阿卡邁科技 (AKAM) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2013 Akamai Technologies earnings conference call.

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

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

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

(Operator Instructions).

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

I would now like to turn the conference over to Mr. Tom Barth, head of Investor Relations.

Please proceed.

Thank you, Derek, and good afternoon and thank you for joining Akamai's fourth quarter and year-end 2013 earnings conference call.

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 and the expected closing of our acquisition of Prolexic Technologies.

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

Additional information concerning these factors is contained in Akamai's filings with the SEC, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

The forward-looking statements included in this call represent the Company's view on February 5, 2014.

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 financial portion of the Investor Relations section of our website.

With that, let me turn the call over to Tom.

Thanks, Tom.

And thank you all for joining us today.

Q4 was an excellent quarter for Akamai.

We generated record revenues and earnings with both exceeding the high end of our guidance range.

Q4 revenue was $436 million, up 15% year-over-year and up 21% when adjusted for the ADS divestment and foreign exchange headwinds.

Revenue exceeded our expectations in every solution category and in every geography.

Non-GAAP net income for the fourth quarter was $100 million or $0.55 per diluted share.

Our strong results in the quarter capped off a very solid year for Akamai.

For the full year, we grew revenue to nearly $1.6 billion, up 20% over 2012 when adjusted for the ADS divestment and foreign exchange headwinds.

We generated non-GAAP net income of $367 million or $2.02 per diluted share, up 26% over 2012 and up 15% when adjusted to the change in depreciation methodology that we introduced at the start of the year.

And we continue to have strong cash flow generation with $564 million in cash from operations during 2013.

I will be back in a few minutes to talk more about the progress that we made in 2013 and the opportunities that lie ahead.

But first let me turn the call over to Jim to review our financial results in detail and to provide the outlook for Q1.

Jim?

Thank you, Tom.

Akamai had a great fourth quarter and a very strong 2013 fiscal year.

Before I get into the details, I would like to remind you that the ADS divestiture and the depreciation methodology change for our network assets continue to impact our 2013 reported results and growth rates.

Where appropriate, I will point out the impact of these items so you can better understand the operational performance in the quarter.

As Tom outlined, Q4 revenue came in well above the high end of our guidance range at $436 million, up 15% year-over-year or up 21% if you adjust for the ADS divestment and foreign exchange headwinds.

As I mentioned in our last call, there were two factors that would play a large role in where we would land, relative to our fourth-quarter guidance.

The first was the timing of the renegotiations with our largest media customer which did not impact the fourth quarter.

The second was the strength of the holiday season which exceeded our expectations in every solution category and in every geography.

Turning to our media delivery solutions, revenue was $207 million in the quarter, up 19% over Q4 of last year and up 10% sequentially.

Traffic and revenue growth continued to be very strong across our video, gaming, social media, and software download customer base and particularly strong among our largest, most strategic accounts.

Revenue from our performance and security solutions was $192 million in the quarter, up 18% over Q4 of last year and up 11% sequentially.

Within this solution category, we continued to see strong demand for both our website and application acceleration solutions as well as our security offerings.

Notably signings for these solutions were the strongest we saw all year.

We believe this represents an important proof point for the traction we began to see from our sales force investments.

Finally, revenue from our service and support solutions was $36 million in the quarter, up 36% over Q4 of last year and up 11% sequentially.

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

Turning now to our geographies.

Sales in our markets outside North America represented 29% of total revenue in Q4, flat from the prior year and up 1 point from Q3.

Revenue outside North America grew 17% from Q4 of last year and 13% sequentially, with currency fluctuations having a negative impact on revenue of approximately $4 million on a year-over-year basis and a positive impact on roughly $2 million on a sequential basis.

Excluding the impact of currency, revenue outside North America grew 20% from Q4 of last year and 12% sequentially.

We saw continued strong growth in our Asia-Pacific geography and performance in our EMEA markets was better than expected, despite continued macroeconomic headwinds in southern Europe.

Revenue from North America grew 15% from Q4 of last year and 9% sequentially.

If you adjust for the impact of the ADS divestiture, North America grew a healthy 21% year over year.

North America continued to perform very well for us and had particularly strong growth in our large strategic accounts.

And finally, revenue through resellers represented 21% of total revenue in Q4.

Moving on to costs.

We were pleased with our continued execution on managing cost of goods sold which resulted in another quarter of expanding gross margins.

Our cash gross margin was 78%, up 2 points from the prior quarter and up 3 points from the same period last year and coming in at the high end of our guidance range.

As we have demonstrated over the last couple of years, our network operations and engineering teams continued to execute well on managing cost of goods sold through the implementation of ongoing platform efficiency initiatives.

GAAP gross margin which includes both depreciation and stock-based compensation was 69%, up 2 points from Q3 and up 6 points from the same period last year.

This year-over-year improvement included a favorable impact of roughly 2 points due to the depreciation methodology change that took place at the beginning of the year.

GAAP operating expenses were $186 million in the quarter.

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

Excluding these charges, non-GAAP cash operating expenses were $150 million, up $21 million from Q3 levels and slightly above our guidance range for the quarter, due primarily to an increase in year in performance-based compensation accelerators from the revenue overachievement and an increase in demand generation spending.

