Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Akamai Technologies, Inc. (NASDAQ:AKAM)

Credit Suisse Annual Technology Conference Call

December 3, 2013 5:00 PM ET

Executives

Tom Leighton - CEO

Analysts

Sitikantha Panigrahi - Credit Suisse

Sitikantha Panigrahi - Credit Suisse

My name is Siti Panigrahi, I am a member of the software research team at Credit Suisse. We have Tom Leighton CEO of Akamai. So Tom, maybe we will just start with a quick question about Prolexic acquisition that you guys announced Monday.

Tom Leighton

Yesterday.

Sitikantha Panigrahi - Credit Suisse

Yesterday, yeah. So could you talk about how the acquisition complements your existing business?

Tom Leighton

Yes. It's very synergistic with our existing security business. Today, Akamai focuses on defending websites and web applications, and we defend them against pretty much any kind of cyber attack, that includes DDOS, network-layer attacks, and application layer attacks.

Prolexic focuses on defending the datacenter from DDOS attacks, and that includes all the applications in the datacenter, including non-web IP-based applications. Enterprises have a need for bulk capabilities, they want to defend the datacenter against DDOS, and typically they have some web applications that are very important, that they want to make sure have the ultimate in protection, and they perform well, when the protection is on, and it needs to be always on, and that's what they would use Akamai for.

So by having both products together, we have a full portfolio now for defenses of enterprises against DDOS and application layer attacks.

Sitikantha Panigrahi - Credit Suisse

So, could you talk about the competitive landscape in the DDOS market? Who do you think you are competing, like, who are the existing vendors like?

Tom Leighton

We are sort of the new guys on the block. We do things differently than the traditional approach. The traditional approach to buy a device from a security vendor, a box provider, place that device in your datacenter, and then use it to filter out the malicious traffic. And that can work great. There is a couple of drawbacks. One is, it can be an impact on performance when you turn it on, or actually use it to filter traffic. The bigger problem is, is that the attacks today, particularly the DDOS attacks, they come in very large scale. Could be hundreds of gigs a second of traffic, and that overwhelms the datacenter infrastructure, the transit type of the datacenter can be overwhelmed, the device can be overwhelmed, and it becomes really impractical for most enterprises to pay to defend at the scale they need to defend today.

So really, I think long run, the best solution is done in the cloud, far away from the datacenter, and even beyond the carriers that are supplying connectivity to the datacenter, where there is much more capacity and you can do it on a shared platform. So much more cost effective. That's Akamai's approach, that's the Prolexic approach, and very natural for them to come together a single product suite.

Sitikantha Panigrahi - Credit Suisse

Okay. So what kind of growth rate they have, and how is that going to have -- contribution to your growth rate, maybe going forward in the next few years?

Tom Leighton

Yeah. Prolexic has been a fast growing company. They have excellent brand in the business, been very successful, and at this point, we are projecting an additional four points of revenue growth for Akamai as a whole, based on a full year basis, if they were to become part of Akamai in January 1, 2014, which I don't think it will happen exactly then, but if that were to be the case, we'd have four points of additional growth off of our 2013 revenue.

Sitikantha Panigrahi - Credit Suisse

Perfect. Now switching back to the core business CDN, could you give us an update in the competitive landscape and the pricing environment, given the macro environment (inaudible)?

Tom Leighton

Yeah, it really is unchanged. It's a highly competitive environment. Lots of different kinds of competitors there. I think the one fundamental change that would be in our favor is that we are making a real effort to partner more deeply with the major carriers. Most recently, we announced Turk Telecom, and that followed the announcements of Korea Telecom, Swiss Telecom, Orange and AT&T over the course of the last year. Several of those carriers had competed with Akamai, had competing solutions in their geographies, and now they are converting to the Akamai platform. So that's a positive development in the competitive landscape for media. But by and large, you got the existing long term players, you got the startups, you got the giants that all have offerings that compete in form or another. So every year pricing goes down, traffic goes up, the high level dynamics have really not changed there.

Sitikantha Panigrahi - Credit Suisse

Okay. Now, we have seen some of the financial -- some of your competitor's financial struggle off late. So is that some kind of (inaudible) to gain market share, how are you gaining market share overall in that market?

Tom Leighton

In media?

Sitikantha Panigrahi - Credit Suisse

In media, yeah.

