阿卡邁科技 (AKAM) 2016 Q4 法說會逐字稿

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

fourth-quarter 2016 earnings conference call.

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

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

Please go ahead, sir.

Thank you, Jonathan, and good afternoon, and thank you for joining Akamai's fourth-quarter and year-end 2016 earnings conference call.

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

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

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

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

These forward-looking statements included in this call represent Akamai's view on February 7, 2016.

Akamai disclaims any obligation to update these statements to further 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, please let me turn the call over to Tom.

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

Q4 was another strong quarter for Akamai with accelerated revenue growth and excellent earnings and free cash flow.

Revenue in the fourth quarter was $616 million, up 7% year over year in constant currency.

The strong revenue result was driven by robust seasonal traffic and media, the continued rapid growth of our Cloud Security Solutions, and the success of our recently launched new products.

Of particular note, revenue from our Cloud Security Solutions was $102 million in Q4, up 41% over Q4 in 2015.

Non-GAAP EPS for Q4 was $0.72 per diluted share, consistent year over year and up 8% when adjusted for the reinstatement of the federal R&D tax credit that benefited Q4 of 2015.

Cash generation continued to be strong with free cash flow of $106 million in Q4, bringing full-year free cash flow to $550 million, up 72% from 2015 levels.

As we discussed during our recent calls, our overall revenue growth rates in 2016 were lower because of the do-it-yourself or DIY efforts by few of the Internet's largest platform companies.

If we exclude the impact of Amazon, Apple, Facebook, Google, Microsoft, and Netflix from our results, then our Q4 revenue was $558 million, which is up 15% over Q4 of last year in constant currency.

Revenue for 2016 as a whole was $2.3 billion, up 7% year over year and up 15% excluding the six large Internet platform companies.

Our exposure to DIY in these accounts continued to diminish as they collectively accounted for less than 10% of our total revenue in the fourth quarter, down from roughly 16% a year ago.

As a result, our overall revenue growth rate accelerated in Q4 due to the continued strong growth of our core business.

As I look back at 2016, I am especially pleased with the success of Akamai's innovation engine.

We released several new products last year, including Bot Manager, Image Manager, and Enterprise Application Access, and their reception in the marketplace has been very positive.

Bot Manager, in particular, has proven to be our most popular new product in several years.

Bot Manager identifies nearly 1400 types of bots and enables our customers to customize their response to requests based on the type of bot.

We sell Bot Manager across all our major verticals and for a variety of uses.

I recently spoke to one major enterprise that is saving many millions of dollars per year because of Bot Manager's ability to identify and mitigate price scrapers.

Our recent acquisition of Cyberfend is intended to further enhance Bot Manager's market-leading capabilities by providing even greater defenses against credential abuse.

For many of our customers, a large fraction of the login attempts are from bots, checking to see if stolen user credentials are valid on their sites.

Validated credentials are then sold to criminal organizations for exploitation.

By incorporating the Cyberfend technology into Bot Manager, we can more effectively stop these attacks and tell our customers which user IDs have been compromised.

Our new Image Manager solution has also gotten off to a very strong start in the market.

Image Manager automatically optimizes images by creating and delivering the right sized image for each user in real time based on the device type, browser type and quality of connection.

The solution enables our customers to accelerate their time to market, improve performance and conversion rates, especially for mobile apps, and also to reduce their cost.

Last year, we formed our enterprise and carrier division, and I am happy to report that we are now entering the market with two exciting new products to improve enterprise security: Enterprise Application Access and Enterprise Threat Detection.

Using technology acquired from Soha Systems in October, Enterprise Application Access or EAA addresses the growing need for businesses to more easily and securely manage application access for a growing mix of users with different risk profiles.

EAA does not require enterprises to poke holes in their corporate firewall to enable access, which greatly improves security over traditional BPM solutions.

EAA is also much easier to integrate and use than traditional remote access solutions.

Close on the heels of EAA is our new Enterprise Threat Protector or ETP service.

ETP is now in beta with 15 customers.

It helps companies block access to malware sites and data exfiltration botnets.

Just like EAA, Enterprise Threat Protector is very easy to set up.

Unlike most enterprise security products, ETP can be deployed and configured in under 30 minutes.

Nearly all of the customers in our beta program have been able to get it up and running totally on their own.

EAA and ETP are attractive solutions for a wide variety of enterprises, providing Akamai with an opportunity to pursue new customers and verticals.

For example, manufacturing companies will be able to use ETP to block threats without needing to deploy and maintain on-prem hardware.

In addition to our successful new product introductions, our core business also remains strong in 2016, with especially robust growth in our OTT business.

Following a record-breaking Euro 2016 and Rio Olympics, we set a new record for a news events on the night of the US elections with 7.5 terabits per second of peak delivery.

Then during the holiday season, the Akamai platform achieved a new traffic record of 46 terabits per second, doubling our 2014 peak of 23 terabits per second.

The global adoption of OTT has continued at a strong pace, not only in the US, but also in EMEA and especially in Asia and Latin America.

Our experience and expertise in streaming video at scale with quality and reliability around the world means that we are in an excellent position to benefit from the increasing demand for high-quality content online.

Of course, security remains the most pressing concern for many of our customers as the scale and sophistication of cyber attacks continued to escalate, along with a potential for disruption and damage.

In 2016, the number of DDoS attacks launched against our customers grew by 75% over 2015.

We are very proud of our excellent track record of successfully defending our customers from some of the web's largest and most malicious attacks.

We believe that our unique approach of leveraging a distributed network of servers at the edge of the Internet where there is enormous capacity continues to be a critical differentiator for Akamai.

