阿卡邁科技 (AKAM) 2011 Q4 法說會逐字稿

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

My name is Derek, and I will be your operator for today.

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

We will facilitate a question and answer session at the end of the conference.

(Operator Instructions).

At this time I would now like to turn the call over to Ms.

Natalie Temple, Investor Relations.

Please proceed.

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

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

Sherman, Akamai's Chief Financial Officer; and Jim Benson, Senior Vice President of Finance.

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 February 8, 2012.

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 record revenue in Q4, with our largest quarter over quarter revenue growth ever.

Financial highlights for the fourth quarter include -- revenue of $324 million, a 14% year-over-year increase and a 15% increase over the third quarter of 2011.

A normalized EPS of $0.45, up 13% from Q4 of last year, and up 32% sequentially.

For the full year, we grew revenue to $1.16 billion, up 13%.

We generated normalized EPS of $1.52, an increase of 6% over 2010.

And we continued to generate strong cash flow, with a full-year cash from operations of more than $450 million.

I'll be back with some additional comments on what we are seeing in the market.

I'll also have a few comments about our new product rollouts in 2012, and the planned transition we announced today in the role of CFO, with Jim Benson taking over from J.D.

Sherman after we close the books on 2011.

But first, J.D.

and Jim are going to review our 2011 results in detail and look ahead to the start of 2012.

J.D.?

Thanks, Paul.

With the Q4 revenue of $324 million, up 14% year over year and up $42 million or 15% sequentially, we exceeded the high end of our guidance with solid growth across the board.

Our commerce vertical increased 20% compared to last year, and 25% sequentially, driven by a significant increase in online shopping activity.

We typically experience strong online retail and advertising seasons in Q4, but this was the best holiday season in Company history.

Enterprise, our fastest-growing vertical, once again grew 23% year over year, against a very strong Q4 of 2010 and grew 6% sequentially.

We also saw revenue growth accelerate in the high-tech vertical, which grew 9% compared to Q4 of 2010, and 10% sequentially.

This was driven by adoption of our cloud infrastructure solutions, and these solutions now make up 55% of our sales in the high-tech vertical.

Revenue from our media and entertainment vertical grew 11% year-over-year and 17% sequentially, as we saw traffic growth accelerate in the quarter.

Public-sector revenue grew 3% year over year and declined 2 points sequentially, due to the timing of some of our custom projects.

Across all our verticals, cloud infrastructure solutions grew 20% over Q4 of 2010 and now make up 58% of our total revenue, up from 55% last year.

International revenue growth accelerated from Q3 levels on a constant currency basis.

Foreign exchange was a slight benefit compared to Q4 of 2010, but a $3 million negative impact on revenues on a sequential basis.

Revenue from outside of North America grew 11% sequentially and 15% on a year-over-year basis.

And we saw accelerated growth in Europe and all major economies outside the US, except Japan, where we continue to face macroeconomic headwinds.

Revenue from North America grew 13% on a year-over-year basis and 17% sequentially.

During the fourth quarter, sales outside North America were 28% of total revenue -- that's down a point from the prior quarter, primarily due to the strong US commerce season.

Resellers represented 19% of total revenue, and that's consistent with the prior quarter.

Our cash gross margin for the quarter was 79%, consistent with last quarter, and down two points from the same period last year.

GAAP gross margin, which includes both depreciation and stock-based compensation, was 68% for the quarter, up 1 point sequentially and down 2 points from last year.

Our GAAP operating expenses were $142 million in the fourth quarter.

These GAAP numbers include depreciation, amortization of intangible assets, and stock-based compensation.

Excluding these non-cash charges, our operating expenses for the quarter were $109 million, up $9 million from Q3 and up 8% on a year-over-year basis.

Adjusted EBITDA for the fourth quarter was $148 million.

And that's up 14% from the same period last year, and up about 21% from Q3 levels.

Our adjusted EBITDA margin came in at 46%, up 1 point from the same period last year, and up three points from the prior quarter.

For the fourth quarter, total depreciation and amortization was $44 million, and this includes $35 million of network-related depreciation, $4 million of G&A depreciation, and $4 million of amortization of intangible assets.

Net interest income for the fourth quarter was $2 million.

Moving on to earnings, GAAP net income for the quarter was $60 million or $0.33 of earnings per diluted share.

As a reminder, our GAAP net income includes several primarily non-cash items -- including $21 million stock-based compensation, including amortization of capitalized equity-based compensation -- and $4 million from amortization of acquired intangible assets.

We are including GAAP taxes in our normalized earnings.

And that tax charge was $28 million, based on a full-year GAAP tax rate of 35%.

Our normalized net income for the fourth quarter was $83 million; that translates to $0.45 per diluted share on a normalized basis, up 13% from Q4 of last year, and up 32% from Q3.

Our weighted average diluted share count for the fourth quarter was 183 million shares.

With our solid fourth-quarter results, we finished the year with $1.16 billion in revenue, an increase of 13% over 2010.

Full-year GAAP gross margin came in at 68%, down two points from 2010.

And cash gross margin was 79%, also down two points from the prior year.

Full-year GAAP operating expenses were $493 million.

These GAAP numbers include depreciation, amortization of intangible assets, and stock-based compensation.

And excluding these non-cash charges, operating expenses for the full year were $395 million.

