阿卡邁科技 (AKAM) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Akamai Technologies Q1 2017 Earnings Call.

(Operator Instructions) As a reminder, this conference is being recorded.

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

Sir, please begin.

Thank you very much, and good afternoon, and thank you for joining Akamai's First Quarter 2017 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 filing 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 May 2, 2017.

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.

Also, please note that all growth rates referenced will be in constant currency unless otherwise noted.

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

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

Akamai performed well in the first quarter with solid growth on both the top and bottom lines.

Revenue in Q1 was $609 million, up 8% year-over-year, our strongest year-over-year growth rate in several quarters.

Non-GAAP EPS for the first quarter was $0.69 per diluted share, up 5% year-over-year.

Our strong results were driven by our Performance and Security Solutions with revenue growth of 18% over Q1 of 2016.

These solutions accounted for over 60% of our overall revenue in Q1 and they contributed very attractive margins.

As we discussed at our recent Investor Summit, the EBITDA margin profile for our Performance and Security Solutions has been about 50%.

And this figure includes the substantial investments we made last year to innovate and bring compelling new products to market.

For example, Ion 3.0, which we launched last month, dramatically improves the mobile experience for end-users.

For a customer like ZALORA, an Asian fashion retailer, mobile performance is critical because a significant amount of their business comes from mobile users.

With Ion 3, ZALORA performance was 225% faster over cellular and 250% faster over Wi-Fi.

That has translated into higher sales for them and a better experience for their customers.

Through our recent acquisition of SOASTA, Ion is now complemented with 2 exciting new products; mPulse and CloudTest.

These innovative solutions will provide our customers with the ability to measure, validate and improve the business impact of their websites and applications.

For example, Lowe's use the full suite of SOASTA capabilities to correlate site performance with sales and then drive e-commerce sales to over $1 billion through increased traffic and conversion rates.

On the security front, scale has become critical as typical attacks now contain tens or hundreds of gigabits per second of malicious traffic, more than enough to overwhelm the traditional defenses of even the most well-equipped data centers.

To address this expanding threat, we launched Kona Site Defender 5.0 and Web Application Protector in Q1.

The new version of Kona Site Defender includes protection for API endpoints to help secure websites, mobile infrastructure and other API-driven requests.

Web Application Protector is designed for the mid-market, providing customers with low-touch and virtually maintenance-free protection from the most common DDoS and Web application attacks.

We also launched Bot Manager 2.0 earlier this quarter.

The new version of Bot Manager features enhanced bot detection and mitigation, along with advanced policy enforcement capabilities.

This summer, we expect to further enhance Bot Manager to include innovative machine learning capabilities to better stop account takeover attacks.

This technology was obtained in part through our recent acquisition of Cyberfend.

We're also planning to bring new enterprise security and networking products to market this year.

Our vision for these products is to secure, optimize and accelerate the enterprise network as a service in the cloud.

We're doing this by utilizing the power of the Akamai platform to support new services that are simple to understand and easy to use, allow customers to try before they buy, allow for a land-and-expand sales motion and to create synergies with the rest of our product portfolio.

For example, at our recent Investor Summit, we demonstrated our new service for securing access to enterprise applications.

Enterprise Application Access, or EAA, leverages software obtained through our recent acquisition of Soha Systems.

It addresses the growing need for businesses to more easily and securely manage application access for a growing mix of users with different risk profiles without poking holes in the enterprise firewall.

EAA is easy to deploy and simple to manage.

Customers can implement it in minutes and then take advantage of Akamai's other performance in security solutions for all their internal applications.

At the Investor Summit, we also demonstrated another exciting new offering called Enterprise Threat Protector or ETP.

ETP is designed to protect enterprise employees and infrastructure against phishing, malware and data exfiltration attacks by providing a cloud-based recursive DNS service to block access to malware sites and data exfiltration botnets.

It's currently in beta with 17 customers, all of whom are able to self-integrate and use the product to block malware that evaded their other security systems.

ETP is expected to launch this summer.

Branch Accelerator is also now in beta.

For users in the branch, their enterprise connectivity to the Internet may not be sufficient to support video or downloads without impinging on their ability to do other kinds of work.

Branch Accelerator puts Akamai's software in or near the branch office to provide caching, enforce quality of service and ensure protocol optimization, all with the goal of improving branch performance.

Our enterprise business is just getting started, and I expect significant growth ahead as we ramp up and launch these new products.

Next, I'd like to talk about our media business.

As we discussed at our analyst calls over the last year, our media business continues to be heavily impacted by the do-it-yourself efforts of 6 of the largest Internet platform companies.

Our Q1 revenue from these companies was $51 million, a 29% decrease over Q1 of 2016.

Traffic from our other media customers has continued to grow at a rapid rate but at a slower pace than we've seen historically.

As we discussed in the past, media traffic growth rates are highly variable over time and depend on a variety of factors.

Pricing in the media sector remains aggressive, but the rate and pace of price declines continue to be in line with historical trends.

The net effect of all these factors is that as we look forward to the rest of 2017, we believe that the revenue growth rate for our media business will continue to be below the growth rates we've historically seen and that the growth rate for Akamai's overall revenues and margins will continue to be impacted as a result.

That said, I want to be very clear that I believe media is a good business for Akamai and that it has a very bright future.

Over the longer term, I believe that the impact of the large platform companies on our media business will lessen and that the business overall will return to historical levels of performance.

One of the reasons for my optimism is our OTT business.

A recent study predicts that over-the-top viewing will exceed traditional broadcast viewing within 5 years.

