

So I'd say we have to earn our keep every day with our customers because it's always been a competitive market.

Do It Yourself is the first competitor inside a large enterprise; their first question is, why do we need to listen to anybody?

Can't we do this ourselves?

We've already spent a lot of money on IT and on the Internet.

There have been many competitors, large and small, in and around this market.

I'd say that both the competitive and pricing dynamic remains very consistent for years.

Our goal is to continue to add value.

I think an enterprise -- any enterprise IT sale, if you don't come with additional value and functionality of scale, speed, performance, analytics, security every year on an ongoing basis, you will erode your own value regardless of what happens in the marketplace.

So we're very focused on continuing to innovate, like the security features that we've been talking about in these new services, that we've only been selling for the last year or so.

So I'd say that that dynamic is consistent.

We're maniacally focused on competing for business and I'd say that we're continuing to do well.

Okay.

Thank you.

Sterling Auty, JPMorgan.

If the volume is improving but not quite to the expectation, is it more the whole -- meaning is it more the consumer of the content that's just not consuming as much as maybe what you thought?

Or is part of it the supply?

Is part of it the customer side just not putting as much content through the [CDI]?

You know, I think it's a mix.

Part of it's the seasonal question, there's always less demand seasonally; although year-over-year, it increases.

We've seen that.

We continue to see more content going online.

But we really went through a big inflection in high-quality video broadband over the last couple of years; we saw a huge acceleration over a year ago.

And historically, we've seen that happen in intervals over time.

We're not in a massive retrenchment, as we saw three years ago in the recession when the ad market disappeared and content providers weren't sure how to monetize content.

At the same time, they're not sure always how to monetize content on the Internet as effectively as the old models.

And there's a little bit of two steps forward, one step back in those models.

So I think it's a combination, but again, we're seeing the traffic grow.

We've even seen the rate growth accelerate a little bit, but it is not where it was a year or 18 months ago, and we just want to be clear about that.

I think that's fair.

But kind of extending that, when you look at the back half, you mentioned a couple of catalysts even a quarter or so ago, that you thought would accelerate the volumes.

Have any of those changed?

Or have any of them been eliminated for one reason or another?

No, and we've seen some acceleration, but it hasn't been at last year's levels.

So we're just going to be very conservative about it.

Until we see it, we're not going to say we know it's coming.

We've seen some acceleration; we continue to be optimistic about it.

But I just think as we're realistic where we are today, the macro pressures in some of the international markets that we've seen -- we're just going to try to be very straightforward about what we think's going to happen.

All right, thank you.

(multiple speakers)

(multiple speakers) Then in the context of a very strong first half of the year.

That's fair.

Thank you.

Gray Powell, Wells Fargo.

Thanks for taking the questions.

First, wanted to kind of follow-up on a prior question -- I mean, basically, gross profit margins have seen a little bit of pressure since 2009.

And the main driver appears to be colocation costs.

How should we think about trends going forward?

And can you maintain margins in sort of the 79% to 80% range?

And then I know you don't want to give longer-term guidance, but how should we think about EBITDA margins beyond the next quarter?

Is 42% to 43% kind of the new run rate?

So, again, we're not going to give a new long-term model.

We'll update the long-term model at the end of every year; I think that's the appropriate way to talk about the longer-term trends and how we see them in the business.

The network COGS is a combination of things, including colocation; including the bandwidth charges.

Clearly, there's been some, as we talked about earlier, a little more pressure on keeping up colo prices.

And energy prices have skyrocketed and that's a big piece of colocation costs; those get passed through in contracts.

That's an aspect.

A big piece of our focus, though, is driving efficiency into our network to get more out of the same footprint than if we are effectively lowering the colo portion of the delivery per megabit of data.

And I think those are the dynamics and we've got great levers.

We can work on the ones like software development, that we can control, and capturing the effective Moore's Law on a machine being more efficient than the last one we bought and deployed.

The piece that's more outside of our control is the realistic cost and energy costs.

Got it.

Thank you very much.

Mike Olson, Piper Jaffray.

Just a couple of quick questions.

Looking kind of one level deeper on what's going on in Media and Entertainment, do you think the perception of switching costs from Media and Entertainment customers is lower than maybe it used to be?

And is that potentially resulting in those customers being increasingly willing to switch between CDN providers more on a best-pricing terms basis?

Or is that an oversimplification of what may be impacting that portion of the business?

Well, we've always said it's a competitive market.

And I don't want to make it appear that we've lost sight of that or don't believe that it isn't a very competitive market.

There are switching costs.

They are not just around price, they're around analytics; they're around performance; they're around all the things, for example, that we built in or are building into the HD network.