Our full-year adjusted EBITDA was $525 million, up 11% from 2010.

And full-year adjusted EBITDA margin was 45%, down 1 point from the prior year.

GAAP net income for the year was $201 million, or $1.07 of earnings per diluted share.

This GAAP net income included $69 million of stock-based compensation expense, including amortization of capitalized equity-based compensation and $17 million of amortization of intangible assets.

Excluding these items, our normalized net income for the year was $285 million or $1.52 of earnings per diluted share.

That's up 6% from 2010.

This number includes a full-year GAAP tax charge of $106 million, based on a full-year GAAP tax rate of 35%.

Cash generation was very strong.

Cash from operations for the fourth quarter were $136 million, and for the full year we generated $453 million in cash from operations.

We spent $76 million in share repurchases during Q4, buying back just under 3 million shares at an average price of $26.38.

For the full year, we spent $325 million buying back 12 million shares at an average price of $26.45.

Coming into 2012, we had $130 million remaining in our share buyback authorization.

Capital expenditures in Q4, excluding equity compensation, were $47 million.

And for the full year, capital expenditures were $183 million or 16% of revenues, in line with our model.

At the end of Q4 we had over $1.2 billion in cash, cash equivalents, and marketable securities on the balance sheet.

Finally, days sales outstanding for the quarter were 56 days.

Overall, the company performed very well in Q4, and this is an exciting time for Akamai.

This is a great team, and I'm a proud of what we've accomplished over the last six years, as we grew to over $1 billion in revenues.

At the same time, I'm looking forward to a new challenge in a very different role than I've played here in Akamai.

And I'm also very pleased to be turning the reins over to Jim Benson, who I worked with for the past two years now as my senior VP of Finance.

I'm confident that this will be a seamless transition.

With that, let me turn the call over to Jim to talk about our Q1 guidance.

Jim?

Thanks, J.D.

It's been a pleasure working closely with you, and I look forward to following your example of professionalism and business leadership in the years ahead.

As J.D.

said, our business performed very well in Q4, with accelerated growth for both our cloud infrastructure solutions and our content delivery solutions.

With $42 million in sequential revenue growth, we recorded our largest quarterly revenue increase ever.

And while it's too early to call it a trend, we did see very promising traffic growth in Q4 for our media solutions.

For Q1, we do expect to see a normal sequential revenue decline due to seasonality.

Perhaps a bit more pronounced than in the past, due to the exceptionally strong Q4 we experienced in 2011.

We also expect foreign exchange will be a headwind, with an expected negative sequential impact of about $1 million, based on current spot rates.

Coming off of our record Q4, we are expecting Q1 revenues of $305 million to $313 million, or 11% to 13% growth.

As a reminder, this guidance excludes the impact of the pending Contendo acquisition.

We expect cash gross margins to be roughly flat with the prior quarter, and GAAP gross margins to be down 1 to 2 points sequentially, given the normal seasonal revenue trends.

We expect Q1 operating expenses to remain roughly flat with the prior quarter, as normal Q1 items such as the annual payroll tax reset and sales training expenses roughly offset the Q4 expenses, driven by year-end commission and bonus accruals.

As a result, we expect adjusted EBITDA margins to be about 43%.

We also expect to record a higher tax charge, based on a GAAP tax rate of 38% to 39%, or taxes of $25 million to $29 million in Q1, due primarily to the expiration of the federal R&D tax credit.

This rate change will have roughly a $0.02 impact on normalized EPS for the quarter.

As a result, we expect normalized EPS of $0.36 to $0.39 for Q1, assuming a fully diluted share count of roughly 183 million shares.

On CapEx, we expect to spend about $50 million in the quarter, excluding equity compensation.

Overall, we are extremely pleased with the momentum we have coming into Q1.

We remain optimistic about the growth potential and markets for our solutions.

That said, we are maintaining our practice of providing guidance only one quarter ahead.

We are also looking forward to closing the Contendo transaction, potentially as soon as this quarter.

We'll talk more about the financials associated with Contendo when the deal closes, but we expect the transaction to be roughly neutral to 2012 normalized EPS.

Finally, today we announced the acquisition of Blaze, a provider of front-end optimization technology, with a small team in Ottawa, Canada.

From a financial perspective, we don't expect the acquisition to have a material impact on revenue or profit in 2012.

We look forward to updating you again on our next earnings call.

Now let me turn the call back over to Paul.

Paul?

Thank you both.

Before I provide some commentary on the year ahead, I would like to thank J.D.

for six years of dedication to Akamai.

When he joined us from IBM, his goal was to help us scale the business to capture the growth opportunities we saw in front of us.

He met that goal and helped Akamai to grow to well over $1 billion in annual revenue.

Now he wants an opportunity to help run an early-stage technology business.

He will be leaving us after he signs the 10-K for 2011 to join HubSpot.

We wish JD well, and we'll miss him, but we are confident that he'll be leaving us in good hands.

Which brings me to Jim Benson, who many of you already know from IR meetings over the past year.

Jim joined us from an accomplished career in high-tech finance at HP, Compaq, and DEC.

He's been helping J.D.

to run our finance organization for two years, and I'm confident he's going to pick up the CFO mantle without missing a beat.