Even if this prediction is only approximately correct, there is the potential for a very large amount of video traffic to move online, and Akamai is very well-positioned to benefit as a result.

At last week's National Association of Broadcasters, or NAB Convention in Las Vegas, I met with executives from several of the world's leading media companies, and they were all talking about the growing demand for OTT content and how Akamai solutions can and do meet their needs.

At NAB, we demonstrated 2 new products that dramatically improve the OTT experience for viewers: Media Services Live and Media Acceleration.

Media Services Live was recognized with 2 awards at the convention.

Streaming Media named it as 1 of 6 best of NAB winners.

NTB Technology presented Media Services Live with a Best of Show Award.

Media Services Live features breakthrough technology designed to eliminate the large latencies that are typical with Internet streaming, resulting in a viewer experience that is comparable to or better than traditional broadcast TV.

We recently used this new solution to deliver nearly 100 million live video streams for a major sporting event with a 100% ingestion success rate and greater than 99.99% availability for viewers.

In addition, we recently launched our new Media Acceleration capability to more efficiently communicate between end-user devices and the Akamai network, thereby providing a much higher-quality video experience for viewers.

When Media Acceleration was used for a recent major sporting event, we achieved 72% fewer video start errors, 24% less rebuffering, 23% more HD viewers and 25% more 4K viewers.

Better quality video, like HD and 4K, requires higher and more consistent throughput to end-users, which is an area where Akamai excels.

Across the world, media companies have come to appreciate that it is very difficult to replicate our ability to deliver online video with broadcast-level quality, scale and security.

It's also our belief that Akamai is leading the competition in inventing what's next while improving on what's now.

That's always been our heritage.

So while today's viewers are consuming live streams over IP, we're anticipating what's coming next, virtual and augmented reality delivered seamlessly anywhere in the world over wired and wireless networks with virtually 0 latency.

That's the future of the digital media experience, and Akamai is already working hard to enable it.

In summary, I'm pleased with our Q1 results and I'm even more excited about the opportunities that lie ahead as enormous volumes of video move online, billions of devices get connected, cyber-attacks explode in size and sophistication, and enterprise networks undergo a massive change as they turn inside out.

I believe that Akamai is uniquely positioned to solve the challenge faced by companies across the world as they try to cope with these major technology shifts.

Personally, I'm as excited as ever to be at Akamai.

I remain confident in Akamai's future.

And even though I'm already a large holder of Akamai shares, I'm happy to announce today that I'll be continuing my personal stock buyback program through a 10b5-1 plan that will purchase $1 million of Akamai stock every month for the rest of 2017.

Now let me turn the call over to Jim for a more detailed look at the quarter, and then we'll answer your questions.

Jim?

Thank you, Tom, and good afternoon, everyone.

As Tom highlighted, Q1 was another solid quarter for Akamai with both revenue and earnings coming in at the high end of our guidance range.

Revenue in the first quarter was $609 million, up 7% year-over-year or up 8% in constant currency, and up 13% if you exclude our 6 large Internet platform customers.

Revenue from our Performance and Security Solutions was particularly strong, coming in at $369 million, growing 18% year-over-year and was the driver of delivering to the high end of our guidance in the quarter.

Performance and Security Solutions contributed over 60% of our total revenue in Q1.

We are very pleased with the continued revenue diversification into our highly differentiated, higher-margin and more stable subscription model offerings.

Within this solution category, we saw solid growth across all major product lines with particularly strong growth continuing in our Cloud Security Solutions.

First quarter revenue for our Cloud Security Solutions was $110 million, up 37% year-over-year.

Our security business now has an annualized revenue run rate of $450 million.

We are pleased with the continued strong growth and execution of our cloud security business, led by our flagship Kona Site Defender and Prolexic offerings and our continued portfolio of expansion into new areas, like Bot Management and Enterprise Application Access.

And we plan to further broaden our performance, security and enterprise offerings where we see substantial long-term growth potential.

And our recent SOASTA acquisition, which closed in early April, is a good example of extending our market-leading Web acceleration offerings into the natural adjacency of digital performance management focusing on cloud application monitoring and testing and aligning performance to business value.

Turning now to our Media Delivery Solutions.

Revenue was $187 million in the quarter, down 9% year-over-year and up 3%, excluding our large Internet platform customers.

This revenue growth rate was lower than the past several quarters and below our expectations, driven by a moderation of traffic growth throughout the quarter in our Americas region and within our gaming vertical, most notably.

It is important to note that while the pricing environment in the media business remains highly competitive, aggregate price per bit declines remain roughly within historical norms.

As we've discussed in the past, the drivers of the media business, namely traffic volumes and price, can lead to revenue variability from period to period given the timing of customer renewals at lower price points, the size, timing and delivery mechanism of software and gaming releases as well as the adoption of social media and video platform capabilities.

And while media growth rates have moderated more than we expected in the near term, we continue to remain bullish on the longer-term secular growth trends for our media business, particularly in the OTT area, as more video content moves online.

Finally, revenue from our Services and Support Solutions was $53 million in the quarter, up 15% year-over-year.

Turning now to our Q1 revenue results by customer division.

Revenue from our Web Division customers was $305 million, up 15% year-over-year.

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

Revenue from our Media Division customers was $285 million in the quarter, up 1% year-over-year and up 11%, excluding the impact of the large Internet platform customers.

This growth rate was lower than 2016 levels driven by the moderation in media traffic that I mentioned earlier.

Finally, revenue from our emerging Enterprise and Carrier Division customers was $19 million in the quarter, up 24% year-over-year.

