阿卡邁科技 (AKAM) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2015 Akamai Technologies, Inc.

earnings conference call.

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

(Operator Instructions) As a reminder, this call is being recorded for replay purposes.

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

Please proceed.

Thank you, Stephen; and good afternoon and thank you for joining Akamai's second-quarter 2015 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.

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 July 28, 2015.

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.

Akamai delivered a solid second quarter with strong revenue growth across all of our geographies and in all of our solution categories, with particularly strong growth coming from our cloud security offerings.

Revenue in the second quarter was $541 million, up 14% year over year and up 18% when adjusted for foreign-exchange headwinds.

Non-GAAP EPS for the second quarter was $0.57 per diluted share, down 2% year over year but up 3% when adjusted for foreign-exchange headwinds.

I'll be back in a few minutes to talk more about progress that we made during the second quarter and the opportunities that lie ahead.

But first, let me turn the call over to Jim for our detailed financial results and the outlook for Q3.

Jim?

Thank you, Tom, and good afternoon, everyone.

As Tom just highlighted, Akamai performed well in the second quarter.

Q2 revenue came in slightly above the midpoint of our guidance range at $541 million, up 14% year over year or up 18% if you adjust for foreign-exchange headwinds, with strong and balanced growth across the entire business.

Media revenue was $244 million in the quarter, up 12% year over year or up 17% on a constant currency basis.

These growth rates are particularly strong when you consider our very strong Q2 of 2014, which benefited from several large gaming releases and the World Cup matches.

As I have mentioned on past earnings calls, where we land in our revenue guidance range is heavily influenced by media traffic, and Q2 traffic came in at the midpoint of our expectations.

Turning now to our performance in security solutions, revenue was $256 million in the quarter, up 15% year over year or up 19% on a constant currency basis.

Within this solution category, we saw solid growth across most of the product lines.

And, as Tom mentioned, we have continued to see strong growth in demand for our cloud security offerings.

Second-quarter revenue for our cloud security solutions was $61 million, up 39% year over year or up 44% on a constant currency basis.

We are pleased with our continued growth and market recognition of our unique and differentiated cloud security capabilities.

We have grown our security business from just a few million dollars in 2011 to over $210 million over the past 12 months.

Finally, revenue from our services and support solutions was $41 million in the quarter, up 14% year over year or up 18% on a constant currency basis.

We continued to see improvements in new customer attachment rates for our higher-end enterprise class professional services as well as service offering upgrades into the installed base.

Turning now to our geographies, revenue growth continued to be solid across all of our major geographies.

Sales in our international markets represented 26% of total revenue in Q2, consistent with the prior quarter.

International revenue was $142 million in the quarter, up 7% year over year or up 22% on a constant currency basis.

The stronger dollar continued to weigh on growth rates and had a negative impact on revenue of $21 million on a year-over-year basis and $1 million on a sequential basis.

On a constant currency basis we saw solid growth in both our Asia-Pacific and EMEA markets.

Revenue from our US market was $399 million, up 16% year over year, with solid growth across all solution categories.

And finally, revenue through channel partners represented 27% of total revenue in Q2, up 1 point sequentially.

Moving on to costs: cash gross margin was 77%, down 1 point from the prior quarter and the same period last year and coming in at the lower end of our guidance range, given both the revenue results and the increased investment in network expansion in the quarter.

GAAP gross margin, which includes both depreciation and stock-based compensation, was 67%, down 1 point from the prior quarter and down 2 points from the same period last year, and in line with our guidance.

GAAP operating expenses were $255 million in the second quarter.

These GAAP results include depreciation, amortization of intangible assets, stock-based compensation, acquisition-related charges, and other nonrecurring items.

Excluding these charges, non-GAAP cash operating expenses were $204 million -- at the upper end of our guidance -- and up $15 million from the prior quarter as we absorbed a full quarter of the Octoshape and Xerocole acquisitions and continued to make headcount and infrastructure investments across the business, with the goal of driving both growth and scale.

Adjusted EBITDA for the second quarter was $214 million, down $9 million from Q1 levels and down $10 million from the same period last year.

Our adjusted EBITDA margin came in at 40%, down 2 points from Q1 levels and down 3 points from the same period last year and coming in at the low end of our guidance range, given our revenue and gross margin configuration.

GAAP depreciation and amortization expenses were $74 million in the second quarter.

These GAAP results include depreciation associated with stock-based compensation, amortization of intangible assets, and amortization of capitalized interest expense.

Excluding these charges, non-GAAP depreciation was $64 million, up $3 million from Q1 levels and in line with guidance.

Non-GAAP operating income for the second quarter was $150 million, down $12 million from Q1 and down $5 million from the same period last year.

Non-GAAP operating margin came in at 28%, down 3 points from Q1 levels and down 5 points from the same period last year, and in line with our guidance.

Moving on to the other income and expense items, interest income for the second quarter was roughly $3 million, down slightly from Q1 levels.

Non-cash interest expense related to our convertible debt was roughly $5 million, also consistent with Q1 levels.

As a reminder, this non-cash expense is excluded from our non-GAAP results.

Moving on to earnings, GAAP net income for the second quarter was $67 million or $0.37 of earnings per diluted share.

Non-GAAP net income was $102 million or $0.57 of earnings per diluted share and coming in at the midpoint of our guidance range.

For the quarter, total taxes included in our GAAP earnings were $35 million, based on an effective tax rate of 34.5%.

Taxes included in our non-GAAP earnings were $49 million, based on an effective tax rate of 32.5% -- slightly lower than our guidance due to a revised full-year 2015 tax rate projection that reflects a higher mix of foreign earnings.

Finally, our weighted average diluted share count for the second quarter was 181 million shares, consistent with Q1 levels and in line with our guidance.

Now I'll review some balance sheet items.

Days sales outstanding for the second quarter was 59 days, consistent with Q1 levels and down one day from the same period last year.

Capital expenditures in Q2, excluding equity compensation and capitalized interest expense, were $107 million -- slightly below the low end of our guidance for the quarter, primarily due to some planned network capacity investments shifting into Q3.

