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CompanyName:AkamaiT echnologiesIncCompanyTicker:AKAMSector:T echnologyIndustry:Internet
EventDescription:Q12016EarningsCallMarketCapasofEventDate:9.03BPriceasofEventDate:52.66
©2014TheStreet,Inc.Al l R ightsReserved Page1of21
AkamaiTechnologies(AKAM)EarningsReport:Q12016ConferenceCallTranscriptThefollowingAkamaiTechnologiesconferencecalltookplaceonApril26,2016,04:30PMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
TomBarth;AkamaiTechnologies;InvestorRelationsTomLeighton;AkamaiTechnologies;CEOJimBenson;AkamaiTechnologies;CFO
OtherPart icipants
MarkMahaney;RBCCapitalMarkets;AnalystRobSanderson;MKMPartners;AnalystVijayBhagavath;DeutscheBank;AnalystColbySynesael;CowenandCompany;AnalystSterlingAuty;JPMorgan;AnalystJonathanSchildkraut;EvercoreISI;AnalystJamesBreen;WilliamBlair&Company;AnalystMikeOlson;PiperJaffray&Co.;AnalystSitiPanigrahi;CreditSuisse;AnalystMarkKelleher;D.A.Davidson&Co.;AnalystMichaelBowen;PacificCrestSecurities;AnalystMichaelTurits;RaymondJames&Associates,Inc.;AnalystHeatherBellini;GoldmanSachs;AnalystEdMaguire;CLSALimited;AnalystWillPower;RobertW.Baird&Company,Inc.;AnalystSameetSinha;B.Riley&Co.;AnalystPriyaParasuraman;WellsFargoSecurities;AnalystJeffVanRhee;Craig-HallumCapitalGroup;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
Goodday,ladiesandgentlemen,andwelcometotheAkamaiTechnologies,Inc.firstquarter2016earningsconferencecall.
(OperatorInstructions)
Asareminder,today'sconferenceisbeingrecorded.
Iwouldliketointroduceyourhostfortoday'sconference,Mr.TomBarth,HeadofInvestorRelations.Sir,pleasegoahead.
T omBarth (InvestorRelations):
Thankyou,andgoodafternoon.ThankyouforjoiningusonAkamai'sfirstquarter2016earnings
CompanyName:AkamaiT echnologiesIncCompanyTicker:AKAMSector:T echnologyIndustry:Internet
EventDescription:Q12016EarningsCallMarketCapasofEventDate:9.03BPriceasofEventDate:52.66
©2014TheStreet,Inc.Al l R ightsReserved Page2of21
conferencecall.
SpeakingtodaywillbeTomLeighton,Akamai'sChiefExecutiveOfficer;andJimBenson,Akamai'sChiefFinancialOfficer.
Butbeforewegetstarted,pleasenotethattoday'scommentsincludeforward-lookingstatements,includingstatementsregardingrevenueandearningsguidance.
Theseforward-lookingstatementsaresubjecttorisksanduncertaintiesandinvolveanumberoffactorsthatcouldcauseactualresultstodiffermateriallyfromthoseexpressedorimpliedbysuchstatements.AdditionalinformationconcerningthesefactorsiscontainedinAkamai'sfilingswiththeSEC,includingourannualreportonForm10-KandquarterlyreportsonForm10-Q.
Theforward-lookingstatementsincludedinthiscallrepresentthecompany'sviewonApril26,2016.Akamaidisclaimsanyobligationtoupdatethesestatementstoreflectfutureeventsorcircumstances.
Asareminder,wewillbereferringtosomenon-GAAPfinancialmetricsduringtoday'scall.AdetailedreconciliationofGAAPandnon-GAAPmetricscanbefoundunderthefinancialportionoftheInvestorRelationssectionofourwebsite.
Andwiththat,letmepleaseturnthecallovertoTom.
T omLeighton (CEO):
Thanks,Tom.Andthankyouallforjoiningus.
Q1wasaverysolidquarterforAkamaiinboththetopandbottomlines.Revenueinthefirstquarterwas$568million,up8%yearoveryearandup9%whenadjustedforforeignexchangeheadwinds.Excludingthecontributionfromourtwolargestcustomers,revenueinthefirstquarterwasup15%overQ1of2015.
Ourstrongrevenueachievementwasdrivenbythecontinuedrobustdemandforoursecurityservices,whichgrew47%inconstantcurrencyoverthefirstquarteroflastyear,aswellassolidperformanceacrossallofourmajorproductlinesandgeographies.Non-GAAPEPSforthefirstquarterwas$0.66perdilutedshare,up8%yearoveryearandexceedingthehighendofourguidancerangeduetoourstrongrevenueachievementsandourcontinuedfocusonefficiencyacrosstheCompany.
OursolidperformanceinQ1hasgottenusofftoanexcellentstartfortheyear.IwasparticularlypleasedtoseeourcontinuedstrongexecutionduringthetimewhenwewererealigningtheCompany.Asaresultoftherealignment,wenowhavethreemajordivisions--media,web,andenterpriseandcarrier.Eachdivisionhasitsownresourcesfordevelopment,productmanagement,marketing,andsales.
Forexample,themediadivisionisdevelopingproductsfocusedonvideoandsoftwaredelivery.Theymanageourcustomersandprospectsinthemedia,software,socialnetworking,andgamingverticals.
Thewebdivisionisresponsiblefordevelopingourwebsecurityandapplicationaccelerationproducts.Andtheymanagecustomersandprospectsinverticalssuchase-commerce,financialservices,softwareasaservice,andthepublicsector.
Theenterpriseandcarrierdivisionisresponsiblefordevelopingproductsforenterpriseandcarriernetworksandenterprisesecurity.Andtheymanageourcarrierrelationships.
Goingforward,wewillreporttherevenueforeachdivisionintermsoftherevenuederivedfromcustomersinthatdivision.Forcontinuitypurposes,wewillalsocontinuetoprovidetheproductbasedviewofrevenuethatwehavehistoricallyreported.JimwillprovideallofthisdataforQ1shortly.
CompanyName:AkamaiT echnologiesIncCompanyTicker:AKAMSector:T echnologyIndustry:Internet
EventDescription:Q12016EarningsCallMarketCapasofEventDate:9.03BPriceasofEventDate:52.66
©2014TheStreet,Inc.Al l R ightsReserved Page3of21
But,first,I'dliketomentionsomeoftherecenthighlightsfromthemediaandwebdivisions.It'sbeenanexcitingstarttotheyearforthemediadivision,withrecord-breakingonlineaudiencesformajoreventssuchastheSuperBowlandMarchMadness.4millionviewerswatchedtheSuperBowlonlinethisyear,upfrom2.5millionin2015.Theaveragebitratewasup30%to4.5megabitspersecondin2016,andtheaverageviewingtimewasup20%toover100minutes.
Wealsodeliveredamajorgolftournamentinthenew4Kformatafewweeksago.ThiswasthefirsttimethatamajorUSsportingeventhasbeendeliveredin4Konline.Thequalitylevelswereextraordinary.UsingourOctoshapeclienttechnology,wedeliveredanaveragebitrateof13megabitspersecondwithare-bufferingrateoflessthan1%,showing,onceagain,Akamai'sabilitytodeliverbroadcastqualitycontentreliablyandsecurely.
Theexcellentend-userexperiencethatweareprovidingwithouradvancedvideodeliverycapabilitieswasamajortopicofdiscussionattherecentNationalAssociationofBroadcasters,orNAB,show.That'sbecausetheabilitytodeliverhigh-qualityvideoatscaleiscriticaltotheenablementofover-the-top,orOTT,services.
Acommonthemeinmyconversationswithmanyoftheworld'sleadingbroadcastersandmediacompaniesattheshowwasthattheygreatlyvalueourabilitytoprovidesuchhighqualityandscaleandtodosowithaveryhighlevelofreliability.Itisverydifficulttoreplicateourabilitytodeliveronlinemediawithworld-classquality,scale,andsecurity.That'sbecauseofouruniqueapproachofstreamingcontentthroughaglobalnetworkofmorethan200,000edgeserverslocatedclosetoendusers,whichallowsustobypasscongestedmiddlemilepeeringpoints,resultinginamorereliableviewingexperienceforendusers.
Oursuperiorcommunicationandvideotransportprotocols,whicharedesignedtodeliverthehigherqualitypicturethatisdesiredbyviewersandbroadcastersalike.Ourclient-sidesoftware,whichisnowinstalledonover100milliondevicesaroundtheworldanddesignedtogreatlyimprovequalityandscalewhilealsoloweringcosts.Andournew24-by-7broadcastoperationscontrolcenter,orBOC,capabilityforend-to-endmonitoringofqualityandfastresolutionofperformanceissues.
