阿卡邁科技 (AKAM) 2016 Q1 法說會逐字稿

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

first-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded.

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

Sir, please go ahead.

Thank you, and good afternoon.

Thank you for joining us on Akamai's first-quarter 2016 earnings conference call.

Speaking today will be Tom Leighton, Akamai's Chief Executive Officer, and Jim Benson, Akamai's Chief Financial Officer.

But before we get started, please note that today's comments include forward-looking statements, including statements regarding revenue and earnings guidance.

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

Additional information concerning these factors is contained in Akamai's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q.

The forward-looking statements included in this call represent the Company's view on April 26, 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 please turn the call over to Tom.

Thanks, Tom.

And thank you all for joining us.

Q1 was a very solid quarter for Akamai in both the top and bottom lines.

Revenue in the first quarter was $568 million, up 8% year over year and up 9% when adjusted for foreign exchange headwinds.

Excluding the contribution from our two largest customers, revenue in the first quarter was up 15% over Q1 of 2015.

Our strong revenue achievement was driven by the continued robust demand for our security services, which grew 47% in constant currency over the first quarter of last year, as well as solid performance across all of our major product lines and geographies.

Non-GAAP EPS for the first quarter was $0.66 per diluted share, up 8% year over year and exceeding the high end of our guidance range due to our strong revenue achievements and our continued focus on efficiency across the Company.

Our solid performance in Q1 has gotten us off to an excellent start for the year.

I was particularly pleased to see our continued strong execution during the time when we were realigning the Company.

As a result of the realignment, we now have three major divisions -- media, web, and enterprise and carrier.

Each division has its own resources for development, product management, marketing, and sales.

For example, the media division is developing products focused on video and software delivery.

They manage our customers and prospects in the media, software, social networking, and gaming verticals.

The web division is responsible for developing our web security and application acceleration products.

And they manage customers and prospects in verticals such as e-commerce, financial services, software as a service, and the public sector.

The enterprise and carrier division is responsible for developing products for enterprise and carrier networks and enterprise security.

And they manage our carrier relationships.

Going forward, we will report the revenue for each division in terms of the revenue derived from customers in that division.

For continuity purposes, we will also continue to provide the product based view of revenue that we have historically reported.

Jim will provide all of this data for Q1 shortly.

But, first, I'd like to mention some of the recent highlights from the media and web divisions.

It's been an exciting start to the year for the media division, with record-breaking online audiences for major events such as the Super Bowl and March Madness.

4 million viewers watched the Super Bowl online this year, up from 2.5 million in 2015.

The average bit rate was up 30% to 4.5 megabits per second in 2016, and the average viewing time was up 20% to over 100 minutes.

We also delivered a major golf tournament in the new 4K format a few weeks ago.

This was the first time that a major US sporting event has been delivered in 4K online.

The quality levels were extraordinary.

Using our Octoshape client technology, we delivered an average bit rate of 13 megabits per second with a re-buffering rate of less than 1%, showing, once again, Akamai's ability to deliver broadcast quality content reliably and securely.

The excellent end-user experience that we are providing with our advanced video delivery capabilities was a major topic of discussion at the recent National Association of Broadcasters, or NAB, show.

That's because the ability to deliver high-quality video at scale is critical to the enablement of over-the-top, or OTT, services.

A common theme in my conversations with many of the world's leading broadcasters and media companies at the show was that they greatly value our ability to provide such high quality and scale and to do so with a very high level of reliability.

It is very difficult to replicate our ability to deliver online media with world-class quality, scale, and security.

That's because of our unique approach of streaming content through a global network of more than 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 higher quality picture that is desired by viewers and broadcasters alike.

Our client-side software, which is now installed on over 100 million devices around the world and designed to greatly improve quality and scale while also lowering costs.

And our new 24-by-7 broadcast operations control center, or BOC, capability for end-to-end monitoring of quality and fast resolution of performance issues.

I'm pleased to report that our BOC is already receiving national accolades for the level of service that it can provide to our broadcast customers.

At NAB, the BOC was selected as TV Technology's best of show for its design, features, cost efficiency, and performance.

The BOC also won Streaming Media's Best of NAB 2016, one of only six awards the publication presented from among the 1,600-plus exhibitors at the show.

Of course, it's hard to predict how fast the OTT market will grow, but we believe that we are very well positioned to benefit from the increasing demand for high-quality video online.

There are also some exciting developments to report from our web division, most notably, our new Bot Manager service became generally available earlier this month.

Bot Manager identifies over 1,200 types of bots, and enables our customers to customize their response to requests based on the bot type.

For example, one of our government customers recently deployed Bot Manager to thwart malicious entities that were checking on the validity of stolen account names and passwords.

Using Bot Manager they were able to automatically report passwords as being invalid when we detected that a bot was making the request instead of a human, thereby preventing the fraudulent use of stolen identity.

I'm also pleased to report that we now have over 1,000 Ion customers.

As you may recall, we launched Ion a little over three years ago and it has since become the leading solution for accelerating websites and applications online.

Ion is particularly well-suited for accelerating mobile apps and content being delivered to mobile devices.

This is important because the mobile environment is often much slower than the desktop environment.

