阿卡邁科技 (AKAM) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2012 Akamai Technologies earnings conference call.

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

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

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

(Operator Instructions).

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

I would now like to turn the conference over to Ms. Natalie Temple of Investor Relations.

Please proceed.

Good afternoon and thank you for joining Akamai's investor conference call to discuss our second-quarter 2012 financial results.

Speaking today will be Paul Sagan, Akamai's President and Chief Executive Officer, and Jim Benson, Akamai's Chief Financial Officer.

Before we get started, please note that today's comments include forward-looking statements, including statements regarding revenue and earnings guidance.

These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements.

Additional information concerning these factors is contained in Akamai's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q.

The forward-looking statements included in this call represent the Company's view as of July 25, 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 performed extremely well in the second quarter across all of our key financial metrics.

We delivered record revenue of $331 million, up 20% from the same period last year and our third consecutive quarter of accelerating year-over-year growth.

We grew the bottom line even faster than revenue in the quarter, generating normalized EPS of $0.43 per diluted share, up 23% from Q2 of last year.

We had another very strong quarter of cash flow generation with $150 million of cash from operations.

This cash generation puts us back over $1 billion in cash and equivalents, even after completing two significant acquisitions earlier this year.

We continue to see strong demand across all of our key verticals and markets.

Importantly, with more applications and transactions moving to the Internet, sales of our cloud infrastructure solutions accelerated 22% on a year-over-year basis.

Revenue, profit, and cash flow performance in the first six months of the year all set records for Akamai.

I'll be back in a few minutes to talk about how our solutions are helping our customers adapt to the biggest trends driving IT, but first let me turn the call over to Jim for details on Q2.

Jim?

Thank you Paul.

As Paul just highlighted, we had a great quarter.

We saw continued strong performance in our content delivery solutions, and accelerated revenue growth in our cloud infrastructure solutions.

At the same time, we've begun to realize significant benefits from improvements we are making to scale our network operations, resulting in higher-than-expected gross margins and EBITDA for the quarter.

We did all of this while continuing to make key investments back into the business to better enable customers to move more and more of their mission-critical business to the Akamai cloud securely and efficiently.

Since the beginning of the year, we have released seven new products, entered into several important new partnerships, accelerated key go-to-market initiatives, and successfully completed two acquisitions, while at the same time maintaining strong profit margins.

Diving into the details of our second-quarter results, our revenue was $331 million, coming in above our guidance.

This was up 20% year-over-year and up 4% sequentially.

As Paul noted, this represents the third consecutive quarter of accelerating revenue growth with revenue growth accelerating in every vertical and every geography during the second quarter, exceeding our expectations.

Cloud infrastructure solutions growth accelerated to 22% year-over-year and made up 58% of our total revenues.

And in terms of brand new customers to Akamai, over 75% purchased a cloud infrastructure solution.

Turning to our verticals, media and entertainment delivered healthy growth in the quarter with revenue growing 19% over Q2 of last year and 4% sequentially.

We continue to see strong traffic growth, building on the trend that began last fall.

Our commerce vertical grew 21% over Q2 of last year and declined 1% sequentially in what is typically a slower seasonal quarter for eCommerce.

We saw excellent growth year-over-year from continued demand for our Dynamic Site Acceleration Solution as well as solid early traction for our security portfolio.

Revenue from our enterprise vertical grew 18% year-over-year and 5% sequentially as companies continue to shift their content and applications to the cloud and leverage the security and performance of the Akamai Intelligent platform.

High-tech continued its strong start to the year in Q2.

Revenue in this vertical grew 18% year-over-year and 4% sequentially, driven by higher software download volumes.

We also continued see traction among Software-as-a-Service or SaaS providers who have migrated to our cloud infrastructure solutions.

Finally, public-sector revenue was very strong, growing 23% year-over-year and 18% sequentially.

Much of this performance was driven by several custom projects that were completed in the quarter for different government agencies.

Turning to our geographies, sales outside North America represented 27% of total revenue in Q2, down 1 point from the prior quarter.

This revenue grew 1% sequentially and 11% year-over-year despite currency headwinds.

The stronger dollar had a negative impact on our revenue of about $1.5 million sequentially and $5.5 million on a year-over-year basis.

Excluding the impact of currency, revenue growth outside North America accelerated from Q1 levels, growing 17% year-over-year and 3% sequentially.

We saw accelerated growth in all of our major European and Asia-Pacific markets.

Revenue from North America grew 23% year-over-year in Q2 and was up 5% sequentially.

Resellers represented 21% of total revenue, flat with the prior quarter.

Turning to costs, we were extremely pleased with the performance on cost of goods sold and gross margins in the quarter with cash gross margins of 80%, up 1 point from the prior quarter and flat with the same period last year.

GAAP gross margin, which includes depreciation and stock-based compensation, was 68% for the quarter, consistent with both Q1 and the second quarter of last year.