Moving on to our geographies.

Sales in our international markets represented 33% of total revenue in Q1, up 2 points from Q4 levels.

International market revenue was $203 million in the first quarter, up 19% year-over-year or up 21% in constant currency, driven by continued strong growth in our Asia Pacific region.

Foreign exchange fluctuations had a negative impact on revenue of $4 million on a year-over-year basis and $2 million on a sequential basis.

Revenue from our U.S. market was $407 million, up 2% year-over-year.

The large Internet platform customers are based in the U.S. and continue to weigh heavily on U.S. market growth rates.

Moving on to costs.

Cash gross margin was 77%, consistent with Q4 levels in the same period last year.

GAAP gross margin, which includes both depreciation and stock-based compensation, was 66%, down 1 point from Q4 levels and consistent with the same period last year.

GAAP operating expenses were $288 million in the 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 $228 million, down seasonally from Q4 levels, but above our guidance range, driven by higher commissions and performance incentives as well as increased recruiting-related spend associated with an uptick in hiring activity.

Adjusted EBITDA for the first quarter was $241 million, down $6 million from Q4 levels, due to seasonal revenue decline and up $7 million from the same period last year.

Our adjusted EBITDA margin came in at 39%, down 1 point from Q4 levels and down 2 points from Q1 last year and within our guidance range.

GAAP depreciation and amortization expenses were $87 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 $75 million, up slightly from Q4 levels and in line with our guidance.

Non-GAAP operating income for the first quarter was $165 million, down $9 million from Q4 levels from the seasonal revenue declines and up $1 million from the same period last year.

Non-GAAP operating margin came in at 27%, down 1 point from Q4 levels and down 2 points from the same period last year and within our guidance range.

Moving on to other income and expense items.

Interest income for the first quarter was $5 million, up slightly from Q4 levels.

Noncash interest expense related to our convertible debt was roughly $5 million.

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

Moving on to earnings.

GAAP net income for the first quarter was $81 million or $0.46 of earnings per diluted share.

Non-GAAP net income was $120 million or $0.69 of earnings per diluted share and at the high end of our guidance, driven by the strong revenue achievement.

For the quarter, total taxes included in our GAAP earnings were $34 million based on an effective tax rate of 29%.

Taxes included in our non-GAAP earnings were $49 million based on an estimated -- based on an effective tax rate of 29%.

Finally, our weighted average diluted share count for the first quarter was 175 million shares, unchanged from Q4 levels and down 2 million shares from Q1 of last year.

Now I'll review some balance sheet items.

Days sales outstanding for the first quarter was 58 days, up 4 days from Q4 levels and down 2 days from the same period last year.

Capital expenditures in Q1, excluding equity compensation and capitalized interest expense, were $94 million and at the midpoint of our guidance.

Cash flow generation continued to be solid with cash from operations of $143 million in the first quarter.

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 just under $900 million.

During the quarter, we spent $72 million on share repurchases, buying back roughly 1.1 million shares.

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

Over the past 5 years, we have lowered the company share count by over 7 million shares or 4% while also spending nearly $1 billion in strategic acquisitions, thereby deploying capital in areas that we believe were in the best long-term interest of the company and our shareholders.

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.

Before we look ahead to Q2, I wanted to spend just a minute on our recent Investor Summit.

For those of you that joined us in person or via the webcast, the themes we shared this year was the same as in prior years.

There has been a level of consistency in what we've talked about every year, the favorable market trends, the uniqueness in differentiation of the Akamai platform, the leadership position we maintain and the very rapidly changing and evolving cloud ecosystem and a tremendous amount of innovation we've seen across the business and new product adjacencies as well as continued enhancements within our existing core offerings.

Innovation is alive and well across all the divisions, and we believe it will be a key enabler for accelerating growth back to double digits for the company.

The fundamentals of our business remain strong.

We're continuing to innovate rapidly.

And while our investments in new adjacencies will pressure margins in the near term, we believe they will drive significant future top line and bottom-line growth.

As I said at the Investor Summit, we are committed to balancing both top line and bottom-line over the long term.

And I certainly believe that if we continue to execute, we will remain a compelling investment proposition for investors.

Looking ahead to the second quarter, we expect media growth rates to continue to moderate from Q1 levels and within America's gaming vertical, most notably.

While it is also possible that media growth rates moderate in the back half of 2017 as well, we remain bullish in the medium- to long-term growth prospects for this business, especially the potential for an increase in the amount of video traffic that could move online.

Factoring in the anticipated moderation of media growth, we are expecting overall Q2 revenue in the range of $597 million to $609 million.

At the high end of this range, year-over-year growth would be 8% in constant currency, consistent with Q1 levels and up 2 points from Q2 2016 levels.

At current spot rates, foreign exchange fluctuations are expected to have a negative impact on revenue of $6 million compared to Q2 of last year and a positive impact of $3 million sequentially.

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

Q2 non-GAAP operating expenses are projected to be $235 million to $241 million, up roughly $10 million sequentially at the midpoint.

This increase is driven partly by our continued investment in new product innovation, service delivery enablement and platform scaling and partly from absorbing our recent SOASTA acquisition.

Factoring in the cash gross margin and operating expense expectations I just provided, we anticipate EBITDA margins of roughly 37%.

And while we are not providing specific guidance beyond Q2 during this call, we want to be transparent about our plans to continue to make investments in the business throughout 2017 in the areas outlined earlier.

Even while the media business experiences a near-term moderation in revenue growth, we believe these are important investments that will enable us to drive accelerated, sustainable, long-term double-digit top and bottom line growth.