Users expect mobile devices to be fast, and over half of all transactions on the Akamai platform now come from mobile devices.

Before turning the call over to Jim, I would like to emphasize that, although we have a new divisional structure, Akamai's goal remains the same as it has always been -- to make the Internet fast, reliable, and secure.

And we are still laser focused on solving four grand challenges for our customers -- 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.

We believe that we will continue to benefit from strong secular tailwinds such as the increasing amount of video being consumed online, the rapid proliferation of mobile devices, the growing need for cloud-based security solutions, and the continued migration of enterprise applications to the cloud.

And we're continuing to invest in the growth of the business.

I believe that our new divisional structure will enable us to be even more responsive to our customers' needs and to bring new capabilities to market at an even faster pace than before.

In summary, Akamai is off to a strong start in 2016 and I'm very excited about the substantial opportunities for growth that lie ahead.

I will now turn the call over to Jim to review our Q1 financial results and to provide the outlook for Q2.

Jim?

Thank you, Tom, and good afternoon, everyone.

As Tom outlined, and as we previewed at the Investor Summit in March, we are now managing the business in our new division structure.

In an effort to make this transition as clear and transparent as possible, in addition to providing our results through this new division lens, we will continue to provide you with our financial results by the solution categories we've historically shared.

Looking to top-line performance, Akamai had a strong first quarter and is off to a good start in 2016.

Q1 revenue came in near the high end of our guidance range at $568 million, up 8% year over year or up 9% to adjust the foreign exchange headlands.

And growth outside of our top two customers continue to be strong, up 15% in constant currency.

Turning to our solution categories, revenue from our performance and security solutions was $316 million in the quarter, up 16% year over year or up 17% on a constant currency basis.

Within the solution category, we saw solid growth across the major product lines and we continue to see significant growth and demand for our cloud security offerings.

First-quarter revenue for our Cloud Security Solutions was $81 million, up 46% year over year or up 47% on a constant currency basis.

We are pleased with how well our unique and differentiated cloud security capabilities are being adopted by our customers and being recognized in the marketplace.

Our Bot Manager offerings is the latest example of how we are innovating to expand our security portfolio to meet strong customer demand.

Turning now to our Media Delivery Solutions, revenue was $206 million in the quarter, down 4% year over year and in line with our expectations.

As we have previously mentioned, media revenues continue to be impacted by DIY efforts in two of largest media customers.

However, the rest of our media business grew over 11% compared to a very strong Q1 in 2015.

Finally, revenue from our Services and Support Solutions was $46 million in the quarter, up 16% year over year.

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

Turning to our new division view, as we shared in our last call, we are now managing the Company in a new division structure which integrates the development, product management, marketing, and sales teams into three divisions to focus on the Company's media, web, and enterprise and carrier products and customers.

This new customer aligned structure is designed to create tighter alignment and integration between customer requirements and product innovation, while increasing the ease of leveraging Akamai's services, and is intended to help us better serve our customers and accelerate growth.

Under this new division construct, revenue from our media division was $292 million in the quarter, down 1% year over year or flat on a constant currency basis.

The media division is impacted by the continued DIY efforts of our two largest customers, the media customers, that I mentioned earlier.

Revenue growth for the media division customers outside of the top two was a healthy 11%.

Revenue from the web division was $264 million, up 18% year over year.

We have continued to see solid growth in this customer base, with particularly strong security growth of 51% year over year in constant currency.

Lastly, revenue from the emerging enterprising and carrier division was $12 million in the quarter, up 45% year over year.

To be helpful, as we migrate to this new division reporting lens, we will continue to report the former solution category view through the balance of 2016.

Even though our security revenue will now be embedded within each of the three divisions revenue results, we'll continue to break out total security revenue separately.

You will find all of these revenue results detailed in today's press release and on our Investor Relations website.

Moving on to our geographies, sales in our international markets represented 30% of total revenue in Q1, up 2 points from Q4.

International revenue was $170 million in the quarter, up 24% year over year or up 27% in constant currency.

Foreign exchange fluctuations had a negative impact on revenue of $4 million on a year-over-year basis and was roughly neutral on a sequential basis.

We continue to see very strong growth in our Asia-Pacific geographies.

Revenue from our US market was $397 million, up 2% year over year.

As we have shared with you previously, our two media customers reside in the US and continue to weigh heavily on domestic revenues.

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

Moving on to cost, cash gross margin was 77%, consistent with Q4 levels, down 1 point from the same period last year, and in line with our guidance.

GAAP gross margin, which includes both depreciation and stock-based compensation, was 66%, down 1 point from the prior quarter, down 2 points from the same period last year, and in line with our guidance.

GAAP operating expenses were $259 million in the first quarter.

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

Of particular note in the quarter, we recorded $7 million in nonrecurring restructuring charges for severance and impairments related to the organization realignment.

Excluding these items, non-GAAP cash operating expenses were $201 million, down $9 million from Q4 levels and at the low end of our guidance.

As always, we will strive to balance investments in the business to align with the expected near-term moderation in revenue growth rates.

Adjusted EBITDA for the first quarter was $234 million, down $4 million from Q4 levels from the seasonal revenue declines Q4 to Q1, and up $11 million from the same period last year.

