阿卡邁科技 (AKAM) 2012 Q4 法說會逐字稿

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

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

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

Later, we will conduct a question-and-answer session.

(Operator Instructions).

I would now like to turn the conference over your host for today, Ms. Natalie Temple.

Please proceed.

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

Speaking today will be Tom Leighton, Akamai's 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 on February 6, 2013.

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 Tom.

Thanks, Natalie.

And thank you all for joining us today.

I am delighted to be speaking to you as Akamai's new CEO.

And I'd like to begin by thanking Paul Sagan for his leadership and many contributions to the success of Akamai during the past 14 years.

The transition has been going well, and I look forward to continuing to work closely with Paul in his new role as Executive Vice Chair of the Board.

Now, on to our results -- Akamai posted record revenue and record earnings in Q4, and our strong results in the quarter capped off a full year of excellent performance in 2012.

Fourth-quarter revenue was $378 million, a 17% year-over-year increase, and a 9% increase over the third quarter of 2012.

As you know, our fourth-quarter revenue can vary depending on the strength of our e-commerce holiday traffic, which was strong this year, but not as strong as the record levels we saw last year.

Normalized EPS for the fourth quarter was $0.54, of which $0.04 was from a favorable change in tax rates which Jim will discuss further in a few minutes.

Without the tax change, normalized EPS would've been $0.50, up 11% from Q4 of last year, and up 16% sequentially.

For the full year, we grew revenue to over $1.37 billion, up 19% over 2011.

We generated normalized EPS of $1.81, also an increase of 19% over 2011.

And we continued to generate strong cash flow, with full-year cash from operations of $530 million.

Beyond the record revenue and earnings, 2012 was a strong year for Akamai in other respects.

We introduced new products in each of our Solution lines.

We completed four acquisitions to accelerate the Company's longer-term growth.

And after placing a major emphasis on driving efficiencies in our network operations, we improved margins in our core CDN business for the first time in several years.

These were clearly impressive results, but I'm even more excited about the opportunity that lies ahead.

My excitement stems in part from our belief that the primary forces that are shaping the future of the Internet are very closely aligned with Akamai's core strengths.

For example, the rapid growth of media over IP; the proliferation of new and more powerful mobile devices; the urgent need to defend against ever more powerful cyber attacks; and the shift of businesses online, as enterprises move to the cloud, are all driving business to the Akamai platform.

Taken together, these megatrends have the potential to create significant growth opportunities for Akamai over the next 3 to 5 years.

So that you can better understand these opportunities, I would like to say a few words about how I view our business, and the kinds of investments that we are making to drive the next phase of our growth.

Of course, we'll say a lot more about these subjects at our Investor Summit on March 11 in Cambridge, where we'll have the time to provide a deeper view into the financial aspects of our various businesses.

In the past, we've talked about our businesses having two broad product categories -- content delivery and cloud infrastructure solutions.

Roughly speaking, the content delivery category consisted of services for storing and delivering content, such as pictures or videos.

And the cloud category comprised everything else.

For consistency, we will continue to report on the split of our revenue between these two categories.

But going forward, we will also talk about that Company a more granular way.

Specifically, we will talk about our two largest and most firmly established businesses -- media delivery and Web performance -- as well as three smaller, relatively new businesses -- Web security, network operator solutions, and hybrid cloud optimization.

I think of all of these businesses as being cloud businesses.

And I want to say a few words about each of them today, starting with our media delivery business.

Our success in the media delivery business is determined by how fast the volume of traffic increases; our cost for delivering the traffic; and the pricing that we can command in a highly competitive marketplace.

Our quarterly revenue and margins can also vary as we renew customers at lower price points, or we refuse to pursue deals that we deem to be unprofitable or of little strategic value.

Over the long term, I'm enthusiastic about the potential for profitable growth in the media delivery business.

That's because of our proven ability to reduce our costs of serving video traffic, and because of the potential for a large increase in the amount of video traffic that can move online.

If the industry were to reach a point where a significant portion of video is consumed over IP, and if this video were to be delivered at true HD bit rates, then the volume of video traffic could increase by a factor of 100 or more from today's levels.

To capitalize on this potential opportunity, Akamai will continue to invest in our SOLA Media Solutions in 2013.

We will focus our efforts on growing network capacity, reducing network costs, improving quality, and making the Akamai Intelligent Platform more user-friendly.

By providing high-quality video at great scale and reduced cost, our goal is to continue to be the video distribution partner of choice for leading media brands such as Apple, Sony BMG, News Corp, Nintendo, and NBC.

In contrast with our media delivery business, Akamai's Web performance business is less about traffic and more about enhancing the performance of mission-critical sites and applications.

As many of you know, when it comes to Internet applications, performance matters.

And Akamai has always been the leader in performance.

That is why so many of the top brands on the Internet -- retailers like eBay, [Rakitan], Zappos and Ticketmaster -- and enterprises like Morgan Stanley, FedEx, Boeing, and Standard Chartered Bank --use our Web performance services.

But we believe we can do even more in this area going forward, particularly outside North America.

We see two significant mechanisms for driving growth in our Web performance business.

First, we are increasing our sales capacity and supporting go-to-market functions.

In the short term, this sales investment shows up as OpEx and it lowers EBITDA.

But over the longer term, it will fuel further growth in this very profitable business.

Second, we are allocating resources to improve the performance of our services.

Our ultimate goal is to provide nearly instant response times for applications and web pages; even for mobile devices, which today often suffer from painfully slow performance.

