Akamai Technologies, Inc. (AKAM) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Akamai Technology (sic) [Technologies] Earnings Conference Call. My name is Derek, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Natalie Temple, Investor Relations. Please proceed.

Good afternoon, and thank you for joining Akamai's Investor Conference call to discuss our first quarter 2012 financial results. Speaking today will be Paul Sagan, Akamai's President and Chief Executive Officer; and Jim Benson, Akamai's Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements, including statements regarding revenue and earnings guidance. These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these factors is contained in Akamai's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking statements included in this call represent the company's view on April 25, 2012. 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 News & Events portion of the Investor Relations section of our website. Now let me turn the call over to Paul.

Thanks, Natalie, and thank you all for joining us today. Quite simply, Q1 was a great quarter where we exceeded our expectations in almost every area, and I couldn't be more pleased with the results. And that strong Q1 performance really built on our record revenue achievement in the fourth quarter. We posted total revenue of $319 million in Q1, up 16% from the same period last year. And organic growth on the top line accelerated year-over-year for the second straight quarter. We generated normalized EPS at $0.41, up 8% from Q1 of last year. We had another strong quarter of cash flow generation, with $93 million of cash from operations in the quarter. And we are pleased to announce that our board has authorized another extension of our share repurchase program, this time for $150 million. I'll be back in a few minutes with some additional thoughts on our business, and I'll have some comments about the planned transition we announced today to eventually name a successor to me as President and CEO. But first, let me turn the call over to Jim for more about our very strong first quarter results. Jim?