These results are better than the guidance we provided on gross margin earlier in the quarter.

Our network operations and engineering teams have been heavily focused on implementing a number of hardware and software initiatives designed to manage our global network more efficiently.

These projects provided early benefits in Q2, positively impacting our gross margins, and we believe they will allow us to continue scaling our network going forward without increasing COGS at the same rate.

GAAP operating expenses were $157 million in the second quarter.

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

Excluding these charges, our operating expenses for the quarter were $122 million, up $10 million from Q1 and roughly in line with our expectations for the quarter.

Adjusted EBITDA for the second quarter was $143 million.

That's up 13% from the same period last year and flat with Q1 levels.

Our adjusted EBITDA margin came in at 43%, better than our guidance range of 41% to 42%, down 2 points from the prior quarter and down 3 points from the same period last year.

For the second quarter, total depreciation and amortization was $50 million.

These charges include $40 million of network-related depreciation, $5 million of G&A depreciation, and $5 million of amortization of intangible assets.

Net interest income for the second quarter was about $2 million.

Moving on to earnings, GAAP net income for the quarter was $44 million, or $0.24 of earnings per diluted share.

As a reminder, our GAAP net income includes several non-cash or nonrecurring items, including $28 million of stock-based compensation, including amortization of capitalized equity-based compensation and $5 million from amortization of acquired intangible assets.

We are including GAAP taxes in our normalized earnings and the GAAP tax charge was $26 million based on estimated full-year GAAP tax rate of about 39%, approximately 1 point lower than our guidance range.

Based on this full-year tax rate, our normalized net income for the second quarter was $78 million.

This translates to $0.43 per diluted share on a normalized basis, up $0.08 from Q2 of last year and up $0.02 from Q1 levels.

This was above our guidance range coming into the quarter as the increased revenue growth and effective management of our network combined to drive a very positive result on the bottom line.

Our weighted average diluted share count for the second quarter was 182 million shares.

Now let me review some balance sheet items.

Cash from operations for the second quarter was a record $150 million.

Year-to-date, we have generated $242 million of cash from operations, or 37% of revenue.

At the end of Q2, we had just over $1 billion in cash, cash equivalents, and marketable securities on the balance sheet.

Capital expenditures, excluding equity compensation, were $56 million, below our guidance range, due primarily to the timing of some network investments that shifted out of the second quarter.

This number includes both investments in the network as well as capitalized software development.

During the quarter, we spent $67 million in share repurchases buying back 2 million shares at an average price of just under $31.

Since the inception of our share repurchase program, we have spent $558 million buying back a total of 20 million shares at an average price of just over $27.

And finally, days sales outstanding for the quarter was 57 days.

Rounding out the first half of the year, Q2 provided us with another strong quarter of growth for both cloud infrastructure and content delivery solutions.

We believe we have very strong momentum as we head into the back half of 2012.

In our view, the very healthy signings we've seen from our cloud infrastructure solutions demonstrates the value Akamai can bring to enterprises that want to realize the benefits of doing business over the Internet.

In addition, traffic growth accelerated once again for our content delivery solutions in part due to our strong presence with social media and gaming customers as well as our traditional strength with online media clients.

Looking forward to Q3, we expect revenue in the range of $332 million to $342 million.

The midpoint of our revenue guidance translates to 20% year-over-year revenue growth.

At current spot rates, foreign exchange should be about a $2 million negative impact on a sequential basis and about a $7.5 million negative impact on a year-over-year basis.

We expect gross margins to remain relatively stable with cash gross margins in the range of 79% to 80% and GAAP gross margins, which include equity compensation, in the range of 67% to 68%.

Q3 operating expenses are projected to be up a couple of million dollars from Q2 levels, and we expect EBITDA margins to come in at about 43%, consistent with Q2 levels.

We expect to see fully taxed normalized EPS of $0.40 to $0.42 for the quarter.

At the midpoint of this range, this represents 21% year-over-year growth.

This EPS guidance includes taxes of $27 million to $30 million, based on a full-year GAAP tax rate in the range of 38% to 39% and also reflects a fully-diluted share count of 180 million shares.

On CapEx, we expect to spend $60 million to $65 million in the quarter, excluding equity compensation.

For the full year, we expect CapEx to be within our model of 13% to 16% of revenue.

Overall, we are very pleased with the performance of the business in Q2 and the momentum we have heading into Q3.

Now let me turn the call back over to Paul.

Thank you Jim.

As most of you know, we believe there are four major trends driving business online and fueling great potential for Akamai -- cloud computing, mobility, online video and the need for much stronger Internet security.

Businesses of all types have an unprecedented opportunity to use the Internet to drive growth and accelerate innovation.

They're turning to cloud computing to achieve greater agility and reduce costs.

They are implementing mobile strategies to reach customers, employees, and partners in dramatically new ways.

And they're finding greater opportunities to attract viewers and generate significant revenue by delivering interactive video.