Just this morning, we announced our new Web Application Protector service, which is designed to provide online businesses with a low touch way to protect their websites from the most common attack.

We also announced enhancements to our flagship Kona Site Defender solution to defend APIs from a wide range of both DDoS and application layer attacks.

APIs are emerging as a popular target for attackers as the usage of mobile devices continues to grow.

Over the last four years, we have grown our cloud security business from little more than an idea into a $400 million market leader.

We believe that our remarkable success in cloud security demonstrates that with prudent investment, we can create substantial, new and profitable revenue streams beyond our core CDN business.

As we look to the future, we see several opportunities with similar growth potential.

And so we are planning to increase investment in 2017 to capitalize on these opportunities to further accelerate our long-term revenue.

Our goal is to replicate the success that we've had with our cloud security business in other adjacent areas where the scale, resiliency, and security of our unique distributed edge platform can enable us to provide compelling cloud solutions to our customers.

This investment strategy will pressure margins in the near-term, but we believe it will help accelerate revenue growth in the longer term.

Of course, as always, we will continue to keep a close eye on overall expense and to carefully track performance as we grow the business.

We will talk more about our plans for product expansion at our Investor Day on March 14 and as we make key investments.

In summary, I remain confident in our business strategy, our market position, and our ability to execute on the significant opportunities for growth that lie ahead.

I have never been more optimistic about our future.

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

Q4 revenue came in above the high end of our guidance range at $616 million, up 6% year over year or up 7% adjusted for foreign exchange movements.

Revenue was up a healthy 15%, if you exclude the six large Internet platform customers Tom just mentioned.

Revenue growth continued to be solid across the business with the overachievement versus our guidance driven by a higher-than-expected uptick in holiday season traffic with our media solutions and customers.

I mentioned in our last call that holiday season traffic could play a large role in where we would land relative to our fourth-quarter guidance and it did.

Media-related traffic was particularly strong in the quarter.

Before I get into the revenue details, please note that all revenue growth rate references will be in constant currency.

Revenue from our Media Delivery Solutions was $196 million in the quarter, down 10% year over year, but up 8% excluding our large Internet platform customers.

We saw healthy seasonal traffic growth in both our gaming and software download verticals and continued robust growth in video delivery.

Turning to our Performance and Security Solutions, revenue was $367 million in the quarter, up 17% year over year.

Within the solution category, we saw solid growth across all major product lines.

As Tom mentioned, we have been seeing strong traction with our recently launched Image Manager and Bot Manager solutions, and we have continued to see significant growth and demand for all of our cloud security offerings.

Fourth-quarter revenue for our Cloud Security Solutions was $102 million, up $0.41 year over year, capping off another tremendous year of revenue growth and customer adoption of our security solutions globally.

Exiting Q4, our security business now has an annualized revenue run rate of over $400 million.

We are very pleased with the growth and execution of our cloud security business over the past few years.

This growth was driven by targeted product innovation and go to market resource investments, as well as a very successful acquisition.

We plan to maintain this aggressive investment posture to further broaden not only our cloud security offerings but also our web performance and emerging enterprise solution capabilities where we see substantial long-term growth potential.

Finally, revenue from our services and support solutions was $53 million in the quarter, up 14% year over year.

Turning now to our Q4 customer division results, revenue from our web division customers was $300 million, up 14% year over year.

We continue to see solid growth in this customer base, particularly with our cloud security offerings.

Revenue from our media division customers was $301 million in the quarter, roughly flat year over year, and up 15% excluding the impact of the six large Internet platform customers.

This strong growth rate was driven not only by media division customers driving more holiday season traffic, but also from upgrading and penetrating more of Akamai solutions deeper into this customer base.

Finally, revenue from our emerging enterprise and carrier division customers was $15 million in the quarter, up 26% year over year.

Moving on to our geographies, sales in our international markets represented 31% of total revenue in Q4, consistent with the prior quarter.

International revenue was $193 million in the fourth quarter, up 19% driven by continued strong growth in our Asia-Pacific region.

Foreign exchange fluctuations had a negative impact on revenue of just under $2 million on a year-over-year basis and a $6 million impact on a sequential basis as the dollar strengthened significantly through the quarter.

Revenue from our US market was $424 million, up 2% year over year.

If you exclude the large Internet platform customers, which are based in the US, revenue growth was a solid 13% across the rest of the business.

Moving on to costs, cash gross margin was 77%, up 1 point from Q3 levels consistent with the same period last year and in line with our guidance.

GAAP gross margin, which includes both depreciation and stock-based compensation, was 67%, up 2 points from Q3 levels, consistent with the same period last year and a point higher than our guidance due to the strong revenue achievement.

GAAP operating expenses were $289 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 $230 million, up $23 million from Q3 levels.

This was above the high end of our guidance, driven by increased year-end commission costs associated with the revenue overachievement, as well as a significant uptick in litigation spend associated with our Limelight patent infringement cases.

Moving into 2017, we expect to see similar elevated levels of litigation spending.

Adjusted EBITDA for the fourth quarter was $247 million, up $9 million from Q3 levels and $10 million from the same period last year.

Our adjusted EBITDA margin came in at 40%, down 1 point from Q3 levels, and from Q4 last year, and in line with our guidance.

GAAP depreciation and amortization expenses were $84 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 $74 million, consistent with Q3 levels and at the low-end of our guidance due to the timing of some network deployments that shifted into Q1.

Non-GAAP operating income for the fourth quarter was $174 million, up $10 million from Q3 levels and up $6 million from the same period last year.

Non-GAAP operating margin came in at 28%, consistent with Q3 levels and down 1 point from the same period last year and at the high end of our guidance.

Moving on to the other income and expense items, interest income for the fourth quarter was about $4 million, consistent with Q3 levels.