As I mentioned earlier, Akamai has three emerging businesses -- Web security, network operator solutions, and hybrid cloud optimization.

Among these newer focus areas, you've heard the most about security.

Last February we introduced KONA Site Defender.

This Web security solution is designed to leverage our global distributed platform to defend a website or application against a large-scale DOS attack without sacrificing performance; something that we believe solutions offered by other companies can't do.

KONA Site Defender was critical to the defense of some leading US financial institutions as they battled the Operation Ababil attacks over the last several months.

Despite the large volumes of these attacks -- upwards of 65 gigabits per second in some cases -- KONA Site Defender kept our customer sites accessible and performing well.

The best defense against such large-scale attacks, we believe that you need the capacity and distributed architecture that is unique to the Akamai platform.

In 2013, Akamai will continue to increase investment in our security solutions, with a focus on extending our protective capabilities and on making our product easier to deploy, and more channel-friendly for key partners.

Our second emerging business is focused on solutions that we sell to major carriers, such as our Aura Network Solutions.

These solutions are designed to help operators reduce costs, improve performance, and create new revenue streams by offering their own CDN services based on Akamai technology.

In addition to generating revenue, we believe that having a deeper relationship with carriers can benefit Akamai over the longer term by reducing our CapEx, co-location and bandwidth costs, as we leverage the carrier's infrastructure.

By improving performance for our customers as we deploy our software even deeper into the last mile networks.

And by improving sales capacity and efficiency by extending our channel relationships.

We have already made positive inroads with major networks, as witnessed by the recent announcements with AT&T and Orange.

And we believe that our acquisition of Verivue in December will accelerate our time to market with a licensed component of our operator CDN solution.

Third, I'd like to talk about a new opportunity that we see in helping enterprises take advantage of hybrid cloud computing strategies.

For nearly 15 years, Akamai has excelled at improving performance for websites and applications delivered over the public Internet, outside the corporate firewall.

Our goal going forward is to extend our services to reach behind the enterprise firewall; applying our acceleration, security and offload capabilities to applications wherever they reside and however they are accessed.

Such a capability is rapidly becoming increasingly important to enterprises as their applications move into the cloud and as their employees need to access those applications from mobile devices, and locations outside the corporate headquarters.

Capitalizing on the opportunities that I've described today will require investment.

In this context, I think it is important to understand three things.

First, our three emerging businesses are highly synergistic with each other and with our core media delivery and web performance businesses.

And so they all benefit from the common technology base and an economy of scale associated with the Akamai Intelligent Platform.

Second, we believe that the proven capabilities of our platform, combined with our ability to innovate, puts Akamai in an excellent position to be able to offer unique, compelling and highly profitable services in important adjacent markets.

Third, we will continue to keep a close eye on overall expense, and to carefully track performance.

If an initiative is not proving to have the desired synergy or potential for future profit, then we will have the discipline to terminate that initiative.

As an example, we recently announced the sale of our advertising decisions solutions business to MediaMath.

As our ADS business grew, and as the online advertising industry evolved, it became clear that the potential for our ADS business could best be realized outside of Akamai and through a partnership with MediaMath.

And so we did that to that business, thereby freeing up operating expenses for more promising areas that we believe will be more synergistic and profitable for Akamai in the future.

In summary, 2012 was an excellent year for Akamai.

And I'm very excited about the opportunities that lie ahead.

In 2013, we plan to continue to innovate and to make the disciplined investments needed to fuel our long-term growth.

Jim will now review our 2012 results in detail, and look ahead to the start of 2013.

Jim?

Thank you, Tom.

As Tom mentioned earlier, our business performed well in the fourth quarter, capping off a very strong 2012.

We grew revenue of $33 million sequentially, and 17% year-over-year, to $378 million in the fourth quarter, coming in just shy of the midpoint of our guidance range.

I mentioned on our last call it the online holiday shopping season would play a large role in where we would land relative to our fourth-quarter guidance.

And while we had a solid e-commerce season, it was not as strong as the record growth we saw last year.

During the quarter, we grew our content delivery solutions revenue 11% year-over-year, and 5% sequentially.

Solid growth, when you consider the timing impact of the significant Q3 software releases we discussed in our last call; releases that historically took place and benefited Q4 growth.

Our cloud infrastructure solutions grew 20% year-over-year, and 12% sequentially in the fourth quarter.

We are particularly pleased with the great traction and demand for our security solutions, with more than five times year-over-year revenue growth in the fourth quarter.

And we had more than 400 customers leveraging at least one of our security offerings at year-end.

For the quarter, total cloud infrastructure solutions comprised 60% of our total revenue.

Turning to our key industry verticals, enterprise was our fastest-growing vertical, with revenue up 28% year-over-year, and 11% sequentially, as our customers shifted more applications to the cloud and we saw increased demand for our optimization, performance, and security solutions.

Our commerce vertical increased 17% over Q4 of last year, and 21% sequentially.

We continued to see strong growth at our flagship website acceleration solutions, as well as continued traction with our security solutions.

Revenue from our media and entertainment vertical grew 15% year-over-year and 6% sequentially.

This is particularly strong growth when you consider the timing of the significant Q3 software releases I just mentioned.

High-tech revenue grew 13% compared to Q4 of last year, and 6% sequentially.

Growth in the quarter was driven by solid software download volumes and software-as-a-service customers adopting more of our cloud infrastructure solutions.

And finally, public-sector revenue grew 14% year over year, but was down 6% from a very strong Q3, due to the timing of several large custom government projects that were completed in the third quarter.

