阿卡邁科技 (AKAM) 2002 Q3 法說會逐字稿

Good afternoon.

My name is Daniel and I will be your conference facilitator today.

At this time I would like to welcome everyone to the third quarter earnings conference call for Akamai Technologies.

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 1 on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you.

Mr. Raby, you may begin your conference.

Thank you,.

Welcome to Akamai Technologies investor conference call to discuss our third quarter 2002 results.

Speaking today are George Conrades and Tim Weller, our chief financial officer.

Paul Sagan, our president, will also be available during the question and answer portion to follow management's prepared remarks.

Conference call will discuss information about Akamai's future expectations, plans and prospects that constitute forward looking statements for the purpose of the safe harbor provision of the private securities litigation reform act of 1995.

Actual results may differ materially from those indicated by these forward looking statements.

As a result of various informed factors including but not limited to general economic conditions as well as those specific to the Internet and related industries, the dependence of Akamai's internet content delivery services and on our outsourcing business infrastructure services and software, unexpected increases in Akamai's use of funds, failure of our services to achieve market acceptance, an inability to collect amounts owed by Akamai customers, failure by us to successfully to enter into any license technology development or any other technology partnership agreements in the time period expected by us at all.

And failure of Akamai's network infrastructure.

Any unexpected increase in expenses including increases in bandwidth costs, failure of our sales force to achieve productivity targets in a timely fashion or at all, failure to achieve planned savings in a timely fashion at or at all, changes in regulation or laws related to privacy or other aspects of the Internet, the complexity of our services in the works on which our services are deployed and human error in operating the same, the ability and service and repair outstanding debt, the unpredictability and lengthy amount of time to gauge a customer, and failure of customers to renew new contracts, renew contracts and other factors that are discussed in our annual report on Form 10(k) or quarterly reports on Form 10(q) and other documents periodically filed with the SEC.

In addition any forward looking statements represent our estimates only as of today and should not be relied on as representing our estimates as of any subsequent date.

While we may elect to update the 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.

Thank you, J.C..

Good afternoon, everybody, and thank you for joining us on our quarterly conference call.

I'll briefly go over third quarter results, including achievement of revenue, EBITDA and capital expenditures which are all within our previous guidance.

Then I'll cover our plan to generate positive EBITDA beginning in the first quarter of next year, accelerating our drive to profitability as we strive to meet our most important goal which is to become free cash flow positive in 2003.

Finally, I'll speak about our expectations for future revenue growth.

In the third quarter we achieved revenue of $35.4 million, down slightly from the second quarter.

Let me provide some insight about the strength and challenges in our revenues and the obstacles we face in achieving our gross targets.

Importantly our booking of new gross monthly recurring sales in the third quarter exceeded our churn from [inaudible] monthly recurring sales.

That's the first time that's happened since the first quarter of 2001.

This is a vital step in restoring top line growth and evidence of demand for our high value services.

Revenue from Edge Suite [inaudible] our flagship product proved a 39 percent of total revenue for the quarter, up from 36 percent in the prior quarter and 27 percent from the first quarter.

We believe that Edge Suite is the foundation of our future growth.

We added 32 net new enterprises in the third quarter bringing the total Edge Suite customers under long term recurring contracts to 243, including major enterprises such as Adidas Salomon A G, America Online, Campbell Soup, EDS, Federal Express, Fox Sports, The Washington Post company, and YUM Brands, the parent company of A&W, KFC and Pizza Hutt.

We also renewed an early enlarged edge suite client Semantec and extended our relationship with Yahoo! which is using a wider array of our services than ever before.

Of significance, during the quarter we signed five customers to commitments of more than $1 million per year.

At the same time we continued to experience churn, particularly among our older free flow and streaming segment from weaker customers and resellers struggling financially.

In addition to churn, free flow and streaming essentially bit pushing only businesses continue to see price competition at the low end, and we continue to walk away from unprofitable low value business.

That said, we were very pleased to register our first quarter in over a year in which bookings of new monthly recurring revenue outpaced losses of monthly recurring revenues.

Obviously as we continue to penetrate major enterprise accounts and the Federal government with our edge suite whole site delivery and edge computing offering, we expect to further reduce the impact of legacy customer attrition.

While revenue was down slightly in the third quarter, we were nonetheless able to match costs with revenues.