We are confident we can manage the company within our 37% to 39% EBITDA model, while we may go through some quarters where EBITDA margins fall slightly below these levels, possibly even in the second half of 2017.

As I've said in the past, our ability to maintain EBITDA margins within our stated ranges is heavily dependent on revenue volumes, possible M&A and needed investments in the business.

Moving now to depreciation.

We expect non-GAAP depreciation expense to be $77 million to $79 million.

Factoring in this depreciation guidance, we expect non-GAAP operating margin of 24% for Q2.

And with the overall revenue and spend configuration I just outlined, we expect Q2 non-GAAP EPS in the range of $0.59 to $0.61.

This EPS guidance assumes taxes of $42 million to $44 million based on an estimated quarterly non-GAAP tax rate of 29%.

This guidance also reflects a fully diluted share count of 174 million shares.

On CapEx, we expect to spend $110 million to $115 million, excluding equity compensation in the second quarter.

This is an uptick from Q1 levels, primarily due to some planned facility and IT upgrades as well as continued expansion of our secure delivery network and Prolexic scrubbing capacity.

In summary, I am very excited about the opportunities that lie ahead for Akamai and our ability to execute on our plans for the long term.

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

Operator?

(Operator Instructions) Our first question is from Sterling Auty of JPMorgan.

I think the first question that really jumps to mind is the Investor Summit wasn't that long ago and it really feels like there's a change in tone around the media business.

When did that become apparent?

Was it apparent earlier in the quarter and you just wanted to focus on the high level of the investment Summit?

Or is this something that you were expecting better volumes at the end of the quarter type of thing?

Yes, let me start with -- we are very bullish on the media business.

So that has not changed.

Nothing has changed about what we believe are the growth prospects of the media business, relative to our Investor Summit that what we did see is that we did see traffic growth moderate, as I mentioned, in the Americas region in particular and, very notably, in our gaming vertical.

And it moderated throughout the quarter.

So it was relatively strong in January and then it moderated in February and then it moderated further in March.

And that was really the driver of kind of, I would say, missing our internal expectations, but I'd say we are very, very optimistic about the media business long-term.

And as we've said to you guys before, the nature of the media business, if it does go through periods where traffic spikes, traffic softens at times, but over the long term, we think this is a very good business and it will be a very good growth for the company.

And then maybe one follow-up question.

Can you help us parse maybe the data this way?

You give us the geographic and we see the North America weakness and the comments that you made, but if you were to split the platform, the big 6, out from that, what did North American growth look like, just so we can kind of get to the non-big 6 in North America to understand what's happening there?

Yes, you got to be careful because the Americas also includes our media customers as well as our Web customers.

I think America's growth, if you exclude the largest in our platform customers, was roughly 10%.

Our next question is from James Breen of William Blair.

Just a couple of questions.

One, in the guidance for next quarter, as you look at that number, approximately SOASTA closed in the beginning of the quarter.

I think you had said it'd be about $20 million of revenues.

Is that included in that guidance number?

I was just comparing that relative to where consensus is.

And then on the big 6, obviously saw pretty good absolute step-down in the first quarter from the fourth quarter and the third quarter last year.

Is there anything in there that's seasonal in that?

And then as you think about your largest customers now, how big are your top 2 or 3 customers as a percent of revenue?

So I think the largest in our platform customers, for the most part, came in line with what we expected in Q1.

They do seasonally drop Q4 to Q1.

That view of Q4 seasonally is a large quarter for all -- actually, all of our large media customers in particular.

So the step-down there was not unexpected, pretty much in line with what we thought.

Those customers now represent about 8% of our revenues.

So the good news is that as we go through this, the diversification of the company's revenue, as I mentioned in the Investor Summit, we are much better diversified.

From a customer perspective, we're much better diversified.

From a product category perspective, we're much better diversified from a geography perspective.

So I think the health and diversification of the company's revenue is much better now than it has been.

And I think relative to the giants and maybe what we expect them to do kind of longer-term, I think as we said before, we do expect a further deceleration with 2 of those 6. And we expect them to further kind of decline as they serve more of their traffic themselves.

So nothing there is really changed.

And what we've seen here is very much in line with our expectations.

And then just on the guidance side because that guidance would include some portion of that SOASTA revenue since the deal closed in April.

Yes, yes.

As I said, we're not going to guide specifically on SOASTA revenues and margin.

I said at the Investor Summit that SOASTA probably will generate, call it, roughly $20 million for the remainder of 2017.

It could be a little bit less than that.

But what you're going to have in the first quarter with SOASTA is, as you know, with purchase accounting, we're going to take a very large deferred revenue haircut.

So the revenue in the second quarter will certainly be less than it will be in the third and the fourth quarter.

So it's not that material.

We're going to embed that in our Web performance business, and we're going to report that within our Performance and Security category.

And just finally, just as you look across the division, it seems though performances carry continue to perform well.

So really, the weakness we're seeing is mainly in the Media side.

Around that gaming vertical, is it multiple players?

Was there 1 or 2 players that you're seeing having most pressure?

There's a lot of competition in media, and I would say especially when it comes to software downloads, which is where the revenue comes from the gaming vertical.

And as the traffic shifts more towards updates that can be done in the background as opposed to a new game, where you're sitting there waiting for it in real time, well, that means performance matters less, means pricing is lower and competition is even stiffer.

And you know we've talked about that before.

And I think that's part of what we're seeing here.

But there's lots of competition in Media, particularly for software downloads and especially if it's in a background kind of mode.