Tom Leighton

You know, it's not impossible that there could be a scale play to be out there. But generally, we try to gain market share by offering a really superior product. The highest possible quality, at a very competitive price, and we are constantly working. A lot of people working on improving quality, offering support for the latest formats, ultra HD 4K and in reducing costs, so that we can maintain our margins. Actually had really good progress this last year, we actually grew gross margins there, in an environment where major competitors are willing to lose money over long periods of time to try to hold some share there.

Sitikantha Panigrahi - Credit Suisse

Okay. So going through that (inaudible) acquisition, could you provide us an update on the integration side, and how do you (inaudible) to impact so far in your business?

Tom Leighton

Yeah, a bear view is integrated into Akamai. We use that in our carrier product portfolio. It has greatly reduced the time-to-market for those carriers that want to buy a licensed version of Akamai content delivery capabilities. It's a component of our overall carrier strategy, and it actually really is a -- in terms of the real revenue directly attributed to the license sale, is a small component of the overall strategy. But I think it's an important one, certainly psychologically. Relationships that we have announced in the last year, started with the notion of, is the carrier owning and operating? Which would mean, we sell them a licensed product.

Most did not end that way, most ended in a way where we'd be at least operating, if not owning the platform there, as part of our broader platform, but it is important to be able to have that capability in our carrier discussions.

Sitikantha Panigrahi - Credit Suisse

Okay. So sticking to the theme of acquisitions for a moment again, could you update us on the FastSoft with regard for the announcement of your mobile application (inaudible)?

Tom Leighton

For FastSoft?

Sitikantha Panigrahi - Credit Suisse

Yeah.

Tom Leighton

FastSoft wasn't geared at mobile per se. We have integrated the FastSoft technology to our platform and we upgraded the platform as a whole. We didn't charge anything additional to customers to get the benefit of the FastSoft technology, and it was sort of one of the benefits you have from doing business with Akamai, is that we are constantly making improvements to the platforms, and in many cases, you don't have to pay anything additional. We just improve it and we let you know, and the service has gotten better without a change in price.

Sitikantha Panigrahi - Credit Suisse

Okay. Now switching to M&A segment. What are you seeing in terms of M&A and e-commerce traffic at this point? How do you compare that to the second half of the past couple of years?

Tom Leighton

Well in the fourth quarter, you can see bumps in traffic for our commerce sites. Now, most of our commerce business is not traffic based. The very largest commerce companies do have a strong traffic component, but most is not. We actually have information with the net usage on our website, you can go take a look at that data. We are not going to really know what the revenues are there from the e-commerce traffic, until we are adding it up in January.

Another way traffic can change for media and entertainment in the fourth quarter is -- as people get new devices for the holidays as gifts, say it’s a smartphone, a new play against console of some kind, they will be getting software on that device, and that quite often would come from us, and so we will see -- it can see software spikes, at the end of the fourth quarter. And that software delivery is typically tied directly to revenue based on traffic. So if traffic goes up, then revenue can rise at the end of the fourth quarter.

Sitikantha Panigrahi - Credit Suisse

Okay. Also, could you update us on the progress of integration of Blaze and Cotendo and how do you think that's going to drive value in the next few quarters?

Tom Leighton

Yeah. Cotendo is full integrated. In fact, I just came back from our office near Tel Aviv. And we have, since the acquisition, doubled the number of employees in Tel Aviv, and have gotten a new facility that we did the ribbon cutting for a few weeks ago, and there is a space to double again. So we now have about 100 employees in Tel Aviv, primarily developers. Many working on our security products, and several working our web experience or acceleration products. Most or all the customers are on the Akamai platform now. It has been a very successful integration for us.

Blaze was a much smaller company, based out of Ottawa. Fully integrated, in fact, their technology forms a core component of the new Ion service, that will become our flagship dominant service for acceleration in the future. We are seeing good upsell, as customers convert from DSA, or Dynamic Side Accelerator, a former flagship to Ion. Still, relatively small number, or a fraction of customers have Ion, but it has got great performance results for mobile, for in-country acceleration, has really used their measurements. You can see what the reeling users are experiencing, as they are navigating the sites, something customers have asked us for a long time, and the Blaze team, their technology and those people, really a core part of the new Ion service. In fact, the CTO from Blaze is now the CTO of our entire web-experience division. So we have been, I think that has again been very successful for us.