I'mpleasedtoreportthatourBOCisalreadyreceivingnationalaccoladesforthelevelofservicethatitcanprovidetoourbroadcastcustomers.AtNAB,theBOCwasselectedasTVTechnology'sbestofshowforitsdesign,features,costefficiency,andperformance.TheBOCalsowonStreamingMedia'sBestofNAB2016,oneofonlysixawardsthepublicationpresentedfromamongthe1,600-plusexhibitorsattheshow.Ofcourse,it'shardtopredicthowfasttheOTTmarketwillgrow,butwebelievethatweareverywellpositionedtobenefitfromtheincreasingdemandforhigh-qualityvideoonline.
Therearealsosomeexcitingdevelopmentstoreportfromourwebdivision,mostnotably,ournewBotManagerservicebecamegenerallyavailableearlierthismonth.BotManageridentifiesover1,200typesofbots,andenablesourcustomerstocustomizetheirresponsetorequestsbasedonthebottype.
Forexample,oneofourgovernmentcustomersrecentlydeployedBotManagertothwartmaliciousentitiesthatwerecheckingonthevalidityofstolenaccountnamesandpasswords.UsingBotManagertheywereabletoautomaticallyreportpasswordsasbeinginvalidwhenwedetectedthatabotwasmakingtherequestinsteadofahuman,therebypreventingthefraudulentuseofstolenidentity.
I'malsopleasedtoreportthatwenowhaveover1,000Ioncustomers.Asyoumayrecall,welaunchedIonalittleoverthreeyearsagoandithassincebecometheleadingsolutionforacceleratingwebsitesandapplicationsonline.Ionisparticularlywell-suitedforacceleratingmobileappsandcontentbeingdeliveredtomobiledevices.
Thisisimportantbecausethemobileenvironmentisoftenmuchslowerthanthedesktopenvironment.
CompanyName:AkamaiT echnologiesIncCompanyTicker:AKAMSector:T echnologyIndustry:Internet
EventDescription:Q12016EarningsCallMarketCapasofEventDate:9.03BPriceasofEventDate:52.66
©2014TheStreet,Inc.Al l R ightsReserved Page4of21
Usersexpectmobiledevicestobefast,andoverhalfofalltransactionsontheAkamaiplatformnowcomefrommobiledevices.
BeforeturningthecallovertoJim,Iwouldliketoemphasizethat,althoughwehaveanewdivisionalstructure,Akamai'sgoalremainsthesameasithasalwaysbeen--tomaketheInternetfast,reliable,andsecure.
Andwearestilllaser-focusedonsolvingfourgrandchallengesforourcustomers--deliveringvideoovertheInternetwithunparalleledquality,scale,andaffordability;providingnearinstantperformanceforwebsitesandappsonanydeviceanywhere;securingwebsitesanddatacentersfromcyberattacksthataimtodisrupttheironlineoperations,corrupttheirdata,orstealsensitiveinformation;andscalingenterprisenetworkstohandlegrowingcloudworkloadsefficientlyandsecurely.
Webelievethatwewillcontinuetobenefitfromstrongseculartailwindssuchastheincreasingamountofvideobeingconsumedonline,therapidproliferationofmobiledevices,thegrowingneedforcloud-basedsecuritysolutions,andthecontinuedmigrationofenterpriseapplicationstothecloud.Andwe'recontinuingtoinvestinthegrowthofthebusiness.Ibelievethatournewdivisionalstructurewillenableustobeevenmoreresponsivetoourcustomers'needsandtobringnewcapabilitiestomarketatanevenfasterpacethanbefore.
Insummary,Akamaiisofftoastrongstartin2016andI'mveryexcitedaboutthesubstantialopportunitiesforgrowththatlieahead.
IwillnowturnthecallovertoJimtoreviewourQ1financialresultsandtoprovidetheoutlookforQ2.Jim?
JimBenson (CFO):
Thankyou,Tom.Goodafternoon,everyone.AsTomoutlined,andaswepreviewedattheInvestorSummitinMarch,wearenowmanagingthebusinessinournewdivisionstructure.Inanefforttomakethistransitionasclearandtransparentaspossible,inadditiontoprovidingourresultsthroughthisnewdivisionlens,wewillcontinuetoprovideyouwithourfinancialresultsbythesolutioncategorieswe'vehistoricallyshared.
Lookingtotop-lineperformance,Akamaihadastrongfirstquarterandisofftoagoodstartin2016.Q1revenuecameinnearthehighendofourguidancerangeat$568million,up8%yearoveryearorup9%toadjusttheforeignexchangeheadlands.Andgrowthoutsideofourtoptwocustomerscontinuetobestrong,up15%inconstantcurrency.
Turningtooursolutioncategories,revenuefromourperformanceandsecuritysolutionswas$316millioninthequarter,up16%yearoveryearorup17%onaconstantcurrencybasis.Withinthesolutioncategory,wesawsolidgrowthacrossthemajorproductlinesandwecontinuetoseesignificantgrowthanddemandforourcloudsecurityofferings.
First-quarterrevenueforourCloudSecuritySolutionswas$81million,up46%yearoveryearorup47%onaconstantcurrencybasis.Wearepleasedwithhowwellouruniqueanddifferentiatedcloudsecuritycapabilitiesarebeingadoptedbyourcustomersandbeingrecognizedinthemarketplace.OurBotManagerofferingsisthelatestexampleofhowweareinnovatingtoexpandoursecurityportfoliotomeetstrongcustomerdemand.
TurningnowtoourMediaDeliverySolutions,revenuewas$206millioninthequarter,down4%yearoveryearandinlinewithourexpectations.Aswehavepreviouslymentioned,mediarevenuescontinuetobeimpactedbyDIYeffortsintwooflargestmediacustomers.However,therestofourmediabusinessgrewover11%comparedtoaverystrongQ1in2015.
CompanyName:AkamaiT echnologiesIncCompanyTicker:AKAMSector:T echnologyIndustry:Internet
EventDescription:Q12016EarningsCallMarketCapasofEventDate:9.03BPriceasofEventDate:52.66
©2014TheStreet,Inc.Al l R ightsReserved Page5of21
Finally,revenuefromourServicesandSupportSolutionswas$46millioninthequarter,up16%yearoveryear.Wecontinuedtoseestrongnewcustomerattachmentratesforourhigher-endenterpriseclassprofessionalservicesglobally.
Turningtoournewdivisionview,aswesharedinourlastcall,wearenowmanagingtheCompanyinanewdivisionstructurewhichintegratesthedevelopment,productmanagement,marketing,andsalesteamsintothreedivisionstofocusonthecompany'smedia,web,andenterpriseandcarrierproductsandcustomers.
Thisnewcustomeralignedstructureisdesignedtocreatetighteralignmentandintegrationbetweencustomerrequirementsandproductinnovation,whileincreasingtheeaseofleveragingAkamai'sservices,andisintendedtohelpusbetterserveourcustomersandaccelerategrowth.
Underthisnewdivisionconstruct,revenuefromourmediadivisionwas$292millioninthequarter,down1%yearoveryearorflatonaconstantcurrencybasis.ThemediadivisionisimpactedbythecontinuedDIYeffortsofourtwolargestcustomers,themediacustomers,thatImentionedearlier.Revenuegrowthforthemediadivisioncustomersoutsideofthetoptwowasahealthy11%.
Revenuefromthewebdivisionwas$264million,up18%yearoveryear.Wehavecontinuedtoseesolidgrowthinthiscustomerbase,withparticularlystrongsecuritygrowthof51%yearoveryearinconstantcurrency.Lastly,revenuefromtheemergingenterprisingandcarrierdivisionwas$12millioninthequarter,up45%yearoveryear.
Tobehelpful,aswemigratetothisnewdivisionreportinglens,wewillcontinuetoreporttheformersolutioncategoryviewthroughthebalanceof2016.Eventhoughoursecurityrevenuewillnowbeembeddedwithineachofthethreedivisionsrevenueresults,we'llcontinuetobreakouttotalsecurityrevenueseparately.Youwillfindalloftheserevenueresultsdetailedintoday'spressreleaseandonourInvestorRelationswebsite.