As a reminder, this CapEx number includes capitalized software development activities.

Cash flow generation was strong in the second quarter, with free cash flow of $168 million or 31% of revenue.

During the quarter we spent $63 million on share repurchases, buying just over 850,000 shares at an average price of $74.

At the end of Q2 we had $308 million remaining on our current share repurchase authorization.

Our balance sheet also remains very strong, with roughly $1.5 billion in cash, cash equivalents, and marketable securities on hand at the end of the quarter.

If you factor in our convertible debt, our net cash is approximately $835 million.

As we've discussed in the past, we believe the strength of our balance sheet and cash position is an important competitive differentiator that provides us the financial flexibility to make key investments at opportune times.

As always, our overall goal is to deploy our capital in a manner we believe is in the best long-term interest of the Company and our shareholders.

In summary, we executed well and in line with our expectations in Q2.

We delivered solid revenue growth and made the investments in the business that we believe are necessary to build a foundation for sustained long-term growth and scale.

Looking ahead to the third quarter, we expect continued foreign-exchange headwinds to weigh on growth rates.

At current spot rates, foreign-exchange fluctuations are expected to have a negative impact on Q3 revenue of about $2 million compared to Q2 and $20 million compared to Q3 of last year.

In addition to currency headwinds, we anticipate a moderation in media growth rates for Q3.

As we have discussed in the past, traffic volumes can vary from one quarter to the next, given the size and timing of software releases as well as the adoption of social media and video platform capabilities.

And as you will recall, our very strong Q3 results last year were driven by unseasonably strong traffic and revenue growth with our largest and most strategic social media gaming and software download customers in particular.

We are not expecting that same level of traffic volume uptick in this Q3 and anticipate traffic patterns consistent with what we've seen seasonally during the mid-summer months -- specifically, lower traffic volumes as people spend less time on the Internet.

And while we expect a moderation in media growth rates this quarter, we expect remain bullish on the longer-term secular trends for this business going forward.

Factoring in both of these items, we are expecting Q3 revenue in the range of $543 million to $555 million.

This range represents 13% to 15% growth, adjusted for foreign-exchange movements, over an exceptionally strong Q3 of last year.

At these revenue levels, we expect cash gross margins of 77% to 78% and GAAP gross margins of approximately 67%.

Q3 non-GAAP operating expenses are projected to be $205 million to $210 million, up slightly from Q2 levels.

Factoring in the various items I just mentioned, we anticipate Q3 EBITDA margins of 40%.

And as I have been messaging, looking beyond Q3, we expect to operate the Company in the 40% to 41% EBITDA range for the foreseeable future.

However, to be transparent, EBITDA margins will be heavily dependent on several factors, including revenue volumes, possible M&A, spending on platform capacity in anticipation of greater demand for our over-the-top video delivery services, and foreign-exchange movements.

Moving on to depreciation, we expect non-GAAP depreciation expense to be $66 million to $67 million, up from Q2 levels, driven by our first-half and planned Q3 network buildouts and the completion of several large software projects.

Factoring in this depreciation guidance, we expect non-GAAP operating margin of 27% to 28% in Q3.

And with the overall revenue expense configuration I just outlined, we expect Q3 non-GAAP EPS in the range of $0.56 to $0.58.

This EPS guidance assumes taxes of $49 million to $51 million based on an estimated quarterly non-GAAP tax rate of roughly 33%.

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

On CapEx, we expect to spend approximately $95 million to $105 million in the quarter, excluding equity compensation.

The elevated levels of CapEx this year are driven by our desire to increase our capacity to stay ahead of anticipated traffic growth on the network.

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

Because the revenue benefit from our network buildouts tends to trail the investment, our margins are expected to be slightly pressured in the near term.

But we believe it is the right business decision to build out now to ensure the capacity is available to support the potential for significant growth in online video traffic in 2016 and beyond.

In closing, we delivered another solid quarter and first half of 2015, and we remain confident in our ability to execute on our plans for the long-term.

Now let me turn to call back over to Tom.

Thanks, Jim.

It's great to see Akamai building on our strong start to the year, and I'm very optimistic about the opportunities that lie ahead.

We believe that our solid financial performance is evidence of the sound fundamentals in our business strategy and the pivotal role that we play in the growth of the Internet.

We continue to provide unique value by focusing on solving four grand challenges for our customers: delivering video over the Internet with unsurpassed quality, scale, and affordability; providing near-instant performance for websites and apps on any device, anywhere; protecting websites and data centers from cyber attacks that aim to disrupt their online operations, corrupt their data, or steal sensitive information; and scaling enterprise networks to handle new cloud workflows with high performance and low cost.

End users today expect to be able to consume any content, anywhere, any time, on any device.

And they expect their online experience to be fast, reliable, and secure.

If they are watching a video, then the picture needs to have high resolution and never rebuffer.

In response, the world's major broadcasters and Internet companies are working to create over-the-top, or OTT, services and packages for popular video content.

This has the potential to create an enormous amount of traffic on the Internet.

Typical subscribers watching OTT video delivered across the Akamai platform could consume 10 megabits per second or more of traffic while they are watching.

This means that an audience size of only 5 million users -- which is the equivalent of about 4 Nielsen points -- could generate 50 terabits per second of demand, far more than we deliver today for all of our customers combined.

And if OTT becomes commonplace, the demand could increase by an order of magnitude or more.

This is why we are investing in growing the capacity of our platform and why we are working on new technologies to decrease the cost of delivering large volumes of video.

But making OTT successful involves a lot more than just capacity and scale.

The quality of the viewing experience is also critically important.

Delivering broadcast-quality video over the Internet at scale is a lot harder than most people realize, especially considering the diversity of video formats; devices; operating systems; browsers; video players; DRM and ad-insertion technologies; encoders; and carrier equipment in the ecosystem.

And that's just for the landline Internet.

The problem is even harder when you try to deliver high-quality video over cellular networks.

That's because cellular networks were originally built for voice, and voice uses about 1,000 times less capacity than video.