As a result, our EBITDA in the third quarter was a loss of $6.7 million, a 20 percent improved over EBITDA loss in the second quarter of $8.3 million and a 60 percent improvement over a loss of $16.6 million in the third quarter a year ago.

As always, we calculate EBITDA as our earnings before paying interest, taxes, depreciation and amortization.

Total cash flow in the third quarter was a loss of $18.3 million.

Now, this actually compares favorably to second quarter's $11.5 million cash burn when considering we made the semiannual interest payments of $8.25 million in the first and third quarters and additionally we paid $2.7 million on our headquarters move this quarter which is included in the $18.3 million of total cash burn.

We end the third quarter with a balance of $142 million in cash and equivalent, keeping our business plan fully funded as we look toward generating free cash flow next year.

As always, we calculate free cash flow as the change in cash and marketable securities from the beginning of the quarter to the end of the quarter, i.e., our cash burn.

Now let's turn to our future outlook and operating plan.

Today we're announcing several important steps we're taking to better position the company for the future and to help ensure that we meet our goal to become free cash flow positive in 2003.

With the economy continuing to put negative pressure on high tech spending, we've taken a hard look at the markets and the customers that we choose to serve and have aligned our go to market plan and our service offering with the most productive opportunities while significantly reducing infrastructure expense.

This morning we implemented a 29 percent reduction in our global work force and we expect to end the year with 550 employees.

Virtually all affected personnel have been notified.

It's a painful decision to process for all involved any time a company undergoes a work force reduction, but we don't take lightly asking some of our colleagues to leave the business and we thank them for their efforts on behalf of the company.

Importantly, we design the reductions in head count to preserve our investment in our direct sales and customer phasing technical resources as well as in the core engineering and network resources that have earned Akamai a seat at the table with major enterprises as a trusted technology partner.

Many of the go to market and product decisions were made in consultation with key customers including members of our customer advisory board.

The result is that we are strengthening our primary focus on our Edge Suite service including the exciting potential we see for Edge Computing.

We've been winning here and want to accelerate the pace of success.

Of course we are committed to continuing to offer our market leading streaming and free flow contact delivery services.

In total the cost savings from these initiatives are expected to be 30 to $35 million annually having positive and immediate impact on both EBITDA and free cash flow.

In fact, we believe that even at current revenue level, the new cost structure would lead us to the EBITDA positive in the first quarter of 2003.

Which begs the question when will revenue begin to grow again?

For us revenue growth occurs when gross monthly recurring revenue, what we call GMRR exceeds lost monthly recurring revenue, LMRR, over time.

As I mentioned, this happened in the third quarter for the first time in a year and a half.

However, revenue didn't immediately grow this quarter because recurring revenue lagged new booking by a month or two.

Also nonrecurring revenue was down slightly.

For the third quarter we had GMRR of one and a half million dollars in total, or $18 million of new annualize revenue.

As I mentioned we substantially reduced churn from the peak in the summer of 2001, but it continues to be a challenge.

For the third quarter our lost monthly recurring revenue was $1.2 million in total, or $14 million annualized.

You can be sure that all of our sales and marketing efforts are focused on growing growth monthly recurring revenue while minimizing revenue loss.

Now, the opportunity for further improvements in net new monthly recurring revenue comes primarily from the improvement in the quality of our customers supported by solid credit and customer risk assessment and a strong collections process.

In addition, the effectiveness of our sales team continues to improve with their time in the field.

To improve productivity even further, we added Mark Vargo, a 10 year veteran of EMC to lead our marketing team.

Now, Mark and his people have already rearchitected our sales training, collateral, marketing priorities and go to market strategy.

All of these actions will help drive our gross monthly recurring revenue.

And now I'd like to address our guidance for the current quarter, fourth quarter.

Revenue for the fourth quarter will be between 32 to $35 million.

Our guidance for EBITDA in the fourth quarter is a loss of 3 to $5 million.

Our guidance for capex in the fourth quarter is 2 to $3 million.

We believe our business plan is fully funded and the steps we're taking today to further reduce costs strengthen our cash position.

Now I'll turn it over to Tim for more details on the numbers.

Thank you, George.

Our third quarter results support our unrelenting drive towards positive EBITDA and free cash flow.

We ended the third quarter with 142 million of cash and marketable securities and took dramatic steps to lower our cash burn rate while maintaining strong customer relationships and revenue opportunity.

As George mentioned we had a major head count reduction today bringing our overall head count to 789 at the end of Q3 to an estimated 550 at the end of this year.