Yes, Jim, your comment about Performance and Security, it continues to be a very strong growth for the company.

The 18% growth in Q1 last year consistently grew kind of in the high-teens.

So what you see here, really, is just a little softening in media growth kind of in our Americas region, in the area that we mentioned.

Again, this tends to be the nature of the media business.

And I think as we go through -- we've gone through these fellows before, where media surges and you start to see media accelerate.

So it's not uncommon to go through these periods.

But I believe we are very -- we're optimistic about the long-term growth potential, not just for OTT, but also within gaming, that as gaming becomes more and more latency-sensitive and performance-sensitive, you see more and more things like AR and VR that I think that, all of a sudden, the differentiation for Akamai becomes more and more apparent.

So we're bullish about the prospects for media.

I think we're going to go through some near-term slowing in media, but optimistic about the long-term for media.

Our next question is from Will Power of Baird.

Our next question is from Tim Horan of Oppenheimer.

Could you give us maybe some color on your media business percentage, where you think you have kind -- fairly differentiated services that are not as commodity like we're seeing on software here?

And Jim, maybe give a little more clarity what you're seeing on the guidance on the media side, how much it'll be down sequentially.

Maybe I kind of missed that, but it seems like I'm having a tough time getting to the type of overall revenue guidance that you're providing for the second quarter.

Yes, I'm not sure what else to tell you about the guidance.

We don't guide necessarily by product category, that our media products were about 3% growth, kind of excluding the large Internet platform customers.

And our Media Division customer growth was about 10%.

So we expect that to further moderate to the areas that I mentioned, which is in the Americas and, notably, within gaming.

We do expect to have continued strong growth in Performance and Security.

Continue to have good growth within services.

So I think what you're going to see here in the guide is you kind to do it at the midpoint.

At the midpoint, you're going to see a further moderation of media growth rates, and that's really kind of what it's all about.

And on media, can you maybe give us some color on what do you think is more commoditized versus what you have more for differentiated product?

I mean, I think some of your OTT video was fairly unique in terms of quality and scale, where you're at, at this point of the business.

Yes.

No, I think you characterized it well.

At one end of the spectrum, you've got background software downloads, which is not performance-sensitive, and that's the best opportunity for competition.

Obviously, pricing, lower there as well.

The other end of the spectrum, you've got live and linear OTT, where performance is very sensitive, and it's very challenging to deliver high quality of scale.

And you see the great work that we're doing there with the kinds of awards we win at NAB.

We're the go-to player for the major events that you watch online and traffic, growing well there.

And I think really key for us is to see OTT adoption continue, even better if it accelerates, quality levels to improve as broadcasters move more content into the higher-quality formats, HD and someday, 4K.

Those are all very good areas for Akamai.

Our next question is from Siti Panigrahi of Wells Fargo.

Just switching to security business.

Security this time grew around 35.5% year-over-year.

That's a deceleration from last year of 47% and even Q4, 41%.

I'm wondering, I saw the remaining up a year, I know you don't guide.

But are you expecting any kind of new product that's coming in contributing?

Because if I look at your 2015 to '16, it decelerated from 49% to 44%.

But as you look 2017, what's your expectation in terms of trends and contribution from the newer products?

Yes, well, let me start, then I can have -- Tom can talk a little bit about the products.

I think you're right that the growth rates in security, we're in the kind of the high 40s and then the low 40s, and now in the high 30s.

This is a business that is now an annualized run rate of $450 million.

5 years ago, this was just an idea.

So this business is growing very, very rapidly.

Its growth rate on a percentage basis is lower because it's on a much, much bigger base.

So we're very, very positive about the security business and our execution of the security business for this.

And you've got to remember, this is all subscription model offerings.

This is not license model.

This is literally a subscription model business that now is approaching $0.5 billion.

So Tom can talk a little bit about the product categories, but there's a lot going on there.

Yes.

I talked about in the prepared remarks at the beginning, we have the new version of Kona out now, and that includes now protection for API end points.

The way to think about that is for your mobile apps, where as you have more mobile apps deployed, the attackers are now going after those, and we have a really unique capability to very nicely defend against those.

You have the new version of Bot Manager, and that manages the response given to the automated entities that are coming to your websites and apps.

There's a wide variety of those.

I guess, price scrapers and account takeover attacks being maybe the worst there.

And as I talked about with our new machine learning capabilities to be deployed this summer and then the next version of Bot Manager, we're very excited about that because that will provide even better capabilities to stop the people trying, checking stolen IDs.

And there's a ton of stolen IDs out there today.

Then on the enterprise side, we're really just getting started in the market.

There's 2 security products there.

We're in the market selling enterprise application access today.

That was released in Q4.

And we're in beta now with Enterprise Threat Protector, and that it will become more generally available this summer.

So there's a lot of new activity and products and innovation on the security side of the house.

And I'm very optimistic for continued very strong growth rates in our security business.

Our next question is from Colby Synesael of Cowen.

Maybe just a follow-up on that last question regarding the security business.

Just curious, do you feel that your security products, in aggregate, are growing at market rates or potentially above?

And to that point, what's the ability to sustain that?

It looks like -- well, it shouldn't look like -- when I look at the new products that are coming out, I'm just curious, are those -- in the security segment, are those anticipated to sustain the glide path, if you will, in terms of deceleration in growth that we're seeing?

Or is there risk of a more prominent step-down?

And I guess the reason I'm asking this is that with the media business being weak or weaker than anticipated, obviously, the security business has really been what's supported that.

And it's difficult, I think, for all of us to really explicitly quantify exactly what that growth deceleration is going to look like.