Thank you, Paul. As I walk you through our very strong Q1 financial results in detail, I'll provide you with the consolidated numbers that include roughly one month of the Cotendo acquisition, which closed in early March. And where appropriate, I'll also provide you with Akamai's results from Q1 excluding Cotendo. Revenue came in above our guidance range at $319 million, up 16% year-over-year, with solid growth across the business. Cotendo accounted for less than $2 million in revenue for the quarter. Excluding the impact of Cotendo, revenue was up 50% year-over-year and down just 2% sequentially. In Media & Entertainment, we saw strong traffic growth year-over-year, building off of the acceleration we saw in Q4 and exceeding our expectations. As a result, Media & Entertainment revenue grew by 14% over Q1 of last year and was down 2% sequentially. Commerce was our fastest growing vertical in Q1, increasing 21% over the first quarter of last year. As expected, revenue declined 7% sequentially due to normal seasonality. Revenue from our enterprise vertical grew 17% year-over-year and 3% sequentially, as applications continue to shift to the cloud and we saw increased demand for optimization, performance and security solutions. We also saw revenue growth accelerate again in the high-tech vertical, which grew 15% year-over-year and 3% sequentially. This acceleration was due to the timing of several large software download releases and continued traction among Software-as-a-Service, or SaaS customers, who continue to migrate to our cloud infrastructure solutions. Finally, Public Sector revenue grew 9% year-over-year and 7% sequentially. Across all of our verticals, cloud infrastructure solutions made up 57% of our total revenue. During the first quarter, international sales represented 28% of total revenue, consistent with the prior quarter. International revenue grew 10% year-over-year and was flat sequentially in Q1. Foreign exchange had a negative impact on revenue of about $1 million on both a year-over-year and a sequential basis. Excluding the impact of currency, international revenue grew 11% year-over-year and 1% sequentially. All geographies outside of North America, with the exception of Japan, saw a very strong growth. Revenue from North America grew 18% year-over-year and was down 2% sequentially, driven by normal seasonality. Resellers represented 21% of total revenue, up one point from the prior quarter. Our cash gross margin for the quarter was 79%, flat with the prior quarter and down one point from the same period last year. GAAP gross margin, which includes both depreciation and stock-based compensation, was 68% for the quarter, consistent with both Q4 and the first quarter of last year. This is a little bit better than our GAAP gross margin guidance for the quarter, primarily due to lower depreciation expense from network buildout that moved from Q1 to Q2. GAAP operating expenses were $145 million in the first quarter. These GAAP numbers include depreciation, amortization of intangible assets, stock-based compensation and acquisition-related charges. Excluding these charges, our operating expenses for the quarter were $111 million, up $2 million from Q4, slightly above our guidance range due exclusively to expenses associated with our acquisitions of Cotendo and Blaze. Adjusted EBITDA for the quarter was $143 million. That's up 10% from the same period last year and down 3% from Q4 levels. Our adjusted EBITDA margin came in at 45%, down 2 points from the same period last year and 1 point from the prior quarter. For the first quarter, total depreciation and amortization was $46 million. These charges include $36 million of network-related depreciation, $5 million of G&A depreciation and $5 million of amortization of intangible assets. Net interest income for the quarter was about $2 million. Moving on to earnings. GAAP net income for the quarter was $43 million or $0.24 of earnings per diluted share. As a reminder, our GAAP net income includes several noncash or nonrecurring items, including $23 million of stock-based compensation, including amortization of capitalized equity-based compensation, $5 million from amortization of acquired intangible assets and $4 million of acquisition-related costs. We are including GAAP taxes in our normalized earnings and the GAAP tax charge was $30 million based on an estimated full year GAAP tax rate of about 41%. This tax rate is slightly higher for the year than the 38% to 39% we estimated at the start of the year due primarily to the tax impact associated with the Cotendo and Blaze acquisitions. Based on this full year tax rate, our normalized net income for the first quarter was $75 million. That translates to $0.41 per diluted share on a normalized basis, up $0.03 from Q1 of last year and down $0.04 from Q4 levels. This was above our guidance range coming into the quarter, as the increased revenue growth and higher margins drove a strong bottom line result. Our weighted average diluted share count for the first quarter was 182 million shares. Now let me review some balance sheet items. Cash generation continued to be strong. Cash from operations for the quarter was $93 million. At the end of Q1, we had just under $1 billion in cash, cash equivalents and marketable securities on the balance sheet, net of recent acquisitions. Capital expenditures, excluding equity compensation, were $43 million, below our forecast at the beginning of the year due to the timing of investments that have shifted out of the first quarter. This number includes both investments in the network, as well as capitalized software development. During the quarter, we spent about $8 million in share repurchases, buying back 223,000 shares at an average price of $35.45. As Paul mentioned, our board has authorized a $150 million extension of our share repurchase program beginning in May and extending over the following 12 months. As with our existing program, we intend to fund it out of our strong cash generation with a primary goal of offsetting dilution from ongoing equity grants. Finally, days sales outstanding for the quarter was 61 days. Q1 was a great start to the year. We saw an acceleration of traffic volumes for the second straight quarter in Media, and as a result, we've seen solid revenue growth in our Media business. We also continued to record healthy signings for our cloud infrastructure solutions as customers have moved more of their business transactions online and adopted cloud computing models. Looking forward, we see significant opportunities across all of our verticals, and we are making important investments to capture these opportunities. Our recent acquisitions are great examples of how we've used the strength of our balance sheet to invest for future growth. We expect these acquisitions to be roughly neutral to our earnings over the next 4 quarters, but near term, our expenses will slightly exceed revenues from the acquired companies until we absorb and scale these acquisitions within Akamai. We will be integrating these acquisitions into our core businesses, and going forward, we will not be reporting them separately. Looking forward to Q2, we expect revenue in the range of $322 million to $330 million. This guidance includes a full quarter of Cotendo revenue. As a reminder, Cotendo's revenue run rate exiting Q1 was a little under $2 million per month. The midpoint of our revenue guidance translates into 18% year-over-year revenue growth, accelerating again from Q1 levels. At current spot rates, foreign exchange should be roughly neutral on a sequential basis and a $4 million negative impact on a year-to-year basis. We expect gross margins to come down about 1 to 2 points sequentially, supporting the increase in traffic levels and given that some planned investments in the network moved into Q2. We expect Q2 operating expenses to increase by about $11 million from the prior quarter, as we absorb the Cotendo and Blaze acquisitions and as we continue to invest organically in go-to-market and R&D staffing. As a result, we expect adjusted EBITDA margins to be about 41% to 42%. This is below our long-term model due to investments we're making now that we expect will drive significant growth going forward. At this level of revenue, we expect to see fully taxed normalized EPS of $0.36 to $0.38 for the quarter. At the midpoint of this range, this represents 7% year-over-year growth. This EPS guidance includes a tax charge of $22 million to $27 million based on a full year GAAP tax rate in the range of 40% to 41% and also reflects a fully diluted share count of 184 million shares. On CapEx, we expect to spend around $65 million to $70 million in the quarter, excluding equity compensation. This reflects our desire to stay ahead of the growth that we expect on the network and the impact of some investments that moved from Q1 to Q2. For the full year, we expect CapEx will be at the high end of our model of 13% to 16% of revenue. Overall, we are extremely pleased with the performance of the business in Q1 and the momentum we have coming into Q2. Now let me turn the call back over to Paul. Paul?

