Tom Barth - Head-Investor Relations Frank Thomson Leighton - Chief Executive Officer & Director James Benson - Chief Financial Officer & Executive Vice President.

Steven M. Milunovich - UBS Securities LLC Vijay K. Bhagavath - Deutsche Bank Securities, Inc. Mike J. Olson - Piper Jaffray & Co (Broker) James Breen - William Blair & Co. LLC Jennifer Swanson Lowe - Morgan Stanley & Co. LLC Michael Turits - Raymond James & Associates, Inc.

Sitikantha Panigrahi - Credit Suisse Securities (USA) LLC (Broker) Sterling Auty - JPMorgan Securities LLC Gray W. Powell - Wells Fargo Securities LLC Jeff Van Rhee - Craig-Hallum Capital Group LLC Colby A. Synesael - Cowen & Co. LLC Rishi Jaluria - JMP Securities LLC Edward Everett Maguire - CLSA Americas LLC Sameet Sinha - B. Riley & Co. LLC.

Good day, ladies and gentlemen, and welcome to the Q1 2015 Akamai Technologies, Inc. Earnings Conference Call. My name is Joyce and I will be the operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. 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, Tom Barth, Head of Investor Relations. Please proceed..

Thank you, Joyce, and good afternoon, and thank everyone for joining Akamai's First Quarter 2015 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 April 28, 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 measures 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 website.

With that, let me turn the call over to Tom..

Thanks, Tom, and thank you all for joining us today. Q1 was another strong quarter for Akamai and a great start to the year on both the top line and bottom line. Revenue in the first quarter was $527 million, up 16% year-over-year and up 20% when adjusted for foreign exchange headwinds.

Our strong revenue results continued to be driven by solid performance across all of our geographies and all of our major product lines, with especially rapid growth from our Cloud Security Solutions. Non-GAAP EPS for the first quarter was $0.61 per diluted share, up 5% year-over-year and up 12% when adjusted for foreign exchange headwinds.

I'll be back in a few minutes to talk more about the progress that we made during the first quarter and the opportunities that lie ahead. But first, let me turn the call over to Jim to review our Q1 financial results in detail and to provide the outlook for Q2.

Jim?.

GAAP net income for the first quarter was $78 million, or $0.43 of earnings per diluted share. Non-GAAP net income was $111 million, or $0.61 of earnings per diluted share, and coming in at the midpoint of our guidance range. For the quarter, total taxes included in our GAAP earnings were $42 million, based on an effective tax rate of 35%.

Taxes included in our non-GAAP earnings were $54 million based on an effective tax rate of 33%. This tax rate is one point higher than our guidance due to a revised full-year 2015 tax rate projection that takes into account the negative impact of the strengthening U.S. dollar on projected 2015 foreign earnings.

Finally, our weighted average diluted share count for the first quarter was 181 million shares, consistent with Q4 levels and in line with our guidance. Now, I'll review some balance sheet items. Days sales outstanding for the first quarter was 59 days, up three days from Q4 levels and up one day from the same period last year.

Capital expenditures in Q1, excluding equity compensation and capitalized interest expense, were $123 million, slightly below the low end of our guidance for the quarter, primarily due to some planned Q1 facility and network capacity investments shifting into Q2. As a reminder, this CapEx number includes capitalized software development activities.

Cash flow generation continued to be solid. Cash from operations for the first quarter was $100 million. During the quarter, we spent $63 million on share repurchases, buying back roughly 900,000 shares at an average price of just over $67. At the end of Q1, we had approximately $371 million remaining on our current share repurchase authorization.

Our balance sheet also remains very strong, with roughly $1.5 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 $825 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.

We took advantage of this to purchase Xerocole in Q1 and Octoshape at the beginning of Q2, all cash deals that we believe position us well for further innovation. As always, our overall goal is to deploy our capital in a manner we believe is in the best long-term interests of the company and our shareholders.

In summary, we are pleased with how the business performed in Q1. We continued to execute well, delivered strong revenue growth, managed network cost effectively and made the investments in the business that we believe are necessary to build the foundation for sustained long-term growth.

Looking ahead to the second quarter, we expect to see continued foreign exchange headwinds from the strengthening of the U.S. dollar against most currencies. At current spot rates, foreign exchange fluctuations are expected to have a negative impact on Q2 revenue of $3 million compared to Q1 and $22 million compared to Q2 of last year.

As we guide for Q2, we are expecting another strong top-line quarter, with Q2 revenues in the range of $532 million to $547 million. This range represents 17% to 20% year-over-year growth adjusted for foreign exchange movements over a very strong second quarter last year, which included notable high-profile live events like the World Cup matches.

At the high end of this guidance range, this growth rate is consistent with our Q1 growth rate, even with the full quarter wraparound effect of the Prolexic acquisition. At these revenue levels, we expect cash gross margins of 77% to 78% and GAAP gross margins of approximately 67%.

