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Akamai Technologies (NASDAQ:AKAM)

Q1 2014 Earnings Call

May 01, 2014 4:30 pm 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

Jennifer Swanson Lowe - Morgan Stanley, Research Division

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

Justin Rowley - Goldman Sachs Group Inc., Research Division

Aaron Schwartz - Jefferies LLC, Research Division

Colby Synesael - Cowen and Company, LLC, Research Division

Richard Fetyko

James D. Breen - William Blair & Company L.L.C., Research Division

Edward Maguire - CLSA Limited, Research Division

Sameet Sinha - B. Riley Caris, Research Division

Rob Sanderson - MKM Partners LLC, Research Division

Timothy K. Horan - Oppenheimer & Co. Inc., Research Division

Philip Winslow - Crédit Suisse AG, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter Akamai Technologies, Inc. Earnings Conference Call. My name is Philip, 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, sir.

Tom Barth

Well, thank you, and good afternoon and thank you for joining Akamai's first quarter 2014 earnings conference call. Speaking today will be Tom Leighton, Akamai's Chief Executive Officer; and Jim Benson, Akamai's Chief Financial Officer.

Before we get started, please note that today's comments include forward-looking statements, including statements regarding revenue and earnings guidance. These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these factors is contained in Akamai's 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 May 1, 2014. Akamai disclaims any obligation to update these statements to reflect future events or circumstances.

As a reminder, we will be referring to some non-GAAP financial metrics during today's call. A detailed reconciliation of GAAP and non-GAAP metrics can be found under the financial portion of the Investor Relations website at akamai.com.

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

F. Thomson Leighton

Thanks, Tom, and thank you, all, for joining us today. Q1 was another excellent quarter and a great start to the year for Akamai, with revenues and earnings both exceeding the high end of our guidance range.

Q1 revenue was $454 million. That's up 23% over Q1 of 2013. Our excellent performance was driven by continued strong traction across all of our major product lines and geographies, with especially strong growth for our security products. The overachievement compared to guidance was driven by greater-than-expected traffic for our media delivery solutions.

Non-GAAP net income for the first quarter was $105 million or $0.58 per diluted share, which is up 14% over Q1 of 2013. Our overachievement on the bottom line was primarily driven by the better-than-expected revenue.

As most of you know, we completed 2 major transactions during the first quarter. First, we closed the Prolexic acquisition on February 18. And then 2 days later, we raised $690 million through our convertible debt offering, further strengthening our balance sheet for additional strategic flexibility.

I'll be back in a few minutes to talk more about our security products and some of the other achievements from the first quarter. But first, let me turn the call over to Jim to review our financial results in detail and to provide the outlook for Q2. Jim?

James Benson

Thank you, Tom. As Tom just highlighted, Q1 was another strong quarter for Akamai on both top and bottom lines. As I walk through the details of our Q1 financial results, I'll provide you with the consolidated numbers that include roughly 6 weeks of the Prolexic acquisition, and where appropriate, I'll also provided you with Akamai's results for Q1 excluding Prolexic.

As Tom outlined, Q1 revenue came in above our guidance range at $454 million, up 23% year-over-year with strong growth across the business. Prolexic accounted for approximately $7 million in revenue for the quarter. Excluding the impact of Prolexic and also adjusting for the ADS divestment and foreign exchange headwinds, revenue was still up 23% year-over-year. Revenue growth was strong across every solution category, but the overachievement was primarily driven by better-than-expected traffic growth in our media business.

Turning specifically to our media delivery solutions. Revenue was $215 million in the quarter, up 19% year-over-year and up 4% sequentially. We are very pleased with the growth in media coming off a very strong fourth quarter and absorbing the impact of new pricing terms for our largest media customer that became effective on January 1.

Traffic and revenue growth accelerated across most of the customer base, with particularly strong growth within our software download and gaming customers, driven by unplanned patches and gaming releases. Additionally, there were several large live events in the quarter that also had some modest contributions to the revenue overachievement. And while events like the Winter Games in Sochi and the NCAA Basketball Championships do not materially move the needle on revenue within the quarter, they do highlight our unique ability to deliver high-quality video over the Internet at scale.

Turning now to our performance in Security Solutions. Revenue was $198 million in the quarter, up 26% year-over-year and up 3% sequentially. Excluding the impact of Prolexic, revenue was up 22% year-over-year and roughly flat sequentially.

Within this solution category, we saw solid growth in our Web Experience Solutions, and as Tom mentioned, we saw a nice uptick in growth rates in our Web security solutions. Net signings were particularly strong for both our Kona and Prolexic security offerings, an important proof point of early traction with our Prolexic integration.

Finally, revenue from our services and support solutions was $41 million in the quarter, up 48% year-over-year and up 12% sequentially. We continued to see solid traction in service attachment rates across all of our solutions, and we saw an uptick in event-driven revenues as customers relied on Akamai service professionals to help them execute the notable live media events I mentioned earlier.

Turning now to a review by geography. Effective this quarter, we revised our method for splitting out U.S. and international revenues. Previously, revenues were split based on the invoicing location. Starting in Q1, revenues are split based on the location in which the sale originates. Prior period amounts have been recast under this new method, and the historic growth rate trends are very similar under both methods and a reconciliation of the 2 methods for fiscal years 2012 and 2013 can be found under the Quarterly Earnings Release section of our Akamai website.

Sales in our international markets represented 28% of total revenue in Q1, flat from the prior year and up 1 point from the prior quarter. International revenue grew 24% year-over-year and 7% sequentially, with currency fluctuations having a negative impact on revenue of approximately $2 million on a year-over-year basis and negligible impact on a sequential basis. Excluding the impact of currency fluctuations, international revenue grew 26% year-over-year and 7% sequentially. We continued to see strong growth in our Asia Pacific geography, and we were very pleased with the improved performance in our EMEA markets.

Revenue from our U.S. market grew 23% year-over-year and 3% sequentially. Our U.S. market continued to perform very well for us and have particularly strong growth in our large strategic accounts. And finally, revenue through resellers represented 24% of total revenue in Q1, up 4 points from the prior year and up 3 points from the prior quarter. This improvement was primarily due to traction with our carrier partners, as well as contributions from Prolexic's strong channel relationships.

