阿卡邁科技 (AKAM) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the conference of second-quarter 2013 Akamai Technologies, Inc.

earnings conference call.

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

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

We will facilitate a question-and-answer session towards the end of this conference.

(Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Ms. Natalie Temple, Investor Relations.

Please proceed, ma'am.

Good afternoon and thank you for joining Akamai's investor conference call to discuss our second-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 are contained in Akamai's filings with the SEC, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

The forward-looking statements included in this call represent the Company's view on July 24, 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.

Akamai performed very well on both the top and bottom lines in Q2.

Revenue in the second quarter was a record $378 million, up 14% year over year or 19% when adjusted for the ADS divestment in foreign currency headwinds.

We had strong growth in all of our product lines and we were particularly pleased with the 19% year-over-year growth in revenue for our Performance and Security Solutions.

We generated non-GAAP net income of $84 million, up 25% year over year, and non-GAAP EPS of $0.46 per diluted share, up 24% year over year.

Of these results, $9 million or $0.05 per share are attributable to the change in our depreciation methodology that we introduced in Q1.

Adjusted for the depreciation change our non-GAAP EPS was up 11% over Q2 of last year.

I will be back in a few minutes to talk more about our achievements in Q2.

But first, Jim will provide the details on our Q2 financial results.

Jim?

Thank you, Tom.

As a reminder, there are two discrete items that occurred in Q1 which continue to affect our 2013 reported results in growth rates -- the ADS divestiture and the depreciation methodology change for our network assets.

As I walk you through the details of our very strong Q2 financial results, where appropriate, I will point out the impact of these two items so you can better understand the operational performance in the quarter.

As Tom mentioned, revenue came in at the high end of our guidance range at $378 million, up 14% year over year or up 19% if you adjust for the ADS divestment and foreign-exchange headwinds.

Growth was solid across the business but was particularly strong within our Performance and Security Solutions category where we saw revenue of $168 million in the quarter, up 19% over Q2 of last year and up 7% sequentially, exceeding our expectations.

This overachievement was primarily driven by faster-than-expected growth of our IP Accelerator Solutions.

Turning to our Media Delivery Solutions, revenue was $179 million in the quarter, up 14% over Q2 of last year and down 1% sequentially.

As expected, and discussed in our last call, one of our large media customers fully migrated their video traffic off the Akamai platform, which contributed to the sequential revenue decline.

To give you a better sense of the puts and takes of our media revenue in the second quarter, overall traffic growth continued to be strong throughout the quarter for our video, gaming, and social media customer base but slowed for software downloads.

As we have stated in the past, software downloads can have meaningful variability from one quarter to the next, given the nature and timing of software releases.

Finally, revenue from our Service and Support Solutions was $31 million in the quarter, up 41% over Q2 of last year and up 14% sequentially.

We continue to make great traction attaching our enterprise class professional services and customer support to our core business solutions.

Switching now to our geographies.

Sales outside North America represented 29% of total revenue in Q2, up 2 points from the prior year and down a point from the prior quarter.

Q2 international revenue grew 21% year over year and was flat sequentially.

The stronger dollar had a negative impact on revenue of about $4 million on a year-over-year basis and $3 million on a sequential basis.

Excluding the impact of currency movements, revenue outside North America grew 25% year over year and 3% sequentially.

We saw particularly strong growth in our Asia-Pacific geography which offset continued macroeconomic headwinds in Europe, most notably felt in our Southern European business.

Revenue from North America grew 11% year over year in the quarter and increased 4% sequentially.

Excluding the ADS divestiture, revenue from North America was up 16% year over year and 5% sequentially.

Resellers represented 20% of total revenue in Q2.

Moving on to costs.

As expected, our cash gross margin was 76%, flat with the prior quarter and up 3 points from the same percent last year.

As we have demonstrated over the past year and a half, we continue to make solid traction on our management of cost of goods sold.

GAAP gross margins which includes both depreciation and stock-based compensation was 67%, flat sequentially and up 7 points from the same period last year.

This year-over-year improvement included a favorable impact of roughly 3 points, due to the depreciation methodology change that occurred in Q1.

GAAP gross margins were about a point better than our guidance due to lower depreciation from network asset purchases happening later in the quarter and some purchases moving from Q2 into Q3.

GAAP operating expenses were $156 million in the quarter.

Cash operating expenses for the quarter were $123 million, up $7 million from Q1 and up 22% on a year-over-year basis.

This is slightly below our guidance range due to some planned hiring shifting into the third quarter.

Adjusted EBITDA for the second quarter was $166 million.

That is up 16% from the same period last year and flat with Q1 levels.

Our adjusted EBITDA margin came in at 44%, down 1 point from Q1 levels and up a point from Q2 of last year.

This was slightly above our guidance range for the quarter due to the combination of revenue coming in at the high end of guidance and slight favorability on both network costs and operating expenses.

For the second quarter, total depreciation and amortization was $44 million.

These charges included $32 million of network-related depreciation, $6 million of G&A depreciation, and $6 million of amortization of intangible assets.