Our adjusted EBITDA margin came in at 41%, consistent with Q4 levels, down 1 point from the same period last year and in line with our guidance.

GAAP depreciation and amortization expenses were $81 million in the first 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, consistent with Q4 levels and slightly below our guidance due to the timing of network deployments.

Non-GAAP operating income for the first quarter was $164 million, down $4 million from Q4 and up $1 million from the same period last year.

Non-GAAP operating margin came in at 29%, consistent with Q4 levels and down 2 points from the same period last year, and 1 point higher than our guidance given the strong revenue attainment and cost efficiencies mentioned earlier.

Moving on to the other income and expense items, interest income for the first quarter was $3 million, consistent with Q4 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 first quarter was $75 million or $0.42 of earnings per diluted share.

Non-GAAP net income was $118 million or $0.66 of earnings per diluted share, $0.02 above the high end of our guidance range.

Our better-than-expected earnings were fueled by higher revenues and continued efficiencies in the business.

For the quarter, total taxes included in our GAAP earnings were $38 million, based on an effective tax rate of 33.5%.

Taxes included in our non-GAAP earnings were $49 million based on an effective tax rate of 29.4% and in line with our guidance.

Finally, our weighted average diluted share count for the first quarter was 178 million shares, down 2 million shares from Q4 levels from our opportunistic increase in share buyback activity, and in line with our guidance.

Now I'll review some balance sheet items.

Days sales outstanding for the first quarter was 60 days, up 1 day from Q4 levels.

Capital expenditures in Q1, excluding equity compensation and capitalized interest expense, were $85 million and at the low end of our guidance for the quarter.

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

Cash flow generation continued to be strong.

Free cash flow was $108 million in the first quarter or 19% of revenue, a very strong result considering Q1 is our seasonally lowest free cash flow quarter.

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 $109 million on share repurchases, buying back roughly 2.2 million shares.

As we mentioned in our last earnings call, the Board authorized a new $1 billion share repurchase program through the end of 2018.

We have approximately $960 million remaining on that authorization.

And as we have discussed in the past, our overall aim is to deploy our capital to 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 multi-year capital allocation plan to offset dilution from equity compensation plans and to provide us with the flexibility to return more cash to shareholders, depending upon business and market conditions.

In summary, we are pleased with how the business performed in Q1 and we remain confident in the long-term prospects of profitable growth for the Company.

Looking ahead, we're projecting revenue from our top two customers to decline in Q2 and possibly the second half of the year.

As such, we're expecting slightly less sequential growth in the second quarter than we have historically seen.

We expect Q2 revenues in the range of $566 million to $582 million.

At current spot rates, foreign exchange fluctuations are expected to have a positive impact on Q2 revenue of roughly $3 million sequentially and less than $1 million compared to Q2 of last year.

At these revenue levels, we expect cash gross margins of roughly 76% and GAAP gross margins of 65%.

Q2 non-GAAP operating expenses are projected to be $206 million to $211 million.

As I've mentioned on the past couple calls, we have purposely slowed down the rate and pace of headcount additions and discretionary spending to align with our near-term top-line 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 of these items I just mentioned, we anticipate Q2 EBITDA margins of 40%.

And as I continue the message, we will strive to operate the Company in the 40% to 41% EBITDA range for the foreseeable future.

Of course, our ability to maintain EBITDA margins in this range 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 $73 million to $75 million.

Factoring in this depreciation guidance, we expect non-GAAP operating margins of 27% for Q2.

With the overall revenue and spend configuration I just outlined, we expect Q2 non-GAAP EPS in the range of $0.62 to $0.65.

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

This guidance also reflects a fully diluted share count of 176 million shares.

On CapEx, we expect to spend approximately $90 million to $98 million in the quarter, excluding equity compensation.

As always, we will strive to balance network investment against future revenue opportunity and continued network efficiency initiatives.

In closing, Q1 was a solid start to 2016, and we remain confident in our strategy and our ability to execute on our long-term plans.

Thank you.

And Tom and I would like to take your questions.

Operator?

(Operator Instructions)

Mark Mahaney, RBC Capital Markets.

Thanks.

You talk about the growth in the media segment of about 11%, ex the two largest contributors.

Could you talk about the trend in that growth ex those two largest contributors, and how we should think about the sustainability of that growth?

Is that a reasonable way to think about that segment ex the two large players going forward?

Thank you.

Good question, Mark.

Actually, that growth rate is consistent with the growth rates that we saw in Q4.

We've been in the double-digit range for a while.

Sometimes it'll be a little bit higher than that.

As we've shared in the past, that sometimes growth rates in the media business are affected by large software releases, a gaming release, or things of that nature.

But I think, generally speaking we expect that we could probably operate in the low double digits for the media delivery outside of those top two customers.

Thank you very much.

Rob Sanderson, MKM Partners.

Thank you.

A couple, one for Jim, one for Tom.

Tom, a question on cost reduction.

Many years of high growth in traffic volumes along with price breaks that you've been passing along.

How much has the Company been able to cost reduce traffic delivery over the years?

Is there a way we can compare cost per bit today compared to, say, five years ago?