Q2 non-GAAP operating expenses are projected to be $200 million to $205 million, up from Q1 levels as the business absorbed a full quarter of the Octoshape and Xerocole acquisitions and as we continue to make head count and infrastructure investments across the business.

Factoring in the various items I just mentioned, we anticipate Q2 EBITDA margins of 40% to 41%. And as I have been messaging, looking beyond Q2, we expect to operate the company in the 40% to 41% EBITDA range for the foreseeable future.

However, EBITDA margins will be heavily dependent on revenue performance, possible M&A, increased platform capacity in anticipation of greater demand for our over-the-top video delivery services and continued foreign exchange movements.

To provide some color on the foreign exchange point specifically, at current spot rates, we expect to see a negative impact on our EBITDA margin of one percentage point year-over-year.

Moving on to depreciation, we expect non-GAAP depreciation expense to be $64 million to $65 million, up from Q1 levels due to increases driven by our Q1 and planned Q2 network and facility build-outs, as well as the completion of several large software projects.

Factoring in this depreciation guidance, we expect non-GAAP operating margin of 28% to 29% for Q2. And with the overall revenue and expense configuration I just outlined, we expect Q2 non-GAAP EPS in the range of $0.55 to $0.59.

This EPS guidance assumes taxes of $49 million to $52 million based on an estimated quarterly non-GAAP tax rate of 33%, consistent with Q1 levels. This guidance also reflects a fully diluted share count of roughly 181 million shares. On CapEx, we expect to spend approximately $108 million to $113 million in the quarter excluding equity compensation.

The elevated levels of CapEx are primarily driven by our desire to increase our capacity to stay ahead of anticipated traffic growth on the network.

For the full year, we are expecting to be at or slightly above the high end of our long-term model for CapEx as a percent of revenue, primarily driven by network expansion that we anticipate will continue throughout the year. Of course, the revenue benefit from network build-out tends to trail the expense by one to two quarters.

In closing, we accomplished a great deal in Q1 and remain confident on our ability to execute on our plans for the long term. Now let me return the call back over to Tom..

delivering video over the Internet with high-quality, scale and affordability; providing near-instant performance for websites and apps on any device anywhere; securing 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 securely handle new cloud workloads with agility and affordability.

At the recent National Association of Broadcasters Meeting in Las Vegas, I met with several of our large media customers to discuss their requirements for addressing the growing demand for over-the-top or OTT content.

These broadcasters are looking to Akamai for delivery solutions that will meet their need for scale and affordability, as well as the expectations of online viewers for high quality.

The potential for explosive growth in online video traffic presents Akamai with substantial opportunities, and it is the reason why we are continuing to invest in network build-out and media technology innovation.

We recently closed the Octoshape acquisition, which is expected to augment our technological and operational capabilities to deliver a high-quality media to broadcast-size audiences.

We believe that the Octoshape technology will further improve the quality and reliability of our live and linear streaming services, and that it will provide us with an end-to-end broadcast-over-IP service that aligns well with our media customers' roadmaps.

Delivering high-quality video over the Internet at scale is much more complicated than most people realize.

As broadcast TV moves online and IP subscription or pay-per-view models become mainstream, the expectation is that the quality and reliability of video delivery over the Internet will be comparable to that of traditional delivery mechanisms such as satellite and cable.

This is very hard to achieve given that the Internet was not designed to handle such use cases at large scale. The multiplicity and rapidly expanding ecosystem of devices, operating systems, browsers, video players, encoders, DRM technologies, ad insertion methodologies, video formats, and carrier equipment make the problem even more challenging.

If any component in the ecosystem has an incompatibility with another component or if any component gets overloaded, even for an instant, then there is the prospect of millions of end users suffering through a poor viewing experience. And this is just for the landline Internet.

The problem gets harder still when we need to deal with the inherent capacity limitations of cellular networks. Cellular networks were designed to handle voice communications, which consume a factor of 100 to 1000 less bandwidth per user than video.

The shift of mainstream viewing to IP has barely begun, and yet already, you can see reports of traditional delivery approaches failing to keep up with the increasing demands for quality and scale. When video gets congested at network peering points, the result is often degraded picture quality and painful re-buffering.

Akamai's video delivery services are designed to manage all of these challenges for the world's leading broadcasters and content providers. Our unique approach of streaming content through servers in thousands of locations close to end users allows us to bypass congested peering points, resulting in a much better viewing experience for end users.

And our large and very talented media R&D team is constantly working to ensure that our platform supports the myriad of devices, operating systems, browsers, video players, encoders, DRM technologies, ad insertion methodologies, video formats and carrier devices.

Looking forward, we believe that the recent acquisition of Octoshape will further accelerate our efforts to develop and deploy the next generation of video delivery technology.

The combination of Octoshape and organic Akamai capabilities positions us well in comparison to our competitors and do-it-yourself efforts when it comes to scaling and securing the Internet for our video customers. Our tremendous scale is achieved in part through close cooperation with the world's leading carriers.

We locate our servers in over 1,350 networks, and we are forming much deeper relationships with the largest carriers. Today, I am very pleased to announce a new strategic partnership with China Unicom, one of the largest cloud computing service providers in China.