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

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

Moving on to earnings, GAAP net income for the fourth quarter was $92 million or $0.52 of earnings per diluted share.

Non-GAAP net income was $126 million or $0.72 of earnings per diluted share.

$0.02 above the high end of our guidance range driven by higher revenues and a slightly lower tax rate.

Adjusting for the reinstatement of the R&D tax credit in Q4 of 2015, earnings grew 8% year over year.

For the quarter, total taxes included in our GAAP earnings were $34 million based on a Q4 effective tax rate of 27%.

Taxes included in our non-GAAP earnings were $50 million based on a Q4 effective tax rate of 28% and coming in about 2 points lower than our guidance due to a higher mix of foreign earnings.

For the full year, the 2016 non-GAAP effective tax rate was just above 29%.

Finally, our weighted average diluted share count for the fourth quarter was 175 million shares and in line with our guidance.

Now we will review some balance sheet items.

Day sales outstanding for the fourth quarter was 54 days, down two days from Q3 levels.

Capital expenditures in Q4, excluding equity compensation and capitalized interest expenses, were $78 million and slightly below our guidance for the quarter, primarily due to the timing of network buildouts that moved into Q1.

For the full-year 2016, capital expenditures came in at 14% of revenue and below our long-term model as we grew into our existing capacity from the significant 2015 buildouts.

We expect 2017 capital expenditures to be back in line with our long-term model range.

Cash flow generation continued to be strong in Q4.

Free cash flow was $106 million in the fourth quarter and $550 million for the year or 24% of revenue.

Our balance sheet also remains very strong with roughly $1.6 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 $1 billion.

During the quarter, we spent $79 million on share repurchases, buying back roughly 1.3 million shares.

For the year, we spent $374 million, buying back approximately 7 million shares.

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

Looking ahead to the first quarter, we expect to see a normal sequential revenue decline due to seasonality, perhaps a bit more pronounced than in recent years due to the particularly strong media performance this past quarter.

In addition, we expect further currency headwinds from the strengthening US dollar over the past few months.

At current spot rates, foreign exchange fluctuations are expected to have a negative impact on Q1 revenue of just under $4 million sequentially and $5 million compared to Q1 of last year.

Factoring in both of these variables, we are expecting Q1 revenue in the range of $596 million to $610 million.

At the higher end of this range, year-over-year growth would be 8% in constant currency, a slight acceleration from Q4 levels.

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

Q1 non-GAAP operating expenses are projected to be $217 million to $222 million, down seasonally from Q4 levels, primarily due to less commission spend and fewer customer events.

Factoring in the cash gross margin and operating expense expectations I just provided, we anticipate Q1 EBITDA margins of 39% to 40%.

And as mentioned earlier, we plan to significantly increase our investment levels in 2017 in new product innovation, service delivery enablement, and platform scaling, important areas we believe will help us enable to drive accelerated sustainable long-term growth and scale.

And while we're not providing specific guidance beyond Q1 during this call, we want to be transparent about our plans to grow investments throughout 2017 at a faster pace than revenue growth.

Our goal is to accelerate the top-line growth back into double-digit levels in the longer term.

We are confident the success we have had with our cloud security investment strategy can be duplicated in other areas of the business, most notably in our new and emerging enterprise solutions portfolio.

We also plan to broaden our offerings within our security, Web performance, and media solution portfolios.

This deliberate investment strategy will result in EBITDA margins in the high 30s% in 2017 for the foreseeable future.

Moving now to depreciation, we expect non-GAAP depreciation expense to be between $74 million and $76 million.

Factoring in this depreciation guidance, we expect non-GAAP operating margins of 27% to 28% for Q1.

And with the overall revenue and spend configuration I outlined, we expect Q1 non-GAAP EPS in the range of $0.66 to $0.69.

This EPS guidance assumes taxes of $48 million to $51 million based on an estimated quarterly non-GAAP tax rate of just under 29.5%.

This guidance also reflects a fully diluted share count of 175 million shares.

On CapEx, we expect a significant uptick from recent spending levels in both the first quarter and throughout 2017.

This increase is driven partly by some platform deployments that shifted from Q1, but mostly by our desire to continue expanding our secure delivery network and increasing capacity to support our rapidly growing security business.

We expect to spend approximately $90 million to $96 million, excluding equity compensation.

It's also worth noting that our planned investment increases in product innovation and scaling our platform will impact CapEx as well as OpEx as we capitalize more R&D development.

As such, we expect CapEx spending to return to our long-term model range of 16% to 18% of revenue in 2017.

And with the increasing CapEx, you will also see an uptick in depreciation levels throughout 2017.

In closing, Akamai accomplished a great deal in 2016, and 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 at our upcoming Investor Summit in Boston on March 14.

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

Operator?

(Operator Instructions) Mark Mahaney, RBC Capital Markets.

You talked about the contribution from the three newer products: Bot Manager, Image Manager, and the Enterprise & Carrier Division products.

Could you help us think through the revenue ramp?

In other words, how widely sold across the verticals are all three of those products, and when do you think that they will be at a point where they will be fully penetrated?

Does that take six months, 12 months, two years?

Thank you.

Yes, I'll take that.

As you can imagine with new products, it is going to take a fair amount of time to actually fully penetrate them into the installed base.

But, as Tom said, for both of these products, Bot Manager launched earlier in the year, Image Manager launched midyear.

Bot Manager, in particular, this is the fastest-growing product we've had in a long, long time.

And so the penetration is still early days, but it was a reasonably meaningful contributor to growth in Q4, in particular our performance and security portfolio.

You will see that continue to ramp and further penetrate in 2018, but it's probably going to take a couple of years to see it fully penetrated.

