阿卡邁科技 (AKAM) 2003 Q1 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Akamai Technologies Q1 2003 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 this time, press the star and then the 1 on your telephone key pad.

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

Thank you.

Mr. JC Robbie, you may begin your conference.

Thank you, Operator.

Thank you for joining Akamai conference call to discuss our first quarter 2003 results.

Speaking today will be George Conrades, Chairman, CEO, Bob Sagan, our Chief Financial Officer, Paul Sagan our President and Mike Ruffolo Executive Vice President Global Sales Services and Marketing will also be available during the question and answer portion that follows management's prepared remarks.

This conference call will discuss information about our future expectations, plans and prospects that constitutes forward-looking statements for purposes of the safe-harbor act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements including but not limited to general economic conditions as well as those specifically and indirectly related to the economic industries [inaudible].

Our outsource e-business infrastructure businesses software, unexpected decrease in Akamai use of funds, [inaudible] Or timing of the inability to collect amounts owed by Akamai customers.

Inability to service and repair outstanding debt.

Inability to execute agreements and other factors Akamai customers.

Inability to service and repair outstanding debt.

Inability to execute agreements [inaudible] and other factors discuss in our annual report on form 10 K our quarterly reports in form 10-Q and our documents filed with the SEC.

In addition, any forward-looking statements [inaudible] for today. [inaudible] 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.

During this call we will be referring to non-GAAP financial measures.

These non-GAAP are [inaudible] to generally accepted accounting principles. [inaudible] Appears on our web site in the investors section under the heading reconciliation of non-GAAP to GAAP financial measures.

These non-GAAP financial measures include the following: EBITDA defined as net loss before interest, taxes, depreciation, amortization, equity related compensations, restructuring costs and benefits and [inaudible].

Pre-cash flow or cash [inaudible] net change in cash and cash equivalents restricted cash and marketable securities quarter after quarter.

Normalized net loss defined as net loss before amortization, equity related compensation, construction charges and benefits and certain gains and losses on equity investments.

Defined as purchases of property and equipment, capitalization of [inaudible], cash gross profits [ inaudible], depreciation, equity related compensation, cash gross margins, [inaudible] of cash gross percentages before revenues, average common shares outstanding, network loss including -- cap Tam expenditures defined as purchases of property and equipment cash operating expense defined as the sum of research and development, sales and marketing G&A excluding depreciation amortization and [inaudible] compensation.

Finally I would like to turn the call over to George Conrades.

Thank you, JC.

Good afternoon, everyone.

And thank you very much for joining us on our conference call.

For those of you who didn't take down all those definition of non-GAAP financial measures, you can access them on our website.

That's the reconciliation of non-GAAP to GAAP financial terms.

In the first quarter, Akamai continued to demonstrate steady improvements in our underlying business fundamentals signaling that not only are we weathering the technology sector meltdown.

We are successfully building on our large and healthy base of enterprise and government customers while continuing to attract new ones.

Quarter to quarter, revenue grew 3.4% to $36.6 million, the first sequential quarterly revenue growth in a year.

We also achieved our second consecutive quarter of positive EBITDA, which grew five fold to $6.3 million from $1.3 million in the prior quarter.

EdgeSuite customers grew by 77 for a total of 346, an increase of about 30% over the prior quarter.

And for the first time sales of our flagship service account were over 50% of our revenue.

New EdgeSuite customers in the first quarter included Accenture PLC, Australian Broadcasting Corporation, BMW Japan, Canadian Broadcasting Corporation, Chicago Sun Times, Cirque d'Soliel Incorporated, [inaudible], Home Office Communication Directorate of the U.K., John Wiley and Sons, Lorial, Lycos Asia, Norman [inaudible] Defense and Thompson Financial, among others.

In addition to growing our EdgeSuite customer base, our total number of recurring customers are customers under contracts of at least 12 months, grew almost 4%.

Importantly, normalized net loss declined, quarter to quarter approximately 34% to $13.3 million and for the second consecutive quarter we reduced our quarterly cash burn ending the first quarter with $109.9 million in cash and cash equivalents, restricted cash and marketable securities.

