阿卡邁科技 (AKAM) 2002 Q1 法說會逐字稿

Good afternoon. My name is

, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the first quarter 2000 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad, and questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key. Thank you.

Mr.

you may begin your conference, sir.

Thank you operator. Thank you for joining

conference call to discuss our first quarter 2002 results. Speaking today will be George Conrades, chairman and CEO, and Tim Weller, our chief financial officer. Paul Sagan, our president, will also be available during the question and answer portion that follows management's prepared remarks.

This conference call will discuss information about optimized future expectation, plans and prospects that constitute forward looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements.

Of the results of various important factors including but not limited to general economic conditions, as well as specific to the Internet and relating industries, the dependence on optimized Internet conference delivery services, and on our outsource e-business infrastructure services and software. On expected increase in Akamai's use of funds,

services to achieve market acceptance.

In other words, to collect amounts owed by Akamai customers,

to successfully enter into any license, technology development, or other technology partnership agreement within the time periods expected by us or at all. Any failure of Akamai's network infrastructure, an unexpected increase in expenses including increases that result from an increase in bandwidth costs to earlier to achieve incremental revenue growth through increased sales resources in a timely fashion or at all.

Changes in regulation or laws relating to privacy or other aspects of the Internet, the complexity of our services in the networks on which our services are deployed, and human error in operating the same, the failure to obtain access to transmission capacity, the unpredictable amount of time required to engage a customer, and other factors that are discussed in our annual report on

our corollary reports on

and other documents periodically falls with the FDC.

In addition, any forward-looking statements represent our estimates only after today. It should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change. Now I would like to turn the call over to George.

Good afternoon everyone, and thanks for taking time to join us on this conference call.

First I'll summarize our first-quarter performance, and then I'll follow that with some updated guidance for the rest of the year, and then offer some important insight on the nature and evolution of our business.

Overall, we're pleased with our first-quarter results. We saw a modest growth on the topline, and continued strong improvement on the bottom line, reflecting substantial progress in our drive to profitability, while maintaining a healthy balance sheet. We ended the quarter with more than $170 million in cash in marketable securities.

Our first quarter revenue was $37.9 million, right in line with our $37 to $39 million forecast, and up from $37.1 million in the fourth quarter. The revenue mix reflects our contingent success at adding enterprise customers with our higher functionality

offering, while managing turns among the lower end of our customer base. In other words, under that modest revenue growth, our revenue quality has improved.

Revenue from EdgeSuite, our primary growth driver, was 27 percent of total revenue for the quarter, up from 20 percent in the fourth quarter. This is a 37 percent sequential quarterly increase led by 33 new EdgeSuite customers including leader major enterprises such as DaimlerChrysler, Toyota Motor Sales,

, MTV Networks, Footlocker, and Trend Micro, for a total EdgeSuite customer base of 185.

Now the average monthly revenue for EdgeSuite customers was $20,300 versus $19,500 in the prior quarter. Our first quarter

was just $5.8 million, well ahead of our earlier guidance of the $10 to $12 million

. This was the fifth consecutive quarterly drop in

losses, and represents an 84 percent reduction

losses from quarter one 2001. This improvement was driven by gross margin gains, the full quarter effects of our April and October 2001 workforce reduction and some non-recurring gains that Tim will address later in this call.

But by any account, our operating performance in the first quarter was very strong. First quarter recurring free cash flow, which we defined as EBITDA less net interest expense less capital expenditures, with a loss of $12.1 million.

That's a considerable improvement over the $24.8 million recurring free cash flow loss in the fourth quarter. Just over half of the gain was attributable to EBITDA, and the balance came from reduced capital expenditures.

Now, I think you'll agree, our achievements in operating and capital expense reduction over the past year -- a 43 percent drop in cash operating expenses and an 89 percent drop in capital expenditures -- have been substantial. It's also clear that profitable revenue growth continues to be our most important mission, especially given the opportunity we see in enterprise accounts.

And we have a great base on which to build. It begins with our customers and strong market position, and leverages our global in-place network and world-class technology platform.

Our vision remains the same -- delivering content and applications on a common enterprise technology platform -- across the Internet, extranet, and intranet. From content delivery to Edge computing, Akamai is leading the way in creating a global network and software technology that allows enterprise customers to outsource costly and complex applications infrastructure and focus then solely on the creation of great applications that provide them competitive advantage.

In fact, Akamai's technology could, as a new Gartner report states, quote, "profoundly affect Internet platforms for decades," end quote. We continue to add customer-valued functionality to EdgeSuite, enhancing our already attractive ROI for customers, with new features such as Site Shield for denial of service mitigation,

for increased reliability, distributed SSL for online transactions, enhanced DNS and more.

We're also pioneering Edge Computing with industry-leading partners, including our recently announced EdgeSuite for Microsoft .net initiative and our ongoing development of EdgeSuite support for distributed Java applications. And we continue to build on our early open interface success with the ESI standards, in partnership with IBM, Oracle, BEA, Vignette and others.

Our goal is to the distributed computing platform of choice, independent of an enterprise's application or choice of operating system. And I'm more confident than ever of our long-term opportunity and success. And after Tim's remarks, I'll have more to say about Edge Computing.

Near-term, our specific challenge is top-line revenue growth, as the economic environment, particularly IT spending, remains difficult and churn continues, albeit at significantly reduced levels. Simply put, revenue growth is customer revenue additions exceeding customer revenue losses. And let me comment on both of those.

A good indicator of future additions is EdgeSuite sales activity. And there we're making more calls, making more proposals and are engaged in more active negotiations than ever before. We are so encouraged about that that we are adding to our direct-in channel sales force both experienced sales reps and seasoned sales leaders. We're also driving revenue growth with existing accounts by up-selling the more than 20 components of EdgeSuite. And of course, any incremental IT spending would benefit us greatly, although our model currently assumes flat levels.

