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Akamai Technologies, Inc. (NASDAQ:AKAM)

Prolexic Technologies Acquisition Conference

December 02, 2013 8:45 am ET

Executives

Tom Barth

F. Thomson Leighton - Co-Founder, Chief Executive Officer and Director

James Benson - Chief Financial Officer, Chief Accounting Officer and Executive Vice President

Analysts

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Michael Turits - Raymond James & Associates, Inc., Research Division

Gray Powell - Wells Fargo Securities, LLC, Research Division

Aaron Schwartz - Jefferies LLC, Research Division

Edward Maguire - CLSA Limited, Research Division

Colby Synesael - Cowen and Company, LLC, Research Division

Heather Bellini - Goldman Sachs Group Inc., Research Division

Sameet Sinha - B. Riley Caris, Research Division

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Richard Fetyko

Operator

Good day, ladies and gentlemen, and welcome to the Akamai Technologies, Inc. conference call to discuss the acquisition of Prolexic conference call. My name is Tahesha, 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 your host for today, Mr. Tom Barth, Head of Investor Relations. Please proceed.

Tom Barth

Good morning, everyone, and thank you for joining us to discuss Akamai's execution of a definitive agreement to acquire Prolexic Technologies, Inc. Participating on the call today will be Dr. Tom Leighton, Akamai's Chief Executive Officer; and Jim Benson, Akamai's Chief Financial Officer. A press release with information on today's announcement can be found under the News and Events portion of the Investor Relations section of the Akamai website at www.akamai.com.

The agenda for today's call will be straightforward. We will begin with prepared remarks for about 10 minutes, and then we'll open up the call for a question-and-answer session. This call is being webcast from Akamai's corporate website, and a replay of this call and webcast will be available until midnight, Eastern Time, on December 16.

Before we get started, please note that certain comments made during the call may be characterized as forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements due to various important factors. These include, but are not limited to, such things as substantial delay in the expected closing of the proposed merger transaction, inability to secure all regulatory approvals or meet other conditions necessary to affect the proposed merger, any failure to realize the expected benefits of the merger and other factors that are discussed in our annual report on Form 10-K, our quarterly reports on Form 10-Q and other documents periodically filed with the SEC.

Any forward-looking statements discussed in this call represent the company's view on December 2, 2013. Akamai disclaims any obligation to update these statements to reflect future events or circumstances.

During this call, we will be referring to some non-GAAP financial measures that we believe are helpful to understand our financial expectations with respect to the proposed acquisition. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A detailed reconciliation of GAAP and non-GAAP metrics can be found under the News and Events portion of the Investor Relations section of our website.

Now I would like to turn the call over to Tom.

F. Thomson Leighton

Thank you, Tom, and good morning, everyone. Today is an exciting day for Akamai. This morning, we announced that we've signed a definitive agreement to acquire Prolexic, a leading provider of cloud-based security services for protecting data centers and enterprise applications from distributed denial of service, or DDoS, attacks. We believe that acquiring Prolexic is an important step forward towards Akamai's goal of making the Internet be fast, reliable and secure.

Any company doing business on the web faces an ever-evolving threat landscape aimed at disrupting operations, defacing the brand and stealing sensitive data. There are many sources of, and motivations for, cyber attacks. Nation-states and regional entities may be pursuing political or strategic objectives. Criminals may be seeking profit through cyber-extortion or theft. Hacktivists may be pursuing a populist agenda, and individuals may be seeking notoriety or pursuing other personal objectives. As a result, cyber attacks are occurring daily all over the world and many are resulting in significant economic or reputational damage to enterprises, governments and end users.

There are several kinds of cyber attacks, with DDoS attacks being among the most common. In a DDoS attack, the attacker uses a potentially large number of computers spread across the Internet to overwhelm the target's infrastructure with malicious traffic, thereby interrupting normal functions. A DDoS attack can come at the network layer or the application layer, and the target can be a website or application, a non-Web enterprise application or even an entire data center.