Adjusted EBITDA for the fourth quarter was $192 million.

That is up 11% from Q3 levels and from the same period last year.

Our adjusted EBITDA margin came in at 44% at the high end of our guidance range, due to the strong revenue performance.

This result is consistent with Q3 levels, but down 2 points from Q4 of last year driven by our continued targeted investments in the business.

For the fourth quarter, total depreciation amortization was $50 million, which included $37 million of network-related depreciation, $8 million of G&A depreciation and $5 million of amortization of intangible assets.

Interest income for the fourth quarter was $1.5 million, roughly flat with Q3 levels.

Moving on to earnings, GAAP net income for the quarter was $80 million or $0.44 of earnings per diluted share.

Non-GAAP net income was $100 million for the quarter or $0.55 of earnings per diluted share and coming in $0.02 above the high end of our guidance range, due to the strong operational execution areas highlighted earlier.

As a reminder and as we included in our Q4 guidance, $0.03 of our Q4 EPS is attributable to the depreciation methodology change which we made in the first quarter to extend the useful lives of our servers by one year.

For the quarter, total taxes included in our GAAP earnings was $37 million, based on a tax rate of about 31%.

And taxes in our non-GAAP earnings were $50 million, based on a tax rate of about 33%, which was slightly favorable to guidance due primarily to higher-than-expected foreign earnings.

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

With our strong fourth-quarter results we finished the year with nearly $1.6 billion in revenue, an increase of 15% over 2012 or an increase of 20% when adjusted for the ADS divestment and foreign exchange headwinds.

Cash gross margin was 77%, up 3 points from the prior year and the second straight year of improved gross margins.

Full-year GAAP gross margin came in at 68%, up 7 points from 2012 or up 4 points if you adjust for the depreciation methodology change introduced at the beginning of 2013.

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

And we believe we can maintain our ability to scale the network going forward.

Full-year GAAP operating expenses were $653 million.

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

Excluding these charges, non-GAAP cash operating expenses for the full year were $517 million up 28% on a year-over-year basis.

As we discussed throughout 2013, we are committed to investing organically and through M&A to drive innovation and future growth.

For the full year we added over 800 employees across the Company, focused primarily in sales and supporting go to market capacity, service and customer support staffing, network efficiency scaling, and engineering innovation.

Full-year adjusted EBITDA was $697 million, up 13% from 2012 and full-year adjusted EBIT margin was 44%, down 1 point from the prior year.

GAAP net income was $293 million or $1.61 of earnings per diluted share for 2013.

$0.18 of our EPS was attributed to the depreciation methodology change.

Non-GAAP net income for the year was $367 million or $2.02 of earnings per diluted share.

That is up 26% as reported from 2012.

This number includes a full-year non-GAAP tax charge of $180 million based on a full-year non-GAAP tax rate of 33%.

Now I will review some balance sheet items.

Days sales outstanding for the fourth quarter was 55 days, down two days from last quarter and down one day from Q4 of 2012.

Capital expenditures in Q4, excluding equity compensation, were $63 million, slightly above our guidance.

As a reminder, this CapEx number includes network investments as well as capitalized software development, facilities and IT-related expenditures.

Cash generation continued to be very strong.

Cash from operations for the fourth quarter was $172 million and year-to-date we generated $564 million in cash from operations.

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

During the quarter, we spent approximately $48 million on share repurchases, buying back 1.1 million shares at an average price of just over $45.

For the full year, we spent $160 million buying back over 3.9 million shares at an average price of just over $41.

And since the inception of our share repurchase program in April 2009 through Q4 2013, we have spent a total of $785 million buying back over 26 million shares at an average price of just under $30.

In summary, we are very pleased with how the business performed in Q4 and the full year.

We continue to execute well, deliver strong revenue growth, manage network costs effectively, and make the necessary investments in the business to build a foundation for sustained long-term growth.

And we believe we have good momentum as we head into 2014 and are expecting another strong quarter in Q1.

Before I get into the guidance specifics for the first quarter, I want to address two items that are related to our guidance.

First, we outlined in our last call that we were in the process of renegotiating the contracts and pricing terms with our largest media customer.

And our Q1 guidance includes this customer's new pricing terms retroactive till January 1. Second, since the Prolexic acquisition is not yet closed, we have not included any impact of Prolexic in our Q1 guidance.

With these two factors in mind, we are expecting Q1 revenue in the range of $426 million to $442 million.

This range represents 17% to 21% year-over-year growth when adjusted for the ADS divestiture and foreign exchange headwinds.

At the midpoint this translates to 19% year-over-year growth.

At current spot rates, foreign exchange is expected to have a negative impact of approximately $1 million compared to Q4 and $2 million compared to Q1 of last year.

We expect cash gross margins to remain flat to Q4 levels at 78% and GAAP gross margins to come in at 68%.

Q1 non-GAAP cash operating expenses are projected to be $145 million to $150 million, down slightly from Q4 levels as commission accelerated reset at the beginning of the year.

We anticipate EBITDA margins of about 44%.

However, as I have mentioned previously we intend to operate in the low 40s EBITDA margin over time.

With this revenue and spend configuration, we expect non-GAAP EPS in the range of $0.51 to $0.55.