We anticipate severance costs of 3.5 - 4 million.

We expect the reductions and other cost cutting measures to yield between 30 and $35 million of savings per year helping to dramatically accelerate our EBITDA and free cash flow break even targets.

We completed the move into our new Akamai headquarters building so we can start to see the benefits of the $9 million annual dollars of cost savings in this current quarterly.

Now, I'll walk you through the third quarter financial results and our future expectations.

I'll address customers and revenue, network costs, operating expenses and EBITDA, capital expenditures and most importantly free cash flow.

Revenue for the third quarter was $35.4 million versus our guidance range of 35 to $38 million.

We are pleased with the stabilization of top line in spite of some churn, as it provides further evidence of our ability to win key enterprise contracts in a continuing flat IT spending environment.

Revenue from recurring customers was 94 percent of overall revenue for the quarter versus 93 percent in the prior quarter.

Our recurring customer count was 975 at the end of the third quarter versus 1 ,034 customers at the end of the second quarter.

During the third quarter we added 86 gross new recurring customers and lost 145 recurring customers.

Our average monthly recurring revenue was $11,000 per month versus $10,750 per month in the previous quarter.

We ended the quarter with 243 Edge Suite customers up from 211 the previous quarter.

We indicated last quarter that it was our belief that churn bottomed in the third quarter of 2001 and churn improved again this quarter on a dollar basis.

The churn we continue to experience in free flow and streaming continues to be largely attributable to the financial distress of some of our reselling partners and smaller retail customers and a poor capital raising environment.

Churn from competitors has been minor and to the extent free flow customers leave us for a competitor it is often because we have terminated them for nonpayment and other financial difficulties as we focus on building a profitable business around Edge Suite a business which we continue to face no major competition.

Consistent with the trend of the past year, the average revenue per customer of churn to customers continues to be less than half that of the remaining base.

As George mentioned, we believe our customer base is healthier than ever.

Day sales outstanding for accounts receivables or DSO's came in at 43 days for the third quarter - the same as last quarter's performance, attesting our strong record of collections.

Edge Suite revenue was 39 percent of the total in the third quarter, up from 36.4 percent in the second quarter.

We are obviously excited that Edge Suite contributes so substantially to our overall growth within only a year and a half after its introduction.

We think that this is the best statement of the value Edge Suite provides.

Edge suite average revenue per customer was approximately $20,200 per month.

This continues to be a blended average resulting from us targeting entry level customers in the 10 to $15,000 per month range with large enterprises at 50 to $100,000 per month or more.

No customer was 10 percent or more of revenue in the quarter.

Resellers accounted for 22 percent of revenue in the third quarter versus 23 percent in the prior quarter, down slightly as some of our 50 plus resellers continue to face a tough financing market or pending bankruptcy.

International sales contributed to the top line as well accounting for approximately 13.8 percent of sales for the quarter versus 13.4 percent in the prior quarter.

We can expect a portion of these sales to decline next quarter as we are consolidating our international operations to focus primarily on Europe.

Now let's review our costs in the third quarter starting with the network.

Cost of service was $9.6 million for the third quarter versus $10.9 million in the prior quarter.

Gross profit was $25.8 million or 73 percent of revenue as we continue to sell higher margin Edge Suite services.

With the network many times larger than our closest competitors, we can simultaneously expand our server presence to key locations while reducing server purchasers and moving them within the network and we have a long track record of network optimization.

Edge Suite is highest gross margin major service and the makeshift occurring speaks well for margins go forward.

Free flow continues to see pricing pressure but we believe we he can hold margin with three strategies - 1) meeting low end competitors with our own target entry level offerings while holding our prices for free flows value proposition, 2) continuing to lower or network costs and 3) leveraging our position as the market leader in independent competitor with the strongest balance sheet.

You see by performance in the past year in spite of low end competition of free flow we can deliver solid gross margins.

Streaming, as a stand alone product continues to be a stable and profitable business and it's important component of edge suite while we are the leader in streaming, we do walk away from deals that don't meet our margin requirements even if we lose revenue from an existing customer and remain committed to supporting streaming.

The size, scale and functionality of our underlying network are a key to optimize superior value proposition.

Our global network platform is now 12,942 servers in 1105 networks located in 66 countries.

Revenue per average employee a key driver of productivity was 177,000 annualized consistent with the 178,000 annualized from the first quarter and this will obviously change significantly next quarter.