Net interest income for the second quarter was $1.5 million, roughly flat with Q1 levels.

Moving on to earnings.

GAAP net income for the quarter was $62 million or $0.34 per diluted share.

We are pleased that, due to strong operational execution, our non-GAAP net income for the second quarter was $84 million or $0.46 per diluted share.

coming in at the high end of our guidance range.

This result was up $0.09 from Q2 of last year.

This was down $0.05 from Q1 levels as we benefited from the reinstatement of the 2012 federal R&D tax credit in our first-quarter results.

As Tom mentioned, and as we included in our Q2 guidance, $0.05 of our EPS is due to the depreciation methodology change we made in the first quarter to extend server useful lives by one year, $0.04 of which is attributable to network assets that were in place as of January 1, 2013.

And an additional $0.01 is due to network assets that were added during the first half of this year.

Our GAAP -- our Q2 GAAP and non-GAAP tax rates were 38% and 36% respectively.

Our non-GAAP tax rate is about 2 points higher than our guidance, primarily due to lower foreign earnings.

For the quarter, taxes included in our GAAP earnings were $37 million and taxes included in our non-GAAP earnings were $47 million.

Our weighted average diluted share count for the second quarter was 181 million shares.

Now I will review some balance sheet items.

Cash generation continued to be strong with cash from operations totaling $130 million for the quarter.

Days sale outstanding for the quarter were 57 days, consistent with last quarter [in] Q2 of 2012.

Capital expenditures in Q2 excluding equity compensation were $72 million, slightly under our guidance range due to a shift in the timing of some of our network investments from Q2 into Q3.

This CapEx number also includes capitalized software development as well as facilities and IT-related expenditures.

During the quarter, we spent $42.5 million on share repurchases, buying back approximately 1.1 million shares at an average price of just over $39.

The goal of our share repurchase program is to both offset dilution from our equity compensation plans, and to opportunistically return value to shareholders.

At the end of Q2, we had more than $1.1 billion in cash, cash equivalents and marketable securities on the balance sheet.

Because a constant process of innovation is required in order to maintain our position as a market leader, we believe our strong balance sheet and cash position are important competitive differentiators that provide the financial flexibility necessary to make the best investments at the most opportune times.

As always, we continue to evaluate strategic investments to strengthen our business on an ongoing basis.

Our overall aim is to deploy our capital to achieve favorable returns for our shareholders in a manner that we believe is in the best long-term interest of the Company and our investors.

We are very pleased with how the business performed in Q2.

We continue to drive strong revenue growth, manage network costs effectively, and make necessary investments in the business in an effort to accelerate growth and innovation.

Looking forward to Q3, we are expecting another solid quarter.

As a reminder, our strong Q3 2012 results were aided by one-time sporting events and the timing of some significant software releases.

We are expecting another significant software release late this quarter, but the exact timing and traffic volume is difficult to estimate this far in advance.

Foreign exchange is expected to have a negative impact of approximately $1 million compared to Q2, and a $4 million impact compared to Q3 of last year.

Given all of this, we expect Q3 revenue in the range of $380 million to $392 million.

This range represents 15% to 18% year-over-year growth when you exclude ADS and foreign exchange movements.

Of course, the timing of the software release I just mentioned will influence where we land within our guidance range for the quarter.

We expect cash gross margins to be in the range of 76% to 77%, and GAAP gross margins to come in at 66% to 67%.

On the operating expense side, we expect to grow cash OpEx by $8 million to $10 million on a sequential basis as we further invest in go to market and R&D initiatives that we believe will yield important longer term benefits.

Through the first half of the year, we added nearly 400 employees across the Company, focused primarily in ramping up sales and supporting go-to-market capacity, servicing customer support staffing and engineering resources.

And we expect to continue hiring in these areas in the second half of the year.

With these increased expenditures, we expect EBITDA margins in a range of 42% to 44% for the quarter.

We continue to expect EBITDA margins to decline to the low 40s over time.

At this level of revenue, we expect non-GAAP EPS in the range of $0.44 to $0.47 for the quarter.

This EPS guidance assumes taxes of $42 million to $46 million based on an estimated quarterly non-GAAP tax rate of 34% to 35%.

This guidance also reflects a fully diluted share count of roughly 182 million shares.

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

For the full year, we are expected to be slightly above the high end of our long-term model for CapEx as a percent of revenue.

Due to significant facility-related investments that we have made throughout the year, to support the headcount growth.

Overall, we have had a very solid first half of the year and we expect strong performance through the second half as well.

We have been seeing promising momentum in the business and we are making investments that we believe will position us for meaningful growth beyond 2013.

Now, let me turn the call back over to Tom.

Thank you, Jim.

Akamai delivered another strong quarter and our results demonstrate that a diverse and growing set of companies continue to turn to Akamai to accelerate and secure their online businesses.