There are also attacks which are designed to deface a website or to steal data that is being used by an enterprise application. Such attacks are, by design, harder to detect and they generally occur at the application layer. Akamai has built a suite of security solutions to defend websites and web applications against DDoS attacks, as well as more nefarious application-layer attacks. Our Kona Site Defender solution protects individual websites and web applications by using a DNS CNAME to direct traffic to Akamai's platform. Akamai then automatically identifies and mitigates the attack traffic at the edge before it reaches our customer's infrastructure. We are able to block both network- and application-layer attacks while ensuring continued application performance and availability, site integrity and compliance with security standards.

The sheer size and scalability of our Intelligent Platform, which consists of more than 140,000 servers distributed in over 1,200 networks all over the world, plays a key role in our ability to absorb and deflect large volumes of malicious traffic. Through the combination of our globally distributed platform, our DDoS mitigation technologies and our Web Application Firewall solution, we believe that we have the strongest Web application protection on the market.

Our current offerings do not, however, cover non-Web applications, nor do they protect the customer's data center or IP address space. In contrast, Prolexic has focused its security solutions on preventing DDoS attacks against enterprise data centers in the entire spectrum of enterprise applications, including non-Web-based applications such as Citrix, e-mail, VPNs and file transfers. This requires protecting an entire block of IP address space, which Prolexic does by activating a routing change using the Border Gateway Protocol or BGP. Once the routing change is made, all traffic destined for that IP space is automatically directed to Prolexic's scrubbing centers. Prolexic then filters out the malicious attack traffic and forwards only the normal business traffic to the data center.

Prolexic also operates a 24/7 Security Operations Center, or SOC, to detect and mitigate attacks on its customers. The Prolexic SOC detects DDoS attacks in their early stages through techniques such as flow-based monitoring of routers to identify denial of service attacks from the Internet, application-based monitoring to detect application-layer attacks and, in some cases, equipment placed at the customer's data center to detect attacks that arrive via secure HTTPS requests.

Prolexic has been in the security space for over 10 years and combines world-class managed security operations with state-of-the-art facilities to monitor and mitigate attacks in real-time. Over the past decade, they have built a strong customer base of over 400 enterprises across a variety of industries around the world. Prolexic has achieved a specially strong traction in the financial services sector, which is an important and growing vertical for Akamai. By acquiring Prolexic, we believe that Akamai will be able to extend their optimization and security solutions to protect all enterprise applications. This acquisition is intended to combine Akamai's best-in-class, always-on security and performance platform with Prolexic's on-demand DDoS mitigation services, providing enterprises with a comprehensive solution to address today's evolving threat landscape.

Headquartered in Florida, Prolexic has over 200 employees who we believe will fit extremely well within Akamai's innovation-driven culture. Their deep security domain expertise and technology talent will augment Akamai's existing global security team. By combining our respective R&D efforts and traffic data, we aim to accelerate the development of a world-class reputation database to identify and filter traffic from malicious entities in real-time across the combined platforms.

The need for solutions that address a broader security landscape is very real today. We believe that the acquisition of Prolexic will better position us to increase the pace of innovation in cloud security and bring us closer to achieving our goal of making the Internet be fast, reliable and secure.

I'll now turn the call over to Jim for a brief review of some financial aspects of the acquisition. Jim?

James Benson

Thank you, Tom. Under the terms of the agreement, Akamai will acquire all of the outstanding equity of Prolexic in exchange for a net cash payment of approximately $370 million, after expected purchase price adjustments, plus the assumption of outstanding unvested options to purchase Prolexic's stock.

As we have discussed in the past, acquisitions are a key component and extension of Akamai's innovation and growth strategy. In 2012, we acquired 4 companies, and Prolexic will make this our second acquisition to be announced in 2013. With each acquisition we have considered, we have demonstrated a disciplined approach for evaluating and prioritizing opportunities with a specific focus on shareholder value and returns. Our M&A strategy is to invest in our core offerings and expand into highly related technologies that both reinforce and fortify our core businesses and capabilities. We believe Prolexic fits these criteria and is another compelling acquisition for Akamai for a number of key reasons.

Prolexic will significantly enhance the scale of our security business, and scale matters in the security market. Prolexic has a monthly recurring revenue model very similar to Akamai's. And using 2013 estimates would've added roughly $50 million to our existing security revenues, effectively doubling the size of our security business and giving us instant critical mass. Prolexic has also demonstrated strong growth momentum and traction in the marketplace, and we expect that growth to continue and to be additive to Akamai total growth rates in 2014.