I would think in the past it's something like Moore's Law, but is there any way you can attempt to quantify that?

And how do you think this compares to some of the generic CDN or some of the do-it-yourself efforts that you've seen over this timeframe?

And then a quick one for Jim.

Free cash flow, will Q1 be the seasonal low again this year, as it has in the past, or is there something unusual seasonally this Q1 for cash generation?

To the first question, we put a lot of effort in R&D to reduce our internal cost per bit, to deliver more bits per second per CPU, more bits per second per square foot of colo, for a kilowatt of power.

And then we pass on those savings to our customers.

So, I think as you look over time, every year we are able to offer significant cost reductions on a per bit basis to our customers.

So over five years the savings are really quite substantial.

We are very competitive when it comes to pricing for large traffic customers.

And I think we are very competitive with not only the other CDNs out there but also the do-it-yourself efforts that some of our largest customers have tried to engage in.

And you see this where some of our large customers have had do-it-yourself efforts in the past and then after a few years discover that Akamai is a lot more effective at it and charges them less than their internal efforts cost them.

So, then I traffic rose again, even though they've got do-it-yourself efforts.

On the question on free cash flow, as you know, free cash flow really depends on the couple things.

One, we are not an inventory-centric company, so other than profitability, receivable collections tends to be the driver from quarter to quarter if you see upticks or downticks.

Also, CapEx happens to have variability from quarter to quarter.

I would expect that this will probably still remain our seasonally lowest quarter, but it all depends upon capital expenditures.

And, as I said earlier, if we see demand that we need to do more network deployment, we'll do that.

I don't want to signal something and then later on if we are maybe a little bit lower than that.

It really depends on CapEx investments.

But I'd say, based on our current line of sight, it'll probably be the lowest seasonal quarter this year, as well.

Vijay Bhagavath, Deutsche Bank.

Yes, hi, Tom, Jim.

The question is on your security business.

We get this question from clients a lot saying, would the law of large numbers start impacting the security business, because it's primarily selling into DDoS and web application security versus the broader security opportunity.

I'd like to hear your thoughts there.

Thanks.

I'm not sure what you mean by the law of large numbers, but the attacks are certainly growing in size and sophistication, to the point now where any of the traditional defenses simply don't work.

You can't defend yourself by buying boxes and putting them in your data center.

You can't even defend yourself by buying a clean pipe from a carrier simply because of the scale of the attacks.

That's why Akamai has been uniquely able to defend a lot of the world's major enterprises against the largest attacks out there.

In addition, we're able to defend against the attacks that try to deface or corrupt a website, change the content in a way to embarrass the website owner.

And also we can defend against the attacks who try to steal data from the web application, like a credit card or information about transaction.

Going forward with our enterprise and carrier division, we are developing products that will protect enterprise employees, for example, from phishing malware kinds of attacks or enterprise data exfiltration attacks.

So, it's, I think, a very exciting future potential for us in security.

A quick follow-on, Tom.

Corporate video in big companies have these all hands meetings, town hall meetings where tremendous video volumes get generated in corporate networks, which is quite expensive.

Would Akamai have a play there in better managing or making corporate video and enterprises more efficient?

Thanks.

Yes, absolutely.

In fact, we have a product today through the Octoshape acquisition that supports corporate videos to offload their private network or their corporate network.

It gives a very high quality experience, very secure, without flooding the branch office network.

Thank you.

Colby Synesael, Cowen and Company.

Great, thank you.

Two questions, if I may.

The first one, I just have a point of clarification on guidance.

I thought I heard you say that you thought that the top two customers could further decline in the back half of the year.

I think the previous expectation was that they would drop at around 6% or greater in the second quarter.

I just wanted to clarify what I thought you might have said during your comments on guidance.

And then I have a follow-up question.

On the guidance, I'd say we're probably appropriately being cautious, to be frank.

We have good visibility within the quarter for these top two customers.

I'd say the visibility beyond the quarter is less, so what we're trying to do is be cautious in what we're telling you, that we certainly expect from Q1 to Q2, as we told you last time, that revenue volumes would decline for these top two customers.

I think what we're saying is that we're not 100% sure on the back half of the year, so we're being a little cautious in our projections that it could decline further.

There are things that could stabilize it.

There are things beyond that, depending upon different features and capabilities for these two customers, that could cause it to grow, as well.

But I'd say what we're trying to provide you is a level of consciousness, and that's the way we're looking at it internally.

To some degree, that implies, then, that these customers are on some form of month-to-month or short-term contract, that they have the ability to turn on and turn off service quarter to quarter.

Is that a fair interpretation?

No, it's not.

These customers are on long-term contracts, but these contracts are structured in a way that volumes can ebb and flow from period to period.

There are minimums that they need to hit, but volumes can certainly fluctuate to a point.

But these customers are on long-term contracts.

They're not on month-to-month contract.

Okay, great.

And then just my follow-up question, I think you had been looking for a head of sales for your web division.

I wondered if there is any update on that.

Thanks.

We are in the process of a search there, so no update.

Okay, great.

Thank you.

Thank you.

Sterling Auty, JPMorgan.

Thanks, guys.