In addition to this continued improvement in our business fundamentals, we anticipate improving our financial position by executing favorable settlements of our impaired long term real estate leases.

In restructuring the agreement, Akamai expects to eliminate approximately $50 million in net long-term lease obligations.

Underscoring the low capital requirements of our business model, capital expenditures in the first quarter totaled $2.2 million in line with our long-standing guidance of Cap X accounting for 10% or less of annual revenue.

Now after Bob gives you a deeper look into the numbers I'll share some insights about our business, the markets in which we compete, and why I remain so excited about our business prospects.

Thank you, George.

We believe our first quarter results clearly demonstrate the benefit of our company-wide effort to grow and improve the quality of our customer base and to operate the business on more cost-effective structure with the goal of becoming free cash flow positive by year end.

We are pleased to report revenue of $36.6 million for the quarter, an increase of 3.4% over Q4 '02 revenue or $35.4 million.

In the first quarter over quarter increase in a year.

Our first quarter net loss in accordance with U.S.

GAAP was 8.6 million or a loss of 7 cents per share.

These results compared favorably to a Q4 '02 loss of 55.6 million, or a loss of 180 cent loss per share and to a Q1 '02 net loss of 59.1 million or a loss of 54 cents per share.

Normalized net loss for the quarter was $13.3 million or a loss of 11 cents per share.

Beating consensus first call estimates of a loss of 15 cents per share.

This compares to a normalized net loss of $20.1 million or a loss of 17 cents per share in Q4 and a loss of $29.5 million or a loss of 27 cents per share in the first quarter of '02.

This performance represents an improvement in our normalized net loss of 34% over Q4 '02 and an improvement of 55% over the first quarter of last year.

Weighted average shares outstanding used in the per share calculation for Q1 were 116.4 million compared to 114.9 million in the fourth quarter and 109.7 million in Q1 of the previous year.

Our outstanding share count on March 31st, was approximate 1st was 117.8 million shares while the fully diluted share count, which includes outstanding warrants and stock options was 133.5 million.

In the quarter our cash burn of $15.2 million declined from the previous quarter despite making one-time employment litigation-related payments totaling $4.3 million and the semi-annual interest payments on our convertible bonds.

As a result, we ended the quarter with $109.9 million in cash, cash equivalents, restricted cash and marketable securities.

As George mentioned, the quarterly results include the anticipated restructuring of all of Akamai's domestic impaired lease obligations which will result in average annual cash savings of approximately $8 million from 2004 through 2010.

In restructuring the agreements, Akamai expects to eliminate approximately $50 million in long-term lease obligations.

By agreeing to make one-time cash payments totaling $15 million, which includes $7 million of restricted cash in long term deposits.

As a result of the expected settlements, net loss for the first quarter includes a one-time benefit of $9.8 million.

Now I would like to walk you through Q1 operating results in metrics addressing the areas of revenues and customers, network costs, operating expenses, EBITDA and interest expense, and capital expenditures.

As previously mentioned, revenue for the quarter increased 3.4% quarter over quarter to $36.6 million.

The first quarterly growth in a year.

This growth and revenue was driven principally by four factors.

The effect of three consecutive quarters of positive net monthly returning revenue on net bookings.

Two, the decline in customer churn and the resulting increase in the number of recurring customers.

Three, increased volume from software down loads, and four, approximately 500,000 of an increase in revenue driven by world events.

We define our net monthly recurring value as customers entering into or existing customers updating or committing to new services under contracts that are 12 months or greater less churn customers and down grades.

This, our third consecutive positive net monthly recurring revenue was also our best in terms of absolute contribution.

Our recurring customer base increased this quarter by almost 4% to 994.

This increase is a result of our continued success in adding permanent economy enterprise organizations and various clients in the public sector market.

Revenue from recurring customers, those under contracts of at least 12 months, was 96% of overall revenue, comparable to the first quarter.