Upon the close of the acquisition, we will include Prolexic results within our performance and security solutions category for revenue reporting going forward. Prolexic also has some of the best talent in the security industry. As we've gotten to know the Prolexic team, the clear alignment between our companies and our cultures are something that we believe will help further accelerate our security innovation and growth ambitions.

Upon the close of the acquisition, Prolexic's global operations and over 200 employees will be integrated into our Akamai security division. Further, Prolexic will bring to Akamai a third security engineering center of excellence, each of which will have distinct missions: Cambridge, Massachusetts, focused on application security and Web Application Firewall technologies; Protelea [ph] Israel, focused on big data mining for security and machine running; and Prolexic's operations in Fort Lauderdale, Florida, focused on network security and security operations technologies.

Prolexic's strong revenue growth is a direct result of both the value they bring to customers and their commitment to make the necessary investments in both their direct sales force and indirect channels. In fact, over 45% of their business runs through channels. Akamai intends to leverage Prolexic's solutions and carry their relationships to further deepen our own relationships with these partners. We believe there is significant upsell and cross-sell opportunities into our respective install base of customers. We expect to continue to invest in our go-to-market capabilities to enable us to capitalize on the significant growth opportunities and the broader security landscape.

In the first full year with Akamai, we expect the acquisition to be additive to organic revenue growth rates by about 4 percentage points and to lower Akamai aggregate EBITDA margins by about 2 points. We also expect the acquisition to be slightly dilutive to non-GAAP earnings of $0.06 to $0.08 in the first full year.

While Prolexic is expected to be modestly dilutive to earnings as we integrate the companies, we are very confident that we can grow and scale the business to drive significant profit growth over the longer term as the business and market opportunity grows.

In sum, we believe that the synergies from a Prolexic and Akamai combined security business will enable us to operate comprehensive portfolio of Web security and DDoS protection solutions capable of addressing the full range of customer needs today and more broadly, as the cloud security landscape evolves.

The closing of the transaction, which is subject to customary closing conditions, including regulatory approvals, is expected to occur in the first half of 2014. Therefore, the company's Q4 2013 guidance remains unchanged. We expect to provide more detail after the acquisition closes.

With that, I'd like to ask the operator to open it up to Q&A and take the first question.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Sterling Auty from JPMorgan.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Maybe one technology question and one follow-up on finances. Tom, on the technology side, you mentioned Prolexic's been around since, I think, 2003 or so, 400 customers. What do you think you can do differently to increase the traction and adoption of their solution set within customers?

F. Thomson Leighton

Well, I think there's a lot of synergy in a combined offering. As we talked about, Akamai has specialized in defending websites and applications, whereas Prolexic has specialized in providing DDoS prevention solutions for a data center and all enterprise applications. And that's really a good combination to be able to take to market. We -- Akamai, of course, has a much larger customer base, and there is the opportunity now to sell Prolexic capabilities and bring that offer to market to our customer base and more broadly. And we also now have the opportunity to sell into Prolexic's customer base, so there's synergy there as well.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Okay. And then a follow-up for Jim. So looking at that 4% additive to revenue, given the recurring nature, can you give us a sense, do they have annual contracts, multiyear contracts, monthly? And how should we think, because I imagine because it's a recurring revenue, you're going to get that deferred revenue right off in a ramp, should we think about a bigger chunk of that 4% increase in revenue growth coming at the latter part of that first year of inclusion?

James Benson

That's a good question. So yes, they have a very similar monthly recurring revenue model to Akamai. They have committed contracts that vary in length from kind of 12 months to 2 years, so very consistent with Akamai. And you're right that, obviously, in the first full year, that because it's a recurring revenue business, the roughly $50 million revenue stream that I mentioned in 2013 actually has a run rate that's higher than that going into 2014. Now admittedly, we'll have to adjust for some purchase accounting adjustments for deferred revenue and things of that nature, that is just normal course of business. But we do expect that business will continue to grow much faster than the Akamai average and add over 4 points of growth to the Akamai business.

Operator

Your next question comes from the line of Michael Turits from Raymond James.