Maybe just following up on the media side, taking the top two customers out, curious about the visibility.

You've often talked about talking with the customers around timing of software updates and different items that might move the needle in terms of volume.

How would you say your visibility in the rest of the customer base looks at this point of the year as compared to last year?

Honestly, it's similar to our top two customers, as well.

Our visibility within the quarter is certainly a lot better than our visibility for the remainder of the year.

There is certainly things that we know that are going to occur, things like the Olympics, things like presidential debates, and things of that nature, that will cause volumes.

There are certainly staged rollouts of software releases and things of that nature.

But I'd say we have very good visibility within a three-month window.

It just lessens in the back half.

And it's not for the top two customers, it's in general.

That's just the nature of the media business.

Got it.

Thank you.

Jonathan Schildkraut with Evercore.

I'm going to try to sneak in two questions, too.

First, I was wondering if you could give us a little bit more color on international.

It's obviously been growing really well and it's becoming a much more meaningful piece of your business.

It's harder to have visibility into the competitive landscape drivers, et cetera, as we look into some of the international markets.

I was hoping you might spend a second talking about that.

And then I'm curious because we've been doing a lot of work on Internet of Things, and the more I look at it, particularly around connected car, driverless car, things that require performance-sensitive information to make your way into the network, the Internet of Things is looking more and more like a DDoS, from my seat.

And I'm just wondering about your perspective for the role of Akamai in a world of Internet of Things.

Thanks.

Let me start, Tom, on obviously your comment on international growth.

Our international growth, you're right, has been very strong.

We grew 27% in constant currency in Q4.

It's grown particularly well in our Asia-Pacific geographies.

We've seen very strong growth across our Asia-Pacific markets.

As you know, when we began investing in incrementing the sales force, we were investing more in our sales resources outside the US than actually in the US.

As we've told you in the past, it takes time for a rep to ramp to productivity, and so I think you're starting to see the benefit of the investments that we've made.

So, we're very pleased with that.

From a competitive landscape perspective, there's still broad global competitors that you know who they are, and then there are local competitors in different markets.

But I'd say that we have fared very well and I think there's a significant opportunity to continue to grow internationally faster than actually in the US.

And to the IOT question, the proliferation of devices and the Internet of Things represents, really, a great opportunity for Akamai.

In particular, you mentioned connected cars.

We have great relationships with the world's major automotive companies.

They are, obviously, very interested in having fast and reliable communication with their cars and the devices.

And they are very worried about security, as you can imagine.

Not only denial of service but application layer attacks where somebody might try to gain control of the car, corrupt information on the car.

And that's a wonderful opportunity for our security services.

Great.

Thanks for taking the questions.

James Breen, Williams Blair.

Thanks for taking the question.

Can you just talk about the capital intensity overall -- you seem to have spent a lot of capital in 2015 in anticipation to some of the OTT buildout -- and how that's flowing through the cost structure now and how that would impact spending in the future.

Thanks.

Sure.

On CapEx, you're right, we were above our long-term model last year in 2015.

We signaled that we were about 19% of revenue.

It was all driven by incremental network CapEx.

As we saw for the quarter, that I think $85 million was about 15% of revenue.

We're certainly going to be dialing CapEx down in alignment with what we are seeing here, but I expect we will be back to our long-term model of 16% to 18%.

Again, we signaled that if we see demand in the back half of the year that requires us to do more buildout, we'll do that.

But I expect we should be in the 16% to 18% with network CapEx, which is the component that has the most variability, dialing back from roughly 10 percent of revenues last year to probably the in 8% range this year.

Thank you.

Mike Olson, Piper Jaffray.

Good afternoon.

I know you typically suggest that no one major event has an impact on revenue, but isn't there likely to be some degree a favorable impact from the Olympics in Q3 just given the favorable time zone and just increased consumption of these types of events online?

And then, secondly, you talked a bit about competition earlier.

There's been increasing chatter in recent weeks on competitive threats from Google and other players in the space.

Can you just give us your take on what we're seeing there and if anything is changing in your view?

Thanks.

Sure.

I'll take the first one and then Tom can comment on the competitive landscape.

I think we've definitely said historically that there isn't any one event that is a significant needle mover on revenue in a quarter.

We've never said that we don't garner revenues from those events.

And certainly events that last over multiple days generate more revenues that events that last for a day or a few hours.

So, you will definitely see revenue volumes as a result of the Olympics in our results.

You will see that.

But, again, it's not going to be a significant needle mover.

I would say very large software updates tend to be more of a needle mover than an event like that.

In terms of competition, I don't see any real change in the landscape there.

You're right, and you mentioned there's been chatter about Google and so forth.

But that's, I think, what it is.

The Google service is designed to provide delivery for applications that are on their compute and storage infrastructure.

In that regard, they're competing with AWS and Azure, for example, and we really don't see a real impact from that.

As you know, we have dozens of competitors and always have, and we differentiate ourselves based on our level of performance.

So, if you want your applications to be faster, whether you're on Google, Azure, or AWS, you would use Akamai to accelerate those applications.

If you want your applications to be secure, wherever you have them hosted, you'd use Akamai Kona Site Defender and our Prolexic Routed capabilities, and that will protect you from DDoS attacks and application layer attacks.