As an example, for cloud security, which we have been a market now for a little over four years, I think about 38% of our customers buy our Cloud Security Solutions.

So still a lot of ramp to go, even in cloud security.

So it takes a while to have those customers ramp, but you can certainly see that we started a few years ago from roughly a few million dollars in cloud security to now over $400 million.

So I think these new product offerings are kind of again proof points to Tom's comments that innovation is alive and well, and there's more to sell into the installed base to accelerate growth in the Company.

Thank you, Jim.

Edward Maguire, CLSA.

I was wondering if you could discuss the competitive environment for your anti-DDoS services, particularly with AWS getting into the market.

What sort of competition are you seeing there, and are there also other opportunities where you are seeing cross-selling and attach for your -- for the anti-DDoS services?

We are in a good position with the DDoS solution because of our unique distributed platform.

We are in a position to defend and absorb the largest attacks out there, and we've got a great track record, and there's a lot of other folks that offer scrubbing services or DDoS services of one kind or another, and they have all pretty much had high-profile failures.

AWS, we don't see really much in the marketplace for DDoS.

It would be a different kind of approach.

So it's not -- we'll see that as being a significant threat to the DDoS business, and DDoS is relevant for most of our customer base.

So there's a lot of cross-selling that takes place, and the security services in general we're leading with a sale there and a lot of new accounts where they will join with Akamai because either of our -- either our DDoS solutions or our application layer protection capabilities with Kona, and that brings new customers to Akamai.

Great.

And just to follow up on the -- with the declines in revenue from the Internet platform customers, do you believe that you have reached a point of stability where the predictability of the migration away from your platform has reached an equilibrium of sorts?

Yes, you know, as we talked about, they are now collectively less than 10% of our revenue, so the future impact is obviously limited.

And we expect to see some further decline, but nothing -- the scale that we have seen over the last one to two years.

Great.

Thank you.

Matthew Heinz, Stifel.

Just wondering if you could go into a bit more detail about some of the enterprise opportunities you are investing in outside of security, I guess specifically on the web performance side, and how you see those markets transpiring today from a sales standpoint, whether there's headcount additions you need to make to broaden the distribution, and how those products are attaching alongside the security solutions?

Right.

Well, as we talked about with the Image Manager, that is a web performance solution.

Very pleased with the early traction there.

The new Ion 3 solution has an SDK for substantially improved performance, especially for mobile devices and pre-positioning of content, and as we make major investments this year, we will talk about those as we make them.

We move into a new product area, then we will talk about it then.

Of course, it will be important that it is synergistic with the existing business and that it can leverage Akamai's unique distributed platform.

Okay.

Thanks.

And then just one other on the share guidance.

It looks like you're looking at a flat year-over-year share count.

I'm just wondering if the increased CapEx expectations, is it all limiting the buyback in 2017 relative to what you repurchased in 2016?

Not at all, not at all.

Our balance sheet has a lot of firepower to do M&A, to do CapEx purchases, and to do our share buyback.

And as we talked about, our share buyback is intended to offset dilution, but it is a programmatic trade, and it buys more shares when the stock price is lower, it buys fewer shares when the stock price is higher.

But we have ample firepower to do both CapEx purchases, share buyback, and M&A.

Okay.

Thank you very much.

Sameet Sinha, B. Riley.

I can understand if you don't want to talk about some of these new adjacencies that you are entering into, but can you give us what the profile of the Company would look like?

Are these products primarily SaaS-based so that you have an initial CapEx spend that maybe at a later time that CapEx spend goes down, and you can get a -- what you listed as a recurring revenue stream.

And the second question would be any initial take on net neutrality?

Obviously the new administration means taking (inaudible) stance.

Where do you think you will stand on that, and any view to benefit from it, or it's a potential negative at some point down the line?

Yes, of course.

We're in a business with recurring revenue streams, and so any new areas we would go into you would think would be consistent with that model.

So I wouldn't expect any major deviation there.

In terms of acquisitions we've done over the past, there's technology tuck-ins.

Sometimes there is a product like Prolexic that is an adjacency that fits very well with our existing business but is a new product that is very synergistic.

And -- oh, you know occasionally over our 20-year history, we have done some rollups.

That's less frequent, I would say.

And I don't think there would be a major difference in the kinds of things that we are planning to do this year from what we've done in the past.

With net neutrality, I think there's going to be changes there.

With the new administration, I think a lot of the rules that existed before may go away, and I don't think that really makes much difference to our business.

We weren't regulated in the first place, and I don't see anything coming there that would be bad in any way for Akamai.

Thank you.

Greg McDowell, JMP Securities.

Hi.

This is Rishi Jaluria dialing in for Greg.

Thanks for taking my question.

Just wanted to follow-up on the headcount question I was asked earlier.

We did see a bit of an uptick in hiring this quarter.

With the increased product development focus, that may be a little bit more of a vertical focus within the enterprise division.

How are you thinking about headcount going forward, not just for the next quarter and later into 2017, but kind beyond that?

Can you see a return to normal headcount growth that we've seen in the past, or is it going to be a little more deliberate?

And I have one follow-up.

We're certainly going to see a step-up in headcount investments.

You are right that we had a little bit more headcount ramp here in the fourth quarter, but we hired for the year about a little over 400 people, I think, including some acquisitions.

I think in years past we averaged more than 1000 hires per year.

I think what you're going to see is that the step-up in investment is that our headcount are probably going to be more similar to what it has been historically than it was this past year.

And, as I mentioned, it's going to be very heavily -- it is going to be targeted, but very heavily focused in new product innovation.

