Tom Barth - Head, IR Thomson Leighton - CEO James Benson - CFO

Jennifer Lowe - Morgan Stanley Sterling Auty - JPMorgan Steve Milunovich - UBS Michael Turits - Raymond James James Breen - William Blair Rob Sanderson - MKM Partners Gray Powell - Wells Fargo Sameet Sinha - B. Riley Mike Olson - Piper Jaffray Colby Synesael - Cowen and Company Jeff Van Rhee - Craig-Hallum Will Powell - Robert Baird Rishi Jaluria - JMP

Good day ladies and gentlemen and welcome to the Fourth Quarter 2014 Akamai Technologies Incorporated Earnings Conference Call. My name is Denise and I'll be the operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now turn the conference over to Mr. Tom Barth, Head of Investor Relations. Please proceed, sir.

Thank you, Denise and good afternoon and thank you for joining Akamai's fourth quarter and year-end 2014 earnings conference call. Speaking today will be Tom Leighton, Akamai's Chief Executive Officer; and Jim Benson, Akamai's Chief Financial Officer. But 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 February 10, 2015. 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 section of our Web site. With that, let me turn the call over to Tom.

Thanks Tom and thank you all for joining us today. Q4 was another excellent quarter for Akamai with record revenue and earnings. Revenue in the fourth quarter was $536 million, up 23% year-over-year and up 25% when adjusted for foreign exchange headwinds. Our strong revenue results continue to be driven by solid performance across all of our geographies and all of our major product lines with very strong growth coming from our security and media products. Non-GAAP EPS for the fourth quarter was $0.70 per diluted share, up 27% year-over-year. Our higher than expected earnings were aided by the end of year reinstatement of the federal R&D tax credit. The tax credit had a $0.05 benefit on non-GAAP EPS and was not included in the guidance that we provided you last quarter. Our strong fourth quarter results capped off another full year of outstanding financial performance for Akamai. For the full year we grew revenue to nearly $2 billion, up 24% over 2013. We generated non-GAAP net income of $449 million or $2.48 per diluted share, up 23% over 2013 million and we continue to generate strong cash flow with over $658 million of cash from operations. I'll be back in a few minutes to talk more about the achievements and the progress that we made during 2014 as well as the opportunities that lie ahead. But first let me turn the call over to Jim to review our Q4 and full year financial results in detail and to provide the outlook for Q1. Jim?