Turning to our geographies, sales from outside North America represented 29% of total revenue in Q4, consistent with the prior quarter and up 1 point from the prior year.

International revenue grew 22% year-over-year, and 10% sequentially in Q4.

Foreign exchange provided roughly a $1 million benefit on a sequential basis in the quarter.

This benefit was lower than our guidance expectations by about $1 million.

On a year-over-year basis, foreign exchange had a negative impact of about $1 million.

Excluding the impact of currency, revenue growth outside North America grew 23% year-over-year, and 9% sequentially.

Revenue from North America grew 15% year-over-year in the quarter, and was up 9% sequentially.

Resellers represented 23% of total revenue in the quarter, up 1 point from last quarter as we expanded our partner ecosystem in new markets.

Turning to costs, we were extremely pleased with our continued execution on managing cost of goods sold and gross margins in the quarter.

Our cash gross margin for the quarter was 82%, up 1 point from the last quarter and up 3 points from the same period last year, and at the high end of our guidance range.

GAAP gross margin, which includes both depreciation and stock-based compensation, was 70% for the quarter, up 2 points sequentially and from the same period last year.

We've continued to find ways to make our network even more efficient while taking advantage of our scale.

These are critical factors in our ability to deliver gross margins at these levels.

GAAP operating expenses were $170 million in the fourth quarter.

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

Excluding non-cash charges, our operating expenses for the quarter were $137 million, up $15 million from Q3; up 26% on a year-over-year basis; and in line with our expectations for the quarter.

Adjusted EBITDA for the fourth quarter was $173 million.

That's up 17% from the same period last year, and up 11% from Q3 levels.

Our adjusted EBITDA margin came in at 46%, better than our guidance, due to our higher gross margins in the quarter.

This level was consistent with the same period last year, and up 1 point from the prior quarter.

For the fourth quarter, total depreciation and amortization was $55 million.

These charges include $44 million of network-related depreciation, $6 million of G&A depreciation, and $5 million of amortization of intangible assets.

Net interest income for the fourth quarter was $1.6 million, roughly flat with Q3 levels.

Moving onto earnings, GAAP net income for the quarter was $68 million, or $0.38 of earnings per diluted share.

As a reminder, our GAAP net income includes $23 million of stock-based compensation, including amortization of capitalized equity-based compensation, and $5 million from amortization of acquired intangible assets.

Taxes included in our GAAP and normalized earnings were $29 million, based on a full-year GAAP tax rate of 36.6%, but driving a 30% tax rate for the fourth quarter.

As Tom mentioned earlier, this tax rate is more favorable than our 39% full-year guidance range, due primarily to higher foreign earnings as a result of a full-year tax adjustment to our global cost-sharing model.

Specifically, we adjusted the way we share our R&D costs across our subsidiaries.

Including these tax charges, our normalized net income for the fourth quarter was $98 million.

That translates to $0.54 per diluted share on a normalized basis; up $0.09 from Q4 of last year; up $0.11 from Q3 levels; and coming in $0.04 above the high end of our guidance range.

The favorable tax rate contributed to $0.04 of this overachievement.

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

With our solid fourth-quarter results, we finished the year with $1.37 billion in revenue, an increase of 19% over 2011.

Full-year GAAP gross margin came in at 69%, up 1 point from 2011.

Cash gross margin was 81%, up 2 points from the prior year.

We are extremely pleased with our margin expansion this past year.

Our improvements in this area are a direct result of the work by our engineering and network teams to implement a number of hardware and software initiatives to manage our global network more efficiently.

And we believe we can maintain our momentum in scaling the network going forward.

Full-year GAAP operating expenses were $628 million.

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

Excluding these non-cash charges, operating expenses for the full year were $493 million, up 25% on a year-over-year basis.

As we discussed throughout 2012, we are committed to pursuing the exciting opportunities in front of us.

Last year we invested both organically and through M&A, taking steps to increase the pace of innovation and accelerate growth.

We hired over 700 employees across the Company, focused primarily in additional engineering resources, service and customer support staffing, and network efficiency scaling.

We also began to ramp sales and supporting go-to-market capacity, and expect to further ramp hiring in this area in 2013.

Full-year adjusted EBITDA was $615 million, up 17% from 2011.

And full-year adjusted EBITDA margin was 45%, consistent with the prior year.

GAAP net income was $204 million, or $1.12 of earnings per diluted share for 2012.

This GAAP net income included $98 million of stock-based compensation expense, including amortization of capitalized equity-based compensation, and $21 million of amortization of intangible assets.

Excluding these items, our normalized net income for the year was $329 million, or $1.81 of earnings per diluted share.

That's up 16% from 2011.

This number includes a full-year GAAP tax charge of $118 million based on a full-year GAAP tax rate of 36.6%.

Now let me review some balance sheet items.

Cash generation was very strong.

Cash from operations for the fourth quarter was $147 million.

And for the full year, we generated $530 million of cash from operations, or 39% of revenue.

At the end of Q4, we had over $1 billion in cash, cash equivalents, and marketable securities on the balance sheet.

Capital expenditures in Q4, excluding equity compensation, were $61 million.

For the full year, capital expenditures were $220 million, or 16% of revenues, in line with our expectations heading into the year.

This number includes both investments in the network, as well as capitalized software development, facilities, and IT.

During the quarter, we spent $30 million on share repurchases, buying back about 800,000 shares at an average price of $37.50.

For the full year, we spent $141 million, buying back over 4 million shares at an average price of $32.50.