Movingontoourgeographies,salesinourinternationalmarketsrepresented30%oftotalrevenueinQ1,up2pointsfromQ4.Internationalrevenuewas$170millioninthequarter,up24%yearoveryearorup27%inconstantcurrency.Foreignexchangefluctuationshadanegativeimpactonrevenueof$4milliononayear-over-yearbasisandwasroughlyneutralonasequentialbasis.WecontinuetoseeverystronggrowthinourAsia-Pacificgeographies.
RevenuefromourUSmarketwas$397million,up2%yearoveryear.Aswehavesharedwithyoupreviously,ourtwomediacustomersresideintheUSandcontinuetoweighheavilyondomesticrevenues.Outsideofthesetwocustomers,revenuegrowthwassolidacrosstherestofthebusiness.
Movingontocost,cashgrossmarginwas77%,consistentwithQ4levels,down1pointfromthesameperiodlastyear,andinlinewithourguidance.GAAPgrossmargin,whichincludesbothdepreciationandstock-basedcompensation,was66%,down1pointfromthepriorquarter,down2pointsfromthesameperiodlastyear,andinlinewithourguidance.GAAPoperatingexpenseswere$259millioninthefirstquarter.
TheseGAAPresultsincludeitemssuchasdepreciation,amortizationofintangibleassets,stock-basedcompensation,acquisition-relatedcharges,andothernonrecurringitems.Ofparticularnoteinthequarter,werecorded$7millioninnonrecurringrestructuringchargesforseveranceandimpairmentsrelatedtotheorganizationrealignment.
Excludingtheseitems,non-GAAPcashoperatingexpenseswere$201million,down$9millionfromQ4levelsandatthelowendofourguidance.Asalways,wewillstrivetobalanceinvestmentsinthebusinesstoalignwiththeexpectednear-termmoderationinrevenuegrowthrates.
CompanyName:AkamaiT echnologiesIncCompanyTicker:AKAMSector:T echnologyIndustry:Internet
EventDescription:Q12016EarningsCallMarketCapasofEventDate:9.03BPriceasofEventDate:52.66
©2014TheStreet,Inc.Al l R ightsReserved Page6of21
AdjustedEBITDAforthefirstquarterwas$234million,down$4millionfromQ4levelsfromtheseasonalrevenuedeclinesQ4toQ1,andup$11millionfromthesameperiodlastyear.OuradjustedEBITDAmargincameinat41%,consistentwithQ4levels,down1pointfromthesameperiodlastyearandinlinewithourguidance.
GAAPdepreciationandamortizationexpenseswere$81millioninthefirstquarter.TheseGAAPresultsincludedepreciationassociatedwithstock-basedcompensation,amortizationofintangibleassets,andamortizationofcapitalizedinterestexpense.Excludingthesecharges,non-GAAPdepreciationwas$70million,consistentwithQ4levelsandslightlybelowourguidanceduetothetimingofnetworkdeployments.
Non-GAAPoperatingincomeforthefirstquarterwas$164million,down$4millionfromQ4andup$1millionfromthesameperiodlastyear.Non-GAAPoperatingmargincameinat29%,consistentwithQ4levelsanddown2pointsfromthesameperiodlastyear,and1pointhigherthanourguidancegiventhestrongrevenueattainmentandcostefficienciesmentionedearlier.
Movingontotheotherincomeandexpenseitems,interestincomeforthefirstquarterwas$3million,consistentwithQ4levels.Non-cashinterestexpenserelatedtoourconvertibledebtwasroughly$5million.Asareminder,thisnon-cashexpenseisexcludedfromournon-GAAPresults.
Movingontoearnings,GAAPnetincomeforthefirstquarterwas$75millionor$0.42ofearningsperdilutedshare.Non-GAAPnetincomewas$118millionor$0.66ofearningsperdilutedshare,$0.02abovethehighendofourguidancerange.Ourbetter-than-expectedearningswerefueledbyhigherrevenuesandcontinuedefficienciesinthebusiness.
Forthequarter,totaltaxesincludedinourGAAPearningswere$38million,basedonaneffectivetaxrateof33.5%.Taxesincludedinournon-GAAPearningswere$49millionbasedonaneffectivetaxrateof29.4%andinlinewithourguidance.Finally,ourweightedaveragedilutedsharecountforthefirstquarterwas178millionshares,down2millionsharesfromQ4levelsfromouropportunisticincreaseinsharebuybackactivity,andinlinewithourguidance.
NowI'llreviewsomebalancesheetitems.Dayssalesoutstandingforthefirstquarterwas60days,up1dayfromQ4levels.CapitalexpendituresinQ1,excludingequitycompensationandcapitalizedinterestexpense,were$85millionandatthelowendofourguidanceforthequarter.Asareminder,thisnumberalsoincludescapitalizedsoftwaredevelopmentactivities.
Cashflowgenerationcontinuedtobestrong.Freecashflowwas$108millioninthefirstquarteror19%ofrevenue,averystrongresultconsideringQ1isourseasonallylowestfreecashflowquarter.
Ourbalancesheetalsoremainsverystrong,withroughly$1.5billionincash,cashequivalents,andmarketablesecuritiesonhandattheendofthequarter.Ifyoufactorinourconvertibledebt,ournetcashisapproximately$800million.
Duringthequarter,wespent$109milliononsharerepurchases,buyingbackroughly2.2millionshares.Aswementionedinourlastearningscall,theBoardauthorizedanew$1billionsharerepurchaseprogramthroughtheendof2018.Wehaveapproximately$960millionremainingonthatauthorization.
Andaswehavediscussedinthepast,ouroverallaimistodeployourcapitaltofavorablereturnsforourinvestorsinamannerthatwebelieveisinthebestlong-terminterestoftheCompanyandourshareholders.Givenourstrongbalancesheetandcashgeneration,thisnewauthorizationisintendedtocontinueourmulti-yearcapitalallocationplantooffsetdilutionfromequitycompensationplansandtoprovideuswiththeflexibilitytoreturnmorecashtoshareholders,dependinguponbusinessandmarketconditions.
CompanyName:AkamaiT echnologiesIncCompanyTicker:AKAMSector:T echnologyIndustry:Internet
EventDescription:Q12016EarningsCallMarketCapasofEventDate:9.03BPriceasofEventDate:52.66
©2014TheStreet,Inc.Al l R ightsReserved Page7of21
Insummary,wearepleasedwithhowthebusinessperformedinQ1andweremainconfidentinthelong-termprospectsofprofitablegrowthfortheCompany.Lookingahead,we'reprojectingrevenuefromourtoptwocustomerstodeclineinQ2andpossiblythesecondhalfoftheyear.Assuch,we'reexpectingslightlylesssequentialgrowthinthesecondquarterthanwehavehistoricallyseen.
WeexpectQ2revenuesintherangeof$566millionto$582million.Atcurrentspotrates,foreignexchangefluctuationsareexpectedtohaveapositiveimpactonQ2revenueofroughly$3millionsequentiallyandlessthan$1millioncomparedtoQ2oflastyear.Attheserevenuelevels,weexpectcashgrossmarginsofroughly76%andGAAPgrossmarginsof65%.
Q2non-GAAPoperatingexpensesareprojectedtobe$206millionto$211million.AsI'vementionedonthepastcouplecalls,wehavepurposelysloweddowntherateandpaceofheadcountadditionsanddiscretionaryspendingtoalignwithournear-termtop-linegrowthexpectations,butwearecontinuingtomakeprudentinvestmentsinthebusinessthatwebelievearenecessarytosupportsustainedlong-termgrowthandscale.
FactoringinalloftheseitemsIjustmentioned,weanticipateQ2EBITDAmarginsof40%.AndasIcontinuethemessage,wewillstrivetooperatetheCompanyinthe40%to41%EBITDArangefortheforeseeablefuture.Ofcourse,ourabilitytomaintainEBITDAmarginsinthisrangewillbeheavilydependentonseveralfactors,includingrevenuevolumes,possibleM&A,andspendingonplatformcapacityinanticipationofgreaterdemandforourover-the-topvideodeliveryservices.
Movingontodepreciation,weexpectnon-GAAPdepreciationexpensetobe$73millionto$75million.Factoringinthisdepreciationguidance,weexpectnon-GAAPoperatingmarginsof27%forQ2.WiththeoverallrevenueandspendconfigurationIjustoutlined,weexpectQ2non-GAAPEPSintherangeof$0.62to$0.65.
ThisEPSguidanceassumestaxesof$46millionto$48millionbasedonanestimatedquarterlynon-GAAPtaxrateof29.5%.Thisguidancealsoreflectsafullydilutedsharecountof176millionshares.OnCapEx,weexpecttospendapproximately$90millionto$98millioninthequarter,excludingequitycompensation.Asalways,wewillstrivetobalancenetworkinvestmentagainstfuturerevenueopportunityandcontinuednetworkefficiencyinitiatives.