Thank you, Tom and good afternoon everyone. As Tom outlined Akamai continued to execute well and had a great fourth quarter, closing out yet another very strong fiscal year in 2014. Q4 revenue came in above the high end of our guidance range at $536 million, up 8% sequentially and up 23% year-over-year despite foreign exchange headwinds. Foreign exchange movements during the quarter had a negative impact on revenue of $8 million sequentially and $10 million year-over-year. Adjusted for foreign exchange, Q4 revenues grew 9% sequentially and 25% year-over-year. Revenue growth continued to be solid across the entire business. But the overachievement compared to our guidance was driven by exceptionally strong traffic and revenue growth in our Media Delivery solutions. I mentioned in our last call that holiday traffic would play a large role in where we would land relative to our fourth quarter guidance. And we had a tremendous burst in media related traffic in late November and December specifically. Media revenue $250 million in the quarter, up 21% year-over-year or up 23% on a constant currency basis. Traffic and revenue growth was solid across all geographies and most of the customer base with particularly strong growth coming from our largest and more strategic software update gaining social media and video delivery customers. We are very pleased with the continued strong performance of the media business and remain bullish on the secular trend for this business looking forward. At the same time we recognize that the drivers of this business mainly traffic volumes and price can lead to revenue variability from one quarter to the next, given the timing of customer renewals at lower price points, the nature, timing and size of gaming and software releases as well as the adoption of social media and video platform capabilities. Turning now to our performance in security solutions, revenue was $240 million in the quarter, up 25% year-over-year or up 27% on a constant currency basis with balanced performance across all of our geographies. Within this solution category, we saw solid growth across all our major product lines, and as Tom mentioned, we continue to see exceptionally strong growth and demand for our cloud security solutions. Finally, revenue from our services and support solutions was $47 million in the quarter, up 28% year-over-year or up 31% on a constant currency basis. We continue to see very strong service attachment rates to our security solutions in particular. Turning now to our geographies. Revenue growth continued to be strong across all three major theaters. Sales in our international markets represented 26% of total revenue in Q4, down 1 point from the prior quarter. International revenue was $139 million in the quarter, up 16% year-over-year, or up 24% adjusted for foreign exchange. We saw solid growth in both our Asia-Pacific and EMEA markets despite continued macroeconomic headwinds. Revenue from our U.S. market was $397 million, up 26% year-over-year with solid performance across all solution categories, but most notably media. Most of this core [ph] total revenue over achievement compared to our guidance came from the U.S. where our largest software update, gaming, social media and video delivery customers reside. And finally, revenue through channel partners represented 25% of total revenue in Q4, consistent with Q3 levels. This revenue mix is also in line with what we saw throughout 2014, driven by traction with our carrier partners in particular, as well as contribution from Prolexic's channel relationships. We expect these positive trends to continue into 2015 as a result of our ongoing investments in the channel business. Moving on to costs, cash gross margin was 79%, up 1 point from both Q3 and the same period last year and in line with our guidance. GAAP gross margin, which includes both depreciation and stock-based compensation was 70%, up 2 points from Q3 and up 1 point from the same period last year and slightly above our guidance as we continue to execute well against our platform efficiency initiatives. GAAP operating expenses were $237 million in the fourth 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 $193 million up $50 million from Q3 levels, slightly above our guidance primarily due to increased year-end commission and bonus cost associated with higher than expected revenue. Adjusted-EBITDA for the fourth quarter was $232 million, up $19 million from Q3 levels and up $40 million from the same period last year. Our adjusted-EBITDA margin came in at 43%, consistent with Q3 levels, but down 1 point in the same period last year and coming in at the high-end of our guidance given the strong revenue achievement. GAAP depreciation and amortization expenses were $68 million in the fourth quarter. These GAAP results include depreciation associated with stock-based compensation, amortization of intangible assets and amortization of capitalized interest expense. Excluding these charges, non-GAAP depreciation was $56 million, up $1 million from Q3 levels and in line with guidance. Non-GAAP operating income for the fourth quarter was $175 million up $18 million from Q3 and up $27 million from the same period last year. Non-GAAP operating margin came in at 33%, up 1 point from Q3 levels and down 1 point from the same period last year and in line with our guidance. Moving onto the other income and expense items, interest income for the fourth quarter was roughly $2 million, up slightly from Q3 levels. Non-cash interest expense related to our convertible debt was roughly $5 million. As a reminder, this non-cash expense is excluded from our non-GAAP results. Moving on to earnings. GAAP net income for the fourth quarter was $97 million or $0.54 of earnings per diluted share. Non-GAAP net income was $127 million or $0.70 of earnings per diluted share and coming in $0.04 above the high-end of our guidance range. As Tom mentioned earlier, the reinstatement of the U.S. Federal R&D tax credit late in December was not included in our guidance and positively impacted non-GAAP net income by $9 million or $0.05 of earnings per diluted share. Excluding this tax benefit, our non-GAAP earnings would have been $0.65 per diluted share, coming in at the higher end of our guidance driven by the strong revenue performance. For the quarter, total taxes included in our GAAP earnings were $37 million, based on an effective tax rate of 27%. This rate is down 4 points year-over-year primarily related to the R&D tax credit I just mentioned. Taxes included in our non-GAAP earnings were $51 million based on an effective tax rate of 28% and coming in about 4 points lower than our guidance range, again due to the R&D tax credit. Finally, our weighted average diluted share count for the fourth quarter was 181 million shares consistent with Q3 levels and in line with our guidance. With our strong fourth quarter results, we finished the year with nearly $2 billion in revenue, an increase of 24% over 2013 or an increase of 25% when adjusted for foreign exchange. Full year cash gross margin was 78% and GAAP gross margin was 69% both up 1 point from the prior year and representing the third straight year of expanding gross margins. Our improvements in this area are a direct result of the ongoing exceptional work by our engineering and network teams to implement a number of hardware and software initiatives to manage our global network more efficiently. Full year GAAP operating expenses were $863 million. These GAAP numbers include depreciation, amortization of intangible assets, stock based compensation, restructuring charges and acquisition related charges. Excluding these charges full year non-GAAP cash operating expenses were $688 million, or 35% of total revenues up 2 points through 2013 levels. As we discussed throughout 2014, we are committed to investing organically and through M&A to drive innovation and future growth. We added nearly 1200 employees across the Company in 2014, focused primarily in sales and supporting go-to-market capacity, service and customer support staffing, network efficiency scaling, engineering innovation and company infrastructure scaling, and we plan to continue hiring in these areas in 2015. Full year adjusted-EBITDA was $853 million, up 22% from 2013 and full year adjusted-EBITDA margin was 43%, down a point from the prior year. Fully GAAP net income was $334 million or $1.84 of earnings per diluted share for 2014. Non-GAAP net income for the year was $449 million, or $2.48 of earnings per diluted share. That’s up 23% from 2013 levels. This number includes full year non-GAAP taxes of $205 million based on a full year non-GAAP tax rate of 31%. Now I'll review some balance sheet items. Day sales outstanding for the fourth quarter was 56 days down four days from Q3 level and up one day from the same period last year. Capital expenditures in Q1 excluding equity compensation and capitalized interest expense were $98 million, slightly above the high-end of our guidance for the quarter, primarily due to network build-outs in anticipation of future traffic demand. We plan to continue with this aggressive build-out moving into 2015. As a reminder this CapEx number also includes capitalized software development activities. Cash flow generation continued to be strong. Cash from operations was a $196 million in the fourth quarter or 36% of revenue and $658 million for the full year, or 34% of revenue. During the quarter we spent $42 million on share repurchases, buying back roughly 700,000 shares at an average price of just under $60. For the year we spent nearly $270 million, buying back approximately 4.6 million shares at an average price of $58. As of Q4 end we had $434 million remaining on our current share repurchase authorization. Our balance sheet also remains very strong, with roughly $1.6 billion in cash, cash equivalents and marketable securities on hand at the end of the quarter. If you factor in our convertible debt, our net cash is approximately $900 million. As we've discussed in the past we believe the strength of our balance sheet and cash position is an important competitive differentiator that provides us the financial flexibility to make key investments at opportune times. As always, our overall goal is to deploy our capital to achieve favorable return in a manner we believe is in the best long-term interest of the Company and our shareholders. In summary, we are very pleased with how the business performed in Q4 and throughout 2014. We continue to execute well, delivered strong revenue growth, manage network cost effectively and made the necessary investments in the business that we believe are building a foundation for sustained long-term growth. Looking ahead to the first quarter and 2015, we expect significant foreign exchange headwinds from the continued strengthening of the U.S. dollar against most currencies. At current spot rates foreign exchange fluctuations are expected to have a negative impact on Q1 revenue of $7 million, compared to Q4 and $50 million compared to Q1 of last year. In addition the currency headwinds, while we expect another solid media quarter in Q1, we do anticipate a moderation in media growth rates heading into 2015 driven by a few factors. First, as I discussed earlier Q4 revenue growth benefited from exceptionally strong holiday traffic which we expect will abate. Second, in Q1 of 2014 we benefited from several large software and gaming releases as well as the Sochi Olympics, which makes for a more difficult compare this quarter. Lastly, while contract renewals at lower price points occur every quarter, we expect the impact of recent renewals to have a slightly greater impact on media growth rates in the first quarter. That said, it is important to note that the rate of decline in media pricing and renewal time has remained consistent with prior years and that media business is strong, with revenues projected to grow at a very healthy rate in 2015, just not at the record 2014 levels. Factoring in these items, we are expecting another strong quarter with Q1 revenue in the range of $517 million to $534 million. This range represents 17% to 21% growth adjusted for foreign exchange movements over a very strong first quarter last year. At these revenue levels we expect cash gross margins of 78% down one point from Q4 levels and GAAP gross margins of 68%. Q1 non-GAAP operating expenses are projected to be a $189 million to a $193 million, roughly in line with Q4 levels as commission accelerated reset at the beginning of the year offset with continued headcount investments across the business. Factoring in all these items I just mentioned, we anticipate Q1 EBITDA margins of 41% to 42%. As I have been messaging in prior calls, looking beyond Q1 we expect to be in the low EBIT -- low 40 EBITDA range, or more precisely in the 40% to 42% EBITDA range as we plan to continue making the necessary investments that we believe will help drive Akamai's future growth and scale. Moving on to depreciation, we expect non-GAAP depreciation expense to be $59 million to $60 million, up from Q4 levels due to increases from both our Q4 and planned Q1 network build-outs and the capitalization of several large software projects. Factoring in this depreciation guidance, we expect non-GAAP operating margin of 30% to 31% for Q1. And with the overall revenue and spend configuration I just outlined, we expect Q1 non-GAAP EPS in the range of $0.60 to $0.63. This EPS guidance assumes taxes of $50 million to $53 million, based on an estimated quarterly non-GAAP tax rate of 32%. This tax rate is a few points higher than what we saw in the fourth quarter for two reasons. First Q4 included a full year benefit from the U.S federal R&D tax credit that was reinstated for fiscal year 2014. And second, Congress did not approve an extension of the tax credit into 2015. This guidance also reflects a fully diluted share count of roughly 181 million shares. On CapEx we expect to spend approximately $125 million to $130 million in the quarter, excluding equity compensation. These levels are higher than what we have spent in recent quarters, primarily driven by a continuation of our network investments to support the continued growth of our customers with large, global end user foot prints and an expected increase in a number of complex live events. In addition, the timing of some facility build-outs required to support our headcount growth also contributes to the uptick in Q1 CapEx. We expect Q1 to be the high watermark for quarterly CapEx spend in 2015 with full year 2015 annual CapEx as a percentage of revenue projected to be roughly consistent with 2014 levels. In closing, we accomplished a great deal in 2014 and remain confident in our ability to execute on our plans for both the short-term and long-term. We look forward to having an opportunity to go into more details with you about the business and future trends in the industry at our upcoming Investor's Summit in Boston on February 24. Now let me turn the call back over to Tom.

