阿卡邁科技 (AKAM) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Akamai Technologies fourth-quarter and fiscal year 2015 earnings call.

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

(Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to introduce your host for today's conference, Mr. Tom Barth, Head of Investor Relations.

Sir, please go ahead.

Thank you, Liz, and good afternoon, and thank you for joining Akamai's fourth-quarter and fiscal year 2015 earnings 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 February 9, 2016.

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.

And with that, let me turn the call over to Tom.

Thanks, Tom, and thank you all for joining us.

Q4 was another strong quarter for Akamai on both the top and bottom lines.

Revenue in the fourth quarter was $579 million, up 8% year over year and up 11% when adjusted for foreign exchange headwinds.

Our revenue overachievement compared to guidance was driven by the continued rapid growth of our security services, as well as our strong holiday commerce season.

Non-GAAP EPS for the fourth quarter was $0.72 per diluted share, up 3% year over year and up 5% when adjusted for currency headwinds.

Our better-than-expected earnings were fueled by higher revenues, improved efficiency, and a $0.06 benefit from the reinstatement of the federal R&D tax credit.

We also had very strong cash generation in the fourth quarter with free cash flow of $139 million.

Our fourth-quarter results capped off another excellent year for Akamai.

In 2015, we generated $2.2 billion in revenue, up 16% in constant currency over an outstanding 2014.

As a result, Akamai is now one of only 11 US public Internet software and services companies that has generated over $2 billion in annual revenue.

Our Performance and Security Solutions topped $1 billion in revenue in 2015, making this our largest solution category.

Contributing to that result were our Cloud Security Solutions, which grew 54% for the year and now have an annual revenue run rate of nearly $300 million.

We continued to be very profitable in 2015, generating non-GAAP net income of $454 million or $2.52 per diluted share, up 6% over 2014 in constant currency.

I believe our excellent 2015 financial performance demonstrates that our business is strong, growing and highly profitable, validating our comprehensive strategy to make the Internet fast, reliable and secure for our customers.

In support of this strategy, we are laser focused on solving four grand challenges: delivering video over the Internet with unparalleled quality, scale and affordability, providing near instant performance for websites and apps on any device anywhere, securing 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 growing cloud workloads efficiently and securely.

Security, in particular, is a pervasive concern for customers across all verticals and geographies, and it is a tremendous growth opportunity for Akamai.

In addition to world-class protection, our unique cloud-based security solutions offer substantial advantages such as quick implementation without the need for data center hardware, easy deployment across a wide range of web infrastructures and enhanced performance for Web applications.

When deploying Akamai security solutions, there is no need to upgrade or replace hardware to meet ever-changing threats.

Our Cloud Security services are designed to enable customers to rapidly deploy a known, standard set of security protection across all of their websites, regardless of how or where they are hosted.

And unlike traditional approaches to security, which can slow down performance, Akamai's security solutions have been shown to actually improve performance.

This means that Akamai's solutions can be used in an always on proactive mode which provides substantially improved security for websites and applications.

Our Cloud Security Solutions are also differentiated by the quality of our security data.

With our unique global platform, Akamai is able to gather more than 20 terabytes of security data every day.

We process this data using real-time behavioral analysis and machine learning algorithms to continuously improve our level of protection.

We are also using this data to provide advanced services, such as Client Reputation, which we launched late last year, and Bot Manager, which we plan to introduce at the upcoming RSA conference later this month.

As we look forward, we plan to expand our suite of security solutions to also protect enterprise employees from phishing and malware attacks.

Our first offering in this area is scheduled to be released later this year, and it will make use of our successful AnswerX recursive DNS platform to block access to malicious sites that propagate malware or aid in the exfiltration of confidential corporate data.

Through partnerships with many of the world's leading carriers, our AnswerX platform is already being used on a daily basis in tens of millions of homes around the world to block access to undesirable content.

By leveraging the AnswerX platform to provide security for our enterprise customers, we plan to substantially expand the addressable market for our security solutions.

In the long run, we believe that the market for enterprise security solutions in the cloud could exceed our current market for protecting websites and applications.

We are also very excited about the opportunity for growth in our Media business.

Our Media Delivery Solutions generated nearly $1 billion of revenue in 2015 and with strong profit margins.

As we have discussed in the past, the growth rate of our Media business and of the Company as a whole is influenced by the revenue that we receive from a few very large customers.

Over the last few years, our largest two customers in particular have comprised about 13% of Akamai's overall revenue.

As we look ahead to 2016, we expect these two accounts to still be our largest Media customers and that they will contribute about 6% of our overall revenue.

This 7-point change in contribution results from their increased do-it-yourself or DIY efforts, and it is the main reason we anticipate a lower year-over-year revenue growth rate over the next couple of quarters.

It is important to know that the revenue growth from the rest of our customer base remains strong.

In addition, we believe that we will exit 2016 with a much more diversified revenue base that will be less subject to future changes in our largest accounts.

More importantly, as more video moves online, I believe that there is the opportunity for substantial future growth in our Media business, even in the top few accounts where DIY is currently a factor.

When performance matters, even the biggest Media companies turn to Akamai.

That is because it is very hard to replicate our ability to deliver online Media with world-class quality, scale and security at an affordable price point.

Our many advantages over alternative solutions include our unique approach of streaming content through a global network of 200,000 edge servers located close to end-users, which allows us to bypass congested middle mile peering points, resulting in a more reliable viewing experience for end users.

Our superior communication and video transport protocols, which are designed to deliver the kind of higher-quality picture that is expected by users and broadcasters alike, and our client type software, which is now installed on over 100 million devices around the world and designed to greatly improve quality and scale while also lowering cost.

It is hard to predict how quickly the demand for video services will increase, but as OTT grows, I believe Akamai is in an excellent position to benefit, with our ability to deliver broadcast level quality at enormous scale and at an affordable price point.