Moving on to costs. As expected, our cash gross margin was 78%, flat with the prior quarter and up 2 points from the same period last year. As we've demonstrated over the past couple of years, we continued to execute well on our management of cost of goods sold. GAAP gross margin, which includes both depreciation and stock-based compensation, was 69%, flat with the prior quarter and up 2 points from the same period last year. GAAP operating expenses were $193 million in the quarter.

These GAAP results include depreciation, amortization of intangible assets, stock-based compensation, restructuring charges and acquisition-related charges. Excluding these charges, non-GAAP cash operating expenses were $152 million, up slightly from Q4 2013 levels and at the low end of our expectations due to some planned hiring that shifted into the second quarter.

Adjusted EBITDA for the first quarter was $204 million. That's up 6% from Q4 levels and up 23% from the same period last year. Our adjusted EBITDA margin came in at 45%, up 1 point from Q4 levels and consistent with Q1 of last year. This result exceeded our expectations coming into the quarter, primarily due to our revenue overachievement and also from lower OpEx related to hiring that shifted into Q2.

For the first quarter, total depreciation and amortization was $54 million, which included $38 million of network-related depreciation, $8 million of G&A depreciation and $7 million of amortization of intangible assets. Interest income for the first quarter was roughly $2 million, consistent with the prior quarter. Noncash interest expense related to our convertible debt was $2 million. This noncash expense is excluded from our non-GAAP results.

Moving on to earnings. GAAP net income for the quarter was $73 million or $0.40 of earnings per diluted share. Non-GAAP net income was $105 million for the quarter or $0.58 of earnings per diluted share and coming in $0.04 above the high end of our guidance range due to the revenue overachievement and hiring shifts I highlighted earlier.

For the quarter, total taxes included in our GAAP earnings were $47 million, based on a tax rate of 39%. This rate is up roughly 9 points year-over-year, reflecting the expiration of the R&D tax credit and a nonrecurring deferred income tax charge related to our foreign operations. Taxes included in our non-GAAP earnings were $55 million, based on a tax rate of 34% and in line with our guidance. Finally, our weighted average diluted share count for the first quarter was 182 million shares.

Now I'll review some balance sheet items. Days sales outstanding for the first quarter was 58 days, up 3 days from the last quarter and up 1 day from Q1 of 2013. Capital expenditures in Q1, excluding equity compensation, were $84 million, roughly in line with our expectations if you include Prolexic's CapEx. As a reminder, our CapEx number includes network investments as well as capitalized software development, global facility build-outs and IT-related expenditures. Cash generation continue to be solid, with cash from operations in the first quarter of $89 million.

During the quarter, we spent approximately $116 million on share repurchases, buying back about 2 million shares at an average price of just under $59. As of Q1 end, we had $586 million remaining on our current share repurchase authorization. We had roughly $1.4 billion in cash, cash equivalents and marketable securities in the balance sheet at the end of the quarter. This includes approximately $655 million from the net proceeds of our convertible debt offering in February.

As we've discussed in the past, we believe our strong balance sheet and cash position are important competitive differentiators that provide financial flexibility necessary to make the best investments at the most opportune times. As always, our overall aim is to deploy our capital to achieve favorable returns for our shareholders in a manner we believe is in the best long-term interest of the company and our shareholders. Our Prolexic acquisition is a great example of how we've used the strength of our balance sheet to invest for future growth.

In summary, we are very pleased with how the business performed in Q1. We continue to execute well, deliver strong revenue growth, manage network cost effectively and make the necessary investments that we believe will build a foundation for sustained, long-term growth. As I have shared previously, we expect the Prolexic acquisition to be slightly dilutive to our earnings over the next 4 quarters, as expenses will exceed revenues until we absorb and scale the business within Akamai. Operationally, we will be integrating Prolexic into our core security business, and going forward, we will not be reporting on them separately.

Looking ahead to Q2, we are expecting another strong quarter, with revenue in the range of $464 million to $478 million. This guidance includes a full quarter of Prolexic revenue. As a reminder, Prolexic revenue run rate exiting Q1 was approximately $5 million per month. At current spot rates, foreign exchange is expected to have a positive impact of roughly $2 million compared to Q1 and $3 million compared to Q2 of last year. We expect cash gross margins of 77% to 78% and GAAP gross margins of 68% to 69%, which is flat to down about 1 point from Q1 levels as we absorb the Prolexic acquisition and increase network investments to support expected traffic growth.

Q2 non-GAAP cash operating expenses are projected to be $166 million to $170 million, up from Q1 levels as the business absorbs a full quarter of Prolexic spend as we continue to further ramp investments in go-to-market and R&D resources and as we add facilities and infrastructure costs to support headcount growth globally. Factoring in the above, we anticipate Q2 EBITDA margins of 42% to 43%, down 2 to 3 points from Q1 levels.

As I've been messaging in prior calls, we are planning to operate the company in the low 40s EBITDA range in the near term. To be more specific, we expect EBITDA margins between 40% and 42% in the back half of the year, as we fully integrate Prolexic and as we continue to ramp up the necessary investments that we expect will help drive Akamai's growth and scale beyond 2014. Whether we land at the high end or low end of this range will be heavily dependent on revenue volumes. I would also add, and as I shared at the March Investor Summit, the long-term EBITDA model for the company remains at 40% to 45%.

With this revenue and spending configuration, we expect Q2 non-GAAP EPS in the range of $0.53 to $0.57. This EPS guidance assume taxes of $50 million to $55 million based on an estimated quarterly non-GAAP tax rate of 34%. This guidance also reflects a fully diluted share count of roughly 182 million shares.

On CapEx, we expect to spend approximately $90 million to $95 million in the quarter, excluding equity compensation. This is an uptick in spending due to the addition of several large facility and IT investments focused on scaling our infrastructure, as well as costs associated with expanding the Prolexic network footprint. Taking into account these important investment areas, which will continue throughout 2014, we expect full year CapEx as a percent of revenue to be slightly above our long-term model for the year.

In closing, we accomplished a great deal in Q1 and remain confident in our ability to execute on our plans for the long term.