Thanks, Jim. By every financial measure, 2014 was an excellent year for Akamai, with robust growth on both top and bottom-lines, strong performance across all our geographies and product lines and solid execution on our business strategy. We believe that our excellent financial results validate the soundness of our strategy and the continued market opportunities for our offerings and we are continuing to focus on the four grand challenges faced by our customers; delivering video over the Internet with unparalleled quality, scale and affordability; providing near instant performance for websites and apps on any device, anywhere; protecting websites and data centers from cyber-attacks that aim to disrupt their online operations, corrupt their data or steal sensitive information; and scaling enterprise networks to efficiently handle new cloud workloads. At the Consumer Electronics Show last month I met with several of our major media customers and partners. They told me that they are experiencing rapidly increasing demand for online video and they are turning to Akamai as the leading provider of solutions with high quality and scale. In order to capture the anticipated growth in media traffic, we plan to continue making investments in innovative media, technology and network build-out. As you might imagine security is also becoming a primary concern for major media companies, and Akamai is very well positioned to help with our Kona Site Defender and Prolexic Routed Solutions. I am very happy to report that as the first anniversary of the Prolexic acquisition approaches we are well on track to achieving all of the success metrics that we established for the acquisition; including meeting our 2014 revenue targets, extending the Prolexic security operation center capabilities in Fort Lauderdale to centers in Tokyo, Bangalore and Krakow, and retaining key customers and employees. Of course security is a top concern for customers across many verticals. As cyber-attacks have continued to increase in scale and sophistication, more and more enterprises are leveraging Akamai's massively distributed platform as an outer layer of defense while preserving site performance and availability. As a result security has continued to be our fastest growing product category. At the end of 2014 nearly 1,700 customers were using our security products with more than 900 having purchased one or both of our flagship Kona Site Defender and Prolexic Routed Solutions. In addition to cyber-attacks, there are several other factors that make it hard to deliver a fast and reliable web experience. Web sites are richer, heavier and more interactive, which means that they require more time to deliver. Internet peering points and cell powers are becoming more congested, which slows everything down. And more business applications are moving online, which saturates enterprise network capacity. Akamai built the Ion product line to help address these performance challenges. Ion is equipped with numerous real-time optimizations and is particularly well suited for use with mobile devices. Ion helps our customers expand revenue opportunities with improved performance, increased scalability and reduced infrastructure cost. As a result, 96 of the Internet retailer 100 companies use Akamai to accelerate their Web sites and over one-third have upgraded to Ion since it was launched two years ago. In October of last year, we expanded the Ion product line with the launch of Ion Standard and Ion Premier. Ion Standard provides industry leading web performance in a fully self-serviceable package to help companies realize value quickly. For customers whose online businesses require even more performance, such as top Internet retailers, Ion Premier offers additional optimizations that can be customized to provide the maximum possible performance benefit. I am proud of what Akamai accomplished in 2014 and I believe that our achievements attest to the sound fundamentals of our strategy and innovative technology. I am very excited about the opportunities that lie ahead for Akamai in 2015 and beyond. Thank you for your time today. Now Jim and I will take your questions.