Since our founding, Akamai has been at the vanguard of the Internet revolution and as we prepare to celebrate our 15th anniversary next month, our spirit of innovation and our desire to solve the most difficult Internet challenges are just as strong today as they were 15 years ago.

From day one, we have worked hard to gain an understanding of how our customers want to use the Internet to make their businesses more agile, more customer-centric, and more profitable.

And we use that understanding to guide our innovation and to invent new solutions to help make our customers' visions a reality.

For example, we learned early on that enterprises conducting transactions online need those transactions to be fast.

And today, user expectations have increased to the point where transactions need to be nearly instantaneous.

Many studies have shown that conversion rates for e-commerce sites grow substantially when download times improve from several seconds to one second and that they are even higher when download times reach subsecond levels.

They have also shown that user abandonment rates increase with every extra second of delay.

Even small delays can result in lost business and brand damage.

Akamai has long understood the ever-increasing need for speed.

And that is why we have engineered what we believe are the world's fastest application acceleration technologies.

And as a result, many of the world's leading enterprises turn to Akamai to accelerate their applications online.

Our customer base now includes 96 of the Internet retailer 100 companies.

Seven of the top 10 global banks.

19 of the top 20 hotel brands.

And more than one third of the global 500 companies.

We accelerate nearly 2 trillion deliveries every day and over $250 billion worth of e-commerce transactions each year.

Our market-leading acceleration solutions, Dynamic Site Accelerator, DSA, and Web Application Accelerator are considered by most to be unparalleled in terms of their speed and reliability.

But we have not stopped there.

Late last year, we released our next-generation acceleration solutions -- Aqua Ion and Terra Alta.

And in June we released the second versions of these solutions.

The new versions of Ion and Alta provide even greater acceleration than their predecessors and they are specially designed to speed up dynamic applications in the most challenging network and mobile environments.

The new versions of Ion and Alta also have the ability to provide timely reporting on the real end-user experience such as which device and browser they are using, which type of network they are on and how it is performing, and the speed observed by the real end-user as they access the application.

This capability to monitor real end-user performance as opposed to test agent performance has long been desired by our customers because it allows them to better understand exactly how their websites and applications are performing in the real world.

With the latest release of Ion and Alta, online businesses now have improved acceleration solution coupled with a new ability to monitor and optimize the effectiveness of their applications across the wide spectrum of conditions experienced by their end-users.

Customers can now see for themselves, the benefit provided by our acceleration solutions.

And the results are impressive.

Real user monitoring has shown that by adopting Ion or Alta leading commerce, high-tech and media companies can make their sites and applications nearly twice as fast and sometimes three times as fast as when they were using DSA.

That is significant especially when you consider the DSA has already been shown to be much faster than solutions offered by other companies.

Akamai has also long understood the critical need for web security.

In fact, we have been working on cyber security defenses for our platform for over a decade, long before attackers began making headlines by taking down websites from major banks and enterprises.

And so when our customers reached out to us for help with defending against cyber attacks, we were ready.

Over the past year, our flagship, Kona Site Defender solution, has proved to be successful against even the largest and most sophisticated attacks.

In fact, it has succeeded in many cases where traditional security solutions have failed.

That is because Kona Site Defender can utilize the massive scale and unparalleled capabilities of the Akamai Intelligent Platform to identify and filter out attack traffic, well before it reaches the enterprise or cloud data center.

And because of Akamai's expertise and acceleration, we can do the filtering without negatively impacting performance.

Among other things, this means that Akamai's defenses can be operated in an always on mode.

This is an important advantage over traditional security solutions which often inflict a significant performance penalty and so are typically turned on after the attack has begun, which can often be too late.

The threat of web attacks is now a global concern as evidenced by the recent experience of several Dutch banks that are struggling with the same kind of punishing attacks that have plagued North American banks for the last year.

Globally, 45 customers purchased Kona Site Defender in Q2, including three of the top five banks in the Netherlands.

In Q2, we also released two new products for sale to carriers.

The first is Aura Lumen, a licensed CDN software suite based on technology obtained through the Verivue acquisition.

The second is Aura Spectra, a Software-as-a-Service CDN that provides carriers with media CDN capabilities that can be quickly deployed and with far less upfront investment than is required by competing offerings.

Aura Spectra was a key component of the Korea Telecom partnership that we announced in Q2.

Korea Telecom is the leading carrier in Korea and having them join the Akamai family opens an important new market for us.

We are especially pleased with the speed with which KT has integrated our solution into their network and go to market functions.

In fact they have already signed up their first customer using the Akamai solution.

Lastly, Akamai has always played a major role in the delivery of media content.

It is how we started our business.

And today, 2,400 customers use our media services including all of the 30 largest global media companies.

These customers require delivery solutions that can provide high quality of scale and at the lowest possible price, which is why we are continuing to innovate and to invest in these areas.

In summary, Akamai's goal is to deliver on the promise of a truly hyperconnected world, improving and transforming online experiences for everyone and everything wherever, and however they are connected.