Our partnership is with China Unicom's cloud division, which has agreed to complement its own cloud services with Akamai's full product suite of media delivery, Web performance and cloud security offerings. As you might imagine, we are seeing increased demand for delivering content to Chinese Internet users from global customers.

Coupled with the agreement we signed last June with China Telecom, our new relationship with China Unicom allows us to improve the performance, scalability and cost effectiveness of our China CDN offering for our global customers.

The vast scale and distributed nature of our platform also gives us significant advantages over the competition when it comes to security.

Scale has become critical for security as typical attacks now contain tens or hundreds of gigabits per second of malicious traffic, more than enough to overcome the traditional defenses of even the most well-equipped data centers. Of course the need for security is not limited to our media customers.

Enterprises across the board are concerned about the security of their Internet operations, and they are turning to Akamai for help.

We believe that our flagship Kona Site Defender and Prolexic Routed Solutions are differentiated not only by their scale and sophistication, but also their ability to preserve performance in the face of large-scale attacks.

Since launching Kona Site Defender three years ago, our quarterly revenue from all our security products has grown from near zero to over $55 million in the first quarter of 2015. Going forward, we plan to continue scaling our Kona Site Defender and Prolexic Routed businesses and we're also investing in the development of new security products.

At the RSA conference last week, we introduced two new managed cloud security offerings, Managed Kona Site Defender and Kona DDoS Defender. These new offerings are designed to provide customers with 24x7 monitoring and attack support through Akamai's globally distributed security operation centers, or SOCs.

Leveraging our cloud security intelligence and security experts at five locations worldwide, the Akamai SOCs provide an integrated security model that can help organizations respond to the latest attacks with shorter response times and higher mitigation quality.

We're also working on the development of future Enterprise Security Solutions that will be designed to detect and prevent phishing, malware and data exfiltration attacks on corporate employees and infrastructure. The Xerocole acquisition that we closed in February provides a first step in this direction with their advanced recursive DNS technology.

By combining our security intelligence with Xerocole technology, we are working on solutions that will block malicious entities at the DNS layer. There is much work still to be done, but we expect to have the first generation of our Enterprise Security Solutions in the market in 2016.

In summary, 2015 is off to a strong start, and I'm very excited about the opportunities that lie ahead for Akamai. We believe that our continued investments in product innovation, sales capacity, platform capabilities and overall scale are laying a solid foundation for our future growth. Thank you for your time today.

Now, Jim and I will take your questions..

The first question comes from the line of Steve Milunovich. Please proceed..

Great. Good afternoon. You seem pretty excited about the potential for over-the-top.

Could you – I know it's very early, could you size this potentially significant financially? And are these potential customers that you've not really done any business with before? Or have you been in maybe small parts of them and have a much bigger opportunity going forward?.

Yes. There's – as you may know, there's a lot of buzz right now about over-the-top and new video models emerging. This presents us with a lot of opportunity, and that's why we're increasing our investment in our media technologies and our platform scale. I think it's really hard to predict how much TV viewing will move over-the-top.

The industry experts are trying to figure that out as well. And I think we'll have to see over the course of the next year just how big of an impact that is. Now as you know, we do a lot of business with most of the world's major broadcasters.

And I think there's the opportunity to increase that business, and maybe in some cases, there'll be entities that don't do a lot of business with us, but the large majority of the world's major broadcasters already heavily use Akamai's services for their Internet content..

And then, I also wanted to ask about the RSA conference.

What was your experience there? And do you feel like you're getting some real traction and getting fairly well recognized as a security brand?.

Yes, I think we're actually making good progress there. Our revenues have grown dramatically.

We have two products that are viewed as really very capable of defending against the large-scale DDoS and application layer attacks, and they're unique in their capabilities with both the scale and sophistication, but also the ability to preserve performance of websites and apps and data centers that are under attack.

A lot of the traditional solutions just get swamped with the volume of today's traffic. And even when you engage them, performance degrades substantially. So I think we are getting to be more recognized as a security player; still a lot of work to do there, but we're making progress..

Thank you..

The next question comes from the line of Vijay Bhagavath. Please proceed..

Recently picked up coverage.....

Vijay?.

Yeah, hi. Recently picked up coverage on Akamai.

A question I hear from our clients is, how do you channel-check this company? So give us some metrics and observation points to dig into, into the field to get a better sense of how the company is doing in cloud security, media delivery, web performance? What are the metrics we need to look into in the marketplace? That would be very helpful, thanks..

Yes, certainly, we've tried to provide a handful of information in our business. One, we're providing a breakout now of our security business, so you can see our security business is growing and compare that to other cloud security companies. We certainly provide how the media business is growing and some of our other businesses.

I think one thing that you can look at – you can certainly – people can follow the news. And the first question around over-the-top is a good question. I think there's a lot going on relative to the grand challenges that Tom talks about. Video over IP at scale is but one.