This EPS guidance assumes taxes of $48 million to $52 million based on an estimated quarterly non-GAAP tax rate of 34% which is negatively impacted by about 1 point, due to the expiration of the federal R&D tax credit.

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

On CapEx, we expect to spend approximately $72 million to $77 million in the quarter, excluding equity compensation.

This is an uptick in spend, due to the addition of several large facilities and IT investments that are focused on scaling our infrastructure.

Let me now give you a brief update on the Prolexic acquisition.

We are working our way through the regulatory review process, but we cannot provide an exact closing date.

When the deal does close we intend to integrate the operations of the Prolexic business into our existing security business.

And going forward, we will not be reporting Prolexic separately.

However, to give you some color around the impact to our business, Prolexic's current revenue run rate is roughly $5 million per month.

We also expect Prolexic to reduce Akamai's organic EBITDA margins by about 2 points and to be slightly dilutive to non-GAAP earnings by $0.06 to $0.08 in the first 12 months.

Once we integrate the Companies, we are confident that we can grow and scale the business to drive profit growth over the longer term with the anticipated growth in the business and market opportunity.

In closing, we accomplished a great deal in 2013 and remain confident in our ability to execute on our plans for the long term.

We look forward to having an opportunity to go into more details with you about the business and future trends in the industry at our upcoming Investor Summit in Cambridge on March 25.

Now let me turn the call back over to Tom.

Thanks, Jim.

Akamai is stronger and more profitable than ever and I believe that our financial results demonstrate the fundamentals across our business are solid and that we continue to be a key player in the growth of the Internet.

February marks the 15th anniversary of the beginning of our commercial service when we first delivered a single object for a single website.

We have come a long way since those early days in 1999.

Today, Akamai delivers a large portion of the web content that matters, handling over 2 trillion request per day from over 1 billion end-users and supporting traffic levels of over 20 terabits per second.

In the United States, we are trusted by 97 of the top 100 Internet retailers, nine of the top 10 banks, 20 of the top 24 cable networks and 72 of the top 100 media companies, including 19 of the top 25 gaming companies.

In Latin America, we support eight of the top 10 e-commerce companies, all top three banks and the five largest media conglomerates in Brazil.

In Europe, we are trusted by five of the top seven automotive companies, six of the top 10 banks, and 21 of the top 25 media companies.

And in Asia our customers include four of the top five airlines, five of the top 10 banks, three of the top five stock exchanges and nine of the top 10 media companies.

It took a lot of hard work over many years by our very talented employees to achieve these impressive results.

And we believe that work has positioned us well for an even more promising future.

Everyone and everything is getting connected, creating a new environment that some refer to as the Internet of Everything, others call the Internet of Things, and we know as the Hyperconnected World.

Whatever you choose to call it, vast amounts of traffic are poised to move online and users everywhere are demanding near instant access to applications and information from a myriad of connected devices.

This demand represents both a challenge and an opportunity and the investments that we have made over the past several years should help us to address the challenges and capitalize on the opportunities that lie ahead.

2013 in particular was a year in which we made significant investments to pave the way for future growth.

For example, in our media business, we expanded our network footprint to nearly 150,000 servers in over 1,200 networks spanning over 90 countries.

We reduced our network costs to improvements in software and hardware and the development of more robust and scalable network management processes.

And we forged deep and strategic relationships with leading carriers such as AT&T, Orange, Swisscom, Korea Telecom, and Turk Telekom.

We expect these relationships will enable us to grow revenue more economically and to further improve end-user performance.

We are also excited to be continuing our work with the world's leading device manufacturers and technology companies.

For example at the recent Consumer Electronics Show in Las Vegas, Akamai teamed up with QUALCOMM to showcase the online delivery of 4K videos.

This new ultra-high definition format is expected to quadruple the resolution of the average HDTV.

Delivering this level of quality at scale presents many technical and financial hurdles for content owners and service providers, problems that Akamai is already solving.

We also joined forces with QUALCOMM to demonstrate the significant performance benefits and cost savings that can be obtained by having Akamai software run on a device in the home such as QUALCOMM's Atheros smart home gateway.

Demonstrations like this provide a glimpse into the future where we endeavor to locate our software in homes, offices and devices everywhere, thereby enabling faster and more secure access to media and applications at lower costs.

Akamai has always worked closely with our customers to provide the ultimate in online quality.

Last weekend, Akamai delivered the Super Bowl on line to over 0.5 million concurrent viewers with an aggregate traffic level of over a terabit per second, making it one of the most viewed live streams ever.

Later this week, Akamai will be providing the streaming site acceleration and security services for NBC's online coverage of the Winter Olympics games in Sochi.

The Sochi Olympics marks the first time that all of the competitions will be streamed live.

For live and on-demand video delivery, NBC Olympics is leveraging Akamai's digital media solutions to stream all 98 events including highlights, athlete interviews and profiles.

Akamai was chosen by NBC in part because our suite of cloud-based, media workflow storage and delivery solutions provides the necessary quality and scale to solve the challenges of multi-device media consumption.

We also made major investments in our performance and securities businesses in 2013, significantly growing our sales capacity and launching several new products and key features.

We ended the year slightly ahead of our sales hiring plans, growing our direct rep count by over 40% in 2013.