With such a strong Q4 and end of the year, we believe we are well-positioned to take full advantage of the market opportunities for growth ahead of us.

Over the past year, you've heard me talk about the hyper-connected world, and what that means for both Akamai and our customers.

There's tremendous opportunity for organizations of all kinds to build and expand their online businesses, to provide instant access to applications and content anywhere and on any device.

Our clients are providing an unprecedented user experience -- one that is personalized, impactful, relevant, high-performing, and secure to employees, customers, partners, and other stakeholders around the globe.

As recent headlines make very clear, doing business online faces increasing security risks.

Our customers are reporting an increasing number of attacks directed at their web properties.

From 2009 to 2011, the number of distributed denial of service attacks that we investigated on behalf of our customers more than tripled.

Perhaps most alarming, hackers are employing new methods that combine network and application error attacks to bring sites down, and it's harder than ever to defend against these new forms of attacks.

Akamai's cloud-based Web security solutions leverage our massively distributed platform, providing new ways to protect an organization's online presence.

Our approach to Web security is not only designed to not only absorb high-volume attacks for our customers, but also to keep attack traffic as far away as possible from a customer's data center.

This solution is designed to enable client sites to stay up in their Web applications to keep performing.

This year we are rolling out enhancements across nearly all of our product lines.

This week, we brought together our entire worldwide sales organization for a preview and training.

One of the new services we highlighted is a next-generation Web security product that provides a sophisticated layer of defense against malicious online activity.

It will be released to the market next quarter.

We built momentum in the Web security market last year that we believe will continue into 2012.

We increased sales of Web security solutions by 149% in 2011.

While security is generally the number one concern of CIOs doing business online, site performance is also still critical to them.

So you'll see us continue to invest resources to build even better performance-optimizing cloud services throughout 2012, in addition to security enhancements.

We believe that one of the most promising new areas is a technology called front-end optimization.

Earlier today, we announced the acquisition of Blaze.

We are excited about the prospects of integrating Blaze's unique cloud-based technology with ours and incorporating it into our next-generation dynamic site accelerator solution.

During Q4, we announced that we entered into an agreement to acquire Contendo.

Together, we will continue addressing the acceleration complexities of the cloud and mobile environments.

The Contendo deal could close as early as this quarter, pending standard regulatory approvals.

We are looking forward to having another extremely talented team join Akamai.

Partnerships are also helping us to expand the reach of our capabilities and bring Akamai new markets.

This quarter, for example, we're looking forward to announcing general availability of the Akamai Riverbed solution.

Through this partnership, we believe we will be able to offer clients a better way to ensure that SaaS applications are accelerated and optimized wherever they are accessed -- in the public cloud, or a private network -- to provide a consistent user experience anywhere.

We have been testing the solution with 10 global beta customers since late last year, and these tests have been showing exceptional performance improvements.

We demonstrated some of these test results that are at our Investor Summit in December.

For those of you who weren't able to join us, I encourage you to watch the replay, which you can find on the investor page of our website.

In particular, the demonstration showed a reduction in the download time of a local file using Office 365 from 14 seconds to 1 second.

We reduced the upload time from 45 seconds to less than 2 seconds.

We think our customers will find the results very compelling.

Another area of investment for us is in the mobile arena, where we are rolling out a new product this year called Mobile Accelerator.

This embraces the shift in consumer behavior toward mobile computing over smartphones and tablets.

This solution includes device detection and protocol optimization capabilities that reduce page load times and packet loss.

We believe we are helping customers unlock new revenue sources through innovation that removes the complexities connecting the increasingly mobile world, while improving online performance.

In fact, that's our strategy across Akamai's entire lineup of cloud infrastructure solutions -- to enable our clients to offer secure and higher-performing sites and applications, reaching any user on any device anywhere around the world.

It's also key to our strategy for our content delivery media solutions.

It wasn't long ago that video on the Internet was more like an interesting science project -- dominated by user-generated content.

Many said the Internet would never really compete with TV.

And while we're not quite there yet, the industry is rapidly moving in that direction.

A perfect example was last weekend.

Television's largest event migrated for the first time to the Internet, with the Super Bowl being streamed live on the website of our partner at NBC sports, and delivered exclusively over the Akamai HD network.

It was interesting to see the complementary nature of a compelling online video experience paired with a live TV broadcast.

We saw more than 2.1 million unique users, a record for a live event for a single broadcaster.

These were end-users participating in an interactive, personalized experience unlike anything they've ever had before, and we believe this is a great indication of where media is heading rapidly.

Broadcasters and content owners are exploring new ways to engage their audiences to initiatives such as ultraviolet -- TV everywhere.

We are rolling out the second generation of the Akamai HD network this year, with enhanced security capabilities to help our media clients succeed in these initiatives and others.

And at the same time, to protect their assets while reaching the widest possible online audiences.

All of these trends in cloud computing, online Web security, mobile and media require a full suite of solutions that address the challenges of moving mission-critical businesses onto the Internet.

So, with all the opportunities in front of us, we are very positive about the investments we've been making in new product capabilities, and about Akamai's prospects for growth in 2012 and beyond.

Now, J.D., Jim and I will take your questions.

Operator, the first question, please?

Scott Kessler, S&P Capital IQ.

Best of luck to you, J.D.

A couple of questions.