(Operator Instructions) Our first question come from Jennifer Lowe with Morgan Stanley. Please proceed.

Jim, I wanted to drill in the sort of the commentary around the '15 outlook a little bit. And firstly you mentioned that there were some contracts that were coming up for renewal and I would assume marking back down the market rate and that's kind of the normal course of business, but you had a similar impact in '14 when I think your largest media customer came up for renewal right at the beginning of the year and saw a reset there. So I'm just curious to contextualize the impact of the effective pricing declines you set this year versus last year when you also had a big contract that came up and reset? And then sort of secondly, you talked a bit about the expectations around media growth being slower in '15 versus '14. If it is the performance in security business that's been a more stable performer if you take out the Prolexic inorganic benefit. So is there any reason to think that the trajectory around performance should change at all in '15?

Sure I'll take your -- so your first question around kind of media that I think it's important to kind of have as a backdrop that we grew the media business in 2014 21%. You're not going to grow the media business 21% every year. So we're coming off a record year for the media business and we're coming off a record quarter, where we grew the media business 23%. So our growth in the media business in 2014 has been exceptional. And so we still expect growth in the media business to be very strong. I mentioned three areas. If not, you kind of highlighted one of them. One is we had a very, very strong burst in November and December for media related traffic. We would expect that to abate just because the holiday season is over. Two, we had several large gaming and software releases last Q1. So it makes for a little bit more of a difficult compare. And the third is, as I said we do have large customers that renew every quarter. They don’t renew linearly. So it's not like a 25% a quarter renew. So there's going to be some quarters that a few more renew than other quarters and that's exactly what is happening this quarter. It's nothing really notable. The pricing changes that we're seeing are in line with what we've seen with historical patterns. So we've not seen an increase or a decrease in the rate of pricing erosion. It just means and really just so that we're clear, I was really signaling more for media growth in Q1, obviously being driven by the reset from a couple more contract reprises than usual, but we still expect very strong growth rates in the media business, just not in the low 20s. And relative to performance and security, you are right that that business, to adjust it for a kind of -- foreign exchange has been growing very consistently and we would expect that business to be relatively stable -- a stable grower going into 2015.

Our next question comes from Sterling Auty with JPMorgan. Please proceed.

In the past spikes in CapEx spending like the investment you're talking about have been a precursor to volume growth. You mentioned that you expect that again. But what I'm curious about is in the context of what you're seeing now, what gives you the visibility and confidence of being able to capture the same percentage of that growth opportunity as you have in the past?

Yes, you are right that we have reasonably good visibility from talking to our customers around traffic demand. We certainly have good visibility in the near term, and as we told you before, when we build out CapEx we're building our CapEx really to achieve what we believe is going to be highest possibility of traffic growth that we could get. We want to make sure we're building up the network to take traffic for our customers. That’s effectively what we are doing. If in fact we don’t see the traffic demand materialize, we can always notch CapEx down in future quarters. And so you are right. What we're signaling here is confidence that we believe that it is going to be a nice uptick in traffic going into 2015 even beyond Q1. But if we don’t see that happen obviously we'll ratchet CapEx down later in the year. But that’s not what we're expecting right now.

And then second, in your prepared remarks you mentioned the holiday traffic, holiday media traffic spike a couple of times. I want to make sure that we're clear. What specifically is that media traffic that you are seeing? What’s the source of it that seasonally falls off?