On the customer loss side, churn peaked in the third quarter of last year. And as I mentioned, this means that the quality of our new enterprise customers each month is substantially better. As pleased as we are with this progress, we believe churn can be reduced even further which will help support revenue growth.

A slight uptick in customer additions, coupled with a slight downtick in churn from current levels, will go a long way to get revenue growing again, and we're doing everything possible to do just that.

Because recurring revenue growth is so sensitive to both customer additions and losses, revenue forecasting is challenging. All of our efforts to drive additions and reduce losses are aimed at producing growth in the second half of 2002.

This now leads me to talk about guidance, near-term revenues, and full-year EBITDA and free cash flow.

Our outlook for the second-quarter revenues is $35 million to $38 million, led by EdgeSuite growth and moderated by our experience in the selling cycle required to achieve success in today's environment within our target markets of the top 2,500 enterprises, the Web 250, and government.

For the full year 2002, our new revenue guidance is $150 million to $160 million versus our previous forecast of $165 million to $170 million. Importantly, our EdgeSuite revenue forecast remains strong at over 30 percent of total revenue for the year.

We believe our best opportunities to exceed this outlook, short of an upturn in IT spending, come from investing in additional direct and indirect field resources, feet on the street if you will, and overachieving on new initiatives such as behind-the-firewall solutions, enterprise content delivery, and the sale of custom offerings to government accounts, both of which are difficult to forecast, given their early stages.

Full-year 2002 EBITDA guidance is a loss of $30 million to $35 million, strong even on lower revenue numbers. The savings would be due in part to conservative hiring levels year to date versus our budget, achieving lower than expected network cost and a significantly improved health of the customer base that has led to lower bad debt reserves.

Our guidance for total cash burn in 2002 is to come in at less than $90 million of negative free cash flow, including the $15 million onetime payment to buy out our Cambridge headquarters

. So we expect to end the year with approximately $120 million in cash and marketable securities, and we are still committed to becoming free cash flow positive during 2003.

And now I'll turn it over to Tim for more details on the numbers, and then I'll come back with some closing remarks.

Thank you, George.

Our first quarter results strongly support our drive towards positive EBITDA and free cash flow. Not only did we end the first quarter with $171.7 million of cash and marketable securities, we took a major step in reducing our real estate costs to strengthen our fully funded business plan.

I'll walk you through the first quarter financial results and our future expectations, emphasizing how the numbers support our strong free cash flow goals. I'll address customers and revenue, network costs, operating expenses and EBITDA, capital expenditures, and most importantly, free cash flow.

First quarter revenue was 37.9 million. We're pleased with the top line, and it provides evidence of our ability to win enterprise contracts in a continued flat IT spending environment. It also reaffirms the power of our recurring revenue business model at a time when many product companies are seeing dramatic declines in new sales opportunities.

Our recurring customer count was 1,055 at the end of the first quarter, roughly the same level as 1,078 at the end of the fourth quarter. During the first quarter, we added 123 gross new recurring customers and lost 146 recurring customers.

The mix of our customer base continues to evolve towards enterprises and higher paying customers. We indicated last quarter that it was our belief the churn bottomed early in the third quarter of 2001. Similar to last quarter, the average revenue per customer of churned customers continued to be less than half that of the remaining base. Churn is difficult to predict, and we won't offer a forecast, but the past two quarters have certainly been encouraging.

Financial distress and a poor capital-raising environment are contributing to customer churn in FreeFlow and Streaming. We also experienced minor competitive churn in these product lines, and we have created some new entry-level offerings to thwart these competitors, but our focus is on EdgeSuite, and there not a competitor with a comparable offering there.

You can see the improving quality of our overall customer base in an average monthly recurring revenue, which increased to $11,168 per month, versus $10,186 per month in the fourth quarter, an increase of almost 10 percent. Recurring customers produced 94 percent of our revenue in the quarter, up from 90 percent the prior quarter.

Another key quantitative measure of customer quality is day sales outstanding for accounts receivable or DSOs. Our DSOs came in at 45 days from the first quarter, well ahead of the 49 days achieved during the fourth quarter, continuing our strong record of collections. EdgeSuite revenue was 27 percent of the total in the first quarter, up from 20 percent in the fourth quarter of last year, and it should continue to increase in the mix.

EdgeSuite average revenue per customer was approximately $20,300 percent, a 4 percent increase versus the prior quarter, and substantially higher than our per-customer FreeFlow or Streaming numbers.

From a customer concentration perspective, no customer was 10 percent or more of revenue in the quarter. Resellers accounted for 25 percent of revenue in the first quarter, unchanged as a percentage of revenue from the fourth quarter, and we saw major resellers continue to drive Akamai Solutions within their sales forces and customer accounts.

International sales continue to be an important vehicle of growth for the company, with 12.7 percent of sales for the quarter coming from Europe and Japan.

Now, one to expenses. Consistent with our drive for additional disclosure, you'll see in today's release that we have broken out more detail on the income statement than in previous quarters. In particular, we've split SG&A into two lines and moved some network operations head count expense from the engineering and development line into cost-of-service to reveal a research-and-development line.

For comparison, we've provided four quarters of historical information in both the new and old formats. But let me describe the key changes. First, we split the S/G/A line into a sales and marketing line and a general administrative, or G&A line coupled with our customer and revenue information, we hope the new expense breakouts will allow you to track the progress on our go-to-market strategy on sales productivity.

