阿卡邁科技 (AKAM) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter one 2013 Akamai Technologies, Inc.

earnings conference call.

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

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

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

(Operator Instructions).

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

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

Please proceed.

Good afternoon and thank you for joining Akamai's investor conference call to discuss our first-quarter 2013 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 April 24, 2013.

Akamai disclaims any obligations 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 & 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.

Q1 was a great quarter for Akamai on both the top and bottom lines.

Revenue in the first quarter was $368 million, up 15% year over year, or 19% when adjusted for the ADS divestment and foreign currency movements.

This result exceeded the high end of our guidance range due to better-than-expected traffic growth in our media business, particularly near the end of the quarter.

We generated non-GAAP net income of $93 million or $0.51 per diluted share, exceeding the high end of our guidance range due to higher-than-expected revenue and strong operational performance.

Non-GAAP EPS was up 42% year over year, in part due to a favorable tax rate and the recently introduced change in our depreciation methodology, both of which were factored into our Q1 guidance.

Excluding these items, non-GAAP EPS was up 19% over Q1 of last year.

We also had another solid quarter of cash flow generation with $103 million of cash from operations.

I'll be back in a few minutes to talk more about the key trends we are seeing in the marketplace and how they are driving our business, but first, let me turn the call over to Jim for the details on Q1.

Jim?

Thank you, Tom.

As we discussed in our last earnings call, there are three discrete items that will affect our 2013 reported results and growth rates.

The ADS divestiture, which occurred in late January, the depreciation methodology change for our network assets, and a lower Q1 tax rate from the retroactive reinstatement of the 2012 federal R&D tax credit.

As I walk you through the details of our very strong Q1 financial results, where appropriate I will also provide you with Akamai's results for Q1 adjusted for these three items so you can better understand the operational performance in the quarter.

Revenue came in above our guidance range at $368 million, up 15% year over year with solid growth across the business but most notably within our media delivery solutions.

ADS accounted for less than $3 million of revenue in the first quarter.

Adjusting for the impact of ADS and $3 million of currency headwinds, revenue grew 19% on a year-over-year basis.

As a reminder, at last month's Investor Summit, we discussed three new solution categories -- media delivery, performance and security, and service and support.

We will no longer discuss revenue by industry vertical during the call, but we will continue to provide a breakout of revenue for each vertical on the Investor Relations section of our website.

To ease in the transition of our new reporting, we plan to continue providing this vertical reporting breakout through the end of the 2013 fiscal year.

Turning now to our new solution categories, media delivery revenue was $181 million in the quarter, up 17% over Q1 of last year and up 4% sequentially and was the primary driver of our revenue overachievement in the quarter.

We saw strong traffic and revenue growth notably near the end of the quarter.

This result more than offset the impact of winding down some contracts with a few media accounts as we discussed in our call last January.

Revenue from our Performance and Security Solutions was $157 million in the quarter, also up 17% over Q1 of last year.

As expected, revenue declined 4% sequentially due to normal holiday seasonality.

Within our Performance and Security category, we continue to see strong demand for both our web experience and security solutions.

We saw signings for our new Aqua Ion solution released in Q4 of last year across all our key geographies.

As we have discussed on our last couple of calls, our goal is to meet the market demand and reaccelerate growth in this key solution category by continuing to increase our go-to-market investments.

Lastly, our Service and Support revenue was $27 million in the quarter, up 35% over Q1 of last year and up 3% sequentially.

We continue to see strong traction in service attachment rates to our core media, performance, and security offerings.

Switching now to our geographies, sales outside North America represent 30% of total revenue in Q1, up 1 point from the prior quarter and up 2 points from the prior year.

Q1 international revenue grew 22% year over year and 1% sequentially.

The stronger dollar had a negative impact on revenue of about $3 million on both a sequential and a year-over-year basis.

Excluding the impact of currency movements, revenue growth outside North America grew 26% year over year and 3% sequentially with particularly strong growth in our Asia Pacific geography, offsetting macroeconomic headwinds in some of our European markets.

Revenue from North America grew 12% year over year in the quarter and declined 4% sequentially.

Excluding the ADS divestiture, revenue from North America was up 16% year over year and flat sequentially.

Resellers represented 20% of total revenue in Q1.

Moving on to costs, we were extremely pleased with our continued execution on managing cost of goods sold, which resulted in our fourth consecutive quarter of expanding gross margins.