We believe this additional capacity will provide us with the opportunity to not only reach new prospects and new geographies, but also to provide additional solutions to our installed base, particularly in performance and security.

Our product releases focused on self serviceability, more advanced reporting, and on improving real end-user experiences, especially for mobile devices.

Our customers can now see how their websites and applications perform for real end-users and they can dramatically improve that performance by leveraging the many innovations that Akamai brought to market in 2013 as part of our Ion suite of solutions.

Cyber attacks continue to increase in both scale and sophistication in 2013, requiring a distributed approach to defending a website and the data behind it.

Akamai security solutions leverage our global platform to provide a large and powerful layer of defense for any website or web application.

As a result, security was our fastest growing solution line across all of our geographies in 2013 as both our existing customers and new prospects turned to Akamai for help.

At the end of the fourth quarter, nearly 800 customers were using our security products and nearly 230 had purchased our flagship Kona Site Defender solution.

Our portfolio security services will be significantly enhanced in the near future when, as Jim mentioned, we expect to close the Prolexic acquisition.

Once the acquisition closes, Akamai will extend our security solutions to protect all enterprise applications against BDOS and other malicious attacks, substantially enhancing the completeness of our offerings.

In summary, 2013 was an excellent year for Akamai.

In addition to our solid financial performance, we continue to build a foundation that will propel our future growth.

That's important because as exciting as the last 15 years have been, I am even more excited about the opportunities that lie ahead.

Thank you for your time today.

Now Jim and I will take your questions.

(Operator Instructions).

Sterling Auty, JPMorgan.

One question, one follow-up.

I just wanted to make sure that we are clear.

In terms of the guidance for the first quarter you mentioned the price going into effect retroactively to January 1. Are you saying that that contract renewal is complete and in force?

Or you are saying that once it is complete you will roll it back to January 1?

And then I have one follow-up.

So, it is the latter which is the -- we have agreed to pricing terms, we have to finalize all the kind of dot the i's and cross the t's, but it will be retroactive pricing to January 1 and that is what is reflected in the guidance.

Okay, but the basic terms are -- well, you said you have got to go through the contracting process, but all the major items are (technical difficulty)?

That is correct.

Okay, and then one follow-up in a different area.

You talked about the strong signings and security and performance as evidence of the traction of productivity in the sales hires.

Can you give us a little bit more color there?

So, specifically what are you seeing in terms of that productivity?

What is it that is finally allowing them to turn the quarter -- corner and how should we think about what that will drive as 2014 unfolds?

That is a good question.

I think we shared with you all year that there were going to be two things.

One, you need to get the reps on board and then, two, we were monitoring the productivity of the reps and we call it by tenure class.

And we said that it takes several quarters before a rep is fully productive.

And as you know, we only began to ramp up the sales force investments, really, in the back half of 2012.

And so, call it the first class of tenured reps is coming full circle here.

And what we saw across the board was we just saw, again, all of the reps by tenure class are tracking to our expectations.

And you are starting to see the benefit now of reps that have been a long -- in the Company for a longer period of time are beginning to produce.

And so, again, I would say it wasn't a big driver of the revenue overachievement in Q4, but that strong bookings which was significantly higher than it had been all year, I think, is the proof point of what we have been saying which is we expect to see accelerating revenue growth in the performance and securities solution category in 2014.

And I think this is a really important proof point that the sales force is on board, they are trained and we are starting to see some productivity from them that we are expecting to see yield revenue growth in 2014.

Great.

Thank you.

Jennifer Loew, Morgan Stanley.

Maybe even following up on that last train around the guidance, we were impressed to see a guidance a guide that basically implies revenue flat quarter over quarter which is sort of normal seasonality despite what I would assume is a pretty material reduction in revenue from the large digital media customer.

So can you just give us a little color on what is offsetting that price decline at the large customer?

Is there anything unusual in Q1 that we should be thinking about or is it really just the demand and performance and security offsetting some of the pricing impact there?

How should we sort of contextualize the guidance relative to what we -- normal seasonality?

Sure.

No, I think the way to think about it, I think the business in general across the board is very strong.

It is strong in the media business.

It is strong in performance and security.

It is strong in service and support.

And one of the reasons why we provided some color about this large customer renegotiation in Q4, we wanted to make sure it was open and transparent, that the rest of the business is performing very well.

And I think what this is reflecting in our guidance is you can see the rest of the business is performing very well.

That pricing impact is factored into the guidance and it is, as we said, this is a customer that has not had a pricing adjustment for several years.

So it is a significant impact, but the rest of the business in media and in performance and security is just compensating for that and it is just offsetting what is a headwind from one particular customer.

Great.

And then one follow-up for me.

Given the strong demand that you are seeing and the 40% growth in sales headcount last year, what are you thinking about in terms of the level of investment into sales this year?

Well, we are going to continue to make investments in the sales force.

We haven't specifically provided guidance around what that is going to be, but you can expect that we are going to be adding sales reps at a similar rate in 2014.

Great.

Thank you.

Heather Bellini, Goldman Sachs.

Two questions.

One is -- regards to some comments that you made I think a couple of months ago about the impacts that the NSA and the spying, it has the potential to impact your business outside of the US.

I was wondering if you could touch a little bit about that.

And then, secondly, just in relation to what happened last month regarding net neutrality and your views on how that might impact the industry.