And I think any color that could help us in that regard would be helpful.

Yes, let me start with that.

It depends on who you want to compare it to.

But I think for most, all choices, our growth rate in our security solutions is very strong compared to the competition.

The traditional competition there is we have box providers.

And that just doesn't cut it anymore when you have the scale of attacks being so large that you can easily overwhelm the data center defenses.

In fact, you can't afford to buy enough boxes to defend yourself against the large-scale attacks.

In addition, we're now, as we talked about, just getting into the area of enterprise security.

And just so I'm clear about that, our -- almost all of our revenue today comes from what I would call web security or application security, and that's defending websites and defending Web apps against things like DDoS attacks or site takeover attacks, that kind of thing.

With our new enterprise line, we're now going to be defending enterprise users and the enterprise network against attacks like phishing attacks, malware attacks, attacks where maybe some device has been infected in the enterprise.

They get -- the bad guys have gathered up all the internal data and now they're going to exfiltrate it.

And we're going to be stopping those kinds of attacks.

So really, it sounds like security still, and it is, but it's a different buyer, different capabilities, and in the long run, a much larger market for us.

So I do think that we have every opportunity to maintain a very strong growth rate in our security business as it gets larger.

We don't provide forward-looking guidance.

We will keep you advised on how the new enterprise line is doing once it gets some critical mass.

But I'm very optimistic about the future, very strong growth of our security products.

I guess, maybe just one other question.

You made 3 acquisitions in the second half of '17: Concord, Cyberfend and Soha.

I think you mentioned that ex FX and ex the top 6 customers, growth was 13% year-over-year.

Can you give us -- what's the organic growth?

Is it fair to say maybe 1% or 2% of that was the result of those acquisitions?

No.

No, because Concord was just a handful of people with technology.

We really like a very small acquisition.

Cyberfend has not yet been integrated.

As I talked about, we'll be releasing capabilities with the next version of Bot Manager this summer with Cyberfend Technology.

And Soha, we're just getting started.

Yes, sales.

Colby, there was really no revenue for any of those.

Those were more technology tuck-ins.

There are certainly some revenue that comes with SOASTA, as I mentioned, but the first 3 that you mentioned really were more technology capability acquisitions.

Our next question is from Vijay Bhagavath of Deutsche Bank.

Have a question on your overseas business and also, back here in the states.

The strength you're seeing overseas is a bit counterintuitive.

And then several equipment suppliers we track, no big demand trends especially in Europe.

So is the emerging markets primarily driving the strength you're seeing overseas?

And then back here in the states, any of your big media customers kind of indicating to you that increase their OTT programming volumes through the Akamai network heading into the back half or into next year?

Yes.

No, you're absolutely right about the international growth, that the growth rates are very different in the European markets than the Asia-Pacific markets.

And I mentioned in my prepared remarks that we're seeing very, very strong growth in the Asia-Pacific markets.

We are not seeing nearly the same level of growth in the European markets.

But we have pretty good growth rate also in Europe.

They're not the same as in Asia Pacific, but I'd say international growth rate's at 21%, heavily fueled by Asia-Pacific, but decent growth in EMEA.

And that's probably not uncommon.

And we certainly have more opportunity in our Asia-Pacific markets where we're not nearly penetrated.

And you can take the OTT question.

Yes, I think when you talk to the leading executives, I think they are more bought-in than ever that a lot of the video content is going to move over-the-top.

And I think the approach they're taking now is to try lots of different vehicles.

A typical broadcaster might have their own OTT offer for their content and they might participate in several aggregated packages.

And I think at this point, they don't really know which ones will be the most successful.

So I think they're trying a variety of alternatives with the idea being that, one way or another, a lot of the content is going to move online.

And they don't want to get caught short, making the wrong bet so they're trying lots of the alternatives.

Our next question is from Mark Kelleher of D.A. Davidson.

Great.

I wanted to get back to the media side.

Is there a steady state level of revenue for Internet platform customers?

Or does that go right to 0?

Does that $51 million level out somewhere?

I mean, it's -- I think at the end of the day, it's tough to tell what's going to happen with the Internet platform customers that we certainly know that 2 of them have an intention to serve more of the traffic themselves.

So as we said over the last couple of quarters, we expect those 2 customers to continue to serve more traffic themselves, which means less traffic will be served by Akamai.

I think it's more difficult to call some of the other large Internet platform companies.

Many of them have a culture of wanting to do more themselves.

They do a lot with us today.

I think it's really a matter of the use case and the capabilities that we possess.

And if the capability we possess match the use case that they have and they don't have that capability, then we will continue to grow with them.

So the reason we ring fence them for you is because I think that investors have their own views of what's going to happen with those large companies, and I think it's difficult to call.

I think that what we've tried to kind of provide some guidance on for you is that our expectation is they will continue to decline kind of over time here.

So I don't know if they're going to go to 0, but I'm not sure we're ready to call that yet.

But we expect that this is certainly going to continue to go down.

And as a follow-up to that, if the entire -- if your other media customers are a little -- the gaming sector -- a little slower, where do you stand with capacity utilization?

And can you pull back on CapEx because you've got lots of media revenue to support?

To be clear, traffic -- media traffic, is growing at a substantial rate.

So we are continuing to build out.

And of course, OTT traffic is growing at a substantial rate.

So it's not a situation of underutilization.

It's just that the growth rates as a percentage are less than they were before, of course, led by the largest platform companies.

So you're not adjusting your CapEx for short-term reasons?

No.