Our cash gross margin was 76%, up 1 point from the prior quarter and up 3 points from the same period last year.

This result was also 1 point better than the guidance we provided for the quarter, driven by our revenue over achievement and by cost efficiencies in the network.

GAAP gross margin, which includes both depreciation and stock-based compensation, was 67% for the quarter, up 4 points sequentially and up 6 points from the same period last year.

GAAP gross margin included a favorable impact of roughly 4 points due to the depreciation methodology change we discussed on our last earnings call.

GAAP operating expenses were $146 million in the quarter.

Cash operating expenses for the quarter were $115 million, up $3 million from Q4, up 26% on a year-over-year basis and slightly below our guidance range as some planned hiring activity shifted into the second quarter.

Adjusted EBITDA for the first quarter was $166 million.

That is up 16% from the same period last year and up 4% from Q4 levels.

Our adjusted EBITDA margin came in at 45%, down 1 point from Q4 levels and flat with Q1 of last year.

This was above our guidance range for the quarter as we drove better-than-expected revenue performance and network cost management.

Our gross margin expansion more than offset the continued investment in operating expenses.

For the first quarter, total depreciation and amortization was $42 million.

These charges include $31 million of network-related depreciation, $5 million of G&A depreciation, and $6 million of amortization of intangible assets.

Net interest income for the first quarter was $1.6 million, flat with Q4 levels.

Moving on to earnings, GAAP net income for the quarter was $71 million or $0.39 per diluted share.

As a reminder, we introduced non-GAAP net income and EPS using the new tax effective methodology at our Investor Summit in March.

Details of that methodology change and a recent update to the 2012 non-GAAP tax quarterization can be found on the Investor Relations section of our website.

This update has no impact on full-year 2012 non-GAAP net income or EPS.

Our non-GAAP net income for the first quarter was $93 million or $0.51 per diluted share, $0.04 above the high end of our guidance range, driven by strong operational execution.

This result was up $0.01 from Q4 levels and up $0.15 from Q1 of last year.

Our Q1 GAAP and non-GAAP tax rates were 30%, both benefiting from the retroactive reinstatement of the 2012 R&D tax credit.

For the quarter, taxes included in our GAAP earnings were $31 million, and taxes included in our non-GAAP earnings were $40 million.

$0.08 of our Q1 EPS results can be attributed to the 2012 retroactive reinstatement of the federal R&D tax credit and the depreciation methodology change discussed previously, both of which were reflected in our Q1 guidance.

Our weighted average diluted share count for the first quarter was 181.6 million shares.

Now let me review some balance sheet items.

Cash generation continued to be strong.

Cash from operations for the first quarter was $103 million.

At the end of Q1, we had over $1 billion in cash, cash equivalents, and marketable securities on the balance sheet.

Capital expenditures in Q1, excluding equity compensation, were $63 million and in line with our guidance range.

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

During the quarter, we spent $40 million on share repurchases, buying back 1.1 million shares at an average price of just under $37.

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

With a strong start to the year and continued progress on planned investments in strategic areas, we are optimistic about our long-term growth potential.

For Q2 we are expecting another strong quarter with revenue in the range of $368 million to $378 million.

This range represents 15% to 18% year-over-year growth when you exclude the ADS divestment from our 2012 results.

At the high end of our guidance range, this growth rate is consistent with our Q1 growth rates, even after the impact of the Q1 media contract wind downs and the wrap around effect of the Cotendo acquisition on reported growth rates.

Included in this guidance is an expectation that foreign exchange will have a negative impact of approximately $2 million compared to Q1 and a $4 million impact compared to Q2 of last year.

We expect cash gross margins to remain stable at above 76% and GAAP gross margins to come in at 66%, down 1 point from Q1 levels due to depreciation increasing as we continue to build out the network.

In Q2 we plan to continue to increase our investment levels in the business.

On the operating expense side, we expect to grow cash OpEx by $9 million to $11 million on a sequential basis as we further invest in go-to-market and R&D initiatives that we believe will yield important long-term benefits.

With these increased expenditures, we expect an EBITDA margin range of 42% to 43% for the quarter, and it will remain in the low 40s for the remainder of the year.

At this level of revenue, we expect to see non-GAAP EPS in the range of $0.44 to $0.46 for the quarter.