Now let me turn the call back over to Tom. Tom?

F. Thomson Leighton

Thanks, Jim. It's great to see Akamai get off to such a strong start for the year, and I'm very optimistic about the opportunities that lie ahead.

I would like to thank all of you who joined us for our Investor Summit last month, whether you were here with us in person or you tuned in for the webcast, you heard me talk about the 4 grand challenges that we're focused on solving for our customers: delivering video over the Internet with unparalleled quality and scale and at affordable price points; making websites and apps have near-instant performance even on congested cellular networks; protecting websites and enterprises from the many attackers that are trying to take them offline, corrupt their content or steal their confidential information; and making branch office connectivity for major enterprises be much faster and more affordable.

I want to focus my remarks today on the challenges relating to video and security, both of which contributed to our success in Q1. As many of you know, the amount of video being consumed online has been rapidly increasing. For example, on February 2, we delivered the Super Bowl to 5.5 million online viewers, making it one of the most-watched live sporting events ever on the Internet. A few days later, Akamai provided the video streaming, website acceleration and web security services for 25 broadcasters of NBC's online coverage of the Winter Games in Sochi. This was the first time -- first Olympic Games where all of the competitions were streamed live.

In March, we delivered 21 million live video streams for March Madness. And just a few weeks ago, we helped IBM deliver the Masters Golf Tournament to 1.7 million viewers, with advanced functionality such as multiple camera views, live stream packaging and audience analytics.

I had the opportunity to meet with several of our large media customers last month at the NAB show in Las Vegas, and the positive feedback I received was a powerful validation of our success in delivering quality video at scale. I was especially pleased to hear one major media executive use the word flawless when describing his experience with our team.

People often underestimate just how challenging it really is to deliver high-quality video over the Internet at scale. Delivering great quality video to large audiences presents huge technical and financial hurdles for both content owners and service providers. This is an area where Akamai has repeatedly proven its capabilities while others have struggled. In fact, some of you may have seen recent news stories citing concerns about the Internet's ability to scale following the failures of some other smaller media events handled by our competitors.

Internet scalability is a very important issue. Akamai has always believed that if you try to deliver large volumes of video from a few data centers or through peering points, you were going to have capacity problems that will result in poor performance or failures. That is why our approach has always been different. We deliver video from servers in thousands of locations that are close to end users where there is far greater capacity and much lower latency, and that has been a key reason why Akamai has succeeded where others have failed.

As Jim mentioned, Akamai does not generate large amounts of revenue for delivering the live events that I have referenced. I have called out these events today because they demonstrate our unique capabilities to deliver high-quality video at scale, and these capabilities are responsible for a large portion of Akamai's revenue and growth.

It is also worth noting that an increasing portion of the revenue that we receive from media events is for other services, like website acceleration and web security. In fact, we believe that a key reason that you didn't see headlines about any of these websites being attacked is because they were protected by Akamai. The lack of headlines doesn't mean that the attackers didn't try to corrupt the sites or to take them offline. All high-profile events are prime targets. It's just that the attackers were thwarted by our security protection.

In general, cyber attacks are continuing to grow rapidly in terms of their frequency, scale and sophistication, with many attacks resulting in significant economic or reputational damage to enterprises, governments and end users. The enormous volume of many attacks can easily overwhelm the defenses traditionally deployed by major enterprises. That's because the attacker can induce large numbers of well-connected devices to flood a target with traffic, but the enterprise typically cannot amass the infrastructure needed to absorb or filter the attack using traditional defenses.

That's where Akamai's unique approach makes a big difference. Our servers are in thousands of locations at the edge of the Internet where there's plenty of capacity. By leveraging our massively distributed platform as an outer layer of defense to absorb large-scale attacks and to filter out malicious application layer exploits, we have been able to protect major enterprises in situations where their traditional approaches have failed.

Moreover, Akamai has integrated our performance capabilities into our security solutions, which means that our defensive shield can be applied without hurting performance. As a result, Akamai Security Solutions can be deployed in a proactive, always-on manner, which is an important advantage for Akamai in the security arena. Performance degradation is a challenge with traditional security products, and so they are often only turned on after the damage from the attack has occurred. Needless to say, that is often too late for the enterprise.

Because of our unique abilities to defend websites and applications, security is our fastest-growing product segment. At the end of the first quarter, and not counting Prolexic, 867 customers were using our security products including over 100 leading banks, and over 260 customers had purchased our flagship Kona Site Defender solution. Including Prolexic, we had over 1,250 customers using one or more of our security products at the end of Q1.

We are now in the process of integrating Prolexic capabilities with Kona Site Defender to form a combined security services stack. We are also investing to extend Prolexic's managed security services to include Kona. This will enable us to provide customers with a comprehensive portfolio of security solutions designed to defend an enterprise's web and IT infrastructure against application layer, network layer and data center attacks delivered via the Internet.

In closing, Q1 was a fantastic start to the year. The fundamentals across our business are strong, and we are continuing to drive innovation across all of our solution lines to help solve the major challenges our customers face in delivering a fast, reliable and secure web experience on any device anywhere.

Thank you for your time today. Now Jim and I will take your questions.

Question-and-Answer Session

Operator

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

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

I wanted to go into 2 subjects. The first one is the media delivery. You mentioned some of the large events. How -- as well as some of the software patches in gaming. How should we think about that flow or that volume as we look out, not only for the June quarter that you've given us guidance, but for the back half of the year? Is there additional catalysts and things that you already see that can continue that momentum?

James Benson

Sure. So I'll take that. So you're right. We had a very strong quarter in Q1, and we talked about this in the past that obviously, there's variability in our media business due to traffic. And it can be variable due to large software downloads, gaming releases that happened in one quarter and maybe don't happen in the next. We happen to have a very strong quarter pretty much across the board in media. We did well in social media. We did well in video. We did well in software download and gaming. So pretty much all the areas that I've talked about in the past. But what was notable in Q1 was we had some large, unplanned software downloads that benefited the quarter and which is really what drove us to be above our guidance, as well as some gaming releases. So it was a very strong software download and gaming quarter. It's tough to say going forward. I think what happened is that I think software downloads really are a little bit more consistent than they've been in the past. But when you have large ones like the ones that occurred, they do cause a spike in traffic and revenue in the quarter. And you're going to see those -- are you going to see them next quarter? Are you going to see them in the back half of the year? I'm sure we will, but there's a level of variability to them that I just really can't call out specifically. I can tell you that within my guidance range for the second quarter, certainly at the midpoint, we're expecting to have a very good media quarter again in Q2 going towards kind of the low end of the range, maybe traffic decelerates going towards the high end of the range, maybe traffic accelerates a little bit more. So really the variable probably for Q2 whether we're going to be at the high or the low end is going to be what happens in media. Does that help?