There is also investment we're going to need to be making in our service delivery enablement that I mentioned that our services business is growing quite rapidly, and we're going to be making investments and continuing to scale the platform.

So you should expect headcount more similar to what it's been in the past than basically what it's been in 2016.

Okay.

And then just kind of a quick follow-up, Jim, you did say just in terms of looking at the Q1, we can expect a bigger sequential decline from Q4 to Q1 on the revenue basis than typically we have seen.

I just wanted to understand how much of that is being driven by, like you said, the outperformance on the media side, and how much of that is continued expectation of -- and I know it's not as significant before, but just the continued declines in revenue from the top six Internet platform customers?

Yes, as Tom mentioned that the -- we probably will see continued decline in the Internet platform customers in the first quarter, one, because seasonally they decline Q4 to Q1 anyways because they also have a seasonally stronger Q4.

But I would say the bigger component of it is not that, and it's more that we had a very strong Q4 for media.

Media traffic was seasonally very, very strong.

We had a large number of gaming releases.

A fair number of software download events that -- the media business can be a bit spiky that way.

So some of -- I would say the bigger part of the sequential decline is driven by the media business.

Certainly not the Performance and Security Solutions.

Got it.

Thank you so much.

Vijay Bhagavath, Deutsche Bank.

A consistent question I hear from clients is whether Akamai is an episodic growth story, and I think where they are coming from is the media delivery business does extremely well during live events.

We saw recently the elections holiday season on -- I think what they are looking for is any data points or trends you could help us with to get all of us comfortable about this low to mid teens (inaudible) for the media business now that we are lapping the DIY customers.

And 2017 is a prime number of years.

So how would we feel comfortable with no major life events in the calendar this year?

Thanks.

Yes, I don't know if it has too much to do with prime numbers.

Even years, there are more events, but as we talked about in the past, any given event gives us some revenue, but it's not really swinging the needle.

Now sometimes with Olympics and so forth, new devices will come out, and someday like VR, for example, we started to do some of that, and that can drive traffic levels on a more sustained basis afterwards.

But I wouldn't read a lot into that, and I think the media business is very healthy.

We are seeing very strong growth in OTT, very strong growth in our gaming customers, and just a modular to very big -- the six platform companies that are doing more of their own.

The media business has been very good.

I think it's also fair to comment that even outside of media that I think the Company is certainly much more diversified now than it was even a year ago or two years ago.

Our Performance and Security business now represents 60% of the Company's revenue.

You include services -- call it, 70% plus of the revenue.

So media is becoming a much smaller percentage of the Company's revenue, and we know that the media business can have variability just given the nature of the business.

So I think what you're going to see going forward is that you're going to see more stability in the Company's growth rates.

I do think that there is an opportunity for media to reaccelerate growth rates, but I think the catalyst for that is really going to be a significant uptick in over-the-top viewing.

I think we're seeing steady growth in that area right now.

But if you see that become more mainstream, I think we are poised to benefit significantly from that.

Perfect.

A quick follow-on would be, do you see any cross-sell, upsell synergies between your gaming customers and DDoS?

A common complaint from gamers is performance is weak because of DDoS attacks, packet attacks, etc., and I think they complain no matter what, but still do you see any synergies in gaming and the security business?

Thanks.

Yes, you're right.

I think the gaming vertical is probably as attacked as any.

And so they are large adopters of DDoS prevention services from Akamai.

Perfect.

Thanks.

Keith Weiss, Morgan Stanley.

Nice quarter, guys, and thank you for taking the question.

Following up on OTT, just help us mark to market.

You talked about the steady growth.

One, are we getting to a point where it's actually materially driving the numbers in either media or performance in terms of that is a significant driver of revenues today?

And two, when we think about the uptick in CapEx spend into 2017, is that by any means based upon an anticipation of more OTT revenues, but is it more so the traditional businesses that are growing up in CapEx?

Yes, I will parse that.

So assuming on the OTT side, we are seeing very steady growth in OTT.

It has been kind of -- it's been that way for some time, but it's steady growth.

So it's much more consistent growth in over-the-top than, say, gaming or software downloads, which tend to be much more variable based on games they get released or software updates that occur.

So -- and I would say that has been the bigger catalyst driving growth in the media business that those -- the gaming and the software download area tends to be much more spiky, and you will have surges at times and then it won't at other times.

So I think the catalyst for growth in the media business is going to be OTT.

I don't think you're going to see the catalyst -- you may see even a catalyst, as Tom mentioned, as you see more VR and things like that in the gaming space that require performance to work well.

I think that between things like that and OTT, that is going to be the cause of re-acceleration in the media business.

And on your CapEx question, I'm glad you asked because we certainly are not trying to signal that we are doing a buildout for some anticipation of further OTT.

Actually the buildout that we are doing is, as you can imagine, our security business now is on an annualized run rate of over $400 million.

It is rapidly growing.

And so there's buildout we are doing to support our security business, and there is also buildout that we are doing with our secure delivery network.

More customers want to have their traffic served over a secure delivery network, so we are building out capacity in that area.

So it's not -- it's really for other parts of the business.

It's not so much for the media business.

Excellent.

Thank you.

That's very helpful.

Siti Panigrahi, Wells Fargo.

Thanks for taking my question.

On the security business area, you mentioned it is already $400 million run rate, or also you invested -- you made a few tuck-in acquisitions the second half of last year and also introduced new products.

I'm wondering how much -- how big is an opportunity at this point to cross-sell this within your installed base?

How much penetrated at this time, and how sustainable is this 40% growth in security business?

And I have a follow-up.

Well, the cross-sell opportunity is very strong, and as I mentioned earlier, we also entered new accounts leading with security quite often.

So it's good both ways.

Growing at 40% is really great to see.