And if you want your video and media delivered with very high quality, whether you're using any of those cloud services to store the content or not, again, you'd use Akamai to do that delivery for you to get the high-quality video experience.

So, no fundamental change in the competitive landscape at all.

Thank you.

Siti Panigrahi with Credit Suisse.

Hi, guys.

Thanks for taking my question.

I just wanted to dig into your enterprise security business.

Enterprise division around $12 million revenue, almost doubled.

You talk about Bot Manager.

First question is, what feedback have you gotten on Bot Manager?

That's a pretty interesting product.

But, also, what's your plans to expand this business?

Are you planning to acquire more of these tuck-in acquisitions, or are you planning to build in-house products?

Okay.

First let me make it clear that Bot Manager is part of our web security business, and that's in the web division.

That product is built by the web division.

And the customer feedback there has been outstanding.

The capability to identify the bot type and then tailor the response based on the bot type is really unique out there and of high value to our customers.

We have some customers that see half of their requests are actually from bots.

And there's many different types of bots.

Some are friendly, some are very much not friendly, and there's those that are in between.

So, I would say the initial customer reaction is very strong.

That is a web division product.

Now, for our enterprise security products, we don't have any in the marketplace yet.

Our first product will be based on recursive DNS.

That is the capability that we do have in the market through our carrier partners for home use, and we will be bringing to market for enterprise use for later this year.

And that's designed to protect an enterprise from malware, from phishing attacks, and from data exfiltration attacks.

Now in terms of our strategy, I think you'll see us do a lot of development organically, and you'll also see us continue to make acquisitions.

And, as you know, recently we've made acquisitions with Xerocole and Bloxx, and they are in the enterprise security space.

Also, we've done organic development, taking the Xerocole capability for carriers and now in the process of bringing a product to market for enterprise security.

Thanks for that color.

Just a quick housekeeping question.

How much was the [D of D] revenue that you moved from media to Performance and Security this quarter?

Yes, I want to recall it was like $109 million.

We shared that at our IR Summit.

It's actually available on the Investor Relations.

Yes, but do you have anything for this Q1?

How much was that?

No, it's embedded in our overall results, but you can generally divide by 4. That's roughly speaking what the quarterly average is.

All right, thank you.

Mark Kelleher, DA Davidson.

Great.

Thanks for taking my question.

Just wanted to look at the over-the-top opportunity.

It's been a couple months since your analyst day.

We're a couple months further in the year.

Can you give us an update on what you are seeing there?

I would imply from your guidance on your top two customers that maybe that's still in limbo, but just wondered if you could give us an update on what you're seeing there.

Thanks.

The guidance from the top two customers really isn't related to OTT capabilities.

I think in general there's a lot of interest in the over-the-top space.

It was exciting to deliver the first major sporting event in the US in 4K.

That business is growing nicely for us.

I don't know of any particular fundamental change in the landscape that would cause a huge overnight increase in traffic.

But I expect to have steady and substantial growth over time with over-the-top.

So, the top two customers are unrelated to your expectations in OTT, just to be clear on that?

Currently, yes.

Okay, thanks.

Michael Bowen, Pacific Crest.

Thanks for taking the question.

I'm sorry, I've got to beat this dead horse one more time, but I'm getting questions over the transom here.

The 6% for the two DIY customers at the end of Q2, was that a 6% exit rate or an average for the first half, and then, therefore, are you talking about potential decline from an average 6% or an exit rate 6%?

6%, we shared that in Q4, that what we had said was that these two customers combined used to be about 13% of our revenues, and they have been declining.

And we said that we expected that they would probably decline to about 6% of our revenues.

Now, obviously, a percentage implies that you know what your other businesses are going to do.

So, to some extent there's a little bit of variability in 6%, whether it's 6%, whether it's 5%, whether it's 7%.

But we expect that the revenue volumes will decline in Q2.

And based on this guidance that we've provided at the mid point, that is roughly 6% of their revenues in the quarter.

In the second quarter?

That's correct.

Okay.

And then the back half could be conservatively a little lighter than that.

That's right.

Okay, very clear.

Thank you.

Michael Turtis, Raymond James.

Hey, guys.

Jim, can you comment on how you said that you'd be limiting investments at this point?

It does seem like the OpEx guide is pretty light, even with EBITDA margins where they are.

We continue to make the appropriate investments in the business that we think are necessary.

But Tom and I are managing the Company prudently, and we think that we want to manage the Company in the low 40s EBITDA range, which means that we're scaling back investments.

We are not scaling back investments that would jeopardize future growth and scale for the Company, but, yes, we are scaling back little investments relative to what we were doing in prior years.

And you can expect that we will continue to do that.

Again, we are still making very targeted investments.

We're making targeted investments in areas to help scale the network.

We're making targeted investments in areas of R&D and things of that nature.

So, we are still making investments in the business but we're just making them at a slower pace.

To be clear, we are growing headcount and growing business, it's just not at the rapid pace that you saw over the last few years.

There is still plenty of growth at Akamai.