There's a lot of buzz, you're starting to see announcements from companies developing over-the-top programming content. That is kind of a proof point. Those – the big customers that not all of them, but many of them are Akamai customers that we're poised to benefit as more and more of video content moves online.

So some of it is listening to what we're talking about, following the trends that we outline the business, and then I think following the general industry around what's happening in the media ecosystem.

You can listen to other companies talk about where they're rapidly changing and evolving media ecosystem, hard to find companies that aren't talking about their concern about security and attacks. Certainly, we have solutions that can address some of them, not all of them, but we're certainly bolstering the portfolio with that.

So I think you got to look at our portfolio, and you got to look at the industry and kind of what's going on. And I think we're providing proof points. We provide a little more content annually at our Investor Summit because we can provide – we have you there for several hours – and we're able to kind of go through it in more detail.

So since you're new to covering Akamai, I would encourage you to go to the IR website and listen to a replay of that. And we'd be happy to have a follow-up conversation with you on anything else that you'd like to understand..

Excellent. And a quick follow-on if I may. Recently, we are hearing media reports of the major TV syndicates and the program producers following Netflix's lead, doing live streaming on the Internet – some using 4K video. Would that be potential business for Akamai, these major TV content producers doing live Internet streaming? Thank you..

Yes, that is a potential business for Akamai. We are in that business today. We don't see many people streaming at 4K yet. We do support 4K, but we do see the quality levels increasing. So whereas a typical stream might have been done at a few megabits a second, now it's moving up towards 8 megabits a second or maybe a little bit more.

But yeah, that's all potential business opportunity for Akamai, which is why we're investing in this area..

Thank you. Good luck..

Thank you..

The next question comes from the line of Mike Olson. Please proceed..

Hey, good afternoon everybody.

Just one question for me, could you update us on what percent of your customers are on an Akamai security solution today? And I guess what you think, it's probably hard to say, but what you think that penetration within your existing customer base could be, say, over the next three to five years? And then also, if you have it, what percent of customers using a security solution are also using another Akamai product or service?.

Yeah. So I think we have, I think, a little bit over 1,750 customers that are leveraging one of our security solutions. We have, roughly speaking, 5,400 customers. To your question around penetration, we actually think all customers could have the benefit of our security solutions.

So our expectation is over the next three to five years, we certainly should be able to get – not that everyone is going to buy them, but I think that every single one of our customers, I think, is viable to covering one of our security solutions.

And relative to customers that buy both security and other offerings, I would say that we still have customers that buy only security, especially those companies that came from Prolexic, so it's an upsell opportunity for us to sell them Web Performance Solutions. But in many cases, customers buy both Web Performance and Web Security..

All right. Thanks very much..

The next question comes from the line of James Breen. Please proceed..

Thanks for taking the question. Just a couple questions. Jim, one, on the currency side, you guys obviously had certain assumptions about currency when you gave guidance on the fourth quarter call. Just wondering how currency got worse throughout the first quarter. Just to get an apples-to-apples with where consensus was versus the number you reported.

And then secondly, maybe for Tom on the strategy side, there's been a lot of talk about Level 3 and their agreement with Verizon in terms of sharing some of the CapEx on the interconnect side. Just wondering how you see that impacting. It seems like this would be beneficial to overall traffic, and just wondering how specifically it impacts Akamai.

Thanks..

Yeah. On the Q1 FX versus our earnings guidance, I think we guided early February, it's about $1.5 million impact from the time of our earnings guidance to the end of the quarter. It was $3 million Q4 – I'm sorry, $7 million Q4 to Q1, but since our earnings guidance, it was about $1.5 million..

And on the second question, both Level 3 and Verizon resell Akamai services. They both have CDN efforts that compete with us, and I don't see any impact to their recent agreement on Akamai services..

Great. And then just one follow-up to that. You announced today or Rackspace announced that you guys were enlarging the relationship you have there. Could you just give us a little bit of color on that? Thanks..

Yeah, this is enabling Rackspace users to have the benefit of Akamai content delivery services with a click. So it becomes very easy to use Akamai in the connection with Rackspace's Cloud. And as part of our effort in general, we're trying to make our services easier to use and more broadly accessible, and this is a great step in that direction..

Great. Thank you very much..

The next question comes from the line of Jennifer Lowe. Please proceed..

Great. Thank you. Maybe this is a question for Jim. I think when you had given the guidance for Q1 initially, one of the things you'd mentioned was that there was a number of larger contracts that had come up for renewal and would have a greater impact on Q1.

To the extent that, though you've seen those contracts come up for renewal and now we're sort of seeing it in the numbers, I was just curious if there's any color there on how those renewals went and if there was anything notable in terms of the competitive dynamics in those renewals, pricing dynamics, anything on that front?.

Yeah. That was a good question. You're right.

We had guided in Q1 because the growth rates for media, we were projecting they grew at 23% in Q4, and we were signaling that they weren't going to probably grow at those growth rates because of, one, a very strong Q4 on the traffic side; and, two, we were having a few more large customers renew in Q1 than normal.