That obviously gets harder as the numbers get larger, but we are excited about Bot Manager and the Cyberfend acquisition, as well as the new products that we are bringing to market in enterprise securities.

So that's an area where we will be continuing to make investments in order to maintain strong growth rates.

And with this new introduction of this new product and acquisitions, are you making any changes to your go-to-market strategy?

What are the other investments you are planning to do?

With the enterprise -- the new enterprise products, we have an overlay team, but we expect with those products that our existing salesforce can sell them.

They are both easy to explain and, as I mentioned, easy to use and integrate and get going.

So I think our existing salesforce is going to be able to sell those, and right now we are helping them with an overlay.

Thank you.

Colby Synesael, Cowen and Company.

You mentioned to your -- you are obviously going to be investing in the business, and for the year we should see EBITDA margins in I think you said the high 30s%, and I think you also mentioned that the intention is to get back up to double-digit growth.

So I guess my question is for the Company to continue to grow at double-digit growth beyond 2017 into the next years hopefully, do you think that you have to remain in the high 30s% and, therefore, that's the new long-term operating margin for the business or EBITDA margin for the business?

Or do you think this is more of a one-time investment through 2017, and then as we go into 2018 and beyond, we can potentially get back up to that 40% type EBITDA margin?

Thanks.

Thanks for the question, Colby.

We will cover it more at the upcoming Investor Summit, but I still think the long-term model for the Company in the low 40s% is the right one.

I do think that what you're going to see in 2017 and I said for the foreseeable future because I think you're going to hear in 2017, you're going to hear about new product adjacencies that we're going to enter.

And I think what you're going to see is we're going to make investments in those areas.

Those investments are probably going to extend beyond 2017.

And so I think the interim model for the Company, not the long-term model -- I think the interim model for the Company is going to be high 30s%.

But I do think that once those businesses get to a level of scale -- because they will be early-stage businesses.

I think once they get the scale, I think we will be able to get the Company model back to the low 40s% EBITDA, but I think that even beyond 2017, we tend to operate the Company in the high 30s%.

And I think that given the nature of the adjacent areas, I think that they have significant opportunity for EBITDA that's more like our performance in security EBITDA, but obviously it's going to take time for those businesses to ramp to be able to realize that.

And I think what we want to do is we don't want to constrain investment?

We want to make sure we are investing to capitalize on that because now is the opportunity.

Great.

Thank you.

James Breen, William Blair.

Just wanted to clarify one thing and then just follow up with a question.

On the CapEx, you talked about it significantly going up, but still within the 16%, 18% range.

That's my understanding?

Yes, yes.

We were 14% in 2016.

We will be back in 16% to 18% range in 2017.

Great.

And then just on new sales and where the revenue growth is coming from, as you look across security performance and media as three separate segments, is it adding new customers, is it existing customers taking more services, and does that differ across those segments?

Thanks.

Yes, I would say that the -- more of the growth has been coming from selling more to our installed base.

We have been able to take the offerings that we have and further penetrate them into the installed base.

I think Tom is right that security has been a product category that we've been able to penetrate with new customers.

And then once you get in, you can land and expand them.

You can expand it to the other offerings, but I would say more of the growth to date has come from penetration at the installed base, and there is still a significant opportunity to do more there.

I mentioned earlier that 38% of our customers buy security.

So that means there is an opportunity for 62% of the customers to actually buy one of our security solutions.

And so I think you're going to see that we're going to further penetrate the offerings, and I think as we bring more innovation to the table, there is more of an opportunity to sell more into the installed base.

And I think you're going to see us do more in the way of new customer acquisition in our land and expand model, and I think some of the new offerings are actually going to help us with that.

Great.

Thank you.

Will Power, Baird.

Just maybe come back on the security area, Tom, you referenced the strength in Bot Manager, that being one of the most successful newer products you've had in the last couple of years, and you have got a couple of the new Enterprise Security products, which I realize are early, but I wonder if you can just help us maybe frame how we should think about the market size opportunities for each of those, Bot Manager and Enterprise, perhaps relative to your DDoS market and what you're doing in securities today?

I think they're very large.

Bot Manager fits in with our Kona Site Defender in the web security product space, and Bot Manager's market is at least as big as Kona, and we're seeing that in terms of the ARPUs with customers that are adopting that.

EAA and ETP are on the Enterprise side, and that is a new market for us to go into.

That's a market that has traditionally used devices that are purchased by the IT manager, operated in the private network.

I think, as we go to the future, you are going to see those capabilities sold as cloud services in a recurring revenue market.

We are bringing those kinds of products to market now to help that fundamental change in enterprise architecture and enterprise security.

In the long run, I think the services for enterprise networking and security have a bigger TAM than web delivery and security.

Of course, it's just at the beginning, so it will take a long time to catch up.

But there's a lot more money spent in enterprise networking than there is in content delivery.

And I think the enterprise -- the term often you will hear in the industry is enterprise networking is turning inside out, and I think you'll be seeing the adoption of cloud services replacing a purchase of devices operated by the IT manager and the WAN.

Thank you.

Michael Turits, Raymond James.

Can I see if we can put -- maybe put a finer point on the top six question.

I know you said it would decline in 1Q.

Is 1Q the point where it bottoms as a percentage of revenue?

And is there any of the -- especially the top four because those are the material ones that might be up for renewal later in the year where there might be some risk to that bottoming out of those six as a percentage of revenue?

As we talked about, I think as the percentage of revenue, we expect or are certainly prepared to see a decline in percentage of revenue.

First, you have the rest of the business, the core business over 90% growing at a very strong clip, and I think these six, of which there's really three that are larger today, quite possibly could decline in the revenue they pay us, which would mean their percentage would continue to decrease.