Akamai's video delivery solutions are designed to manage all the challenges of delivering OTT content for the world's leading broadcasters, content providers, and major Internet companies.

Our unique approach of streaming content through servers in thousands of locations close to end users allows us to bypass congested peering points, resulting in a more reliable viewing experience for end users.

Our superior communication and video transport protocols are designed to enable a higher-quality picture, which is increasingly demanded by users and broadcasters alike.

And our highly talented media R&D team is constantly working to ensure that our platform has the scale, quality, and affordability needed for OTT to become widely adopted.

We also believe that we are making good progress with integrating Octoshape's streaming optimization technology into our next generation of video delivery solutions.

And we are confident that our combined capabilities and scale will differentiate Akamai from our many competitors and do-it-yourself efforts.

Akamai's unique global scale is achieved by partnering with the world's leading carriers.

Just last week we were very pleased to announce our new strategic partnership with Telecom Italia.

As a result of this partnership, Telecom Italia will now be offering Akamai's full suite of services within the Italian market, including video delivery, Web acceleration, and security.

Overall Akamai has more than 1,400 network partners, and we have about 190,000 servers in thousands of locations across 111 countries.

Of course, the scale of our globally distributed platform offers significant advantages over the competition and do-it-yourself efforts when it comes to delivering large volumes of content quickly and reliably.

It also provide significant advantages in defending websites against cyber attacks.

In the past year alone, the number of DDoS attacks mitigated by Akamai has increased by more than 130%.

Today we are defending many of the world's leading brands against attacks that typically flood their sites with many tens of gigabits per second of malicious traffic.

And the largest attacks now contain several hundred gigabits per second of traffic.

These volumes are more than enough to overwhelm traditional security defenses in most any enterprise.

And that is why so many enterprises are turning to Akamai for their Web security needs.

Our flagship security solutions, Kona Site Defender and Prolexic, are differentiated by their scale, their sophistication, and their ability to sustain performance in the face of such large-scale attacks.

Over the past three years, we have grown our quarterly security revenue from $4 million when we first launched Kona Site Defender to $61 million in Q2.

We were particularly pleased to see our security business grow 44% over Q2 of last year, the first quarter that included the full benefit of the Prolexic acquisition.

As a result, Akamai is now one of the few cloud-based security companies with an annual revenue run rate of more than $200 million.

Our growth has not gone unnoticed in the marketplace, and our security services are now being recognized by the leading independent research firms.

In the last month both Forrester and Gartner published research reports on the cyber security landscape that included Akamai.

Forrester identified Akamai as a leader among DDoS service providers and scored Akamai as the top Company in the strategy and market presence categories.

Gartner cited Akamai's differentiated WAF as a cloud service solution and made us one of only a few companies to move up and to the right in their Magic Quadrant.

In addition, Gartner stated that by 2020 more than 60% of Web apps will use WAFs delivered from the cloud -- up from less than 15% today -- which we believe speaks to the large opportunity ahead for Akamai's security business.

Since cyber security is so vital to our customers, we are continuing to invest in the development of new and more capable security solutions.

In May we launched our first client reputation service.

Leveraging behavioral analytics and the huge volume of Web traffic that Akamai handles every day, our new client reputation service identifies IP addresses that have attacked or abused customer websites.

Customers are able to alert or block the identified malicious users based on a risk score derived from the history of their past actions.

Client reputation is designed to complement and extend the protection provided by Kona Site Defender by blocking traffic from users that have attacked any Akamai customer within the past 45 days.

Initial customer reaction to this new service has been very positive, with numerous customers purchasing the service in Q2.

We are also developing a suite of enterprise security solutions to detect and prevent phishing, malware, and data exfiltration attacks against enterprises.

We expect the advanced recursive DNS technology that we acquired with Xerocole in February to play a significant role in these offerings, which we anticipate introducing into the market in 2016.

In summary, Akamai is off to a very solid start in the first half of 2015.

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

Thank you for your time today.

Now Jim and I will take your questions.

(Operator Instructions) Gray Powell, Wells Fargo.

So maybe to start, what is your view on the rate and pace of over-the-top offerings?

Do you see a point in time over the next 6 to 12 months when it has more of a direct or potentially accelerated impact on your business?

Yes.

It's really hard to predict the rate of adoption and when new OTT services will become available, but we are in conversations with the country's leading broadcasters -- and, in fact, several global broadcasters -- and major Internet companies.

And there is a lot of buzz out there and a lot of interest in bringing major video content online over-the-top.

And that's already starting to have an impact on our financials in the sense that -- you know, we are buying -- more CapEx -- and you'll see us be a little bit above our long-term plan in CapEx this year.

And as we put that CapEx into colo and get it connected with bandwidth, there is some cost there.

And we want to be in the position of being prepared.

There is a possibility that it could have a significant impact on our financials next year.

We are taking risk in doing this, because there is always a chance that, you know, the offerings will be delayed; or there won't be as much uptake among the users and subscribers as people are hoping for.

But we are willing to take that risk.

The downside there is that we just deploy the CapEx a little early, and we will be using it within a year, anyway.

But we really want to be ready if OTT takes off, as a lot of people think it might.

Got it.

Then just one more on the cost side, if I may.

So I understand that the margin target -- that the EBITDA margin target remains in the 40% to 41% range.

Can you just help us think through the components there?

I mean, I think that your new sales reps kind of continue to grow at the same pace that you have seen over the last couple of years.

Productivity should scale; I would assume that Prolexic margins should be improving.

Can you just kind of help us think through some of these incremental investments in the line items to keep margins at current levels?

Thanks.

Yes.

I'll take that.

So as you can imagine, with the network CapEx buildouts that Tom referenced, that that's going to pressure margins in the near term -- and, in particular, gross margins; but obviously that affects EBITDA as well.

We think it's the right business decision.

So you can expect that -- you know, last year I think we ended at 79% gross margin in Q4.

Obviously, we were at 77% in Q2.

We'll probably be in the 77% to 78% range for the foreseeable future.