You talked about acceleration in some of the verticals, particularly high-tech.

Can you speak to what might have driven that?

Obviously, I would imagine that it didn't necessarily have to do exclusively with the strong holiday shopping season.

And I have a follow-up.

Thanks.

So, one of the nice things of a quarter -- and the really positive surprise -- was that we saw strength across the board.

We thought it would be a good holiday season; it was an exceptional holiday season.

So commerce was very strong.

But as we mentioned, we saw some acceleration in media volumes.

We saw acceleration the in software and SaaS delivery market.

And so there was just a very strong Internet ecosystem economy, which we hope will set us up well for 2012, as well.

In a follow-up I had -- it seems pretty obvious that maybe you're looking a little bit differently, in terms of your balance sheet and your financial flexibility, in that you've announced two strategic acquisitions over the last couple of months.

And I guess I'm wondering how do you think about both the balance sheet and use of cash, particularly as M&A plays, perhaps, a greater role in your priorities going forward.

Thanks a lot.

Well, sure.

Our goal is to return strong growth and shareholder value to our investors.

We want to use our balance sheet whenever possible to strengthen the Company.

And we've said for a long time we would continue to be opportunistic about acquisitions, to fill holes faster in our product portfolio, and to try to grow the Company more quickly.

You've seen us some years do a number of acquisitions, some years not.

So I think we are a disciplined buyer.

We have a roadmap across our divisions of things we want to add to our portfolio.

And we are always making that make-or-buy evaluation.

And in this case, we found two terrific companies that we thought would help us grow the business, and that's why we went the M&A route.

And in the future, we'll continue to look.

We do have a great balance sheet, and it allows us to be opportunistic and to move when we need to.

I would just add to that, that we've used our balance sheet -- really, flexibility -- in two ways last year.

One is with the share buyback.

We started the year at $1.2 billion in cash; we've basically used our free cash flow to buy back shares last year, when it made sense and was opportunistic.

And of course, with that strong balance sheet, we were also able to make a cash acquisition of Contendo, and then a smaller one with Blaze.

So it doesn't give us a lot of flexibility, and we'll be opportunistic, both in terms of returning it to shareholders via buybacks as well as acquisitions.

[Mark Keller, Dougherty & Company.]

Great.

Thanks.

Congratulations on a good quarter.

And congratulations, J.D., on your new opportunity.

I wanted to ask -- focus on the value-added services, the cloud services.

Was there anything that particularly drove the strength in the quarter?

You mentioned networking was up 149% year over year.

Has that become a meaningful part of that?

I wonder if you could just talk about the different elements within that part of the business.

It was really demand for security products.

So we talked a lot about providing a different layer in a security in-depth philosophy of web-based security from the Akamai cloud.

And that was the strong growth we saw in interest and security products last year.

I'll let Jim make some additional comments, if he'd like.

Yes.

We had very good signings in our cloud infrastructure solutions, and we had very good momentum in our cloud infrastructure solutions.

In particular in our DSA product line, which tends to seasonally do very well in Q4 because of the online commerce season.

So we had growth, as Paul mentioned, across the board.

But we continue to see momentum in the cloud infrastructure solutions in particular.

And just one quick follow-up.

The legal settlement -- what was that about?

On legal settlement -- oh, I'm sorry, yes.

That had to do with a dispute that we had brought against somebody.

I can't comment on the details at all.

We obviously excluded that from our normalized earnings.

It's one time in nature.

And that was not connected to our patent litigation.

That's was what I was going after.

Thank you.

No, it was not.

David Hilal, FBR.

J.D., good luck with everything, as well.

I guess I wanted to ask Paul or J.D., on a go-to-market with both Blaze and Contendo -- and so, specifically for Blaze, is that going to be embedded in DSA or is it a separate product, with separate pricing?

And then, similarly, for Contendo -- maybe you can just talk about what the product looks like, whether it's separate, bundled into other things, and the opportunity to sell those into your install base?

Thank you.

Sure.

Let me take them in reverse order, because we're not going to make any specific comments on Contendo until that deal is closed.

We like a lot of their capabilities.

We like their team.

We think it brings a lot to Akamai, but I won't comment specifically there until we close that.

In terms of Blaze, which is already closed, we'll be embedding that capability across our dynamic site capabilities.

We'll be announcing new product availability in dynamic site acceleration and mobile acceleration.

And we'll be using front-end optimization capabilities where it makes sense.

Just to help folks understand, this is the idea that the sites are now effectively created in the browser, and that's very different on different kinds of devices.

So there's this ability to create optimization in this front end where the user is across devices.

And Blaze has very interesting cloud-based capabilities.

There are a lot of people who say they're in the front-end optimization space, or the Web content optimization space, but often they are a single point of failure solution or a data center solution or a box solution, and -- we don't believe are scalable.

What we really liked about -- not just the team at Blaze and their expertise -- was their design, in that, our belief was we could embed it in our massively distributed platform and bring it to bear on a number of products.

I won't jump the gun and announce pricing or how the bundling is done -- that will be done by product marketing and rollouts.

But you could assume that over the next couple of years we believe front-end optimization will be important.

And taking what Blaze has done and building on it should be important to that product suite.

Gary Powell, Wells Fargo.

Just had a couple of quick ones.