This EPS guidance includes taxes of $40 million to $43 million based on an estimated Q2 non-GAAP tax rate of 34%.

We expect non-GAAP tax rates for Q3 and Q4 to be consistent with Q2 at roughly 34% and a full-year tax rate projection of approximately 33%.

This guidance also reflects a fully diluted share count of roughly 180 million shares.

On CapEx, we expect to spend $75 million to $80 million in the quarter, excluding equity compensation.

This is higher than what we've been spending in recent quarters, primarily from the timing of facility-related buildouts to support the planned headcount growth in the business and partly due to our desire to stay ahead of the traffic growth we expect to see on the network.

For the full year, we are expecting to be slightly above the high end of our long-term model for CapEx as a percent of revenue due to more significant facility-related investments that we anticipate will continue through the year.

Overall, we are very pleased with the performance of the business in Q1 and the momentum we have coming into Q2.

Now let me turn the call back over to Tom.

Tom?

Thanks, Jim.

I'd like to start by saying how great it was to see many of you at our Investor Summit in Cambridge last month.

Whether you were there in person or tuned in to the webcast, you heard us speak in depth about the four mega trends that are shaping online business -- cloud, mobile, video, and security -- and why we believe that Akamai is well positioned to benefit from these trends.

For example, consider cybersecurity.

It has become abundantly clear over the past several months that any company doing business online needs to be diligent about security.

Online attacks are becoming larger in size, more frequent, more varied and sophisticated, and they are being launched on a global scale.

For example, the attacks we witnessed while defending our US banking customers during [Operation Obabel] came from servers located in more than 100 countries.

These highly-distributed attacks demonstrate why companies need to think about web security differently and also why we believe that they need the distinct advantage provided by our distributive platform.

By leveraging the global scope and capacity of our distributed architecture, Akamai is uniquely able to mitigate not only the high-volume attacks that can overwhelm traditional Web defenses, but also those aimed at compromising a web application through more subtle methods.

At Akamai, we are also continually improving our services so that we can help our customers stay ahead of new and emerging modes of attack.

Just this quarter, we unveiled a set of enhancements to our flagship security solution, Kona Site Defender, that are designed to provide the greater intelligence, flexibility, and visibility required to better defend websites and applications against the latest threats.

We also rolled out new interface functionality intended to ease integration with our customers' existing on-premise appliances and to support their relationships with managed security services providers.

By the end of Q1, we had nearly 500 customers leveraging one of our security solutions, and more than 130 had purchased our flagship Kona Site Defender offering.

In addition to defending their websites and applications, our customers also require their online assets to perform at optimal levels at all times and for any device anywhere.

Akamai's Web performance solutions are designed to meet this critical requirement and to improve the overall user experience, driving more visits, more sales, and increased productivity for our customers.

Whether our customer is a leading retailer trying to tackle the complexities of the online channel or a global enterprise trying to connect employees, customers and partners around the world, they face similar challenges.

They need their sites and applications to load quickly to keep users engaged and to be easily accessible from any device, anywhere, anytime.

Early adopters of our new Web Experience Solutions are already reporting how well the technology helps them respond to the very real challenges of optimizing Web performance across the many environments presented by their end users.

For example, one of our new Aqua Ion customers saw a 3X reduction in the load time of their homepage after upgrading from our dynamic site accelerator service.

And as you know, DSA has been our flagship performance service for many years, which makes this additional performance improvement even more impactful for our customers.

In this case, the new front-end optimization capabilities in Ion were specifically cited as contributing to the dramatic performance improvement.

Even more impressive, we are seeing such performance gains for mobile users, as well.

This is important because mobile users are accounting for a rapidly increasing share of site visits, but mobile performance has traditionally been poor due to the well-known challenges with latency and congestion in cellular networks.

Our new Web Experience Solutions are specifically designed to overcome these challenges.

As a result, one of our retail customers achieved an average performance improvement of more than 48% over cellular networks in North America and 62% over cellular networks in Asia by leveraging Akamai's Ion mobile solution.

Ultimately our goal is to help our customers' websites and web applications become nearly instant, and the investments in innovation that we are making today will be critical to making that goal become a reality.

I'd now like to change topics and say a few words about our media business where our goal is to continue to offer solutions that deliver not only superior quality at very large scale and at affordable price points, but that also simplify end-to-end content preparation and workflow.