We've been seeing this in virtually every industry we serve and in all key geographies where we operate.

At the same time, enterprises are facing many new challenges with their online initiatives.

Business leaders know that providing poor sight for application performance can do real damage.

Not properly securing an online application for data can lead to real losses, and failing to scale capabilities to meet rising demand can disappoint existing customers and new prospects alike.

That's where Akamai comes in.

Our expanding and unique portfolio of solutions is designed to help our customers overcome these challenges and deliver a consistent, protected and dynamic experience for users across virtually every device, geography and application.

Turning to security, this is one area where we can address these real business problems.

Just this quarter, we had 74 new security signings.

We are now providing our security solutions to over 250 Akamai customers, and over 20% have already purchased more than one security product to defend their Web properties.

Our new Kona Site Defender provides a robust sophisticated layer of Web security from Akamai's global cloud to defend against a range of security threats.

And we do it without sacrificing performance of a client's site or application.

Since February, we've already signed up more than 40 customers for this new service.

Beyond security, while CIOs understand how adopting cloud computing can cut costs and improve flexibility and agility, they're also worried about the very real possibility of decreased performance and application availability in hybrid environments.

Akamai is addressing these concerns with solutions designed to improve the way enterprises are both delivering and consuming cloud services.

We recently introduced Akamai Terra Cloud Catalyst for cloud service providers that are interested in offering their customers an optimized experience.

This technology makes it easy for infrastructure as a service, platform as a service, and hosting providers to add the power of the Akamai Intelligent platform to their offerings.

Customers of leading providers such as Rackspace, HP, and others are already experiencing the benefit of Akamai performance improvements embedded in the solutions they are consuming every day.

For individual businesses and SaaS providers delivering applications over the public Internet, we recently launched Akamai Terra Alta servers.

Customers of this solution now have a simple way to integrate Akamai Technologies into their existing IT operations, resulting in measurable improvements in the way their users experience online applications around the world.

Since its introduction in late March, Terra Alta has also been well received.

Turning to mobility, all of our customers face user demand to deliver content and applications to an ever-increasing variety of mobile devices.

Just having a mobile site or application isn't enough.

Users want the same experience they get from their fixed-line connections.

They expect high performance and will quickly abandon a mobile site if their expectations aren't met.

So we have a multi-pronged strategy to help our customers deal with the particular demand of mobile users and applications.

We introduced Aqua Mobile Accelerator last quarter to help customers overcome specific issues they encounter from latency and packet loss over cellular networks.

And we are encouraged by early interest in this new offering.

We also worked with Ericsson last quarter to introduce their Smart Cloud Accelerator solution which embeds Akamai technology and Ericsson's SSR 8000 family of routing gateways.

Just last month, we announced that we will be working with QUALCOMM to optimize delivery to mobile devices that are built on the Snapdragon chipset.

We think there are even more opportunities to help our customers with mobile applications and content, and we expect to continue to introduce new capabilities in this important arena.

And for video, we've been able to find even more effective and efficient ways to support the delivery of dramatically increasing volumes on wired and wireless networks.

A great example of this phenomenon is the 2012 London Olympic Games kicking off this week.

Some predict the games will attract at least 1 billion online viewers.

Once again, Akamai is supporting many of the world's major broadcasters as they prepare to stream an unprecedented amount of video from London across the board from cloud computing to media and from mobility to online security.

This is a very exciting time for our business and I couldn't be more pleased with how Akamai is performing now, and I'm very excited about our future plans.

Thank you again for joining us today.

Jim and I would now like to take your questions.

Operator, the first question from the queue please.

David Hilal, FBR.

Hey guys.

Thanks for taking the questions here.

I've got two.

First, Paul, you talked quite a bit about the security offering and the increased traction there, which is great to see.

I specifically wanted to dive into the Riverbed and QUALCOMM partnerships, and I don't know if there's anything qualitative or quantitative you can share with us there on how those two are going.

What's the second question?

We'll take them both.

And the second question for Jim, so on margins, you guys put together a good quarter on margins and that guide for Q3 looks pretty good too.

I am specifically talking about the EBITDA of 43%.

So after a couple of years of margins eroding, do you feel like now you're getting more efficiencies out of the infrastructure where we should view margins as flat or possibly up?

I guess really what I'm asking, what is kind of your margin outlook not just for the next quarter but over the next year or two?

Do you think we stabilize, go higher or go lower?

Thank you guys.

I might just take them both in reverse order.

I think what you're seeing on margins is tremendous work by our software teams and our network teams to find unique and proprietary ways in our network and our software to drive significantly higher throughput, greater efficiency with the same great performance our customers expect.

And that -- we are seeing earlier dividends than we expected which is why we overachieve so well on margin.

We think there's more to come as we develop it.

We're not going to give you long-term guidance.

You know we don't do that quarter-by-quarter.

We've given you expectation for CapEx for the year and for margin in the near term.