So it was a very nice acceleration in revenue growth, particularly in the media and entertainment vertical.

Can you just give a little bit more color as to the driver there?

And then broadly speaking, how do you think pricing in the competitive environment in the CDN space will look in 2012 relative to 2011?

Thanks.

Well, that's the age-old question, that the answer doesn't really change much.

The pricing environment has been quite consistent.

I'd remind everyone that our goal is to drive the cost and the price down on the delivery of volume content, because that's how our customers can afford to bring more longform media online.

The pricing environment in the second half of last year, in Q4, was very consistent with what we've seen for years, so I expect it will be similar this year.

Our goal is to drive even more costs out of the business so we can help our customers do more online.

So, no fundamental change there last year, don't expect it this year.

And the acceleration really came from our customers feeling better about their ability to bring more media online and profit by doing so -- probably a little bit of recovery in the economy, a little bit of recovery in the ad market, which is how a lot of this content is effectively monetized online by our customers.

And so they brought, I think, more content online, and we saw -- volumes always increase, but we saw that rate of increase tick up a little bit.

Again, we don't want to say that it's a giant trend, but it is something that we expected would happen.

We saw it happening in Q4, and I think that helped the growth on the content delivery solution side.

And I think that's a good data point.

Got it.

That's very helpful.

And just as a quick follow-up -- you touched on it here -- can you just provide details as to what you're doing to control colocation costs, and how we should think about that item or component of your gross margin going forward?

Yes, I can cover that.

There's a couple of things that were doing.

In particular, for colocation costs -- the driver of colocation costs, obviously, is the server footprint that sits in the data centers.

And so there's a lot of work that we're doing around improving software enablement to get more throughput out of the servers.

There's also work to be done on the hardware side, as well, that hardware becomes more efficient as we introduce new servers into the data centers as well.

So both of those areas are what's helping us focus on colocation costs, and make sure that we manage it appropriately.

I think we have the ability to continue to drive the cost of delivery down significantly, going forward.

It sort of invisible out there because a lot of it is the -- effectively, taking advantage of Moore's Law -- a machine is not a machine year-over-year.

And the incredible efficiency that we can drive out of our own software development, or change it -- physical changes in those boxes.

And so our goal is to never have a larger footprint than necessary, but to make that footprint more efficient every year.

And that's a big focus on our network and platform site.

Jennifer Swanson, Morgan Stanley.

Congrats to J.D., and to the group, on the great quarter.

I did want to drill in a little bit -- Paul, you made the comment, I think you touched on this -- but in terms of the re-acceleration in traffic growth, I know that's something that you talked about a couple quarters back as something you had expected.

Should we think about the acceleration through Q4 as, basically, what you were talking about a couple of quarters ago, but with some conservatism playing out in line with what you hoped it would be?

Or were there other drivers that caused that to happen either faster or more dramatically than maybe you'd anticipated a couple quarters back?

How should we think about that re-acceleration, relative to your expectations a couple quarters ago?

Jen, thanks a lot, by the way.

I think if you step all the way back, it's clear to us and to most people that we are going to see content move online and quality improve.

And I think we are starting to see that.

Q4, there's a lot of seasonality in there.

We are always nervous to put one point and call it a trend, and there's got to be some seasonality built into that.

We had some -- we'll have some of that naturally.

It will be interesting to see how it plays out quarter by quarter.

The only thing I know really, for sure, is that I would expect that to happen over the next several years.

But it's hard to call quarter by quarter at this point.

I think the Super Bowl is a great example of what can be done.

What we've seen with these inflection points over time is, it's a combination of the economics.

The cost of delivery married to the monetization capability.

And the other is just, what's possible from an experience?

And we now believe that you can deliver -- reliably, in HD quality -- a movie that shouldn't re-buffer during the time people watch it.

Or a sporting event that, frankly, people said -- and I used to hear this all the time -- well, the Internet's great, but the Super Bowl will never go on the Internet.

Well, it just did, and it was a great experience, and a complementary experience to television.

So I think that distributors, content providers, broadcasters are all going to look at that and say, it actually enhanced the audience and created new opportunities to make money.

It didn't cannibalize.

And I think that that will also drive more media online, and that will be good for our content delivery business.

And then just turning a little bit -- it sounds like pretty much every business did see some strong acceleration in the quarter.

The one that looked maybe like it decelerated a little bit was the enterprise business.

And that's been such a strong performer over the last few quarters.

Still a good result, but maybe a little bit of a deceleration there.

Was there anything that changed in that business, or that we should be thinking about there?

No.

We saw very strong growth in enterprise, as you mentioned.

I think last year we had a very, very strong performance in the enterprise segment, so the comp is a little bit tougher for that area.

But it still is our fastest-growing vertical.

And so we're very pleased with the growth in the enterprise vertical -- in particular, with our APS solutions.

Mark Mahaney.

J.D., way to go out on a bang, on a good note.

In terms of the international sales, you disclosed that you had acceleration in all of the regions except for Japan.

Could you just remind us how material Japan is to you as an end market?

And then just talk broadly about the international growth.

It seems awfully lumpy.

It's nice to have that acceleration, but it seems like it's a lot more uneven in terms of its year-over-year growth in international.

Is that just the way those markets work for you?

Or is there something you can do to kind of -- not necessarily perfectly manage the growth, but get it more consistently in that upper-teens level?