Before turning the call over to Jim, I would like to cover one last item.

Today, we announced an evolution of our organizational structure designed to help us better serve our customers and further accelerate growth by more tightly aligning our teams that build products with those that work day-to-day with our world-class customers.

We've made great strides diversifying our product portfolio is recent years, delivering record sales and profitability.

And as we close out another excellent year, I believe that our Media and web performance and security businesses are now at the scale where a transition to this type of customer and solution-centric organization makes sense.

This change will become effective in Q2, does not involve layoffs, and will not be disruptive for our customers.

Indeed, I am looking forward to Akamai becoming even more responsive to our customers' needs and bringing innovative solutions to market at an even faster pace.

In summary, I see a very bright and exciting future for Akamai.

Our rapidly growing security business has a rich collection of new products in the pipeline.

We are well-positioned to benefit from the potential of very large volumes of video traffic moving online.

We are well ahead of the field when it comes to improving websites and application performance, especially for mobile devices.

And we are just beginning to tap into an enterprise security and networking market that could someday be larger than the current market for our web services.

This is why, in addition to the three-year, $1 billion share repurchase program recently authorized by our Board of Directors, I plan to enter into a personal 10b5-1 plan to purchase $10 million worth of Akamai stock over the next six months.

I will now turn the call over to Jim to review our Q4 financial results and to provide the outlook for Q1.

Jim?

Thank you, Tom, and good afternoon, everyone.

As Tom outlined, Akamai had a strong fourth quarter.

Q4 revenue came in above the high end of our guidance range at $579 million, up 8% year over year or up 11% if you adjust for foreign exchange headwinds.

Revenue from our Performance and Security Solutions was $286 million in the quarter, up 16% year over year or up 19% on a constant currency basis, and was the sole driver of our revenue overachievement.

Our web performance business benefited from a stronger-than-expected online holiday season, and we continue to strong growth and demand for our Cloud Security offerings across all three geographies.

Fourth-quarter revenue for our Cloud Security Solutions was $73 million, up 46% year over year or up 50% on a constant currency basis.

Exiting 2015, our security business now has an annualized revenue run rate of nearly $300 million.

Turning now to our Media Delivery Solutions, revenue was $247 million in the quarter, down 2% year over year or up 1% on a constant currency basis and in line with our expectations.

As I mentioned in our last earnings call, the moderation in Media revenue growth rates was driven by the impact of DIY efforts in our largest two Media accounts.

However, the rest of our Media business grew over 10% compared to a very strong Q4 of 2014.

Finally, revenue from our Services and Support Solutions was $46 million in the quarter, up 18% year over year or up 21% on a constant currency basis.

We continued to see strong, new customer attachment rates for our higher end enterprise class professional services globally.

Turning now to our geographies, sales in our international markets represented 28% of total revenue in Q4, up 1 point from the prior quarter.

International revenue was $163 million in the quarter, up 17% year over year or up 27% on a constant currency basis.

The stronger dollar continued to weigh on growth rates and had a negative impact on revenue of nearly $14 million on a year-over-year basis and $1 million on a sequential basis.

On a constant currency basis, we continued to see solid growth in both our Asia-Pacific and EMEA markets.

Revenue from our US market was $416 million, up 5% year over year.

Our two largest Media accounts reside in the US and heavily weighed on the US markets results.

Outside of these two accounts, revenue growth was solid across the rest of the US business.

And finally, revenue through channel partners represented 27% of total revenue in Q4.

Moving on to costs, cash gross margin was 77%, consistent with Q3, down 2 points from the same period last year, and in line with our guidance.

GAAP gross margin, which includes both depreciation and stock-based compensation, was 67%, consistent with the prior quarter, down 3 points from the same period last year and about a point higher than our guidance, due to the revenue overachievement.

GAAP operating expenses were $263 million in the fourth 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 $211 million, up $7 million from Q3 levels and at the higher end of our guidance.

We continue to balance investments in the business with the near-term moderation in revenue growth rates.

Adjusted EBITDA for the fourth quarter was $238 million, up $16 million from Q3 levels, and up $6 million from the same period last year.

Our adjusted EBITDA margin came in at 41%, up 1 point from Q3 levels, down 2 points from the same period last year, and at the high end of our guidance.

GAAP depreciation and amortization expenses were $80 million in the fourth 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 $70 million, up $5 million from Q3 levels, and slightly above our guidance.

Non-GAAP operating income for the fourth quarter was $168 million, up $11 million from Q3 and down $7 million from the same period last year.

Non-GAAP operating margin came in at 29%, consistent with Q3 levels and down 4 points from the same period last year, and a point higher than our guidance.

Moving on to the other income and expense items, interest income for the fourth quarter was about $3 million, consistent with Q3 levels.

Non-cash interest expense related to our convertible debt was roughly $5 million.

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

Moving on to earnings, GAAP net income for the fourth quarter was $88 million or $0.49 of earnings per diluted share.

Non-GAAP net income was $129 million or $0.72 of earnings per diluted share, $0.08 above the high end of our guidance range.

Our better-than-expected earnings were fueled by higher revenues, improved efficiency, and a $0.06 benefit from the retroactive reinstatement of the US federal R&D tax credit in December, which was not included in our guidance.

Without the benefit of the R&D tax credit, we generated non-GAAP earnings of $0.66 per diluted share, $0.02 above the high end of our guidance range.

For the quarter, total taxes included in our GAAP earnings were $32 million based on an effective tax rate of 27%.

Taxes included in our non-GAAP earnings were $42 million based on an effective tax rate of 24% and coming in about 6 points lower than our guidance range, again through the R&D tax credit.

Finally, our weighted average diluted share count for the fourth quarter was 180 million shares, consistent with Q3 levels and in line with our guidance.