But let me just say we are very pleased with what we are seeing out of the efforts and the renewed focus that we brought to COGS and I think there is more to gain there over time.

At the same time, we're going to invest in innovation, so we're going to balance the two very well but maintain a very profitable business.

On the other partnerships, the Riverbed partnership we announced about a year ago.

About a quarter ago, we said we were now selling.

We're starting to close deals, so I'm very pleased with the early signings.

It is an enterprise solution sale, so that's usually not a transaction to close, but we are pleased with what we are seeing and we are actually signing now full contracts with customers for that new solution, so we are pleased with the early in-market results.

Then the QUALCOMM announcement was very recent and that's a technology partnership to try to work collaboratively with one of leading technology providers in the cellular space to effectively embed some of our technology in their chips.

As those gain traction in the marketplace, it will allow us to bring to our customers even better performance for content and applications on devices that use those chipsets.

We think that's very exciting.

As I said, mobility requires a multi-pronged strategy.

There isn't a single magic bullet.

What you see is the breadth of our technology capabilities, the breadth of our customer relationships, allowing us to partner at many places in the ecosystem, even ultimately down to the chips in the devices themselves to bring really unique solutions to improving performance, which benefits everybody -- benefits that end-users, benefits the handset manufacturers; it benefits the network which is really important because they're trying to figure out how to drive more capacity in a very expensive environment, and it benefits our customers who are looking for the highest performing way to reach their customers.

So, we think working with that broad ecosystem is going to be key to our leadership position in that aspect of good performance.

Operator, next question please.

Mark Kelleher, Dougherty & Company.

Great, hi.

Thanks for taking the question.

I wanted to just go back to gross margins a little bit.

You did talk about the opportunity benefits you've been getting.

Maybe you could address the pricing dynamic you saw in the quarter.

What was that doing to gross margins, both on the CDN and the cloud side and maybe tie that into what you're seeing in competition.

Thanks.

The market has always been competitive.

We've always talked about the need to drive high-value solutions that our customers will pay for.

We are continuing see the same kind of competitive dynamic that we've traditionally seen in the same pricing dynamic.

I think what you're seeing is the effectiveness of the team to innovate and bring new high-value solutions that our customers are willing to pay for across cloud, infrastructure solutions, particularly now security, as well as media, which is really reflected by the accelerating traffic that we've been seeing there, which is our customers bringing more content to market and relying more on Akamai to deliver.

So, I'd say the general atmosphere is consistent with what we have seen and I think the overachievement on the top and the bottom line has been really, really good execution by the teams here working with our customers to deliver products and our network partners to drive capacity up and costs down in large part through huge innovation in our own software.

Fair enough, thanks.

Michael Turits, Raymond James.

Good afternoon.

Just a really strong acceleration on the cloud side.

Is there anything that you can tell us about what in particular was stronger in terms of products on the cloud side, what drove that reacceleration versus last quarter?

And then also you had a full quarter of Cotendo.

If you could give us any feel for how much of a contribution that made and how much of that might've been cloud versus content?

Most of Cotendo is on the cloud side.

We said once that was integrated we wouldn't be breaking it out, and they have been integrated and that process has gone very, very well.

What you're seeing is, across the board, the products that I talked about, security is the newest area we have been in, but the Terra products both that we sell direct to our customers to improve application performance and to the service providers that allows them to provide Akamai optimization to their customers, particularly now with the Cloud Catalyst product that allows people to add our capability seamlessly through other people's portals and other people's selling motions are allowing us to grow there.

So I think you see a combination of innovation of new products like security catching on as well as really good infield motion of direct selling and improved channel management or partnering capabilities to drive strong results there as well.

And the Cotendo team contributed with a good customer base, good functionality, and we are continuing to add there on the development side to build we think a strong pipeline of products to come in the coming couple of years.

And just one other question in a completely different direction.

A couple years ago, about 1.5 years ago now, you had that synchronization of a bunch of media contracts come up for renewal all at once.

Has that -- have those cycles smoothed out now, or could you (multiple speakers)

I think we've answered that one every quarter yes.

That was a one-time.

They recycled themselves on different -- different rate and pace, and that affect was a year and a half ago now.

Strong quarter, thanks guys.

Sterling Auty, JPMorgan.

Thanks, hi guys.

Since 2008, it looks like, if you're successful in next quarter, this would be the second time you've kind of made that trip to 20% revenue growth.

My question is do you feel like there is enough drivers now to make this higher growth rate more sustainable, and what visibility do you have in that sustainability?

I think there was a global meltdown in the middle, and that one was out of our hands.

I don't mean to be flip but there are externalities that are way beyond our ability or anyone's ability to fully predict or plan.

We have been very pleased with what we have seen over the last year.

We gave you guidance for the quarter and then for the year on CapEx.

We are not going to go beyond that.

I will say I think that the four trends are continuing and providing us opportunity around cloud, around mobility, around video and security.