Okay, first, let me make it really clear that the Prism Press has had no meaningful impact on our business.

And I don't anticipate it will.

It is not a good thing out there, it does cause conversations to take place.

There might be a deal are two in Germany that take longer, but that is not impactful in any meaningful way to our business.

I want to make that really clear.

Second, in terms of net utility, I think there's still a ways to go before all of that plays out.

As you may know CDNs were excluded as part of the net neutrality regulations in the first place.

To the extent that changes are eventually made that are beneficial to the carriers, I think that is either neutral or beneficial to Akamai.

As you know we partner very closely with the carriers.

We have deep strategic relationships with several of the major carriers and so if something happens that is favorable to them, being a major technology provider to them, that is helpful to us, I think.

Great, thank you.

Mark Kelleher, D.A. Davidson.

Congratulations on a strong quarter.

Wanted to go back to the contract that you renegotiated.

Is there any timing, any length of time that you can give us some insight on that?

I am just wondering when we need to worry about this again coming up.

And then just as a follow-up, is there any sense within that contract negotiations that this customer may eventually as large contact providers sometimes do bring their CDN in-house?

Thanks.

We are not going to provide any details about the customer negotiation.

That is us -- between us and the customer.

So we are not going to give you the average contract length or any of that.

I can tell you that the pricing impact is as of January 1 and we expect this customer to be a continued customer for us going forward.

You know and in terms of the do it yourself generally, any very large media company at one time or another, I think in the past or currently, is looking at a do-it-yourself solution.

That is not uncommon.

Do-it-yourself as we have always talked about is one of our largest competitors.

It is a lot harder than people think though to really do the delivery at scale, continually improving it and to continually be reducing the cost for it.

And we have seen examples where very large media companies have gone off and done it and then within some small number of years realize that it is not core to them and they are not doing it as well as they had hoped and they actually come back and use Akamai again.

In fact there's a large media company today that is nearing the second end of that cycle.

It is not as -- not so easy to do and we put a lot of effort into doing it really well and to continually improving the quality, the scalability and the cost.

Okay, great.

Thanks.

Aaron Schwartz, Jefferies.

Good afternoon.

Thank you.

Two questions if I could.

First, on the media growth there.

It seemed like the holiday or e-commerce metrics for you were probably a little bit of an uptick, relative to what you saw last year.

And I was wondering if there was any way you could differentiate between for the traffic growth you saw and then also the download activity you saw for download activity that may have been either directly or indirectly related to e-commerce sales is just people sort of activating new devices around the holiday season.

And second question on the margins I know you are not including Prolexic in the guidance, but if we assume the dilution you spoke to, your longer term margin is still sort of below what would get us there and I am just wondering what the delta would be there.

Is that just continued investment in the business that we should think about or is this just some wiggle room for potential future inorganic deals or any way you can reconcile the two there?

That would be great.

Thank you.

Sure.

So to take your first -- and I'm glad you asked on the holiday season.

I think sometimes people think that the holiday season impact is really just a commerce effect.

And it is really much more than that.

There is a significant amount of new devices that get released around the holiday season that drives a lot of traffic.

There's usually a significant number of software downloads or gaming releases that come around the holiday that drive a lot of traffic.

And really what we saw in Q4 was, as I mentioned, it was across the board.

We saw very strong growth in our social media customers.

We saw very strong growth in our video delivery customers.

We saw very strong growth in gaming.

We saw very strong growth in software download.

So it wasn't one area, it was all areas.

All four areas that we've talked about as far as secular kind of tailwinds in our media business continued to perform very well and that was really what took place in Q4.

And relative to commerce, you know, commerce is really germane to our B2B customers, on B2C customers, and yet we had a strong commerce season.

But I would say probably the most noteworthy was what we saw around just incremental traffic in the media space.

And relative to margins, we have told you for a while that we intend to operate the Company in the low 40s EBITDA.

We ended Q4 at 44% and you are right, you can do kind of the math around ultimately when the impact of the Prolexic acquisition occurs, but that is going to have about a 2 point impact on it on margins.

And I think what we're trying to tell you is that we believe that we -- our aspiration is to grow this Company at the compound annual growth rate of 18 plus percent growth rates.

And we want to make the investments in the business either organically or through M&A to enable that and we believe that operating the Company in the low 40s EBITDA is going to enable us to do that.

Great.

Thanks, Jim.

Colby Synesael, Cowen.

Two questions, if I may.

First off I think since you last reported Verizon announced that it had acquired EdgeCast.

If I am not mistaken, Verizon is a reseller relationship of yours.

So, I'm curious if you anticipate that deal having any impact on your current relationship with Verizon?

And then my second question has to do with your guidance, and maybe I am being too cute, but your revenue range is about $16 million.

I think that that is a little bit larger that it typically is.

Is there something there that you are not as confident in that you might typically be, that could affect that there?

Thanks.

All right, I will take the first question.

The VDMS or the digital media unit within Verizon purchased EdgeCast.

That group has been a competitor with Akamai in the past and will remain so in the future as a result of the acquisition.

Akamai's relationship with Verizon has been through the enterprise services or VES group.

That relationship is not changing right now so customers can continue to use that channel for Akamai services and both companies are committed to continuing and making that work.