Michael Turits - Raymond James & Associates, Inc., Research Division

So 2 questions. One, Tom, could you just talk a little bit about the architecture integration please, how it fits into your existing solution, how it fits in the data centers? And then again, Jim, just back on the numbers, I just wanted to clarify. You said 4 points of, I think you said organic revenue contribution, so what do you mean by that, since you're acquiring this?

F. Thomson Leighton

First, on the integration, as these things go, it will be relatively straightforward. We are going to maintain and grow the Prolexic infrastructure. And today, we already have a few joint customers that use both Kona Site Defender and Prolexic's DDoS defense for the data center. So we've already been through the process of integrating the customers so they can use both capabilities in a synergistic way. So that work is pretty much done. So it's not a situation where we've got to dismantle a network and then put it all into Akamai. These will be separate infrastructures that already we know how to make work together well.

James Benson

And as far as the 4 points of additive growth rate, the way to think about it is, if you literally take the consensus for 2013 and then you assume that the consensus for 2014 that's on the Street, what I'm saying around additive of 4 points is, it will add 4 points of growth onto our 2013 consensus estimates, which are about 15 64 [ph].

Michael Turits - Raymond James & Associates, Inc., Research Division

Okay, adds 4 points of growth onto the 15 64 [ph].

James Benson

That's right.

Operator

Your next question comes from the line of Gray Powell from Wells Fargo.

Gray Powell - Wells Fargo Securities, LLC, Research Division

Maybe can you just help us size what you view as the total DDoS mitigation market? And then, how does the Prolexic acquisition increase your addressable portion of the market?

F. Thomson Leighton

The -- we think broadly of our security market as being comparable to our application acceleration market, both in terms of overall revenue, roughly in terms of ARPUs, comparable customers, although the specific buyer within an account may be a little bit different. The only difference really is that our -- we're much smaller in the security business today. Of course, this acquisition changes that a little bit. It gets us closer to being a larger entity and closer to where we are with application acceleration. The Prolexic acquisition takes about 2 years off, accelerates our time-to-market by about 2 years. We're having data center level defenses and being able to defend all enterprise applications, IP applications, not just the web applications that we defend today. So it gives us a much more, I think, compelling product suite to bring to the market for the benefit of our customers.

Gray Powell - Wells Fargo Securities, LLC, Research Division

Understood. Okay. And then after the deal closes next year, will you consider breaking security out as a separate line item?

F. Thomson Leighton

That's a good question. I think we'll consider that. We're certainly going to provide annually to you a view of how the security business is, as a separate stand-alone business. We haven't made a decision yet on whether we'll separate security, but we may.

Operator

Your next question comes from the line of Aaron Schwartz from Jefferies.

Aaron Schwartz - Jefferies LLC, Research Division

Jim, I know you provided some financial metrics and all along, you've always talked about your desire to invest for growth and the impact of margins here. But I just wanted a little more detail behind the dilution. I believe you mentioned they have a sort of separate network or a separate facility, they also have proprietary hardware. Can you just walk through your expectations for the continued rate of reinvestment in those areas? And can you get some expense synergies with this over time, or is it really the revenue scale we should think about in terms of lifting the margins over a multi-year period?

James Benson

That's a very good question. So as you would expect for a company that is kind of in a early-stage, maturing kind of business model as Prolexic, they're about an EBITDA-neutral business, actually, which is actually pretty good for -- if you look at a lot of security companies, they're not even EBITDA-neutral at the kind of revenue volumes that they have. And the dilution impact in the first year is, this acquisition in the early goings is much more about the business and revenue synergies of the combined companies than it is about the expense synergies. That's not the premise of the acquisition. You can expect in the first year that we will continue to invest in the business, that this security is the fastest-growing product category for Akamai. I think with Prolexic, it will continue to be the fastest-growing product category. There will be some things in the first year that I would say are notable, that we're going to be building out a broader facility expansion in their Fort Lauderdale location. So we're going to have some one-time cost on CapEx that will increase depreciation. We're also going to do some things regarding the network to make sure that we're hardening the network, kind of to an Akamai standard that we believe that is necessary. So there are some things that we're going to do in the first year that are going to be adding costs that I think you can expect. Beyond that, we should be able to get this business to grow and scale. So we have confidence, as I said, that the financial model of this business can be very attractive. I think it'll earn -- more than earn its cost of capital for the company. It's just a matter of growing and scaling over time.