Those continue, and frankly even in soft spots around the world like Europe, we're still seeing strong demand for those kinds of services there that we are not immune from the global recession.

Somebody said congratulations, you're immune.

Maybe we would do better if the economy was thriving but we have products that are value to people who are continuing to move their businesses online even in tough economic times, and we think that they are catalysts for strong growth for us, but I'm not going to give you a long-term growth projection.

Okay.

Maybe one follow-up would be --

Sure.

You talk about cloud was growing 22% but just I want to make sure we're clear and we are all on the same page.

Are you saying -- does cloud incorporate all of what we used to call VAS or can you give us some commentary or quantitative figures in terms of (multiple speakers)

I'll give that to Jim.

Yes.

What we call cloud infrastructure solutions we previously called value added solutions.

As Paul said, they did grow 22%.

Michael had asked the question around the impact of Cotendo.

We are certainly not going to break Cotendo out separately because we have embedded it in the rest of Akamai, but we did share last quarter that Cotendo was a little less than $2 million a month just as a frame of reference.

But if you adjust for Cotendo and for constant currency, we grew cloud solutions 22% regardless.

So, it was a very strong cloud solutions quarter.

Great, thank you.

Jen Swanson Lowe, Morgan Stanley.

I would just like to follow up a little bit on Cotendo and also on the Blaze acquisition which were both important acquisitions.

And I know people have asked about the financial impact, but just curious more around the business impact.

How has that integration been going?

Where do you think you are in the process and what are the benefits maybe that you are starting to see from those two acquisitions?

Sure.

Cotendo brought revenue and customers, and we have done well so far integrating customers across our network to our suite.

There's still a process to go.

We said that, beginning to end, that could take about 18 months, so we are clearly not through it, but we've made good progress and we are on or ahead of plan, the same with integrating personnel and starting to move people off of integration as much to new things.

Very encouraged by what we are seeing, the capabilities of the development center in Israel.

And we have ambitious plans to ramp up hiring there.

There's great engineering capability, including on the security side.

And as we do more in cloud security, we will be looking for more -- to build up more expertise in that office and other places.

And then we will be announcing or just subtly moving functionality from Cotendo into some of our cloud infrastructure products.

Blaze, for those people who maybe didn't follow it as closely, was an FEO or front end optimization technology, again a great engineering team integrated into Akamai.

They didn't bring revenue and a large customer base.

They brought really important functionality to further improve the performance of websites.

We have not made any product announcements with that technology, but we are really pleased with that now that it's under our roof, and over the next few quarters, we will be making product announcements in that area that we think are significant as well.

Then just as a second question, not necessarily related but following on Sterling's question earlier around the sustainability of some of the trends you're currently seeing in your business, I think three quarters ago when you started see this inflection in traffic growth, you were reluctant to label it as a new sustainable trend and kind of caution that can be cyclical.

And now my impression is the tone seems a little more confident around the duration and stability of that increase in traffic.

Is it -- do you have more confidence there that the sustainable trend versus cyclicality in the traffic business and what sort of the things you're looking for to make that determination?

Historically, those cycles go on for a little while.

They're not one or two quarters, especially if you can hold content for economic turmoil.

We've been really pleased with what we see.

We have some visibility in it from our customers.

We think the drive to more media, video, particularly online because of the ability drive high-quality, both to fixed-line and wireless environments is important and with high quality and high security.

So we believe it will continue to grow.

We've been pleased with what we've seen for the last few quarters, but it remains the hardest piece to predict long-term.

We think the long-term trend is going to be more video over the top.

Again, the majority of TV viewing in the home is old-fashioned TV, so there's lots of opportunity to grow the delivery of video, particularly high-quality video.

I think you've seen us be increasingly optimistic about it just because we've got more data points on a steeper curve.

But I don't think that's a space that we will ever give you really long-term specifics on because it is a little cyclical.

So right now, we are certainly in a good part of that curve.

Great, thank you.

Ed Maguire, CLSA.

Good afternoon.

I was wondering if you could just comment on, going back to the Cotendo acquisition, just discuss -- you had a number of different partnerships -- how the rationalization of the products and partners is working.

And also to follow up on that, you'd mentioned the Riverbed partnership is tracking well, and Ericsson is expanding your mobile footprint into -- along into a QUALCOMM partnership.

Could you discuss how that go-to-market is tracking as well?

It's two questions in one but I appreciate it.

Thank you.

Sure.

So as I said earlier, very pleased with the integration of Cotendo, including how we are working the product into our portfolio and maintaining the existing customer base they brought over and then selling new things to those customers as well.

I'm very pleased so far with the tracking of migration of partnerships and resellers throughout the world.

That's gone very well.

The others, obviously some of them are technology partnerships like the one we announced recently with QUALCOMM, and technology plus go-to-market with Riverbed.

I think what you're seeing as an overall theme is Akamai sits in the cloud.