Inclosing,Q1wasasolidstartto2016,andweremainconfidentinourstrategyandourabilitytoexecuteonourlong-termplans.Thankyou.
AndTomandIwouldliketotakeyourquestions.Operator?
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)
MarkMahaney,RBCCapitalMarkets.
MarkMahaney(Analyst-RBCCapitalMarkets):
Thanks.Youtalkaboutthegrowthinthemediasegmentofabout11%,exthetwolargestcontributors.Couldyoutalkaboutthetrendinthatgrowthexthosetwolargestcontributors?Andhowweshouldthinkaboutthesustainabilityofthatgrowth?Isthatareasonablewaytothinkaboutthatsegmentexthetwolargeplayersgoingforward?Thankyou.
T omLeighton (CEO):
CompanyName:AkamaiT echnologiesIncCompanyTicker:AKAMSector:T echnologyIndustry:Internet
EventDescription:Q12016EarningsCallMarketCapasofEventDate:9.03BPriceasofEventDate:52.66
©2014TheStreet,Inc.Al l R ightsReserved Page8of21
Goodquestion,Mark.Actually,thatgrowthrateisconsistentwiththegrowthratesthatwesawinQ4.We'vebeeninthedouble-digitrangeforawhile.Sometimesit'llbealittlebithigherthanthat.Aswe'vesharedinthepast,thatsometimesgrowthratesinthemediabusinessareaffectedbylargesoftwarereleases,agamingrelease,orthingsofthatnature.ButIthink,generallyspeakingweexpectthatwecouldprobablyoperateinthelowdoubledigitsforthemediadeliveryoutsideofthosetoptwocustomers.
MarkMahaney(Analyst-RBCCapitalMarkets):
Thankyouverymuch.
Operator :
RobSanderson,MKMPartners.
RobSanderson (Analyst-MKMPartners):
Thankyou.Acouple,oneforJim,oneforTom.Tom,aquestiononcostreduction.Manyyearsofhighgrowthintrafficvolumesalongwithpricebreaksthatyou'vebeenpassingalong.HowmuchhastheCompanybeenabletocostreducetrafficdeliveryovertheyears?Isthereawaywecancomparecostperbittodaycomparedto,say,fiveyearsago?Iwouldthinkinthepastit'ssomethinglikeMoore'sLaw,butisthereanywayyoucanattempttoquantifythat?AndhowdoyouthinkthiscomparestosomeofthegenericCDNorsomeofthedo-it-yourselfeffortsthatyou'veseenoverthistimeframe?
AndthenaquickoneforJim.Freecashflow,willQ1betheseasonallowagainthisyear,asithasinthepast,oristheresomethingunusualseasonallythisQ1forcashgeneration?
T omLeighton (CEO):
Tothefirstquestion,weputalotofeffortinR&Dtoreduceourinternalcostperbit,todelivermorebitspersecondperCPU,morebitspersecondpersquarefootofcolo,forakilowattofpower.Andthenwepassonthosesavingstoourcustomers.So,Ithinkasyoulookovertime,everyyearweareabletooffersignificantcostreductionsonaperbitbasistoourcustomers.Sooverfiveyearsthesavingsarereallyquitesubstantial.
Weareverycompetitivewhenitcomestopricingforlargetrafficcustomers.AndIthinkweareverycompetitivewithnotonlytheotherCDNsouttherebutalsothedo-it-yourselfeffortsthatsomeofourlargestcustomershavetriedtoengagein.Andyouseethiswheresomeofourlargecustomershavehaddo-it-yourselfeffortsinthepastandthenafterafewyearsdiscoverthatAkamaiisalotmoreeffectiveatitandchargesthemlessthantheirinternaleffortscostthem.So,thenItrafficroseagain,eventhoughthey'vegotdo-it-yourselfefforts.
JimBenson (CFO):
Onthequestiononfreecashflow,asyouknow,freecashflowreallydependsonthecouplethings.One,wearenotaninventory-centriccompany,sootherthanprofitability,receivablecollectionstendstobethedriverfromquartertoquarterifyouseeupticksordownticks.Also,CapExhappenstohavevariabilityfromquartertoquarter.
Iwouldexpectthatthiswillprobablystillremainourseasonallylowestquarter,butitalldependsuponcapitalexpenditures.And,asIsaidearlier,ifweseedemandthatweneedtodomorenetworkdeployment,we'lldothat.Idon'twanttosignalsomethingandthenlateronifwearemaybealittlebitlowerthanthat.ItreallydependsonCapExinvestments.ButI'dsay,basedonourcurrentlineofsight,it'llprobablybethelowestseasonalquarterthisyear,aswell.
CompanyName:AkamaiT echnologiesIncCompanyTicker:AKAMSector:T echnologyIndustry:Internet
EventDescription:Q12016EarningsCallMarketCapasofEventDate:9.03BPriceasofEventDate:52.66
©2014TheStreet,Inc.Al l R ightsReserved Page9of21
Operator :
VijayBhagavath,DeutscheBank.
VijayBhagavath (Analyst-DeutscheBank):
Yes,hi,Tom,Jim.Thequestionisonyoursecuritybusiness.Wegetthisquestionfromclientsalotsaying,wouldthelawoflargenumbersstartimpactingthesecuritybusiness,becauseit'sprimarilysellingintoDDoSandwebapplicationsecurityversusthebroadersecurityopportunity.I'dliketohearyourthoughtsthere.Thanks.
T omLeighton (CEO):
I'mnotsurewhatyoumeanbythelawoflargenumbers,buttheattacksarecertainlygrowinginsizeandsophistication,tothepointnowwhereanyofthetraditionaldefensessimplydon'twork.Youcan'tdefendyourselfbybuyingboxesandputtingtheminyourdatacenter.Youcan'tevendefendyourselfbybuyingacleanpipefromacarriersimplybecauseofthescaleoftheattacks.
That'swhyAkamaihasbeenuniquelyabletodefendalotoftheworld'smajorenterprisesagainstthelargestattacksoutthere.Inaddition,we'reabletodefendagainsttheattacksthattrytodefaceorcorruptawebsite,changethecontentinawaytoembarrassthewebsiteowner.Andalsowecandefendagainsttheattackswhotrytostealdatafromthewebapplication,likeacreditcardorinformationabouttransaction.
Goingforwardwithourenterpriseandcarrierdivision,wearedevelopingproductsthatwillprotectenterpriseemployees,forexample,fromphishingmalwarekindsofattacksorenterprisedataexfiltrationattacks.So,it's,Ithink,averyexcitingfuturepotentialforusinsecurity.
VijayBhagavath (Analyst-DeutscheBank):
Aquickfollow-on,Tom.Corporatevideoinbigcompanieshavetheseallhandsmeetings,townhallmeetingswheretremendousvideovolumesgetgeneratedincorporatenetworks,whichisquiteexpensive.WouldAkamaihaveaplaythereinbettermanagingormakingcorporatevideoandenterprisesmoreefficient?Thanks.
T omLeighton (CEO):
Yes,absolutely.Infact,wehaveaproducttodaythroughtheOctoshapeacquisitionthatsupportscorporatevideostooffloadtheirprivatenetworkortheircorporatenetwork.Itgivesaveryhighqualityexperience,verysecure,withoutfloodingthebranchofficenetwork.
VijayBhagavath (Analyst-DeutscheBank):
Thankyou.
Operator :
ColbySynesael,CowenandCompany.
ColbySynesael(Analyst-CowenandCompany):
Great,thankyou.Twoquestions,ifImay.Thefirstone,Ijusthaveapointofclarificationonguidance.IthoughtIheardyousaythatyouthoughtthatthetoptwocustomerscouldfurtherdeclineinthebackhalfoftheyear.Ithinkthepreviousexpectationwasthattheywoulddropataround6%orgreaterinthesecondquarter.IjustwantedtoclarifywhatIthoughtyoumighthavesaidduringyourcommentson
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guidance.AndthenIhaveafollow-upquestion.
T omLeighton (CEO):
Ontheguidance,I'dsaywe'reprobablyappropriatelybeingcautious,tobefrank.Wehavegoodvisibilitywithinthequarterforthesetoptwocustomers.I'dsaythevisibilitybeyondthequarterisless,sowhatwe'retryingtodoisbecautiousinwhatwe'retellingyou,thatwecertainlyexpectfromQ1toQ2,aswetoldyoulasttime,thatrevenuevolumeswoulddeclineforthesetoptwocustomers.