We are also pleased to announce that our Board authorized an extension of our share repurchase program, authorizing an additional $150 million over the next 12 months, effective February 1. As with our existing program, we intend to fund it out of our cash generation, with a primary goal to offset dilution from ongoing equity grants.

Finally, days sales outstanding for the quarter was 55 days.

With a solid Q4 and a very strong 2012, we are optimistic about our long-term growth potential.

We continue to see strong demand for both our content delivery and our cloud infrastructure solutions.

We believe that we are executing well in our management of cost of goods sold, and expect that to continue.

We are also committed to making the investments to deliver near-term performance for the business and to drive optimized growth beyond 2013.

Before I get into guidance for the first quarter, I wanted to address three items that will be factored into our future results.

First, as Tom alluded to earlier, we announced on January 24 that MediaMath acquired our advertising decisions solution business, which we call ADS.

Giving the timing of the divestiture, our Q1 guidance will include roughly one month of the ADS business.

To help you understand the impact of the ADS divestiture to our previously reported 2012 result, a detailed breakout of the ADS business can be found on the Investor Relations section of our website.

Second, our Q1 guidance will conclude a full quarter of the Verivue business.

This business will have virtually no impact to the top line, but will add roughly $3 million of operating expense in the quarter.

And third, it has become clear that the expected average useful life of our network servers is actually closer to four years, rather than the current three-year depreciation convention.

Due to the software and hybrid initiatives, we have undertaken to manage our global network more efficiently.

Effective Q1, we plan to extend the useful life depreciation methodology of our network assets by approximately 1 year.

This will result in less network depreciation recorded in Q1 2013, as we distribute the depreciation expense over a longer period of time.

This change in methodology would impact both existing network equipment on our books as of December end, and future network purchases.

A supplemental table highlighting the impact of this change on our existing assets can also be found on the Investor Relations section of our website.

Now, on to guidance -- we are expecting Q1 revenues of $352 million to $362 million.

This range represents 13% to 16% year-over-year growth, adjusted for the ADS divestiture.

The expected deceleration, versus Q4 growth of 17%, is due to the following -- first, as Tom mentioned, we are continuing our selective approach to the management of our media delivery business.

And we will be winding down some contracts with a few media accounts in the first quarter that are not of long-term economic value.

Second, we anticipate more difficult comparisons in our cloud solution growth rates, partially due to the wraparound effect of the Contendo acquisition, which we closed last March.

And third, we expect that foreign exchange will be a headwind in Q1, with an expected negative sequential impact of about $1 million, based on current spot rates.

We expect first-quarter cash gross margins of roughly 82%, up 3 points year-over-year, and consistent with Q4 levels.

We expect GAAP gross margins of roughly 73%.

Included in our GAAP gross margin guidance is a roughly 4-point favorable impact to depreciation as a result of the change in our estimated useful lives of existing assets as of December 31, and new assets acquired during Q1.

Q1 operating expenses are projected to be up about $4 million from Q4 levels.

This increase is driven primarily from a full quarter of Verivue and continued headcount investments focused in sales capacity, building out some of our newer partnerships, and in some of the R&D areas outlined by Tom.

As a result, we expect adjusted EBITDA margins to be in the range of 42% to 43% for Q1.

And we expect to continue to accelerate investment, likely yielding an EBITDA margin in the low 40s for the next several quarters.

At this level of revenue, we expect to see a normalized EPS in the range of $0.50 to $0.52 for the quarter.

This EPS guidance includes taxes of $26 million to $29 million, based on an estimated full-year GAAP tax rate of 34% to 35%, and a quarterly tax rate of approximately 31%.

The driver of the lower Q1 tax rate is the full impact of the reinstated 2012 Federal R&D tax credit in Q1.

This guidance also reflects a fully diluted share count of roughly 181 million shares.

On CapEx, we expect to spend about $65 million to $70 million in the quarter, excluding equity compensation.

This reflects our desire to stay ahead of the growth we expect on the network; and, more specifically, the impact of increased capitalized software and facility buildout investment to support the headcount growth in the business.

Overall, we are pleased with the performance of the business, and we remain optimistic about our growth potential.

We look forward to having an opportunity to go into more details with you about the business and the future trends in the industry at our upcoming Investor Summit in Cambridge on March 11.

Now, Tom and I will take your questions.

Operator, the first question please.

(Operator Instructions).

Mark Kelleher, Dougherty & Company.

Great.

Thanks for taking the question.

I was just wondering if you could go into some more detail on the accounting change.

Did you say just -- first, just a clarification.

Did you say 4 points of gross margin effect to that?

And if that's right, can you give us an apples-to-apples on the -- what the EPS guidance would be without that change of accounting?

Sure.

Let me clarify again what we're doing here.

So, as we talked about over the last year, we made tremendous progress on improving the hardware and software initiative; and implementing a bunch of hardware and software initiates to actually manage our network more efficiently.

We're actually getting more utility out of our servers.

We've been watching that over a period of time.

And, actually, the useful life of our servers on the network is actually more in the range of four years than the current three-year depreciation convention.

That's why we're making the change, because we believe we're going to be able to have these assets on the network for a longer period of time.

And your point or question around the impact -- yes, it has about a 4-point impact on GAAP gross margins.

So think of that as -- if you look at the Investor Relations section of our website, that's about $14 million for the quarter.

We actually provided what the impact is for the year as well.

And if you look at that impact on an EPS basis, because you have to tax effect that -- and so when you tax effect that, the EPS impact or benefit in the first quarter is about $0.05.