So I think we talked in the past that there's basically four big secular trends in the business that have been driving media traffic and revenue growth for the Company. One is been obviously the continued adoption of video delivery through streaming and things of that nature. Two is you're going to -- there's going to be some quarters where you have more software updates than normal, some quarters you're going to have more gaming releases than normal, and certainly social media as a platform has been continuing to grow and innovate over the last several years, and so what you had in Q4 was a four for four that we did well in gaming, we did well in software updates, we did well in social media, we did well in video delivery. You do tend to see it spike around the holiday. People consume more videos. There tend to be more patches and gaming releases that tend to occur around the holidays and that’s effectively what we saw. So it’s not -- it’s fairly normal to see traffic patterns kind of not be at the same levels going into Q1 and that’s what we're expecting and that’s what we're flagging in our guidance. But again to be clear, we are still expecting strong growth in our media business.

Our next question comes from Steve Milunovich with UBS. Please proceed.

First, you didn’t indicate the EPS impact in the first quarter from currency. I wonder if you care to talk about that and if you're going to be hedging any more aggressively going forward, and second, could you update us on your sales hiring? It seems like you've been lagging a little bit behind your goals last couple of quarters. Where are we in terms of both hiring and the efficiency of those sales people coming up the curve?

Good question on the earnings impact, that as I mentioned that we're seeing a sequential headwind of about $8 million and about a $50 million headwind year-over-year due to foreign exchange on the top-line. More of our spending is in U.S. dollars. So you can expect that there's going to be a more notable flow through into earnings impact from that revenue drop. So if you do recall it -- call it a roughly 50% flow through on that, maybe a little bit more than that. So you're talking a penny or two pennies in earnings year-on-year. And relative to sales hiring, actually we had a great quarter for sales hiring. You were right. We were a little bit behind earlier in the year. We caught up a little bit in Q3. We had a strong hiring quarter in Q4 and delivered to kind of a plan that we expected actually a little bit better than we had expected ending the year. And we continue to see good momentum with the efficiency of the sales hiring. And as I mentioned before in other calls that I think what we have found -- this maybe have been an issue when we started to hire, we thought that sales focus would be more concentrated to call it performance and security solutions. And really what we have found is they're selling the entire portfolio, and so some of the performance that we are seeing in media is a result of good execution by the sales team on selling media is well as performance and security. So I'd say we are tracking pretty well and we expect to continue to ramp sales hiring in 2015.

Our next question comes from Michael Turits with Raymond James. Please proceed.

Two questions. First, kind of a center competitive question but maybe from the angle that it seems as if the growth rates are consistently slower from all the competitors that report numbers. So any change or just you guys are killing it and that’s it?

We continue to have substantial competition. The competition varies on the product line and -- but we're executing very well. We've made substantial progress in improving our quality, our scalability at an affordable price point, providing excellent security defenses for our customers. And so we've have been very successful.

Okay, and then on the P&L side, you called out security. Any more detail? You got any good customers? Any more granularity there? And then also perhaps on some of the -- maybe we could call them emerging areas that you've highlighted in some of the Analyst Days on the PNS side including carrier and hybrid club.

Certainly the most -- the fastest growing business within Performances and Security is the security business. As I mentioned in our prepared remarks that we actually had pretty solid growth across most of the major product lines in performance in security, but certainly the noteworthy call out at security, it's been -- it was noteworthy last year and it’s been strong all year. I think the addition of the Prolexic capabilities really has enhanced the Company’s portfolio. I will at the Investor Summit, I will breakout each one of the performance and security solution groups a little bit deeper for you, so that you can see how each one of them did for the full year. But I can tell you that certainly securities leading the way, you'll see that it was pretty solid growth across the Board, but certainly is the most noteworthy being security. And I think the emerging areas, one of the things that we had talked about the announcement certainly of our Cisco partnership in Q3. We were -- we had told you that we didn’t expect any material revenue from the Cisco partnership in 2014, but we've seen a number of proof of concepts. The quality of customers that we're attracting here gives us some optimism that we should see some hopefully -- some further acceleration here in 2015.

Our next question comes from James Breen with William Blair. Please proceed.

Just a couple of questions. One on sort of the currency impact to revenue. You talked about $15 million year-over-year. When you sort of add that to the midpoint of guidance, it implies sort of constant currency growth around 19% for the first quarter. Just thinking about how it trends during the year, since it appears that a lot of currency, the strength in the dollar happened in the back half of ’14. Should we expect that year-over-year revenue growth which right now is about 16% based on your guidance in the first quarter to sort of tick up throughout the year? And then secondly, just can you update us sort of who is your larger customers in terms of potential revenue? I think your largest customer at the end of last year was around 9% or so. Has that changed?

On the FX impact, the way you should think about it, if you look at foreign exchange rates throughout 2014, actually the dollar weakened in the first half of 2014 and then strengthened in the second half. So what you'll see is it will be a headwind on growth rates for probably the first two quarters and then it will be less so in Q3 and Q4. And relative to -- we don’t breakout revenue concentration, we don’t have any 10% revenue customers and I would say while we have some sizable customers, we don’t have any customers that are near 10%.

Our next question comes from Rob Sanderson with MKM Partners. Please proceed.

You mentioned a third of your e-commerce customers upgraded to Ion. Can you talk through what a typical ARPU looks like on Ion versus DSF? I know that customers are very different, but can you sort of help us think about what kind of incremental revenue opportunity is there? And then second customer count, can you give us an update or a way to think about as cloud and SaaS more mainstream how applicable is the Akamai solution into the hundreds of thousands of mainstream enterprise customers. How does management think about that? How should we think about that?