Ithinkwhatwe'resayingisthatwe'renot100%sureonthebackhalfoftheyear,sowe'rebeingalittlecautiousinourprojectionsthatitcoulddeclinefurther.Therearethingsthatcouldstabilizeit.Therearethingsbeyondthat,dependingupondifferentfeaturesandcapabilitiesforthesetwocustomers,thatcouldcauseittogrow,aswell.ButI'dsaywhatwe'retryingtoprovideyouisalevelofconsciousness,andthat'sthewaywe'relookingatitinternally.
ColbySynesael(Analyst-CowenandCompany):
Tosomedegree,thatimplies,then,thatthesecustomersareonsomeformofmonth-to-monthorshort-termcontract,thattheyhavetheabilitytoturnonandturnoffservicequartertoquarter.Isthatafairinterpretation?
T omLeighton (CEO):
No,it'snot.Thesecustomersareonlong-termcontracts,butthesecontractsarestructuredinawaythatvolumescanebbandflowfromperiodtoperiod.Thereareminimumsthattheyneedtohit,butvolumescancertainlyfluctuatetoapoint.Butthesecustomersareonlong-termcontracts.They'renotonmonth-to-monthcontract.
ColbySynesael(Analyst-CowenandCompany):
Okay,great.Andthenjustmyfollow-upquestion,Ithinkyouhadbeenlookingforaheadofsalesforyourwebdivision.Iwonderedifthereisanyupdateonthat.Thanks.
T omLeighton (CEO):
Weareintheprocessofasearchthere,sonoupdate.
ColbySynesael(Analyst-CowenandCompany):
Okay,great.Thankyou.
Operator :
Thankyou.SterlingAuty,JPMorgan.
SterlingAuty(Analyst-JPMorgan):
Thanks,guys.Maybejustfollowinguponthemediaside,takingthetoptwocustomersout,curiousaboutthevisibility.You'veoftentalkedabouttalkingwiththecustomersaroundtimingofsoftwareupdatesanddifferentitemsthatmightmovetheneedleintermsofvolume.Howwouldyousayyourvisibilityintherestofthecustomerbaselooksatthispointoftheyearascomparedtolastyear?
T omLeighton (CEO):
Honestly,it'ssimilartoourtoptwocustomers,aswell.Ourvisibilitywithinthequarteriscertainlyalotbetterthanourvisibilityfortheremainderoftheyear.Thereiscertainlythingsthatweknowthatare
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goingtooccur,thingsliketheOlympics,thingslikepresidentialdebates,andthingsofthatnature,thatwillcausevolumes.Therearecertainlystagedrolloutsofsoftwarereleasesandthingsofthatnature.
ButI'dsaywehaveverygoodvisibilitywithinathree-monthwindow.Itjustlessensinthebackhalf.Andit'snotforthetoptwocustomers,it'singeneral.That'sjustthenatureofthemediabusiness.
SterlingAuty(Analyst-JPMorgan):
Gotit.Thankyou.
Operator :
JonathanSchildkrautwithEvercore.
JonathanSchildkraut (Analyst-EvercoreISI):
I'mgoingtotrytosneakintwoquestions,too.First,Iwaswonderingifyoucouldgiveusalittlebitmorecoloroninternational.It'sobviouslybeengrowingreallywellandit'sbecomingamuchmoremeaningfulpieceofyourbusiness.It'shardertohavevisibilityintothecompetitivelandscapedrivers,etcetera,aswelookintosomeoftheinternationalmarkets.Iwashopingyoumightspendasecondtalkingaboutthat.
AndthenI'mcuriousbecausewe'vebeendoingalotofworkonInternetofThings,andthemoreIlookatit,particularlyaroundconnectedcar,driverlesscar,thingsthatrequireperformance-sensitiveinformationtomakeyourwayintothenetwork,theInternetofThingsislookingmoreandmorelikeaDDoS,frommyseat.AndI'mjustwonderingaboutyourperspectivefortheroleofAkamaiinaworldofInternetofThings.Thanks.
JimBenson (CFO):
Letmestart,Tom,onobviouslyyourcommentoninternationalgrowth.Ourinternationalgrowth,you'reright,hasbeenverystrong.Wegrew27%inconstantcurrencyinQ4.It'sgrownparticularlywellinourAsia-Pacificgeographies.We'veseenverystronggrowthacrossourAsia-Pacificmarkets.
Asyouknow,whenwebeganinvestinginincrementingthesalesforce,wewereinvestingmoreinoursalesresourcesoutsidetheUSthanactuallyintheUS.Aswe'vetoldyouinthepast,ittakestimeforareptoramptoproductivity,andsoIthinkyou'restartingtoseethebenefitoftheinvestmentsthatwe'vemade.So,we'reverypleasedwiththat.
Fromacompetitivelandscapeperspective,there'sstillbroadglobalcompetitorsthatyouknowwhotheyare,andthentherearelocalcompetitorsindifferentmarkets.ButI'dsaythatwehavefaredverywellandIthinkthere'sasignificantopportunitytocontinuetogrowinternationallyfasterthanactuallyintheUS.
T omLeighton (CEO):
AndtotheIOTquestion,theproliferationofdevicesandtheInternetofThingsrepresents,really,agreatopportunityforAkamai.Inparticular,youmentionedconnectedcars.Wehavegreatrelationshipswiththeworld'smajorautomotivecompanies.Theyare,obviously,veryinterestedinhavingfastandreliablecommunicationwiththeircarsandthedevices.Andtheyareveryworriedaboutsecurity,asyoucanimagine.Notonlydenialofservicebutapplicationlayerattackswheresomebodymighttrytogaincontrolofthecar,corruptinformationonthecar.Andthat'sawonderfulopportunityforoursecurityservices.
JonathanSchildkraut (Analyst-EvercoreISI):
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Great.Thanksfortakingthequestions.
Operator :
JamesBreen,WilliamsBlair.
JamesBreen (Analyst-WilliamBlair&Company):
Thanksfortakingthequestion.Canyoujusttalkaboutthecapitalintensityoverall--youseemtohavespentalotofcapitalin2015inanticipationtosomeoftheOTTbuildout--andhowthat'sflowingthroughthecoststructurenowandhowthatwouldimpactspendinginthefuture.Thanks.
JimBenson (CFO):
Sure.OnCapEx,you'reright,wewereaboveourlong-termmodellastyearin2015.Wesignaledthatwewereabout19%ofrevenue.ItwasalldrivenbyincrementalnetworkCapEx.Aswesawforthequarter,thatIthink$85millionwasabout15%ofrevenue.
We'recertainlygoingtobedialingCapExdowninalignmentwithwhatweareseeinghere,butIexpectwewillbebacktoourlong-termmodelof16%to18%.Again,wesignaledthatifweseedemandinthebackhalfoftheyearthatrequiresustodomorebuildout,we'lldothat.ButIexpectweshouldbeinthe16%to18%withnetworkCapEx,whichisthecomponentthathasthemostvariability,dialingbackfromroughly10percentofrevenueslastyeartoprobablythein8%rangethisyear.
JamesBreen (Analyst-WilliamBlair&Company):
Thankyou.
Operator :
MikeOlson,PiperJaffray.
MikeOlson (Analyst-PiperJaffray&Co.):
Goodafternoon.Iknowyoutypicallysuggestthatnoonemajoreventhasanimpactonrevenue,butisn'ttherelikelytobesomedegreeafavorableimpactfromtheOlympicsinQ3justgiventhefavorabletimezoneandjustincreasedconsumptionofthesetypesofeventsonline?
Andthen,secondly,youtalkedabitaboutcompetitionearlier.There'sbeenincreasingchatterinrecentweeksoncompetitivethreatsfromGoogleandotherplayersinthespace.Canyoujustgiveusyourtakeonwhatwe'reseeingthereandifanythingischanginginyourview?Thanks.
JimBenson (CFO):
Sure.I'lltakethefirstoneandthenTomcancommentonthecompetitivelandscape.Ithinkwe'vedefinitelysaidhistoricallythatthereisn'tanyoneeventthatisasignificantneedlemoveronrevenueinaquarter.We'veneversaidthatwedon'tgarnerrevenuesfromthoseevents.Andcertainlyeventsthatlastovermultipledaysgeneratemorerevenuesthateventsthatlastforadayorafewhours.