And that is -- as we look to the future, that is the way we are thinking.

Of course, we're going to do everything we can to maximize revenue in those accounts.

I think we provide them tremendous value, and three of them are still sizable customers and I think will always be sizable customers for Akamai.

And then as I said, any -- of the top four -- I guess the top three are the ones that you are focusing on that would be a risk in the back half of the year as far as renewals?

You know, I don't think there's so much of an issue there, and the impact that anyone of them can have is now much less than it used to be.

So I don't think that's an issue really to be thinking about.

I think the key is they are less than 10% today.

We are anticipating further declines certainly as a percentage of revenue through the year and potentially in the future.

But I don't think there's any giant event in a single quarter associated with any one customer.

I'm going to try and squeeze one more in.

Sorry.

But I don't know if you guys want to, but any thoughts about trying to give us a sense for what depreciation should be for next year so we end up getting not just EBITDA but below the line right as well?

Well, I think -- you know, again, I think you should look at our depreciation expense a bit as a percent of revenue.

To take the depreciation expense that we have been incurring as a percent of revenue and as you ramp CapEx as a percent of revenue, you should be ramping depreciation as a percent of revenue in a similar way.

Okay.

Thanks a lot, guys.

Tim Horan, Oppenheimer.

Just two clarifications.

Tom, can you give us your best guess maybe on the top six of what is going on?

Is it just one or two that are still really seeing declining revenues and maybe a guess on where they can bottom out as a percentage of revenue?

Is it 8% of revenue, 4% of revenue?

Just any more color on that would be great, and I had a quick follow-up.

Yes, we're not giving guidance at that level of detail, other than to say we expect some further declines.

Not at the rate we have already seen obviously because now they are less than 10% of our total revenue, and this is associated with -- these companies spend billions of dollars a year in infrastructure generally, and they are doing more of the delivery themselves.

I think we still provide them significant value, and of course, I would like to see the revenue there increase as we go forward, but we're not expecting to have that happen.

Great.

And then on the OTT video side, can you maybe talk about why is it accelerating now?

What has it come together?

And a few of the offerings seem to be off to a rocky start in terms of quality.

Can you talk about it?

Is that because of the CDN bottleneck, or is there some other bottlenecks?

And maybe just lastly on the OTT front, how do you think your quality is comparing to your competitors in the OTT front?

Thanks.

Yes, I would say OTT is growing at a very solid pace.

It hasn't exploded.

At times, people think that might happen, but that has not taken place.

I think there's a lot of new offers out there who continue to be new offers.

People are going to try lots of different kinds of things, and some will have more success than others in the marketplace.

It is a very hard thing to do.

Just even the delivery of the videos at high levels of quality is very hard, and that's where we really excel.

And so we get a significant share of that market, and as it grows, we should be in a position to benefit from it.

And there's other things besides the delivery that are complicated technically.

Things involving ads with ad-supported OTT.

Very complicated to do, and there's a lot of players in the ecosystem in getting everything to work just right.

There's problems sometimes.

And, again, this is where Akamai really helps their customers in being able to make sure that OTT has delivered reliably to handle large-scale at high bit rates, which means high quality pictures and at a reasonable price point.

Because as that industry grows, they need to see the cost per bid delivered come down.

And so that's a place where we've got great strength, and I am very optimistic about the future growth of our OTT business.

Thank you.

Jonathan Schildkraut, Guggenheim Securities.

Listen, I would like to maybe do a little bit of a follow-on onto the large Internet platform question.

Even this quarter and last quarter, you have been -- the revenue numbers have held a lot better than we were anticipating.

And I'm wondering as we think about that customer group, if it is still overflow that you are receiving in terms of traffic, or if there has been any sort of change in terms of the workloads maybe that they are heading off to you versus the ones that they are keeping on their own do-it-yourself platform?

Or maybe even alternatively, we have seen them push into some of the new product offerings that you guys are out there with.

That incremental color would be helpful.

Thanks.

Yes, we don't really operate on an overflow basis, so it's -- whatever you are seeing is not really attributed to that.

I don't think there has really been a fundamental change in the Internet platform companies in terms of their utilization quarter to quarter.

Generally the trend that we expect to see is they are going to try to do more of the delivery themselves.

Obviously they will take the easier stuff and work on that first.

That's one thing that we have seen in the past.

That said, this stuff is hard to do and to do well and to actually to do affordably.

And I think -- so I think that we will continue to have business with these customers.

I just think it will be a lower percentage of revenue going forward.

All right.

Understood.

Thanks a lot.

Sterling Auty, JPMorgan.

So, in terms of the increased investment that you are planning on making, I want to understand -- I know you don't give guidance beyond the March quarter, but just philosophically is it a front-end loaded investment in the year where there is more hiring upfront and maybe the non-tactile investment happens in the back half?

Just how do you layer it in so that we just stepped down to the high 30s%, and then it is a stable EBITDA, or is there going to be a gradual move down to a trough and then an improvement off the bottom?

No, I think you're going to see a steady increase in investment throughout the year.

I think you're going to see that investment occur.

It's going to begin in the first quarter.

You won't see it manifest itself significantly because it's going to take a while to get the headcount onboard and the spending to ramp.

So I think you're probably going to begin to see that effective in Q2.

And then my expectation is that, again, it will stay in the high 30s% thereafter.

So I think it will probably -- I'm not going to specifically guide for Q2.

But, as I said beyond the first quarter, which I said 39% to 40%.

And I think it will be 39% to 40% depending upon where revenue lands in the range.

But I do expect that in Q2 and beyond, it is going to operate in the high 30s%.