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

And then the security and performance, you mentioned the good signings in the quarter. How much of that is just the interest level in customers in the product portfolio that you've got versus can you talk to us about the topic we've talked many times which is the productivity of the sales hires that you've added over the last year?

James Benson

Yes, so I'll kind of bifurcate the 2. So we had a very, very strong security signings quarter. And as I mentioned kind of in my opening comments, they were strong across our Kona Security Solutions and our new Prolexic security solution. So we were quite pleased that we're starting to get some traction with our sales organization being more comfortable selling security. I think also the addition of the Prolexic sales resources have certainly helped that. So again, a very strong signings quarter for security. As far as productivity, we continue to add more sales reps in the quarter as we've talked about. I'm not going to talk about how many we're going to add for the year, other than I -- as I mentioned in the last call, that we're probably going to add a similar magnitude of people this year as we did last year. And largely speaking, kind of the productivity of the sales reps by cohort class are performing pretty well. There's going to be some quarters where they perform better than others. But I'd say on average, we're doing well on productivity.

Operator

Our next question comes from the line of Jennifer Lowe with Morgan Stanley.

Jennifer Swanson Lowe - Morgan Stanley, Research Division

Great. I just wanted to dig in sort of the strength in security in the quarter, and obviously there was at least one very high-profile security threat this quarter. Does that impact the demand for your security solutions at all? Is it -- do you start to see customers sort of scrambling to address the very high-profile threat and that has an impact in Q1 or in your pipelines going forward? Or is it a little smoother than that? And I'm just sort of curious if that had any accelerating effect on your security business at all.

F. Thomson Leighton

By the threat, do you mean the heartbleed bug?

Jennifer Swanson Lowe - Morgan Stanley, Research Division

Yes.

F. Thomson Leighton

Yes, I think the heartbleed situation shows why you want to have your secure communications and your commerce sites and banking traffic with Akamai. If you're an Akamai customer, your communication, that bug would've been patched 3 days before it was publicly released. And so when it was released, if people try to exploit it then, if you're on Akamai, you're fine. If you were trying to do it yourself or using a lot of our competitors, you would've been exposed at that time. Now I don't think that caused necessarily a lot of people to run and sign up with Akamai. But it's, again, another validation of why you want your HTTPS or your secure traffic on the Akamai platform.

Jennifer Swanson Lowe - Morgan Stanley, Research Division

Great. And Jim, I just wanted to dig in to the margin guidance a little bit around the second half of the year being slightly lower than even Q2, which fully has the Prolexic business integrated in. And as we think about those expenditures, you've already kind of talked about the sales hiring for the year. Is that -- where are those investments going to be? Are they on the product side? On the sales side? How should we think about what's going to be incremental in the second half versus purely just getting the Prolexic cost layered into the business, which we should see in Q2?

James Benson

Sure. So you're -- certainly for Q2, Q2 was much more of a -- you have a full quarter now of Prolexic. But as we talked about in the past, put Prolexic aside for a moment, we've been making investments in the company. We will add more sales reps in Q2 and the back half of the year. We're going to add more go-to-market support capacity for those sales reps. We're going to continue to add more service professionals. You see that we have a very healthy services business. So we'll continue to add more services professionals. We're going to continue to add more R&D resources to really accelerate kind of R&D innovation. And then in addition to that, there are some infrastructure costs that we're building out. So we are adding cost because we're building out more facilities as we add more headcount. And as we add more headcount, we have to build out more IT-related spending. So it's in all those outlined areas. And the reason I wanted to be quite specific about the back half of the year is it -- the company's going to continue to make these investments. And I've been talking in the past about low 40s EBITDA, and I felt it was probably appropriate to be a little bit more specific for you. And obviously, where you land at the low or the high end of that will be how strong revenue is in the back half. And as you know, in Q3, Q3 is notably in the summer, seasonally softer as far as revenue because it's not as much viewing of content on the Internet. And so seasonally, from Q2 to Q3, revenue doesn't grow as much. And if we are continuing to make the investments that I mentioned and revenue doesn't grow as much, it'll put pressure on EBITDA in the short term. But I want to assure you that we're still planning and committed to operating within the guidepost that I mentioned around 40% to 45% EBITDA. And there'll be periods where you're at the low end, and there'll be periods where you're at the high end. I think we're just going through a period of investment right now that we believe the company will be able to scale better going forward and have more sustainable long-term revenue growth.

Operator

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

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

So obviously a very strong quarter and a very strong guide. Some of the upside in 2Q, as you said, came from gaming, some of the -- and software downloads you said, some of which was -- some of which is unanticipated. But the 2Q guidance is very robust also. So what gives you -- and the kind of similar sequential growth rate. So what gives you the visibility, if you had the unanticipated step in 1Q, what gives you the visibility into 2Q to have a similar seasonal guide and not say, hey, this was a little bit of a onetime -- a little bit of a one-timer.

James Benson

Yes, no, it's a good question. I mean, I think within kind of a 3-month window that especially with our large customers, you usually have a pretty good idea of what they're going to do. You are right. There were times where even though you don't understand, that they're going to have an unplanned patch. So some of that is really a function of we have very good communication with our customers on what they're going to do. But sometimes, these patches are patches that they are not even planning on that takes place. You also got to remember that Q1 to Q2, we're going to have a full quarter of Prolexic. So we had $7 million of Prolexic in Q1. You'll obviously get now 7 more weeks of Prolexic since we only had 6 weeks in Q1. So some of it's Prolexic. But even if you adjust for Prolexic, you're right, it is still a strong guide, and I think it reflects what we believe is continued strength in the business. And in particular, as I mentioned in my comments that I believe it's going to be more the media side that's going to be the driver of whether we'll be -- we're at the high end or the low end. And I just think it's important that we provide you guys a range of where we think we're going to be and what the driver of that is.