Obviously it is a situation that we are closely monitoring.

But at this point in time we don't see any near-term impact to our business as a result of the acquisition.

And, Colby, relative to the guidance range, the Company is getting bigger now and so I think it is time for the Company to widen the guidance range.

When you start approaching $400 million plus per quarter in revenue, I just think it makes sense to widen the range.

We've told you in the past that in particular the media business will have more variability because of traffic spikes due to gaming releases, software download, et cetera.

Even though we have seen some sustained growth there that there can be some spikiness there and so what we are trying to do and account for that by broadening the range a little bit.

Great.

Thank you very much.

Gray Powell, Wells Fargo.

Thanks for taking the questions.

Tom, you made a really interesting comment specifically about larger customers that get to a stage where they want to go out and want to build their own CDN.

They realize it's tough and then they end up coming back.

Is that part of this large uptick in traffic that we have seen in the last few months?

I don't think so.

That is a macro trend that has been going on for over 10 years, I would say.

And that's any given account, it works over a period of years generally, both to get started and to wind it down if that is what happens.

Okay, but it is something that you have seen recently?

This is something we have been seeing in a steady-state for as long as I can remember.

It is not uncommon for a very big media company to think about and or try to do it themselves.

Once you go down that path, the lifespan is generally measured in a period of years.

And over a period of years a lot of things change.

Our services get better all the time.

Costs change pretty dramatically over a period of years.

And so what may have seemed like a good idea at the time, after a period of years often doesn't.

Understood.

Okay, that is very helpful.

Then can you help us think about leverage on the cost of goods sold line?

Specifically it looks like colocation costs have been flat to down in absolute dollar terms the last two years whereas your server counts decreased by 50%.

So how should we think about the efficiency there going forward?

I think we told you that -- that I am actually -- that it is a stat that I actually track.

That we actually haven't had the dollar of colocation spend really in over two years.

So you are right.

And I think it is really a tribute to our network operations and engineering teams that they have just driven a lot of initiatives that have then allowed us one, to get more throughput out of the servers that we have on the network.

And not have to add colocation costs.

And so it is really a combination of a lot of factors with -- that we think we can maintain that.

I don't think that we are going to continue in a model that will never add colocation spending, but we think it can maintain the momentum that we have.

And what that is going to equate to is a stabilization in gross margins from the level that we are at right now.

And then, I would say over time -- and I say over time -- as the mix shifts more to the performance and security solutions you should see some gross margin expansion.

But that is going to take some time as those businesses grow.

Got it.

Okay, that is very helpful.

Thank you very much.

Mike Olson, Piper Jaffray.

Good afternoon.

On the sales force ramp there has been lots of questions about this already, but would you be willing to share how many salespeople you have hired to date or maybe by the end of Q4?

And then how many are left to be hired at this point based on your current plans?

And so we shared with you that we had a plan to end the year with about 308 sales reps.

We actually ended the year with 310.

So we did a little bit better than we expected.

And that is a net add of about 95.

Now you know as year-on-year there were a few sales reps in the prior year that were from the ADS business so we actually have a net add of actually over 100.

So we had roughly 215 last year.

Now we have 310.

And we are not going to provide specific guidance going forward of the exact number of sales reps that we are going to add, but I can tell you that we are going to add them, as I mentioned earlier of a similar rate and pace to what you have seen in the last year plus.

Yes, for the remainder of 2014 or just for the first couple of quarters of the year?

No, no, it is going to be throughout the year.

And I think one of the things we have shared with you is that sales force investment has been a little bit more weighted towards their international markets and you should expect that will continue to be the case.

Okay.

And then for media delivery in Q1 I know you guys always say that anyone particular event doesn't move the needle, but will the Olympics move the needle in Q1 or in the context of the overall business is it immaterial, or --?

No, it (multiple speakers) it's immaterial.

It's not a notable driver of revenue.

But it is an important proof point around the consumption of information on the Internet.

And so I think we comment on it because the more -- this is becoming much more pervasive, people's watching live streams via the Internet.

And I think it just shows you that we are in the early days around people's consumption there.

I think it is just going to continue to grow, but as an event by itself it is not material at all.

Okay.

Thank you.

Michael Turits, Raymond James.

Two questions.

One on revenue and the guidance, and the other on margins.

First on revenue guidance.

It is obviously a great guide for 1Q.

Is there anything either in the price and contract negotiations that came out better than you expected?

Or is there anything in the quarter in particular, I know there is a strong across-the-board but in particular there was upside so that's how we got such a strong upside to our expectation?

No, Michael, on the revenue guide, I think the expectation of the large customer renegotiation is pretty much as we expected it to be.

So it is just the health of the business outside this particular customer is just very, very solid as I mentioned.

It's solid across all of our categories and I think we are -- we are bullish that we are going to continue to see that in Q1.

Okay.

Then on the margins, I mean you have given a guide very roughly the low 40s.

I think the Street is about 43%.

I guess I was just wondering if we could get any more specific.

Does that -- whether or not you think that that is an aggressive or conservative number for the rest of the year?

Yes, and the reason I use the term low is I hesitate to give you an exact number because I think it is going to vary based on different factors.

Some people might think 43 is low, low 40s.