From cloud-based transcoding, stream packaging, and security services to world-class content delivery and network storage solutions, Akamai's Sola Media Solutions provide the exceptional video management services that our media customers demand.

To that end, we recently introduced new media capabilities, most notably our Sola Vision ad integration service.

This service dynamically inserts targeted ads into video streams, an approach designed to make it easier for our customers to monetize their video assets without impacting performance or the viewer experience.

In addition, our Sola Analytics Viewer Diagnostics offering, which we unveiled at the recent NAB conference in Las Vegas, provides our media customers with real-time access to viewing experienced information for each of their subscribers.

These new capabilities and features would not be possible without the Akamai intelligent platform on which they are built.

Lastly, I would like to update you on our work with major carriers.

Since the introduction of our Aura Network Solutions about a year ago, we have made good progress in deepening our relationships with major carriers.

From relationships announced at the close of 2012 with Orange and AT&T to partnerships announced in Q1 with Swisscom and Korea Telecom, we believe that global operators are seeing the value in working with Akamai to bring their customers world-class CDN and Web performance solutions.

These relationships provide carriers with the ability to support the explosive growth in devices, content, and traffic, while also helping to defend their customers against an increasing flood of Web attacks.

At the same time, we believe these carriers will help to further Akamai's go-to-market capabilities in areas such as sales, customer support and marketing.

In addition, Akamai has the potential to benefit from the carriers' strong brands, deep customer understanding and local support.

In summary, Q1 was an excellent quarter for Akamai with strong growth on both the top and bottom line, and we continue to drive innovation across our solution lines to help meet the needs of our customers as they navigate an ever changing online business landscape.

Thank you for your time today.

Now Jim and I will take your questions.

Operator, the first question, please.

(Operator Instructions) Michael Turits, Raymond James.

Any chance you could give us a little bit more insight into what drove the upside in the traffic in the first quarter and what verticals and why maybe it was unanticipated, and did you get the full amount of the carrier rolloff that you expected to?

Because we were estimating maybe that would hit around $3 million.

So just a quick answer to those few questions, and then I've got a follow-up.

Sure.

So, Michael, we saw very strong traffic growth, in particular, amongst our largest and most strategic accounts.

And we had a good start to the quarter, but really traffic began to accelerate in February and actually more prominently into March.

And so really what caused the overachievement was just a significant acceleration with some very large strategic accounts during the quarter.

We saw strong growth across the board, but in particular what drove the beat in the overachievement was growth in our large strategic accounts.

As far as the media contracts that we talked about in Q1 and winding them down, those happened as we expected.

And the impact was about as we excepted with one notable exception, that we had one of those contracts that will remain on the Akamai platform through the end of Q2.

So we did see about a $3 million Q4 to Q1 decline from those wind downs, but one of those contracts is actually going to remain through the end of Q2.

So I think what we had talked about before was that we probably see another $1.5 million or so impact into Q2, and that will be muted a little bit because one of these contracts will stay on the platform.

Okay.

And then I guess my follow-up will be on the traffic growth that you've got a software download, as well as the media in one bucket now.

But was it media stuff, or was it software download?

It was actually both.

We saw good download volumes.

We saw good kind of video growth.

I think as we've talked about in the past, we talked about that we're benefiting from some of the trends with social media and gaming.

Gaming was another good quarter.

We saw a good gaming quarter.

So it was pretty strong traffic across the board, but it was most notable with a handful of large strategic accounts.

Okay.

Great, Jim.

Thanks very much.

David Hilal, FBR.

A follow-up to that.

Your guide for 2Q is quite good versus where consensus was.

And so that strength in traffic that you saw in March, has that persisted into 2Q, and the question there is, what has allowed you to give guidance that is nicely ahead of consensus?

Is it that, or is it something else?

No, it is that.

I mean certainly we did better than we expected in Q1, so we expect some of that to be a continuation into Q2.

But really the range of our guidance of $368 million to $378 million, it is an expectation that we will see continued traffic growth similar to what we saw at the end of Q1.

It will be more toward the lower end of the range if traffic growth maybe slows down a little bit and will be at the higher end of the range if we continue to see an acceleration in traffic.

So that's really the driver of the Q2 guide.

Okay.

And Tom, you laid out some ambitious plans from a sales headcount hiring for 2013 and wanted to get an update on where you stand.