And of course, you can now track G&A cost controls as well. Second, we've added network operations head count express to our cost of service line from its previous position in the engineering and development line while our network has minimal operational costs, relative to most global communication service providers, we have decided to include the cost of operations in terms of labor and related overhead in our cost of service line.

For this quarter, the expense was $1.5 million which means the cost of service for our network in the old format was $9.7 million, an over $2 million decline versus the fourth quarter. Third, we've moved our internal IP expenses from the engineering and development line into the G&A line. Fourth, we've relabeled engineering and development line as research and development.

Given the nature of our business and the tight integration of our functions, in our early days, we organized R&D operations and IT into a single unit called engineering and development. In summary, the new format will provide investors greater insight into the technology investments we're making as well as the cost of our network operations and sales and marketing activity.

Now let's look at the numbers and review our cost in the first quarter, starting with the network. Cost of service was $11.2 million for the first quarter. Gross margins were 70.4 percent, landing just above our long-term target range of 65-70 percent. This includes some one-time network charges, netting a few hundred thousand dollars of benefit. It also includes $1.5 million of headcount expense, as I mentioned, from our network operations group, which was previously recorded in the G&A line.

Because we've added this operations expense to our reporting line and not lowered our long-term target of 65-70 percent, we've effectively increased the target on a relative basis. And we continue to press for even better results. As we have discussed on past calls, with the network many times larger than our closest competitors, we can simultaneously expand our server presence to key locations while reducing server purchases and moving existing servers within the network.

continues to be our highest incremental gross margin service, and the mix shift that is occurring speaks well for margins going forward. Freeflow continues to see some pricing pressure, but we believe we can hold margin using three strategies: one, meeting low-end competitors with our own targeted entry level offerings, while extracting higher prices for freeflows full value proposition. Two, continuing to capture bandwidth pricing declines from our suppliers. And three, leveraging our position as the market leader and independent competitor with the strongest balance sheet.

In streaming, we continue to walk away from deals that don't meet our margin requirements, even if we lose revenue from an existing customer. However, streaming is providing positive margin contribution to our business and is an important component of

, so we remain committed to streaming.

Our global network platform is now 12,674 servers in 1,047 networks, versus 13,500 servers in 1,036 networks. These servers are in 66 countries. The server numbers are reaching a mature level for several reasons, some of which we've discussed in past calls. First, this quarter saw the decommission of over 600 servers from networks such as PSINet and at home which were shut down.

When ISPs go bankrupt, we relocate our servers. Second, we continue to employ new servers, but our coverage is already significantly ahead of any competitor and our strategy is to deploy servers where revenue demands occur. Third, we get more efficient in deployment every quarter. Fourth, we're constantly moving, upgrading, and maintaining servers. And fifth, not all servers are the same, and we buy ever more powerful servers each quarter.

In summary, rest assured that we are deploying aggressively into every key network with what we believe is the most capital-efficient strategy possible to maintain a wide lead over competitors in this arena. Our knowlEdge about the Internet, gathered from billions of hits a day, not only makes our service performance number one, but also helps us maximize our return on capital deployed in the network.

We ended the first quarter with 822 employees, versus 841 employees at the close of our fourth quarter. We have a number of open requisitions for new head count, particularly in front-line sales, and overall head count could rise up to 7 percent by year end.

Revenue per average employee on an annualized basis, a key productivity driver, was $182,000, up 20 percent from the fourth quarter of 2001, and nearly 50 percent from the first quarter of 2001, a year earlier.

We continue to hire selectively in key areas such as enterprise sales and research and development. Indeed, we continue to attract top talent, given our market leadership position and strong balance sheet. Our

loss for the first quarter was $5.8 million, well ahead of forecast, an improvement over the $14.3 million

loss in the fourth quarter. This is a significant achievement given our modest quarterly revenue goal. We did have some savings from one-time items, which I'll detail in a moment.

Cash operating expenses, which is the sum of R&D, sales and marketing, and G&A, dropped $5 million in the first quarter versus fourth quarter levels. Our cash operating expenses for the first quarter were almost 44 percent lower than year earlier levels.

I would like to highlight several items, some of which will not recur. First, we did have a large credit from a network partner that will not recur. Second, we had a sequential pickup from our fourth quarter work force reduction, the full impact of which is first seen full quarter in the Q1 numbers. Third, our bad debt expense was actually a gain of $925,000, due to the improving health of our customer base. And fourth, we believe that -- finally, we believe bad debt expense will be at most $500,000 next quarter.

Combining these effects with seasonal issues such as the cost of our annual meeting and year-end filings, we believe overall cash operating expenses in the second quarter could be at least $1.5 million higher than first quarter results.

Now let me provide some details on our large real estate deal announced in March. We reached an agreement to terminate our lease for buildings 500 and 600 Technology Square in Cambridge, the headquarters of our company, for one-time payments totalling $15 million. With an expected $8 to $10 million of annual cash savings, the rate of return made the deal too good to pass. Furthermore, we used $10.2 million of restricted cash as part of the $15 million settlement, so less than $5 million of unrestricted cash was affected. Restricted cash today stands at $16.3 million of the $171.7 million total cash and marketable securities.

The prolonged economic downturn has driven area lease rates dramatically lower. And we are confident that we can realize significant cost savings in our new location. We expect to remain in the Cambridge area, and should have a further update on our relocation plan in the next 30 days.

We recorded a first-quarter restructuring charge of $12.4 million, to reflect the Cambridge real estate settlement, as well as an updated outlook for long-term real estate leases on other properties.

Capital expenditures in the first quarter were $2.8 million, versus the $5 to $7 million we forecast. We believe maintenance levels of capital expenditures will remain low, and now expect to continue to spend in the $4 to $6 million range in coming quarters, as we fund key new initiatives and

improvements in our new headquarters building.