I think we always plan our CapEx and align it with where we believe traffic growth is going to be.

And I think as Tom said, traffic is still growing very rapidly.

It's just not growing as rapid a pace as we had projected.

So yes, we will dial CapEx and align it with our revised projections, but we need to continue to build out as traffic grows.

And we don't have CapEx just for our media business.

That while our media business is certainly the most CapEx-intensive, that we do build our CapEx, as I mentioned, with our rapidly growing security business, we're building out more attack capacity for Prolexic.

And so there is a level of investment that's going on in CapEx.

Even though security is not a heavily CapEx-oriented business, it does have some CapEx.

The other thing is, as we continue to make investments in R&D, we're going to capitalize more R&D, which is basically new product incubation.

So there's a bunch of areas of CapEx that -- many of which will continue to grow.

Our expectation is that we'll manage CapEx and align it with traffic and revenue projections.

Our next question is from Michael Turits of Raymond James.

I have 2 questions.

The first is on a comment about EBITDA margins possibly tipping down in the second half below 37%.

Is that just a function of lower top line?

Or is it higher expenses?

And then second question is, given the -- what sounds like a worse, or at least medium-term market on the gaming side, do you feel like you're still in a position to get media back to double digits and the company back to double digits overall by '18?

Yes, I'll take those, and then, Tom, if you have anything else to offer.

So we're not guiding necessarily, Michael, for the back half.

I did signal that because I think you know that EBITDA has a function of a lot of things, revenue volume as being the most notable.

And as I mentioned, there are important investments that we believe we need to make that are in the best interest of the company and our shareholders long-term, which are investments in some of the enterprise areas, some of the security areas, some of the areas that we mentioned that are going to be very significant, we believe, top line and bottom line growers.

And so we don't want to curtail investment there.

And so my caution for the back half was more that we're going to continue to make investments.

And should you continue to see a top line moderation in media, and again, we don't know whether that's going to be the case.

I think we're really talking about media in particular.

I was just being cautious that if we do dip below 37%, I wanted to make sure that people realize -- well, our intention is to manage the company 37% to 39% EBITDA.

There may be a quarter or 2 where you go through something lower than that, but we'll manage it back accordingly.

And I forget what your second question was.

Double-digit growth.

Oh, yes.

So we certainly have the expectation that we're going to return to double-digit growth in 2018.

That's still where we believe we can be.

You're right with the moderation in media that I don't believe this moderation in media is going to be a long-term phenomenon.

So we may be going through a spell here for the next couple of quarters, where media growth softens.

But as you know, we've been through these periods before, and then media growth wars again.

And so I think there's enough opportunity in media that we can get media growing again to get the company back to double digits.

Our next question is from Michael Hart of Guggenheim Securities.

There've been a bunch of questions about the Media Division, but I'd like to throw in just one more.

This quarter, we saw the media customer revenue growth outperform the media delivery product growth for (inaudible) orders of that trend.

And I'm wondering does that mean that customers -- your customers are buying Performance and Security offerings more than buying traditional media delivery offerings.

And if that is the case, can you provide some more color on what solutions those customers are purchasing Performance and Security products for?

Yes.

I would say that the media customers are certainly buying performance products, especially security.

But they would not be buying more of that than the media products.

The large majority of the Media Division revenue comes from our media products.

And the large majority of the revenue is from those that have the most media to deliver.

The largest several hundred customers would comprise a lot of the revenue.

And those folks are big names.

And so they really care about their brand.

They are big targets for attack, and they care a lot about our security solutions.

And so that is why you see the Media Division or the customer revenue for our media customers be growing at a higher rate than the media products per se.

The next question is from Keith Weiss of Morgan Stanley.

This is Sanjit Singh for Keith Weiss.

Just if we take a step back, what would we have to see in terms of the growth rates that you're seeing in the business that would cause you guys to maybe dial back on the investments?

Is there a certain level of growth that you want to sustain?

Or what would you have to see to -- to cause you guys to potentially peer back on the incremental investments on the enterprise and security side?

Yes.

I mean, I would say that we manage the company as a portfolio and we look at all the investments that we want to make in product areas and what we believe the kind of the return on investment is going to be for each one of them.

And as Tom said in his prepared remarks, that our performance, security enterprise offerings have 50% EBITDA even with the investments that we've been making.

And so the media business goes through spells like this.

And what ends up happening is that the media business goes through a softening.

It does pressure near-term margins for the company.

I can you remind you of a couple of years ago when the media business was growing significantly, you see margin expansion happen very, very rapidly.

That's a bit of the nature of the media business.

And so it wouldn't be wise for us to curtail investments in the business because of some short-term disruption in media growth rates.

I don't think that would be in the best interest of our shareholders or the company.

Yes, we certainly saw that in 2014 when the media business was growing north of 20%.

So definitely your points well taken there.

If I can sneak one on -- sneak one more on the media business.

If we could get more explicit on the sources of competition, to what extent are you seeing incremental competition from the public cloud providers (inaudible) and that cohort versus your traditional (inaudible) competitors and then maybe potentially more of the private guys, more of the private Silicon Valley start-ups?

Is there any one group that's being more aggressive than the other?

No, I think when it comes to the media business, it's aggressive across the board with the entities that you just talked about.

And it's been that way for a long, long time.

In fact, one group you didn't mention that you would have 5 -- 3 to 5 years ago is the carrier.

The carriers were aggressively competing with us 3 to 5 years ago or, in the past.

And now they're mostly standardized on Akamai's capabilities.

But I think we'll continue to see competition from start-ups, from the traditional players and from the cloud providers.