But we still plan to manage the Company at the 40% to 41% level, which tells you we are going to continue to make investments in the business -- across the business.

We are going to continue to make investments in all the areas that we've been talking about.

We will continue to make investments in R&D; we will continue to make investments in platform capacity; continue to make investments in go-to-market.

But we will obviously be mindful of those investments -- in managing those investments within the context of the fact that we are doing pretty substantial buildouts now on the network side.

So we are certainly mindful of that.

But you can expect that we will continue to make investments.

And as I mentioned, for the foreseeable future, we expect to be in the 40% to 41% EBITDA range.

But that does depend upon the things that I mentioned.

It depends upon what happens with revenue volumes; it depends upon if there is an M&A that we think is opportunistic and the right decision for the Company -- that may be altered.

But we are telling you what we see right now.

And if we execute to the plan that we currently have, I think we can operate in those levels.

Understood.

Okay.

Thank you very much.

Sterling Auty, JPMorgan.

Thanks, guys.

One question and one follow-up.

First, on the OTT opportunity -- I wasn't quite clear.

Is this in expectation of closing incremental new customers to drive that growth?

Or is it that you expect your existing customers to drive additional volume?

Or is it a combination?

I think the majority of it would be a substantial increase from existing customers.

You know, today we already service pretty much all the major broadcasters.

And as they bring content over-the-top, that would be traffic that would make sense to put on the Akamai platform.

And in some cases, you know, you have the big Internet companies out there, maybe offering bundles and packages; and pretty much they are already Akamai customers.

It would be a new service for them, potentially.

But most of the major media brands already use Akamai.

So it's, I think, less of new customers, more of new service and substantially increased traffic from our existing customer base.

Okay.

And then the one follow-up: if I heard you correctly in your prepared remarks, it sounds like the guidance here on revenue for the September quarter incorporates not only the tough compare but maybe some moving around of timing of major software releases, etc.?

Can you help clarify in terms of -- while you are not guiding for December, how should we think about the seasonal sequential growth in the back half of this year versus what you have seen in previous years?

I'll take that.

I'm certainly not going to guide for Q4, but to give you a little bit more color on Q3, as you mentioned -- and you have followed the Company for a while -- we had a very, very strong media quarter last Q3.

The media business last Q3 grew 7% from Q2 to Q3.

It's never grown at those rates.

Admittedly, we have told you that traffic volumes vary from quarter to quarter.

Sometimes you get big gaming releases; sometimes you get big software updates.

Sometimes it's an introduction of new capabilities on social media platforms.

And so that really affects traffic volumes.

And so, certainly, for Q3 we are not expecting those same level of volumes that we saw last year.

It's probably less the timing from a big software release, because I don't think that it's necessarily just the timing of the releases; it's also the size of those releases.

And so there's a bunch of factors that we've outlined in our Q3 guidance.

I really would hesitate to give you Q4 guidance, because a lot of things can happen in Q4 because of the holiday season.

It's seasonally our kind of biggest quarter, and we usually provide fairly wide ranges of revenue guidance in that quarter, because it can be heavily influenced by holiday seasonality.

But for the third quarter you can expect the media business is certainly going to moderate, because we expect traffic volumes.

And to be clear, because someone is probably going to ask me this question -- well, is it related to some big renewal of a large customer?

It's not driven by renewals of large customers; it's just driven by an expectation that traffic volumes are going to be more seasonally light, which is what we tend to see in Q3.

And we haven't seen that in the last couple sequential quarters for Q2 to Q3.

Okay.

Thank you.

Steve Milunovich, UBS.

Thank you.

Could you go a bit deeper into the year-over-year decline in gross margin?

How much of that comes from incremental depreciation associated with CapEx?

Are there other factors?

What are you seeing in pricing and so forth?

Yes.

So year-over-year GAAP gross margins were down 2 points.

Cash gross margins were down, I think, about 1 point.

So certainly 1 point of that is depreciation.

And as we mentioned, we've been doing some pretty substantive buildout of the network.

So you can account for half of that.

And as you can imagine, we've been doing very large buildout in the first half.

And so as you deploy CapEx onto the network, you end up having a fair amount of incremental cost to actually get that CapEx deployed on the network.

There is network buildout costs.

There is resources that need to go provide installation of our CapEx into the various networks.

So we did see an uptick in that.

And that's what -- lower gross margins, down 1 point on a cash basis, down 2 on a GAAP basis.

As you saw from the guide for Q3, we think we are going to probably going to hover around those levels; that they are not going to worsen.

If anything, they might -- they are going to be flat to up 1 point is what I guided.

So that's kind of where I see things in the near term: that we are probably going to operate in the 77% to 78% cash margin range and probably in the 67% range for GAAP gross margins for the next few quarters.

Regarding timing of software releases and so forth, I know you probably don't want to comment too specifically, but there's talk that the Windows 10 launch could, quote, break the Internet.

And one assumes that you are among those CDNs being involved in that.

Is that taken into account in your third-quarter guidance?

I'm not going to specifically comment on the Windows 10 release or any particular customer.

But you can expect that -- you know, we have a very close relationship with all of our large software download customers.

And we have factored into our guidance an expectation from all of them.

As you can imagine, with any release the rate and pace of adoption of those releases varies.

So it's not just the timing as far as when the release is provided, but it's the adoption of that release from the customers.

And just to comment on Windows in particular, you know, I think that's anyone's guess relative to -- you know, I would say enterprises are probably going to be much slower to introduce a Windows 10 release.

I would say consumers -- it's really kind of a wildcard.

But you can expect that we have included in our guidance an expectation of all software updates accordingly.

Thanks.

Will Power, Robert Baird.

I guess two questions, if I may.

I guess, first, just maybe coming back to the media business, I wonder if you could just address what you're seeing from a competitive standpoint -- both pricing and any potential loss shares you think about the traffic trends.

I'll start with that.

I think it's like it's always been.

We've got a lot of competitors.

The very biggest media companies will have a do-it-yourself effort in-house.

Pricing is always important -- very competitive there.