In many ways we were the original and largest.

So as the world moves to cloud computing, hybrid environment and providers look to join that ecosystem and grow.

We are just a logical partner, because we are so complementary.

We are complementary with hosting providers who want to now provide a cloud model.

We are compatible with people who are trying to make mobile work better as part of the overall solution for people who want to bring sites or applications online.

So we have invested in being a better partner back.

How do we embed some of our technology, something five years ago we didn't do with embedding Akamai technology in other people's products and we also didn't embed their technology in our products.

These partnerships are examples of both or of the technology in one place talking to our network or vice versa.

We think that, over time, these will all both raise the value of our services and drive new revenue opportunities.

Some will be more immediate in terms of a joint product like the Riverbed opportunity; others will simply enhance the value of our products and theirs, like what we're trying to do with QUALCOMM.

In the case of Ericsson, you have some of both.

Now, in the wireless space, particularly where you're talking about carriers, getting those embedded and rolled out takes a while.

It's not exactly a set of operators who necessarily move quickly, which is why we've taken a long-term view but we are making a long-term bet that mobility will be increasingly important and that our customers will look to us to help the most part of an overall solution.

If we do that well, they will want to do more with Akamai.

If we don't, we will not be as valuable.

That's why you see us doing these kinds of things and, if you will, kind of spreading our reach and our ability to work with more and new kinds of entities in the ecosystem of the Internet.

Thank you.

Colby Synesael, Cowen & Co.

Great.

I have two questions.

Paul, I think, at a recent conference, you mentioned that, in the future, Akamai could actually be a security company that sells CDN services.

So obviously security it sounds like is pretty important to the Company's long-term future.

Was there -- curious if you could try to quantify for us how big security is at this point and maybe kind of expand on what you meant when you made those comments.

And then the second question I had has to do with your headcount ramp.

You guys added about 115 employees.

It seems like a decent amount.

I know you added more last quarter but I think part of that was for Cotendo.

Curious where those employees have been deployed in the Company and maybe more specifically how you're changing some of your go-to-market strategy as it relates to the sales team.

Thanks.

Sure.

I think my comment, and I think you quoted me about correctly, was really about how big the opportunity is for security in the cloud.

And my general point was if we really executed well with security -- cloud security offers like Kona Site Defender, years down the road, people might actually think of us as a cloud security company who also did delivery and performance because of the opportunity is that big.

I didn't mean to imply that we were going to be the whole market, or that cloud security would replace traditional security in depth layers.

I, think with the rising threat levels, that's not going to happen but I do think that sort of if you think of secure the device, secure the perimeter, now secure the cloud is the emerging area, we have the opportunity and are now taking an early leadership position in secure the cloud, secure outside the perimeter because effectively your firewall is becoming so virtual anyway in a hybrid environment.

And so we're pushing hard.

You see us talking about the opportunity, very strong sales.

It's still a relatively small part of our cloud infrastructure business today, which gives us lots of room to grow, lots of room to penetrate existing customers and then to go, frankly, we can now sell those solutions to people who aren't Akamai customers and they don't even have to buy any other Akamai services to get started if they want us to do some cloud security for them first.

So we think it's a great way to add to existing accounts and to go get new ones.

We are very excited about security.

A long way to go before you start referring to us as a security company first.

And I think we've got a lot to prove, but the early steps there I think have been well executed.

I'm very pleased with what the team has done.

I'll let Jim talk about the headcount ramp and obviously the things to remember in terms of summer hiring and acquisitions and other things that go into the mix.

So you're right.

We added a little over 115 -- I think we had 115 people in the quarter.

We added more than that in Q1, but remember I think you were referencing it, that was also including the Cotendo and Blaze acquisitions, which were by themselves over 100 people anyway.

So the areas in particular that we're specifically targeting is we're going to continue to build out our go-to-market resources.

That's what we did in Q2.

We'll do more of it in Q3.

The other area in particular that we are going to be focusing on adding resources is in the R&D area to continue to drive product innovation.

We talked about the -- I mentioned in the opening remarks that we announced seven new products already in the first half of the year.

We expect to announce more products in the second half of the year and beyond, and we're going to continue to add engineers to fuel that pipeline.

Operator -- folks, if we could try to keep the questions tight, we will try to get everybody within the hour.

Aaron Schwartz, Jefferies.

A quick follow-up and one question for me, but you announced a sales management hire earlier this week.

You announced one in Europe earlier this year.

It does seem like, with your diversification with new products and new verticals, there is some change in the overall go-to-market with you just alluded to.

Are there sort of structural changes in the operations below?

Any sort of detail you could give us on sort of how you're architecting this internally to take advantage of all the new product you have out?

Sure.

We moved to a theater model with the Americas, with EMEA, and APAC, and we have appointed three senior sales leaders, one person in Asia-Pac who is already deployed there in a different role, someone with great experience in enterprise solution selling, a former Akamai executive who had left and then was working for IBM who rejoined us, and then just this month the appointment of a head of America -- the Americas region for us as well.

