阿卡邁科技 (AKAM) 2002 Q4 法說會逐字稿

Good afternoon.

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

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

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer period.

If you would like to ask a question during that time, simply press star and then the number one on your telephone keypad.

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

Thank you.

I will now turn the conference over to Mr. JC Raby Director of Investor Relations Mr. Raby, please begin.

Thank you for joining Akamai's investor conference call to discuss the fourth quarter 2002 results.

Speaking today will be George Conrades, Chairman and CEO, and Bob Cobuzzi, our Chief Financial Officer.

Paul Sagan, our President, and Mike Ruffolo, Executive Vice President of Global Sales, Service and Marketing will also be available during the question an answer portion that follows management's prepared remarks

This conference call will discuss information about Akamai's future expectations, plans and prospects that constitute forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995.

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

As a result , various important factors including but not limited to, general economic conditions as well as the specific to the internet and related industries, the dependence on Akamai's internet content delivery services and on our outsource infrastructure services and software, unexpected increases in Akamai's use of funds, failure of our services to achieve market acceptance or timing of acceptance, inability to collect amounts owed by Akamai customers, ability to service and repay outstanding debt and other factors that are discussed in our annual report on Form 10-K, our 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 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.

Finally a reconciliation between GAAP and nonGAAP financial measures appears on our website.

Now I'd like to turn the call over to George.

Thanks, JC.

Good afternoon, everyone.

Thank you very much for joining us on our fourth quarter 2002 conference call.

In the fourth quarter we achieved, for the first time, profitable EBITDA, a quarter ahead of our guidance.

EBITDA defined as earnings before interest, taxes, depreciation and amortization, was positive $3.1 million.

We also improved our net loss, quarter over quarter, by $14.3 million excluding restructuring charges.

These results demonstrate continued improvement in our fundamental business operations, on the way to our goal of becoming free cash flow-positive by the end of 2003.

And despite the macroeconomic challenges of 2002, we also were pleased with our full-year performance, particularly the significant improvement in the quality of our customer base as well as the many improvements we have made in our operations.

In Quarter 4, revenue was $35.4 million flat with the third quarter and consistent with our guidance.

What is not evident in these results, at least not yet, is the continuing improvement in the quality of our customer base and the impact of our second consecutive quarter of net positive bookings.

We define net bookings as the net result of the addition of new long-term customers, those are those entering into contracts that are 12 months or greater, plus existing customers either upgrading current services or committing to new services, less churned customers and downgrade.

We continue to add new customers at much higher average revenue per month than that of churned customers.

During the fourth quarter, we added customers at two times the average revenue per month than that of churn customers, because we're a recurring revenue business with customers under long-term contract, the significance of net positive bookings is in future revenue growth.

Finally, capital expenditures in the fourth quarter totaled $900,000 after accounting for a one-time $1.7 million tenant improvement rebate even is including the rebate our $2.6 million in capital expenditure was better than guidance and continues to underscore the power of our business model.

I'm now going to turn the call over to Bob Cobuzzi, our new CFO.

Bob has come up to speed quickly and will give you the details of our financial performance and highlight the improvement in our underlying fundamentals.

I'll be back after Bob to share some insights about our business, the markets in which we compete, and why I'm so excited about our business prospects in the coming year.

Thank you, George.

And good afternoon, everyone.

Before going through the quarter in detail, I would like to preface my remarks by saying our fourth quarter financial results support the decision and actions we undertook during the period, to reduce our overall cost structure while maintaining our high level of customer service in approving productivity.

Overall employment was reduced by 29 percent to approximately 550 employees at a one-time cost of approximately 3.6 million.

The reduction in staff is expected to lower our annual operating cost between 25 and 30 million.

Revenue per average employee in Q4, a key driver of productivity, increased to 210,000 annualized.

First, 177,000 in Q3 reflecting the obvious effects of the head count reduction and optimization of rules and responsibilities within the company.

The success of company wide efforts to reduce costs combined with improved margins enabled us to become EBITDA-positive a quarter earlier than anticipated and will further facilitate of reaching our goal of free cash flow-positive by year end 2003.

As always, we calculate free cash flow as net changing cash, cash equivalents, restricted cash and marketable securities quarter over quarter.

In addition we ended the quarter with 125 in cash in market securities and strong market position.