Aaron Schwartz - Jefferies LLC, Research Division

Okay, that's helpful. And second question, if I could. I believe Prolexic tended to protect some companies that are prone to very large attacks. You mentioned financial services exposure there. But can you walk through any other larger verticals? Or if there's any customer concentration in that bend, are there any verticals they participate in that you have not historically? I think they have some exposure to gambling, just kind of how you manage that.

F. Thomson Leighton

Yes, they actually span multiple verticals, enterprises really across -- they tend to be on the larger side and have bigger brands to protect and they've become targets. But across many verticals, I think there's a relatively very small amount of revenue that comes from the gaming industry. I think the financial vertical is where they are best known, but their business expands well beyond that.

James Benson

They've also started to expand into the commerce verticals as well.

Operator

Your next question comes from the line of Ed Maguire from CLSA.

Edward Maguire - CLSA Limited, Research Division

I was wondering if you could compare what Prolexic does to some of the competition that you may have evaluated. In particular, I was curious about how the -- their channel partnerships may map against some of the competition that are combining managed hosting with denial of service protection and whether you see this is a footprint to expanding your own carrier relationships.

F. Thomson Leighton

Well, first, Prolexic offers a service, whereas most of the market today involves buying a piece of equipment and putting it in your data center. And the big advantage of having a service where you do the filtering in the cloud is that you have much more capacity to withstand large DoS attacks, and DDoS attacks are quite often about volume. And so it really, today, with the scale of attacks that we're seeing, just isn't good enough anymore to be buying a box in the traditional way and adding pipe to your data center because you just can't afford that to have enough to withstand the larger attacks. Prolexic does have some very strong carrier channel partnerships. This is very synergistic with Akamai, as you know. The major carriers are a core part of our strategy going forward, as we work to deepen our relationships with the major carriers. So there's very strong synergy there. You are correct that several of the major hosting providers and cloud compute providers are adding security to their infrastructure. But again, to really take advantage of that, you'd have to be hosted in their infrastructure. And the advantage of Prolexic or an Akamai solution is that, really, wherever your assets are, wherever your equipment is, that we'll be able to provide a defense for it. And it doesn't matter where you're connectivity is from, we'll be able to filter out the attack near where it's starting, where the bots are. And of course, that makes it be far more scalable.

Operator

Your next question comes from the line of Colby Synesael from Cowen.

Colby Synesael - Cowen and Company, LLC, Research Division

I guess, at this point, just a few financial housekeeping questions. So first off, on the guidance, my understanding is since this closes in 2014, this has no bearing on, obviously, the fourth quarter guidance. But I was wondering if you could actually just provide an update on what you're thinking there. I think you guys have talked about a big customer potentially coming off in the fourth quarter, and I was wondering if you could give us any color, at this point, if that's happened. The second question has to do with the options component of the price. It wasn't clear to me -- does the $370 million include the options component? Was that actually a big number? And then the third question, just to continue with the financials, you've talked about a target of 40% to 45% EBITDA margin. Based on what you said on this call, do you think that that's something you could still stay within?

James Benson

Sure. So I'll start with the last one. So for sure, we think with this acquisition, over time, we can certainly stay within the stated model that I've outlined, around low 40s kind of EBITDA. I'm trying to remember the second question that you had.

Colby Synesael - Cowen and Company, LLC, Research Division

Just the options and was that part of $370 million...

James Benson

Oh, yes. So the part -- the net cash is $370 million. That does not include a portion of the options that we would add to that, so that would be additive to that...

Colby Synesael - Cowen and Company, LLC, Research Division

Is that a big number?

James Benson

No, it's not a big number. And what was your first question?

Tom Barth

Big customer.

James Benson

Yes, the big customer. We're not going to talk about guidance. We provided our Q4 guidance previously. I'm not going to update that on this call.

F. Thomson Leighton

But -- and just to be clear, we have not talked about a big customer leaving the platform in Q4...

Colby Synesael - Cowen and Company, LLC, Research Division

And excuse me, not leaving, renegotiating the contract, sorry.