And then my follow-up question is I think you gave us a comment on the top six customers and what you expect in terms of further decline in the March quarter.

I want to make sure I heard you correctly: does that mean the rest of the customers actually need to accelerate in terms of growth?

And if that's the case, where is the source of that acceleration going to come from?

Is it the security side or the performance or media side and why?

Yes, well, part of that is, again, when you talk about acceleration, you're talking about year on year.

So, as Tom mentioned, the declines we've seen in these large customers were much more significant in 2016.

So the wraparound impact of that really began a little bit in Q4.

You're going to see that continue in Q1, and so some of it is the wraparound effect of these customers not having nearly the impacts on the Company growth rates as they did a year ago.

My comment was more of a sequential comment, the Q4 to Q1.

We always see some seasonal decline in the Company revenues and also with these big customers.

And I expect to see that happen in -- as I mentioned, I think some of the seasonal decline is going to be much more notable in the media business, and I think you're going to see steady growth in the Performance and Security business.

So basically at the midpoint of the range outside of the top six, you're expecting the same performance in March as you just saw on December?

Yes, roughly, yes.

[Brendan Ispal], Pacific Crest Securities.

Just a quick question, can you guys talk a little bit about your relationship with Microsoft and if you are seeing any sort of adoption from public cloud users purchasing your product on their platform?

Yes, you can click to buy Akamai whole site delivery on Azure.

A lot of companies have done that.

It's not a material amount of revenue to us.

The Microsoft relationship, on the other hand, is very important to us.

We have a substantial number of customers and revenue that flow through Microsoft, and of course, they are a large customer themselves.

Great.

And then it sounds like you guys are seeing a little bit more success maybe on the outbound sales side, particularly with security.

What do you need to do to turn that equation around to give more of a pull-in effect?

I know you guys are stepping up your sales force to go after that growth.

But if you could talk a little bit about that, that would be great.

Yes, we have a new CMO, Monique Bonner, and really making substantial progress in our digital marketing effort, and I think that will help quite a bit in terms of generating more efficient inbound sales.

Okay.

Great.

Thanks.

Mike Olson, Piper Jaffray.

Just to clarify, when you talked about getting back to double-digit revenue, were you suggesting that happens in 2017 or beyond 2017, or you weren't saying any timeframe at all?

I wasn't referring to a specific timeframe.

I think you know the Company has been operating in double-digit revenue growth.

This is actually the first year we have not.

I think you know that certainly the driver of that has been what's been going on with these large Internet platform customers.

The Company growth rate outside of them has been growing in the mid-teens.

So we have been growing in the double digits.

I think -- my point was that as we make these investments, these investments are going to take a bit of time to see revenue ramp, and so you are going to see the dividends from these investments more in 2018 and 2019, and I think that is what's going to lead to consistent double-digit growth for the Company.

Okay.

Thanks.

And then for international, it's been growing, but it still remains around 30% of revenue.

Is part of the investment in 2017 focused at all on initiatives that maybe over-index internationally?

It seems like that could be a huge opportunity as a product set or getting the right sales team in place the key factors to drive international to a higher percent of revenue?

We're pretty pleased with our international growth.

You are right that our international growth has been growing very fast and growing very fast in particular in our Asia-Pacific region.

So our investments -- our investments are much more weighted, I would say, on R&D innovation, to be frank.

Our investments are not heavily weighted towards more go to market.

I actually think the go-to-market side of the equation, we will make some investments there.

It's a matter of giving our existing salesforce more products to sell.

Our salesforce is pretty confident at penetrating our products into their installed base set of customers.

It's a matter of giving them more products to sell.

And I think that by stepping up investment in R&D, getting more products announced I think will lead to more revenue.

And we have proved that we can do that, security being the most recent example.

Jonathan, I think we have time for one more question.

Jeff Van Rhee, Craig-Hallum.

Hey, good evening, guys.

This is Ryan sitting in for Jeff.

Just for Ion, I know at the last Analyst Day you mentioned 53% penetration with the product in your customer base.

Any update you can provide on base penetration or where you see the penetration peeking out and the price uplift you are seeing from that?

Yes, I think in general that we continue to get good traction in upgrading Ion into our customers that buy our Web performance products that, as you can imagine, that it's a hierarchy of -- it starts with customers that really, really care about performance.

And so I think we have further room there, but I think that kind of the customers that are going to buy Ion, many of them are already buying their products.

But while there is more to sell there, I would say they are probably not a significant, significant opportunity there.

And yes, we have seen when customers upgrade to Ion that there is an ARPU uplift at times, but I also think there's other things to sell for our Web performance solutions.

As Tom mentioned, Image Manager is another offering to sell into the installed base.

So, if they are buying Ion, now they can buy Image Manager.

If they are buying DSA, now they can buy Image Manager.

And I think you're going to see us have other adjacencies like that within Web performance as well.

Great.

Thanks.

And then back to the top six customers -- platform customers, is there any change you guys are seeing in terms of your share of the traffic that you are delivering relative to what the platform company may be doing themselves or using a multi-CD and strategy for?

With the top six, we have obviously lost share to the do-it-yourself effort.

We are not seeing lost share to other third-party CDNs.

So it's an issue with the DIY, which is the big Company has their own platform, and they want to try and do more of it themselves.

Okay.

Thank you, everyone, and we want to -- appreciate you joining us for today.

And then closing, as Jim mentioned, in addition to our 2017 Investor Summit on March 14, we will be presenting at a number of investor conferences in February and March.

And details of these can be found on the Investor Relations section of Akamai.com.

Thank you all for joining us, and have a wonderful evening.

Thank you, ladies and gentlemen, for your participation in today's conference.

This does conclude the program.

You may now disconnect.

Good day.