You know, if the only, I say, major change has been over the last few years we've developed much closer and better relationships with many of the world's leading carriers, some of whom had large competitive or do-it-yourself efforts in the past and now have abandoned those efforts and decided to partner with Akamai.

So that's been one, I think, change over the last few years.

And that's been a favorable change.

Akamai intends to have very strong share.

And I think that's because of our quality, our scale, reliability, and affordability.

Okay.

And then, Tom, you had alluded to in your prepared remarks some new Internet security offerings you were working on that I think you thought you might introduce sometime in 2016.

I wondered if you could help frame for us -- either A, how big those might be for you in 2016 and beyond, and just how you think about the size of those markets that you are going to start addressing, beyond what you are perhaps addressing today?

Yes.

Today our security business is on the Internet.

And it doesn't extend inside the enterprise.

And as we look to the future, as enterprises move more into the cloud, they are moving out into the Internet.

And I think it's important for us to move into the enterprise networks with our security capabilities.

And that's what we are developing today.

You know, I think it's pretty speculative, but it could be a very large market for us.

As you know, phishing attacks are rampant.

You have data exfiltration happening -- you know, almost daily headlines of massive exfiltration attacks being publicized.

And these are areas where I think we could help.

And I think it potentially is a very large market for the industry as a whole -- having cloud-based offerings that help defend enterprises against those attacks.

And I think it could be a large area for Akamai several years into the future.

Obviously we are in development now.

If we bring a product to market next year, you wouldn't expect revenue instantly.

But as we look towards the end of the decade, we think that could be a large source of revenue for us -- which, of course, is why we are making substantial investments there today.

Great.

Thank you.

Mike Olson, HITE.

(sic - Piper Jaffray)

Good afternoon.

As far as international, are there any particular areas that you are focused on building out your sales headcount?

Or would it be just the most obvious market that would follow the US, like Western Europe?

And, I guess, is there any risk that you are at all late to the game in any of those markets?

In other words, are there incumbent competitors that have begun to dominate some of those international markets that will create a hurdle for growth?

Thanks.

Yes.

We have been making -- sales force investments have been pretty much in all of our markets.

I would say that we are already in a lot of -- I will call it the mature markets in Europe and the mature markets in Asia.

So we are just fortifying our investments in those markets.

But I wouldn't characterize it as, I think, that there is someone -- an incumbent that has already been there, and the opportunity has lessened.

We certainly have competitors in every region.

In some regions there are local or regional competitors, but we wouldn't be making the investments outside of the US like we have if we didn't think the market was there.

We think that we are significantly underpenetrated in those markets.

And we think there is a significant room for growth there.

All right.

Thanks a lot.

Tim Horan, Oppenheimer.

Thanks, Tom.

I'm sorry to harp on this, but I think you said pricing is very competitive.

And our kind of research indicates that a lot of your competitors seem to be -- well, you've had a few new competitors lately, and they seem to be putting a lot more investment into CDN.

Has pricing gotten a little bit worse, do you think, or is it stable?

I know in the past you said it's relatively stable.

And then also, Tom, can you just talk a little bit about your multicast video capabilities with Octoshape, and maybe how that works?

How unique is it, and what the demand looks like for it?

Thanks.

Yes.

I would say that the competitive environment is pretty steady, which means with media in particular -- and CDN, pricing steadily drops per bit delivered or per byte delivered.

And it's always been that way, and I expect it always will.

In fact, we are working hard in development -- and this leads into the Octoshape acquisition, and their multicast and their client-assisted delivery capabilities -- in bringing technologies to market that have an even lower cost basis in addition to having a much higher quality at the same time.

So I would say that pricing is -- the decline in pricing is pretty stable.

The level of competition is pretty stable.

Traffic rises at a pretty fast clip, and pricing drops at a pretty steady clip.

And you take the product of those, and that's been leading to our revenue growth in media, which could have small fluctuations up or down in any given quarter, but generally has been a strong grower for Akamai.

And how unique is Octoshape?

Like, what are the barriers to developing that technology that you had to acquire them?

Thank you.

You know, Octoshape has some really strong technology.

First, when it comes to ingress of live video, where it comes from a single point -- and that means you have a single point of failure.

So you really want to be sure that you get that live video stream at high quality, at high throughput, and there's no interruptions.

And they have some very good communication protocols for that and some very good technology there.

They also have some excellent client-side technology, which is used in the video players for both watching events on the Internet and also watching events inside an enterprise.

And that technology allows you to do it at a lower cost point and also higher quality.

You know, they've been at this for a long time, and in our judgment had done some very special things that we are now integrating into the Akamai platform.

Some are already benefiting us and some will be part of our next-generation video solutions.

Thank you.

Michael Turits, Raymond James.

Jim, the EBITDA margin, if I did the math right, comes out even slightly below, if you go out a decimal place, to 40% to 41%.

It sounds like you have some caution on the EBITDA range going forward.

So, A, in general, are you more cautious than you were on the EBITDA margin over the next couple of quarters?

And is there any impact from the two acquisitions that we should be backing out here?

Well, certainly I mentioned that we did absorb the acquisitions in Q2, and so we have a full quarter impact in Q2.

But in general, for EBITDA -- I would say my caution or my statements were more driven by making sure people have a consideration for what obviously is going to affect EBITDA.

We're making in particular some pretty significant investments in the network buildout, which we believe are the right business decisions for the Company.

And while I believe we can operate the Company in the 40% to 41% range, I also want to be mindful of the fact that we are not going to not make the appropriate investments in the business that we believe are the right business decisions for the Company in the medium-term and the long-term.

And there's a bunch of things that can affect that, as you know -- that the media business in particular can have variability.

And so if traffic volumes downtick a little bit, you are going to be at the lower end of that range.

And I just want to make sure that I'm signaling that we intend to operate in the 40% to 41% range.

There are variables that could affect that.

I mentioned a couple of them.

It could be network buildout being kind of more substantive.

It could be an M&A that we think is the right M&A.

And if it is an M&A that is dilutive to the EBITDA model, but we think it's the right strategic decision for the Company, then we are going to do it.