Now I will review some balance sheet items.

Days sales outstanding for the fourth quarter was 59 days, consistent with Q3 levels.

Capital expenditures in Q4, excluding equity compensation and capitalized interest expense, were $89 million and slightly above our guidance for the quarter.

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

Cash flow generation continued to be strong.

Free cash flow was $139 million in the fourth quarter or 24% of revenue.

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 $800 million.

During the quarter, we spent $100 million on share repurchases, buying back roughly 1.7 million shares.

For the year, we spent $300 million buying back 4.5 million shares.

As Tom mentioned, we are pleased to announce that our board has authorized a new $1 billion share repurchase program running from now until the end of 2018.

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

Given our strong balance sheet and cash generation, this new authorization is intended to continue our multiyear capital allocation plan to offset dilution from our equity compensation plans and to provide us with the flexibility to opportunistically return more cash to shareholders depending upon business and market conditions.

In summary, we are pleased with how the business performed in Q4 and throughout 2015, and we really confident in the long-term prospects of growth for the Company.

Looking ahead to Q1, as a result of the lower volume from our top two accounts and normal Q4 to Q1 seasonality patterns, we are expecting Q1 revenue in the range of $554 million to $570 million.

At the midpoint of this range, revenue growth would be 8% adjusted for foreign exchange movements over a very strong first quarter last year.

At current spot rates, foreign exchange fluctuations are expected to have a negative impact on Q1 revenue of $1 million sequentially and $5 million compared to Q1 of last year.

At these revenue levels, we expect cash gross margins of 77% and GAAP gross margins of 65% to 66%.

Q1 non-GAAP operating expenses are projected to be $201 million to $206 million.

As I mentioned earlier, we have purposefully slowed down the rate pace of headcount additions and discretionary spending to align with our near-term topline growth expectations.

But we are continuing to make prudent investments in the business that we believe are necessary to support sustained long-term growth and scale.

Factoring in all these items I just mentioned, we anticipate Q1 EBITDA margins of 40% to 41%.

And, as I have been messaging in prior calls, we will strive to operate the Company in the 40% to 41% EBITDA range for the foreseeable future.

But as a reminder, maintaining EBITDA margins at 40% of 41% will be heavily dependent on several factors, including revenue volumes, possible M&A, and spending on platform capacity in anticipation of greater demand for our over-the-top video delivery services.

Moving on to depreciation, we expect non-GAAP depreciation expense to be $71 million to $73 million.

Factoring in this depreciation guidance, we expect non-GAAP operating margins of 28% for Q1.

And with the overall revenue and spend configuration I just outlined, we expect Q1 non-GAAP EPS in the range of $0.61 to $0.64.

This EPS guidance assumes taxes of $46 million to $48 million based on an estimated quarterly nine non-GAAP tax rate of 29.5%.

This guidance also reflects a fully diluted share count of 178 million shares.

On CapEx, we expect to spend approximately $85 million to $95 million in the quarter, excluding equity compensation.

Of course, we will continue to balance network investment against future revenue opportunity and continued network efficiency initiatives.

In closing, we accomplished a great deal in 2015.

We 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 Boston on March 7.

Thank you and Tom and I would like take your questions.

Operator?

(Operator Instructions) Michael Bowen, Pacific Crest.

So I guess if you guys could maybe go over a little bit with us with regard to the two customers going from 13% down to 6%, could you maybe characterize for us how that lines up with perhaps the way you were thinking about those revenue levels maybe a quarter or two ago, and maybe another way to think about it is, if that revenue is getting cut in half, where do you see that revenue being made up at this point?

And can you talk about perhaps some of the relative strength between Media performance and also the Cloud Security business in that regard?

Thanks.

Sure.

So just to be clear, the 13% reference is on average what we have received from these top two customers, but it wasn't exactly the percentage of business that we had in the fourth quarter.

So, this has been gliding down globally slowly for the Company, and as we said, we expect next year it will be roughly 6%.

It could be a little bit more than that, it could be a little bit less than that, depending upon obviously traffic volumes.

But we are very, very pleased with the performance in general of our Media business, that our Media business outside these two customers grew 10%.

It is very, very healthy.

I would say that these customers have been doing DIY for a while, and they do serve a fair amount of their traffic themselves.

So depending upon traffic volumes for their businesses, we will serve more or less traffic.

But I would say this is kind of in general in line with our expectations, that I think in particular, what is going to fill this up, I think you're going to go through a period where as their revenues glide down to roughly 6% of our total revenues for the Company, one, we are much more diversified in our portfolio from a customer perspective.

Because there isn't -- customers three and four and below that are not even nearly close to the size of these customers, and these customers combined are only going to represent 6%.

So the revenue concentration is significantly less.

There is significant opportunity for growth, as I mentioned, in the Media business, that the Media business is very healthy in aggregate.

We believe that more and more content is going to move online.

Video content in particular, that will fuel growth.

Our security business grew 54% in 2015, and that was only a few years ago, four years ago that business was just a few million dollars.

So to go from a few million dollars four years ago to a business now that is -- has an annualized run rate of $300 million.

That is a huge opportunity for growth and security.

And there is an opportunity for growth in other aspects of the business as well.

So I think there's many pillars of growth that we think will fuel the Company: Media, security, Web performance and some of the new emerging areas that Tom outlined.

And then maybe as a quick follow-up, if I may, when we had you on the road, Jim, you talked a lot about some of the contract renegotiations with some of the large customers.

Typically, contract renegotiations have a negative connotation to them.

But to the contrary, you were speaking very positively with regard to some of those endeavors.

Can you share with us a little bit how those efforts are going, to the extent you can?

I mean we always go through contract renewals with customers every quarter.