Some people might think 41% to 42% is low, but I think that -- just to give you a little bit of color so we are guiding to 44%, and I said that I think Prolexic is going to be a 2 point impact on EBITDA margins.

So that will at least give you some color around what we expect in the near term to operate the Company at.

Right, but you had thought that was low 40s ex Prolexic, right?

No, it will be low 40s with Prolexic.

Okay.

All right, thanks very much.

Phil Winslow, Credit Suisse.

Congratulations on a great quarter.

Just have a question, dating back into the gross margin side then also on the sales force.

You commented on colocation expenses.

Wonder if you have could also give us some color on just bandwidth expenses you are seeing there and the sort of changes you have seen or might expect to see.

Then also with the sales force when can you give us a sense of what you are seeing in terms of just the ramp of the sales force as you bring heads on and how long it takes for them to get to sort of the levels of efficiency that you would want to see out of them?

Thanks.

So, on the COGS -- on the COGS side, again, we have made great progress on colocation.

On the bandwidth side, we continue to drive bandwidth costs down.

We are a large purchaser of bandwidth so we certainly get buying leverage from that and we -- there are other -- there are initiatives that we are driving to to try to reduce bandwidth even further, so we think we can continue the kind of rate and pace of both bandwidth reduction and the progress we have made on colocation, again yielding a stabilization in margins.

On the sales ramp, again, I think we provided some color before on other calls that there are a few things that are going to drive improvements in bookings.

One, your tenured sales reps you want to make sure you retain them and we have done a very good job of doing that.

Two, for your new sales reps, you want to make sure they're tracking to productivity expectations and it is hard to call an average, but it takes four to five quarters for a rep to get fully productive and we track each rep class and see how they are tracking and throughout 2013 we were tracking very well.

And I think what you had in Q4 was the wraparound affect of more tenured reps for those that were hired in late 2012.

And a little bit in -- early in 2013.

Great, thanks.

James Breen, William Blair.

Again, another question on the margins where the guidance is relative to long term.

Maybe, Jim, if you can talk about the network that you are seeing now, is that something you would expect to go for several more quarters or do you feel like you are toward the end of that?

And then second part of the question maybe for Tom, as you look at your business domestically versus internationally, obviously Apple moving to China should have some impact.

Wondering what your thoughts are on the international business relative to the US and where the growth rates are accelerating.

Thanks.

So I will take the margin.

On the margin front again, this was the second year in a row I mentioned in the opening remarks that we have expanded gross margins.

And I believe we can maintain the margin levels that we are at, and not calling that they are going to expand further other than what I had said a few questions ago, which is I think over time as more of the business is weighted to performance and security solutions which have higher on average gross margins in the media business that you will get some gross margin expansion but certainly not in the near term.

I think we can stabilize gross margins in the near term.

Yes, in terms of international markets, percentage of our revenue that has been outside of North America has been pretty steady, but I think the growth should start coming more internationally.

We are making a majority of our investment outside of North America.

We are opening new territories.

We are getting a lot more feet on the ground in territories where we have been established outside of North America.

And you think about where the people are and the people are coming online in a lot of the businesses and you look outside of North America.

So I think over the longer term we would expect the percentage of our revenue that is outside of North America to grow.

Thanks.

And then one follow-up on the M&A side.

You obviously have quite a bit of cash now and you're generating more and more each quarter.

Can you give us your thoughts on M&A in general in terms of you are looking to buy $100 million of revenue a year, $200 million of revenue a year in terms of the size of the companies?

You know, that is not exactly the way we think about it.

We are looking to make acquisitions that will help Akamai grow, bring greater benefit to our customers.

That can come in the form of a company that has existing revenue.

Quite often we buy companies that really don't have any revenue but they have got a good technology and really smart employees that we can integrate into Akamai and bring leverage to what they have got across our customer base to help Akamai grow.

So when we think about M&A we are lead to make acquisitions that will help Akamai grow and bring better value to our customers.

Great.

Thanks.

Ben Rose, Battle Road Research.

Good evening.

Just a couple of questions.

In light of the events that have taken place at Target in the last couple of months, are you seeing increased interest on the part of the e-tailer community?

Yes.

I think you know the e-retail community is very interested in our Kona Site Defender and our security solutions.

Because of our distributed network and tremendous capacity and all the investment we put into our Web App Firewall, we are really in a great position to help defend against the largest and most nefarious attacks out there.

Whether they are an attempt to denial of service are to go in and corrupt content or to steal information from the website.

And there's just many examples of name brands that have been hit by cyber attacks over the last several months and last couple of years.

So I think there is increasing awareness now really across the board.

But certainly in the e-commerce vertical.

Okay, thank you very much.

Ed Maguire, CLSA.

Good afternoon.

I was wondering if you could give an update on your progress with some of your carrier solution so far.

It had been off to an encouraging start last year.

Also, if you could comment on your Hybrid Cloud initiatives as well.

I believe we were expecting to see some betas of your retail solutions.

Would appreciate an update.

Thank you.

Yes, I think we are making excellent progress with carriers.

Now of course as you know, we have over 1,200 network partners, but in particular we put a lot of focus on the leading global carriers and getting a much deeper and more strategic relationship there.

And during the prepared remarks I summarized the major step forward we took last year and I hope you'll see an impressive group of new carrier strategic relationships this year.