Recurring free cash flow, which we define as

minus cap ex, minus net interest expense, was negative $12.1 million. This is an improvement of over 50 percent from negative $24.8 million in the fourth quarter of 2001. This metric is a combined metric of operational capital and financial risk. We believe that cap X as a percentage of revenue is the best metric of asset utilization, and this ratio declined to 7.3 percent this quarter, down from just under 20 percent last quarter.

Few, if any, global communication service providers have ever reached this ratio as quickly as Akamai, and many never reach it at all. This is the strongest evidence of our low-capital model.

And we continue to believe this ration, in the long-term, will be in the range of 5 to 10 percent of revenue, consistent with leading technology companies.

Overall depreciation was $20 million, of which $11.8 million was for network related assets and $8.2 million related to all other assets. Amortization of intangibles was $5.2 million. Due to

option of

142, we will no longer amortize good will, which is carried at $4.9 million on the balance sheet. Going forward, about $2.2 million represent the good quarterly run rate.

Net interest expense of $3.6 million is a combination of interest accrued on our convertible notes and interest earned on our average cash balance.

Our first quarter normalized net loss per share was 27 cents, compared to first call's consensus summary net loss of 32 cents per share. As always, our normalized loss calculation excludes amortization, noncash and one-time charges. Our first-quarter net loss per share in accordance with GAAP was 54 cents.

Weighted average share account was at 109.7 million shares. Our outstanding share account on March 31 was 115.7 million, while the fully diluted share account was 130.6 million. This is just 2.5 percent higher than year ago levels, so we managed to minimize dilution in the past year.

At this point, let me reiterate our guidance. Second-quarter revenue of $35 to 38 million. Second-quarter EBIDTA loss of $8 to $10 million. Second-quarter cap ex of $4 to $6 million. Full year revenue of $150 to $160 million. Full year Ebathal loss of $30 to $35 million.

Some of the most important current metrics and our belief are as follows. First, EdgeSuite customer account and average revenue per user EdgeSuite is our flagship service, and enterprise penetration and the value proposition are key items to watch. Most important is the quality of the customers and the revenue per customer, both of which we will detail in coming quarters.

Second, gross margins, which represent an excellent proxy to long-term profitability as we scale the revenue line. We believe gross margins in excess of our 65 to 70 percent target range are possible. Indeed, we achieved that this quarter, but we are not ready to raise our long-term target at this point.

Third, annualized revenue per employee, which represents an indicator of overall productivity, particularly in our selling efforts. Once again, we forecast head count growth from 822 level currently, of at most 7 percent to finish with 880 or fewer employees at the end of the year.

Fourth, capital expenditures as a percentage of revenue. This asset utilization metric provides the continuing validation of our low capital model. We'll break out the capital expenditures associated with our headquarters moved as it occurs, so you can continue to see the modest needs of our network. The utilization ratio of cap ex divided by revenue has been our leading indicator of gross return on assets. And we believe it's superior to other metrics, like revenue per server or server counts per se.

Finally, free cash flow. Our commitment of cutting the burn rate to turn free cash flow positive in 2003 remains a top priority. Adjusting for one-time real estate related payments and the twice yearly $8.25 million interest payments on our convertibles, both of which occurred in the first-quarter, you can see that our operating burn rate has improved dramatically, again.

That's a summary of some key metrics which you can track in our financial statements.

Finally, I want to update you on our fully funded business plan. Starting with our $211 million of cash on hand at the beginning of 2002, as shown on our balance sheet in the cash and marketable securities lines. We believe that negative free cash flow for 2002 will be less than $90 million versus the negative $80 million previous forecast, including and absorbing the $15 million of lease termination payments for our Cambridge headquarters move.

Accordingly, we expect to end 2002 with over $120 million in cash. Coupled with our expectation of becoming free cash positive sometime in 2003, you can understand our confidence in our fully funded plan. This assume no additional funding beyond the vendor-financing available to us today. The advantages of our low capital model are becoming obvious as we move toward the all important goal of generating free cash flow.

And now, I'll turn it back over to George.

Thank you, Tim.

Let me wrap this up with some comments about our technology direction and our most important assets is the people at Akamai. The Akamai platform has proven its ability to deliver, assemble and even transform content. And with the emergence of web services and Edge computing, Akamai is ideally positioned to build on our success in the content delivery space by enabling customer applications to run on the Edge of the network.

We're working with the biggest players, both Microsoft and IBM, for example, to develop Edge computing services and extend the benefits of EdgeSuite deeper into enterprises by offering a superior platform for running web services and web applications.

The customer benefit here is several-fold. One is the elimination of the need to build out increasingly complex and difficult-to-manage centralized web infrastructures. Another is the improvement in performance, availability and scalability of their applications, including eventually moving their ERP, CRM and portals, for example, to the doorstep of their end users anywhere around the globe. And third is the opportunity to develop new applications heretofore not possible to take advantage of computing on demand, especially in an increasing mobile environment.

For any enterprise serious about web services and deploying mission-critical applications, Edge computing is the logical next step, and we believe that Akamai will be the optimal service provider to make it all work.

On our last investor call, we talked about putting in place a highly experienced sales team to target enterprise and federal government opportunities for EdgeSuite, including its extension to Edge computing, and we're making great progress.

I'm pleased to report that we continue to penetrate the federal government sector, an important vertical for us. We recently hired

, formerly director of federal ERP application sales at Oracle, to direct our sales effort inside the Beltway. In addition to Keith, we now have a full-time team of seven people devoted to federal sales.