I think what you're referring to is obviously each customer is unique, and the way you structure contracts with customers depends upon the circumstances for that customer.

And so I would say there's nothing unique other than making sure that the contract structure is in the best interest of Akamai and the customer.

And so we make sure that we do that.

Sometimes that means structuring contracts differently than the way they are currently structure.

But I don't think there is anything notable to talk about for any particular customer.

Every customer is unique, and I think we try to come up with a solution for each customer when we work with them to make sure it's something that works for them and for Akamai.

Maybe just a very quick follow-up.

In the context of new competition coming into the space, do you still feel like Akamai has sufficient leverage in these renegotiations of the contract so that these renegotiations will be overall favorable in the pricing construct of those contracts?

Are you talking about for the customer, the top two customers, or just in general?

Well, I guess the answer would be yes to both.

I mean, again, I am not going to get into any specific customer renewal situations.

I would just say that I think you certainly know that we are by far the largest provider and the best provider of content delivery services kind of globally.

And so, in that regard, I think we have a lot to leverage with our customers.

But we try to make sure that when we negotiate with our customers, we are negotiating something that works for them and works for Akamai.

And so I think that is going to be the case.

I think that we will continue to have good leverage, and I think we will try to make sure it's a win-win for both of us.

All right, Michael.

Thank you.

Next question.

Tim Horan, Oppenheimer.

Can you give us a little bit more color on the cloud -- sorry, the performance of the security business?

This is one of the strongest quarters I think you have had.

Is the sales productivity improving?

Do you see integration with enterprises going internally?

Or any other color would be helpful.

Thanks.

I can start with that.

Maybe Tom can offer any color if he wants.

But yes, we had a very, very good quarter in Performance and Security.

It grew 19%, but it grew 19% in Q3 as well.

So we've been growing the performance in the security business in the high teens all year.

So again, very solid performance.

And as I mentioned, it was Jim -- we had very, very good performance in the fourth quarter.

One, we saw an acceleration in our Cloud Security offerings in solutions, so those grew 54% year over year.

We had a very strong online holiday season in the commerce space, so we had a good performance in Web performance as well.

So that, again, I think that category has certainly been the fastest grower for the Company.

And it is certainly, as Tom mentioned, the largest category for the Company now.

So I think there is a lot of room for growth in that category.

Yes, the strong performance we saw in Q4 is all around our existing solutions, Kona Site Defender and Prolexic, our flagship offerings.

And I think what's really exciting is when you look at the roadmap of new solutions coming out and then later this year as we enter the enterprise security space, that that creates the potential to really continue the very strong growth of security solutions well into the future.

Thank you.

Mike Olson, Piper Jaffray.

Along those same lines, is the upside there in security that is coming from faster uptake of security within the existing customer base, or is it faster ramp of selling your security offerings to non-Akamai customers?

It's both.

We have a large customer base that can really benefit from our security solutions, and security is also a great lead offer into certain verticals that may not have already bought our acceleration services.

So both I would say are doing well.

Okay.

And then could you describe on the Media side why or why not your other Media customers outside of those top two customers would be able to do similar DIY buildouts and kind of less than how Akamai fits into their future Media delivery needs?

In other words, why would that happen or not happen outside of these major two customers?

I think there is only a very small handful of customers that can even really think about doing it.

We've been competing against DIY now for 15 years, and through that time, there is only a handful that have gone there.

Generally we compete successfully, and in my opinion, it probably doesn't even make sense for them to be doing it.

And ultimately I think that they discover that as Akamai continues to improve its capabilities, that we will do a better job at a lower price point.

So, I don't think this is something that goes broader than the few customers who do it today, and even there, I am optimistic about our future in those accounts.

Thank you.

Steve Milunovich, UBS.

Following up on that question, could you talk about the timing that you expect at this point with OTT?

And is there a risk that OTT will be dominated by a handful, as you put it, of customers so you get sort of an oligopoly affect?

So even if it does not spread much beyond the current customers doing DIY, that if there is 3 to 5 that do it, that is basically a lot of the market, and it hurts your Media growth over time.

The timing is really hard to predict.

First, when the various offers will come out and then how popular they will be.

So that's just -- it's hard to know.

Our goal and job is to be out in front of it so that we are ready.

And as you know, last year we did purchase some CapEx in advance of what we thought would be a real strong influx of OTT.

That did not take place the way we thought.

I think over-the-top will be dominated by a relatively small number of major entities, broadcasters, carriers, Media giants.

I think we have great relationships with pretty much all of those folks, and we're in a very good position to benefit as OTT increases.

And, of course, OTT -- it is a situation where people are really paying for it.

The quality needs to be really good, and that is the situation where the big folks have really tended to turn to Akamai.

Do you still believe in the 17% compound growth rate to $5 billion in 2020?

Is that still a reasonable goal?

We have achieved that over the last three years.

We are still working hard to get to $5 billion by 2020.

Obviously, our projected growth rates for early this year are less than that.

That makes it harder to reach the goal.

And, of course, the foreign currency situation with a strengthening dollar slows us down.

But so we are working hard to get there.

Is it possible we will be a year or two late?

Of course.

But we are striving to get to $5 billion, and I'm confident that we can do that.

Thank you.

Sterling Auty, JPMorgan.

I wanted to start with -- I am a little confused.

Last quarter, the complementary around the top customers was focused around the top three customers, and the qualitative commentary is that customer number two and customer number three were of similar size.

Now you're saying it is the top two, and number one or number two are a far cry from where number three is.

What happened to customer number three to have the commentary change?

So, I think that in Q4, what was going on was -- the growth was impacting Q4 by the top three customers.

Customer number three does a very, very modest amount of DIY.

And so that was a different kind of dynamic, what was going on with customer number three that we had gone through previously a contract renewal with them.

So it's less a DIY play and certainly only a one quarter phenomenon not going to persist into 2016.