Our EBITDA loss for the third quarter was just 6.7 million versus an $8.3 million EBITDA loss in the second quarter.

Cash operating expense which is the sum of research and development sales and marketing and G&A was $32.5 million, down $1.2 million sequentially from last quarter and down almost 25 percent from the prior year period.

Capital expenditures in the third quarter were $7 million or 20 percent of revenue.

Well within our guidance of 6 to $8 million, of which 4.4 million was associated with one time moving costs and leasehold improvements connected to our move to move to 8 Cambridge center.

We believe fourth quarter capex will be in the two to $3 million range.

You've heard me constantly repeat that the low capex as a percentage of revenue is the strongest evidence of our low capital model and we continue to believe in this ratio in the long term will be in the range of 5 to 10 percent of revenue consistent with leading technology companies.

Recurring free cash flow which we define as EBITDA minus capex minus net interest expense was negative 17.6 million in the third quarter, a dramatic improvement from the 33.5 million in the year ago quarter.

Overall depreciation was 20.7 million of which 11.2 million was for network related assets and 9.5 million related to all other assets.

Net interest expense of 4 million is a combination of interest accrued on our convertible notes and interest earned on our average cash balance.

Our third quarter normalized net loss per share was 28 cents, in line with first call consensus summary net loss of 28 cents per share.

As always, we calculate normalized loss as loss minus amortization, noncash and one time charges.

Our third quarter net loss per share in accordance with GAAP was 42 cents. a complete reconciliation of our normalized loss and the GAAP loss appears in our press release.

Weighted average share count was 114.3 million shares.

Our average -- outstanding share count on September 30th was 116.6 million shares.

Fully diluted share count which includes outstanding warrants and stock options was 134.9 million.

At this point let me reiterate our guidance.

Fourth quarter revenue of 32 to $35 million, fourth quarter EBITDA loss of 3 to $5 million, fourth quarter capex of 2 to $3 million, EBITDA positive for the first quarter of 2003 free cash flow positive in 2003.

First, severance costs for today's work force reduction are expected to be three and a half to $4 million in the fourth quarter.

Secondly, we have a contract with CNN which the carry over from an acquisition in early 2001, and details are disclosed in many of our past public filings.

This arrangement could require us to pay up to $10 million later this year payable in stock or cash at our discretion.

We have not yet determined whether it will be stock or cash, but we will balance dilution concerns with a desire to maintain a strong cash balance.

So summarizing our cash position, we believe when considering these immediate needs, our year-end cash will be between 110 and $120 million.

Finally, let me make a personal comment.

As you may have read in our released to after three years of service I've decided it's time for me to step down as Akamai's CFO after a transition period.

I told George I expect to depart by the end of the year and will continue in the interim to oversee all of our finance and IT functions.

During my time here Akamai has been through the best and worse of economic times and not only survived but also emerged as the leading player in distributed computing, mentioned in the same breath with companies like Microsoft IBM and Oracle.

I came here from Wall Street intrigued by the big idea of distributed computing made possible by Akamai's algorithms and I've seen that gain widespread adoption with the enterprise customers.

I believe the company is positioned for long term success.

I personally had a great time and learned something every day and I want to thank all the employees, especially my finance and IT team, for making Akamai is a great experience.

A search for my successor has been started and I'm committed to Akamai's long term success so I'll make sure the new CFO is ready to hit the ground running.

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

Thank you, Tim.

All of us at Akamai appreciate Tim's many contributions from the IPO in 1999 to today where we benefit from a first rate financial team and information systems that he's put in place.

We're also privileged to have benefited from his high intellect and integrity over the last three years.

One measure of a person's success is his legacy and the strength of Tim's team and our internal controls are world class.

I'm already working to have a new experienced CFO in place shortly allowing Tim to make a complete hands off in plenty of time to transition the business before year's end.

Now I'd like to wrap up with the following remarks and why I'm so confident in Akamai's long term success.

As we've said, we're taking dramatic steps this quarter to ensure that long term success to improve our ability, to internally fund our operation and achieve our profitability target.

We believe this is an important initiative to further enhance customer and investor confidence in our compelling story.

By prioritizing our marketing and developing effort on Edge Suite, including edge computing and focusing on global enterprises, government and only the top web properties, we are positioning the company squarely in the suite spot of our technology advantage and customer opportunity.