But the renewal process, you're right, it's embedded in the results and the renewals came out as expected, so nothing notable as far as it being kind of better or worse. They were as expected. And we're pretty bullish on 16% revenue growth, off of what we think was a pretty tough compare for Q1 of 2014.

As you recall, in Q1 of 2014, we had a lot of large gaming and software releases. We also had the benefit of the Sochi Olympics. So for the business to grow at 16% with kind of that activity going on, we're pretty pleased..

Great. And then just one more from me. I noticed that a couple weeks ago, there was some news out of you all about some leadership changes and some hires that you made in APJ.

Just wondered if there was – clearly, you mentioned all geographies did well in the quarter, but just curious what sort of precipitated the additional hiring or additional focus of leadership in Asia..

Well, we see tremendous potential for growth in APJ. You have a lot of the world's most important companies there. The majority of the world's population is there, a lot of end users coming online, so a lot of potential growth for us, and we are building out our strengths and experience and our management team there.

And so that's why you would see those announcements..

Great. Thank you..

The next question comes from the line of Heather Bellini. Please proceed..

Hi. Thanks. This is Shateel Alam (37:30) filling in for Heather. Sorry, I didn't know the carrier reseller.

I guess did the momentum with carrier resellers continue this quarter? Is there any indication that this channel will kind of see similar growth to what occurred last year?.

Yeah, we had very strong growth in our carrier channel again. It's our strongest kind of growing component of our channel business. I don't think it's going to grow at the rates that we saw in 2014. One of the things that we had mentioned last year was Q4 – 2014 had a little bit of the benefit for a couple of large channel partners.

We were ceding them with some business that was with Akamai Direct that we transitioned to them. It's really helped bootstrap their business going forward. So we had a little bit of higher growth rates in 2014, but very, very strong growth rates in Q1, and again, the fastest-growing component of our channel business..

Thanks..

The next question comes from the line of Michael Turits. Please proceed..

Hey, guys. Good evening. Obviously, as you pointed out, 16% constant currency growth in media, often tough comps when you look at renewal.

Any thoughts – is that kind of a decent enough baseline assumption of mid-teens growth on a real basis, even though we don't have tough comp?.

Are you talking about going forward, Michael?.

Yeah..

Yeah, I mean I think as we talked about that the media business can have variability from quarter to quarter because of gaming releases, software updates, things of that nature. But I think what we've said consistently is, we expect the business to grow in the mid-teens kind of on an ongoing basis.

There's going to be some quarters and some years, it grows well north of that. There'll be some quarters and some years where it grows a little bit less than that. But we believe it's going to be a strong mid-teens grower kind of long term.

And I would say that, again, some period, it's going to be faster than that, some period, it's going to be lower than that..

Thanks. And then on the P&S side, so Security looked really strong, right, $55 million I think after you did $140 million and change for all of last year. So it looks like a big acceleration even 4Q to 1Q.

How is the rest of the Performance business because if you backed the Security out, then that growth looked significantly slower?.

Yeah, I mean if you just do the math on it, you know, kind of in that Performance and Security category that the other non-security businesses grew about 14%, which is consistent with what they grew in Q4, again, pretty solid growth that, as you can imagine, the Security is the new offering for the company. It's been a new offering for a while.

I think with the Prolexic acquisition, there's been a lot of training and, I would say, focus from the sales force for selling security. And one of the things I had shared is that in addition, as we've been building out the sales force, the sales force also sells media.

And so, I think what you're seeing is that the sales force sells the myriad of our solutions. I think we're seeing a little bit stronger growth in media and certainly in security.

I think the Web performance growth rates are pretty good, but I think that certainly the Web performance growth rates, I think, are being impacted by maybe the focus more on the security space for now..

Okay. Great. Thanks very much, guys..

The next question comes from the line of Phil Winslow. Please proceed..

Hi. This is Siti Panigrahi for Phil. Just looking into your gross margin, this was slightly down from Q4, but in line with what you guided. You talked about earlier all the network optimization and grooming that you have been doing.

Just wondering if you could give some color in terms of color in terms of collocation and bandwidth expenses that you are seeing this quarter and how should we think about going forward?.

Yeah, I mean we're very pleased with the gross margin performance. I think what tends to happen sometimes in Q4, Q4s tend to be seasonally our strongest revenue quarters, and so sometimes you tend to see margins uptick. Last year, we had gross margins of around 78%. I think we're probably going to have gross margins in the 77% to 78%.

We're not that tight within a point. So we're very pleased, as you can imagine, that we've been building out more on the platform. We built more out in Q4. We built more out in Q1. We're signaling we got to do more in Q2. You can expect that when we're doing that, we're increasing in particular collocation costs for that build-out.

We're seeing bandwidth costs that obviously increase with the level of traffic growth. But if you look at it in aggregate, having gross margins of 77% to 78%, we're very pleased with that..