At Akamai, at the same time, particularly for a very high-volume site, delivery is a big cost and they need to manage it as much as possible, especially in line with the monetization capabilities.

So I'm not sure that I think switching costs are higher or lower.

There are complexities to do it and risks to anyone when they do it.

I think the real issue is this is a market of volume growth where pricing has declined very consistently year-over-year.

We continue to see very consistent kind of unit price changes year-over-year, even now.

And then the swing factor is how fast the volumes grow.

But I don't really think it's a switching cost phenomena.

Okay.

And then just one quick housekeeping.

J.D., did you give a customer account number?

Or will you give one?

We did, and we did say it was a record number.

And it seems like every time we stop talking about something, we do really well on it.

So maybe that should be our strategy.

But we actually added 147 net new customers this quarter, which is, I think, an all-time record.

And we had great signings -- well over half of those signings were the first-time-in-the-door signing a deal for a value-added solution, which is where our focus has been in the field.

Churn has stayed low in a comfortable range, so we're really pleased with the performance, in terms of our new customer signings this quarter.

Good.

Thanks.

Jeff Van Rhee, Craig-Hallum.

A couple of questions, guys.

First, on the cash gross margin side, help me understand directionally -- I guess you had guided down roughly 100 basis points.

The mix is gradually, some quarters more so than others, shifting [to that], and you're essentially looking for revenues on the top line to be roughly flattish at the midpoint.

So what is it within the gross margin side that drives that change sequentially lower?

Yes, Jeff, so I do think that what we're seeing going on is that the Value-Added Solutions are pretty stable in terms of the gross profit percentage.

They're very high in software, like as we've talked about.

We do get a little bit of ADS seasonality, which our advertising and business solution business has sort of a 50% or sub-50% gross profit margin.

So that's a little bit of a decline.

But the issue, particularly on the volume side or on the network side, is we keep building out and adding to our colo costs.

And we had a couple of points and discussions on that, and that's really what has driven, in the short-term here, some of that gross profit margin decline.

We're still sort of within the range of the long-term model that we contemplated.

And I do think that we get the benefit over time of a shifting mix.

But right now that's being offset a little bit by the colo costs coming on.

Okay.

And then while you're on the VAS side, the absolute dollar looks like it's flattish sequentially here.

As I take a quick look back, at least in the last four years, I don't see a flat Q2 to Q1.

You did have some sequential benefits from currencies, so arguably maybe it was down sequentially.

What's different in the VAS side this year compared to past years?

(multiple speakers) I mean you've got -- you mentioned the security product ramping and it's not volume-dependent, so it doesn't seem like you've touched on that.

Yes.

So, I think there's a couple of things.

One is if you look by vertical, the -- you look in the enterprise vertical, we actually did see growth and that's driven by Value-Added Solutions.

And that's where you would see a lot of the cloud adoption, some of the early adoption security.

Where you saw a bit of the sequential decline in commerce, which is also a heavily Value-Added Solution there, I would attribute it somewhat to the seasonality.

Now, last year, we kind of blew through that seasonality as we were really sort of earlier in the stage of DSA adoption and growing there.

We have seen a bit of a slowdown in that, and I attribute some of that just to the law of size -- you know, it's a bigger space to work off of.

But I think seasonality has something to do with it.

And then we are still getting growth, particularly in our new products around the cloud.

Okay.

And just what (multiple speakers) -- one last quick (multiple speakers) --

(multiple speakers) Yes, let's make them quick because we're approaching the end of our hour and I'd like to get to as many people in a long queue as we can.

Got it.

Real quick then -- the licensing to carriers of technology, any thoughts internally or discussions on any serious level of doing that?

Well, we're not going to make new product announcements today, but we always look for better ways to partner with networks.

I described the basic value proposition that continues to be, I think, as true today as it was 13 years ago.

When we started, maybe more so networks are -- particularly mobile networks, really just being crushed by the flood of data, much of that driven by uptake in video usage.

And we believe that there's a lot of value in our platform that isn't even exposed to network providers.

And if we can find a way to partner with them effectively and help them, we think that's good for them, us, our customers, and the ecosystem -- the Internet will continue to explore that.

Great.

Thank you.

Angela?

Yes.

And your next question, sir, comes from the line of Chad Brantley with Pacific Crest.

Please proceed.

A quick follow-up on pricing commentary.

I had a question on year-over-year price declines, specifically in the Media segment.

Obviously, working through some customer renewals, and I think some share shifts and traffic in the first half.

Did you see year-over-year price declines in the Media segment actually ease or lessen in the second quarter?

No, I would say we saw sort of the same typical rate of price decline -- relatively consistent level of decline (multiple speakers), Chad.

(multiple speakers) So it was consistent despite the renewals and some of the other factors going on?