I think what you're seeing is growth and sophistication of the go-to-market effort under very, very strong leadership provided by Bob Hughes, who has the worldwide responsibility for sales, but also services and marketing in really all of our forward facing initiatives in the field.

So you see him building out a team with theater responsibility so that we can be in-market, in-language, fully responsive to our customers' needs because, in the world of the cloud, there is no down for maintenance.

There's no hours you are closed.

Day and night, seven days a week, people are using our network to make their business run.

And we have to be responsive where they are.

So you're seeing us grow the capability of our team, driving more sophisticated management deeper into the field for greater responsiveness and, frankly, authority in the field and putting it in the hands of some really seasoned executives.

And I think you're seeing it in the accelerating growth and the tremendous results, particularly the cloud infrastructure services.

So you're exactly right to pick up on it.

It's deliberate and I think it's paying off extremely well and those three leaders are very strong.

Obviously, two have been here for a while.

One has been here for about a week and a half, still trying to figure out Akamai acronyms, but we are very enthusiastic about their potential.

You said you had one other question I think for Jim.

No, that was actually it.

I was wondering on the sales side.

Thank you so much.

Richard Fetyko, Janney Capital.

Good evening guys.

I'm just curious how you factored in Europe and what's going on in Europe into your guidance.

What consideration did you give it?

So, I'll take that.

We actually, interestingly enough, we actually had a really good quarter in Q2 across all of our markets, as I mentioned.

We actually had a good quarter in the European markets as well.

Certainly, there's a little bit of caution in the southern countries of Europe.

While we saw growth there, I think our value proposition, even in a difficult market, is still very compelling, so while we may not have the opportunities as plentiful in Southern Europe, we still believe in general the European market in total, the northern markets, the Central European markets are going to grow very well for us, the Asia-Pac markets are going to grow well for us.

So we believe that we have significant opportunities to grow, both in Europe and Asia-Pac, as Paul had outlined.

Ben Rose, Battle Road Research.

Good afternoon.

Question for Jim -- could you talk a little bit about the impact of colocation costs this quarter and perhaps where you think those costs will be going in the next quarter and beyond?

I think Paul highlighted a little bit around -- just in particular he was trying to provide a little overview in particular of what we are doing to drive our network costs and network scale.

And really what that is is that's allowing us to drive scale in our colocation costs.

So we are doing things on the pricing front with colocation costs, so pricing in the sense of making sure that we are located in the right priced colocation facilities, not necessarily the most expensive ones.

And we continue to drive software efficiencies that allow us to get more throughput out of our servers.

Therefore, we don't need to add incremental colocation costs, nor do we need to add, going forward, as much incremental CapEx, because we'll get more throughput out of the servers that we have.

So in general, we are executing very well against that playbook, and we think that's going to continue going forward.

Gray Powell, Wells Fargo.

Hi, thanks for taking the questions.

I just had a quick one.

Really in the last few days, it seems like there's been increased concern on enterprise spending trends with even AT&T and Digital Realty making some cautionary comments.

Obviously, you guys are a little bit different and doing much better, but can you just give us a sense as to what you're seeing from your enterprise customers over the last month or so, and the comfort level you have with visibility on the vertical?

So far, it's been very positive.

As we said, we were ahead of expectations in every vertical and every geo.

We certainly see customers being cautious about spending, but they are pushing forward on most of their Internet initiatives.

They see the future to save money in other areas is by going online and to drive future growth in online initiatives.

And the most efficient place to be is in the cloud with an application online, reaching users with data they need whenever, where ever they want it.

Frankly, if you don't do that, you're not competitive in virtually every industry in the world now.

So even though there is caution and even though everyone is trying to spend less in aggregate, we see their willingness to spend on Internet initiatives, particularly around security and performance.

And so I guess we could speculate that we would do even better if the economy globally was in great shape, but with it in bad shape, and that's not a good thing, that just is the fact, we are continuing to do extremely well and beat our own projections so far.

So, we've been very pleased with that.

Got it.

That's very helpful.

Thank you very much.

Rob Sanderson, ABR Investment Strategy.

Hi, good afternoon, thanks.

Questions related to products.

Just I'm going to kind of throwback one of your answers to an earlier question and see if this is a fair characterization.

So really the acceleration in cloud infrastructure driven by all of the above, but it sounds like obviously Kona Site Defender is doing very well and Terra Alta is driving some momentum.

Maybe the mobile accelerator cloud catalyst and cloud Steelhead are still on the com with a good start?

Is that a good way to think about it?

I didn't track everything you put in there.

Obviously, things like Riverbed are new.

Mobile is fairly new but we are selling that direct and we've had very strong uptake.

It's only been out for a few months.

We are not going to break out numbers on every one.