Sitikantha Panigrahi - Credit Suisse

Can you talk about Prolexic, how that's complementing KONA. So just wondering, how is the adoption so far in the KONA security, and I think you have 700 customers, reported new customers in that. So does the Prolexic bring some kind of cross-sell opportunities with KONA? Technically, how is that business doing?

Tom Leighton

Yeah, Akamai standalone has about 700 customers that buy some flavor of a security service. The flagship service is KONA Site Defender, and we added 40 new customers there in Q3, for a total of 180. Prolexic has over 400 customers. The Prolexic product has a comparable ARPU to KONA Site Defender. They make for an excellent package, a suite of solutions. There are some customers overlapping, not very many, but enough for us to know the integration as a product and the architecture. We know how to do that, that's going to be just fine. But we have a very good cross-sell opportunity for Prolexic customers to buy KONA Site Defender and for KONA Site Defender to buy Prolexic products.

And also, there is good synergy between security and performance, and we are really starting to see that now with customers that came to Akamai for security purposes, and then they see that while their performance got better, we can show them the data now, because they are on the platform for security, we can say, here is what we can do if you buy the flagship service. That since they are already in the platform, it becomes a much easier upsell to buy the performance. So there is a good synergy between the security services and the acceleration services. Either one requires you to be on the Akamai platform, once you are there, much easier to integrate and upsell the other side.

Sitikantha Panigrahi - Credit Suisse

Okay. I have a few other questions, but let me pause here for any questions from the audience. Here at the front.

Question-and-Answer Session

Unidentified Analyst

Hi, earlier, I believe it was this year, you guys made some significant adds to the sales force. I was just curious if you could provide a quick update on ROI, whether you are seeing a significant margin benefit, positive or negative? Then secondly, as you continue to grow your security offerings, I am assuming, since this is a fairly hot space in the market right now, especially in the wake of the NSA Snafu. I am just curious to get your thoughts on valuations of these deals, how you think through pricing, what kind of metrics you use, so that way you can achieve your desired hurdle rates there?

Tom Leighton

Right. So the plan to grow the sales force is on target. We began substantial increase in a number of quota bearing reps in Q4 of last year. We are on target for this year, to be where we wanted. We are going to continue that going forward at a lower rate, but continue growth of the sales force. It takes a rep about a year, till they get to -- most of the way to being productive, to be being fully productive, and so we are just deploying that with the first reps hired, reach that year point. We are tracking, obviously their productivity very carefully, and we are on plan there, and happy with how that's going. Its very early stages of course. We really don't know about the productivity reliably until next year, when we have more of the reps have been with the company for at least a year, and then of course we are a recurring revenue business, so it will take another year before the productive rep has a full year from customers, as they start signing up. So we really start seeing the big impact to revenue, more towards end of 2014 and beginning of 2015.

In terms of -- security valuations and the NSA PRISM situation, are really different things. You can talk about both. The short story on PRISM is, we are not involved with that. We don't tend to carry the kind of traffic that governments are interested in. They are after communications, generally to catch bad guys, and we are not the kind of vehicle that's used for that.

That said, the headlines in the press is not good for American companies. Its not material to our business. There are conversations with content providers that we have overseas, with a -- they ask us, hey are you giving everything to the government? And the answer is no, we don't. Of course we don't do that. Like any company, we comply with whatever the laws are in that country, but we are not engaged in that. So there is no real impact to Akamai there.

In terms of security valuations, yeah, it is a hot area, so valuations can be higher in that environment. We don't look at it that way, we look at it -- in fact, we looked at it very carefully, when we did the diligence on Prolexic. We looked at how is Akamai going to do without them, on the build option. How do we think we will do, if we do the acquisition, and we look at the value that's there to Akamai, and there is a variety of ways you can compute, turn that into, what we think the company is worth to pay for, which is what we went through, and we don't think its worth more, just because it’s a hot area. In this case, the valuation made sense to us, and we reached agreement that we announced Monday.

Unidentified Analyst

Could you may be comment on Amazon as a competitor through AWS and CloudFront and may be how they are different from other competition you have seen in the past, and what your competitive match will be over them?

Tom Leighton

Yes. So CloudFront would compete with our CDM business. We see them sometimes, but not very often in the marketplace. One difference with CloudFront is, you really only use CloudFront if you are hosted on AWS, either S3 or EC3 or something like that. The vast majority of our customers do not host their web applications and websites there. We have a few to do, and they use us to accelerate and to make the site reliable, and that's just fine from our perspective, it's like a different way of hosting, and there is still the need to accelerate and secure the site.