Thanks, Jim. This is an exciting time for our business around the globe. Since the start of the year, I've literally been around the world, visiting with clients, prospects and employees in at least 10 countries and 20 cities on Akamai business. And everywhere I went, I was impressed by the energy of our teams, the opportunities in our various markets, the passion our customers have for their businesses and the trust they place on Akamai to help them achieve their goal. From San Francisco to Singapore, the promise of cloud computing, mobility and online media and the threat to web security were constant topics of conversation with customers and prospects alike. They are counting on us to provide solutions to address their business challenges in these 4 critical areas. We're meeting their needs with a commitment to innovation and rapid introduction of new services, including a plan to roll out new product and other significant enhancement in every part of our portfolio this year. One area above all seems to open every discussion these days, the myriad of security threats to online businesses. CIOs are beginning to recognize that they need new defenses to protect their enterprises. And to address this pressing need, we introduced Kona Site Defender in February. This new service deployed across the distributive Akamai Intelligent Platform combined our technology for mitigating distributed denial of service attack with our web application firewall capability to filter out other malicious activity. We've heard time and again from our customers that their businesses need a security solution that doesn't degrade performance even as a defense against an attack before it’s in full swing. Kona Site Defender was created with these customer requirements in mind. And based on early market traction, it's clear that our approach has resonated with clients. Already, we're providing our new security solutions to more than 200 Akamai customers, including 17 members of the Fortune 100 and 34 of the world's top Internet retailers. And we've also developed new services for customers that are deploying cloud applications. Last month, we launched our Terra Alta solutions to help our customers better optimize and accelerate business applications in new ways with greater flexibility and higher performance. In addition, as part of our Terra enterprise solution suite, we launched the Riverbed Steelhead Cloud Accelerator service powered by the Akamai Intelligent Platform. Together, we're providing companies with a seamless way to add accelerated public cloud services to their private cloud infrastructures, effectively creating better performing applications that they used to host themselves, but now want to access from third-party cloud providers. That's not always easy over the Internet and it's even more difficult in a mobile environment. This is why we're also focused on improving the performance of mobile applications for customer serving this growing market. Today, Akamai is already optimizing the delivery of more than 2 million page views from mobile sites every minute, and we're taking mobile optimization to the next level with our recently launched Aqua Mobile Accelerator. Now this solution brings together a variety of Akamai capabilities, such as smart data retransmission for oversubscribed mobile networks. And the ability to identify mobile devices and automatically redirect users to sites optimized for them. We believe Aqua Mobile Accelerator provides the fastest, most consistent, mobile user experience, and already major online retailers and international hotel chains have signed up for this service. These and other new products we've already announced or plan to announce throughout the year are the direct result of investments that we've made in cloud and mobile computing solutions and enhanced web security. We were also very pleased to see the accelerated traffic and revenue growth we experienced in Media in the first quarter. While we still believe a significant inflection point for Media traffic growth driven by more premium content shifting online is still ahead of us, the Q1 volumes were encouraging and ahead of our expectations. We're also noticing another trend with online video that's driving more traffic. Big sporting events in Q1 like the NFL championship game and the NCAA Men's Basketball Championships demonstrated how the growth of online media is tied to the growth of online social applications. More and more, we're seeing that while users are watching events or programs on television, they're simultaneously enhancing their viewing experience by interacting with multimedia content, friends and other fans online. And our customers depend on Akamai's ability to deliver high-quality video online and related realtime applications to capitalize on these new viewing trends. Also as consumers demand for rich online media grows, our network partners are looking for smarter ways to manage the traffic that goes with that growing usage. And some of you know Akamai has been building and managing custom content delivery networks for many years. And we've taken what we've learned to develop a new product line we call AURA Network Solutions. Announced in Q1, these capabilities are designed to provide both fixed line and mobile network operators with better ways to monetize traffic on their networks and reduce cost. Of course, not all of our innovations will come from organic investments, and we've very pleased to have completed the 2 strategic acquisitions in the first quarter. With Cotendo and Blaze, Akamai gained innovative technology, talented people and clients. We've already begun incorporating their efforts into what we're developing to improve the performance of cloud-based applications, mobile computing, web security and the delivery of rich media content over the Internet. As I saw in my world tour in Q1, these are the main topics on the minds of our customers around the globe, which makes me confident that Akamai has never been more relevant or better positioned to grow and continue to succeed. Now before we take your questions, a few comments from me on our second news release this afternoon, our announcement that I intend to transition out of my current role as President and CEO by the end of next year. I want to be very clear, there is no back story to this announcement. Simply, as I approach my 15th year, helping to lead this great company, I believed it was appropriate to ask my fellow board members to begin the CEO succession process for Akamai. In 1.5 decades here and almost 8 years as CEO, I have accomplished far more professionally than I ever imagined. I've been honored to work with an incredible team to build one of the most successful tech companies of the Internet era and a firm with so much potential to the future. At the same time, it seems to me the best time to look for a great successor for the top job is when a company is doing well and growing rapidly as Akamai has been. Starting a search now means the board and I can take the time we need to find the right person to elevate the company to the next level and achieve the $5 billion revenue goal I set for us by the end of this decade. Today's announcement allows us to run a transparent process to find the best candidate to help guide Akamai's future. But let there be no question. I intend to vigorously lead the company until my successor has been named and a full transition is completed. And we have a great management team here, with an average tenure of over 8 years each at Akamai. This team is committed to remaining focused on executing against our strategic plan and making the CEO transition a complete success when the time comes. In the meantime, we know we all have a lot of work to do and we're looking forward to updating you on our progress next quarter. Now, Jim and I will take your questions. Operator, the first question, please?

[Operator Instructions] Your first question is coming from the line of Mark Mahaney from Citi.

Two quick questions. One on the Media segment, that 2 quarters in a row of acceleration, I'll just ask the hard question, which is I would almost have thought there would have been greater acceleration given the comp and given that you renegotiated or negotiated those media deals last year, so any color on that? And then in international markets where I think you've singled out Japan as weak, were there anything interesting to note in terms of the other geographies? And do you have any read into how long it might take Japan to get back to normalized growth?