We accomplish this goal through the development and operation of the world's largest and most advanced distributed platform for securing and accelerating Web content and applications of all kinds from media and software downloads to dynamic and personalized content for the world's most important applications.

As we move forward over the next 15 years, Akamai will continue to help improve our customers' businesses in a rapidly changing and increasingly complex online world.

Thank you for your time today.

Now Jim and I will take your questions.

(Operator Instructions).

Mark Kelleher, Dougherty & Company.

Congratulations on a solid quarter.

I wanted to look at the security a little bit deeper.

Is there any way you can maybe break that out within the Performance and Security segment?

Just give us some sense of the size of that.

And can you also talk about how the recent Cisco acquisition may change your view or how the security market is operating out there?

Thanks.

I can cover the first part of it.

So, what we disclosed at our Investor Summit in March was that we are going to provide a breakout of all of the solutions within our performance and security portfolio annually.

It doesn't really make sense every quarter because there is not a huge movement every quarter on some of the solution categories.

I will tell you though that security solution is our fastest growing solution in the web performance -- in the Performance and Security category.

And continues to be.

So we continue get good take rates there, but we only provide it annually.

And I think what we shared at the Investor Summit was that the business was on a clip to be roughly a run rate of roughly high 20s annualized run rate for revenue in 2013.

So that is where we ended 2012 and we continue to have good progress in that business.

And the recent acquisition by Cisco in that space really has no impact on our view of the marketplace.

Our approach to web security is really quite unique.

And we have tremendous advantages with the Akamai distributed platform in terms of a massive scale.

And our approach is to intercept the attacking traffic really close to the source and the last mile long before it gets to the data center.

And so we can withstand very large-scale attacks, but you just can't begin to defend against with devices in your data center or with traditional solutions.

We also have various [defense] application layer filtering capabilities that actually interact with the origin data center to see what impact a particular request is having on the margin.

And we have the ability to filter out traffic based on rate controls of certain behaviors.

We can actually deploy software onto the client device to check is it really a human or is it a bot.

Lots of things you just can't do with the traditional approach to web defense.

Jennifer Loew, Morgan Stanley.

Great quarter.

I just wanted to follow up a little bit on the recovery or the rebound in Performance and Security Solutions growth.

It was a little bit lighter last quarter and it looks like you had really nice uptick and then coloration there even though it seems like it should have been a tougher comp given that you had anniversaried the Cotendo acquisition.

I think in the prepared remarks there was a comment that there was the IP acceleration that did particular well.

But any more color there in terms of was there a catch-up of business or anything like that that was pushed out of Q1 into Q2?

Or really what was that driver of acceleration?

Yes, we had a very strong quarter there.

We are, as you know, making a lot of investments there both in terms of the capabilities of the solutions, making the acceleration solutions as I talked about be faster, to really provide performance improvement in mobile environments as more and more critical transactions move to mobile, over the longer term, you will see us move from web applications to general IP-based applications.

And that is actually where we saw a little bit more business than we expected in the quarter, and it produced the upside in our performance with our IP Accelerator Solution.

And that is used to find better routes in the Internet, better communication protocols to accelerate non-web applications.

So nothing to do with caching.

Things like movies, phone calls, video, one-to-one kind of capabilities that are different than our traditional businesses.

And you will see us move more to that area with all of our solutions -- security, and as we work on hybrid cloud optimization to move beyond just web to do all IP acceleration and performance.

Mike Olson, Piper Jaffray.

Good afternoon.

One other quick one on security.

I think it was tracking at 500 or so customers at the end of Q1.

Any sort of update you can give us on that number?

And then, how is the trajectory towards improving ARPU for security solutions tracking?

From what I remember it was expected to be trending higher as customers deploy the suite versus point products.

Yes, we -- in the Q2 with about 650 customers using our security solutions and ARPU continue to improve in security because we have more and more customers that are leveraging our flagship Kona Site Defender offering, which has a much higher ARPU than some of the other security offerings.

So good progress in both increasing ARPU and good progress on getting better customer penetration.

David Hilal, FBR.

Two parts.

I guess first, public sector was quite strong in the quarter.

I don't remember it being $20 million plus for a while.

I know that business is lumpy.

So my question is was this just a function of lumpiness in that business or was there something else suggested that business is maybe going from being flat to a growth trajectory?

And then my second question is in security.

It has often been a missionary sell, as you guys have tried to convince prospects that you also can be viewed as a security company.

I am wondering where in that evolution is Akamai?

What type of progress have you made to build a brand on the security side?

Thank you.

So, on the public sector case, you are right.

We tend to have I think we have even used the phrase before -- lumpy.

We had a good quarter in the public sector business.

But I would say that nothing kind of noteworthy other than there are times where projects complete within the quarter and we happened to have that in Q2.

And so we had a very solid public sector for you.

But I would say nothing noteworthy to call out.

To the security question there is no doubt that a customer under attack is our most motivated prospect and we do sign up a lot of customers in that environment and they become very happy and a long-term Akamai customer as a result.

The recent headlines with banks coming under attack both in North America, now in Europe, helps to increase awareness that cyber security is really an important matter.