The reason for asking is it seems, especially with everything you're doing with NAB, just having finished, and the BOC product having rolled out, it seems as if there's a lot that can be done in terms of end-to-end value creation for broadcast in areas you've dabbled in, you've had some participation in the past, whether it's ingestion transcoding, digital rights management, content management, areas of the broadcast supply chain.

And wondering whether or not it's important to invest there now and if you're ramping that up at all.

Yes, we are continuing to make investments.

That is one area that's very important for us.

And we believe there's a very large future in over-the-top video, so it makes perfect sense to invest in those areas and we continue to do so.

For example, the BOC is an area that we talked about.

Also, obviously, investing in web security, obviously investing in enterprise and carrier products, particularly enterprise products for networking and security.

And you will continue to see the investment and growth there.

Thanks a lot, Tom.

Thanks, Jim.

Heather Bellini, Goldman Sachs.

Great.

Thank you.

I had a couple questions, as well.

The first one is, you mentioned software downloads as a big driver, and I'm just wondering -- we saw some of the very large software downloads last September get about three-quarters smaller than they were in the past, and there seems to be a big focus on people reducing file sizes, there's been a lot of improvements in encoding.

I'm just wondering how you think about those initiatives and how that might impact traffic volume that you might see going forward versus when the files were much larger in the past.

And then I had a follow-up question.

Certainly for traffic, software downloads come in varying sizes.

You're right, that in some cases they're smaller for the reasons you outlined.

In some cases, they happen more frequently.

They are smaller but happen more frequently.

And it's not just software updates that are drivers of traffic volumes.

Video delivery is a driver of traffic volume.

Social media is a driver of traffic volume.

Gaming is a driver of traffic volume.

Software download activity is but one of several growth drivers on traffic.

You'll see variability in software traffic volumes based on frequency and size.

And what was your second question?

Just to follow-up on that, encoding was the other thing I mentioned.

Facebook's head of network engineering actually spoke at F8 and mentioned that because of improvements in encoding, they're actually able to reduce the size of their video files now by 20%.

So, that gets to the other thing.

There's file sizes and software downloads, but there also seems to be improvements in encoding that might be impacting some of the file sizes of video that used to get transferred versus what maybe they were two years ago.

So that's one thing that I wonder if you have a comment on.

And then the other would be, clearly everyone's asked about these top two customers and the trajectory in the back half of the gear.

What I'm interested in is, 12 to 18 months ago there was concerns over DIY and it was always talked about that you just get a better experience, which you do, using Akamai.

So, unlikely that these guys would make such bold steps to bring as much in-house.

There's some concern that we get from people that, what's to stop the third and fourth largest customers that you have now from embarking down the same path?

Are they just so far away from having the level of traffic at the top two that it's just not a viable opportunity for them?

Good.

Let me take those two questions.

The first one is, there's always improvements in video compression technology.

And I think the important thing to look at is the increase in bit rate because you need a higher quality picture, combined with the decrease in bit rate because you've got better compression.

You mentioned a 20% improvement in compression.

That pales in comparison to the increasing bit rates that we are seeing because people want a higher quality picture.

In fact, if you take the combination of state-of-the-art quality picture combined with state-of-the-art compression, and the CAGR of that net, for years it was growing but at a slower rate, and now we're seeing it actually accelerate on the cumulative growth rate.

So, taking the state-of-the-art compression combined with typical bit rates that people are watching, actually it's growing per minute of video watched, and growing now at a faster rate than it has in the past.

On top of that, you have people watching longer and more content moving online.

So, the net effect is actually much faster growth rate in aggregate traffic being consumed for video online.

You can take as an example, the Super Bowl stats that we gave.

We are seeing that kind of growth pretty much across the board in video.

Now, to your third question about DIY and can that go to the third and fourth largest customers.

In fact, our third and fourth largest customers have had DIY for over a decade.

In fact, one of them actually sells a CDN service, yet they still use us to deliver their content for their website, and they use us to deliver their videos.

They have very large websites and a very large video business, and they use us to deliver that despite the fact that they actually operate a CDN service, and have for the last decade.

The other provider uses us, as well, despite in-house efforts they've run over the years.

In fact, our share of their business has increased during this same period because they see the quality difference and the cost difference.

DIY can seem like a good idea at the time.

Maybe they can save some money bringing it in-house, or they think that, but then after a few years they discover that -- oh, my goodness, Akamai is doing it with a lot less cost and with a lot better performance.

So, our share has actually increased in the third and fourth largest customers.

There's not too many past the top four that actually can even afford to think about doing their own delivery.

Yes, we are experiencing some loss to DIY in our top two accounts now.

I think the timeframe for when that happens is bounded, as Jim said, the impact it will have on our business.

And then you'll see our cumulative growth rates return to where the norm of the rest of the business is.

Great.

Thank you.

Ed Maguire, CLSA.

Hi, good afternoon.

I'm intrigued by the role that your software on 100 million endpoints is playing in your ability to rein in costs across the network.

Could you talk about what you are accomplishing with that footprint of software and whether that is actually having the desired impact of helping you rein in costs of content delivery?

Yes.

When it is actively used, it substantially decreases our costs, and we pass a lot of that savings on to our customer that's making use of it.

The usage today depends on the customer.