I think you wanted to add about 100 folks or so.

So an update and then where you are deploying those folks.

Thank you.

Yes, we are making progress there.

It was a little slower in Q1 than we had planned, but we are expecting to catch up on that in Q2.

And the majority of that headcount is deployed outside North America, particularly in APJ where we see strong greenfield opportunities.

Great.

Thank you.

Heather Bellini, Goldman Sachs.

I guess I had two questions for you.

First, I was wondering if you could give us an idea of the leverage that you continue to exhibit on the gross margin line.

And I know you said the revenue overage helped you out there, but how should we think about the efficiencies that you could still get out of the network?

If you could share with us how we should be thinking about that.

And then I guess secondly, I was wondering how we should be thinking about the AT&T partnership.

I know it was signed, obviously, months back, but I'm just wondering if you've seen any contribution to your business thus far and how we should be thinking about that whole thing for the full year?

Thank you.

We engage on numerous projects to reduce our costs of serving traffic.

Of course, we benefit from new hardware, we benefit from deeper relationships with our carrier partners, but we're also working on the software so that we get more bps delivered per kilowatt, per CPU, per square foot of co-lo.

And there is a lot of projects we have working on that internally.

We also are working on where we store certain content so that it's less costly in terms of the bandwidth to serve it.

And those have been ongoing efforts, and we continue to invest heavily there because the return is so good, as you've seen from quite increasing gross margins over the past year.

In terms of the AT&T relationship, it's strategic for us, very important.

We are beginning to have traction now in terms of the AT&T enterprise sales force selling our solutions, including now in the security area.

We think there's really great synergy between Akamai and AT&T, but it's just beginning in terms of the impact on revenues.

Thank you very much.

Mike Olson, Piper Jaffray.

I just had a couple of security questions.

Can you tell us how many customers are now on the security solutions?

I think it was 400 at the end of Q4.

Yes, we are over 500 now, and we have a little over 130 with our flagship product, Kona Site Defender.

Okay.

And then along those lines, you've alluded to this idea that security ARPU has been artificially low as some of the customers had purchased point solutions in the past, but increasingly moving toward a suite in the future.

Is that starting to happen as far as ARPU moving higher, or when would you expect to see that?

Well, actually, we've seen ARPU continue to grow every quarter, so ARPU in the security space is growing.

And as more and more customers leverage our flagship solution, Kona Site Defender, you will continue to see that grow.

So ARPU has grown every quarter.

It grew again in Q1, and our expectation is it will continue to grow as we have more of a mix shift of our Security Solutions towards Kona Site Defender.

Okay.

Great.

Thanks very much.

Scott Kessler, S&P Capital IQ.

My primary question relates to your federal government business.

Obviously, with the sequester now in place, I'm wondering if you seen any or heard about any related impacts?

Thanks a lot.

Yes, that is incorporated certainly into our guidance.

And there are some impacts there, but we have long-term relationships on some of our most important contracts with the government, and the most important contracts are not impacted thus far by sequestration.

Okay.

Great.

Thanks.

Aaron Schwartz, Jefferies.

I had a follow-up question on the media traffic.

Obviously, as you pointed out, better than expected here in the quarter, and it seems like the guide implies that as well.

In your experience when this is the year it started off this strong, how does that play out through the year?

Do you typically see some of your larger accounts have early renewals, or how does that play out earlier later in the year, and is there an economic impact from that?

That's a good question.

I mean I think it varies.

It varies by customer.

Each customer has a different set of contracts, and I think we've had cases where customers burn through their commitments earlier.

We're certainly not signaling that here.

So I think what we are expecting here at least in the short term is that we are expecting to continue to see a nice acceleration going into Q2.

As we talked about in the past, it's difficult at times to predict the rate and pace of traffic on growth.

And so whether that continues I think really depends upon the success of our customers' business models, as we've talked about.

So I think we have a pretty good line of sight within the quarter.

I think beyond that, it's more difficult to call.

Colby Synesael, Cowen.

Two questions, if I may.

First one, as it relates to the new Ion platform update that you guys put out, I was wondering if you could put some context around that, perhaps in terms of what percentage of customers have already moved to that or what percentage of customers you are anticipating or what the new revenue opportunity might look like or how much more you are charging for that?

Just something so we can start to quantify that a little bit better.

And then my second question had to do with partnerships.