Well, let me do them in reverse order on international since I did go around the world and stopped -- not everywhere, but quite a few places, and I would say we're seeing good trends for us, but that doesn't mean that the economies are fixed and we all know that the headlines from certainly from Europe and places like Japan. I think we benefit because IT budgets are large, and even if they don't grow as fast or even shrink, sometimes people are shifting their investments to the cloud and to the Internet. And so they come to us for help for better, faster, cheaper way to get their businesses moving online and we benefit. Certainly, saw a great opportunity across Asia when I was there and some pockets of strength in Europe as well, despite some of the strong economic winds in the other direction. As for Japan, I am not an economist, so I can't say what even -- I think your word was regular growth is going forward. I can say that on the IT side, those companies are -- many companies I met with there -- could be multinational, are serious about mining opportunities outside of Japan to look for growth because of just the characteristics of the economy there. Online media there is pretty strong and we think there's a lot of opportunity. There are still –- it just hasn't turned around as well as other economies did coming out of '08, '09 and, obviously, the double whammy that hit there environmentally is the main reason behind that. As for media volumes, it's not relevant to the issues of a year ago. It's really a question of how much is going online and then we try to get our share of that, and I think what we're seeing is more content and more usage moving online and that's an extremely strong trend. And it was strong in the fall and that's continued over the winter and accelerated some more, which is great. I think that there is more coming long term, but we'll take what we're seeing now as a real positive.

Your next question is coming from the line of David Hilal from FBR. David M. Hilal - FBR Capital Markets & Co., Research Division: Paul, could you please -- let's talk about Riverbed and the Steelhead partnership. Can you help quantify what you think the revenue opportunity is for Akamai this year? And could you also remind us of what the go-to-market strategy is with Riverbed?

So the go-to-market strategy is primarily, they're selling motion which is a channel-based model because it's really an augment to someone who's using their solution behind the firewall and now want to access private from going from private to public cloud capability, so say something like Office 360 or Google Docs or something across the public Internet. So we're using that selling motion. And there's -- then the customer is adding this as a service on top of the capability. They have -- and there's a revenue share between the 2 of us. So we're really supporting their channel. And we had a very strong set of beta tests in the winter, announced general availability just in the last quarter, so it's too soon to quantify and we're certainly not going to put any public sale targets out there. But again, remember we have a recurring revenue services model so it ramps up. It's not a one quarter phenomenon, and so I would not describe it as a material opportunity this year and we never did. David M. Hilal - FBR Capital Markets & Co., Research Division: Okay. And then maybe one follow-up. High-tech was strong. It sounds like there's some specific software product downloads, which begs the question with Windows 8 later this year. Is that another opportunity where maybe you have some strength in that sector?

Well, I think that's been a strong sector because we've seen the increase in some of the downloads, but also the overall shift to a SaaS model is driving a lot of business in that category. I don't want to speculate on a single release for one company. That would be theirs to speculate on in terms of volumes and we're happy to serve, but we're not going to get ahead of anything they would want to say.

Your next question is coming from the line of Michael Turits from Raymond James. Michael Turits - Raymond James & Associates, Inc., Research Division: Very, very strong quarter obviously on that, but one thing, anything else, Paul, you can say about why you had -- why now have you see trends in terms of the acceleration of volumes? You weren't sure about how much of the trend that was. Obviously, 2 points makes the trend. But anything more you can elaborate on in terms of how strong you see that trended and why, and then I have a question on margins?

Well, I'll take the first one and maybe Jim will take the second one. I think if there was just more and more content going online and continuing some over-the-top growth, some sporting growth, fair amount of live, fair amount of DoD and just more and more rich media and higher and higher bandwidth and bit rates. Also the combination of being able to deliver with the Akamai HD Network any content they'll need to buy [ph], I think people are saying I can put this out there and it can go to the big screen, it can go to the PC, it can go to the smartphone, it can go to the tablet and it's creating new forms of demand and driving the nice increases in volumes that we've now seen for half a year. Those don't seem to be onetime trends, so they're not single event. So I take that as really a positive. But whether they continue to accelerate or just to stay at the stronger clip, that's always a little hard to guesstimate, and I'll turn it over to Jim if you had a margin follow-up. Michael Turits - Raymond James & Associates, Inc., Research Division: Sure. I think that you kind of [ph] said 41% to 42% EBITDA margins. You've got the gross margins down for next quarter. Can you see -- obviously, it's important to make these investments. Anything you can tell us about how those should trend over the following several quarters, the back half of the year because it would be great to see some leverage off that, and any help you can give us there, it would be great.