F. Thomson Leighton

That's correct. And that is underway, and we have talked about that previously. There's no change there.

Operator

Your next question comes from the line of Heather Bellini from Goldman Sachs.

Heather Bellini - Goldman Sachs Group Inc., Research Division

I was just wondering how you see your current sales force being able to leverage this product. And I guess, in particular, I'm just wondering, your solutions today versus the solutions you're acquiring, are you selling into a different person or do you think you could get some sales synergies, and if so, how do you expect to get them?

F. Thomson Leighton

Yes, this is highly synergistic with our current sales motion around Kona Site Defender. In fact, in discussions when selling Kona Site Defender, sometimes, a discussion about Prolexic will arise. So very synergistic, same buyer buys Prolexic as they buy Kona Site Defender. And already, our field is pretty well aware of Prolexic's capabilities. So I think this will be very well-received by our field force and our customers.

Operator

Your next question comes from the line of Sameet Sinha from B. Riley.

Sameet Sinha - B. Riley Caris, Research Division

A couple of questions here. So on the margin front, for the last couple of quarters, you've been talking about the low 40s margins. Does this acquisition include that low 40s? Meaning, should we expect other organic pressures to kind of bring margins down to the low 40s? And secondly, $370 million in buyback here, 1.2 [ph] upside, $370 million purchase price, you have about 1.2 [ph] in cash. You have a buyback program in place which is supposed to be over and above the option dilution. Do you think you will need to pull back on that in the near term and maybe have a more aggressive buyback in the later years? Or do you think that continues as per plan?

James Benson

Good question. So on the margins, so the way to think about the margin profile is, I've been saying all along before this acquisition, that we intend to operate the company in the low 40s EBITDA. So that still stands. And then think of this as, this will basically drop another 2 points of EBITDA on top of that. So think of it as the very low 40s will be the impact of this acquisition in its first full year. Obviously, the deal needs to close first. But within its first full year, it will add another 2 points of EBITDA erosion. Relative to the buyback, we believe that we have $1.2 billion worth of cash. Yes, this will exhaust some of that. But the -- relative to the authorization, we do intend to be able to do both, which is continue with our buyback program. As you know, our buyback program is intended not to just offset dilution but to do more than that, which is a little bit of a change from our prior buyback appropriation. But we believe that we can do both, continue to buy back shares. Obviously, we've been a pretty disciplined purchaser of our shares, so you can expect we will continue do that. But we continue to do both, which is find M&A like this and also continue to buy back stock.

Operator

Your next question comes from the line of Jeff Van Rhee from Craig-Hallum.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Tom, just one for you, first. Just in terms of the customer bases and the respective customer bases, how many common customers were there? I think you touched on a little bit, but if you could expand on that? And then how many do you have -- I guess, how many do you have using the product side-by-side? And also, in terms of evaluating the acquisition, how did you validate the customer's desire for both, just to expand on that if you would?

F. Thomson Leighton

The -- their 400-plus customers, a small fraction, are also Akamai Kona Site Defender customers. But it's a large-enough pool that we were able to have very good conversations with those customers, and we're very familiar because how we integrated together, because we were a key architect for doing that. We -- and as I mentioned before, our sales force is already -- the security folks are already well familiar with Prolexic's capabilities. It does come up in conversations. And so this will be a very natural fit, be very synergistic, I think, as a combined product and give us really a great step forward to a more comprehensive solution in the DDoS prevention and cyber attack prevention space.

Jeffrey Van Rhee - Craig-Hallum Capital Group LLC, Research Division

Okay. And then just, I guess, 2 follow-ons. One, just touch on the numbers in terms of the historicals, what kind of growth rates have they been putting up the last few years? And then the last one for me is, in terms of the key founders, can you talk to who will be coming from the senior management team that is -- that are being retained?

F. Thomson Leighton

Let me address the last one then hand the first one over to Jim. The original founders are largely not with the company anymore. The current management, which has been very successful in growing Panther, we anticipate they will stay on, largely in their current roles, working now as part of the larger company. And then, Jim, do you want to talk about...