Okay, so we said that a third of the Internet Retailer 100 had upgraded to Ion, and the ARPU lift is something that we don’t talk about but we have seen lift and of course the service provides much faster performance for Web sites and is particularly tailored for the mobile environment. And we're getting to the point now where close to half of online transactions are on mobile devices. So mobile performance really matters. That's been a big shift over the last few years. A few years ago almost no transactions were on mobile devices. We don’t talk about the customer counts in general, but I can tell you we are focused on the 1,000 customers out there and not really on hundreds of thousands of customers. Now that said, we do have channel partners and resellers who do focus on that segment, and so they tend to that calculation of enterprises. In terms of our direct sale where we would count customers, it’s focused on you want to think of as thousands of customers, not hundreds of thousands.

Well I think it’s a fair color Tom to your point on channels that we had an exceptional channel quarter and an exceptional channel year. The carrier partnerships that we've announced over the last couple of years are bearing fruit. That’s our fastest growing -- of our channel partners, the carrier partners are our fastest growing, but the indirect channel is growing faster than our direct business. So I think to Tom’s point we're focusing our direct sales force in the right areas for our Enterprise class customers and then that’s not to say that our channel partners are not focused in those areas as well, but they can go a little bit deeper and get broader penetration for the Company.

Our next question comes from Gray Powell with Wells Fargo. Please proceed.

Just a couple if I may. In the past you cited total ARPU for the security business I think in around $7,000 per month with Kona closer to 14,000 per month versus the site acceleration side at 20,000. How should we think about the potential for security if the ARPUs improve and how long do you think it takes for penetration security to match the site acceleration side of your business?

Yes I'll provide the details of the security ARPUs at the Investor Summit. It's a little teaser for you to come. I will tell you that the ARPUs are increasing in Security. As you mentioned that it's -- you have to look at the broad security portfolio. Kona Site Defender and Prolexic have much higher ARPUs than kind of our standard web application firewall and other security offering. So it's been growing and I'll provide the specific numbers at the Investor Summit later this month.

And then just maybe one follow up if I may, sticking with security. Just how should we think about the product roadmap there? Any tangential areas that look interesting to you?

Yes, we are now in Beta with a client reputation service to identify IP addresses that have behaved with -- had malicious behavior in the past, and to identify the nature of what's sitting behind an IP address. And the customer interest there in the Beta stage has been high. And as we look farther into the future, we're looking at enterprise security. As you know, we have the cloud networking division with its first product being Akamai Connect sold by Cisco, and as we start dealing with enterprise traffic, obviously the building to secure that and protect the enterprise employee becomes a very interesting area to apply our security expertise.

Our next question come from Sameet Sinha with B. Riley. Please proceed.

A couple of questions. You gave us some data on DSA and the penetration of the IR 500 -- sorry IR 100. Can you talk about the Ion Prime? What sort of penetration -- what sort of go-to-market strategy that has? And also if you could provide equivalent data on the Internet Retailer 500, sort of your level of penetration and what sort of market? Is it the entire 500 or do you think just the top 100 are kind of the key markets for Ion Prime? Then secondly Jim, for every time that you said low 40s EBITDA margin. I would have been a rich man if I got a penny every time. What exactly are you spending on? I can understanding hiring real-estate. Can you give us a little more detail and kind of how we should think about this spending through the year?

Let me take the first question. DSA, Dynamic Site Accelerator was our former flagship acceleration product and then we launched the Ion line a couple of years ago and then last October we launched Ion Standard and Ion Premier. The way to think about Ion Standard is that it's really easy to use, really easy to configure. You can sort of turn it on yourself and so it allows an enterprise to quickly get a lot of their sites and applications going with very strong performance gains. And Ion Premier is more of a customized capability. So they are the sites that care the most about performance, are willing to put effort into really optimizing that, really tuning it for all the different kinds of devices that are out there, they would want to get Ion Premier. Now if you think about Internet Retailers, they're obviously in the sweet spot for Ion Premier, because it's well known that if your site is faster, you sell a lot more on it and that's why we have such strong adoption of our services in the IR 100. We also have very good adoption in the IR 250 and IR 500. Don’t think we released the statistics there, but commerce as a whole, there's certainly a sweet spot for web performance capabilities.

Yes. And on your question on low 40s, I'm only chuckling because you're right. I have signaled that we're going to operate in the low 40s. I will remind you though that what has driven the Company not operating in the low 40s to-date is that we've had significant revenue growth and over achievement beyond our expectation. So the Company grew in constant currency 25% last year. That was certainly higher than what we had planned. We expanded gross margins for the third straight year. That was better than we had expected. So we have been spending in the areas that I outlined, and I talked about sales and supporting go-to-market capacity, I talked about services and support, I talked about kind of investments in network scaling, I talked about investments in R&D and innovation, and we're also making investments in Company infrastructure scaling. So you can expect that we're going to continue to do those things. We're not going to grow every -- I would love to think every year we can grow 25%. Maybe we can. We're not certainly signaling that here with our guidance for Q1. And so what I'm trying to signal to you is that that's the intent of the Company, to manage the Company in the range of 40% to 42% EBITDA. So I don’t want anyone to be surprised if and when that happens.

Our next question come from Mike Olson with Piper Jaffray. Please proceed.