Thank you.

Yes, I think just to sort of weave my way back to those -- thanks a lot by the way, first of all.

I think it's a bit small -- the markets are smaller, so just small numbers move around a little bit more.

So you have a little bit of that phenomenon.

And, of course, currency moves around.

So that probably describes some of the choppiness that you see with our overall international revenue.

Roughly speaking, international was 28% of our revenue.

About two thirds of that is Europe and about one third is Asia Pac, and Asia Pac is dominated by Japan.

So it's a pretty large market for us, and it's one that we haven't seen a lot of growth this year.

And it's been somewhat of a constraint on our growth outside of Europe.

I was really pleased to see the growth in Europe accelerate in the quarter, and we've also got emerging markets which are still relatively small part of our overall -- international revenue portfolio, but they are growing in the 40% range.

So I think if we get a little bit of stability and the big markets, the product announcements that we have coming out, the investments that we've put in there, we are pretty optimistic about the ability to grow outside the US, faster than we are going to grow inside the US.

Sterling Auty, JPMorgan.

Let me add my congratulations to you, J.D.

Congrats on the move.

Two questions.

First, when you look at the sequential decline for the first quarter, you mentioned the seasonality in the fourth quarter.

What is it that you want to see, if there's anything in particular, before you're ready to call the improvements in volumes and business in (inaudible) a trend?

Well, the volumes have increased.

It's the rate of increase, and we'll just have to watch that over a few more quarters and decide if we think it's really an inflection point in video.

And in our cloud infrastructure services, we've seen very strong growth last year.

Q4 was great results.

I'll be looking at how we're doing in our dynamic site and security and in mobile solutions this year, as we go forward and try to forecast how we're going to do.

I think that, when we talk about is -- for a Vice President has to have three points to call a trend.

The CFO has to have two points, and the CEO has to have one point.

So I'm not quite ready to call it a trend yet.

Maybe Paul is.

(Laughter.)

And I need three quarters.

Yeah, and he wants three quarters.

So I guess that's as scientific as we can get.

No, seriously, there's a very strong back half of the year, very strong bookings.

Great communications with our customers.

We are going to be rolling out either enhancements or entirely new offers in every major category of our products set this year -- from site acceleration, mobile, web security, media delivery.

And I think our customers are focusing on, more and more, how they're going to grow their businesses online.

And we're talking to them about the kind of suite of solutions and a platform that they need.

With that, with the new offerings and how you're interacting with your customers, what changes have you finalized the sale structure to optimize that go-to-market for 2012?

We are not changing the structure at all.

We are continuing to make investments in growing the sales offices in regions where we see opportunity; opening new offices opportunistically where we see additional opportunity.

But the enterprise -- vertically, our industry-aligned structure that we've had for a number of years under the direction of the global sales services and marketing leadership, I think is really working for us.

And our goal is not to upend that, or if you will, fix it.

I think it's working well.

Colby Synesael, Cowen and Company.

Thanks for taking my call.

And J.D., sorry our time together will be so short.

Just a few questions.

First off, I wanted to get an update on the products you didn't mention.

Number one, the Ericsson product, as well as the licensed CDN.

I was wondering if you could comment on where those are.

And then also, you keep on talking about product enhancements, and I'm just curious -- when we think of mobile, when we think of security, even I guess the new Blaze acquisition, are these going to be new products with new revenue opportunities?

Or are these essentially improvements to current solutions to help further differentiate you versus your competitors, but don't necessarily lead to potentially new revenue?

Well, our goal with whatever we bring out is, I believe, is to drive new revenue for the Company.

In some cases, they will be next-generation products; in other cases, they will be wholly new products.

And in both cases, I think they give us opportunity to go to our customers and do more, get paid more.

That's at least what we try to earn every day with them.

In terms of those other two areas, I'm very pleased with the partnership with Ericsson, which we said was going to do joint development across a number of products.

We are not ready to announce those today, but I'm very pleased with the collaboration and the work, and some of the actual field testing results that we're seeing.

But we are not ready to make product announcements yet.

And in the area of working with our network partners, also very encouraged by some of the work that we have going there.

As we said on the last call, we now have more formal network relationships than in the history -- any time in the past history of the Company.

They are more interested in how to drive more traffic efficiently across their network and work with us.

We think that that has opened up new opportunity to create a new kind of a relationship, and even potentially a new revenue stream for us.

We are not ready to make those announcements formally as new products yet, but we continue to work in that category and are very optimistic about that as well.

But you'll just have to watch this space across those two categories for formal product announcements this year.

Paul, am I right to think, though, that you guys have talked about launching those in the back half of 2012, it's just we're not exactly sure when?

No, I haven't made a formal statement about that.

Michael Turits, Raymond James.

J.D., congratulations.

All the best to you going forward.

First, on the high-tech services, this is the best quarter you guys have had in a long time there.

Can you give us any more granularity on -- you gave us the breakout of what percentage of it was -- I think you said, SaaS-based as opposed to, probably, software delivery.

I forget exactly how you characterized it.

But maybe just tell us a little more about exactly what that business is, that is the SaaS-based portion, and what the growth rate is there?

And then I had a couple of follow-ups.

Yes.

I think I'll take that.