And we fare well against the competition, especially in situations where quality matters.

Our next question is from Heather Bellini of Goldman Sachs.

Yes.

I actually have 2 of them.

One was related to OTT.

And I was just wondering what's the potential for the players that are trying to get big in OTT to generate the same problem down the road that you're having with the big platform providers today, where the biggest companies who get all the subs end up investing to do this themselves.

Like, what are you hearing from them?

Is there anything you could share with us to help maybe mitigate those fears, since OTT is one of your drivers, that you're holding out?

And then the second thing was just your comments about the carriers.

In particular, I just -- and can you share with us with the transition to these unlimited data plans and people forcing if you use those to go from HD to SD quality and obviously, the size of those files then becomes smaller.

How do we think about that having any positive or neutral or negative impact on the growth that you're seeing through the network?

Okay.

The first question on, are we worried about the big broadcasters as they start their own services and grow and so forth, doing more themselves, I don't think so.

I think it's going in the other direction.

Generally speaking, those folks are taking, doing less in-house maybe than they did before.

I think they've recognized, this is not their core area of expertise and doing more outsourcing going forward.

So I don't see that's an issue.

Obviously, these giant platform companies, most of those guys spend billions of dollars a year in infrastructure.

And they're just at a different scale where it becomes possible for them to think about spending hundreds of millions more, trying to do some content delivery.

So I don't see that being an issue in terms of OTT going forward.

If anything, it's going in the other direction.

With the carriers, I think we're seeing actually the quality levels for video increase as opposed to a scenario you're describing where it would decrease.

And there's competition there and their users, the end viewers, demand the higher-quality video as you get better devices into the home, I think just the opposite happens.

You get higher quality levels and we see the carriers already experimenting with sort of super high quality, which means more traffic.

So that's, I think, is more likely to go that way then to lower quality levels.

Our next question is from Jeff Van Rhee of Craig Hallum.

A couple from me.

First on the gaming side, it seems to me the shift to background updates has been happening gradually.

Was there a specific event or a specific customer that drove what seems to be a bit more, just feels like the messaging is that this was a bit more sudden than I would perceive sort of a gradual shift to play out as?

Any color there?

I don't think there's any specific customer.

Like you say, this shift has been taking place.

And it's having an impact on traffic growth.

So it's not one event, no.

I think it's been a trend in the industry.

Okay.

And then with respect to the Ion, sort of the acceleration side, have you seen on renewals pricing -- how would you describe pricing on renewals around Ion and acceleration pricing trends now, say, versus 12, 18 months ago?

I think when you come to a renewal for the same product, they always want a lower price.

On the other hand, maybe there's more traffic, which helps.

And the best part is we've got a lot of new products.

There's Image Manager, there's Bot Manager, there's the next generation of Ion focused on mobile, the next generation of Kona, again, focused on mobile.

So there's more to bring to bear in the account, which helps us whole price or grow revenue in the base.

And so we are seeing revenue growth in the base of customers with our Performance and Security products.

And how about the actual net customer count growth?

We don't actually report customer count.

We haven't done that for some time.

So we really don't have much to comment there.

Okay.

And then, I guess, just one last one, just a clarification.

You commented on expenses being a bit above the expectations on the back of higher commissions and more aggressive hiring.

Both seem a bit counterintuitive given the business trends.

Can you just expand a bit on those?

Well, actually, we performed well in Q1.

So it shouldn't be surprising that commission spend would be a little bit higher.

And relative to my comment about getting recruiting related spend that, as I mentioned, that last year was a period where hiring was a pretty low period for the company.

And our expectations is we're going to step up hiring a bit more this year.

And so we incurred more kind of recruiting-related spend in the first quarter than we expected, which means we'd be able -- we moved a little bit faster than we thought we could.

So those are really the 2 big drivers.

Our last question is from Brandon Nispel of Keybanc Capital Markets.

I guess, one more on the media solutions category.

Can you give us the split between gaming, video, social and software download?

And then what are your expectations for some of the new services coming out?

I mean, Hulu, potentially Comcast products, potentially a Verizon product.

For those companies that already have a CDN capability, would you expect that traffic to continue to go to you guys?

Or would they have that traffic on their own platform?

Or it might be a hybrid of both?

Okay.

So I'll take those.

The -- a lot of the business is video and a lot of it is software downloads.

Now gaming, most of the gaming business today is software downloads, either just in the gaming vertical.

We don't give out the splits, but both are significant sources of traffic and revenue for us.

On your comment around Hulu, Comcast and Verizon, the answer is, it depends.

With Comcast, they have their own delivery mechanism for their own networks.

So to get to their own subscribers, they may use their own delivery network.

We also have many Akamai Edge servers within the Comcast networks.

So we deliver a lot of content to Comcast users as well.

Same with Verizon.

Verizon has a competing offer, but we deliver a lot of content within Verizon's network.

You take a Hulu.

That's more of a direct aggregator of content.

And that's a situation where Akamai would be in a good position to deliver their content.

And even in cases where there's a big content provider that maybe is in the same parent company with a big network, even if they have their own capability to deliver their network, you might well see us doing the delivery of the content for that content provider.

Generally speaking -- there's a couple of exceptions -- but generally speaking, a lot of the video delivery that's done, especially live or for pay content, we'll be doing that today.

Okay.

Well, thank you, everyone.

In closing, we will be presenting at a number of investor events in May and June in both the Americas and in EMEA.

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

So thank you for joining us, and have a wonderful evening.

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

This concludes your program.

You may now disconnect.

Everyone, have a great day.