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

So again, the visibility into next quarter, you said you have a feel in what your customers can do. Is that, again, on the software downloading and gaming side?

James Benson

It's pretty much across the board. It's across our video delivery customers. It's across our download customers, gaming customers, social media customers. So it's pretty much across the board. Specifically, with your large customers, as we talked about, that this has been several quarters in a row where we had particularly strong growth across our large strategic accounts. And large strategic accounts can move the needle in a quarter when their business starts to pick up, or there is a large gaming release or there is a large software release. So I'm pretty confident in the range that I provided. And as I said, I think at the midpoint, it's another strong quarter. At the high end, it means that the traffic growth continues to accelerate even beyond what we saw in Q1 and maybe you have some more unplanned patches and things of that nature. And at the low end, it says things are still strong but maybe not as strong as what we saw in Q1.

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

Jim, can I squeeze one more in? Can you -- obviously you're giving us essentially EBITDA guide into the back half of the year, which we really appreciate. But can you talk a little bit about, if you could, about depreciation? Depreciation came in a little above where we were looking for this quarter, granted it's just our model, but then you had brought on a new company. Anything to help us out there in terms of what depreciation looks like in the back half or 2Q and into the back half?

James Benson

Yes, I'm not going to guide on depreciation specifically, but I think maybe a little bit of it, Michael, is that as you know, we changed our depreciation methodology last year, in Q1 of last year, which effectively lengthened the depreciable life of our network assets from 3 years to 4 years. And we got a benefit, as we mentioned, all last year of assets that were on our books as of the end of 2012. And so there's a little bit of a compare headwind for us when you look at 2014. But you -- I think the way to think about it is that we had a pretty -- even though we came in where we thought, CapEx was kind of in the, call it, the $84 million range in Q1. We said $90 million to kind of $95 million in Q2. So you're seeing that -- now admittedly, when you double-click on that CapEx, actually the network CapEx, with the exception of Prolexic, is actually pretty flat as a percent of revenue. It's probably around 8% of revenue, which is roughly what we've been operating at. So really where we're seeing more CapEx, which probably leads to less depreciation is when you're doing leasehold improvements and IT buildout because that gets depreciated over a longer life. But I think what we try to do is give you enough information for Q2 that you can almost back into what the depreciation guidance is, because I gave you EBITDA, I gave you EPS, I gave you the tax rate. You can kind of assume what interest income is going to be because it's roughly what it's been in the past and you can kind of back into depreciation. So I think that will at least help you understand maybe what depreciation is going to be for Q2, so it will help you build your model for Q3 and Q4.

Operator

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

Justin Rowley - Goldman Sachs Group Inc., Research Division

It's just Justin on for Heather. Nice quarter. I think a question you get a lot from investors is where does Akamai fit in the conversation about net neutrality. So if we just assume that ISPs are indeed going to be allowed to get preferential treatment from certain customers, presumably at higher cost, can you guys help us frame where Akamai shakes out in this? And maybe a scenario where you could see yourselves benefiting and then if there's any negative consequences, that would be helpful.

F. Thomson Leighton

Yes, there's, as you know, a lot of discussion going on in Washington and in other countries, and it's not yet clear what laws are going to get passed and if and how the rules will be changed. But Akamai is in a very good position here. We work closely with both sides, the content folks and the carriers and both of our customers and partners. And really, if you want to think of Akamai as providing the technology that enables the performance, and it enables high-quality video at scale. And that we do all this in a way that reduces cost for the ecosystem. So really, however the rules shake out, there is going to be a need for what we do, and we're closely tied to both sides and I think in a very good position to supply the technology that's going to be needed to have a better Internet, to have a video quality at scale and of course, to have security at affordable price points. So I think -- I like where Akamai sits in the ecosystem as this debate unfolds.

Operator

Our next question comes from the line of Aaron Schwartz with Jefferies.

Aaron Schwartz - Jefferies LLC, Research Division

I had a question on the services business. You talked about the strong attach rate again and certainly, the trend line there as just a percent of total continues to move higher. I guess the question I have is a lot of the sales hiring you've made here recently seem to be focused on more "enterprise-type products" that may require even further services, and that business is at a lower margin. So could you just talk about maybe where you think that business goes as a percent of total over time and just sort of how you manage the margin of that business over that period of time as well?

James Benson

Yes, you're right. Certainly, the sales reps that we're adding, and as we've talked about for our performance in Security Solutions, which is effectively an enterprise sell, that most, if not all, of those customers when they're buying those offers, and even our media solutions, that they are interested in buying kind of -- attaching services. And just to be clear, our services are product enablement focused. So we're not in the services business that is providing kind of consulting and support. This is a product enablement services business. But I think what you've seen is that it wasn't that many years ago where effectively, the services that -- we were not monetizing services. We've put together packages for services, and we found huge interest from our customers who want to get more expertise from our service professionals and helping them leverage how they use the Internet and how they use our solutions. So some of it is that we have very good traction, and you're right. I talked about good attach rates with services. I had mentioned this quarter as well that these large events that I mentioned, the media events that take place over kind of a longer period of time, many customers rely on our service professionals to help deliver those events for them. So what you saw in Q1 was kind of some event-driven services revenue. But you are right that I think 2 years ago, services revenue was about 7% of our revenue. Last year, services revenue was 8% of our revenue. If you look at just Q1, I think that's about 9%. It's probably going to be somewhere, call it, in the 9% to 10% range. I would say we're not throttling back services. If it's leading to more ability for customers that want to buy more of our performance products, buy more of our security products, buy more of our media products, which we've actually proven that it does, we'll continue to grow the services business. You are right. I provided a model for you guys that it is a lower gross margin and EBITDA model, but it's still pretty attractive gross margin and EBITDA model. So I think the way you have to look at the company is we are a blend of a media business. We are blend of kind of these Infrastructure as a Service/SaaS business in performance and security, and we have a services component. And when you look at that, the company has a pretty attractive overall model. And so I don't want you to think that we're throttling services. But you can kind of think of it as we'll continue to grow it in line with as long as it continues to be product enablement-oriented and drive more stickiness of our solutions, that's really the strategy that we have with that part of the portfolio.