I know International's been a bigger focus over the last few quarters and years, but it hasn’t really grown as a percent of the revenue mix and it seems like maybe that’s been in the category a good problem to have because domestic growth has maybe just bit stronger than expected. But how do you see that tending over the next few quarters and maybe next couple of years? Is that a focus on new sales force hires? Do you kind of feel like you've been maybe leaving business on the table by not having as strong of a sales presence outside the U.S.? Definitely it seems like that could be another lever of growth in the coming years. Thanks.

Yes, actually you hit the nail on the head that we're pleased with the international growth. It's just that our domestic business grew much faster than we had expected. And our largest customers in the media business in particular tend to reside U.S. And so really we drove and fueled kind of the overachievement in the media growth rates in particular, we had strong growth across the Board but we had particularly strong growth with our large media customers, which tend to sit, more of them -- not all of them but more of them tend to sit in the U.S. So we're very pleased with the international growth. It’s just we had exceptional growth in the Americas. And you're right, going forward from a sales hiring perspective, actually we have -- roughly 50% of our sales reps are already outside the U.S. So the hiring we've been doing over the last couple of years has been more weighted to international because we believe we are less penetrated outside the U.S. than we are in the U.S. We certainly have opportunities in all markets but we believe there is significantly more Greenfield opportunity outside the U.S. and you're starting to see us get traction for some of the sales force hiring that we've done and plan to do going forward. So I would expect that you will see the international revenue as a mix percent grow in the future. It'd be nice to the have the problem we have right now, which is it may not grow because the domestic business grows equally which would be a nice problem to have, but we do expect that probably in the future that the International business mix will be a little bit higher than what we've seen to date.

Our next question comes from Phil Winslow with Credit Suisse. Please proceed.

Hi, guys this is [indiscernible] for Phil. Most of my questions have been answered but I want to focus on our gross margin line. Looking at the 2014 gross margin, it went up from 2013. You talked about some of this network grooming and improving optimization et cetera. So wondering if you could also give us some color on co-location and bandwidth expenses you are seeing there and sort of changes you might expect to see. And how should we think about that going forward in 2015?

I think we've talked about that. We've made good progress on managing bandwidth cost. So bandwidth cost per megabit per second continues to go down. Obviously the total cost for traffic reserve is going down at a greater rate in pace than what we're seeing in pricing erosion. But we've done a good job on optimizing on the co-lo side, we've done a job of optimizing on the bandwidth size and some of it has been hardware initiative, some of it has been software initiatives that our team has driven. We certainly have some buying leverage because we are a huge purchaser of bandwidth, given the amount of traffic that we serve. So I think we're very, very pleased with the work that we done on the network side and we expect that we can continue to keep pace with what we've been doing. I'm not calling that -- obviously in this guidance for gross margin expansion but we think we can get gross margin stabilization on the cash gross margin side.

Our next question comes from Colby Synesael with Cowen and Company. Please proceed.

Great, two questions if I may. First off on CapEx intensity. I think Company’s long-term high-end target is about 16%. I think this year you spent just over 17%. I think the guidance for this year is expected to be roughly flat at 17%. Is it fair to say that the capital intensity of the business is just slightly higher than what you previously anticipated and that that 17% is a good longer-term number for us to be thinking about? And then also on APRU, so the one metric you do provide is servers and certainly if you look at total revenue divided by servers you actually saw revenue per server go up about 7% and 7.5% in 2014 and if we look at our model for last six years, it’s gone down every single year. Can you help talk about what actually happened in 2014 that you think drove revenue on a per server basis? And I guess is that sustainable?

So on the CapEx intensity side, so you're right. We landed at 17% for 2014 and I signaled that we're probably going to be at that rate for 2015. I think it’s important to parse our CapEx. Half of that are or call it 8 points of the 17% is network CapEx, which several years ago was roughly 10% of revenue. So we've seen nice scale on network CapEx. I'd say the one area Colby that's probably been a more notable uptake in CapEx is around capitalized software, which I think is a good thing, because as that from an accounting perspective when we invest in R&D resources, when they're working on specific software development work, we capitalize that and that turns into CapEx. And the way to think about that is that’s future product innovation that’s about to be released. That’s probably a little bit higher than what we had expected. I'm not going to signal on this call kind of an adjustment to the long-term model for the Company. We will provide an update at the IR summit where I'll talk about the trends in the business and I'll talk about the kind of the long-term model for the Company then. And on your revenue per server, yes we don't believe that's a very good metric to be quite frank. I know that maybe in the old days people have looked at that. So I'm not sure looking at revenue per server is a meaningful measure for the Company. We're always doing refreshers of servers on the network. And so I don't think necessarily looking at it just on a server basis is a way of looking at efficiency. I think the way you can look at efficiency is looking at our network CapEx as a percent of revenue. Our network CapEx as a percent of revenue has gone down. It was 10% two or three years ago. It's now 8%. So you're seeing efficiency in our -- the CapEx intensity on the network side as evidenced by a nice steady decline and now a stabilization of network CapEx as a percent of revenue.

Yes, I was just going to add, obviously you continue to provide servers. So to some degree one might think that there might be some value in that. And I guess the other question is obviously there's been a lot of questions on ARPU this quarter. And based on the fact that you're saying that revenue per server is not a good number, it might be helpful at some point for you guys to potentially provide some more metrics on that if it's at all possible? Thanks.