Okay, great.

That's very helpful, thank you.

Scott Kessler, S&P Capital IQ.

Hi.

It's Scott Kessler, thanks a lot.

A couple of questions -- Tom, you highlighted some of the strength that you've seen in the businesses; and, Jim, I think you touched upon the particular strengths in enterprise, being up 28%.

I'm wondering if you could go into some specifics as to maybe some noteworthy wins, as to how people are thinking about purchasing and deploying your product.

And I'm also wondering if you think you might have benefited from the equivalent of a budget flush.

And I have a follow-up, as well.

Thanks.

I can start, Tom, then you can comment on it.

So, enterprise in particular, we talked about getting good traction with our security solutions.

We've gotten really good traction with our security solutions with our enterprise customers.

So I would say one notable area that's fueling an acceleration in our enterprise growth actually is the adoption rate of our security solutions.

We also continue to get good penetration in the enterprise market with our Web performance solutions as well.

We just have -- I think the focus there -- I think the focus of the sales force and the investments that we've made there -- is starting to prove a return in the enterprise space.

Tom, I don't know if you want to comment more on the solutions.

Yes.

I think the message of protect and perform is unique in the marketplace, and it's being very well received.

And we are seeing many accounts now where an enterprise will buy the solution driven by our ability to defend them against the cyber attacks.

And then also by the Web performance solution, and the acceleration for their website.

And it's a shift in our business that traditionally has always been about performance for enterprises.

Now the security aspect is often in the driver's seat and very important.

Great.

Thanks a lot.

And I look forward to hearing more about the security business in a couple of months, or in a month or so.

My second question involves the balance sheet.

So, obviously you talked about the new $150 million authorization, given that the other authorizations have expired.

I'm wondering if you could talk a little bit about how you think about capital; and, more specifically, what percentage of the indicated cash and investments resides overseas at this point?

Thanks.

Sure, that's a good question.

Of our roughly $1.1 billion of cash, about $100 million is overseas.

So actually we have -- most of our cash is not overseas, which we are in an enviable position in that regard.

But as far as we were looking at our capital and our capital structure, for sure there are significant market opportunities in front of Akamai.

And one of the things that we're looking at our balance sheet floor and our cash position is to, first and foremost, see if we can put that cash to use in the form of M&A.

And what you've seen us do in 2012 is we actually acquired four companies and spent over $300 million on acquisitions.

We will continue to be very active shoppers in the market across our various portfolios; but be very disciplined buyers.

And we're going to pretty much be looking not in any one particular area, but across -- where it makes sense to have a logical adjacency.

That's probably the first area to be put to use, as far as the cash.

The second area is, we will continue as we've done before -- continue with the buyback of stock to basically offset dilution from new equity.

That's really the approach that we're taking to the management of the balance sheet.

Great.

Thanks a lot, Jim.

Thanks a lot, Tom.

Gray Powell, Wells Fargo.

Hi.

Thanks for taking the questions.

Just had a couple -- can you help us think about customer demand for AQUA Ion versus your legacy DSA product?

And has the addition of front-end optimization technology to the offering created any incremental demand?

Yes.

Ion was launched in Q4, as you may know.

And the initial results are positive, both in terms of offering greater performance, particularly in the mobile environment -- as you know, mobile is really critical in the Web going forward, as the world moves to mobile -- and also in the uplift.

We're seeing customers upgrade from DSA to Ion.

In some cases also with KONA for the security offered offering, and so we're seeing a very nice uplift in the revenues as we convert those deals.

Now, a new key component of the new Ion solution, the first version, is front-end optimization.

And that has a variety of capabilities to make the experience be really tailored to the device and to the environment where it's operating.

So, for example, if you're in a congested network and you've got a small form factor device, we'll automatically adapt the images to compress them.

So you still get a good picture, but a lot fewer bits are passing through the congested environment.

So, the front-end optimization has been very favorably received, especially in the mobile environment.

Got it.

And since you touched on it, can you give us some insight into how customer demand is changing for mobile acceleration-type services?

And then, I don't know if it's possible or not, but can you help us think about the additional ARPU lift on a DSA contract if a customer signs up for AQUA Mobile as well?

Yes.

I think you go a couple of years ago, and mobile was barely an afterthought among folks with websites and applications.

And today it's mission-critical.

As more commerce moves online -- and it moves onto mobile devices, more business is done on mobile devices -- performance now really matters.

So you see that folks with websites are actually making special applications that are sized for the mobile devices, and now they worry especially about the performance there.

And that's particularly important, because mobile performance is often very bad.

Some of the studies say that if you look at the mobile Internet today, it performs sort of like the landline Internet performed nine years ago.

And we remember how bad that seems in comparison to today.

So, mobile acceleration is important.

We have a special offering there of AQUA Ion for mobile, and it's doing very well.

Got it.

Okay, thank you very much.

Michael Turits, Raymond James.

Hey, guys.

Some expense questions for Jim, and then a bigger-picture question for Tom.

On the expense side first, it sounds like a couple -- you said several quarters, I think, of EBITDA margins in the low 40s.

So I assume that's about where we end up at the year.

What is the OpEx growth really going to be like within the upwards of 25% last year?

What is it this year?

And also back to the EBITDA question, cutting out ADS, it looks like ADS had a $5 million EBITDA loss.

That's why I particularly want to get a sense of the OpEx, because even with getting rid of that $5 million of loss, you are down a couple points in margins.

Well, we didn't lose -- the ADS business was EBITDA positive.