Aaron Schwartz - Jefferies LLC, Research Division

And just a quick follow-up, if I could. If that sort of stabilizes, just for conversation's sake, if that stabilizes at roughly 10% of the mix, is the cost sort of what it is? Or does -- are there opportunities for you to possibly raise the margin within services?

James Benson

I mean, it's obviously -- we're working every day and not just our network costs and trying to drive network cost down. We do the same thing in the services business. There's a lot of work of the services team is doing to try to drive down the cost of delivering service. Some of that is tools. Some of that is making it more self-serviceable. So there's a bunch of things we're doing that are focused on margins and services, just like we're focusing on margins in media and focusing on margins in our performance and security solutions.

Operator

Our next question comes from the line of Colby Synesael with Cowen and Company.

Colby Synesael - Cowen and Company, LLC, Research Division

Just a few. So first off, I just wanted to get an update on where we are in the Ion and Alta upgrade opportunity. I know that that's -- the last few quarters had been a driver. I'm just trying to get a sense of where we are in that opportunity. The second thing is, Jim, just to clarify your comments around CapEx. You said CapEx will be at the higher end of the long-term range. I think that range is now 14% to 16%. But if I look back really the last 3 or 4 years, you've been above 16%. So you're effectively just calling out that, that same trend that we've really been seeing for a while now is simply going to sustain. Or is it actually going to go even higher than, call it, 16%, 16.5% or so where we've been? And then just point of clarification as well on servers, you added just 2,065 servers in the quarter. Just going through my model, last time it was low was the second quarter of 2009. Just wonder if there's anything to call out there.

F. Thomson Leighton

Yes, in terms of the upgrade opportunity for Ion and Alta, I would say we're in the early stages. The Ion product provides excellent performance gains, particularly in the most challenging environments, countries that are relatively small and for example, cellular environments, which are challenged in terms of congestion and latency. And we're seeing upsell when customers upgrade from DSA to Ion, which is great. We are also combining it with a protect and a perform offer. So it can go out there with -- and sell it with Kona, and that's been successful. So we're in the early stages and a long way to go in terms of realizing benefit from Ion and Alta.

James Benson

Yes, and I'll take the CapEx question. So I think we need to clarify, so we've been operating at about 16% of revenue for the last couple of years, and that is the high end of our long-term model. But to be clear, what I said is I think we're going to be slightly above the high end of our long-term model. But you have to double-click on our CapEx, which is basically 3 areas: one is network CapEx, one is capitalized software and the third is facility and IT. And network CapEx has scaled very nicely for the company over the last 2 years and actually this quarter. So it wasn't that many years ago that network CapEx was over 10% of revenue. Network CapEx is now in the 7% to 8% of revenue range. So network CapEx is scaling very nicely. Capitalized software has been increasing, and it's about 5% of revenue. And you've got to think of that as that really is because we capitalize R&D, that is really new product innovation. And so I consider that kind of good CapEx. Where we notably had a large uptick in CapEx, we had a large uptick last year. And I think we're going to have an even more notable uptick this year is in facility and IT. You don't add the number of resources that we have without the need to build out facilities and without the need to add kind of related IT expense. So we're going through a period that I believe is going to continue this year, that is going to be more substantive facility and IT buildout. I don't think you're going to see those volumes going into 2015, but you are in 2014. And so I think that -- you got to kind of look at our CapEx and break it out because I think there are some notable things going on which is nice scale within the network. And notably, we're going through a period, as you invest in headcount, that you're going to need kind of, call it, infrastructure buildout for them that should not be CapEx that you need to do every year. You have to try to get ahead of it now. Does that help?

Colby Synesael - Cowen and Company, LLC, Research Division

Yes, it's just that it didn't seem like there was really much of a change. So I was just curious what you're calling out just based on what you've actually been doing, but that's helpful. And just quickly on the servers?

James Benson

So there's nothing notable on the servers. I mean, we have more efficient servers that we put -- every quarter and every year, we're working on what are the -- what is kind of the server design that we're looking for. And every year, we get more efficient servers, which gives us more throughput. So that's really what's going on in the server front.

Operator

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

Richard Fetyko

Just curious on the international side, if you could tell us if the mix of revenue among your segments is different from the U.S. and which product specifically within the performance and solutions side perhaps is driving the growth? Or are you leading with the media-delivered typically solutions?

James Benson

It's good -- I mean, the mix is relatively similar outside the U.S. as it is in the U.S. kind of media versus performance, security and service and support. So I mean, the mix is not materially different. You are right that we certainly have more -- we have more greenfield opportunity outside the U.S. And so it's easier for a sales rep, when you add them, to probably go and sell our media products for us and then sell performance and security second. But it's something that we look at, but I would say that there's really not a notable difference in kind of the mix of the offerings in any of the regions.

Richard Fetyko

Okay. And just to follow up on the earlier questions around the professional services revenue growth. Which product tend to have the highest attach rates for services?

James Benson

Well, I think -- probably it's -- we -- again, it's product-enablement services. So in some cases, think of it as their support packages where you get a higher level of response. So those are getting a good uptake. I think there's also -- some of these are packages where we're selling them with, say, our security solutions. And they are being bundled into our security solutions where we're providing a Web Application Firewall to the customer. And the -- basically, the rule settings need to be updated. And so we're able to sell a service package which actually have services resources working with the customer to continue to update the rule setting based on different security threats so that the customer wants update on an ongoing basis. So I think it varies, but I'd say we're probably getting stronger attach rate in the performance and security solutions than we are on the media solutions because those tend to be more sophisticated offerings that require more of our services professionals. But hopefully that gave you a little bit of color on the type of offerings that are doing well within the services.

Operator

And our next question comes from the line of James Breen with William Blair.

James D. Breen - William Blair & Company L.L.C., Research Division

Just a couple of questions, one with respect to the product set and the performance and security solutions. Any color you can give us on the customers -- existing customers that are now taking a security solution? Is that sort of the grow -- fastest-growing segment of products? And then how many of the total customers are taking a security solution now versus where we were a couple of months ago and does Prolexic help that?