But I would say what we see right now, Michael -- I think we can operate the Company in the 40% to 41% range.

Okay.

And then, Tom, if you back out the security piece from performance security -- just to kind of generalize here, the DSA portion performance piece of it seems to still be growing constant currency in the low to mid teens.

I think that you've had your eye on trying to reaccelerate that.

Any thoughts on that?

Yes.

You know, it's growing in the low to mid teens.

We'd like to see it grow faster.

And we are putting a lot of development effort in terms of innovative capabilities around mobile acceleration.

That's an area that is particularly challenged in terms of performance.

And as you start to see the majority of use cases in transactions now moving to mobile, it becomes increasingly important to our customer base.

You see the rapid adoption of mobile apps.

And that's an area we are making investments in.

And we would like to see that area grow faster.

Okay.

Thank you very much.

James Breen, William Blair.

Thanks for taking the question.

Just a couple -- one from a regulatory standpoint.

Given some of the interconnect deals that have happened in this space, does that impact your traffic at all over the next couple of quarters?

And then with respect to the over-the-top video, you guys have talked about having a long-term business model of growing sort of the high teens -- 17%, 18% top line over the last five years.

Is it safe to assume that the investments we are making in OTT would be something that could push those growth rates higher than that range?

Thanks.

Yes, I'll take that.

You know, I don't think the regulatory environment has anything to do with an expectation about traffic growth rates whatsoever.

So I'm not quite sure what you are referring to there.

But I would say that we have certainly talked about -- a long-term model for the Company is that we believe that we have an ambition to hit $5 billion by 2020.

And if you do the math on that, it means you need to grow the Company around 17% on a compound annual growth rate.

And we have a pretty broad portfolio between media, Web performance, security, and some of the new emerging areas with the carrier and also in cloud networking that -- we might not necessarily get the pieces right, but each of those areas are growing significantly -- that we believe the combination of them is more than enough from a market opportunity perspective to grow the Company at 17% if you look through kind of the first several years of the decade -- and we've been able to do that.

And our expectation is if we execute well, that we are certainly not market-opportunity constrained.

This is about execution.

And I think with the combination of offerings that we have, that with good execution, I think that those aspirations still make sense.

Does it seem as though the target could be even higher now, given the amount of focus on over-the-top traffic?

I don't know.

I would say that it's all about rate and pace.

You could see an uptick in that for a period of time.

I think the media business does have variability, as we've said.

So I think that could fuel the media business.

And, yes, I guess if you hit it on all cylinders, and the media business starts to accelerate because of over-the-top, and we get an acceleration and continued growth in security in our performance businesses, and we start to get traction in the newer emerging businesses, you could.

We are not calling that, because we know that across all of our portfolio that we think there's enough that -- if you look at the -- if you flawlessly executed against every single area, yes, we could.

But I think what we are calling is that in general, we think 17% on a compound annual growth rate is probably where our aspiration is.

We'd love to do better.

Great.

Thanks.

Mark Kelleher, D.A. Davidson.

Thanks for taking the question.

I just wanted to ask about Cisco -- how is that partnership progressing?

And in general, just your efforts to move into the enterprise and through the firewalls.

How is that progressing?

Yes, the partnership is strong with Cisco.

As you know, we launched -- or they launched -- Akamai Connect, which is software, Akamai software, that's on their new branch office router.

There is customer adoption there in their sales.

The product works very well.

I would say it's been a slowish start there.

We'd like to see stronger adoption.

And Cisco is actively working towards that.

Okay.

Thanks.

Keith Weiss, Morgan Stanley.

This is Sanjit Singh for Keith Weiss.

Tom, last quarter I think you mentioned prior sort of investment waves that there was a one- to two-quarter lag in terms of revenue after the buildout.

So heading into this particular -- with OTT, coming into this particular wave, is there more uncertainty about the timing than you had versus past cycles?

With OTT, yes, I would say there is a fair amount of uncertainty.

And that -- usually the buildout is at least a couple of quarters ahead.

And then you have to see: are the services launched?

Do the subscribers buy the service?

It takes time for that, so it can extend beyond a couple of quarters.

At this point we are engaged in purchasing CapEx and doing buildout for 2016.

And it's hard to know exactly if and when the services get launched and the adoption takes place that drives the traffic.

There is a lot of buzz out there.

There is excitement.

I think a lot of folks in the industry think that this is going to start happening more.

But it's hard to say exactly when, and that's certainly outside of our control.

But we want to be ready to support our customers as they make those decisions and as they do get adoption.

I appreciate that.

And then just sort of follow-up back to the media business, you guys have been very clear, at least in the first half of this year, about some of the tough year-over-year comparisons as it relates to renewals; as it relates to some of the big events and software releases that we had last year.

But heading into the second half, I think this time last year you were also expecting more seasonal growth in Q3.

You ended up having a very strong Q3 last year and ended up having a very strong Q4 last year.

So what were the factors, if you could be more specific, in terms of that were driving the upside in Q3 and Q4 that you are just not anticipating into the second half of this year?

I will take that.

I mean, as I mentioned earlier -- and I even mentioned it in kind of our prepared remarks -- that traffic volumes are really driven by a bunch of things, but most notably they are driven by the timing and size of game releases, software updates, the introduction of new features on social media platforms.

So it's not just the consumption of social media, but it's also the introduction of new capabilities that get offered -- as well as, obviously, what Tom had referred to, which is beyond over-the-top, just ongoing video delivery services.

And I would say last year what you had -- it was pretty much all year, to be quite frank.

We had a 4-for-4 on all about of those.

Every quarter seemed to be some large, chunky gaming releases; large software updates.

We saw introduction -- not just more people consuming social media but introduction of new features on social media and continuing growth in video delivery.

So across all those areas is what fueled last year's media business to grow 21%.

So we kind of said you are probably not going to grow the media business 21% every year.

We just grew the media business 16% in Q1 and 17% in Q2.

So pretty darn healthy growth rates off of what were very strong growth rates last year.