Now, I would like to walk you through the Q4 financial results, addressing the areas of customers and revenue, network costs, operating expenses and EBITDA, capital expenditures, free cash flow, and a Q4 recap and per-share results.

Revenue for the quarter was 35.4 million versus our guidance range of 32 to 35 million, in flat with third quarter results.

Drivers of revenue during the quarter were web traffic generated by online holiday sales, the launch of major web based marketing campaigns by several clients, and greater penetration in the public sector and increased volume in software downloads.

We are pleased with the continuing reduction in customer churn quarter over quarter and the growing of our recurring revenue base with the addition of higher quality business that we believe will serve as well in the months and years to come.

Churn from loss of business and competitors has not been significant and consistent with the trend of the past year, the average revenue per churn customer continues to decline.

Churned customer account declined 26 percent quarter over quarter and 31 percent year over year.

Our future growth is now defined by success with permanent economy enterprises and the public sector.

The fourth quarter was a second consecutive quarter of net monthly recurring revenue or net bookings.

As George indicated, we define net bookings as a result of the addition of new long-term customers, those entering into contracts that are 12 months or greater, plus existing customers the either upgrading current services or committing to new services less churn customers and downgrade.

Overall for the year we had positive net bookings, mostly driven by a strong second half of the year reversing the cumulative effect of churn in the first six months of the year.

Revenue from recurring customers was 97 percent of overall revenue versus 94 percent in the previous quarter.

Our recurring customer count was 955 versus 975 at the end of the third quarter.

We added 89 new returning customers while losing 109.

However, average monthly recurring revenue increased 8 percent to approximately $11,800 per month.

Significantly, we entered the fourth quarter with 278 suite customers, up from 243 at the end of Q3 and 152 with the end of 2001.

Our customer base today is healthier than ever which is further evidenced by our days sales outstanding, or DSO's for accounts receivable at 44 days attesting to the strong enterprise customer base.

EdgeSuite was 44 percent of our total fourth quarter revenue up from 39 percent in the third quarter and 20 percent of revenues in the fourth quarter of last year.

EdgeSuite average revenue per customer was essentially unchanged from Q3, at just over 20,000 per month.

This is a blended average or entry level customers in the 10 to 15,000 per month range in large enterprise customers generating revenue of $50 to $100,000 or more per month.

During the quarter, Microsoft became our largest customer accounting for approximately 11 percent of our revenue as Microsoft pushed more traffic to our network.

Resellers accounted for 26 percent of revenues in Q4 versus 22 percent in the prior quarter and 25 percent versus the prior year quarter.

International sales accounted for approximately 11 percent of the sales for the quarter versus 14 percent in the prior quarter and 12 percent in the fourth quarter of 2001.

Weakening European revenues reflected continued weakness in the European economy.

In the fourth quarter, we sold our 40 percent interest of Akamai Japan to our partners Soft Bank Broad Media, resulting in a gain of $446,000.

Going forward, the old Akamai Japan, now called CDN Solutions, will operate as a nonexclusive reseller of our services along with IBM Japan and one other with whom we are working to establish a relationship in the near future.

Akamai Japan ended the year with over 30 customers including significant traction in the airlines, newspaper, media and entertainment markets.

Already IBM Japan is off to a fast start with four new accounts in the quarter.

We are excited about this new cost-effective approach that we believe will accelerate our penetration of the Japanese markets.

Now let's review our network costs.

Cost of service was 6.6 million for Q4 versus 9.6 million in the prior quarter down 31 percent even though network traffic was up 29 percent quarter over quarter.

Gross profit was 28.8 million or a margin of 81 percent of revenue up 8 percentage points over Q3 and up 19 percentage points of Q4 of '01.

This margin improvement is the result of more effective network management, improvement of product mix, and one-time settlements from defunct network providers.

The size, scale and functionality of our underlying network are key to Akamai's value proposition.

Our larger and more geographically distributed network is a significant competitive advantage.

We consistently lead the industry in performance, reliability and scalability as measured by independent third parties.

While operating at what we believe to be the lowest effective costs in the industry.

As a result, even for basic object delivery and streaming, we expect to continue to deliver solid gross margins at competitive prices.

Streaming as a standalone service continues to be a stable and profitable business and, of course, is an important component of EdgeSuite.

Our global network at the end of Q4 consisted of 13,622 servers in 1135 networks and at 65 countries.