And that does help business as well.

So I think over time you'll see our customer base even if they are not yet under attack, realizing this is something they need to have.

And we have invested substantially in terms of our field force and we have talked about that, to get the message out with security, professionals that help speak the right language to our customers and to educate them that Akamai has a fantastic solution here really does things that only Akamai can do with our distributed edge platform.

And we are making, I think, very good progress there.

We are still small in the security business, but growing rapidly.

Phil Winslow, Credit Suisse.

This is [Harris Hyre] for Phil.

Thanks for taking the question.

We were hoping that you could comment on bandwidth and also co-location pricing.

Have you seen any changes during the first half and what are your expectations for the second half?

Yes, I think in general we have continued -- the cost of bandwidth continues to come down.

I would say the rate and pace has been pretty consistent.

We continue to see reductions in pricing of bandwidth.

I would say the story on colo, it is really less a story of the cost of colo going down and just as being a much more efficient user of colocation, given that we are just doing a lot of work on our network to get more software efficiencies and throughput out of the existing service that we have.

And therefore you are effectively being able to leverage your colo costs more effectively.

And we continue to do that in Q2.

We have done that, literally we have done that for many, many years.

But literally over the last 18 months we have made great progress.

So we have made good progress both on colo.

We made good progress on continued on the bandwidth and that is what allowed us to stabilize margins as we had expected.

Sterling Auty, Morgan Stanley -- JPMorgan.

On the performance and security, you mentioned the general IP Accelerator, but what I am curious about is did you see the pickup in demand from new customers' further penetration into existing customers and how much of this acceleration actually just came from the additional sales capacity that you added?

And the root of the question I am trying to get to is with this acceleration that you saw in this segment, how should we think about within the guidance you gave for September?

Should we see similar types of growth rates or how should we think about this segment for September?

Yes.

I think in general that I think as we told you in the past, just to step back, we have certainly been making investments in the sales force that we began last year.

And we are increasing the rate and pace of that hiring this year.

I think what we said is it is going to take four to five quarters to get those sales reps ramped and productive.

And so you shouldn't read into the improvement that we saw in Q2 to be a reflection of the improved productivity of that sales force even though we are on track with the hiring that we had expected.

And actually the productivity of those reps, relative to being early in their tenure as we expected, it was more driven by just continued penetration in our install base set of customers.

And with that solution in particular, we happen to make some traction with a large -- some large accounts.

And that was really the driver of it.

And we also had good performance in general across the Performance and Security category.

So we notably talked about that area.

But we made pretty good traction across the category in total.

We mentioned Security had another good quarter as well.

And so, I think what I said to folks in the past is that you should expect that we are going to operate that business probably in the high teens for the remainder of the year.

[Mr.

Colby, K&I].

I have two questions.

The first one, the Services and Support line item, I think at your Analyst Day you talked about how over the long term that would be flat.

That we should expect that to be flat.

And obviously you guys got -- brought an attach rate to some of your other businesses.

Do you still think that long term that that is a flat contributor to revenue or do you think that we could actually start to see that growth rate look more similar to some of the other segments?

And then the second question is last year you did about three acquisitions.

This year we haven't seen any.

Is that meant to imply that you guys are getting more comfortable with your own internal R&D and perhaps less of a need to go outside the Company?

Is it simply there's just there hasn't been anything that is of meaningful interest you just yet and that's probably more the reason?

Sure.

On the first -- it is a four question.

Just to make sure we clarify that that really was not even a solution category for the Company four or five years ago.

We've made great early traction in attaching our service and support solutions to our media customers, our performance customers, our security customers.

And what you are seeing is just a continuation in that.

I think what we said is that long term, once you get broader penetration, that the growth rates that we are seeing now will slow over time.

That is not going to happen in the near term.

I think we expect that we are going to have very healthy growth rates for that business in the near term.

As you get more penetrated around customers that actually have service and support solutions, you'll start to see it slow.

And it will probably grow long term slower than the overall Company.

But that is more long term.

I think in the near term you can expect to see strong growth in that category.

Relative to M&A, yes.

Last year was actually for acquisitions, not three acquisitions.

And there were years before that we haven't had any acquisitions.

So you shouldn't read into that because we haven't done something necessarily in the first six months of the year, that we are not continuing to look at opportunities across the portfolio.

Because we are.

We are looking at opportunities to accelerate the rate and pace of our R&D either in direct adjacencies or related adjacencies in all of our categories.

And we continue to look at those opportunities.

And I am not signaling that we are going to do something in the second half, but I am telling you that we are opportunistically always, we are very active shoppers, but disciplined buyers.

And we want to make sure that we are putting the cash that we have to use opportunistically because we want to make sure we have that leverage if the opportunity arises that we can move on it.

So, don't read into it necessarily that we are just going to do it more for internal R&D, even though we are quite happy with the internal R&D progress that we have made.

Yes and let me add to that.

In terms of the innovation question, the innovation and engine at Akamai is really cranking.