James Benson

Yes, I mean, I don't think anything has notably changed. I mean, we shared with you guys at the Investor Summit just a month or so ago kind of the penetration of our solution -- our security solution and the penetration of our performance solutions with our customers. So I don't think it notably changed since then. I do -- I would say, though, that obviously we've had Prolexic. It was 6 weeks in the quarter. I mentioned that we had very good signings. I think the strong interest from our customers in both our Prolexic offerings and our Kona offerings. So we're pretty pleased kind of early days here with the integration and the interest from customers in our security offerings. And I think I shared with you guys in the past that security is a different sale, and our sales professionals were much more accustomed selling performance. And I think they're getting more comfortable selling security, and I think the addition of the Prolexic sales reps and us having maybe more of a sales specialist model on the security side is actually leading to additional traction in security that we hope that we can continue going forward.

James D. Breen - William Blair & Company L.L.C., Research Division

And with respect to Prolexic, you've talked about it being a $5 million a month in terms of revenue. Is there really any EBITDA associated with this year? So as we think about margins in the back half, can we assume that's sort of revenue without EBITDA attached to it?

James Benson

Yes, I think the way to think about it is it's certainly, in the early goings, it's not -- it's more cost than revenue. And then I think probably as you go towards the outer part of the year, it'll probably be revenue and cost in alignment. But in the early goings, it's more spending than revenue. But obviously, we expect to continue to grow the Prolexic business that we think that you'll see probably by the end of the year, call it, neutral EBITDA. And then beyond that, our expectation in 2015 is you'll start to see some scale. Again, we're not going to separate Prolexic from the rest of our security business, but that's kind of generally the way to think about it.

James D. Breen - William Blair & Company L.L.C., Research Division

Okay. And then just last -- one last question on the media delivery solutions. As you sell more internationally, given your footprint globally and sort of lack of maybe underlying wireline infrastructure globally, is there an opportunity there in pricing in that segment to be better outside the U.S. than it is in the U.S. and will that help over time?

James Benson

I mean, certainly, the market dynamics are different in every geography. And so certainly, the price points for a U.S. customer for kind of that we price our media solutions are different than the price points that you're going to charge someone, say, in the Japanese market. But that's more a function of the local market dynamics. So it's tough to kind of -- you can't make a general statement. I think it depends upon the market and the cost associated with delivering services in those markets. And that's really -- we price based on local market conditions.

Operator

Our next question comes from the line of Kevin Smithen with Macquarie.

Unknown Analyst

This is Will filling in for Kevin. I know you touched on international a little, but I was wondering if you could give us any more color on the strength of bookings and the difference between EMEA and Asia Pac. And also, would you be able to break out the Prolexic revenue by geography?

James Benson

So we're not going to break out bookings between Europe and APJ. We -- that's just not something that we're going to do. I can give you a little bit of color on that, that we continue to make good traction. Growth has been very strong in Asia Pacific. It's been strong for a while. I think growth in Asia Pacific has been a little bit more media-oriented. I think we saw some nice improvement in growth rates in Europe. Europe is still suffering from some of the southern markets of Europe, from just a macroeconomic perspective are still not performing well. But I think generally speaking, both markets are performing well, and we expect over time that these markets are going to grow faster than our U.S. markets. Now that's an over time comment. And what was your other question?

Unknown Analyst

About the Prolexic revenue, if you could break that out.

James Benson

Yes, so the Prolexic's mix, I think, was about, if I remember it right, it's about 40% of their mix was in international, 60% in the U.S., roughly speaking. So it's a little bit more concentrated in international than the Akamai business, but not notably.

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 just discuss the competitive environment in the core media solutions business, and at least any discussions around some of your customers that may be large media customers that may be trying build-outs of their own because that's a recurring theme, particularly at the low end of the market, and how that may be informing some of the discussions you're having.

F. Thomson Leighton

Yes, media remains a very competitive business. There's a lot of competitors there. Price is an important consideration obviously. So there's no fundamental change in those dynamics. The good news is traffic's increasing at a rapid rate, and of course, pricing per bit delivered continues to decline. And as always, the largest -- the few largest media customers continue to try do-it-yourself solutions. I expect that to continue in the future as well. In some cases, they've actually tried in the past and now are coming out of that phase. As I mentioned before, it is much harder than folks think to really do video at high quality and at scale. And you -- it seems like a good idea at the time. And so you embark on a project and after few years, suddenly you're not current anymore and it's a lot more expensive than you thought. And so Akamai is in this for the long game, but I expect it to be -- continue to be a competitive environment and it's up to us to deliver better performance at better scale and affordable price point.

Edward Maguire - CLSA Limited, Research Division

Great. And just a quick follow-up, do you have any concentration of large contracts up for renewal in the next quarter or 2?

James Benson

Yes, I mean -- I think I've said this before that every quarter we have kind of notable customers that are renewing. I did mention the -- our largest media customer, only because of its size. We don't have any customer that's near that size. So every quarter, we see large customers that renew, but there's nothing kind of extraordinary that is going to take place over the next quarter or so.

Operator

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

Sameet Sinha - B. Riley Caris, Research Division

I'm going to focus this on security. Now that you have Prolexic and you see how it works, can you think of other solutions that you could tuck in and patch, maybe it's internal, maybe through acquisition? But is there opportunity to continue to grow synergistically? Second question would be those competitor out there talking about them blocking the largest DDoS attack, probably in Europe, I think. And the size of the attack, if I remember the number correctly, was above kind of the peak rate that you had given out during your Investor Summit. So if you -- what do you need to build out to get after these bigger attacks, which some of your competitors are throwing out? Or do you think there's -- your number would account for 80% of the DDoS attacks out there?

F. Thomson Leighton

All right. So first question, we're always looking for new capabilities and technology across all of our solution lines, including security, and of course, you saw us make the Prolexic acquisition. We're also doing a lot of internal innovation and development across our solution lines, including in security. If we find a company out there that has a great technology that we can bring to market for the benefit of our customers and it makes financial sense to do the transaction, then we'll do that. In terms of -- I'm not sure what you're referring to in Europe, but I think Akamai has been uniquely capable of defending against the largest attacks that are out there, and we've got a great track record of doing that where others have not been successful. We will continue to build out our infrastructure for delivery, as well as defense and security purposes. So that's an ongoing situation.