So we are very pleased with the growth rate in the media business.

Yes, you are going to see a little bit of a moderation in Q3 of this year.

I think we are not worried about it, because traffic volumes can vary.

I don't think the trends in kind of what drives that business have changed.

It's just -- you are going to go through a period here where it's just a little bit lighter than maybe it was last year.

And as I mentioned earlier -- someone else had asked: it's too early to call Q4, because a lot of things can happen in Q4.

But I want to make sure we are clear that we are very bullish on the media business.

And just because it's going to moderate here a little bit in Q3, I don't think it's a sign of the health of the business at all.

I appreciate the answer, Jim.

Thanks.

Vijay Bhagavath, Deutsche Bank.

Two questions: the first is around your opportunity in the enterprise.

And where I am coming from is: we do have reasonable color from you on the TV over-the-top and the security opportunities; what we lack insights on is how would Akamai view the enterprise as a longer-term growth opportunity?

First part of the question.

Yes.

I think as a longer-term growth opportunity, it is very large for us.

That's why we've been placing significant investments to develop products there.

They are focused in two particular areas.

The first is for enterprise networking -- to enable an enterprise to have greatly increased and improved connectivity into the branch offices, both using its WAN and also using the Internet.

And, also, to be able to do that at a lower price point.

Many enterprises today need 10X the capacity they've got into their branch office -- maybe even more, as enterprise employees need to access video, to access the Web directly without having to go back through the WAN into the central data center.

And as they increasingly rely on the Internet, they need it to perform really well to do their jobs effectively.

And enterprise networking is very expensive.

And this is an area where I think we can really help.

And our first offer there is Akamai Connect; actually, it's offered by Cisco.

And we are working on additional offers that we hope to bring to market next year to further improve the capability of enterprise networks to be faster, more reliable, more scalable, and more cost-effective.

The other area, which we talked about a little bit before on the call, is with enterprise security.

And here, sort of two factors -- one is the enterprise is a huge target today.

People trying to steal confidential information, spread viruses, do very bad things.

And we've all read the headlines of the consequences of some of those bad things.

And the other aspect is that the enterprise is becoming more and more vulnerable, because the employees are accessing the Internet more and more to do their jobs.

So as you access the Internet, you need to be able to secure the enterprise from attacks coming in through the Internet.

This is an area where we've got great expertise and have enjoyed a lot of success with the Internet side of this with our Kona Site Defender, our Web app firewall, stopping DDoS attacks.

And what we want to do is now bring that capability into the enterprise to defend the enterprise employee and the enterprise infrastructure against attacks.

So whereas our existing products, like Kona Site Defender, defend an application from bad things happening, now we would like to defend the enterprise and the enterprise employees from bad things happening.

And so those are the two areas we are focusing on for our enterprise products in the future.

And I think the market is going to be incredibly large there.

And they can be very important for Akamai as we move later in the decade.

Thanks.

That's very helpful.

And a quick second part of the question is on security.

Give us a snapshot of the on the hiring plans.

We did hear from our own channel checks the Company is looking to staff up, security overlay sales specialists, you know, who talk the security vernacular.

So how is it going in terms of security sales hires and investing behind demand on that?

Thanks.

It's been going well.

We do have an overlay force, and we also train our existing sales force in security.

Our goal is that every rep -- whether you are a specialist or not -- should be able to sell security.

We are not there at 100% yet, but we have had good traction with security sales.

And as you can see, being up 44% year over year off a number that included all of Prolexic is something that we were very happy with.

And now, going from near nothing a few years ago to over a $200 million trailing run rate -- again, we are very happy with that.

That's a reflection of the success that the sales force has had in learning how to sell security.

It takes a lot of effort, and not everybody has done it.

But as a company we've had real success there, and that's great to see.

Thanks, Tom.

It's been very helpful.

Heather Bellini, Goldman Sachs.

Hi, thank you.

I was wondering if we could talk a little bit about the growth in the indirect channel.

I think you had -- over a two-year period, you signed up about nine partners, if we go back to the slide deck from your analyst day in February.

I think, if I recall, you had 49% growth in that segment in the year-ago period.

And you guys mentioned that that helped drive a lot of media revenue.

I'm just wondering: how much of a tough comp is that creating for this year?

I'll take that.

It does obviously create a tough comp.

The channel business is actually growing faster than our direct business.

And it grew faster than our direct business this quarter as well.

But is that growth rate decelerating materially?

It's decelerating, but it's decelerating from, I think, a very, very high base.

We signed up a -- all the partners that you mentioned, in particular the carrier partners -- they are still our fastest-growing channel.

As I mentioned last year, one of the drivers of our growth rates last year in the channel was that in order to get some of these channel partners -- the carriers in particular -- we ceded some of our direct customers to them.

And so some of the growth rate that you saw last year was ceding them direct customers -- that they were actually able to grow even faster than we were able to grow on our own by expanding kind of further offerings into them, just based on their relationships with them.

So yes, you are going to see a deceleration in the channel growth rates.

But we are very pleased with the performance in the channel -- and, in particular, pleased with the performance of our carrier partners in particular.

And then I just had one follow-up, if I could.

In response to the question asked about getting to your 2020 target -- and it sounds like, based on your answer, that over-the-top is factored into that number -- given the cost of delivering that content is more than the other content you are serving now, does that mean the profitability picture or the EBITDA target in 2020 have to be altered somewhat?

No, no.

I don't -- I think our EBITDA range reflects the fact that if you are going to have a higher weighting of media revenue, you will obviously potentially be at the lower end of that range.

But our media margins actually are very, very strong, as I share kind of annually.

Media EBITDA, media free cash flow are very, very strong for the Company.

So I don't think it changes.

Plus, you have to be careful that -- you know, we are in 2015, and the model is 2020.

So a lot can happen between now and then.

So yes, over-the-top is likely to gain traction.

But we are hoping that we are going to gain traction in other areas as well.

So I'm not prepared to call that our media revenue mix is going to increase exponentially, because I think we have growth opportunities outside of media as well.

Great.

Thank you.