And we have had some very exciting innovations here over the past couple of years.

And I expect that to continue and even accelerate.

But that doesn't mean we aren't looking outside for great ideas that are outside of Akamai.

As we demonstrated last year with several acquisitions that were to really to gain technology that we could bring to bear for the benefit of our customers.

So we are working hard at innovation inside with great success.

But also we have got our eyes open and if we can find something good outside that will help our customers, we will go and do that if we can.

Scott Kessler, S&P Capital IQ.

Two questions.

The first is, is there any way that you can quantify the impact of mobile on your business?

Obviously it is one of the big themes that you guys have talked about for the last couple of years.

And I am just wondering if there is a way that we could understand how you think about that in a more quantified fashion.

And then I have a second question as well.

Yes, sure.

Mobile has taken over the Internet.

14% of our traffic is now on mobile devices.

That is up dramatically from a couple of years ago.

It is estimated that in North America, a quarter of online transactions are mobile.

That is up from 2% two years ago and it is expected that within two years that the majority of the online transactions in North America will be mobile.

And large parts of Asia are already there.

So I think if you measure by transactions, mobile is going to become the majority.

If you look at [bips], probably not going to become the majority for a while.

Because a lot of the bips come through software downloads that go to a lot of devices that aren't mobile.

And also video.

And generally mobile video has a little bit less in terms of the traffic share than video into your living room.

But mobile is vital and we have a lot of our R&D centered around products and services to make the mobile experience be really great for our customers.

And so there is no way, Tom, that the Company could offer maybe even like Jim had referenced earlier in terms of some of the details related to security being released on an annual basis.

It would be interesting to understand how mobile contributes to the business model from a new perspective, let's say.

Yes.

I think I commented on that a little bit.

I think part of it is that we, within our performance and security suite of solutions we tend to bundle mobile optimization as part of our broader packages because you have customers that buy our offerings whether they are using it on a landline, whether they are using it on a Wi-Fi, whether they are using it through a mobile network.

And so it tends to be embedded and bundled into our broader set of solutions.

And so customers get that.

Because obviously we are trying to solve the performance problem across all of those networks.

And so actually internally we don't really look at it to be honest with you narrowly between just what mobile acceleration is versus something else.

We actually look at it as part of kind of we can increase the overall ARPU for a customer by selling them some of our broader solutions that happen to have mobile bundled into it.

Ed Maguire, CLSA.

Good afternoon.

I was wondering if you could comment on the broad pricing environment for your media business as well as if there are any major contracts up for renewal or that you expect to come up for renewal in the next quarter or so?

Thank you.

Sure.

The media price environment is pretty consistent.

It is a very aggressive pricing environment and we expect it to be that way.

I think what you see quarterly is that -- it's what happens as far as traffic volumes, it depends upon the price point that different customers have.

So there are some quarters where you are going to have customers that have higher price points and push more traffic than other quarters.

But in general, the pricing environment has been pretty consistent, which is aggressive.

And what was the other question?

Major contracts for Q3.

There's nothing notable.

We have contracts that renew every quarter.

And so there is -- you are going to see some contracts that renew in Q3, but there is nothing noteworthy other than historically what we have seen.

Michael Turits, Raymond James.

Good afternoon, it is James Wesman sitting in for Michael.

Taking a look off of Ed's question.

Could you talk to some of the competitive dynamics in the quarter?

Are you guys seeing any signs of Amazon Web Services, Limelight, et cetera?

Yes.

We have a lot of competitors.

And as you know the media products for us have a large number of competitors.

Been around for a long time.

Very aggressive pricing as Jim talked about and we expect that to continue going forward.

Limelight is one of our major competitors there.

Amazon Web Services, not as much.

Not so much there.

In terms of our acceleration products, that is a different environment there.

We are pretty unique in what we do in the acceleration capabilities that we can provide.

Most of the CDNs out there have some sort of offering around acceleration, none of them as a particularly strong force in terms of being a competitor for those products.

In security, of course, there's lots of incumbent players in security that we are competing with to try to grab market share as we grow that business.

James Breen, William Blair.

Can you talk about some of the carrier relationships and maybe any traction that you are seeing now that the agreement with AT&T is a few months old, a couple of quarters old?

And then how you feel about that going forward, when could we expect more relationships on the horizon?

Thanks.

Yes.

The carrier relationships are going very well.

This last quarter we announced Korea Telecom.

I talked a little bit about that earlier.

And as you know, the AT&T relationship is an important one for us and that is going very well.

They have signed up several customers on the platform even just in our security solutions alone.

So I was say that relationship is proceeding very well.

We are hard at work with other major carriers.

And I hope through the rest of this year you will see other announcements.

Aaron Schwartz, Jefferies.

Good afternoon.

I had two quick questions.

First on the media business.

You guys have talked about gaming and social media consistently as being strong verticals for you.

My question is, is there a shift towards traffic being delivered more to consumer-centric sites?

And is that any more seasonal into Q3 than maybe your traditional traffic on the media business?