And one follow-up on the CapEx. Last quarter, you talked about CapEx guidance. You were higher than what you guided, but you were expecting 2015 guidance to be in line with like around 16%. But now, you're expecting now up on the high-end of your long-term guidance.

What has really changed in between, and what's really driving CapEx at this point?.

Yes, well, to be clear, we were a little bit lighter in Q1. We didn't signal in Q1 that were going to be kind of at 16% in revenue for the year. Our range is 16% to 18%. And what I'm saying is that, I think we're going that 18% or maybe a little bit higher than that.

And I think what we're seeing is we're signaling that we are doing more network build-out. We did some in Q1. We're going to do more in Q2. And you can expect that that is in anticipation of traffic demand. And there is a lag between building out the network and monetizing it from a revenue perspective. The lag tends to be maybe a quarter or two.

And what we want to make sure we're doing is we want to make sure we're building up the network to support the most aggressive traffic growth expectations. And we have found that if those traffic growth expectations don't materialize, we grow into it in the following quarter. So it's a low-risk proposition for us.

And what we're doing is we're building out for what we think is going to be traffic growth in the back half of the year and we'll see if that occurs, but if it's a little bit less than what we expect, we'll just dial back CapEx thereafter. So I think you're going to see us go through a period of increased network build-out.

And I think you should view that as a bullish sign from the company around what we think is opportunity ahead..

All right. Thank you..

The next question comes from the line of Sterling Auty. Please proceed..

Jim, I think you just answered my question with that last comment, but I'm going to ask it anyway. Media was the big driver relative to people's expectations last year. You mentioned in the first quarter you didn't have the gaming updates, the software updates and the Olympics.

So I was going to ask is growth kind of tapped out here in terms of that side of the business and even maybe even in Security and Performance and what are going to be the incremental drivers to maybe drive a re-acceleration on a constant currency basis off of what we saw, especially on the media side?.

Yes, I think you heard the tail end of it that we're – actually, we're quite bullish on all the businesses. But media in particular, the traffic build-out that we're signaling is we're definitely signaling some bullishness that we have on the traffic side. We'll see, again.

As I said, we build out in anticipation of what we think is an aggressive traffic demand so that we're there for our customers should they need us. If we fall a little bit short of that, it will be just a quarter thereafter that we kind of lower our cap expectations. But we are very bullish about the prospects for security.

So I think you're going to see continued growth in the security space. There's a lot of opportunity as well with Web performance. We're not nearly penetrated on Web performance with customers that, in particular in the international markets, there's a lot more opportunity. Certainly have opportunities in the U.S.

as well, but we're pretty bullish on all the areas that – I think there's secular tailwinds for the company both in media, with more content moving online. I think there's opportunities in security and there's opportunities in Web performance. I think what you're seeing us do is we're investing to capitalize on those opportunities..

But for the second half that you made the comment on specifically, is it winning more customers? Is it more content from existing customers? What specifically is that driver that you're building out ahead of?.

Well, I'm not going to provide guidance beyond the second quarter. I did signal kind of just so that people have an awareness of where we're heading so that it is not a surprise. I think you can expect that it's a combination of both.

It's customers that we currently have and it's customers that we expect may move to the Akamai platform and that's what we're bullish about..

All right. Great. Thank you..

The next question comes from the line of than a Sameet Sinha. Please proceed..

Hello?.

It appears that question was cleared from queue. The next question will come from Gray Powell..

All right. Great. Thanks for taking the questions. I just had a couple, if I may.

How should we think about the EBITDA and operating margin profile in your security business this year given that it's growing substantially higher than the company average and the investments you're making?.

We don't disclose the EBITDA and operating margin of each one of the individual businesses. I think you can expect that the security business is in early-stage growth where we're investing more rapidly than we're seeing in revenue growth, so you can certainly see the security business is early-stage.

And you can expect that we're going to continue to invest in that. We're going to invest in build-out of the network to support what we think is growing demand there. We're going to invest in more security engineering capability, more security sales capability.

So we're going to continue to invest in – it's certainly one of the areas of significant investment for the company. It probably is worthy to note beyond security though, your comment about EBITDA, because I'm sure it's going to come up as a question, so I'm guiding 40% to 41%.

I know we've joked about it on other calls, that I've been signaling this for a while. This is certainly something that we're guiding here for Q2. And I certainly signaled that that is the intent of the company to operate in the 40% to 41% range in the foreseeable future. I did outline a few areas.

Obviously, M&A is a variable that may affect EBITDA margins longer-term, depending upon M&A activity that – whatever that company's profile is. Foreign exchange, depending upon what happens with foreign exchange, we have a little bit of a natural hedge, but it's certainly, as I mentioned, it's EBITDA erosion.

So if foreign exchange continues to see the dollar strengthen, that will obviously have an impact on EBITDA margins, that is somewhat out of our control. And I'd say a third area is, we signaled more network build-out.

I would say if we start to see a – maybe an inflection point and the need for us to build out faster to support our customers, we will do that. And that may have an impact on EBITDA margins. So those are things I would say, as I sit here right now, I think we're going to operate in the 40% to 41% range.