And if we conveyed that customer two and three were of the same size, then my apologies, because that is certainly not the case.

Customers one and two are certainly much larger than customers two and three.

Customers two and three just give you our -- between 2% and 3%, and below that, no customer is more than 1%.

So, our concentration is actually fairly limited, just to give you a little bit more color on that.

Okay.

And based on the trends that you are seeing within those top two customers -- and I understand you are only giving guidance for the March quarter, but I think a lot of us are trying to think about the model and the shape of the seasonality and the impacts from these trends.

Would you expect the growth rate to trough second quarter, third quarter?

Is there any visibility around that?

We did not specifically guide -- as you know, you're right, we are only guiding for the quarter, but we did try to provide some helpful information for you without giving you a specific guide.

And specifically, what Tom talked about is we expect that we are going to see growth moderation for the next couple quarter, and I will leave it to you to understand what you think a couple quarters is.

Okay.

And then last question, under the new structure, I am kind of curious, I think it makes sense in terms of the efficiency on the go to market.

But when you think about the development and the management of the infrastructure, what is different here versus other enterprise software is you have that shared infrastructure of the Akamai network.

How are you going to manage the prioritization of upgrades, as well as modifications to the Akamai network that you may have a little bit of a tug-of-war between what the Media side wants to do versus the Performance and Security?

Yes, great question.

Our platform organization, which includes development and deployment of resources and so forth, is not changing during the reorganization.

We have already figured out how to handle the problem you suggest where the Media division needs to update some software for video delivery, the security team wants to make a new product and get that out there, and it is all riding on the same platform.

So we have already had on the development side a partition of those resources in the business units with product teams, and so that won't change.

We have figured out how to do that as management, and that will continue on the same way.

The difference here with this next step in our organizational evolution is that we are aligning our go-to-market resources directly with the product and development resources in these areas, and the platform organization stays the same.

Got it.

Thank you.

Jonathan Schildkraut, Evercore ISI.

I guess I would like to ask a little bit about what is going on around sort of the cloud side.

You mentioned in your prepared remarks that scaling enterprise networks to handle growing cloud workloads was something that was one of your big goals, and I know that you recently initiated a partnership with Microsoft.

I am just wondering if you could take us up to speed on what's going on with that relationship and sort of what we might look for in the future around this.

Thanks.

Yes, the partnership with Microsoft has several components.

I think you are referring to the part with Azure, where if you have applications running on Azure, you will be able to check the box and deploy Akamai whole site delivery for whatever you are doing with Azure.

And I think that is a great step forward for us.

Microsoft will also be reselling our services.

Now, when I talk about the grand challenge as the beginning, there I am talking more about a business that we are just beginning to get into, and that is focused on the enterprise network, how an enterprise communicates with employees, branch offices, how you manage enterprise security to protect employees from phishing attacks or malware that gets in and steals corporate emails and then exfiltrates that data.

We are not really doing that yet today, but that is where we are headed.

We had our first really toe in the water there in partnerships with Riverbed and Cisco, and we recently announced partnerships with a couple major European carriers, Orange and T-Systems.

But there's going to be a lot of focus as we move forward on developing capabilities for the enterprise network, and that is different than what we do today for websites and applications, which tend to be more enterprise out as opposed to enterprise employees.

That makes sense.

Let me ask one follow-up, if I may.

Just based in terms of our research, even as workloads are making our way into those cloud platforms, people are initially being willing to go there through the public Internet.

Obviously that has a lot of issues, and two of them are security and performance, both of which Akamai can address.

In your opinion, do you think sort of the driver for folks to come to Akamai and work with you on these cloud applications will be the security side or will it be the performance side?

Thanks.

Both.

Because you care about performance and you care about security.

You're absolutely right in what you said, and I think that drives our business forward.

Thank you for taking the questions.

Vijay Bhagavath, Deutsche Bank.

Solid results here.

Good news on the buyback.

I have a question for both of you.

The first question will be for Tom.

The Summer Olympics, the US election and some of these other major events on the planet would at least help to meaningfully ramp over the top video traffic volumes in your Media business, or would the impact be more incremental?

And then also help us understand in terms of any forward visibility or getting out any of your Media customers looking to sign up contracts, capacity agreements, etc., or deliver any of these Internet events at scale to the Akamai global platform?

Thanks.

We carry most all the major events in most all the major countries in the world.

We do derive revenue from those events.

Even years you have more of those events, and they tend to be better years for our Media business.

And perhaps more fundamentally, those events, particularly things like the Olympics, there tends to be changes in the ecosystem.

Fancier TVs, this Olympics will have a lot of 4K involved, and so new technologies get demonstrated, and that tends to have a more long-lasting effect.

For example, if a lot of folks went and bought 4K TVs, decided they liked it, got used to it, but then a lot of the content that is more day-to-day going forward, you can imagine using that kind of capability, and that creates a lot more traffic and more business for Akamai.

So, I think there is a more modest short-term impact.

And yes, we do go get -- make sure we have capacity and sign-up deals for all these events.

That is good for the Media business, but sometimes you also get a little longer-lasting effect afterwards.

Excellent.

A quick follow-on for Jim would be, what steps you might be taking to systematically improve free cash flow generation?

I have been speaking with quite a few clients recently.

They see around a 6% free cash flow yield in this stock.

How would you benchmark your free cash flow generation versus your software Internet peers?

Thanks.

I think it's obviously every Company is a little bit different and unique.

So like from a free cash flow, we generate a substantial free cash flow.

We have been in kind of the mid to high teens from a free cash flow perspective, that some years we are going to -- it is going to be a little bit lower than that if we invest more in network CapEx to build out our network, which is hopefully going to be for revenue that we expect in the future.