But let me address your question more directly, which -- we have been making investments in 2012.

And we specifically made those investments very targeted at accelerating the pace of R&D innovation.

And you've seen us introduce products in every single one of the Company's product categories.

And we're going to continue to make investments in R&D innovation going forward.

They're going to be very focused on the areas that Tom had outlined, specifically building out our security product more fully; expanding our carrier product solutions, or our network operator solutions; and actually going into an area of hybrid cloud optimization.

From an R&D perspective, we're going to continue to make investments in those areas.

I'd say an area that we've made some investments in 2012 but probably more in the back half of the year was around incremental sales capacity.

There is significant demand and market opportunity for our offerings.

And one of the things that I think we've talked you guys about before is that 40% of our business that is CDN-driven, that is more traffic related, is not a sales resource-intensive business.

The 60% of our business that is cloud solutions is a transaction, monthly-recurring revenue business that does require sales capacity to grow.

We are going to continue to make investments in sales capacity because we believe the market opportunity is there re-accelerate our growth in our cloud solutions areas.

Those are two very specific targeted areas.

And the reason we are guiding to the low-40 EBITDA is because we believe these are the right investments to make for the Company, for the -- one, to deliver near-term potential for the Company; and, also, to deliver what we believe is future growth potential in some new adjacent markets.

David Hilal, FBR.

Great, thank you.

A couple ones -- first, I believe you're having the sales kick off this week.

And with the calendar year starting, I'm wondering, are there any interesting changes in the sales structure, quotas, alignment?

Anything that could help or disrupt the pipeline for most immediate 1Q?

I think the main emphasis and change is around our security offerings and getting the reps in the field up to speed on selling that.

We're very excited about the potential for security this year, and going forward into the future.

Otherwise I would say it's a pretty typical sales kick off, and things are going well.

Okay.

Let me shift to your comments about not doing uneconomical deals in the media sector.

When you say uneconomical, should we interpret that as breakeven or deals that lose money?

Or are there actually -- is there a threshold?

In other words, is there profitable business that you would turn away because it doesn't meet the profit requirements that you guys have set?

Yes, I'll take that.

We've always taken a disciplined approach to the management and pricing of our media business, so it really isn't a change necessarily.

However, we don't view all customers the same.

Some customers are of more, long-term economic and strategic value to Akamai, that we believe you can make an investment in.

And then there are other customers that we don't believe are worth making that investment in.

I think what you are seeing us to is, in a handful of cases, where we are choosing to wind down a relationship in a contract with the customer because it doesn't have that economics that we're looking for, and it isn't of strategic value long-term for Akamai.

Ben Rose, Battle Road Research.

Good afternoon.

With regard to the recent AT&T partnership that you announced -- I was hoping, Tom, you could give a little strategic context to that.

And then if Jim could provide any kind of financial color on how the partnership might unfold during the course of 2013.

Sure.

I think that's a very exciting development for the Company.

As you probably know, AT&T has for years invested significant money and resources into building their own CDN specifically to compete with Akamai.

And so it's really great -- it's a great validation of our platform that they have decided to discontinue that.

And they are standardizing their offerings today on the Akamai technology.

They will be a very valuable channel for us going forward.

And we're very much looking forward to going forward to the market with them in 2013.

Yes, and I can comment a little bit about the rate and pace.

Obviously beginning in Q1, I would say the first half of the year is going to be more of an investment phase, where both companies are going to be making an investment in the partnership.

We're going to be investing in channel resources to support them.

They're going to be investing in sales resources to basically sell the Akamai product set.

But there is also some work that we're doing with them from an engineering perspective, around building out some particular portal features that they're looking for.

The way to think about it is, it's an investment probably in the first half of the year.

We'll begin to get the revenue streams, probably to the latter half of the year.

And our expectation is, going into 2014, that they're actually going to be a very significant channel partner for us in the US, in particular.

Colby Synesael, Cowen.

Great.

I had two questions.

These are follow-ups to questions already asked.

The first one, going back to AT&T for a moment, can you talk about -- is that really going to be focused on what we think of as traditional CDN services, and more of a focus towards the media and entertainment and e-commerce verticals?

Or is there going to be more of a broad focus to sell some of the news services that you are introducing, particularly in 2012, to call it that enterprise space.

And then the second question goes back to the guidance you mentioned, the low 40s for EBITDA margin.

I assume that's -- when you say low 40s, that's pretty much the same guidance you gave for the first quarter.

And what I wanted to make sure I understand is that you're expecting your gross margins to remain at the levels that we've seen in the last quarter or two -- in that, call it, low 80s.

And it's really the increase in the sales and marketing that's going to go up that's going to drive those margins down, relative to what we saw, probably, in 2012.

I'll take the first question.

The AT&T partnership is broad-based.

And, in fact, that's one of the advantages that AT&T saw in working with Akamai.

Just having a CDN really doesn't cut it anymore.

You need the advanced solutions and the roadmap for those solutions that really Akamai uniquely has.

And I think that was a key factor why AT&T chose to abandon the internal efforts and to decide to standardize their offerings with Akamai.

Yes, and I'll take your -- you're thinking about it the right way, Colby, that we made great progress last year on improving gross margins in our CDN business.

And we're actually very confident that we can maintain the momentum that we've had in 2012 into 2013.

So the way you are thinking about is the right way, that what's going to drive EBITDA margins to probably be in the low 40s is -- we are going to make very targeted investments in operating expenses.