But those are variables that could affect it, higher or lower..

Got it. Got it. I guess maybe the point I was trying to get at and it's not really a 12-month or 18-month question, but at some point, it's probably fair to assume that your security business is not going to have this, like, hyperbolic growth rate that'll kind of slow down and be more like in line with the company average.

And then when that happens, do the margins in the security business tick higher and that naturally give you some kind of a benefit down the road? That makes sense?.

Yeah, I think you can expect that the maturity business scales that the growth rates will slow from, let's face it, we've had growth rates over 100%, some of it benefiting from the Prolexic acquisition.

But certainly, yeah I think you can expect in the near term, it's going to grow well north of the company average because even with the Prolexic acquisition anniversary occurring, but our expectation again, we've talked about the company model that our desire and ambition is to grow to $5 billion by the end of 2020. It requires a 17% growth rate.

We think that there is opportunity for 17% growth rate really in all of our businesses. I think media has that opportunity to grow like that. I think the performance businesses have that opportunity; I think security does. So, I think there are a lot of – each one of our businesses individually have a lot of room left to grow.

So, even though security growth rates, certainly once you go through an anniversary will slow, I think you can inspect that we are not nearly tapped out as far as opportunity in that space..

Understood. Okay. Thank you very much..

The next question comes from the line of Jeff Van Rhee. Please proceed..

Great. Thank you. A couple questions, guys.

First, I guess with the commentary about China Unicom just gets me down the path of the focus in APAC with some of these new relationships, does that meaningfully influence the CapEx outlook? Namely, is the CapEx increase in particular geographically focused? And then the – my second question was around security, and if you could just give us a sense of where you think the core technologies that you plan to add to the portfolio are going to come from? I mean, obviously, there's going to be some organic, some acquired, but you believe – what would be the predominant sort of the bulk of the newer technologies there? Where would they be likely to come from, either the acquired side or the homegrown?.

Yeah. As we develop major new carrier relationships, typically that will be followed with some CapEx deployment to take advantage of those relationships. I don't think any one in particular as a big swing per se, so I wouldn't worry about that in particular.

Obviously, China is a very important market, and so we are going to be working on the relationships there and expanding deployments. In terms of security, we develop a lot of the core technologies ourselves. We also look at partnerships. And as you know, M&A, we did acquire Prolexic last year. As I talked about earlier today, we acquired Xerocole.

Now, Xerocole, I don't think was positioned as a security company with their recursive DNS technology, but that is an important component, technology component for us as we develop our Enterprise Security Solutions that we plan to bring to market next year. So as we go forward, you can expect sort of more of the same that way.

There'll be a lot of organic development. There'll be partnerships. And potentially, we're always looking for companies that have good technology that we can bring to bear for the benefit of our customers..

Great. If I could, just one last quick one. On the Enterprise side, I didn't hear any update along the front of Cisco and more of a, I guess, a general enterprise update.

So can you give us just a sense of the penetration success there relative to expectations thus far?.

Cisco is still in the early stages, so there has been customer adoption. There's a strong pipeline. I don't expect material impact on our revenues this year to Cisco – with the Cisco relationship, but there's a good road map in place and we hope that there'll be success in the marketplace that will start to really have a help to us in 2016..

Got it. Thank you..

The next question comes from the line of Colby Synesael. Please proceed..

Great. Thank you.

Can you guys hear me?.

Yes..

We can..

Okay. Great. Just wanted to go back to the two transactions that you made, the one in the first quarter and the one that just closed in the second quarter. I realize that they're small, but I was wondering if you can give us any financial detail in terms of were they generating revenue, and to the extent they are, I would assume dilutive to margins.

If you can give any color because it does seem when I look at your second quarter guidance that your revenue is basically in line with expectations. Your margins are a little bit softer than anticipated. I'm just curious how much of that might have to do with the M&A.

And then by second question, and it goes back to I guess what Gray was asking as it relates to EBITDA margins. I think you've historically said – not historically, but in your Analyst Day, set expectations on a go-forward basis for 40% to 42%. You're now saying 40%, 41%. I appreciate FX is a 100 basis point impact at least in 2015.

But as we go into those outer years, would you expect that the margins do continue to kind of creep back up toward that 42%? Just trying to get a little color there. Thanks..

Sure. On the M&A front, both Xerocole and Octoshape had very little revenue. That was really not the purpose of those acquisitions. Those were kind of technology acquisitions and people-related acquisitions. They were quite – they had a little bit of revenue, but I would say not material to even comment on. I think we commented in the press release.

Both copies combined had roughly 50 employees. So just do general math on that, you can probably – it's probably a $3 million sequential increase, $3 million to $4 million on spending. They certainly didn't have, obviously, the margin profile that Akamai does. So they're slightly dilutive, not very material, but slightly dilutive to Akamai.

And on the EBITDA front, I'm not moving off the 40% to 42%; 40% to 42% is our long-term model. What I'm suggesting to you is that we're going through a period here where we're probably going to be operating the company at the lower end of that. And some of that, I think, is based on some upon some investments that we think are going to pay dividend.