The SaaS-based are the cloud infrastructure solutions.

I think they're about 55% of that vertical.

We had very, very good from momentum in that area.

And as we've talked about in the past, that -- you mentioned that the software download business being the other business.

That business is not a business that we are expecting to grow.

That business was actually okay in the quarter; that business tends to be lumpy based on customers that do software downloads.

So we had a reasonably good quarter there, but the real big driver in that was our SaaS solutions.

Any sense of the comparative growth rate?

What the SaaS is drawing?

I don't have that off the top of my head, no.

But overall, our cloud infrastructure solutions grew 20%, and I'm confident that the cloud infrastructure solutions within the high-tech group grew faster than that.

Just another point of reference -- I think last year in Q4, the percentages -- it was less than half of the revenue of the high-tech group was on cloud infrastructure solutions.

So we've really seen that turn this year.

We've talked about that being an important sort of milestone for that vertical, and I think we are turning the corner there.

Back to the income statement, 46% EBITDA margins, which is the long-term target this quarter, but you're guiding 43%.

Any sense of what you need to do in order to get it to 46% in the near-term versus the long-term?

And then -- similar thing, just on tax rate -- is that 38%, 39% good for the year?

Yes, I'll cover that.

So I think we talked about kind of a long-term model of having EBITDA in the 45% to 47% range.

So certainly 43% in Q1 reflects a continued investment in the business.

And I think Paul talked about some of those areas, that we are going to continue to invest in those areas that we think are going to fuel product innovation, and go to market for the Company to continue to grow at the rate that we know the market opportunity is there for.

So I think what you're seeing is here, in the short term, it might bump around 43%.

But we believe that we are going to be well within the long-term model of 45% to 47%.

Now, as far as the tax rate, I'm glad you brought that up, because I covered it briefly in my remarks.

And I want to make sure I clarify for folks.

Not to get into a tax course, but there is a Federal R&D tax credit that has basically expired in 2011.

And from an accounting perspective, you cannot record the benefit for the R&D tax credit in the future years until it's reinstated.

We don't know whether it's going to be reinstated.

So what we've done, from an accounting perspective, is we've assumed that it will not be reinstated.

And as I mentioned, that has roughly a $0.02 impact on our gross.

So that takes us from roughly a 35% to 36% tax rate to a 38% to 39% tax rate.

Does that help?

Yes, it sure does.

Thanks a lot.

So say -- to just assume that for the year, and if we get the benefit at the end, we'll take it?

Exactly, exactly.

And not to get on a political soapbox, (laughter) but that's clearly a problem that we've seen year after year.

And it would be nice for everybody if we just knew.

But that's, unfortunately, not one of the things that Washington seems to be able to figure out.

I think you have some conferences coming up, so you can soapbox there.

(Laughter.)

All right, Michael.

Good point.

Ed Maguire.

J.D., best wishes to you in your new venture.

I had a question about, more broadly, about volumes in the media and entertainment group.

Last year it had been less predictable at points for you, and (technical difficulty) I just wanted to know if you feel that the pace or the variability of volumes is (technical difficulty) more predictable?

And a follow-up to that is, I know you had renewed a number of very large M&A contracts at the end of 2010 and some of those are coming up -- should be coming up sometime in the middle of this year for renewal.

Have you had any discussions with customers there?

And do you anticipate any changes there?

And Ed, as they say on the radio, we'll take your calls off-line, because it sounds like you're on a cell phone and you were warbling in and out.

On the M&E volumes, it was a strong quarter.

We continue to be optimistic that more and more video is going to move online.

The drivers there continue to be finding the audience with the right quality and the right content and the right monetization.

And I think the producers and distributors are more optimistic about that than ever.

I'll let Jim comment on renewals, but we continue to work well with our customers.

I think we've said it before that, it's true, last Q1 was kind of an anomaly, where we had eight of our top 10 renewals occur.

Renewals recur every quarter, and the expectation is that that's going to happen every quarter -- we're going to see renewals.

And I think this year it will be pretty well spaced out.

Last year was an exception.

And one final question -- on the security business, I know the anti-denial of service has been getting a bit of attention.

But could you provide a little more granularity, in terms of which services you are seeing the most traction?

Sure.

So, DDoS is one, clearly, that's been higher interest because of the headlines in the last six months.

But also our WAF -- or Web application firewall product, that allows a filtering rule to be put out at the edge of the Internet, embedded in our cloud, as opposed to in your data center is another.

And then, as I said, we'll be making another announcement about Web security in the first half of this year, which I think will be of interest to a lot of our customers, as well.

Aaron Schwartz.

Congratulations on the results.

Maybe I'll try the volume question in a slightly different angle.

It seems like you're certainly optimistic in some of the things you've seen here in Q4.

I know you don't want to get too much into the guidance around 2012.

But directionally, if you look at the rate of change from '11, do you expect that to sort of increase or stay level in terms of the rate of volume growth?

We are very pleased with what we saw in the second half of last year.

We've said those were good data points, particularly in Q4.

I'm not going to characterize it any more going forward.

Except to say that we think our customers are optimistic about what they can do online, and are really looking at the monetization opportunities.

But I'm not going to try to guide on volumes beyond that.

And then related to the strong M&E performance here in the quarter, was there anything abnormal in terms of burst or overage fees?