And the second question, Jim, I think you talked about some shift in CapEx from Q2 to Q3.

But it looks like the Q3 guided to an absolute.

It is a little less than your initial guidance for Q2.

So I was wondering if you could reconcile the two.

Thanks.

Sure.

So, I think certainly what we talked about is really kind of four factors that influence traffic.

You have got social media.

You have got gaming.

You have video delivery.

And you have software downloads.

And what we talked about in Q1 was we actually had a four for four, all of them did particularly well and had very, very strong traffic growth.

Now this quarter we had strong traffic growth in video delivery.

We had strong traffic growth in social media.

We had strong traffic growth in gaming.

Software downloads were a little bit down, but that happens from quarter to quarter because software downloads and software releases tend to be much more variable.

So I think in general the trend we are seeing on traffic going into the summer months, going into the summer months, traffic does go down.

And it goes down just because people are more active and outside and not consuming as much content on the Internet.

So we do expect that.

That doesn't mean it is not growing year over year, it just means that sequentially you tend to see a downtick in traffic.

Relative to CapEx, one of the things that we had talked about in Q2 was we had guided to [75 to 80] and we came in at [72].

And that CapEx is related to network CapEx and facility CapEx.

And I think I have been telling you guys that this year is a big year as far as doing significant facility buildout, given that headcount growth in the Company.

And relative to the network CapEx, some of the network CapEx moved from Q2 to Q3.

But again if you take the three quarters combined you look at it on a percent of revenue, what I said is I think will probably be at the higher end of our guidance range.

Or our long-term model for the year.

And if you do the math on that that suggests that is where we are at.

Now what you will see in that, though, is that we are actually doing very well on network CapEx as a percent of revenue.

Where you are seeing us maybe would be a little bit above the model is on facility-related CapEx.

So that is an area of CapEx that we don't expect to continue at that rate and taste every year.

You are going to have bumps on that when you have headcount growth and you need to accommodate that.

Richard Pitico, AVR Investment Strategy.

Good evening.

Curious with the partnerships and resell of partnerships with AT&T and other carriers, and also the licensed CDN deals that you've announced.

Is that helping with deploying deeper into their networks and therefore also improving their performance of Akamai solutions outside of the carrier customers?

Yes, absolutely.

And that is one of the key drivers for why we are so interested in partnering with the major carriers.

Also helps with our economics.

The deeper we can go and the better the relationship we have, the better the economics work out, I think, for both parties.

Helps in terms of the channel model.

When we can have those kinds of relationships, we can now leverage the tremendous power and scale of the sales forces of these major carriers.

So it is really across the board.

And the revenue we actually generate from any particular deal is small in comparison to the overall benefit, economic benefit to Akamai, and also performance benefit.

Because as our servers and our software go deeper into these carriers, the performance for all of our customers and now their customers get better.

Gray Powell, Wells Fargo.

Obviously distributed and analyst service attacks have been getting a lot of attention.

What part of your customer base have you seen the most success on the upsell of Kona Site Defender?

And do you see other tangential areas within security that you could expand to?

Well, we actually see it across our customer base.

Now, obviously, the banks that are being attacked are a good target customer there.

In fact we signed three of the top five Dutch banks just in the last quarter.

And that is probably related to the attacks that have begun there in the last quarter.

But media companies buy the security solution.

People try to get their message on a media company site and try to deface it to get some fame or to cause harm.

Commerce companies, obvious targets for cyber extortion and attack.

It really goes across the board.

Public sector, government websites get attacked by enemies of the country or people trying to make a statement.

So cyber security is important pretty much across our base and in every vertical.

And there is a lot of greenfield for us to go after there.

Got it.

And do you see any other tangential areas on to DDOS that would make sense for you to get into?

It is not just DDoS, it is also WAF or web app firewall capabilities that are attacks designed to corrupt and to take over the site, to steal personal information.

Which is of little bit different than the DDoS, which is a volume attack meant to bring it down.

Often you will see them both in conjunction.

You will have the DDoS attack and while the website is responding to all the alarms going off, you sneak in the attack to infect it or steal something or corrupt the site.

But it goes across all of our customer base.

And when you look at the long range, I think our security business could be just as large as our performance business is today.

The target customers are similar.

The early ARPUs look comparable.

And the needs, the level of need is different, but comparable.

So I think it is a large potential business for us going forward, which is why we are really investing there.

Jeff Van Rhee, Craig-Hallum.

Wondered if you would just clarify on the headcount side, I think you ended 2012 at 212 direct reps.

And you were shooting for roughly 100 in the year.

I heard conflicting some hiring may have been pushed up and I thought you said at one point it was on schedule.

So just if you would touch on the sales hiring.

And then the second part was as it relates to guidance.

You said the variability was soft.

Can you just expand up little bit more?

Are there one, two key events?

What did you assume at the high and low end of those ranges so we have a better feel for that?

Thanks.

Sure, so just to make sure I clarify on the hiring fronts.