James Benson

Yes. I can't give you a specific growth rate because the deal hasn't closed yet, and it wouldn't be appropriate for me to comment on Prolexic's actual growth rate. I can tell you that they are a rapidly growing security business and it's significantly faster growth rate than the Akamai average.

Operator

Your next question is a follow-up from Sterling Auty from JPMorgan.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Two quick follow-ups. While you don't want to comment on growth rates, can you at least give us a sense of what the trailing revenue actually was? You mentioned approximately $50 million for 2013, if you had them. But maybe just give us a 2012 revenue generation by the company?

James Benson

Yes, I'm not going to provide 2012 revenue. Because if I gave you 2012 revenue, you could calculate what the growth rate is. So again, it's not appropriate for me to comment on their specific growth rates. The deal has not closed yet. I'm trying to provide you some color that it's roughly a $50 million revenue business. Obviously, they haven't closed their fiscal year yet, so I say roughly because we don't know exactly how they'll close. And I can tell you that it is a rapidly growing security business that has had very significant traction and momentum in the security marketplace.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

The reason I asked, Jim, is if we look at -- if we add the 4 points of growth, it's somewhere around, let's just call it, $55 million, just for argument's sake. In that $55 million, given the contract structures and the deferred revenue that you'll probably have to write down, I would imagine, would have to ramp in over those 4 quarters, which would suggest that the revenue run rate would have to be materially higher for you to recognize that level. Now I just want to make sure that that's correct, or is there some other growth assumption built in?

James Benson

No, I think you're thinking about it the right way. You're right that there'll be a haircut because of the deferred revenue write-down. Offsetting that, obviously, is that their revenue run rate is going to be higher than the $50 million that I just mentioned because of the recurring revenue nature of their business. And if their $50 million, roughly speaking, for 2013, you can expect that their revenue run rate going into 2014 is higher than that. So you're thinking about it the right way. And it will build, it will build throughout the year, next year. You'll have a write-down of the deferred revenue kind of in the first quarter of the acquisition and that it will build back from there.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Now because you're providing ongoing service to those customers, is the write-down typically lower than what we might expect for other product-oriented acquisitions?

James Benson

Yes. Yes, I think that's probably right.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Okay. And then last question for Tom. When I think about the DDoS solutions for this part of the market, I have to think about customers that are paying kind of $100,000 a year, give or take, as a subscription to provide protection and monitoring on an ongoing basis, and maybe that ramps up during big attacks. Are you thinking about ways that you can increase that dollar value from customers? Or do you think about this as just the add-on to what you're already doing, so you don't really need to drive a big increase in kind of ARPU for this business, in particular?

F. Thomson Leighton

Well, I think you want to do both. You're, I think, pretty much on target with the ARPU. And by having the combined solution, I think we can drive even more value. And then, as you know, we go to market with a protect and perform solution where it's not just the protection but also the acceleration, and it runs on the same platform and that is very compelling. So we get greater stickiness and greater ARPUs, combining it with the other Akamai solutions. And then going forward, as we talked a little bit about, by combining the R&D efforts of the 2 companies and the malicious traffic data that the 2 companies see, we hope to accelerate the development of new cloud security offerings. Ultimately, the goal of all enterprise traffic passing through Akamai, where it gets cleaned up so it becomes safe and secure and accelerated, so it performs really well.

Operator

You have a follow-up from the line of Michael Turits from Raymond James.

Michael Turits - Raymond James & Associates, Inc., Research Division

Tom, just 2 technical questions. One, can you be more specific in terms of the architecture, when you talk about the difference between your [indiscernible] and web and they're doing data centers. Are you protecting a write-down in touching the data center, as opposed to going the last mile, and how does that work? And then third, on their architecture, are they -- what are the kind of equipment, third-party -- what are they using in terms of technology? Is it all their stuff or are they using any third parties because, typically, you've been all your own IP?