Operator

Our next question comes from the line of Rob Sanderson from MKM Partners.

Rob Sanderson - MKM Partners LLC, Research Division

Did make it in under the wire. Question on channel sales. Revenue contribution from resellers jumped quite a lot this quarter, and you called out carrier partnerships. Is this mostly in the media or the performance and security? And is this an unusual quarter, or do you think carriers are starting to become sustainably better resellers of your products?

James Benson

Yes, so really there's not -- it's not anything notable with the carriers as far as the difference kind of necessarily in the mix. They tend to sell enterprise-class products. So they'll sell all of our products but -- they'll sell media and performance and security. You are right. It was notable that we saw an uptick in our channel business, and in particular with the carriers. So part of it is that we've had good traction with our channel partners. We announced quite a few of them last year, and I think we're starting to see some traction with some of them. I do think it's probably important to note, though, that for some of these very, very large channel partners, part of the relationship that we have with them is we also help them by seeding them a little bit with their business to get them started. So there were some customers that we had on the direct side that we have seeded these -- some of these large carriers to get them going and get the business moving with them. So we've had traction both in selling offerings through the carrier. And admittedly, we've had some of that driven by, call it, the movement of some accounts that were on the direct side that we seeded to the partner. But across the board, I'd say we're pretty pleased with traction in the reseller space, and the fastest-growing reseller that we have are with carrier partners. And as we've talked about in the past, our expectation is that they will be the fastest-growing channel for us, and they're very important to Akamai's future growth.

Rob Sanderson - MKM Partners LLC, Research Division

Just a follow-up, if I could, on the -- back to the -- not to kill this one, but the margin guidance in the back half of the year, 40% to 42%. It seems like a downtick from what I think was interpreted to be 42% prior. Did something change in terms of your investment plans as you bring Prolexic in-house? Or is that just -- or has something changed there?

James Benson

No, nothing's changed other than -- certainly, I'm as aware of kind of how the street models the company as you are. And when I said low 40s, you're right. If someone says low 40s means 42%, I want to be very clear. A low 40s could mean something that's 40% to 42%, just to be clear, and it's going to be dependent upon revenue volumes. And I gave you guys an example of what could happen in the third quarter, just seasonally what happens Q2 to Q3. I'm not suggesting that's going to happen, but I'm trying to provide you a little bit of color so that we don't surprise you if in fact the company operates at those levels and you say, "Why didn't you tell me that?" I'm trying to signal to you what we intend to operate the company at.

Operator

Our next question comes from the line of Tim Horan with Oppenheimer.

Timothy K. Horan - Oppenheimer & Co. Inc., Research Division

You didn't touch too much on mobility on the call, and I was just wondering if you're winning many contracts on mobility and what you're seeing in terms of the ability to kind of improve latency on mobile networks and kind of how important that is for customers at this point.

F. Thomson Leighton

Yes, mobility is really critical across all of our product lines. We're nearing the point where a majority of the transactions are going to be on mobile devices, and that's a stunning increase from where we were a few years ago. And of course, as you know, that mobile is a place that's often very challenged in terms of performance, especially if you're on a cellular network where the congestion can be very high and the latencies are high. And that's where our Ion service is really great because it's really focused on mobile. And we have real user measurements now, so you can actually see how real users on the site are experiencing the site. You can see what kind of device they have, what browser they have, what carrier they're on, and you can see what their performance is. And the results we have, have been really great: dramatic speedups even in the most challenging cellular environments. So we don't break out mobile because -- well, pretty -- a lot of the business is becoming mobile. It just -- it goes with the business.

Operator

Our next question comes from the line of Phil Winslow with Crédit Suisse.

Philip Winslow - Crédit Suisse AG, Research Division

Most of my questions have been answered, but I just wanted to hit on gross margins again. They're strong. A tick above where your guidance range was. Just maybe just give us a little more detail on the sort of what you're seeing in terms of colo, bandwidth. And then I know you guys are doing sort of constant grooming of the network. But I guess sort of where do we stand in this process? And obviously, you've given a long-term guidance. Maybe if you could just help us out, walk through that and just what you saw this quarter, that would be great.

James Benson

Sure. So again, it -- this quarter was another good quarter. I think we guided -- we had said 78%. So our cash gross margins were certainly as we thought. They were flat to Q4. But again, we continue to do a good job with managing bandwidth costs, managing colocation spending. And we've talked about a lot of the things that we're doing, whether they are driving kind of software initiatives to get more throughput out of the servers, whether it's installing more efficient servers into the network. There's a bunch of things that we're doing, and we're going to continue to do. It is fair to say that certainly, we talked much more about the network side. Certainly, a piece of our cost of goods sold is the services side. As our services business grows, we will have to add services resources there. So it's probably important for us to make sure that we remind you that our gross margins are not just driven by what we do on managing network cost. They're also driven by kind of what happens with the revenue mix portfolio for the customer and -- or for our revenue mix. And so if we end up having more services revenue, that services revenue kind of has, call it, low 50s gross margins, which is very different than our media and our performance and security solutions. But I think, again, a very good quarter in Q1. It's been good the last couple of years. We think we can continue the momentum that we made there and, call it, the guide that we have for Q2 is we're absorbing Prolexic. And as a reminder, Prolexic's offering does have service professionals that are working within that offering. So some of our kind of erosion so to speak in EBITDA, you'll see some of that possibly on the gross margin line largely because of Prolexic or a fair amount of Prolexic's cost were in services cost of goods sold.

F. Thomson Leighton

So we'd like to thank you all for joining us today. We're obviously very pleased to have a great Q1, and we're very optimistic about the opportunities that lie ahead in Q2 and beyond.

Tom Barth

Thank you, Tom. This is Tom Barth. I want to, again, thank you for joining us and just to remind you that we'll report Q2 results on July 30 after the market, and we look forward to speaking to many of you soon. Thank you, and have a great day.

Operator

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

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