We're also working to improve sales productivity through technical exchanges with our best customers to co-invent the future, increasingly we are valued by expert buyers for our technology platforms, our network intelligence and Internet know how as exemplified by our recent wins with AOL and FedEx.

AOL is one of the largest networks as you know and owns a premiere line up of online brand.

Our relationship not only includes a broadened network deployment, but also the opportunity to deliver an increasing amount of AOL's own content on that network.

With FedEx we are partnered with a globally recognized enterprise that is using bids to revolutionize its business of shipping packages and is one of the saviest users of technology.

More importantly with each enterprise customer we bring onto the edge suite platform, we widen the significant gap between Akamai and would be competitors who continue to compete primarily with free flow for basic content delivery and streaming services.

A category that Akamai pioneered, a category where we are the low cost producer, and a category in which we continue to compete for quality business.

That leaves us the leader in the delivery of high value information and distributed applications with edge suite where our primary competition is the status quo and legacy systems meaning that although sales cycles are long, the barriers to switching are high once we land a customer.

Increasingly Akamai is being recognized as an innovator in the processing of distributed applications on our global edge network eliminating millions of dollars of infrastructure costs for our customers while improving their internet performance, security and reliability around the world.

Just 18 months ago Edge Suite was a new service with a few adopter customers and a fair share of detractors who said the dynamic assembly content on the edge of the network was technically impossible.

Today Edge Suite is fundamental to major enterprise customers, including 29 members of the Fortune 500 which use it to communicate and transact with their employees, partners, investors and customers.

But of course we're not stopping there.

We're part of a distinguished group of technology companies including IBM and Microsoft that are pioneering web services and edge computing to revolutionize the ways companies do business by using the Internet.

Already we are working with Edge Suite customers to explore the additional benefits of edge computing, to scale applications quickly and break the deployment bottleneck.

Finally, we're a key participant in the Federal government's national infrastructure advisory committee or the NIAC which helps the nation secure its electronic assets from attack.

We believe this distinction came to Akamai as a result of the important role we played for over 20 agencies of the U.S. government, including the White House, the FBI, FEMA, the U.S.

House of Representatives, the Department of Education, the CDC, the Voice of America and the U.S. Army.

Our customers' business is on Main Street, not Wall Street. and though the capital markets continue to weigh negatively on companies like Akamai, customers validate our solution every day because they recognize the real business value we generate, the innovative technology we've developed and our staying power as a service provider through this difficult market environment.

I want to thank you for your participation on our call today.

And now Tim and I will be happy to take your questions and Paul Sagan our president is also with us this afternoon for questions.

So, Operator, first question, please.

I would like to remind everyone that if you wish to ask a question, please press star then the number 1 on your telephone keypad now.

Please hold for your first question. [Pause.] Your first question comes from Venice Edelson.

Hi.

Can you hear me?

Yes.

Okay, great.

Just a quick question.

As I've mentioned in the past, it seems like what's going on with cable and wireless just seems like an example of tit-for-tat.

Would you be able to comment on their latest request for an injunction?

Does that mean anything?

No.

This is Paul Sagan.

We really don't believe that it does.

And I won't get confused with tit-for-tat.

Their strategy has been to respond to our victories in court by throwing up smoke in mirrors.

I want it remind you that we face scores of competitors, virtually all of them we've taken on only in the market.

In two cases we found people who we felt egregiously stepped across the line and misappropriated our technology and felt we needed to seek redress in court.

We found and received a verdict in our favor against Cable & Wireless for infringing on our patent.

They've been told to stop doing so and we expect to have a damages trial next year.

Part of their strategy has simply been to throw every patent they can find at us as a distraction.

They sued us and a jury found that we didn't infringe their technology.

They've continued to throw things up.

We don't believe we infringed their technology and it's a side show to the case.

Okay, great.

I like the term smoke in mirrors more than tit-for-tat.

Thanks

Do you want to follow-up on another topic?

That's it for me.

Okay.

Operator our next question?

Your next question comes from Andy Sheer.

Hi, from Tier 1 Research.

Few questions here.

Tim I want to wish you all the best as you lead.

I was hoping you could give some context for your reasons for leaving if you could start off with that.

Sure, Andy.

As I said, I've been here for three years.

Feel like I've kind of done my thing here, the company's new cost structure leaves us at EBITDA positive on a run rate basis. and as you know I was in your business before this and sort of still recovering from the tail effects of a bull market so I've been going at it hard for nine years and take a little time off and then kind of look for the next thing.