Among new federal customers, key EdgeSuite customers, is the Federal Bureau of Investigation, the latest addition to our strong EdgeSuite government customer list that includes the U.S. Geological Survey, U.S. Army recruitment and the Centers for Disease Control and Prevention, among others.

We're continuing to make important additions to our commercial enterprise sales team as well, most recently with our new VP of West Coast sales,

.

joined us from Remedy Corporation, where he was the vice president of sales for the Americas. We also hired

, who joined us from EMC, where he was general manager for global outsourcing, to help lead our enterprise content delivery initiative.

As you can see, we're not having any trouble attracting great people to come to Akamai to join our team of the world's foremost network engineers, operations and network staff, along with all of the others throughout the company dedicated to carrying out our mission.

So in summary, we had a good quarter. We met our revenue objectives and exceeded our goals for minimizing cash operating expense and capital expenditures. We took some key steps to accelerate our profitability and continued to bring in key personnel with considerable experience selling to the enterprise, and we ended the quarter in a healthy balance sheet.

Now Tim and I will be happy to take your questions. Paul Sagan, our president, is also with us this afternoon. So operator, first question, please.

Certainly. At this time, I would like to remind everyone that in order to ask a question, please press star then the number one on your telephone keypad. We'll pause just for a moment to compile the Q&A roster.

Your first question comes from

of Credit Suisse First Boston.

Hi, George. Hi, Tim. How you guys doing?

Just a couple of questions on EdgeSuite specifically. What are you saying with the sales cycle now, and did you see any EdgeSuite customers turn?

On the sales cycle, we think that EdgeSuite is analogous to any major enterprise software sale. These tend to have longer shelf cycles, and -- but it is variable, entirely variable, depending on each prospect's particular situation.

Our sales cycle is somewhere between three to 12 months for EdgeSuite, so at particularly when we get into newer opportunities, you know, accounts where we haven't been before, and you can see that by the way in some of the new enterprise -- EdgeSuite customer names that we reference. The sales cycle there is longer, but the average revenue for sale is higher.

And did you see any EdgeSuite customer churn?

We had a couple here. The...

Actually,

, the EdgeSuite customer turn was 10 customers, not aware of anybody who's sort of fully implemented this technology and then turned. In a few cases, they were customers who weren't quite ready, and we went back to a different service. And then obviously, we had a financial distress churn as well.

And I'm curious now that you've kind of reshuffled the costs on R&D versus ops, what's the headcount that's truly R&D?

Don't know if I have that number right in front of me. It's always the same apples-to-apples as we have given you before and just over 200.

Great. And last question is you talked about competitors this time around. Can you talk about who it is you're seeing out there in each of your offerings?

Yes, at the high end with EdgeSuite and its increasing functionality, there is no one offering even EdgeSuite let alone the increasing functions that I referenced in my remarks.

At the low end, we are seeing some competition from people like Digital Highland and some smaller players who are offering basic content delivery and streaming offers that are -- you know, they're similar to

. Frankly, they're targeting mostly media with the streaming or freeflow like offer, and they're targeting customers who view cheap bandwidth as a viable low quality alternative where, frankly, price is the most important issue.

OK. Great. Thanks, guys.

Our new question comes from

of

.

Couple of things. Models moved around a little bit again, but can we -- Tim, can you help me understand on the EBITDA, what's the normalized EBITDA so if, you know, you guys were $5.8 million lost this quarter. It looks like on an apples-to-apples basis, it's going to be about even with your guidance for the second quarter. Is that right if we strip out all kind of the one-time stuff?

That's the first question.

Yes, the reason that's difficult to answer, Sanjay, is there are obviously hundreds of elements that go into that. But in terms of some of the larger items I described, you know, you're correct that there's a few million dollars of items I identified. So on the back of the envelope, I'm OK with what you're doing there and that it would be roughly even.

And I did describe that we expect cash operating expenses to go up by over a million and a half dollars sequentially in terms of your modeling.

OK. And then just do you have a deferred revenue number handy by any chance?

I don't. That's not -- we've never really reported on a deferred revenue or backlog kind of a number. We'll ask you to wait for the 10(q) to get that off the financials.

Secondly, can you talk about where the new customers you mentioned, the EdgeSuite customers, and then were there any customers that -- was it more customers transitioning from freeflow to EdgeSuite, or was it actual new signups of customers?

We're starting to see now more of a transition to new signups. As you recall, for the first couple of quarters last year, we reported that number and we were running about half and half from existing versus new. And we're starting now -- we stopped reporting that number in the second half, and we're definitely seeing a continuing trend of more new as we work through the base, and are very focused on obviously new enterprises in the global 2500 web 250 in government.

So if I think about next quarter and kind of drill down on the revenues a little bit, where do you see kind of the softness coming in? Are you seeing less conversions, less

signups on EdgeSuite? It seems like it's 27 percent of our revenues; actually it is, you know, going to be a major component going forward. Is it a price, or is it a pushback on a price, or is it a lower conservation rate?

I don't remember saying we saw any softness as EdgeSuite. We remain very - we're talking about EdgeSuite, so you could assume that that's growing and you know, along the same kind of parameters that we've laid out and that we expect to see a continued turn in some of the areas, you know, some of the other areas. That's the net of our

guidance at this point. I don't want to break off, you know, more detail beyond those two trends.

OK, fair enough, thanks.

Your next question comes from

of Prudential Financial.

Hi. Good afternoon. First off on EdgeSuite. My understanding of EdgeSuite is that it's both a

new and it's going to be a

of services that allow my infrastructure outsourcing. But it's also a different pricing and packaging of, you know, the more fundamental content delivery service as well.