So,youwilldefinitelyseerevenuevolumesasaresultoftheOlympicsinourresults.Youwillseethat.But,again,it'snotgoingtobeasignificantneedlemover.Iwouldsayverylargesoftwareupdatestendtobemoreofaneedlemoverthananeventlikethat.
T omLeighton (CEO):
Intermsofcompetition,Idon'tseeanyrealchangeinthelandscapethere.You'reright,andyou
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mentionedthere'sbeenchatteraboutGoogleandsoforth.Butthat's,Ithink,whatitis.TheGoogleserviceisdesignedtoprovidedeliveryforapplicationsthatareontheircomputeandstorageinfrastructure.Inthatregard,they'recompetingwithAWSandAzure,forexample,andwereallydon'tseearealimpactfromthat.
Asyouknow,wehavedozensofcompetitorsandalwayshave,andwedifferentiateourselvesbasedonourlevelofperformance.So,ifyouwantyourapplicationstobefaster,whetheryou'reonGoogle,Azure,orAWS,youwoulduseAkamaitoacceleratethoseapplications.Ifyouwantyourapplicationstobesecure,whereveryouhavethemhosted,you'duseAkamaiKonaSiteDefenderandourProlexicRoutedcapabilities,andthatwillprotectyoufromDDoSattacksandapplicationlayerattacks.
Andifyouwantyourvideoandmediadeliveredwithveryhighquality,whetheryou'reusinganyofthosecloudservicestostorethecontentornot,again,you'duseAkamaitodothatdeliveryforyoutogetthehigh-qualityvideoexperience.So,nofundamentalchangeinthecompetitivelandscapeatall.
MikeOlson (Analyst-PiperJaffray&Co.):
Thankyou.
Operator :
SitiPanigrahiwithCreditSuisse.
Sit iPanigrahi(Analyst-CreditSuisse):
Hi,guys.Thanksfortakingmyquestion.Ijustwantedtodigintoyourenterprisesecuritybusiness.Enterprisedivisionaround$12millionrevenue,almostdoubled.YoutalkaboutBotManager.Firstquestionis,whatfeedbackhaveyougottenonBotManager?That'saprettyinterestingproduct.
But,also,what'syourplanstoexpandthisbusiness?Areyouplanningtoacquiremoreofthesetuck-inacquisitions,orareyouplanningtobuildin-houseproducts?
T omLeighton (CEO):
Okay.FirstletmemakeitclearthatBotManagerispartofourwebsecuritybusiness,andthat'sinthewebdivision.Thatproductisbuiltbythewebdivision.Andthecustomerfeedbacktherehasbeenoutstanding.Thecapabilitytoidentifythebottypeandthentailortheresponsebasedonthebottypeisreallyuniqueoutthereandofhighvaluetoourcustomers.Wehavesomecustomersthatseehalfoftheirrequestsareactuallyfrombots.
Andthere'smanydifferenttypesofbots.Somearefriendly,someareverymuchnotfriendly,andthere'sthosethatareinbetween.So,Iwouldsaytheinitialcustomerreactionisverystrong.Thatisawebdivisionproduct.
Now,forourenterprisesecurityproducts,wedon'thaveanyinthemarketplaceyet.OurfirstproductwillbebasedonrecursiveDNS.Thatisthecapabilitythatwedohaveinthemarketthroughourcarrierpartnersforhomeuse,andwewillbebringingtomarketforenterpriseuseforlaterthisyear.Andthat'sdesignedtoprotectanenterprisefrommalware,fromphishingattacks,andfromdataexfiltrationattacks.
Nowintermsofourstrategy,Ithinkyou'llseeusdoalotofdevelopmentorganically,andyou'llalsoseeuscontinuetomakeacquisitions.And,asyouknow,recentlywe'vemadeacquisitionswithXerocoleandBloxx,andtheyareintheenterprisesecurityspace.Also,we'vedoneorganicdevelopment,takingtheXerocolecapabilityforcarriersandnowintheprocessofbringingaproducttomarketforenterprisesecurity.
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Sit iPanigrahi(Analyst-CreditSuisse):
Thanksforthatcolor.Justaquickhousekeepingquestion.Howmuchwasthe[DSD]revenuethatyoumovedfrommediatoPerformanceandSecuritythisquarter?
JimBenson (CFO):
Yes,Iwanttorecallitwaslike$109million.WesharedthatatourIRSummit.It'sactuallyavailableontheInvestorRelations.
Sit iPanigrahi(Analyst-CreditSuisse):
Yes,butdoyouhaveanythingforthisQ1?Howmuchwasthat?
JimBenson (CFO):
No,it'sembeddedinouroverallresults,butyoucangenerallydivideby4.That'sroughlyspeakingwhatthequarterlyaverageis.
Sit iPanigrahi(Analyst-CreditSuisse):
Allright,thankyou.
Operator :
MarkKelleher,DADavidson.
MarkKelleher (Analyst-D.A.Davidson&Co.):
Great.Thanksfortakingmyquestion.Justwantedtolookattheover-the-topopportunity.It'sbeenacouplemonthssinceyouranalystday.We'reacouplemonthsfurtherintheyear.Canyougiveusanupdateonwhatyouareseeingthere?Iwouldimplyfromyourguidanceonyourtoptwocustomersthatmaybethat'sstillinlimbo,butjustwonderedifyoucouldgiveusanupdateonwhatyou'reseeingthere.Thanks.
T omLeighton (CEO):
Theguidancefromthetoptwocustomersreallyisn'trelatedtoOTTcapabilities.Ithinkingeneralthere'salotofinterestintheover-the-topspace.ItwasexcitingtodeliverthefirstmajorsportingeventintheUSin4K.Thatbusinessisgrowingnicelyforus.
Idon'tknowofanyparticularfundamentalchangeinthelandscapethatwouldcauseahugeovernightincreaseintraffic.ButIexpecttohavesteadyandsubstantialgrowthovertimewithover-the-top.
MarkKelleher (Analyst-D.A.Davidson&Co.):
So,thetoptwocustomersareunrelatedtoyourexpectationsinOTT,justtobeclearonthat?
T omLeighton (CEO):
Currently,yes.
MarkKelleher (Analyst-D.A.Davidson&Co.):
Okay,thanks.
Operator :
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MichaelBowen,PacificCrest.
MichaelBowen (Analyst-PacificCrestSecurities):
Thanksfortakingthequestion.I'msorry,I'vegottobeatthisdeadhorseonemoretime,butI'mgettingquestionsoverthetransomhere.The6%forthetwoDIYcustomersattheendofQ2,wasthata6%exitrateoranaverageforthefirsthalf,andthen,therefore,areyoutalkingaboutpotentialdeclinefromanaverage6%oranexitrate6%?
JimBenson (CFO):
6%,wesharedthatinQ4,thatwhatwehadsaidwasthatthesetwocustomerscombinedusedtobeabout13%ofourrevenues,andtheyhavebeendeclining.Andwesaidthatweexpectedthattheywouldprobablydeclinetoabout6%ofourrevenues.Now,obviously,apercentageimpliesthatyouknowwhatyourotherbusinessesaregoingtodo.So,tosomeextentthere'salittlebitofvariabilityin6%,whetherit's6%,whetherit's5%,whetherit's7%.ButweexpectthattherevenuevolumeswilldeclineinQ2.Andbasedonthisguidancethatwe'veprovidedatthemidpoint,thatisroughly6%oftheirrevenuesinthequarter.
MichaelBowen (Analyst-PacificCrestSecurities):
Inthesecondquarter?
JimBenson (CFO):
That'scorrect.
MichaelBowen (Analyst-PacificCrestSecurities):
Okay.Andthenthebackhalfcouldbeconservativelyalittlelighterthanthat.
JimBenson (CFO):
That'sright.
MichaelBowen (Analyst-PacificCrestSecurities):
Okay,veryclear.Thankyou.
Operator :
MichaelTurtis,RaymondJames.
MichaelT urits (Analyst-RaymondJames&Associates,Inc.):
Hey,guys.Jim,canyoucommentonhowyousaidthatyou'dbelimitinginvestmentsatthispoint?ItdoesseemliketheOpExguideisprettylight,evenwithEBITDAmarginswheretheyare.
JimBenson (CFO):
Wecontinuetomaketheappropriateinvestmentsinthebusinessthatwethinkarenecessary.ButTomandIaremanagingtheCompanyprudently,andwethinkthatwewanttomanagetheCompanyinthelow40sEBITDArange,whichmeansthatwe'rescalingbackinvestments.WearenotscalingbackinvestmentsthatwouldjeopardizefuturegrowthandscalefortheCompany,but,yes,wearescalingbacklittleinvestmentsrelativetowhatweweredoinginprioryears.Andyoucanexpectthatwewillcontinuetodothat.