This deployment is critical to serving the globe needs of our multinational enterprise customers as well as providing the capacity to handle major events such as the recent Steve Jobs MacWorld keynote which spiked over 12 gigabytes per second while continuing to provide industry leading service to our entire customer base without a hitch.

Now some comments and operating expenses and EBITDA , cash operating expenses the sum of research development, sales and marketing and G&A were 25.7 million, down 6.8 million or 21 percent from the 32.5 million in Q3 and down 31 percent in the prior year period.

The significant reduction in spending results primarily from the October work force reduction and the third quarter move to a smaller lower-cost headquarters facility in Cambridge.

We achieved EBITDA profitability of 3.1 million in Q4 as compared to an EBITDA loss of 6.7 million in the previous quarter, significantly better than our guidance and much improved versus the last year's fourth quarter EBITDA loss of 14.3 million.

We were able to achieve the significant financial milestone through lower operating costs related to our reduction in work force, accelerated efficiency and network utilization, real estate consolidation, and ever more effective cost controls.

Although EBITDA is not a US GAAP term, we believe it is a reasonable measure of our financial progress and one that we have consistently used in the past.

In addition, in the quarter, we recorded a restructuring charge of 26.7 million related to real estate consolidation and work force reductions.

Now on capital expenditures.

Cap Ex for the quarter was 900,000 versus 7 million in the previous quarter.

However, remember that the third quarter Cap Ex included 4.4 million related to the build out of our new headquarters.

In Q4, we benefited from a reimbursement for lease hold improvements of 1.7 million from our Cambridge landlord in exchange for slightly higher rent over the remaining term of our lease.

With annual interest costs of just 16 million in the low capital expenditure model, we believe we are well positioned to reach our next goal of generating positive free cash flow later this year.

Let me conclude my comments with a Q4 recap and earnings per share results.

Overall, depreciation for the quarter was 17.1 million of which 10.7 was for network-related assets and 6.4 million related to all other assets.

Depreciation declined from 20.7 million in the third quarter and 19.9 million in Q4 '01.

Net interest expense in the fourth quarter of 4.1 million is a result of accrued interest on the convertible debt less interest income earned on our average cash balance.

Net interest expense in Q3 was 4 million as a result of interest income on a higher average cash balance.

Our fourth quarter net loss in accordance with US GAAP was 53.8 million, or a loss of 47 cents per share.

On a normalized basis the net loss per share would have been 16 cents exceeding first call's consensus of 25 cents per share.

This strong performance compares to a normalized loss of 28 cents in Q3 and a normalized loss of 35 cents per share in Q4 of '01.

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

Weighted average shares outstanding for Q4 were 114.9 million, compared to 114.3 million in Q3 and $108.4 million in Q4 of the previous year.

Our outstanding share count on December 31 was 117.4 million while the fully diluted share count, which includes outstanding warrants and options, was 134.1 million.

In summary, we ended the year with 125.2 million in cash and marketable securities, the most competitive cost structure we have ever had, and a commitment to build on our EBITDA profitability to reach free cash flow-positive by the end of this year.

Achieving that goal will require growing revenues over time, continuously working to minimize loss from churned accounts and continued diligence on cost controls.

Rather than providing specific guidance, we'll report to you our progress in each of these areas every quarter.

Thank you and now let me turn the call back over to George.

Thanks, Bob.

We are pleased with the continuing improvement in our business fundamentals in the face of a challenging world economy.

We began 2002 with some very clear goals; to reduce our EBITDA loss each consecutive quarter, to increase EdgeSuite adoption by permanent economy enterprises and government, to grow our government business, and to right-size our cost structure to better match our prospects in today's difficult market environment.

In 2002, I believe we surpassed each of these goals.

Throughout the year, Akamai significantly improved the quality of our customer base and revenues as well as our cost structure.

At the same time, we developed important new services and features in response to demand from our enterprise and government customers.

I n the fourth quarter, EdgeSuite adoption continued as we added such premiere customers as American Suzuki Motor Corporation, Cannon Japan, L.L.

Bean Incorporated, Bowl election Incorporated, Samsung, Sony Music Entertainment Japan, Staples, Veritas and VeriSign, among others.

Much of this success is the result of our improvement of proved focus on specific industry and customer opportunities and our more experienced better-trained sales force.