We give you the (inaudible) number and then we are giving you some highlights where we think we are seeing some important changes like security.

But I think the overall theme -- rather than put your words back in my mouth, let me say what I think I was trying to say, which is we think there is a string of innovation you're starting to see that it's targeted the opportunity for growth in the cloud infrastructure space.

We are going to continue to improve the products we've brought out and we've got a roadmap for more things to come across every product suite in the next year, year and a half.

And we are going to push really hard to develop and bring those to market because we think there is more opportunity in all four areas of cloud, video, security and mobility.

And if we can keep bringing out things that our customers need, short of another total economic meltdown, we're going to be able to find demand in the market for them.

Can I follow up on Cotendo, just the cross-sell opportunity?

I know you've got a number of customers there.

Could you remind us how to think about the non-overlapping customers they bring in?

And obviously you've got this great for portfolio of products that I'm sure you (multiple speakers)

Yes, most of their customers don't overlap.

We can't upsell them until we move them to our network; that's an 18-month process overall.

We are moving customers over, have been already for a while.

It's going to take 18 months to complete that.

There is a bell curve, obviously a few in the beginning and some stubborn ones at the very end, the bulk in the middle.

And then we'll get to know them and offer them more things out of our portfolio.

So I think we can sort of think of it as -- it's not a full 18-month opportunity because at the end you're just in the long tail, but a year or more of good opportunity to slowly introduce that customer set to new products, either when we make the first contract and move them over or on renewals and to sell them, things like Kona, as we go.

And we'll mine that opportunity really probably for the next one to two years, and then try to bring them even more things from our portfolio.

But just understand as soon as we move them over, we don't think of them as Cotendo customers.

They are Akamai customers serviced by Akamai people, and we look at what are they taking today and what else could we offer them?

Thank you very much.

Jeff Van Rhee, Craig-Hallum.

Thank you Paul.

Two very brief questions for you.

Number one, on the security front, can you talk to the percentage uplift on ARPU that you are seeing so we have a sense of magnitude from some of the more mature security users?

Second, on the network efficiency, can you put a number roughly on what percent of the efficiency benefits we've seen so far?

On the first one, we are not going to get into pricing and ARPU on individual products, but these are, particularly the new services, premium products for which we are getting significant revenue and they're good margin products.

On the network, we've got a roadmap of changes to come over the next 18 months.

They tend to come kind of they are lumpy as you develop new capabilities and then deploy it on the networks.

So it's not a smooth sort of wee-over-week progress.

There are sort of a step functions there.

But we have a good roadmap of things we're going to continue to do to drive efficiency.

Frankly, as we have been doing this on an ongoing basis for years, I couldn't -- I can't quite break it down as sort of a percentage complete, as you phrase it.

I understand what you're asking.

I just don't know how to answer the question (inaudible).

Fair enough, okay.

Thank you.

Donna Jaegers, D.A. Davidson.

On the Manage CDN service you guys were offering to carriers, is that launched in the market now?

And can you make any comments on it?

And also on Verizon's move to their own CDN, does that have any impact on you guys at all?

Are you helping them?

I'll say on the last one they're still a great reseller partner.

I don't think has any implications there, so no impact to date.

I think, on the other question, there are sort of two components.

The MCDN, or Managed CDN, we've been doing that for a while to provide specific solutions to network operators.

We continue to offer that.

That's a bespoke opportunity and we think we will see some growth there.

The new area is really the OCDN, or Operator CDN, where we can allow operators to deploy our technology that we can provide as software.

They can deploy it on their own hardware if they want to.

They can manage it on their own for some functionality.

They can then federate with us if they want global capabilities or let us operate even more advanced services.

We are now in some trials with customers, very good conversations.

But that is not -- we do not expect that to be a significant revenue producer.

This year, we see that as a very important strategic long-term opportunity.

We now have a team built out and a leader for that business group, and I am encouraged by their early progress, but that is a long-term initiative.

Great, thanks Paul.

Chad Bartley, Pacific Crest.

Thank you very much, should be pretty quick.

I wanted to ask on Cotendo, I know you're not going to talk revenue and that's fine.

But can you remind us which revenue segment, at least at this point, that is benefiting?

Is it enterprise?

Is it technology?

It's primarily -- it's in the cloud infrastructure services.

It's site acceleration and some additional services that improve the performance of sites and applications, so most of that revenue has moved into the cloud infrastructure services bucket.

They did not have a media or video offer.

And I think specifically if you are asking which industry verticals that --

Yes.

-- they operate within, it's pretty much across all of them.

So, as Paul said, it kind of augments capability that we had, and their customer base sells pretty much across all of the verticals we are in.

Probably the light -- mostly in commerce enterprise and high tech, probably to a little bit lesser extent in the media vertical.

Thanks.

Thank you all for calling in.

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

Bye.

Ladies and gentlemen, that concludes today's conference.

We thank you for your participation.

You may now disconnect.

Have a great day.