Last year actually at your Analysts' Day back in, I guess, it was what, December 2011, you made a big deal about partnerships with companies like Riverbed.

I think you might even have mentioned QUALCOMM, if I'm not mistaken.

I'm just curious what the update is on those.

How you pushing or pulling away from those types of partnerships?

Are you looking to do more of the things perhaps that you thought you would do with them by yourself now?

Just curious where those types of things stand.

Thanks.

Yes, Ion was just released at the end of Q4.

We are not releasing the exact number of customers that have purchased it, but we are seeing good traction across multiple geographies.

We are seeing an upsell, so we are getting more revenue as customers move from DSA, which had been our flagship service, and is still the majority of our revenue in the web experience division when they move to Ion.

The technology is a substantial improvement.

As I talked about earlier, we're seeing substantial improvement in performance both for landline access, but particularly interesting is the cellular access, which increasingly accounts for a larger portion of site visitors.

In terms of the partnerships, the Riverbed partnership has not been successful, and that's unfortunate.

The QUALCOMM partnership is successful, and we are working with QUALCOMM on embedding our technology into their solutions, and we will be talking probably more about that later in the year.

We do seek out partners.

We have many large partners, and they are something that we look forward to doing more in the future, and particularly in the carrier space, as you've noticed with the recent deals that we have concluded with Swisscom and Korea telecom.

Great.

Thank you.

Operator?

Do we have any more questions?

(Operator Instructions) Gray Powell, Wells Fargo.

Can you give us a sense as to the uptake on the new DSA product, Aqua Ion?

I know you touched on it in the prepared remarks.

Should we just think about the upsell opportunity here hitting as customers come off of contract and renew, or have you seen customers asking for the improved performance before contract renewal?

Yes, I think it is a combination.

The performance improvements are strong, so as an incentive to upgrade as soon as the technology is available.

And there's a special incentive around Ion's ability to make the mobile and cellular experiences be so much better.

A couple of years ago maybe that didn't matter a lot as a tiny fraction of online commerce was done over mobile devices.

But today, for example in North America, a quarter of e-commerce visits are now done from a mobile device, and that is expected to become over 50% in a couple of years.

So the performance on mobile devices is critical.

Aqua Ion is targeted at that, and the initial results have been very promising.

And so customers are interested in that.

And I guess what I would add is that we launched it in late Q4, so the product has only been in the market for several months here.

So we've had reasonable uptake already.

But as Tom said, you are going to have customers that are interested at time of renewal and some customers are interested even ahead of time.

So we certainly have an early sample.

We are seeing from the early sample a nice uplift over DSA.

I hesitate to give you a percentage because it's going to vary, I think, by customer.

But we've seen a nice healthy uptick in ARPU with the Ion customers that we have seen thus far.

Jeff Van Rhee, Craig-Hallum.

Great.

A couple of brief ones here, guys.

Back in the day you gave new customer numbers a little better sense of how much revenue is coming from installed bases versus new.

Can you give us some more color there in terms of either new customer capture, revenue mix?

So I mean we don't report customer account anymore.

I think we stop reporting that a couple of years ago.

But I can tell you that we continue to get good traction with our existing customers in particular and selling our broader portfolio into them.

I think one of the things we've talked about in the past, actually for the last couple of quarters, is some of the investments that we are making in incremental go to market and sales capacity is intended to drive more growth off the installed base and bring on more new customers.

So certainly we continue to do some of that.

I'd say that more of our growth has come from our installed base.

But as we grow our sales capacity, the expectation is that we are going to grow outside the install base and do exactly what we've been able to do with our installed bases, which you start with a beachhead and you grow with multiple solutions thereafter.

So that is the strategy, and I think once we get the incremental sales capacity on board, I think you are going to start to see more traction in that area.

Okay.

And then on the CapEx side, pretty aggressive there.

I think you just gave a few comments there as to what you might be doing.

Can you just expand on that?

You certainly put a fair amount to work in Q1; you're going to do the same here in Q2.

Sure.

I think it's important to maybe step back a little bit on CapEx and just understand where we spend CapEx in the Company.

So we've talked about our model of being call it 13% to 16%, and we have been operating at around 16% with the media business profile that we have right now.

So to think about that 16 points of CapEx, 10 of that is network CapEx, so think of that as building out the network.

Roughly 4 of that in the past has been capitalized software and 2 points have been facility and IT-related spending.