We're also benefiting from more in depth business relationships with key business partners such as IBM and EDS, better alignment of our technology road maps with market requirements, particularly Edge computing which I'll say more about in a moment, and more responsive management of the business through a new operations group focused on profitable revenue growth led by Mike Ruffolo.

So we enter into 2003 stronger than ever with a business plan driven by continued adoption and upsell of EdgeSuite customers.

We are optimistic that we will continue to improve on the positive EBITDA performance we turned in for the fourth quarter and that we will achieve positive free cash flow before the end of the year.

Akamai is the clear leader in the expanding market for content and application delivery service.

From basic object delivery and streaming to more advanced EdgeSuite capabilities such as whole site delivery including secure transactions, denial of service attack mitigation, geographic targeting and reporting, personalization of web content through dynamic page assembly, and the ability to reduce internet latency to achieve significantly improved performance.

270 EdgeSuite customers now use these capabilities which set the stage for taking our EdgeSuite technology and customer value propositions to the next level, Edge computing.

Edge computing offers Fortune 500 and government enterprises the ability to extend and control their e-business infrastructure to process and deliver applications anywhere on the globe with an infrastructure that is fast, reliable, scalable, secure, and efficient.

One way to think of this is that we are virtualizing the data center, an important step to enabling enterprises to consume computing as a utility on demand.

Already, some have described us as the first commercial example of an on-demand global computing utility.

For customers, this is so important because it means that Akamai is breaking the application deployment bottleneck, enabling improved application time to market and scalability, applications that help them compete while avoiding the need for costly data center build-up.

From a customer's perspective, think increased revenues, competitive advantage and better resource utilization.

And best of all, it doesn't require changes to our customers' programming models because we support applications built in Java or J2 EE and Overtime.net along with other common native languages.

This quarter in a technology partnership with IBM's software group, we are deploying a standard WebSphere environment in the Akamai network in an running production Java applications on Websphere beginning in quarter 2 2003.

Let me give you two examples of early customer successes.

Logitech is leveraging Akamai's Edge computing for Java solution.

Logitech a mark of computer interface products celebrated the sale of its 30 millionth cordless device in December by conducting an online contest to give away 20,000 Logitech keyboards during a five-hour period.

Moving its contest application out into Akamai's Edge servers, Logitech was able to avoid the large capital expenditure of purchasing 20 to 30 additional servers and networking equipment required to handle the load.

The results included a successful one-day tally of over 1 million visits to the site, the delivery of more than 70 million page views, and nearly 1 gigabit per second of traffic at peak, more than 12 times the average daily load on the company's website.

Akamai's application architecture ensured that virtually every user request was processed completely at the Edge, resulting in optimal application performance, scalability, and availability.

Logitech believes this is the marketing victory that will spur more sales and a successful model they can use for future promotions.

Sony Ericsson implemented Akamai's Edge computing for Java solution for delivery of its dealer locator application which is designed to drive online visitors into Sony Ericsson brick and mortar dealers doing association they were able to off-load nearly 100 percent of applications server Java processing to the Akamai network.

In fact, Sony Ericsson was able to reduce its server infrastructure 65 percent while decreasing application load time from over three minutes to only 8 seconds and increasing application availability from 92 percent to 100 percent.

A critical part of extending EdgeSuite into Edge computing is giving our customers control over the internet.

Making the internet reliable and predictable enough for is giving our customers control over the Internet.

Making the internet reliable and predictable enough for mission-critical applications enough reliability to be an extension of the customer's own corporate network.

We offer customers unprecedented visibility and management of that extended network from the corporate firewall to the critical end user including what type of traffic we are pushing and where, which content is being consumed and how, where our users are coming, from what is their profile and we alert customers to issues on their extended network while protecting them from viruses such as the slammer SQL worm and denial of service attacks.

The Sapphire worm also known as slammer and SQLEXP infected more than 120,000 computers this past weekend effectively disabling some smaller network providers and overwhelming the routers of some large internet service providers.

Obviously, a massive hit to the internet.

But our EdgeSuite customers were able to maintain high levels of availability and performance during the extended periods of instability caused by the worm.

During events like September 11, the Code Red worm and this recent attack, Akamai has continually proven that it is delivering a better internet.

Throughout the rest of this year, we plan to release additional management and control capabilities.

Customers will have access to data on the health of the internet itself, the capacity and performance of the Akamai network, and extensive information about their extended enterprise network.

This information will be made available through our portal, open interfaces, and third party tools.