I would say it's going to be very heavily focused on sales and marketing, and building out sales capacity, and supporting go-to-market resources.

But it's not going to be just in those areas.

We're also going to continue to invest in R&D innovation in areas that Tom had outlined.

Certainly the Verivue acquisition is but one example where you're going to see that we basically acquired 70-plus employees that you are going to see for -- and we will continue to add on top of that.

One, to build out our -- and accelerate our time to market for our network operator solutions; two, Tom talked about security.

We're going to continue to make investments in security R&D.

We're going to make investments in hybrid cloud optimization.

And we think that there is an opportunity for us to continue to innovate in the Web performance area as well.

I would say the investments are going to be targeted towards incremental sales capacity and go-to-market investments.

And because our solution sets, also, are very high performing and very complex, you also need a level of service infrastructure to support them.

But we're also going to be investing in the R&D area as well.

Okay.

Thank you very much.

Sterling Auty, JPMorgan.

Yes, thanks.

Hi, guys.

Tom, I'm wondering with all the different announcements tonight in terms of the investments, the focus, et cetera -- how much of this is you putting your stamp on the strategic vision, now that you are in the CEO role; versus how much of this was already set into motion prior to that decision being made.

Well, Paul's job, which he did extremely well, was to lead us past $1 billion.

My job is to lead us past $5 billion.

My strategy is going to be to use our very strong cash flow and market position, the unique capabilities of our platform, and our ability to innovate to develop new businesses in security; in carrier products and hybrid cloud optimization; all of which are adjacent markets, new markets for us, with very large potential.

We're also going to work to improve the growth of our Web performance business, as we talked about, in part by improving performance with a special focus on mobile.

Of course, a lot of the business is moving to mobile, as you know.

And also by growing our sales capacity, as Jim talked about.

That's really vital for that business.

We're also making a special effort, going forward, on making our services easier to integrate and easier for our partners to sell and deploy, with the goal of growing the share from our channel partners.

And, of course, in media, as we talked about, there has always been a large potential for growth.

Traffic always grows at a rapid rate.

And the key there is to have quality at scale at very low cost.

And so we're continuing to work on reducing the cost of our media business.

I might add that Paul and I have worked together for many years.

We share the same vision.

And I look forward to working with him in his new role as Executive Vice Chair of the Board.

On the AT&T partnership, you mentioned they are standardizing.

But can you review for us, is AT&T putting all of their CDN -- both business and content delivery -- through Akamai?

Or is there a potion, like in the volume, content delivery, that will continue to be the participant and be a competitor to Akamai?

No, they are standardizing their CDN offerings on the Akamai platform.

Jennifer Lowe, Morgan Stanley.

Hey, guys.

This is actually John Parker calling in for Jennifer Lowe.

I was hoping that we could actually dig in a little bit more to the volume business, as the deceleration was a little bit more than I think we were looking for.

Two years -- around the time we saw a little bit of an issue with a large number of significant renewals coming up at the same time.

And I'm wondering how much of the deceleration might be a function of some dynamic around those deals coming up for renewal again, versus the uneconomical type business -- the media business you assessed earlier --versus any other changes in pricing, or anything else we should be aware of.

And so would appreciate any additional color you guys might have on that.

Thanks.

Yes, I'll take that.

That's a good question.

I think that it's coincidental.

You're right, that two years ago we had a phenomenon in Q1 of 2011 where eight of our top-10 media customers renewed.

And it is two years later, and the question is, is that because those customers are now up for renewal?

And the answer is no.

We're not having that same effect.

I think what you are seeing is a consistent approach that Akamai is taking.

It just happens to be that there's a couple maybe larger ones this quarter, where we've looked at the relationship.

We've looked at the economics of the business.

We look at the strategic value of the customer.

And we have just decided that it's in the best interest of both parties to wind down the relationship.

So that's really the driver of what's happening in the near term.

I would bring you back maybe to Tom's point earlier, which is, there is huge opportunity for traffic growth with media customers.

And so what you're seeing here is a slight dip.

We'll wind down these customers throughout Q1.

Obviously, they will be on the platform in Q1.

They will be off the platform in Q2.

So you can have an expectation of what is going to happen in Q2 as well.

But we also have significant opportunity to continue to grow and penetrate, and grow with customers that are of strategic value for Akamai, and new customer acquisitions that meet the financial profile for the business.

Phil Winslow, Credit Suisse.

Hi, guys.

This is Siti Panigrahi for Phil Winslow.

Could you talk about your competitive landscape?

And also if you could comment on any pricing trends that you are seeing in M&E versus commerce business, and anything that you'd expect to see going forward?

Sure.

Our competitive landscape varies depending on the business you are talking about.

In media, as we have talked about, of course it's a highly competitive landscape; lots of competitors.

And there's always pricing pressure there.

And it's all about growing the traffic and providing a lower cost of service so we can grow that business profitably.

In the Web performance business, it's a different situation.

The primary competition is do-it-yourself.

Our customers see tremendous value in our service, because as we make their applications and sites be faster, they get a higher ROI, higher conversion rate, more use of their site.

And so we are the fastest out there.

We're the most reliable and the most secure.

And that has real value to our customers.

Now, that said going forward, we are making our services even better to set even a bigger gap between us and the competition to grow that business going forward.

If you look in the security space, you have a different set of competitors.

You have -- carriers can offer solutions; you have the cloudwashing companies; and you have companies that will sell a device you stick it in your data center.

Now, this is an exciting area for us, because none of those solutions can protect the major enterprises against that big attack.