Okay. Just to refresh folks on my comments. So certainly, one of the drivers of the EBITDA going down Q1 to Q2 is the impact of absorbing both the Blaze and the Cotendo acquisitions. So that's a fairly large piece of the kind of OpEx growth from Q1 to Q2. On the gross margin side, we talked about the fact that there were some investments in the network that kind of pushed from Q1 to Q2, which is -- so that's a good news story on the traffic side. So we're certainly seeing and encouraged with the traffic acceleration that we're seeing and we always want to make sure we're building out in advance of that. So I mean that kind is at least an explanation for why in the short term it goes down. Your question about when can we expect to see them kind of go -- we do expect that we can get back into the long term model range we provided of 45% to 47% EBITDA. But I would say, it's going to be probably several quarters before we get back to that range.

Yes, and I think we've seen this pattern as we've done acquisitions before, which is we get the synergies out of them and that's why over the course of the year they're neutral. But obviously upfront, there's more cost and then you get to the synergies you want to see. I don't want to lash them upfront and not get all the quality. It takes a little while to integrate the networks and get the savings that we've seen in the past from this kind of integration, and I expect us to see from this one as well.

[Operator Instructions] Your next question is coming from the line of Jen Swanson from Morgan Stanley.

I wanted to touch on the Cotendo acquisition a little bit. I think when we've asked about it in the past, you said wait until it closes, before you talk about where it fits into the broader portfolio at Akamai. And now it's closed, can you give us a little color there on how it fits in? And then since I'm limited to one question only, append to my second question on it. For the $2 million contribution that you saw this quarter for about a month's revenue, is it reasonable to think about that $2 million as a run rate, a monthly run rate for the business going forward? I know we're not going to break it out separately, but is there any reason not to think about $2 million as kind of -- per month as a baseline revenue run rate for the Cotendo business?

Yes, I'd say it was just below that number. The reason we're not going to break it out is we're migrating those customers on to our platform. They'll move to our services. We'll integrate the network and then there's no way to track it individually, and so that's really the way we've handled these acquisitions every time we've done one. We've moved that group into our site division around site performance. We've integrated the employees into their various functional areas, so network, engineering, sales, et cetera given everybody an assignment, pretty close to day one, if not on day one, every employee knew where they stood. We're integrating both their California and their Israel offices into the company. Very excited to have the new office for us in Israel. It's a geography we didn't have a presence before and it was a place we wanted one, especially for R&D and now gives us the -- I think the critical mass to have a foothold to do that. We're going to take their -- the best of some of their engineering and product features and build them into our site capabilities so that they'll be integrated into one set of services. We won’t say to the customers, do you want that one or this one. It will be off of one platform that will probably take for some of the things up to one year to finish, maybe take a little bit longer to migrate all of the customers, but not to get most of the cost synergies that we need out of the network migration.

Your next question is coming from Gray Powell from Wells Fargo.

So if I just do some very rough math, it looks like the typical Cotendo customer is doing about $5,000 in revenue per month. And just given that the typical Akamai customer does closer to $25,000 to $30,000 per month, what kind of opportunity do you see to upsell customers on additional products and how should we think about potential to ramp the Cotendo base?

So I think using your math as just an example, this is the experience that we've had doing acquisitions in the past of finding a company with good technology and a good set of customers but with a small portfolio. And then going into that base and upselling them to we hope our average over time. That's been our experience. That would be our goal here, whether we get them all there or not, we'll have to see. But one opportunity is simply to go to them with a much broader portfolio and say, how about this, this and this, which would make your online business operate better in a one-stop shop and that's exactly the model that we'll try to run this time in the plan that we have in place.

Your next question is coming from Colby Synesael from Cowen and Company.

Just wanted to follow up on the second quarter guidance. You mentioned OpEx, I think, would be up about $11 million. We've talked about having with the margins of 41% to 42%. And a lot of that being driven by, I guess, Cotendo and Blaze. Is there any of that sequential increase that's onetime as it relates to the integration that theoretically then by the time we get to the third quarter will be gone, and as a result of that we should be assuming a margin higher than the 41% to 42% at least in the back half of the year? I know you've talked about getting back to the long-term target of 45% to 47% over the next several quarters, but I'm curious if we're going to see it around the 41%, 42% for an extended period or we should see an immediate impact or benefit starting as early as the third quarter?

I think that we have this pattern even without acquisitions. A very, very high EBITDA on Q4, lower in Q1 and Q2, so you're seeing that just slightly exacerbated by the acquisitions coming at exactly the same time. We're not backing off of our long-term model. Take any line across there, we think we'll get back to them.

Yes. And I guess, I'll comment maybe more specifically on your question around maybe the out quarters. So certainly, we're absorbing these companies for a full quarter in Q2. There isn't much in the way of onetime expenses that we're going to incur in Q2, so really, to Paul's point, what drives the scale is once you integrate these companies, once we're able to then leverage their customer platform, upsell within their customer set, you're going to see the revenue grow. And when revenue grows from that activity, you'll start to see EBITDA scale. So it's going to be several quarters before you see it kind of get back to the range that we talked about in our long-term model, but we have high confidence that we'll be able to do that.

Your next question is coming from Mike Olson from Piper Jaffray.