And so I think what you are seeing this year is our expectation is we are going to continue to drive down CapEx as a percent of revenue, actually on the network side.

And where you're starting to see an increase in CapEx is really more on capitalized software on some of the new solution categories that we talked about.

But probably most notably is with all of the increase in headcount that we've seen, we are doing a fair amount of facility and IT-related buildout in 2013 to support the headcount growth in the Company.

We added 800 people in the Company last year, and our expectation is we are going to add a similar amount this year.

So we are building out facilities to accommodate that.

So think of some of the CapEx that we're building out in 2013 as -- I don't want to say one-time in nature, but it is certainly not run-rate CapEx by any means.

It's building out to support the headcount growth in the business.

Ed Maguire, CLSA.

At your Analyst Day, you discussed the growing importance of Service and Support, and that seems to be delivering the highest rate of growth among your new segments.

Could you discuss how your current investment may impact that and growth expectations for the rest of the year relative to the rest of the business?

Thanks.

Sure.

I think it's important to step back a little bit, though.

The Service and Support revenue stream is relatively small.

It is less than 10% of the Company's revenues.

So we are growing that support stream from a very small base.

And so what we have been able to do early on, we have only had this solution category really for the Company for, call it, three or four years.

We've gotten very early penetration.

And so some of the growth rates that you are seeing as a percentage basis are large.

We don't expect that over the long term that you're going to see growth rates stay in the 30s.

But I will say that what we're seeing is very good traction at time of customer sale.

And when we're selling a lead product, whether it be media, whether it be performance, or whether it be security, we're having very good attached rate of services at the time of selling that core product offering, which bodes well for growth in that segment.

The other thing is I would say that when you look at that solution category, not just for revenue growth, but much more for stickiness from a customer perspective.

We find that when we have customers that buy our Service and Support solutions and actually have one of our service professionals engaged in the account, that those customers tend to have higher NPS scores; those customers tend to have higher ARPUs and buy more of Akamai's broader services.

So it has actually a multiplier effect when you actually have Service and Support in an account because it enhances the overall value of the account for Akamai.

James Breen, William Blair.

You talked about the growth you have in Asia.

I think you said 26%.

Can you talk about the segment that is coming from and where you are seeing the (technical difficulty) coming from?

Then just as a follow-up to that, did you see any FX impact during the quarter?

Thanks.

Sure.

So actually Asia growth, when you adjusted for currency, was 35%.

It was 26% as reported.

And to your point about foreign exchange, we actually saw very good growth in our Japan market.

And that Japan market is going to, as we've all been following the foreign exchange market at least to some extent, that the yen has weakened significantly.

So that is outlined in our Q2 guidance.

We outlined that we're expecting a $2 million sequential headwind.

That is largely driven by the weakening yen.

But we are pleased with the growth rate in Asia Pacific.

I think that Asia-Pacific growth will be impacted on an as-reported basis from foreign exchange likely in the near term, but we've seen good traction there.

We continue to make investments there.

I think some of the headcount and sales capacity that Tom talked about, a lot of that is going into our Asia-Pacific markets.

Sterling Auty, JPMorgan.

Back on the media delivery side, can you give us a sense -- you had some one-time items like the Olympics that have benefited.

There are some questions over what March Madness might have done for you in the quarter, as well as when you talked about giving more color into that acceleration at the end of the quarter, is there any other color you can give in terms of the type of content whether it was more high-definition shows that are hitting the net like Paul in the past has described as being a driver of volumes?

Yes, I can start and maybe Tom can offer some other points.

I'll start with March Madness.

March Madness in any one event is not a needle mover on revenue in the quarter.

So while it was a very good event, it was, it was a well-viewed event.

That is not the driver of revenue in the quarter.

What you saw was just a nice acceleration.

And, again, it was across our big accounts and smaller accounts, but most notably our larger accounts.

And you saw it in software downloads; you saw it in gaming; you saw in video delivery.

So it was pretty much across the board.

So it isn't any one area, but I think we're continuing to see traction in all of those areas.

Some of those areas tend to be lumpier than others like software downloads, but I think what we've seen is actually even the software download area that as more and more devices get out there, there's actually more and more software downloads that happen on a more frequent basis.

But it was pretty much across the board in social media accounts, in gaming accounts, and in large technology customers.