And if there was, I think you bill that in a January period, if I'm correct there?

I was just wondering if you could comment around that.

There was nothing out of the ordinary as far as bursting our overage fees.

When you get to the M&E contracts, there's not the old-style contract where you have a monthly commit, and then bursting.

They tend to based on usage.

So we recognize revenue as the customers use -- deliver the gigabits or hit the megabits per second.

So it's not the traditional bursting approach.

It's as the customers traffic grows, our revenue will grow.

And what we saw in Q4 was a nice acceleration in the rate of volume growth off of Q3, back to Paul's point -- one point does not a trend make.

And we're not going to call much beyond Q1, except to say that long-term, we all believe that there's a huge opportunity, a tremendous amount of volume growth, on the Internet.

We have time for about one or two more.

Maybe we'll try to do them quickly, so we can get everyone on, if possible, inside of the hour.

Rob Sanderson.

Question on the product pipeline -- a lot of interesting cloud infrastructure products that you talked about at your investor summit.

Can you just give us some sense of how that looks over the next few quarters, and which offerings are more -- you're more optimistic or more maybe, material?

And qualitatively, how many of those might be in terms of installed base or upgrade opportunity, or whatever you can do to help us think about the great pipeline you have here?

Sure.

Well, I think first of all, in this recurring revenue model, we are not making the quarter on the last hour by shipping boxes or licenses.

We need to get people signed up and on the platform, then recognize the revenue radically on a monthly basis across the year or more -- hopefully years of the relationship with us.

I think one of the significant things around the effort in our products and development group is that they're rolling out either enhancements or new product every division, which gives us the ability to go back to our customers and ask for our fair share of their spend on IT and Internet and cloud.

And I think we have the ability to go back and do better in all of those categories, because the enhancements that we are going to be able to roll out, or the new products across the board.

So we're very optimistic, and we'll be able to actually talk to them about these, and tell most of them in the first half of this year.

Tim Klasell.

Just a question, following up on the media and entertainment segment.

It seems like the gross margin, overall, held in well despite the growth in that segment.

Is there anything specific within that segment that's doing well in terms of the cloud services?

As far as the M&E segment -- how we're doing in the cloud services?

Yes, if there are any cloud services specifically within M&E that are growing, and kind of helping the gross margin overall.

There certainly are -- in particular, that we -- our DSA and our M&A products tend to be sold as the M&E segment pretty well.

We continue to make good traction in that area, but -- you were talking about gross margins, and our gross margins kind of -- I just want to make sure I understand your question.

Yes, just the overall gross margin, despite the kind of growth in the M&E segment kind of returning to a higher rate.

(multiple speakers)

I think we talked about it, that our mix of business between kind of values, or our cloud infrastructure solutions in the volume solution was a fairly consistent from Q3 to Q4.

And so you're seeing similar gross margins as a result of that.

The mix didn't shift dramatically -- we actually saw a little bit of a lift in our volume solutions Q3 to Q4 from, I think, 3% growth in Q3 to 6% in Q4.

But the mix didn't really change.

One or two last questions, please.

Chad Bartley.

Thanks for squeezing me in.

I'll actually spare you the 12th question on the media traffic and let you guys take another one.

Philip Winslow.

Just wanted to focus back on pricing a little bit.

I know y'all didn't want to comment too much about what you were expecting for pricing from the rest of 2012.

But when you look at Q4, and I guess at least the first five weeks here in 2012, do you see any sort of significant changes from normal declines year over year versus what you saw in Q4 and in the first part of last year?

And also, just in terms of CapEx, I know you guys gave CapEx guidance for Q1.

But what's the range that you're thinking about for this year as a percentage of revenue?

Thanks.

I'll take the pricing part, because I tried to be very clear and declarative before.

We saw very consistent pattern last year; we expect it this year.

Our goal is to continue to drive costs down and to be able to pass some of that along to our customers, so they can drive more volume.

And I don't expect a change in that pattern.

I will let Jim talk to you about (multiple speakers)

And on CapEx, we expect to stay within our long-term model range of 13% to 16%.

Ben Rose.

I apologize if the question has been asked, but is there an update on the joint development effort that you're making with Ericsson?

That question was asked.

And what I said was, no product announcements today, but very pleased with collaboration with them and very optimistic that we can do some interesting things together over the next couple of years.

Richard Fetyko.

Good luck to those who are departing, and welcome aboard, Jim.

(multiple speakers) Only J.D.

Only one.

Didn't mean to pick on anyone.

Just curious on the headcount growth in the 2011 period, and what do you expect in 2012?

That's it.

So, I think we had headcount growth of roughly -- what -- a couple of hundred people in 2011?

And as I mentioned before, our expectation is, we are going to continue to grow and invest in the business.

So you can continue to see us grow in headcount.

I don't have a specific number that I'm going to share, though.

But we continue to hire, and we continue to look, primarily, for engineers and great salespeople.

And we expect to end the year with more people than we started with.

All right, thank you all for calling.

J.D., good luck.

Please stay in touch.

Jim, welcome aboard to this role.

Jim and I look forward to updating all of you again in another quarter.

Thanks for dialing in.

Goodbye.

Ladies and gentlemen, that concludes today's conference.

We thank you for your participation.

You may now disconnect.

Have a great day.