Can you give us some sense of the components of the EdgeSuite sales? And I know it's not simple to do, but at the extent you can, what's really driving them? Is it just that you're packing

better, so we're getting a lot more essentially free-flow for an enterprise customer in a more taxable way, or can you really show us where and exactly what are the new services that are driving those sales, and what percentage of EdgeSuite sales, some of these other components are?

Yes. And I guess I'm sorry it was long-winded, and I don't mean to draw on it. But it's important for us to in order formulate it, you know, a long-term thesis about how you fit in and change the nature of Internet computing forever to really see what's happening and the kind of quarter-in and quarter-out basis in getting to that point.

Yes. Well, first of all, as I mentioned, the strategy here is to create an Edge network and the technology to run on it to distribute, manage, store, process, and deliver information and application at the Edge, you know, on and across IT networks, but out of the Edge. And the fundamental content delivery carries forward. When we started that was all we did, but that has carried forward as an essential component, because you're still delivering content of all kind, you know, the

, or the streaming.

But in addition, we're building functionality at the Edge which leads to further capabilities to compute at the Edge. So EdgeSuite is a currently evolving technology that you can think of as moving up the value ladder as well as moving across Internet, extranet, and intranet. So it's got two dimensions to it: up the functionality ladder, and across the IT network opportunities.

And I named a few of these, but I'll go over them again. EdgeSuite continues to offer a new service, their components. There are over 20 of them now. But together in combination provide things like dynamic content assembly from the Edge, or denial of service mitigation, or network storage, or business intelligence reporting capabilities, and global traffick management, or being able to open up a direct route across the Internet that's significantly faster than what's afforded by the normal BGP routing through routers.

And of course those kind of functionalities not only help customers process transactions faster -- and another functionality which is distributed SSL for example, not only process transactions faster, and even more securely, they're essential underpinnings for Edge computing. So as you take an application and run a Java servelet at the Edge, now you're communicating between the Edge and the origin server over a much more effective and efficient network linkage. In fact, it's essential to being able to distribute the application if you will.

So we continue to add to the functionality, but on your original question, yes, inside that is still the delivery of content of all forms. But we're adding the computing component, and we're adding the essential capabilities to offer flexibility so that one has the confidence to decentralize their application.

Now, can we, you know, specify how many of these components on average that EdgeSuite customer is taking, or what components of these

services. What is are the bigger component that is of the total value of EdgeSuite?

We don't report on that, but we do look at it. And they come in different combinations depending on customers, and it's the reason I said earlier in my remark that one of our concentrations for driving revenue is to concentrate on the up-sell opportunity; because once we're inside an account, then the customer gets to know us, and gets to understand the benefits of our distributed computing platform, and then we can begin to introduce them to new functionalities. And a good example of this is a major retailer that started at $8,000 a month with us, and is now at $85,000 a month with us, because they added increasing functionality, all of it justified on a return on investment.

So we think that by picking the right customers, the high-quality enterprise accounts, and getting in and doing the fundamental distribution of the web content, we can then up-sell on these additional functionalities. And in some cases, it means they don't have to open a data center in some other part of the world such as Asia or in Europe, but they'll want global traffick management, you know, among -- to the various geographies where they're getting the greatest traffick. So we have a number of capabilities that can facilitate whatever their application and technology direction is.

Last question

. I know you didn't say anything about softness

next quarter, but the number -- the guidance is done from last quarter for a full year. What's actually changed that draws that change in the

?

Well, we first of all, we think that we see a longer enterprise sales cycle, there's no question about it. This is the much more sophisticated sale. And although we have had some really great wins in some major accounts that have a lot of potential for us. But we don't think the sales cycle will shorten in the near term.

We have reduced our revenue outlook for

initiatives, also on the full-year for behind for the firewall CBMS, and some custom government work based on our early experience with the sale cycle in those areas. But our enthusiasm for these areas remains high. And of course there's always the current view of flat IT spending.

There's no question that it's hard for any technology company to get a buck out of an IT department these days. So I think that the full-year guidance is reflective of our ship to new enterprise opportunities, albeit ones that we think are the right places for Akamai to be, short and long-term. And it has a longer sale cycle. And two, you know we have some other initiatives that we're implementing that we think are going to take a little longer to gestate.

OK

, thanks very much.

Take care.

Your next question comes from

of Lehman Brothers.

Yes, hi. This is actually

on behalf of Harry. A few questions.

First, if you can relate to us what the current number of sales people is and where you see that number ramping by year-end?

Secondly, you referred to a credit from a network partner. If you can tell us how much that credit was?

And third, in terms of Sockeye, was the revenue contribution about $250,000, or was it some other amount?

Thanks.

Sir, this is Tim. In terms of the sales reps, who I would call feet on the street, both U.S. and Europe, our worldwide total is 57. And as we said, we're going to try to start growing that from here.

Sockeye revenue was at $250,000, same as last quarter and same as quarters going forward, you know, based on the restructured agreement from a few quarters ago.

And I won't say anything more about the credit from a network partner, I guess, other than the fact that, you know, we constantly, you know, look at every network bill and, from time and time, you know, you can find problems and you get into a negotiation. And we did have a credit here from one network of a few hundred thousand dollars net, if you look at that network gain plus other losses, you know, in the plus and minus column. So, I mean, you can imagine that we're in over 1,000 networks, so...

Sure.

... it's a constant, ongoing negotiation with dozens of them, literally. So nothing stands out. I just wanted to point out that you should probably normalize a few hundred thousand out of your number in terms of going-forward run rates.

Thanks. Do you have a year-end estimate for the number of sales people?

I don't. I think if I asked Mike Ruffolo, he'd say as many as he can get

when selling high-quality EdgeSuite enterprise deals.

OK. Thank you.

The next question comes from

of Bear Stearns.