Sure. Our next question comes from Jeff Van Rhee with Craig-Hallum. Please proceed.

Two brief ones guys. Just wanted to understand on a sales hiring, the sense of magnitude of what we should expect in '15 in terms of the ads I think you had originally said maybe a 100 for '14. It sounds like you came in just a bit ahead of that. So thoughts, if you can dial in a little bit around '15. And then just one brief one on the new customer versus existing customer mix. Is there tasking or incentives in place in terms of sales and sales leadership that target specifically the new versus existing up sells and how we should think about that?

Yes. And so we're not going to specifically guide to an incremental number of sales resources every year. We did that back in -- when we started to ramp the sales force investments. I think you can expect that we'll add a similar number of rep hires every year for what we've done in the last couple of years, and that's anywhere between kind of call it 80 and 100. So you can expect that we'll continue to do that. And relative to where they're focused on new versus existing, as you can imagine when we do territory planning, they plan territories with that in mind, around size of customer, Greenfield opportunities. But again I think from a rep perspective that you're going to have some hunters, you're going to have some farmers, you're going to have some hybrid reps. And so I think it's a little bit of a mixed bag based on the territories that we put them in. So there isn't necessarily an incentive for them to sell more on the new customer side versus existing customer. If we can grow the business through existing customers, we're happy to have that happen. If we can grow the business through new customers, we're happy to have that happen. And we think we have a pretty balanced go-to-market approach to do both.

Our next question comes from Ed Maguire with CLSA. Please proceed.

Ed? I think you are on mute. Okay. Denise, we can maybe go back to Ed. Let's take the next one please.

Sure our next question comes from Will Powell with Robert Baird. Please proceed.

I guess a couple of questions. Maybe first Jim, just to maybe come back to the currency outlook quickly, the EBITDA margin guidance for the year, 40% to 42% any sense for what the FX impact is on that? What that might look like on a constant currency basis. And then the second question, just with all these upcoming streaming video offers on the horizon, of course LinkTV I guess launching, HBO, others coming, maybe any color as to how you think about the emerging or I guess increasing opportunity there generally and any specifics around any of these new particular players that you might be able to make comments around?

So yes, I'm glad you brought the FX impact. So interestingly enough that FX impact is about 1 point year-on-year on EBITDA. So FX alone is about a 1 point impact on kind of the company EBITDA if you look at it on a constant currency basis. So it is meaningful for the Company as I mentioned because we have more of our cost in U.S dollars. And relative to kind of -- I think there's a bunch of trends going on in media space. You mentioned a few. There's going to -- there is a bunch of new offerings -- there's going to be more over the top capabilities and that's going to need to be served by some platform. We think that certainly Akamai is one of those platforms that could serve some of those capabilities. We certainly signaled with the CapEx build-out that we're doing on the network side that we're pretty bullish on traffic growth here going into 2015. So you can expect that we're going to hopefully capitalize on some of what continues to be an emerging trend of traffic growth across all the media. You mentioned one -- social media continues to innovate. Streaming continues to be an area that's growing rapidly. There needs to be more and more gaming releases and software updates. So we're pretty optimistic about the media business going forward.

Yes. As you look father in the future, there is a possibility of a tremendous amount of traffic from video to come online. Today the penetration rates online are very low. When you combine that with the emerging technologies, technologies like 4K, maybe someday 8K, and what that means that for one hour of watching, actually a lot more traffic has to flow to produce the quality. So there is a really tremendous potential for growth, which is why we are so bullish media business and we're are investing for the future.

Our next question comes from Greg McDowell with JMP. Please proceed.

This is Rishi Jaluria dialing in for Greg McDowell. Two quick ones if I may. First, in terms of your security offerings with Kona and Prolexic and your success that you pointed to there, are you typically finding yourself gaining new, gaining customers by up selling to existing Akamai customers or are you actually getting new customers that weren’t with Akamai or with Prolexic prior. And then second in terms of the quarter, it sounds like you had a strong quarter in retail and in e-commerce. I just wanted to see if there any -- are there particular verticals that you saw strength or weakness in that you wanted to point to.

On the Security side the good news is we're seeing both strong upsell in our existing base and also new customers, customers that for whatever reason haven’t done business with Akamai before but are in the market for a Security product. We have a very compelling pair of offers, Kona Site Defender and Prolexic Routed. And then that's great because we're seeing several examples where we once we get them on the Akamai platform with security, then we can upsell them with our traditional solutions with application acceleration.

Yes, in most of the verticals, certainly the media and entertainment vertical had significant growth given what I talked about. But we saw a good growth in the commerce vertical, we saw good growth across our enterprise verticals. We had pretty growth across almost all of our verticals, probably with the one exception being on the public sector side that we probably haven’t seen as much growth in that vertical, but we didn’t expect see significant growth in that vertical but I think across the Board, with the exception of the public sector we've had pretty strong growth.

Okay. Thank you Denise. Thank you, everyone. In closing, as Jim mentioned we hope to see you live or via Web cast, via the Akamai platform at our 2015 Investor Summit to be held on February 24th in Boston. In addition we'll be presenting at a number of investor conferences in March. Details of these can be found in the Investor Relations section at akamai.com. And thank you for joining us and have a nice evening.

This concludes today’s conference. You may now disconnect. Have a great day everyone.