But I think generally speaking, the kind of the model that we've outlined is a model that is kind of low 40s% EBITDA, CapEx in the 16% to 18% range, and then you can calculate obviously the free cash flow from that.

I think relative to -- certainly our peer group in the CDN industry, no one is even close to our financial model.

And then relative to others that are in the software and services industry, again, all companies are a little bit differently.

But I think we fare reasonably well for companies that need to do buildout of their network like we do.

So I think we have a very, very strong business model in this Company.

Thanks to both of you.

Colby Synesael, Cowen and Company.

The organizational split that you announced, does that put the Company in better position to formally split into two legal entities if it so chose?

And do you foresee a situation where that actually might make sense?

And then, as part of that question, if you are now kind of aligning the parts of the cost structure into each of those two buckets, although I appreciate the comments you made about the platforms being as one, will you be in a position to better see visibility on what EBITDA is for each of those two businesses, and do you foresee potentially breaking that out for us as well?

Thanks.

Let me take the first question.

We have absolutely no intention of splitting the Company.

And it wouldn't make sense to do that, and the key point there, of course, is the platform, which is common and which is a huge advantage for us, both in terms of the economics, and the performance, and also the scale.

Our security solutions, our acceleration solutions, and our video delivery solutions all ride on the same platform.

As you know, our Media customers buy all of those from us, so there is no intention to split up the Company.

And I will let Jim talk about EBITDA and reporting.

Yes, so I think you know that we try to provide you guys some color annually anyway around what the EBITDA profile is of our Media business, our Performance and Security business, and our Service and Support business.

So I think we already provided that to you.

And as far as now splitting these up, as Tom mentioned, really what we are doing, remember, is we are taking the kind of the product management, product marketing, product development, engineering and kind of sales and marketing side and -- but that's -- you know, that's not the entire Company.

There is a very, very large kind of organization in a platform, and there's other organizations as well.

So we will continue to provide annually a view for you around what these divisions look like, and I will probably -- while it remains to be seen, we will have to see at the upcoming Investors Summit, what exactly we share in this construct that we are not moving into this model until Q2, so it's probably a little premature to provide visibility.

But I already do provide visibility around EBITDA in the current business construct, and this really isn't fundamentally different than that, other than what we are doing is we are integrating the product teams with the go-to-market teams into one team.

We think it's going to drive better kind of customer-centric solutions and kind of a faster response time and for customers.

So I think in that regard, it's more the goal is really to improve execution.

It's not necessarily going to change the way we are reporting the business.

Great.

And if I can just get one quick follow-up in, obviously the stock, like the broader market, has been under pressure of late.

Can you see yourself pulling forward some of your stock buyback similar to the announcement that Tom himself is going to be investing in the stock over the next six months to offset the stock comp which is your goal?

Thanks.

Yes, so that is why I mentioned it in my prepared remarks.

Certainly the primary goal of our buyback program is to offset dilution from equity grants.

So that will continue to be the primary goal of the program.

But, the way the program is set up, is that we will opportunistically buy back more, depending upon where the stock price trades and depending upon business and market conditions.

So you can expect that if the stock price is trading low relative to kind of general market, that we will end up buying back more shares.

But it's an opportunistic program, and I say that is a secondary benefit of the program.

It's not the primary benefit of the program.

Great.

Thank you.

James Breen, William layer.

Tom or Jim, just wondering if you could give us a little color around the international portion of the business?

And I think last quarter had a pretty good growth rate outside the US.

And then maybe just your thoughts on as you look at some of these larger customers doing it themselves, do you think there is a greater or a less potential threat to happen outside the US given some of the geographic challenges?

Thanks.

I will start with the last question.

We don't see really do-it-yourself outside the US.

It's really only in literally a handful of giant US Media companies.

So it's really not an issue there.

In fact, it probably gets even harder outside the US to try to attempt that.

Our international business, our EMEA business and APJ business are growing at very strong clips.

Of course, that is where we get the most impact from the strengthened dollar, so you don't see either a percentage of our overall revenue growing as fast as it would otherwise.

Yes, our international business grew 27%, so it is growing in the mid 20s%.

So we are very, very pleased with performance in both the European markets and our Asian markets.

Great.

Thanks.

Heather Bellini, Goldman Sachs.

This is Jack Kilgallen filling in for Heather.

Thanks for taking the question.

The first one, you made the comment that excluding those top two customers, the rest of the Media segment grew 10%.

I was just wondering, A), if you could give a little bit of color on how that metric has been trending, and B), if you could also get some color on like the price volume dynamics that underlie that 10%?

I think, as we shared before, the Media business tends to have variability based on traffic volumes and pushing traffic at price points.

So I would say we had a huge Q4 of 2014.

We had a record number of gaming releases, software downloads.

And so the fact that we grew 10% over that we are very, very pleased.

There are some quarters where it does grow more than that, but that's when you have notably more gaming releases and notably more software downloads.

But I would say was a very, very good quarter for Q4 outside of those two customers.

And what was your second question?

Pricing.

So, pricing.

The pricing dynamic, as we said, with Media for some time is it remains a very competitive market, which means you have to offer competitive price points.

But the rate and pace of pricing -- so pricing declines do happen.

They happen annually.

We track them religiously, and kind of the rate pace of pricing declines has been very consistent over the last several years.

Great.

And then if I could just get one more.

You talked about Cloud Security, but the app performance and acceleration business, it grew 11% constant currency in this quarter, which was in line with last quarter.

Is there any reason we -- if that were to accelerate on a year-over-year basis, what would be the drivers there?

I know the lower growth rate, and I know you've cited that the security products were getting a lot of the salesforce's attention.

Is there anything else you are seeing there maybe in terms of competition that you can shed some light on?

Yes, we were very pleased with the -- we had, like I mentioned, we had a very good online commerce season.