As you can tell, we have come a long way from the early definitions of content delivery networks.

For Akamai, we see an ever expanding market opportunity leading the way from basic object delivery and streaming to extending enterprise and government e-business infrastructures anywhere in the world on demand with visibility and control.

Some of you can remember when free flows RPU average $5,000 per month.

EdgeSuite's RPU is now over 20,000 per month or four times that of free flow and we believe that Edge computing will grow our revenues per customer even more.

We are not going to make a full year revenue forecast this time.

While our business has great potential, we are challenged by one of the worst IT spending environments I have ever seen.

You can count on us to work closely with our customers and business partners to maximize EdgeSuite and Edge computing opportunities although it is too early to predict upsell revenue opportunity from Edge computing.

Our business plan also assumes that there will be no significant improvement in the economy.

Having said all that we are confident about our base plan including achievement of positive free cash flow by the end of the year.

This plan is predicated on a continuation of the kind of progress we have been making, progress in developing new offerings, acquiring higher quality customers and revenues, and improving our business processes.

I thank you very much for your participation on this call.

Now Bob and I will take your questions.

Paul Sagan, our President, and Mike Ruffolo our EVP of Global Sales, Services and marketing, are also with us this afternoon.

Operator, we'll take the first question.

Ladies and gentlemen, I would like to remind everyone, in order to ask a question on today's conference, please press star then the number 1 on your telephone keypad.

Your first questions comes from Henry Lowe with Lehman Brothers.

Hi, guys.

Congratulations on a great quarter.

Thank you.

Two questions for you.

Wondering if you could talk a little bit about the gross margins.

I know you guys have stated over the last year that your gross margin is 65 to 70 percent and obviously you guys performed a lot better than that this quarter with the slight benefit from a one-time item.

If you guys could just talk a little bit about what we can expect in terms of gross margins going forward, that would be great.

Yeah.

This is Bob Cobuzzi speaking.

How are you today?

Doing well, thank you.

Good. 81 is certainly on the high side did include some, you know, cancellation of contracts, however the benefit of the those contracts you'll get to realize going forward.

But I think if you look into the future, what we can expect is more in the mid 70s, so probably a higher target than what we had talked about in the future.

Again, we'll continue to negotiate or who we can and drive down our costs because there are opportunities, certainly as broadband costs continue to decline.

Okay.

Great.

And one question for George.

George, if you could comment a little bit on what you guys are seeing in terms of spending patterns by your enterprise customers, it would be greatly appreciated.

Yeah.

Well, as you probably know from reading the most recent reports, it's a bit of a -- it's a bit of a mixed bag.

There are some conflicting prognostications out there.

We're not counting on any improvement.

One thing we do believe, though, is that customers are concerned about leveraging what they have in place, their in-place infrastructure, and additionally working off the top of their application backlog.

In other words, focuses in.

But we offer this of these customers a significant value proposition today where we think we can compete in this difficult environment by shortening time to market of those new applications and avoiding new data center buildout.

In other words, we're optimizing the in-place infrastructure.

And also for those reasons, we believe we're perfectly positioned should a turnaround occur but we're not counting on it, and so in our business plan that there will be any increase in spending, although I must say it is heartening to see at least some people think that there will be an upturn -- a slight upturn in IT spending -- sooner or later, they are going to have to.

People have been reducing their infrastructure.

We love that thought because we're an alternative to replacing that infrastructure with our service.

Great.

Thanks, guys.

Your next question comes from Erroll Rudman from Rudman Capital.

Hello, George.

Hi.

I wanted to discuss the response that you've had in the fourth quarter to your Washington, D.C. office and there have been reports that Homeland Security has not been funded and will not be funded for a long time.

I was wondering if you're running into any difficulties and maybe you could describe what the results have been so far and what opportunities you foresee.

I'd also like to check in on what bursting revenues were in the fourth quarter and maybe you can give it to us for the third quarter of this year and for the fourth quarter of last year, as well.

Okay.

I'll let Bob scramble for the bursting data.

In the Washington -- our Washington operation is growing both in revenues and appropriate head count.

We are finding significant traction with government agencies because we offer just what they are looking for in improvement in delivery and especially denial of service attack mitigation and security.

We obviously are working with all of the different elements that make up Homeland the -- office of Homeland Security and we think that, you know, that shows a great deal of promise.

So I can't go into the specifics of some of the things that we're doing.