Hi, good afternoon. I think most of my questions have been answered. I just have a couple more on the customer side.

First of all, enterprise customers as a percent of total, and then your top 10 customers' revenue contributions?

On revenue concentration, all we've been breaking out is customers above 10 percent, so this quarter we had none. I'll leave it at that, in terms of concentration. We're clearly happy with the trends there.

And in total, over 85 percent of our customers now are enterprise or major resellers. So, you know, we said last quarter that dot-coms is under 15 percent and declining, and I suspect, going forward, that's a number we will stop reporting as well, because clearly, we're 100 percent focused on global enterprise 2,500. We do still focus on the Web 250, the Lycos and Yahoos and substantial players there, but we've kind of, in 2001, come through the dot-com churn and are really an enterprise company at this point.

OK, great. Thanks a lot.

Your next question comes from

of

.

We didn't hear you. Can you say the name again please?

I'm sorry.

of

.

Sir, go ahead with your question.

Operator, maybe we want to move to the next question?

I'm sorry. Yes, sir, you do have a follow-up question from

.

Tim, can you just give me the number one more time real quick, please, on average monthly recurring revenue? Was it -- could you just tell me what that was one more time?

Are you referring to overall,

...

Yes.

... or just for the EdgeSuite?

No, no. Well, actually, if you have both of them handy.

The average was $11,168 on an overall basis. And for EdgeSuite, it was roughly $20,300.

OK. And then recurring

were 94 percent, is that right?

Ninety-four percent.

OK. So on a go-forward basis, can you just give us some inside into how you expect EdgeSuite to kind of trend on, contributions and revenue through the end of the year? I mean, is that still...

You're coming back at me on that same question again. I'm not going to take the bate. But again, EdgeSuite increases as a percentage of the mix. I will tell you that much. And, you know, as George said in his discussion of guidance, you know, some of the newer revenue, you know, which may or may not be recurring as you get into government, custom work or enterprise CDNs is a little bit harder to forecast, so you'll have to kind of do your own mix, in terms of recurring, nonrecurring. But we're clearly very pleased with the 90-plus percent kinds of recurring numbers we've been seeing. It's the strength of our model.

OK. Great. Thank you.

The next question comes from

of

.

Yes, thank you.

Renegotiating the lease or getting out of the lease was clearly brilliant. You seem to have an opportunity with the bond to renegotiate the bonds or actually do an exchange. Could you just comment on whether or not that's something you've given serious consideration to and, you know, should we look for some progress in that area?

Sure. This is Tim. We have given that serious consideration. It's kind of the same answer I give every quarter. We haven't done anything there yet. But as you can imagine, we're always taking a look at our capital structure. And we view that as purely a sort of capital issue. You know, we watch the stock and the bonds and kind of the relative levels on those two. We're confident in our fully funded business plan today with the current capital structure, but, you know, we're opportunistic folks, as well. So we'll just continue. But I don't have anything new to announce today.

Do you see it analogous to the renegotiating the lease or getting out of the lease?

Analogous to, but anytime I can put up $15 million and get a $8 to $10 mullion a year return I get very interested. And I haven't seen anything like that in the capital markets recently.

OK. Thank you.

Your next question, again, comes from

.

Mr.

, please check to make sure whether your line is on mute.

Can you hear me now?

Yes, we can.

Thank you.

This is actually

from First Union Securities.If you look back to your company where you were beginning at 2000, back when you were trading about

, what was your mix of

versus enterprises at that count?

You're going back a couple of years now. I don't have those numbers at my fingertips. I'm not sure we or the market was really even tracking or interested in that data.

It was certainly Web centric.

Yes, certainly Web centric, in terms of the customer base.

That's what I'm getting at. You seem to be much healthier company from a customer-base standpoint than you were back in 2000.

It's no question about it. We have thousands of customers and thousands of them recurring revenue. At the end of 1999 we only had $4 million in revenue, because we had lost $60 million that year. And, you know, we were at $345. Today, look at our performance. We're a much stronger with an in-place network in software technology that there's no comparison to in the marketplace with a very bright future to help lead the large to Edge computing, you know, which has been going on for 40 years. Right? The decentralization of computing. And so, we're in a much stronger position today than we were two years ago.

Two quick follow-up questions. If you look at -- what's your demonstrable ROI as you go in with EdgeSuite? I mean, do you have any numbers on that yet, as far as, you know, return on investment?

Yes. We have -- GigaGroup did a study that showed, as I recall, something like 85 to 105 percent return on investment over a two-year period. They looked at six EdgeSuite customers, as I recall.

It's very specific to customers, as you could imagine. It also depends on whether they view their existing infrastructure as pure embedded cost, or have, you know, sort of more of an amortizing view of that.

But in some cases, we've literally, as George said, had customers tell us they didn't build a data center and populate it with equipment because they put EdgeSuite in. So you're talking about paybacks that are a little less than a year on projects like that, in the extreme examples. And we have any number of those types of examples. And of course, we'd like to increase the functionality of EdgeSuite to the point where that's the everyday story. So customers can avoid cap X and operating expense and outsource to our infrastructure.

If you look at your server capacity, how big a company can you grow into from a revenue standpoint from your current capacity?

That's a difficult question to answer. I can tell you this, that Free Flow and streaming

, our earlier products, tended to use disks on the servers. And EdgeSuite and EdgeComputing, our newer direction, tends to use the processor more on the server. so we believe the embedded base of network and servers can certainly take us to multiples of growth in terms of revenue levels from where we are today. So that would be a very high-class problem, to fill even the existing network. And of course, you know, server prices have come our way, so we're quite capable of buying more if we got to that level.

Thank you.