Seasonally, if you have a good online commerce season, the weather acceleration will do well.

So -- and we had a good online commerce season, which is why it grew 11%.

That business admittedly in years past has grown faster than that.

That business has the potential to accelerate and grow faster.

But because it's a subscription-oriented business, effectively deals you book this year tend to be revenue next year.

And so, I don't think you're going to expect any kind of a significant reacceleration in that business anytime soon.

I do think that there is a significant opportunity.

I think that there is work being done by the engineering teams to increase the pace of innovation and start to offer adjacent products and also improve the existing products.

So I think there's a lot of potential in that business, but that business has been growing in kind of the lower double digits, and it has been decelerating slightly.

It is true that when you have an offering like security that has been growing 50%, it was relatively new to the salesforce.

It has gotten significant mine share.

We have gotten significant traction.

It has taken a little bit away from the web performance business.

But I think there is still good opportunity for that business to grow, and I think it is up to us to execute now.

Thank you.

Michael Turits, Raymond James.

A couple of questions on Media also.

First of all, on 1Q, it seems that way based on what you have guided in terms of modeling.

But are we back to what we think of as normal quarter over quarter seasonality in the Media business after a flattish 4Q, or should I think of it normal kind of couple percent down?

Michael, I don't know what normal is at the time for the Media business.

Well, just statistically similar to prior years is what I mean.

Well, the Media business declined last year, kind of Q4 to Q1 sequentially.

So we are certainly -- we are implying from this guidance it is going to sequentially decline this year.

There have been years past, so the Q4 to Q1 Media business has grown.

So that is why said I can't state that there is more seasonality patterns in the non-Media business than there are in the Media business where those businesses do tend to show sequential declines, I am talking about organically, largely because of the online commerce season that I mentioned, that you don't have that in the first quarter.

But I would say for Media, what you saw in the guide is, as we mentioned, that these top two accounts are going to weigh on growth rates here in the near-term.

But I would say outside of those two customers, if there is something that is normal, it is going to behave more like it did last year.

Right.

But in other words, do we still have an outsized sequential impact from those two, or is that kind of normal -- again, normal patterns off of the 4Q than where we took the big hit?

We are going to see a step down in volumes in these top two accounts as well from Q4 to Q1.

Are they going to be the same magnitude that they were from Q3 to Q4?

We will see.

But, again, you will see a similar step down in revenue volume from Q4 to Q1 in these large accounts.

Okay.

And then next question, and I know it is hard to look out, but how do you think about if you're going from 13% of revenues to 26% of revenues roughly at those top two into 2016, what is your sense of confidence relative to the longer-term?

Do you feel like you've stabilized, or should we think about those as declining businesses for you long-term, those top two?

I would view this as probably stabilizing.

Hard to really predict into 2017.

I think there's plenty of potential for actually upside there, especially if there is real progress in video over the top with these customers.

So, what I would say, there is more upside than downside.

And the very worst possible case, it's only 6% of revenue.

So we are very diversified, and I like that position because now you have some giants, and only a total 6% of revenue could really grow from there and help reaccelerate the business going forward.

Thanks, Tom.

Thanks, Jim.

Gray Powell, Wells Fargo.

So your server count really spiked in 2015, and I'm guessing that is in anticipation of future traffic growth at some point this year.

How should we think about those investments going forward, and what kind of visibility do you have on initiatives that could drive traffic growth higher at some point in 2016?

I will take the server count.

I mean obviously when you look at network CapEx and as you can imagine we are doing deployment in the US, outside the US, and as we talked about 2015, we did begin to forward build for what we thought was going to be the potential of an over-the-top offering.

And so you can think of it as that network -- if you build a network out three to six months in advance, and so we built that out.

It is fair to say we have not monetized that here in the near-term, and you will grow into that here in 2016.

So we spent a little bit more as a percent of revenue in 2015 than we normally do.

We normally spend kind of -- call it 8%, 8.5% of revenue on network CapEx, and we spend about 10% of revenue on network CapEx.

But that is above our model.

We think the model is more in that 8%, 8.5% range, and we will probably be back at those levels in 2016.

And as Tom mentioned around what is going to accelerate Media, I think we talked about what those things are.

I think there is significant opportunity for growth in Media outside these two accounts, and we do believe one catalyst for growth in the Media business is that as more and more premium content moves online, it is poised to push a lot more traffic online.

We believe that we are in a good position to benefit from that when that happens.

Yes, in terms of the visibility question, I think we probably have as good visibility as it is possible to have.

And that said, but it is hard to predict the future.

I think things that happen or don't happen that are even beyond the industry to really know for sure.

We got caught a little bit last year with that.

We and a lot of other folks had very good reason to believe that there was going to be good possibility of a large influx in OTT traffic.

That did not take place.

So generally, I would say our visibility is very good.

We are very well connected with all the major players, but it is not perfect.

Got it.

That is helpful.

And I just want to make sure I have something correct from a modeling perspective.

You may have already touched on this already.

But how much of the impact from your top two customers going from 13% of revenue to 6% is actually hitting in Q1?

Is it all hitting in Q1, or does it phase in over the next two or three quarters?

No, as we mentioned, so the 13% is kind of, call it, what is average over the last few years.

It has been coming down.

So in Q4, it was not -- if it was lower than 13%, and as Tom mentioned that we think that you're going to see it come down probably through the middle part of 2016, and then we will have to see our expectation is that we think it may stabilize from there.

Okay.

Got it.

Thank you very much.

Greg McDowell, JMP Securities.

This is Rishi Jaluria dialing in for Greg McDowell.

Thank you for taking my question.

So first, you discussed your strong e-commerce season that you had over the holiday season.

I believe it was IBM that said that almost 60% of Internet shopping came for mobile devices.