Just for the security initiatives, who do you feel you're kind of competing most with? Is it in-house technology? Is it offerings from existing traditional Internet security companies or is it just the ability to kind of convince customers of the ROI of your security tools? And then the other question is just customer count at the end of Q1, if you could give that, and did you say what cloud infrastructure revenue was as a percent of overall revenue?

Yes. So Jim can recap the second question in a second. On the security, I think this is an expanding wallet. Most CIOs say, I’m cutting my budget, except security, which is pretty much unlimited right now if you've got an answer because this has become a board room enterprise risk question. It doesn't mean that people will just buy anything, but they are really concerned, and I think for a good reason, around security. And so conversations are really about if you believe in a security in-depth model, then we thought locking down the desktop, we thought about locking down the data center and now you got to lock down the network at large. And what Akamai's ability to do cloud-based security does is lock down that broader world and really provide a new layer. So I think it's really a new opportunity, new conversation.

Okay. And one of the things we talked about in the past is that customer count is really not the most relevant statistic that we want to be talking about going forward. So we certainly inherit some very healthy customers from Cotendo, but that's just not something we're going to disclose on a quarterly basis.

And the percentage on cloud versus...

The percentage of our business for cloud infrastructure solutions for the quarter was 57%.

The rest was content delivery.

That's right.

Your next question is coming from Ed Maguire from CLSA. Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division: I was wondering if you could update us on any -- your thoughts on the existing partnerships that Cotendo had, had with Juniper, Citrix and AT&T and how that might impact your plans, technology and investment going forward?

Well, we're excited about those, because they're all companies with whom we've had relationships. We'll try to build on them. You need to remember they were relatively small companies. So any of those partnerships, by and large, is still adding a small piece to a small business. But we're exploring those now that the deal is closed. Those were, obviously, not conversations we could have had as a 3-way conversation until very recently. It just wouldn't have been an appropriate way to go about it. Now we're being able to engage, and we're optimistic that we can find real opportunity because we can bring a great deal more capacity, engineering, product and portfolio to those companies, whether they're interested in remarketing some of the things we do or co-developing new offers. I think it will take some time to bear fruit as it does with any new partnership. And even for Cotendo, they were relatively new partnerships because this is relatively young company, but we're engaged in discussions with those and other partners and we'll sort them out appropriately.

Your next question is coming from Phil Winslow from Credit Suisse. Daniel Morrison - Crédit Suisse AG, Research Division: This is actually Dan Morrison for Phil. Could you guys provide some color in terms of bandwidth and co-location costs and then how those have been trending and what your expectations are going forward? And then could you also comment on how dilutive the 2 acquisitions are to your key -- to EPS guidance?

So I'll cover -- so specifically on, I think as we've talked about in the past, certainly on the bandwidth side, we continue to see bandwidth costs go down and so that has continued to be the case. Relative to bandwidth costs quarter-to-quarter, certainly, if traffic is going to grow, you're going to see bandwidth costs grow. On the co-lo front, really what we've talked about in the co-lo front is that as you build out more on your network, the co-lo costs depend upon where you actually put the co-lo -- what actual networks you're having that co-lo -- that deployment reside within and so certainly the cost depends upon -- if you're in an international network, you're probably going to have a little bit higher cost than not. But in general, we've not seen a substantive change in bandwidth or co-lo costs and I would say that...

I would say we see bandwidth continuing to go down. It's the same.

Well, bandwidth is going to -- co-lo is stable and it depends upon the markets that we're in. And some markets, actually, co-location expenses go down. Other markets, co-location expenses are going up.

And in terms of being dilutive in the quarter, roughly $0.01, I guess.

Roughly. But certainly, as I said, the expectation is over the next 4 quarters that these acquisitions are neutral to EPS.

Your next question is coming from the line of Sterling Auty from JPMorgan. Sterling P. Auty - JP Morgan Chase & Co, Research Division: I wonder if you could just talk a little bit about the competition for the Media & Entertainment space. There's been lots of talk about the carriers’ strategy there. Did you see them at all in the quarter? And what do you think is going to happen as the year unfolds?

Really saw no significant change at all. And I think the environment will stay pretty similar. We believe we're the go-to place that customers look to for this kind of delivery because we are across so many networks in all geographies, and a single network solution is not what our customers need to deliver high-quality, rich media or applications to any device, to any user anywhere. And so I know there's been a lot of speculation, but it really hasn't had a market impact. And I don't think that it's going to because I don't think it's the right answer for the way customers measure performance.

Your next question is coming from Richard Fetyko from Janney Capital.

Curious on your views of the volume based business. It really picked up in terms of year-over-year growth rate in the first quarter and it bounces around in a pretty wide range over the course of time. And I guess some of that depends on the timing of certain contract renewals and so I was just wondering in the long term what do you think that the net revenue growth in this business can be when you consider some pricing declines and the volume trend?