Colby Synesael, Cowen and Company.

Great.

Most questions -- already asked, so I'll just try to be a little more pointed in mind.

So the DSA product -- that's the one area where, if I look back the last year, you have probably more consistently missed our numbers.

And that's where the miss was, at least in our numbers, for this quarter.

I know the question was asked about that, and you mentioned that you'd like to see it growing faster.

But I was just wondering, I guess, what are you doing to actually grow that faster?

Is the issue with the product set?

You mentioned mobile.

Is it not necessarily improving mobile speeds enough that people are wanting to buy it?

Is it a sales execution issue?

And when could we actually expect to see some improvement in that business?

And then my other question -- if I go back to OTT, which I know has been talked a lot about, when I think about last quarter, you talked about increasing the CapEx spend with the expectation that that could drive OTT acceleration in the back half of 2015.

Clearly the press release and what you said on the call today indicates you are now expecting that in 2016.

Was that one or two particular OTT launches that you anticipated to happen that just aren't happening?

Or has there been something else that's changed in your view of the outlook for OTT?

Thanks.

Okay.

I'll take those.

First, with DSA -- DSA is a very successful product.

And it has been growing substantially.

Now, what we are focusing on with DSA and with Ion Standard, which we launched last year, is making it much easier to use; making it be self-configurable so that it's a more rapid sales process, and customers can buy more of it more easily.

With the Ion Premium offer, that's focused on really making it be superfast.

And as I mentioned before, we are investing heavily in the mobile environment, the cellular environment, where it's especially hard to get good performance -- and where that becomes a lot more important as you have more mobile apps and more transactions going online to mobile devices.

You know, with OTT, looking forward, as I said before, it's really hard to say for sure exactly when the various packages and offers will be coming online and predict how fast they will be adopted by subscribers.

As we look forward to the future now, we are confident enough that we are making the investments.

You start to see that in our financials.

And as we look towards the potential revenue, I think 2016 seems like a promising time.

But there's risk there.

It's just impossible to say exactly when these offers become available and how fast the adoption will be.

Okay.

Thanks.

Kevin Smithen, Macquarie.

I wanted to follow up on Colby's question on the DSA.

You mentioned better -- some retraining of the sales force and improved execution on security.

You get a sense there's any cannibalization going on at the sales force level?

Perhaps now they find it easier to sell your security products and less attention is going to DSA?

Or -- and then, I guess, second question on that: when would you expect a product refresh on the DSA business?

Okay.

So I think there is some -- it's not cannibalization per se, but as you see such great traction with security, and it's the newer thing, yes, it does take more of reps' interest.

We've got a lot of focus on training there.

And so I think it is possible that that's -- you know, you see such great growth there.

And actually pretty respectable growth -- we'd just like to see it better with the performance products and DSA.

And in terms of the product refresh, we launched Ion Standard and Ion Premier at the end of last year.

We've had strong adoption there.

Ion Standard is all about ease-of-use, rapid adoption, self-integration.

And then situational awareness, so it works in any environment with websites -- whether you are accessing it with a mobile device or off a desktop.

And with Ion Premium, really focused on really fast performance -- you know, everything you can do to make the website be faster: front-end optimization, adaptive image compression.

So a focus on the ultimate in speed.

And as I mentioned before, there's a lot of focus now on development around other things we can do for mobile devices, especially in the cellular environment.

So the product -- you know, the DSA is an existing product we've had for a long time.

Great product.

Ion Standard and Premier launched at the end of last year, and we are making improvements to those products now.

And just a quick question on China.

You know, you have some partnerships over there that you've announced.

What is the revenue opportunity for you there without a license?

And is this an important market for you?

Yes.

China is an important market for us.

Obviously, a very large market.

And for our customers it's important.

So we do a lot of delivery into China for our customers that are based outside of China.

We do a much smaller but reasonable amount of delivery from customers in China to users outside of China.

An area that we've not really tapped into yet is for domestic delivery for domestic businesses in China.

That's a large market.

And it's a market we hope to explore with partners.

As you know, we have announced relationships with CT and CU.

And we'd very much like to work with the major carriers and the major partners in the region that do have licenses.

And that's really the only way we can go to market inside of China, being a non-Chinese company.

Great.

Thank you.

Ed Maguire, CLSA.

I was wondering if you could just provide a bit of color on how your partnerships with carriers are tracking?

I know you have mentioned a couple of recent wins.

I would say we are very happy with the relationships that we have and are establishing with the world's major carriers.

And as we talked before about the competitive situation -- and I think that's one area that there has been substantial change; you know, you go back four or five years ago, and many of the world's leading carriers were either directly competing with us, or they had a do-it-yourself effort that they were using as some kind of CDN.

And many of them have now changed.

The internal effort maybe didn't work out as well as they hoped.

The competitive efforts weren't as successful as they hoped.

And they have decided to partner with Akamai instead.

And we've been very pleased to see the progress with those relationships as that's happened.

I can think of one large domestic carrier that used to be very competitive with us and is now one of our largest resellers, and a very happy partner with Akamai.

And that's really critical, I think, as we go to the future, because a lot of the people connect through the major carriers.

A lot of the enterprise do their business with the major carriers.

And it's great for us to have such a strong relationship with the world's major carriers.

Great.

And just a follow-up in terms of investment for the rest of the year: I know you've committed to a lot of CapEx, but what are your thoughts on continued hiring plans for sales force expansion as we look in the next couple quarters?

Yes.

I would say that we are continuing to make investments across the business.

So it's not just sales.

As you know, we made very, very significant investments in the sales force over the last several years.

And so you can expect that probably the rate of sales adds is going to kind of moderate here.

But you can expect that across the business, we are going to continue to make investments in the business.

Great.

Thank you.

I would now like to turn the call over to Tom Barth for closing remarks.

Thank you, Stephen.

And in closing, we will be participating in a number of investor conferences and events in August and September.

The details of these can be found on the Investor Relations section at akamai.com.

We want to thank all of you for joining us, and we wish you all a very nice evening.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Thank you very much and have a very good day.