F. Thomson Leighton

Right, okay. So first, to review what Akamai does. So we defend websites and web applications, and we defend them from attacks at the network layer and the app layer. We defend them from DDoS attacks. We defend them from attacks trying to get in and corrupt the site or steal sensitive data. So if it's a website or application, Akamai has what we believe to be best-in-class capabilities there today. And also a tremendous scale, because it rides on the Akamai platform and with great performance, because we're a performance company. So we can be always on and always making the website or application be safe and be secure without hurting performance. That's Akamai. Prolexic focuses on the data center and the IP space. So they go beyond Web, okay? They go into enterprise IP applications that aren't Web applications. And they actually protect the data center. Akamai doesn't defend a data center. Akamai defends the web application. Now there's a lot more than the Web application that an enterprise -- a big enterprise may be worried about defending, and Prolexic covers that territory, with a focus on the DDoS, and the technology by which they do it is a little different as well. Akamai uses a DNS CNAME, the domain name system level, to direct traffic to the Akamai Edge platform so that we can then filter out the malicious traffic. Now that works if the attacker follows the CNAME. But the attacker might go after the data center if -- and if they know the IP space -- the IP addresses there may be able to do that. Prolexic makes the change or directs the traffic via the Border Gateway Protocol or the routing layer. And once that happens, traffic aimed at the data center, attack traffic going to the data center, gets directed to Prolexic's scrubbing centers. And that's where it gets cleaned up and only the good traffic goes back to the data center. So if you want sort of the broad protection for your data center, your IP space for all your applications, Prolexic provides that layer of defense. Then on top of that, if you want something specific for a Web app, and for many enterprises, the Web app is the most important thing, with much deeper levels of protection and performance guarantees and being always on, then you'd layer in Akamai on top of that. So that's the difference between the 2. The actual infrastructure is different, and the Prolexic scrubbing centers use a combination of internally developed tools and some third-party security capabilities. So they have a hybrid in their scrubbing centers.

Operator

Your next question comes from the line of Richard Fetyko from ABR Investment Strategy.

Richard Fetyko

Could you comment on the size of their sales force and perhaps, if not exactly, how many sales reps they have, just relative to Akamai's sales force in the security area? And you mentioned that they have relatively robust channel sales, just curious if you could tell us what percentage of their new business came from direct sales versus channel sales.

F. Thomson Leighton

Their sales force is very small compared to Akamai, a very small fraction. And that's one of the ways that we think we can really leverage the merged companies is because our much larger sales force, and rapidly growing, as you know, due to our recent investments, will now be able to sell the Prolexic solution in conjunction with Kona Site Defender. A little less than half of Prolexic sales are through the channel, and the channel is primarily carriers, again, very synergistic with Akamai. Our percentage of sales to the channel is much smaller, about 20%. But as you know, we have a very strong focus on growing our large carrier relationships. So there's good synergy there.

Operator

Your next question is a follow-up from Sameet Sinha from B. Riley.

Sameet Sinha - B. Riley Caris, Research Division

Can you talk about the competitive landscape and potentially even name some of the players there and talk about size and market share of what the rest of the market for Prolexic?

F. Thomson Leighton

Yes. I think the primary competition -- a large majority of the market share is by a device from one of the many large companies that sells you a application firewall, a intrusion prevention system, intrusion detection system, any number of devices that you would place in your data center to filter out or give alerts when it sees attack traffic. Now the challenge there, of course, is that as the DoS attacks get larger, the pipe into the data center becomes overwhelmed. And so these devices can't really effectively do what they're intended to do and you're brought down. The better way to handle the situation is to filter out the traffic in the cloud. Now there are providers who do this as well. There are providers like Neustar and VeriSign. And our belief is that Prolexic has a much better capability at doing the filtering and performs better. It can handle much larger scale. Some carriers offer a filtering for the pipe for their particular traffic. And that can be useful, although, it is better if you can provide a solution that doesn't require a single carrier and that can filter out the traffic before it even gets to the carrier. You really want to filter out the traffic near the origin of the traffic. So there is a variety of competition out there. We believe that the Prolexic approach is the best for protecting the data center and that they have the best solution with the largest scale in the market and also being highly synergistic with Akamai's capabilities.

Operator

Ladies and gentlemen, that concludes the Q&A portion. I would now like to turn the conference back over to Mr. Tom Barth for closing remarks.

Tom Barth

Okay. Well, thank you, and great questions, everyone, and we appreciate you joining us for today, particularly on such short notice. This concludes the call for today, and we look forward to talking with you on our scheduled earnings call on February 5, after market, if not before. Have a great day.

Operator

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

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