I'm just wondering how -- what sort of impact have you seen from this shift of Internet traffic to mobile devices?

Yes, we saw very similar statistics.

I think our statistics were just a little bit less.

That could be with our customer mix.

We do carry almost all the major commerce sites on our platform, but mobile is certainly increasing its penetration.

We are putting a lot of effort into improving mobile performance.

Mobile performance is more challenged, obviously, than desktop performance, especially if you are using a cellular network.

And there is a lot of interest in our commerce customers and our customer base as a whole in mobile site performance and mobile app performance.

Got it.

Got it.

Okay.

And then you have seen some impressive growth from your Cloud Security business.

I mean there aren't really many Cloud Security players out there with $300 million in annual revenue.

Just as you have gotten to this scale and you continue to grow at this relatively high pace, do you anticipate that you're going to start running into bigger competitors, especially if they kind of take notice of this big, growing business?

I think there's a lot of folks interested in the Security business.

There is giant security companies that license software or sell you hardware.

We come at it from really a different approach where we have built a fantastic platform that we can use in a multitenant way to provide excellent security with excellent performance in a very easy to consume manner.

And there the big folks don't know how to do that.

So we have got a great headstart there, and we've got 15 years of experience operating in that kind of platform.

So there are just lots of customers for us to go and sign up, and it's up to us to execute there.

Plenty of competition all around, but in Cloud Security, we have a very good value proposition.

Okay.

Great.

And then left question and I will jump off.

But so your Investors Summit is next month.

We are excited to be there.

Just in terms of giving us an idea of what to expect out of it, do you think it's going to be like it has been in the past years?

Or given the reorganization you will be doing in Q2, should we maybe be expecting a couple of new things out of it?

I think you will find it to be similar to past years, so I don't think you will see any fundamental differences.

(multiple speakers)

Fantastic.

I will be there.

Thank you so much, guys.

Keith Weiss, Morgan Stanley.

Thank you, guys, for squeezing me in.

I just wanted to revisit the realignment of the business.

Just to sort of get a clear understanding of the rationale for sort of why you are putting the changes into place and maybe it will be helpful if you walk us through a couple of examples of the types of stuff you are expecting to be able to do with the new alignment that you couldn't do with the old alignment.

Maybe help us understand the reason why.

I think whenever you bring the customer closer to the developer, you get a better result.

You make better products.

You make them faster.

Innovation gets into customers' hands faster.

You are more efficient.

And that is what we are trying to accomplish here.

We are getting the folks that work day-to-day with customers lined up right next to the developers that make the products for them.

As you can imagine, there is a very high correlation between the revenue we get from Media customers and the revenue we get from our Media products.

And on the other side of the house, a very strong correlation from the revenue we get from banks and commerce sites as customers and the revenue we get from our application acceleration and web security products.

So, by bringing those teams together, I think we will be more responsive to our customers and more efficient overall.

And I think it helps us accelerate growth.

Okay.

And there is no cost saving angle or sort of consolidation of functionality?

It's just creating different lines of communication amongst the various components of the business?

That's right.

I think if you want to view this as cost control, we weren't doing this in terms of absolute saving dollars.

We are not doing a big layoff here.

But I do expect us to be a lot more efficient, and I do expect that to help us ultimately on the bottom line for the Company.

And is there any execution risk involved in terms of people have different -- like, do account coverages change at all or the way you address the customers change at all?

No and that is important.

We put a lot of effort into that as we planned this realignment.

I think we have less than 0.5% of our customers that will have any change in their account teams.

I think 96% of the reps still have exactly the same territory, and that is probably more than you might even see in a typical year.

So there is not really any disruption on the customer side.

It's just that those teams will have their management change now side-by-side with developer management change.

And so I think you'll see us be more effective as a result.

Okay.

So this can almost be thought of as more strategic in nature than sort of feet on the ground in nature.

Correct.

Operator, we have time for one more.

We are running a little bit long.

So let's take one more question, please.

Will Power, Robert W Baird.

Thanks for squeezing me in.

So I recognize it sounds like the pressure in your top two customers is principally due to do-it-yourself efforts.

But I wonder if you could comment on what you're seeing more broadly in the Media Delivery business competitively among the likes of Amazon, Level 3, EdgeCast or the private players out there, etc.

Any sense of share loss or any sense of changing dynamics on that front that may be pressuring the business?

Not really.

We've got dozens of competitors in the Media space.

We always have.

We always will.

There is so much potential in that space that you are going to have a lot of competitors.

I think we compete very effectively.

I am not aware of any significant share loss there.

I think the only fundamental shift there really has been with the big carriers, and basically I would say the shift has been more towards standardizing Akamai.

I think if you look back four or five years ago, most of the world's major carriers have some kind of DIY effort to build their own CDN and compete with Akamai.

Maybe they bought a lot of equipment from one of the big box manufacturers, and today most of the world's major carriers are pretty much standardizing on Akamai.

Obviously Verizon, an exception there having purchased EdgeCast, would compete with that.

As said, Verizon is still a very large reseller for us.

Level 3, of course, competes, always has, but the list is not long in terms of the carriers.

The cloud providers, some of them partner with us; some of them have competing services.

But we are not seeing erosion due to competition.

We've got two large customers that have built out more of their own internal effort.

We have not lost business to competitors there.

So I think we are in a very good position on the competitive front.

Okay.

Great.

Thank you.

Thank you, Tom.

Thank you, everyone, and thank you.

In closing, as Jim mentioned, we hope to see you at either live or via webcast via the Akamai platform at our 2016 Investors Summit.

See you around March 7 in Boston.

In addition, we will be presenting at a number of investor conferences in both February and March, and details of these can be found on the Investor Relations section of Akamai.com.

So thank you for joining us and have a great evening.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program, and you may now disconnect.

Everyone have a great day.