I think, it wouldn't be good for us, if the whole world, if everything moved on to the AWS platform; because then, you would worry that, hey everybody would just use CloudFront and not worry about making -- accelerating the site, there'd be more risk to that. I think there is probably good reasons why the whole world won't be there. And I think there is really good reasons why sites need acceleration. In terms of the content delivery, that's a business that's already commoditized, and AWS is one more of many competitors there.

In terms of application acceleration, it's all about the speed, and there is a lot of things that you got to do, lot of innovations that we do, to make it be fast, and we are a lot faster, and we are making ourselves faster still, making sure we can really make the mobile experience be good. That's a very challenging environment, and so the goal there is, we provide value by providing the performance, that is not present today with other vendors.

Unidentified Analyst

Can you talk to margins? You guys just talked a year or so ago about margins going down to more low 40s, but it hasn't happened this year, but it seems like next year with this acquisition and the pricing renegotiation, probably there is more pressure on margins and then, so with the (inaudible) for next year, and then kind of longer term for margins?

Tom Leighton

Right. So our guidance is 40 to 45, and for just the low end of that range. This year, we did increase OpEx, pretty much according to plan, but we exceeded our plan in terms of improving gross margins, and that covered the increase in OpEx so that our EBITDA margin stayed up at 44, which was higher than we had expected. We continue to believe that the EBITDA margins will come down, because we are continuing to make the investments, and we are projecting steady gross margins.

Now, on top of that, when we close Prolexic, we believe there will be a two point decrement to EBITDA margin to that time, and we continue to believe that with the combination of the two, that we should still be in the range of 40 to 45. But certainly, the lower end of that range, once Prolexic is added.

Long term, as our security business grows, then the margins for the security business should improve. Right now, we are in an early stage, but we are investing heavily to drive very high growth rates in the revenue for that business.

Unidentified Analyst

The performance business -- there is different sales process, I imagine, like in the media business traditionally. So you hire these salespeople, you are going after different kind of these enterprise sales. Can you describe what -- you are not really familiar with that, I imagine yet? But trying to get -- how lumpy bit of ramp happens to [zoning in] on that kind of a target?

Tom Leighton

Well, the performance business is about 40% of our revenue. We have been in that business now for a long time. So we are familiar with that sales process. And really what we are doing is just growing what we already do. So we are scaling an existing sales process. So that's not a new business for us at all.

Sitikantha Panigrahi - Credit Suisse

All right. So let me ask some questions. So, can you talk a little bit about the recurring customer growth and how you think about that going forward?

Tom Leighton

Yes. We do add to the number of recurring revenue customers under long term contract every year. We don't disclose the number of customers there, but that is -- our goal is to both grow the revenue from existing customers, and to add to the pool of existing customers.

Sitikantha Panigrahi - Credit Suisse

You guys talked about one of the large media customer, I don't know, in Q4 or Q1, is that a target software that you want to (inaudible)?

Tom Leighton

No update. We are working on the renegotiation there. Our management will be in a position to report on that during our Q1 call.

Sitikantha Panigrahi - Credit Suisse

Okay. There is a question there.

Unidentified Analyst

I just had a quick follow-up. At your Investor Day a couple of quarters ago, I think you guided to an 18% revenue CAGR through 2020, if I am not mistaken? I am just curious if you have broken out kind of legacy organic contribution to that growth rate, versus inorganic, and if so, kind of help us think about the cadence of deals from here, that kind of achieve that [place over] that you built into that guidance?

Tom Leighton

Yeah, we don't split it out that way, but you want to think about it as, including acquisitions that we can fund from cash flows and cash balance, that there will -- you know, we are always looking for companies that have great technology and great people that we can integrate into Akamai and into our platform for the benefit of our customers. We are also looking at options for scale that make sense. We did four acquisitions last year, two so far this year, and we are always looking. We are active at looking, but disciplined in terms of the decision to close transactions.

Sitikantha Panigrahi - Credit Suisse

All right. With that, we reached the end of the presentation. Thank you, Tom.

Tom Leighton

Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Akamai Technologies Presents at The Credit Suisse Annual Technology Conference (Transcript)
This Transcript
All Transcripts