All the best to you.

George, on a similar note there was a new employment agreement for you.

Just to make sure I didn't over read that or over analyze that, you're still with the company in full support, the board all that kind of stuff?

Oh, absolutely.

I love this company.

I'd work for it damn near for free.

My salary is $20,000 a year.

I own all my stock and the board said, you know, there's a flip side to that, so let's offer him some options, which they did.

However they clipped, and if I don't hit certain targets, I don't get any of it.

And I love it.

We're going to do and more so I'm excited about this company and about its future.

Great, thanks, George.

How about any thoughts on potentially buying back any of the debt since its trading on 50 cents on the dollar?

Andy, I gave the same answer we've given you every time.

We do look at the capital structure often.

Obviously it's trading at a significant discount.

We have had for probably better part of the year conversations with different bond holders and it's something among many different capital structure items that we do consider, but certainly nothing to announce on that topic today.

Okay.

On the $5 million plus deals that you signed, were any of them government entities?

I believe one of them was, yes.

Great.

And on the expected head count for year-end, can you break that out in any kind of different business areas, sales versus engineering, anything like that?

No, not at this time.

We know what it is, but we are not going to provide that at this time.

Specifically to the sales side you said there were about 60.

That's probably going to be maintained, though?

That's right.

We're not reducing the -- that number.

Gotcha. and as you're resigning and redoing some of your bigger contracts with Yahoo! and AOL and the like, can you give a sense on any changes in the overall revenue impact?

I assume there's some decline on prices but increase in usage on different services and the like.

AOL is net new additional to us in the main, and Paul you might want to comment on Yahoo!

We don't comment on pricing for specific customers, but we've always said that we give increasing discount for large volume and we see volume going up with our largest customers and that makes for a happy a agreement for both sides.

Final question.

Would you give any comment on average pricing for megabit on the free flow side.

No, we've never broken that number out.

Any sense of the change in magnitude?

I'll stop trying there.

Over time we've said we thought and expected model the prices would decline and that's always been the case.

Your biggest clue there in the public financial statements is obviously the gross margin which is really what we care about and as a spread to, you know, basically our entire network cost versus what we charge customers.

Obviously with Edge Suite at 39 percent of revenue now, free flow and streaming pricing is far less of a factor and you can see that in the gross margin.

We've been able to hold those in fact expand those nicely over the last year in spite of that price decline.

So the math is working in our favor on that one.

On the CNN --

Andy, I think that's nine questions and that's a record for one person on the call.

We ought to let somebody else get in here I think.

All right, thanks.

Thanks.

Operator, next question.

Your next question comes from Charles Newens.

Yes this is Chuck Newens.

One is can you give me some idea as to how it's going to layout with cable and wireless as far as the suit?

Where is this suit and what sort of timetable might it be on?

Well, what we've said, we've given updates there have been conclusions, the first was the trial last December where they were trying to infringe our technology.

We had bifurcated that case so there is a separate damages trial and we expect that by next summer, as you know the legal process goes, extremely slowly.

But we felt it was a step we needed to take and we'll continue to prevail on the case going forward.

But I'm asking more about the latest charge of them against you.

Where did that play out and on what time table?

We don't think we infringed that technology.

I can give you a timetable for that to go away.

We'll fight it vigorously as we did what we thought was the frivolous claim before that we prevailed on in court.

I can't tell you a timetable how long that will take for the final resolution.

That's up to the court as much as or actually more anybody can control externally.

And on the CNN payment, can you expand upon that a little bit, give us a better understanding?

Sure. a couple things.

One is I would refer you back to the 10K and some of our past 10Qs.

This is the deal that we inherited in our interview acquisition back in early 2000, and what we did is had a performance guarantee in the contract for our stock price with CNN, given the decline in the stock we may owe them up to $10 million.

It is payable in stock or cash at our discretion, and as I said, obviously we'd be balancing dilution concerns here with a desire to preserve cash.

So we're going to work through that in the fourth quarter and all of our guidance that we gave is inclusive of that.

It's a onetime payment to them and not connected to anything else.

Thank you.

Operator?

Your next question comes from Preshant Gupta.

Hello.

Can you hear me?

Yes.

Hi.

I have like three questions.

I wanted to know, can you give us a division of you know how many customers you have for Edge Suite sitewise and free flow service?

We've actually ever own broken up edge suite by specific service, so we won't give any of the others.