Just to give you my perspective, it's not really a function of contract renewal that affects pricing more than demand in volume, which continue to grow. And most of the changes in the volume growth and how fast it's been growing is really had to do with the help of the media market, how fast content owners, producers, copyright holders had moved their businesses online and made more and more content available that people want to consume on the Internet, over the top or on a range of new devices. And so frankly, it's more exogenous factors. And I think what we're seeing is somewhat healthier economy in a lot of parts of the world. Certainly, a healthier media landscape, especially for video, not so much for print as we know, but that doesn't affect us. The video piece is more essential. And just a growth of both, it's combination of video and social combining to drive higher volumes and longer use cases rather than people watching short attention span theater, they’re watching longer content and staying online longer at higher quality, especially on tablets and bigger screens, and that's driving the increase in volumes that we've seen in the last half year or so, Richard.

Your next question is coming from the line of Tim Horan from Oppenheimer. Timothy K. Horan - Oppenheimer & Co. Inc., Research Division: In the past, we have seen volume growth accelerate like this. How long does it usually last? I know it's tough to gauge, but you've seen a couple of these cycles. And then, do you think revenue growth for the core Media business will be impacted by pricing at all or if the volume growth kind of keeps going at what you're seeing here that we could -- should continue to see this kind of revenue growth?

So I think I won’t to take a stab at your first question and I'll just remind you probably what your stuff always says, which is past performance is no indicator or promise for the future, meaning there are different things that have driven these cycles in the past. Health of the economy, content coming online, broadband inflections. Way too complicated, I think, to generalize that to the future and make a prediction. I think what we're seeing is better and better broadband, more people connected, these mobile devices and tablets driving new use cases that weren't there a year ago and content providers running to that as a new monetization opportunity and then coming to us for the answer to deliver. And really interested in the Akamai HD Network, our universal streaming capabilities, to say give us the high-quality file and we will then deliver it to the right device on the right network with the right bit rate and the right quality with minimal re-buffering in realtime. And that's what resonates with our customers and then they are concerned about their ability to monetize. So clearly, a healthier video ad market helps, healthier economy helps, higher subscription take-up by end users helps -- all of these things we're seeing and they drive growth. Right now, those fundamentals are all in place, so I'm optimistic they'll continue to drive this market. But I don't think you can look to years past and say, how do I use that to predict the length an inflection point.

Your next question is coming from the line of Ben Rose from Battle Road Research.

And a question for you on the volume part of the business, asked a little bit differently. From a competitive pricing standpoint, what kind of behavior are you seeing from the principal competitors there by way of discounting or any acts of desperation at this point?

We've seen a pretty stable environment for years. I don't think acts of desperation is how I've ever described it, so maybe that's your characterization or someone else's. No, I think that we see us always been in a competitive environment for our services. I assume we'll continue to be in one. Our goal is to continue to drive up volumes and take cost out of the business and help our customers do more online. When we do, they're very happy and they keep signing up for more. That's our goal. We continue to drive quality up, flexibility and capability, especially around the Akamai HD Network, and our ability to do universal streaming of video to any device, anywhere, anytime. If we do that, I think we win in the market and that's been our path and that's our strategy and it seems to be working for us. I think it will continue to. Others will have to compete on their own terms and we're happy to see them in the market.

Your next question is from Aaron Schwartz from Jefferies. Aaron Schwartz - Jefferies & Company, Inc., Research Division: I understand the impact you talked about on the gross margins with some things shifting from Q1 to Q2 and the acquisition dilution. But if we look at a lot of the new products in the acquisitions, it seems like they're a little bit more on the cloud infrastructure side or software side. So if you get through some of these nearer-term adjustments, would you expect gross margins to stabilize or start to move higher?

Sure. To be very clear, we said we'll get back to our long-term model. You’re seeing partly the annual cycle of margins going down off of Q4 into the first half of the year, that's normal, then they're exacerbated by doing 2 acquisitions in Q1 and those expenses. We absolutely believe we'll get back to our target margins and hit our targets for the year. You're just seeing a little bit of compression in Q2 because those things all come together at one time.

Your next question is from Jeff Van Rhee from Craig-Hallum.

A couple of questions, Paul, on -- in terms of the -- you've got a pretty wide range of new product here, so help us prioritize here what do you think has the largest revenue potential or likelihood of revenue contribution over the coming year? And then second on the tax rate, we've seen a couple upward revisions, can you give us a sense of sort of some intermediate outlook on gives and takes there?

Sure, I'll handle the first part. I'm very excited about security, very excited about mobile acceleration, very excited about what we have coming in site performance and, frankly, very excited about Media because as the volumes continue to grow, we think we have the best solution in the Akamai HD Network to service our customers. Again remember, all of them are services, so they layer on and grow on top of each other, so they don't take off or stop in a week. They build over time and then we get the great benefit of their referring revenue model, which we love. So I'm excited about all 4 of those, and now I think you're a little bit like saying, which child do you like best. I like all 4 of those. I think they're great opportunities for us. Jim covered the tax impact, but I'll have him repeat that if you missed it.