Jennifer Lowe, Morgan Stanley.

It is actually John Parker calling in for Jennifer Lowe.

Obviously, you've continued to see and gain some nice traction in the security business, and we saw some nice announcements on the carrier side over the past couple of months.

How should we think about the ramp, the continued ramp and contribution of those businesses throughout the year?

Any of those can be big enough to add a couple of points of growth, or how should we think about those?

Thanks.

So I'll start with security.

So security, we believe, is going to be a large business for the Company and actually a very significant contributor to the Company's longer-term growth.

I think we've talked about that security was a little over a $40 million business in 2012, so I think it will be a contributor to growth in 2013 because it's our fastest-growing product category for the Company.

And so it certainly will have a contribution for the overall Company growth, but it's still a relatively small revenue stream -- rapidly growing, but a relatively small revenue stream.

On the carrier front, the carrier front, we are just getting into the license and managed carrier space.

So we're not expecting in 2013 to have any meaningful contribution of revenue for the carrier business.

But it's important to remember with the carrier business that there's multiple benefits that we get from our engagement with carriers.

One is our ability to potentially sell them managed or licensed CD and offerings, which becomes a revenue stream for Akamai.

In some cases, it also becomes a go-to-market channel for Akamai, a la the relationship that we have with AT&T and the most recent relationship we now have with Swisscom.

And then the third area that we get benefit from, as we develop deeper relationships with the carriers, we can get more deeply embedded in the network.

And it allows one, their end users to have better performance, but it also allows Akamai to get better network cost efficiencies as a result of that deeper relationship.

So we actually get benefit from a revenue stream and we get benefit in these two other areas, and they do manifest themselves.

Some of them manifest themselves in a stabilizing or expanding gross margin and some of the manifest themselves in giving Akamai a new channel of distribution to sell our value-added services.

Donna Jaegers, D.A. Davidson.

And I have a great follow-up on your last answer, Tom.

The reseller percentage of revenue was down to 20% versus 22% last year, and yet you've signed these other carriers.

So do you expect that to pick up over the next few quarters, or was there something with maybe currency hitting the 20% number?

I think it's important when you look at the channel, we actually saw an acceleration in our channel revenue through 2012.

A fair amount of our revenue for our ADS business went through the channel.

So the 23% that we saw in Q4 that had the ADS business in there.

So if you pull that out, that 23% becomes a little bit less than 22%.

The channel business did not grow as fast as our direct business, and really the large driver of our direct business, as I said, was we saw very strong growth in our large, strategic accounts.

And that outweighed the growth that we saw in the channel business.

But we do expect these relationships with the carriers over time to result in the channel business growing at a faster pace over time.

It's not going to happen necessarily next quarter, but over time our expectation is our revenue mix that is today call it in the 20% to 22% range should be a much higher percentage of the Company's revenue.

But over a period of time, that is not going to happen overnight.

Okay, thanks.

Chad Bartley, Pacific Crest.

I hope to ask a different question around the media traffic and revenue to just get a better picture of what played out.

Was it just simply your existing customer traffic outperforming, or was there anything unexpected than those existing customers, or was there a competitive share shift, any customer wins?

The reacceleration after the slowdown in Q4 and your commentary around difficult comps and all that -- definitely the reacceleration is surprising, so I am hoping to get a little more detail, if you can.

Thanks.

I'm not sure I can offer much more than what I already covered.

As we said, the traffic acceleration actually surpassed our expectations, as well.

It wasn't in any one area.

We saw strong traffic growth pretty much across the board.

But it was -- we saw it in particular where it surpassed our expectations was largely in some large, strategic accounts -- some in the social media space, some in the gaming space, some in the software download space.

So we saw it pretty much across the board.

And I think as we have talked about, it's difficult to call the rate and pace of traffic acceleration.

I think we can safely look at like a floor for traffic, but I think at times you start to see traffic accelerate based on a customer's business models improving.

So that is the net of what we saw in the quarter.

And just one point I did want to make on my security comment, I made a comment that the security business in 2012 was $40 million.

The security business in 2012 was actually $20 million.

But I think what we've talked about is that the rate and pace of growth in our security business throughout 2012 accelerated throughout the year.

So we had a very significant run rate going into 2013, but the actual number for 2012 was a little over $20 million.

Thanks very much.

We look forward to talking with you all next quarter.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.