So it is an area where we are making a lot of effort and I think it has a lot of long-term value to Akamai.

We view ourselves as being a technology, a strategic technology supplier to the major carriers.

The carriers own the last mile.

They have great enterprise relationships.

They are helpful to us in a variety of ways.

You know, help us to get to market, help us improve quality, help us reduce costs, and we do the same thing for them.

We help them improve quality.

We help them bring services to market and we help them provide better service to their customers and to their end-users.

So I would say I am very pleased with the progress there and we are making a lot of effort.

In terms of hybrid cloud optimization, it is very early stages.

We had excellent early traction last year.

We actually have our technology deployed in several stores around the world on a trial basis.

The feedback from those trials has been very encouraging.

As you may know we demonstrated our software running on a Cisco branch office router at our Edge customer conference in October and that relationship is making good progress.

And as I mentioned earlier, at CES we took another set of Akamai software and put it onto a Atheros, a QUALCOMM Atheros home gateway, smart gateway device and showed how that can bring benefits to the home in terms of improving the speed of software delivery, improving the quality of movies that you watch and decreasing the congestion along the last mile.

And the really nice thing about that is that demonstration was actually done by QUALCOMM at the QUALCOMM booth at CES.

So we are early stages.

We are not forecasting any meaningful revenue this year, but I am optimistic about the long-term value of that capability.

And that is one of the areas we look at for driving new sources of revenue for Akamai going years into the future.

Great.

Thank you.

Tim Horan, Oppenheimer.

Do you have any other customers that are more than 5% of the revenues at this point and would that include some of the resellers like Verizon out there?

Just as part of that have you kind of smoothed out the contracts at this point that we don't have to worry about lumpiness quarter to quarter with repricing of media and other contracts?

Thanks.

Sure, so we don't have -- as I said before we don't have any 10% customers.

I am not going to talk about size of customers beyond that.

We don't have any 10% customers; obviously we talk about this one notable customer that was close to that given their impact.

Relative to the way we structure contracts, again, we've told you this time and again that's the nature of the media business.

The media business is a business that is going to have variability in traffic.

It is a business that is going to go through periods where you are going to go through a pricing reset and that is just the nature of the business.

And I think we have proven over multiple years when you look at this business, this is a very solid growing business.

And so it is -- you shouldn't overreact when there is a downtick in the business.

I think if you look at this business over multiple years, it has proven to be a very steady grower and a very sticky business with our customers.

You upgraded a lot of your products obviously about a year ago or so and then rolling them out, new sales force.

Can you talk about the customer adoption of those upgraded products and how the pricing compares to some of the legacy for things like Kona and Aqua and other products?

I think it is consistent.

The -- again we are getting traction with all of our sales reps.

I think we are getting traction across the portfolio.

We continue to make good traction in selling our security solutions.

We had a very strong quarter in selling our performance solutions in Q4.

So I think in general across-the-board we are getting good take rates for the new products that we have introduced.

Thank you.

Kevin Smithen, Macquarie.

Can you talk about the impact of mobile on your business segment by segment?

And specifically how the uptake has been of the [Aqua] on refresh?

Had a lot of mobile applications on it.

Sure.

Everything is going mobile.

We see about a quarter of the transactions today being done from a mobile device.

Some of our customers in some parts of the world, it is already the majority.

We believe within a couple of years it will be the majority across our platform.

That creates the challenge for performance.

As you can imagine, and probably you know from just using a mobile device that it is a lot slower to do your web applications and transactions on a mobile device than it is on a land device.

Especially if you are on a cellular network.

And as more of those transactions go mobile, this becomes a really important problem for the application owner, for the enterprise, for the commerce side, for the bank.

And that is where we provide you know really substantial value.

We are not quite to the point where we can make it as fast as the landline yet, but we can bring it a lot closer and with our new real user monitoring as part of Ion, we can really give that kind of visibility to our customer.

And they are now much more interested in mobile performance since it is becoming so important.

In terms of media, the proliferation of the devices causes the need for a lot of software downloads because the device itself runs big software packages and then, as you download each app on your device, that means you are downloading software.

And as you play games on it, that means you are downloading software.

So we do see a lot of demand for software downloads because of the proliferation of the devices.

Now in terms of video, I think in the long run the large majority of the bits will be watched from the living room probably on some kind of TV device.

That said, people will watch videos when they are on the run, they will watch their sporting event when they are on the run, so there's certainly more devices which can be downloading video.

The big quality, the high quality which means the high bit traffic for a video you think tend to be more centered on a bigger screen, which tends to be less mobile.

So there's some increase in video traffic because of mobile, but I think in the long run it is more the change in the format.

Things like 4K, ultra HD and the viewing habits, where you go home and you watch something over IP instead of over cable or satellite.

And that is what will drive the traffic.

And a lot of that growth won't be mobile devices per se.

That's very helpful.

Thank you.

At this time there are no more questions in queue.

I would like to turn the call back over to Mr. Tom Barth for any closing remarks.

No closing remarks today, but just to thank you for joining us this evening and we look forward to speaking to you all again soon.

Have a nice night.

Ladies and gentlemen, that concludes today's conference.

We thank you for your participation.

You may now disconnect.

Have a great day.