Also, it helps us a lot with quality.

In fact, we used it in the broadcast at 4K, which is very high quality levels.

It really helps to have the client side software to enable that.

So, it makes quality better and decreases cost, and when we use it, it's a substantial decrease in cost.

Great.

Thank you.

Will Power, Robert Baird.

Great, thanks.

Just to follow up on some of the guidance commentary, Jim, I think you had alluded to limited second-half visibility.

I just wanted to clarify.

Is that more limited this year or is that fairly consistent with what you'd normally see this time of year as you think about the second half?

No, it's pretty consistent with what we've told you all along.

Our visibility within the quarter is certainly much better than our visibility out beyond that.

As I mentioned earlier, we know of specific events, like the Olympics, like a presidential debate, and we know of scheduled activities that customers have for potential gaming releases and things of that nature.

The visibility within a three-month window is certainly much better than beyond that, but it's no different this year than it was historically.

Okay.

That's helpful.

And then just maybe quickly on the security business, obviously, strong growth again.

Any way to quantify how important the new bot product was to that growth?

And any other color on the key drivers within that segment?

We haven't really seen revenue from it yet because we just launched it.

But there is substantial customer interest in that capability.

And I do expect it to start contributing to our revenues and revenue growth in security going forward.

But the 47% year-over-year growth, that's from the products we had before.

And Bot Manager and the other products in the road map will help sustain that growth rate going forward and help us grow revenues for the security products in the future.

Okay, thank you.

Sameet Sinha, B. Riley.

Yes.

Thank you very much.

A couple questions.

In terms of the enterprise business, you just put a senior executive in place as general manager there.

Your revenue growth is there, but it's still pretty small.

What are the key success metrics that you put in place for this business?

Obviously, you've been working on it for a couple of years.

At least in my opinion, it probably could have been bigger than what we had thought a couple years back.

So, if you can elaborate on that.

And the second question is, obviously we are seeing the DIY happening at a couple of customers.

What are the applications that are easy to bring in-house?

And in that context can you talk about OTT and does it have characteristics that make it very difficult to achieve in-house?

Thank you.

On the enterprise business, I think the success metrics would be around the products that we're in the process of bringing to market.

So, for enterprise security, that would be our recursive DNS service, which will be designed to block malware, phishing attacks, and blocking exfiltration of sensitive data from the enterprise.

We'll be watching that product later this year.

So, you would look to see -- and we'll be looking to see -- the adoption rate of that capability.

We will also be bringing to market early next year our cloud connected branch product, which is enterprise networking combined with a secure web gateway functionality.

And that's designed to make the enterprise network scale in a much better-performing way, in a much more cost-effective manner.

So, we would be looking to see the adoption rates there.

I think the potential in both of those areas is very large.

But you're right, we're at the very early stages and we have to see how successful we are with those products in the market next year.

In terms of DIY and the top two accounts, I think you would look at things that are easier to deliver.

For example, software, maybe videos on demand but short form.

It's not OTT.

And I think as you think about OTT, I don't see that as a DIY thing today.

It is much harder to do, particularly in the live and linear formats, particularly in the higher-quality that you'll want to have when subscribers are actually paying to view the content.

That's a whole different game.

There's a lot you have to do.

Today Akamai is in a great position to provide that quality, just one example being the first broadcast of 4K.

But in general sustaining very high bit rates, very low re-buffer rates at scale.

That's what you need for OTT delivery.

And that's why a lot of the companies that are doing OTT are turning to Akamai to do it.

Great.

Thank you.

Gray Powell, Wells Fargo Securities.

Thanks.

This is actually Priya Parasuraman in for Gray.

Just a quick one.

Could you talk about the traction you're seeing in the mobile performance solution set?

Thank you.

Yes, very good strong traction.

And we were very pleased to see that we now have crossed the 1,000 customer threshold for our Ion product, which, of course, delivers the best possible performance across all of your web assets but is really focused on mobile acceleration.

So, very strong traction there.

And, of course, that's not surprising.

As we talked about, today a lot of our customers have over half of their transactions going to mobile devices.

It is a particularly challenging area for performance, particularly when the mobile device is using a cellular network.

Ironically, that's where users expect to get the best performance.

So, I think that's why so many enterprises are turning to Akamai and buying Ion for their mobile assets.

Thank you.

Jeff Van Rhee with Craig-Hallum.

Great.

One real quick one for you.

Sales capacity as you enter the year, how are you thinking about sales capacity additions for 2016?

I think we said when we've shared before that when we started investing in a very significant way in sales a couple years ago, we were providing ongoing updates around how we were doing.

And then I think what we said is it's run rate now in the business and that it's not noteworthy to be talking about investments of a specific amount in any particular area.

You can expect that we will continue to make investments across all areas of the business, including go-to-market capability.

Okay, thanks.

Thank you, Jeff.

And thank you, everyone, for actually a very good set of questions this quarter.

In closing, we will be presenting at a number of investor conferences and events in May and June, and details of these can be found on the Investor Relations section of Akamai.com.

Thank you for joining us, and have a great evening.

Ladies and gentlemen, thank you for your participation.

This does conclude today's program, and you may all disconnect.

Everyone have a great day.