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Again,wearestillmakingverytargetedinvestments.We'remakingtargetedinvestmentsinareastohelpscalethenetwork.We'remakingtargetedinvestmentsinareasofR&Dandthingsofthatnature.So,wearestillmakinginvestmentsinthebusinessbutwe'rejustmakingthemataslowerpace.
T omLeighton (CEO):
Tobeclear,wearegrowingheadcountandgrowingbusiness,it'sjustnotattherapidpacethatyousawoverthelastfewyears.ThereisstillplentyofgrowthatAkamai.
MichaelT urits (Analyst-RaymondJames&Associates,Inc.):
Thereasonforaskingisitseems,especiallywitheverythingyou'redoingwithNAB,justhavingfinished,andtheBOCproducthavingrolledout,itseemsasifthere'salotthatcanbedoneintermsofend-to-endvaluecreationforbroadcastinareasyou'vedabbledin,you'vehadsomeparticipationinthepast,whetherit'singestiontranscoding,digitalrightsmanagement,contentmanagement,areasofthebroadcastsupplychain.Andwonderingwhetherornotit'simportanttoinvesttherenowandifyou'rerampingthatupatall.
T omLeighton (CEO):
Yes,wearecontinuingtomakeinvestments.Thatisoneareathat'sveryimportantforus.Andwebelievethere'saverylargefutureinover-the-topvideo,soitmakesperfectsensetoinvestinthoseareasandwecontinuetodoso.Forexample,theBOCisanareathatwetalkedabout.
Also,obviously,investinginwebsecurity,obviouslyinvestinginenterpriseandcarrierproducts,particularlyenterpriseproductsfornetworkingandsecurity.Andyouwillcontinuetoseetheinvestmentandgrowththere.
MichaelT urits (Analyst-RaymondJames&Associates,Inc.):
Thanksalot,Tom.Thanks,Jim.
Operator :
HeatherBellini,GoldmanSachs.
HeatherBellini(Analyst-GoldmanSachs):
Great.Thankyou.Ihadacouplequestions,aswell.Thefirstoneis,youmentionedsoftwaredownloadsasabigdriver,andI'mjustwondering--wesawsomeoftheverylargesoftwaredownloadslastSeptembergetaboutthree-quarterssmallerthantheywereinthepast,andthereseemstobeabigfocusonpeoplereducingfilesizes,there'sbeenalotofimprovementsinencoding.I'mjustwonderinghowyouthinkaboutthoseinitiativesandhowthatmightimpacttrafficvolumethatyoumightseegoingforwardversuswhenthefilesweremuchlargerinthepast.AndthenIhadafollow-upquestion.
T omLeighton (CEO):
Certainlyfortraffic,softwaredownloadscomeinvaryingsizes.You'reright,thatinsomecasesthey'resmallerforthereasonsyououtlined.Insomecases,theyhappenmorefrequently.Theyaresmallerbuthappenmorefrequently.
Andit'snotjustsoftwareupdatesthataredriversoftrafficvolumes.Videodeliveryisadriveroftrafficvolume.Socialmediaisadriveroftrafficvolume.Gamingisadriveroftrafficvolume.
Softwaredownloadactivityisbutoneofseveralgrowthdriversontraffic.You'llseevariabilityinsoftware
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trafficvolumesbasedonfrequencyandsize.Andwhatwasyoursecondquestion?
HeatherBellini(Analyst-GoldmanSachs):
Justtofollow-uponthat,encodingwastheotherthingImentioned.Facebook'sheadofnetworkengineeringactuallyspokeatF8andmentionedthatbecauseofimprovementsinencoding,they'reactuallyabletoreducethesizeoftheirvideofilesnowby20%.So,thatgetstotheotherthing.There'sfilesizesandsoftwaredownloads,buttherealsoseemstobeimprovementsinencodingthatmightbeimpactingsomeofthefilesizesofvideothatusedtogettransferredversuswhatmaybetheyweretwoyearsago.Sothat'sonethingthatIwonderifyouhaveacommenton.
Andthentheotherwouldbe,clearlyeveryone'saskedaboutthesetoptwocustomersandthetrajectoryinthebackhalfofthegear.WhatI'minterestedinis,12to18monthsagotherewasconcernsoverDIYanditwasalwaystalkedaboutthatyoujustgetabetterexperience,whichyoudo,usingAkamai.So,unlikelythattheseguyswouldmakesuchboldstepstobringasmuchin-house.There'ssomeconcernthatwegetfrompeoplethat,what'stostopthethirdandfourthlargestcustomersthatyouhavenowfromembarkingdownthesamepath?Aretheyjustsofarawayfromhavingtheleveloftrafficatthetoptwothatit'sjustnotaviableopportunityforthem?
T omLeighton (CEO):
Good.Letmetakethosetwoquestions.Thefirstoneis,there'salwaysimprovementsinvideocompressiontechnology.AndIthinktheimportantthingtolookatistheincreaseinbitratebecauseyouneedahigherqualitypicture,combinedwiththedecreaseinbitratebecauseyou'vegotbettercompression.Youmentioneda20%improvementincompression.Thatpalesincomparisontotheincreasingbitratesthatweareseeingbecausepeoplewantahigherqualitypicture.
Infact,ifyoutakethecombinationofstate-of-the-artqualitypicturecombinedwithstate-of-the-artcompression,andtheCAGRofthatnet,foryearsitwasgrowingbutataslowerrate,andnowwe'reseeingitactuallyaccelerateonthecumulativegrowthrate.So,takingthestate-of-the-artcompressioncombinedwithtypicalbitratesthatpeoplearewatching,actuallyit'sgrowingperminuteofvideowatched,andgrowingnowatafasterratethanithasinthepast.
Ontopofthat,youhavepeoplewatchinglongerandmorecontentmovingonline.So,theneteffectisactuallymuchfastergrowthrateinaggregatetrafficbeingconsumedforvideoonline.Youcantakeasanexample,theSuperBowlstatsthatwegave.Weareseeingthatkindofgrowthprettymuchacrosstheboardinvideo.
Now,toyourthirdquestionaboutDIYandcanthatgotothethirdandfourthlargestcustomers.Infact,ourthirdandfourthlargestcustomershavehadDIYforoveradecade.Infact,oneofthemactuallysellsaCDNservice,yettheystilluseustodelivertheircontentfortheirwebsite,andtheyuseustodelivertheirvideos.Theyhaveverylargewebsitesandaverylargevideobusiness,andtheyuseustodeliverthatdespitethefactthattheyactuallyoperateaCDNservice,andhaveforthelastdecade.
Theotherproviderusesus,aswell,despitein-houseeffortsthey'verunovertheyears.Infact,ourshareoftheirbusinesshasincreasedduringthissameperiodbecausetheyseethequalitydifferenceandthecostdifference.DIYcanseemlikeagoodideaatthetime.Maybetheycansavesomemoneybringingitin-house,ortheythinkthat,butthenafterafewyearstheydiscoverthat--oh,mygoodness,Akamaiisdoingitwithalotlesscostandwithalotbetterperformance.So,oursharehasactuallyincreasedinthethirdandfourthlargestcustomers.
There'snottoomanypastthetopfourthatactuallycanevenaffordtothinkaboutdoingtheirowndelivery.Yes,weareexperiencingsomelosstoDIYinourtoptwoaccountsnow.Ithinkthetimeframefor
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whenthathappensisbounded,asJimsaid,theimpactitwillhaveonourbusiness.Andthenyou'llseeourcumulativegrowthratesreturntowherethenormoftherestofthebusinessis.
HeatherBellini(Analyst-GoldmanSachs):
Great.Thankyou.
Operator :
EdMaguire,CLSA.
EdMaguire (Analyst-CLSALimited):
Hi,goodafternoon.I'mintriguedbytherolethatyoursoftwareon100millionendpointsisplayinginyourabilitytoreinincostsacrossthenetwork.Couldyoutalkaboutwhatyouareaccomplishingwiththatfootprintofsoftwareandwhetherthatisactuallyhavingthedesiredimpactofhelpingyoureinincostsofcontentdelivery?
T omLeighton (CEO):
Yes.Whenitisactivelyused,itsubstantiallydecreasesourcosts,andwepassalotofthatsavingsontoourcustomerthat'smakinguseofit.Theusagetodaydependsonthecustomer.Also,ithelpsusalotwithquality.Infact,weuseditinthebroadcastat4K,whichisveryhighqualitylevels.Itreallyhelpstohavetheclientsidesoftwaretoenablethat.So,itmakesqualitybetteranddecreasescost,andwhenweuseit,it'sasubstantialdecreaseincost.