Akamai is unique in its capacity and its ability to do that packet inspection and filtering out at the edge.

And really that's the only way to defend yourself against large attacks.

That's why you see (technical difficulty) for example, major banks don't have KONA Site Defender made headlines.

Because you have a large-scale attack, and all those cloudwashing solutions, boxes, and carrier solutions simply can't work once the attack gets to the data center.

You go into the carrier operator solutions, different set of competitors again.

And hybrid cloud is a new space moving forward, where again I think we're in a unique position because we can leverage the Akamai platform and connect it to software we're placing in the branch offices and in the retail stores, to accelerate the performance they see for all of their applications -- be it in the private network, in the public network, or in SaaS -- and to offload the connection into that branch office, which is often very expensive.

So, the competitive landscape is variable.

But I think Akamai is very well-positioned.

going forward.

Chad Bartley, Pacific Crest.

Hi.

Thank you.

A lot of moving parts with the acquisitions and divestitures; but it seems like the cloud business grew maybe in the mid-teens in Q4 on an organic basis.

And then you talk about CDN at 11%.

So can you talk at all about growth rates for those two segments that's sustainable going forward?

What are the growth ranges we should be thinking about?

Or do you guys expect any sort of pick up or slow down anywhere?

I'll take that.

That's a very good question.

You are right, our cloud solutions growth for 2012 organic organically -- if you separate out the benefits that the Company received from the Contendo acquisition -- was about 18% growth year-on-year.

So, very good growth rates.

But as I mentioned earlier, what really fuels the growth of the cloud solutions business is sales capacity.

It is a highly attractive financial model because it has very, very high gross margins.

And it has very, very low capital expenditures.

But it does require operating expenses to grow.

In particular, it requires sales capacity.

And it also requires service capacity, as well as some R&D innovation.

So it's got a very healthy financial model.

It's actually more attractive EBITDA than the Company's average EBITDA.

But the way the business works is you have to make an investment in the sales capacity, and it takes a while for the sales resources to become productive.

And the way this business works, because it's a monthly recurring revenue business, once they ramp and become productive, you get them on the -- you basically book a piece of business; we integrate them onto the Akamai platform; and then they grow.

So you have this lag period of time where you have investment in advance of accelerating revenue growth.

I think what you're going to see is that we think we can get the growth rates back in that business, back to the levels that they were, maybe -- in the 20%-plus growth range.

But it's going to take some time for the sales capacity to become productive, and then to turn them onto the Akamai platform and turn that into revenue.

We are not gated at all by the market opportunity.

The market opportunity is huge, with significant demand for our solutions.

What we need to do is we need to increase sales capacity to accelerate that growth.

And it's going to take a little bit of time.

I think what we are signaling a little bit is, one, we're going to see the wraparound effect of the Contendo acquisition, which will come up in March; and, therefore, the comps become more difficult for the Company.

But we're making the right investments.

We began making these investments in 2012 in sales capacity and we're going to do more in 2013.

And our expectation is that you should be able to see accelerating growth in that business, going into 2014.

Last question, please.

Heather Bellini, Goldman Sachs.

Yes, this is Sonia on for Heather.

Thank you for taking our questions.

As it relates to the core content delivery business, what are you guys anticipating in terms of pricing erosion and traffic volume growth relative to 2012, just for this year?

And then, are there any dynamics that would drive a more steep price decline this year than what was seen last year?

I'll take that.

I don't think we really commented on the pricing.

That was a good question.

A couple of people have asked that.

The pricing environment in the CDN space, as Tom mentioned, has always been highly competitive.

But we track it, and -- I've been with that Company now for about three years.

We've tracked it for the last several years around the pricing.

It's been pretty consistent, the rate and pace of pricing; the pricing is declining.

But the bands of pricing erosion have really not changed materially.

And actually, I don't expect that, going forward, they will.

We don't expect that they're going to worsen, and we don't expect that they're going to get better.

We expect them to continue at the rates that they've been at.

So, really growing the content delivery solutions business is really then about traffic.

If you believe that the price component on it is going to be relatively stable, meaning that the pricing declines are going to be consistent with what they've been, it's a matter of traffic growth.

And, admittedly, that is a harder area for Akamai to call.

We can call pretty well in a three-month period.

But beyond a three-month period, it's really a function of how successful our customers are, with their products and getting traffic to their websites that we are supporting.

Certainly in the near term, we're quite confident in the range that we provided.

I think there is huge opportunity as more and more content moves online, as Tom outlined.

But I would say that the rate and pace of when that happens quarter-to-quarter is hard to see.

I think we know, over time, there's going to be an explosion of traffic.

And as long as we can make sure that we are the platform of choice for the various companies that we are sorting their traffic for, there is a significant opportunity for long-term growth for Akamai.

Okay, that's helpful.

And then really quickly on Verivue -- you said no impact of the top line, but a $3 million impact to cost.

Do you see this business progressing towards breakeven or profitability later in the year?

Yes.

What we had talked about when we made the Verivue acquisition in December, was we actually said that it would probably be about $0.01 dilutive to our 2013 earnings.

And the way to think about that is that $0.01 dilutive is probably in the first half of 2013.

What we're going to be able to do is get -- an accelerate our time to market with products in that space; get customers on, basically, a licensed CDN product so that towards the back half of the year, what you are going to see is revenue that offsets that expense.

But for the first half, probably slightly dilutive.

For the second half, you'll see it be breakeven.

Thank you very much.

We look forward to seeing you all at our Investor Day on March 11 in Cambridge.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.