But clearly in the case of free flow, if you look at the total number of customers, 975, free flow is obviously hundreds of customers and streaming is hundreds of customers.

Those would be the two largest in terms of customer count.

But some customers have more than one offering.

Ok, how many customers have you taken from you competitors.

Our competitors have traditionally not had many, so it's really not a question of taking very many from them.

Ok the last question, what happened to your Edge Suite for corporates that you announced last quarter and which you had one customer [inaudible]

What has happened to that is we have decided emphasize Edge Suite and Edge Computing because we see steady demand from customers - both new customers and upsell.

And we have decided to put the behind the firewall product behind the back burner, with the exception of some custom opportunities that we have, while we concentrate our resources on what's selling today.

Doesn't mean it's out of our product plan or that we wouldn't develop products with an eye to behind the firewall, but we are not emphasizing it to the extent that we have in the past.

Thank you.

Your next question comes from Doug Campbell.

I think, maybe getting lost in this as far as stock market is concerned, is that you guys introduced Edge Suite a year and half ago and you have 243 and a 50 million plus run-rate which sounds good to me.

Just wanted to ask about the functionality that you are driving for and also in conjunction with the reduction in your R&D budget over the last few quarters, I think its down a third or so in the last four or five quarters.

Are there specific areas that you can de-emphasize with respect to R&D and put the remaining resources on functionality that you think will drive new sales or expand it's penetration.

What is the offset to a lower R&D?

I first want to point out one number for you and I'll hand to George for some additional comments.

If you'll recall at the beginning of this year, given our sort of longer term development efforts, we started to have an increasing amount of capitalized software development in the capex numbers.

So one thing to be cautious of is when you look at the R&D numbers you need to look at both R&D and capex in concert.

It actually today has not come back in dollars as much as you might be seeing if you are looking back 4 or 5 quarters.

We clearly though have done a fair amount of prioritization and as George said certain areas or products were affected by today's action and I'll ask him to make some further comments on that.

As you guys have probably all figured, we have a common basic server and technology platform on which we build functionality so its a little bit more complex than dropping products per se.

In fact Chris Shuttle (ph) who heads our network and engineering organization often reviews with us that over a 150 different sub-technical components all of which interlock in one way or another.

And what we have done her is to take a hard look at only those that are consistent with what our key customers, and that's why I made the comment that we work closely with our customers, we review all this with them, and basically what is really needed by enterprises who want to extend and control their e-business or e-government infrastructure using the internet have to do with whole site delivery, security, personalization of content, dynamic personalization of content, GO targeting and bandwidth detection.

And of course the exciting area to build on all of that, Edge Computing, where now they can begin to think about looking at the way they present their web information and at a touch of a bottom the customer can begin to do some exciting things for themselves in applications that are fast in response.

And where a customer themselves can deploy new computing applications quickly because this global infrastructure exists.

The customers have hammered on that and helped us prioritize on that some of these others are nice to have and in any event if they weren't in that fundamental stream that it takes to build towards this edge Computing, let's reconsider how much engineering resource we have on that.

That's in general, how we got at the engineering reduction.

We are concentrating on the sweet spot of our technology advantage as defined as the kind of customers that we want to keep for life where they say you are a key player at our table and we want to grow with you, but we need you to co-invent with us.

Because a lot of this e-business infrastructure and e-government infrastructure is relatively new and they have a lot of things that they want to do and the internet is still an unpredictable place.

So that is how we chose the technology and thus the engineering resources that we wanted to concentrate on.

Operator, I think we can take one more question.

Ok, your next question comes from John Heddinger

I was just hoping you could comment on the projected slight decline in revenue during the next quarter versus the quarter that just ended.

Without getting too much into all the different product lines, you did hear George say that in the near term we will be de-emphasizing some of the commercial behind the firewall activities.

We have a couple of other things, in terms of contracts that were winding down in some other areas this quarter as well.

The one thing that we are always struggling with is the forecast of bursting revenue, which is basically traffic that we get in excess of minimum commitments.

So we always try to forecast a reasonable level there.

We actually had a very strong September.

Certainly we have our fingers crossed that we can get some strong numbers there and aim towards the higher end of the range.

But that's something that we try to forecast at the mid-level.

Ok, thanks.

Thank you all very much for your participation in the call and your great questions.

We appreciate it very much.

Thanks for your support of the company.

Goodbye.