Your next question comes from

of

Capital.

Hello. I got on just a few minutes late. I don't know whether you discussed the specifics of the work you're doing with IBM and Microsoft and in particular, the latter company's decision to pull back on some of their dot.net activities to consumers. But if you did, I'll try to catch up later. If you didn't, maybe you could just fill those out a little bit.

Well, just briefly, we -- because of both Microsoft's initiative with dot.net services and IBM's initiative with Edge Computing, we're working with both of them to facilitate this next logical step.

Enterprises using dot.net will be able to get the benefits of distributed computing using our EdgeSuite for dot.net platforms. We'll be jointly targeting enterprise customers. And Microsoft's contributing technical and marketing support while we contribute our expertise in Edge Computing. And we'll be updating as we go. We have had a longer relationship in this regard with IBM and their WebSphere capability. And we mentioned that we are working with them on efforts to deploy Edge Java or computing capabilities with them at the Edge of the network. And I would just say, more to come on that as well.

On the Microsoft joint work, do you have any targets for having a commercial product that you are jointly marketing, or that one or the other of you is marketing?

We haven't talked about those dates yet. That's highly dependent, of course, on interactions with select customers and so forth. But there's been no announcement to date.

OK.

And none of that would affect any of our guidance right now or current revenue base. IBM's a large reseller, and that relationship continues to be prosperous, and Microsoft's a customer, and we continue to do well with them there. So that's really what the current economics are with those two, and any future technology upside is obviously great.

Yes. I have one other -- a certain amount of depth to the question of what an enterprise customer is and dot-com and so on.

But anyway, you mentioned adding 122 recurring revenue customers and losing 146 during the quarter. Of the 146, how many would you have categorized as enterprise?

I don't have that right in front of me, but I can tell you qualitatively, when you look at that list, stacked at the top are names that are in the media and entertainment space. And some of those are enterprises there where you take a big movie or music house and they simply haven't figured out a business model for the streaming activity and therefore, you know, price is all they care about. Or, you know, smaller, Internet-only kinds of media businesses.

And it's a stark contrast when you look at that loss list versus the adds list now on a month-by-month business, which, you know, are enterprises of the types of names that George mentions, and that you and I would recognize, you know, everybody on that list. So it's, I mean, it's pretty dramatic, and obviously EdgeSuite gets sold in enterprises, and that's been the difference.

Yes. Well, I recognize it's not where you're leading the company. But to plug that low end, perhaps Streaming customers, I think you mentioned that you have or introducing some low end products. Are they out there now?

They are. We use them tactically. We'd obviously rather sell somebody FreeFlow, you know, at the low end and EdgeSuite at the high end. But we do use them. We've stripped off some of the features and created, as we've said, an entry-level offering at a little lower price point. But, you know, we're not interesting in pricing anything below cost, so if the bidding gets down there, then we're happy to let a competitor take money-losing business.

Yes. I misspoke when I said I only have one more. Can I try another one?

OK.

You mentioned that certain EdgeSuite customers are experiencing a one-year payback. Is that sufficiently established so that you can use them as referenceable accounts or is this kind of sort of early stage back of the envelope?

No, we have a number of referenceable accounts. For example, ticketmaster.com, they'll talk to $1 million in savings, two times the download speed, 70 percent more ads. You know, we have a number of these. They're written up actually on our Web site.

Oh, OK. Thanks very much.

Yes.

We have time for one more question, Operator.

OK. Your next question comes from

of

.

Hi. The question is, with revenues are not growing dramatically, and maybe there is a chance to convert bonds into equity and with cash and saving of cash to go and buy companies in similar businesses with increasing revenues to create a better revenue base.

Well, I'll let Tim deal with the financing, but we see great opportunity for revenue growth with our continuing EdgeSuite penetration of enterprise accounts and growth in functionality of EdgeSuite. It's a terrific business opportunity.

I'll stay with my previous answer on capital structure. You know, we've given revenue guidance and said based on that, you know, we plan to burn no more than $90 million this year and we plan to turn free cash positive next year. So clearly from our current levels of cash we're very comfortable on the funding side, and, you know, we've got a great product set and we plan to grow this revenue internally, you know, at this point.

But if you look forward -- hello?

Yes?

Yes?

If you look forward and assume you do burn $90 million in revenue next year, then you're only left with another maybe $60 million. And you know how

market is close for businesses like yours right now. What are you going to do? You can't turn the key in last minute.

So let me just correct your math there. We started the year with $211, and we said we'd burn less than $90 meaning we finished the year with at least $120 million and a significantly reduced burn rate. So you would expect that next year, we would cut the burn rate even more and burn even less than this year.

And again, next year, we plan to turn positive on free cash flow. So we're actually feeling pretty good, I think, about that, and as I said, our plan is to internally grow the revenues. And we'll continually consider capital structure issues like we have since the inception of the company.

Yes, look. This is George. Let me just finish off. We are very confident about our ongoing success. We're demonstrating that every day, and the growth in EdgeSuite is the primary example. It's the sweet spot of our company, and it's the sweet spot of where computing's going on. So, I don't think -- and I think -- and we have in our view a fully funded business plan.

So let me just summarize that we had a good first quarter. We met our revenue objective. We exceeded our goals for minimizing cash and capital expenditures. We are taking steps to accelerate our profitability. We're hiring incredibly talented and seasoned people, and we end the quarter in a strong cash position with a reduced burn in the forecast.

So, I think all things considered in this marketplace around us, we're doing well. And I'm very excited about the activity that we're generating in the marketplace, and the things that our engineering and network people are working on.

So let me just close off with that, and we'll see you at the end of the second quarter.

Thank you.

Thank you.

You may now disconnect.