You know, one of the areas that we talked about is we are doing a little bit more in the way of network build-out, and so I think that is going to pressure EBITDA margins in the near term.

And we probably shouldn't dwell too, too much on EBITDA margins by themselves because I think you need to look at the financial model of the company in aggregate that if our media business starts to explode on revenue and it has an impact on EBITDA margins, I'm not going to be unhappy with that.

I mean, that's a business mix phenomenon that we'll deal with that – and so I think we just want to make sure that we're agile in responding to what we believe is traffic demand. And that's really what we're doing. And I think what I'm signaling is that we're probably going to operate at the lower end of our kind of range.

And we'll see what happens as far as kind of the ecosystem for media. We'll see what happens with the overall macroeconomic environment with foreign exchange. And we'll see what happens relative to M&A for the company. But I would say based on what I shared at the Investor Summit, I do believe that is the right long-term model for the company..

Great. Thank you. Very helpful..

The next question comes from the line of Greg McDowell. Please proceed..

Hi. This is Rishi Jaluria dialing in for Greg McDowell. Thank you for taking my questions. Two quick ones. So you broke out the security business separately this quarter, which is very helpful.

Do you anticipate that we'll see any seasonality in this business that we see with the company as a whole?.

I don't know if you'll really see seasonality.

I think what you might see in the security business sometimes is that because there can be very high-profile attacks that you read about in the media, sometimes when that happens, you do see an uptick in our security business because customers need to be protected immediately, and they'll turn to us to help them immediately.

So you might see some, I wouldn't call it seasonality, but you might see an uptick if in fact you start to see some significant high-profile media events that occur. But I think in general, it's a subscription revenue business, and that's the way it will operate. It doesn't necessarily have spikes based on traffic usage or things of that nature..

Okay. Great. And then just one quick follow-up. You talked about FX headwinds on revenue for the quarter. I was just wondering if you could tell us what sort of impact did FX headwinds have on Q1 in terms of EBITDA and EPS..

Well, you can think that, as I mentioned, it's about a one point EBITDA impact year-on-year. So you can have a general flavor of what the flow-through is of that. Our EBITDA is 40% to 41%. The flow-through is probably closer – on the FX line is closer to 50%.

So you can take that $22 million that I mentioned and then you're probably going to see an $11 million flow-through from a foreign exchange perspective. And obviously, that will flow through to earnings as well..

Okay. Great. Thank you so much..

The next question comes from the line of Ed Maguire. Please proceed..

Hi. Good afternoon. I just got a question about the over-the-top opportunity, whether that involves a new set of customers and new relationships.

I mean, are they – is the growth and opportunity that you see coming from existing customers, or are you expanding? Does this expand actually your base of customers that are going to be doing a lot of business with you?.

Well, it has the potential for both. But as we talked about previously, the large majority of the world's major broadcasters are already sizable Akamai customers. So I think probably a lot of it is from customers that exist with us today, but would be doing new things with us as they move TV content over-the-top..

Okay. Great. And just regarding hiring, which I think that slipped a bit from Q1, could you provide a bit of color on where you're investing at least in field sales and how you expect your hiring plans to track throughout the year? Thanks..

Yeah, we added about a little over 300 people in the quarter. We've been hiring – you're right. We've been hiring in sales, we've been hiring in services, we've been hiring in engineering. So hiring has been pretty pervasive in the company, and it's focused in kind of two specific areas.

One, it's hiring to enable us to grow and it's also hiring to enable us to scale as a company. So we're hiring in all those areas. And you can expect that we're going to continue to hire throughout the year.

I think you're probably going to see us hiring and our spending maybe grow more in line with revenue growth, kind of longer term, but we have been going through a period of hiring and spending, growing faster than revenue. That will kind of continue for a kind of short period of time.

But I think that they're going to see it level off and grow more in line with revenue..

Okay. Great. Thank you..

The next question comes from the line of Sameet Sinha. Please proceed..

Yes. Thank you very much. A couple of questions. It's been about six months since you launched the newer versions of Ion product to your sales team.

Can you talk about the penetration there and the opportunity? I know you kind of indicated that the focus is more on security solutions, but in terms of the adoption rate? Second question would be in terms of mobile.

What sort of strategies or technology approaches are you pursuing and which of them do you think will come out the winner? Do you have any initial sense of which one you would adopt?.

front-end optimization, adaptive image compression, the Shadow Protocol, which we developed for decreasing the frequency of communications of mobile devices and suppressing the headers, so less back-and-forth there.

So, there's a variety of things we do to try to optimize the experience and get around the inherent bottleneck of lack of capacity and high latencies in cellular environments..

Great. Thank you..

Okay. Well, thank you, operator. And in closing, a number of our executives will be presenting at investor conferences in May and June. The details of those can be found in the Investor Relations section at Akamai.com. We want to thank you for joining us and have a wonderful evening..

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