But suffice it to say that this is an area I'm very pleased with in terms of its continued performance in the prospects we see ahead.

Make any comment as to what contribution Government made for calendar '02?

Yeah.

We don't break that out yet.

But --

I assume it's less than 5 percent, then, since you don't break it out.

Errol, you've done this before with me.

I'll be delighted when the day comes that we'll be talking about this.

Errol in response to your other question on the bursting, again, it's a breakdown or an element that we don't divide.

We won't do it at this point.

Okay.

Shawn Lee Singow, with whom I work, also has one or two questions.

I just have a real quick question on the restructuring charge.

How much of it will result in a cash outflow for 2003?

In terms of the riff you mean, is that what you're referring to?

The 26 million charge.

I'm just wondering if there is a cash component of it that could be seen in 2003.

Yes.

It's probably about $8 million in Q3.

No -- In '03 I'm sorry.

Okay, great.

Thank you.

Your next question comes from Doug Campbell with Spirit Capital.

Thank you.

Hello, thank you.

Hi, Doug.

I have a question about introducing Edge computing capability into the IBM WebSphere suite of services.

Yup.

Will customers pay you for that on a standard subscription basis, or as you evolve into a readily available computer utility do you see any sort of transaction or time-related service fees being built on top of the subscription fees?

Our model is to build in the same way that we build for EdgeSuite services today.

Okay.

It's just -- it's definitely an upsell, I'll tell you that on top of EdgeSuite, but it follows the EdgeSuite pricing model.

Okay.

But it does have its own pricing component?

Yes.

Okay.

Did have a version of EdgeSuite that includes Edge computing has its own pricing component.

I thought the new Edge the -- number of EdgeSuite new accounts is very encouraging as well as the uptick in monthly revenues.

Could you describe at least generally and as much in particular as you like to what the selling environment is for your people out there in the field and also maybe provide some sense of anticipation as you roll out some of these new capabilities on IBM WebSphere how that might affect the receptivity?

Yeah.

Let me turn this over to Mike Ruffolo, this is right up his alley as part of his responsibilities for global sales, services and marketing.

What about the selling environment, Mike?

Thanks.

Well, one of the reasons why I think you are seeing some positive traction in the number of new accounts that we're earning in a tough economy is we decided to really focus our selling efforts in the field and with our channel partners around a few key industries, and not surprisingly, these are industries that have a big appetite for the kinds of things we do and so we have had a lot of success in 2002 and expect to have the same success in 2003 around verticals like retail, both online retailers as well as brick and mortar type retailers, the high-tech industry a lot of business around the software download or the digitized download business.

A lot of success in branded consumer goods, whether that's automobiles or consumer products, a lot of interest in doing online and integrated marketing programs for consumer goods companies, and then our traditional strength in media and entertainment, which has been a stronghold since our beginning.

That's in addition to what you just talked about relative to the public sector, the government market.

So because we stay very focused and we've begun to win customers in those key verticals, it becomes a lot more sensible for another customer in that industry to ask us what we're doing in those industries and then to understand if that's applicable to their business.

And I think that kind of traction, despite the tough economy, is what we anticipate going forward.

A very focused selling effort around key verticals.

As you see new capabilities coming out of your R&D, I mean, are there -- do you have some things in sight that will even be more compelling from the customer's standpoint or prospective customer's standpoint?

As you can imagine, this is Mike again, as you can imagine the excitement of the two examples that George went through in terms of Edge computing we are selling Edge computing not surprisingly to customers that are ready that are very interested and very dependent on what they are doing in the internet environment and where we've already earned a trusted or valued relationship with those customers.

And so the application processing or the Edge delivery of those applications at the Edge we think is very exciting, so it puts us more in an application or almost a business solving kind of mode for our customers.

The thing that we're looking for when we look for those applications, you want to think about it in English terms, it would be verbs, like "apply", "configure", "model", "locate", those are the kinds of words that if somebody's trying to do things like that, that's the kind of application, if you will, that I think we have a very strong applicability to with our Edge computing.

But make no mistakes, we are going big around those verbs, if you will, in the industries in which we feel we have a very strong value proposition so expect to hear more success in vertical markets like the ones I have described.

If you have time, I have one more relating to the maturity of the sales force which was substantially changed over the also year or so.

How would you assess the status of that and where are they on the productivity cycle of salespeople coming in and hitting their stride?