Yes, and even in the renewals, it was consistent.

It was just a number of them that all boxed together around the same time.

But the dynamic has been very similar and consistent.

Okay.

All right.

Thank you very much.

Angela, maybe we can get one or two more in.

Yes, sir.

Your next question comes from the line of Rod Ratliff with SunTrust Robinson Humphrey.

Please proceed.

(multiple speakers) Paul, you referenced the phenomenon of approximately three years ago when there was a guide below expectations, and there were some pretty serious macroeconomic concerns at the moment.

But after that, there was a pretty significant snapback that you referenced earlier as well.

Do you think that there could be any sort of phenomenon going on like that right now, in terms of the volume growth expectations that you set forth and what you've seen to set forth those expectations?

I'll let J.D.

take it.

(laughter)

Well, yes, I think, Rod, what you see with our business are really the two sides of the coin.

The volume business has been, as you point out, a more cyclical business.

Before that phenomenon that we saw at the end of 2008 and 2009, the media business was growing 40% and then it started to shrink.

And then, last year, we got to the high 20s, maybe even 30% for that business, and now we're seeing it moderate again.

So I think there seems to be some natural cyclical trends in there, that it may be -- a piece of it's macroeconomic; a piece of it's just sort of the inflection point of an immature industry; a piece of it's heavier and lighter competition.

You know, you have to factor all that in.

Our Value-Added Solution business, which is actually a business that, over that time period, we built from basically scratch, has been a pretty consistent grower.

I mean, it's moderated a little bit as it's gotten bigger.

We're now talking about a $600 million-plus business.

But that's been a pretty consistent grower.

And I think you're seeing us make a lot of investments there to keep that growth rate going and even accelerate it by expanding our product line.

So I think on part of our business, you're absolutely right.

And it's very difficult to predict the cyclicality of that and the trends in that industry.

We believe, long-term, while there will be ups and downs, that's a great growth opportunity and a great business.

On the other side of our business, that's a fundamental shift that we're benefiting from.

(multiple speakers) If I might, one last question.

Rod, make it real fast.

If I could follow-up very, very quickly -- what do you think about the building wave of wireless and does that seem to have been put off just a little bit?

I'm not an expert on the buildout of other -- of those networks.

And obviously, that's a worldwide question, so you've have to be more specific and we could certainly research it for you from our point of view.

But we continue to see huge demand among our customers for wireless solutions, because so many more users and so many interactions are coming from their customers on mobile devices and connected devices.

So not just smartphones, but tablets like iPad, et cetera.

And that's driving huge demand.

Even if it's a small number of the interactions, it's their same customer who's having a different experience.

And it needs to be consistent and appropriate to the device, or they risk losing that customer.

And we think that's a large opportunity for us to work with our customers, but also with carriers or partners who work with carriers, to build new offers, to help have the best delivery across wireless -- or cellular, I think you mean in this case.

Yes.

No, it's not WiFi.

Operator, one more quick one and we'll wrap up.

Yes, sir.

And your last question will come from the line of Ed Maguire with CLSA.

Please proceed.

Just if you could address how much your new alliances with -- we saw DMC and you've got Rackspace underway, and Ericcson and Riverbed -- how much investment is required to get these ramped up relative to just developing products internally?

And how does that map into your expectations for investment in 3Q and going forward?

Thanks.

Sure.

So we think that those are -- lumping them together rather crudely, not meaning that they'll all be the same -- but in some cases, there's an opportunity or a requirement to provide engineering development upfront where we're developing technology or working together, or embedding technology as we're doing in each other's products in the Riverbed solution.

In the BMC case, it's making their measurement capability available to our customers in -- who buy certain services, to see the performance gains and monitor the performance of their site.

So that's really a bring-to-market of somebody's products; so that's not much engineering.

In many of these cases, it's called marketing work, where we have to support them as a channel, like in the Rackspace example.

And then in the Ericsson example across mobile, that's a variety of things, including working together where we already have products or technology, or jointly developing new things, potentially, even to provide wholly-new solutions in the cellular world.

So it's a mix.

I don't want to overgeneralize, but you can assume some require more engineering and some more marketing channel support.

Engineering comes first generally.

And if we're successful, the marketing support continues to go on because it pays for itself in new business.

So, hopefully, that's helpful.

I know we've gone over time and we always try to keep to schedule for everybody, because we know you're busy.

It's a lot of questions.

I know we didn't get to everyone in the queue, but we hope you understand that we were able to get to at least all of the highest priority questions.

We look forward to updating you again in another three months.

Thank you all for joining.

Bye bye.

Ladies and gentlemen, we thank you for your participation in today's conference.

This does conclude the presentation and you may now disconnect.

Have a wonderful day.