Right. So we guided for the quarter for Q1 38% to 39% for the tax rate. It came in a little bit under 41%. And that was exclusively driven by – certainly when we provided guidance, but we did not provide guidance including the impact of acquisitions. And as a result of the Blaze and Cotendo acquisitions, there were some tax impacts. I won't get into the tax accounting with you, but there were some tax impacts as a result of absorbing them into Akamai that have an impact on the tax rate. As far as what's the tax rate going to be doing kind of longer term, I think you can expect -- one of the things we talked about in the past is there's a lot of variables that affect the tax rate. How much business you do international is probably the biggest driver. So as we drive more and more of our business in our business mix internationally, you can expect that the tax rate will come down over time. It's a matter of the rate and pace. The good news is, for Q1 we had tremendous growth in the U.S. So I think it's very strong. Certainly, we had strong growth in international and our expectation is over time that the mix of business in international grows beyond the current levels.

Your next question is coming from Donna Jaegers from D.A. Davidson. Donna Jaegers - D.A. Davidson & Co., Research Division: On Cotendo, can you tell us which vertical you're going to throw the revenues into?

Well, it's all cloud infrastructure. They had no video or media capability at all. Donna Jaegers - D.A. Davidson & Co., Research Division: So all enterprise then?

No. Donna, they're actually in all of the verticals.

I'm sorry, you meant vertical, I thought you meant which of our 2 categories, yes.

So to Paul's point, they're all cloud infrastructure solutions, but the verticals that they sell into are pretty much all of the verticals.

By industry.

By industry.

Your next question is from Rob Sanderson, ABR Investment.

Can you walk through the trends on the traffic on the network Q4 to Q1? We know the drivers that we saw pick up in the fourth quarter. I think you talked about social media, online and gaming, additional video. Was it really strength across-the-board again in the first quarter or were there categories that sort of lead that?

The easy answer is yes, it was all of those again.

Chad Bartley from Pacific Crest.

I wanted to follow up on the cloud solutions business and based on kind of the percent of revenue and the metrics you've disclosed, it seems like that grew about 14% in the quarter. That was down from about 20% in Q4. So can you talk a little bit about the trend there and then the slowdown despite the traction that you're seeing with some of the new services? And then if we look out, can you talk about when is the timeframe that we could potentially see an acceleration in that from the new services?

Sure. So I think the services we'll build on over the next couple of years as they get uptake based on the response we're seeing, I think what you have to remember is Q4 is an amazing compare because of all the commerce stuff that goes into that quarter and the amazing growth that we usually see in Q4, which we saw driving the really strong Q4. You're not going to see that kind of strength in commerce in Q1. It was strong, but you go from the biggest selling quarter to the biggest sales in returns month in January and then people will forget to shop for a little while. So I don't think you could do that compare, Q4 to Q1, and draw too many conclusions. We were pleased to see continued growth. We are pleased to see very strong signing in the quarter in that category and it gives us confidence that, that will continue to be a strong and profitable area for us going forward.

And my only other add to that, I mean, you have to remember that the cloud infrastructure solutions tend to a subscription-based model, not a kind of a traffic-based model. And we've made a host of product announcements in Q1 and we expect to make more product announcements throughout the course of the year. And a lot of them, actually they're going to be across the entire portfolio, but you're going to see a lot of them in the cloud infrastructure solutions area. So we certainly expect over time that the cloud infrastructure solutions mix will grow beyond current levels.

And that's coming from Sameet Sinha from B. Riley. Sameet Sinha - B. Riley & Co., LLC, Research Division: If you can help us think about these new products, most of them sound incremental, but when you kind of spoke about Cotendo, it seemed like you're basically putting their system into your existing platform. I mean it's -- obviously, they had a competing product, you had a product, how would you sell -- would you sell the 2 separately or do you think you're just going to take the sort of their technology and improve and expand your platform and the product remains the same [indiscernible]?

No, they have some unique products. I'm not going to make a product announcement on this call, but they had some unique things that we didn't sell. We'll be rolling those out as new features, but on our platform. We don't want to sell them in 2 separate product categories. They'll all be on the Akamai Intelligent Platform, but they will be new products. They'll be branded Akamai. We'll only sell under one corporate brand. So some of their customers who had services that were similar, we'll combine the best of technology from both and hopefully have a better overall product. All of our customers will get the benefit. Where they had unique products, we'll port [ph] them over and then be able to sell them into all of our customers where we weren't selling them before and will be able to take all of the products that we have that didn't match something that Cotendo had and try to move those into their customer base. So it's both a combination of improving products by combining where that makes sense and bringing new product to their customers and vice versa. Sameet Sinha - B. Riley & Co., LLC, Research Division: Would that help you in increasing pricing of your product or do you think it's just another value-added service that you'll provide to your customers?

Well, we think it allows us -- we hope to take more wallet share from the IT spend that the customers have by selling them more products and, therefore, raising the average revenue we get overall from a customer by being able to sell them more things. Thank you for calling, Sameet. Thank you, all. I think we've gotten to the end of our questions and the end of our hour. We appreciate your interest. Thank you, all, and we'll be back in another quarter with another report. Have a great evening. Bye-bye.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.