EdMaguire (Analyst-CLSALimited):
Great.Thankyou.
Operator :
WillPower,RobertBaird.
WillPower (Analyst-RobertW.Baird&Company,Inc.):
Great,thanks.Justtofollowuponsomeoftheguidancecommentary,Jim,Ithinkyouhadalludedtolimitedsecond-halfvisibility.Ijustwantedtoclarify.Isthatmorelimitedthisyearoristhatfairlyconsistentwithwhatyou'dnormallyseethistimeofyearasyouthinkaboutthesecondhalf?
JimBenson (CFO):
No,it'sprettyconsistentwithwhatwe'vetoldyouallalong.Ourvisibilitywithinthequarteriscertainlymuchbetterthanourvisibilityoutbeyondthat.AsImentionedearlier,weknowofspecificevents,liketheOlympics,likeapresidentialdebate,andweknowofscheduledactivitiesthatcustomershaveforpotentialgamingreleasesandthingsofthatnature.Thevisibilitywithinathree-monthwindowiscertainlymuchbetterthanbeyondthat,butit'snodifferentthisyearthanitwashistorically.
WillPower (Analyst-RobertW.Baird&Company,Inc.):
Okay.That'shelpful.Andthenjustmaybequicklyonthesecuritybusiness,obviously,stronggrowthagain.Anywaytoquantifyhowimportantthenewbotproductwastothatgrowth?Andanyothercoloronthekeydriverswithinthatsegment?
T omLeighton (CEO):
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Wehaven'treallyseenrevenuefromityetbecausewejustlaunchedit.Butthereissubstantialcustomerinterestinthatcapability.AndIdoexpectittostartcontributingtoourrevenuesandrevenuegrowthinsecuritygoingforward.Butthe47%year-over-yeargrowth,that'sfromtheproductswehadbefore.AndBotManagerandtheotherproductsintheroadmapwillhelpsustainthatgrowthrategoingforwardandhelpusgrowrevenuesforthesecurityproductsinthefuture.
WillPower (Analyst-RobertW.Baird&Company,Inc.):
Okay,thankyou.
Operator :
SameetSinha,B.Riley.
SameetSinha(Analyst-B.Riley&Co.):
Yes.Thankyouverymuch.Acouplequestions.Intermsoftheenterprisebusiness,youjustputaseniorexecutiveinplaceasgeneralmanagerthere.Yourrevenuegrowthisthere,butit'sstillprettysmall.Whatarethekeysuccessmetricsthatyouputinplaceforthisbusiness?Obviously,you'vebeenworkingonitforacoupleofyears.Atleastinmyopinion,itprobablycouldhavebeenbiggerthanwhatwehadthoughtacoupleyearsback.So,ifyoucanelaborateonthat.
Andthesecondquestionis,obviouslyweareseeingtheDIYhappeningatacoupleofcustomers.Whataretheapplicationsthatareeasytobringin-house?AndinthatcontextcanyoutalkaboutOTTanddoesithavecharacteristicsthatmakeitverydifficulttoachievein-house?Thankyou.
T omLeighton (CEO):
Ontheenterprisebusiness,Ithinkthesuccessmetricswouldbearoundtheproductsthatwe'reintheprocessofbringingtomarket.So,forenterprisesecurity,thatwouldbeourrecursiveDNSservice,whichwillbedesignedtoblockmalware,phishingattacks,andblockingexfiltrationofsensitivedatafromtheenterprise.We'llbewatchingthatproductlaterthisyear.So,youwouldlooktosee--andwe'llbelookingtosee--theadoptionrateofthatcapability.
Wewillalsobebringingtomarketearlynextyearourcloudconnectedbranchproduct,whichisenterprisenetworkingcombinedwithasecurewebgatewayfunctionality.Andthat'sdesignedtomaketheenterprisenetworkscaleinamuchbetter-performingway,inamuchmorecost-effectivemanner.So,wewouldbelookingtoseetheadoptionratesthere.Ithinkthepotentialinbothofthoseareasisverylarge.Butyou'reright,we'reattheveryearlystagesandwehavetoseehowsuccessfulwearewiththoseproductsinthemarketnextyear.
IntermsofDIYandthetoptwoaccounts,Ithinkyouwouldlookatthingsthatareeasiertodeliver.Forexample,software,maybevideosondemandbutshortform.It'snotOTT.AndIthinkasyouthinkaboutOTT,Idon'tseethatasaDIYthingtoday.Itismuchhardertodo,particularlyintheliveandlinearformats,particularlyinthehigher-qualitythatyou'llwanttohavewhensubscribersareactuallypayingtoviewthecontent.That'sawholedifferentgame.There'salotyouhavetodo.
TodayAkamaiisinagreatpositiontoprovidethatquality,justoneexamplebeingthefirstbroadcastof4K.Butingeneralsustainingveryhighbitrates,verylowre-bufferratesatscale.That'swhatyouneedforOTTdelivery.Andthat'swhyalotofthecompaniesthataredoingOTTareturningtoAkamaitodoit.
SameetSinha(Analyst-B.Riley&Co.):
Great.Thankyou.
CompanyName:AkamaiT echnologiesIncCompanyTicker:AKAMSector:T echnologyIndustry:Internet
EventDescription:Q12016EarningsCallMarketCapasofEventDate:9.03BPriceasofEventDate:52.66
©2014TheStreet,Inc.Al l R ightsReserved Page20of21
Operator :
GrayPowell,WellsFargoSecurities.
PriyaParasuraman (Analyst-WellsFargoSecurities):
Thanks.ThisisactuallyPriyaParasuramaninforGray.Justaquickone.Couldyoutalkaboutthetractionyou'reseeinginthemobileperformancesolutionset?Thankyou.
T omLeighton (CEO):
Yes,verygoodstrongtraction.Andwewereverypleasedtoseethatwenowhavecrossedthe1,000customerthresholdforourIonproduct,which,ofcourse,deliversthebestpossibleperformanceacrossallofyourwebassetsbutisreallyfocusedonmobileacceleration.So,verystrongtractionthere.
And,ofcourse,that'snotsurprising.Aswetalkedabout,todayalotofourcustomershaveoverhalfoftheirtransactionsgoingtomobiledevices.Itisaparticularlychallengingareaforperformance,particularlywhenthemobiledeviceisusingacellularnetwork.Ironically,that'swhereusersexpecttogetthebestperformance.So,Ithinkthat'swhysomanyenterprisesareturningtoAkamaiandbuyingIonfortheirmobileassets.
PriyaParasuraman (Analyst-WellsFargoSecurities):
Thankyou.
Operator :
JeffVanRheewithCraig-Hallum.
Jef f VanRhee (Analyst-Craig-HallumCapitalGroup):
Great.Onerealquickoneforyou.Salescapacityasyouentertheyear,howareyouthinkingaboutsalescapacityadditionsfor2016?
JimBenson (CFO):
Ithinkwesaidwhenwe'vesharedbeforethatwhenwestartedinvestinginaverysignificantwayinsalesacoupleyearsago,wewereprovidingongoingupdatesaroundhowweweredoing.AndthenIthinkwhatwesaidisit'srunratenowinthebusinessandthatit'snotnoteworthytobetalkingaboutinvestmentsofaspecificamountinanyparticulararea.Youcanexpectthatwewillcontinuetomakeinvestmentsacrossallareasofthebusiness,includinggo-to-marketcapability.
Jef f VanRhee (Analyst-Craig-HallumCapitalGroup):
Okay,thanks.
T omBarth (InvestorRelations):
Thankyou,Jeff.Andthankyou,everyone,foractuallyaverygoodsetofquestionsthisquarter.Inclosing,wewillbepresentingatanumberofinvestorconferencesandeventsinMayandJune,anddetailsofthesecanbefoundontheInvestorRelationssectionofAkamai.com.Thankyouforjoiningus,andhaveagreatevening.
Operator :
Ladiesandgentlemen,thankyouforyourparticipation.Thisdoesconcludetoday'sprogram,andyou
CompanyName:AkamaiT echnologiesIncCompanyTicker:AKAMSector:T echnologyIndustry:Internet
EventDescription:Q12016EarningsCallMarketCapasofEventDate:9.03BPriceasofEventDate:52.66
©2014TheStreet,Inc.Al l R ightsReserved Page21of21
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