Okay.

I'll take that one again.

This is Mike.

As you can imagine, as we've matured the sales force in terms of giving them time in a territory, going through all the new hire training and the mentoring in the field, we're very comfortable that the time over target which really means the amount of time that they have been in their territory calling on the accounts, it's improving monthly.

And we don't give out those metrics on a public basis.

But assuming that the productivity model that we have built on improves with the time and tenure in the field and we're seeing that improving each month and each quarter and our sales force is very stabilized in that regard.

Thanks very much.

Congratulations.

Thank you.

Your next question comes from Michael Malarkey with Markston Capital.

Hi, Michael.

The first one is for Mike Ruffolo.

Apparently, Microsoft was 11 percent of revenues but as I understood -- as I understand it, there are in the process of buying a streaming media company.

And I'm wondering whether or not that purchase will complement you or will be a competitive threat.

Could you just give us a feel for that?

I actually don't have any comment on what you're asserting but I would tell you that what they use us for is to manage the downloads of their MS updates and new releases of software to their customers.

And we continue to work very closely with them as both a partner and as, you know, an vendor/customer relationship and we're fairly optimistic that they are very pleased with what we do for them, and I don't really have any comment about what acquisitions they may have on their mind or other ideas of new business ventures.

Great.

And then can -- can someone give us a quick update on the cable and wireless situation?

Sure.

This is Paul Sagan.

As you know, we've prevailed in a jury trial in our patent lawsuit against cable and wireless and we expect a damages trial later this year.

Okay.

And then could someone tell us the price relative to revenues that the 40 percent of Akamai Japan went for when it was sold to Soft Bank?

The price that we realized both $500 in terms of profit against the revenue, is that --

In other words -- (overlapping speakers).

Let's say for the sake of argument let's say that the revenues were $10 million.

What would your -- what would be the enterprise value relative to sales that, uhm, that the company was valued at when you...

I'm not going to get into give you those details.

Just say from our point of view we think it was a very attractive transaction at the price and given the prospects for the future in terms of our ability to, you know, leverage the sales activity by having, you know, IBM and other resellers to support it.

So....

Great.

Last question, I'm totally befuddled why you haven't acted on the bonds.

I understand you haven't purchased any of the bonds.

And you know, they were recently selling in the mid-30s.

Given the fact that you seem to be making some progress, I'm quite surprised that you haven't acted to -- to, uhm, buy in some of the bonds at these attractive prices.

You know, we routinely review different corporate finance strategies in terms of how we're going to manage our capital going forward.

Certainly the buy back is one such stride you were looking at.

We will evaluate different things including whether it be stock prepurchase, whatever.

But at this point we have looked at the various economics and nothing seemed to make sense to us.

I mean, could you spend a lot of cash and that doesn't make sense given the fact that we're still in a burning position and the prices of stock at $1, $1.40, $1.50 is significant dilution.

So, we believe where we are today we'll continue to evaluate it but we're not prepared to move forward at this stage.

Okay.

And last question, there was a $10 million obligation to CNN, I think or --

Right.

Could you just give a quick review on that?

Yeah.

We basically settled it in the quarter for a $6 million in cash.

And did you put --

6.5, I'm sorry.

So did you book a profit on the 4 million that you --

No.

No.

Okay, great.

Thank you.

Your next question comes from Ryan Levinson with CRN.

Hi.

Good evening.

Hi, Ryan.

Hi.

What was the accounts payable portion of the 50.359 million of accounts payable and accrued expenses?

Uhm...

I'm not sure I have that at this point.

Do you have another question?

We'll trying to -- try to look it up.

Sure.

You're targeting free cash flow positive by year end.

I just want to clarify.

Is it free cash flow positive for the fourth quarter or in the fourth quarter or by year end, and also, what is the -- what is the anticipated cash balance at year end?

We are not going to give the outlook in terms of what we expect cash to be, all we can say is we look for continued improvement throughout the year.

Essentially, you know, we expect to be free cash flow positive in the fourth quarter.

Okay.

In the fourth quarter but not for the fourth quarter.

Well --

I'm sorry to split hairs.

Yeah, it's a fine line.

I guess I'll tell you for the fourth quarter is our projection.

Okay.

And you're not giving a cash balance projection?

No, I'm not.

Okay.

And, uhm, do you have the accounts payable?

I don't.