I made a comment when I talked about our OpEx being a little bit lighter in the quarter; it was due to some hiring that shifted into Q3.

That was actually not on the sales force site.

Actually what we had talked about in Q1 was we were a little bit behind from Q1.

We actually caught up for the most part on our sales hiring through the first half of the year.

So very good traction on sales and go to market hiring.

We are a little bit behind in some other areas of hiring and that is really what is driving the deltas.

I want to make sure that we are clear that sales force hiring is on pace.

Some areas of the business shifted from Q2 to Q3.

And also beyond that, some hiring actually happened later in the quarter.

And so we didn't see the expense impact as we had expected for Q2.

Relative to the software release and our guidance for Q3, as you know that when you have large software releases, and they are -- we actually talk about there is a planned software release late in the quarter.

And you never know whether that release moves a week or not.

You don't know what the traffic volumes are going to be.

What we have assumed in the guidance is we have assumed in the guidance that that traffic, that software release does happen.

And so, that is embedded in our guidance that if you go to the midpoint of our range, that is in our guidance range.

And if it is a little bit stronger, maybe you will be a little bit better than that.

If it slips, maybe it will be a little bit lower than that.

That is one variable, though.

There are many other variables.

We just happened to call that one out because it happens to be a noteworthy one for Q3.

Donna Jaegers, D.A. Davidson.

A follow-up on your last answer.

That software download would be a major operating system for handsets?

Yes.

I am not going to comment on exactly what the software release is.

But there is a large release planned for late in the quarter.

Okay and then a more philosophical question.

European Union recently rated some of the European telcos investigating whether they are impeding Internet traffic.

Does that slow down your goal of working with large carriers to try to create fast lanes in their network?

No.

Not at all.

Everyone wants the Internet to be faster.

And that is a dispute between major carriers as to who pays who how much for taking each other's traffic.

And that is really tangential to our business.

Our relationship with the carriers is to provide better service for everyone at a lower cost.

And I think everyone thinks that is a good idea.

Kevin Smithen, Macquarie.

Yes.

I am wondering if you could elaborate a little more on your comments on international revenues, like the strength in Asia Pac is a little bit different from what we have been hearing from other companies in the IT space.

Are there any specific product launches that drove -- either in software or media that drove the strength in Asia Pac and what do you expect to see in terms of recovery for the rest of the year?

And in it.

Of your sales hires, how many of them are focused in international?

Yes, I will take that.

Our international growth in Asia Pacific in particular was we were in the 30s in Q1 and we were in the 30s in Q2.

It isn't every single market in the Asia-Pacific geography.

There are some markets, that as you mentioned are not doing as well, but in general we have seen very strong performance.

And you have got to remember that is a fairly greenfield opportunity for Akamai.

And so admittedly we are growing, we are growing up a smaller base.

We have made some investments in the sales force there over the last year plus.

The weighting of our investments even this year is going to be targeted.

We are going to still have sales force investments in the US, but you are also going to see them in the international markets.

And we are not going to give you a specific percentage around what is it going to be in APJ versus EMEA versus the US, but you can expect that we think there is significant opportunity in international market.

Significant opportunities in APJ in particular or Asia-Pacific and Japan.

And we are very pleased with our performance there.

Chad Bartley, Pacific Crest.

If you are still breaking it out, can you tell us what percent of total revenue is tied to the value-added cloud hybrid services, I think the old label?

And then e-commerce growth accelerated I think over 700 basis points if you adjust for ADS.

Can you talk a little more specifically about what drove that?

Well, yes, I would prefer not to talk about our cloud versus content delivery because we are actually talking about the business in a media performance and security and service and support.

That information is on the Investor Relations section of our website.

I think it was 59% in the old definition.

But I think the way you should look at the business is the way we are looking at the business internally which is a three category that I mentioned.

And what was the second question?

E-commerce growth.

So e-commerce growth was actually strong.

When you look at the industry vertical cut it actually doesn't look strong.

It looks like it is, I think, 9% growth year on year.

But you have got to remember our ADS business was in the commerce vertical.

Now if you pull the ADS business out of the commerce vertical, we actually had mid-20s growth rates in the commerce verticals.

We are very pleased with that growth rate in commerce.

Tim Horan, Oppenheimer.

Two higher-level questions.

Can you talk a little bit about overall buying growth and maybe what has it shifted much on a quarterly basis, a year-over-year basis and maybe how does your revenue tie at this point in terms of fixed fees and licenses versus directly tied to volume growth and related to that, how important is overage these days?

thanks.

If volume you are referring to traffic and how -- I think traffic volumes have been strong.

As I mentioned they were strong in social media.

They were strong in gaming.

They were strong in video delivery.

They were not quite as strong in the software download space.

So, relative to whether it is what is committed versus bursting, we tend to have -- most of our customers are on committed contracts.

And the rate and pace of bursting really hasn't changed much from what it has been historically.

This concludes the Q&A session.

This concludes today's conference.

You may now disconnect and have a great day.

Thank you.