It will -- we'll break it down and I can give you a call back if you want but I don't have that readily available to be honest with you.

You can find it in the 10-K when we file it.

Okay.

Thank you.

Your next question comes from Krishna Rangarian with CRT Capital.

Couple of quick questions.

First of all, could you tell us what the major uses of cash were for the quarter?

I'm sorry, I missed the question?

What were the major uses of cash for the quarter?

Sure.

The 6.5 million certainly which went to settle and pay CNN, it was about $4 million associated with working capital, some of it for payables and whatever else that might be, there is about a million dollars as you know for Cap Ex.

How about restructuring?

Restructuring.

How much was restructuring?

I think it was 3.5 or 3.6 million.

Okay.

Great.

A follow-up question from me.

When you look at the line items where expenses have been reduced, it appears that R&D has been cut by about 41 percent while G&A was lower by 20 percent and SG&A by 15 percent.

What are we to infer from it?

Is that you had to make difficult decisions around what projects to cut?

And how do you characterize the trade-offs that you made while reducing these three line items by their respective percentages?

Well, the trade-offs at this point have not been difficult.

We believe that we have been able to, as we have said before, put people in the appropriate roles, responsibilities and as such, we haven't seen any diminution in terms of performance.

In fact, our productivity has increased and continues to increase.

And that is certainly true not only in the network side of it but also throughout the organization.

So we're very pleased with effectively where we are at this point.

So your decision.

We are going to general --... (overlapping speakers).

We are not going to jeopardize our future as a technology development company in terms of our engineering resources, we have a very strong engineering team who are -- who are, uhm, all working on the right projects and we got the right people on them.

I'm very pleased with the productivity of our engineering force.

And in response to the first part of your question, part of the reduction in engineering is we are capitalizing under FASB reg 91. 98.1, I'm sorry.

It's about 2.5 million dollars worth of increase in capitalized costs in the quarter.

Okay, thank you.

Okay.

One more question.

Gentlemen, your final question comes from Doug Campbell with Spirit Capital.

Hi.

IBM has been raising the visibility of its interest in being a computer utility.

And you're facilitating that but I wonder if you could go into a little more detail as to the components of your respective companies in that function.

IBM starting the grid computing, computing utilities, computing on demand and it seems to be either an overlap or there are some components of what they are doing that you are supplying.

Well, it's not what I would call an overlap at all.

In fact, we think it's very complementary.

IBM is talking about a whole new thrust for their company which will enable us to orient all of their products and services around the support of the idea of computing as a utility or on-demand computing.

We make some distinction as do they about what grid computing is which is a collection of computers working together to process something versus bringing together a variety of resources like a public utility to build a customer only for the capacity, you know, the processing power, the storage, the bandwidth that they use.

So every facet of IBM is looking at what they do and how their particular efforts can support that concept of a computing utility on-demand.

We are a critical component of that if you think of IBM as a mile wide and they are, you can think of us as much less wide, maybe a inch wide but a mile deep in our ability to implement the requirements for on-demand computing around the globe.

In other words, we have located over 13,000 computers in over 1100 networks in 65 countries around the world, and we've learned how to coordinate that activity, including the processing of applications at the Edge.

IBM's view of that is terrific.

We take all of our products and services and orient them to a customer and include as a business partner Akamai and now we can make WebSphere home locally, we can make it home remote and it's ideally transparent to the customer.

So that's their interest.

And I would say that there is a committment similar thrust going on at Microsoft and you've heard people like HP and Sun and others talk about this concept.

Well, Akamai is the enabler of that.

If you want to do that on a global infrastructure.

That's what -- that's what we are.

We are the deployment component of on-demand or utility computing.

Thank you very much.

Yeah, this is Bob Cobuzzi again.

Let me just make a correction to you.

I don't want to mislead you in terms of capitalized salaries.

For the engineering piece, the net increase q over q is about $300,000.

We have been capitalizing on an on going basis but the net increase in this quarter Q4 over Q3 is about $300,000.

Actually it's been since Q1 the entire year 2002.

Okay.

We thank you all very much for joining this call.

This was Bob's inaugural call.

I thought he did great.

We are happy to have you on board, Bob.

Thank you all very much.

Bye-bye.

Ladies and gentlemen, this concludes today's Akamai Technologies fourth quarter earnings conference call.

Thank you for your participation.

You may now disconnect.