This continued performance further validates the soundness of our business.

Today we believe our customer base is healthier than ever, which is further evidence by our day sales outstanding or DSOs for accounts receivable of 48 days up slightly from the 44 days last quarter but further evidence of a strong enterprise customer base.

Significantly, we ended the first quarter with 346 EdgeSuite customers, up substantially from 269 at the end of Q4 and, an almost 30% increase.

And up from 187 EdgeSuite clients from just 12 months ago.

For the first time, EdgeSuite accounted for over 50% of our total revenue, up from 44% in the fourth quarter, and 27% of revenues in the first quarter of last year.

In Q1, average revenue per EdgeSuite customer was just under $20,000 were month.

This is a blend of entry level customers and large enterprise customers some of which pay us 50 to 100 thousand dollars or more per month.

Our largest customer continues to be Microsoft, accounting for 11% of our revenue.

No other customer accounted for 10% or more.

Resellers accounted for 24% of revenue in Q1 versus 26% in the prior quarter.

International sales accounted for approximately 15% of revenue in the quarter versus 11% in Q4 and 13% in the first quarter of 02.

During the first quarter, we established a new wholly owned Japanese subsidiary to provide service and to support our expanding reseller organization in Japan.

We are pleased with the progress we have made in Japan since our last call and we believe we are now well positioned to accelerate our growth and penetration of the Japanese market.

Now let's review our network cost.

Network cost, excluding depreciation and equity related compensation was $6.9 million for Q1, versus $6.6 million in the prior quarter, up just 4% on traffic that increased 53% at its peak.

Recall that just one year ago our cost was $11.2 million on significantly lower levels of traffic.

Cash gross profit was $29.7 million or 81% of revenue.

Consistent with the prior quarter, and up from 70% in the first quarter of last year.

Included in this quarter results are certain credits associated with new advantageous network contracts.

Excluding these one-time benefits, cash growth margin would have been approximately 79%, consistent with our expectation that margins would remain in the range of high 70s to low 80% levels.

Once again, we were able to sustain our our cash growth margins through more effective band width procurement and network management.

As well as an improvement in our product mix towards the higher end EdgeSuite business.

And for basic object delivery and streaming, we continue to deliver solid growth margins at competitive prices.

Streaming as a stand alone service continues to be a stable and profitable business.

And, of course, streaming is an important component of EdgeSuite.

Our global network at the end of Q1 consisted of 15,307 servers in 1134 networks in 68 countries versus 13,622 servers in 1135 networks in 65 countries at the end of last year.

From time to time we will continue to augment our network using an inventory of servers already on hand.

This overall deployment provides us with significant capacity to amply serve the global needs of our multinational enterprise customers as well as providing the capacity to handle major events.

Now some comments on operating expenses, EBITDA, and interest expense.

Cash operating expenses were $23.4 million, down $4.1 million or 15% from $27.5 million in Q4 and down 28% from the prior level of $32.4 million.

This significant a reduction in spending reflects the benefit from the first full quarter savings from our total workforce reduction and also from continuing strong cost controls.

Nowhere are the benefits of our efforts more evident than in the dramatic growth in EBITDA this past quarter.

EBITDA was 6.3 million, an increase of almost 5 fold over the previous quarter of 1.3 million and compared to a loss of $5.8 million in the prior year quarter.

Our improved EBITDA results underscore our success to date as penetrating new enterprise markets, lowering operating costs achieving a higher level of efficiency in network management and ever more effective cost controls.

We are pleased with our EBITDA performance in the quarter and expect improvement albeit at a more modest rate going forward.

Overall depreciation for the quarter was $15.2 million of which $10.6 million was for network related assets and $4.6 million related to all other assets.

Depreciation declined from $17.1 million in the fourth quarter and $20 million in Q1 of '02.

We anticipate depreciation expense will decline further as the level of annual Cap X spending remains at levels more consistent with our business model of 10% or less of annual revenue.

Net interest expense in the first quarter of $4.2 million represents the accrued interest on the convertible debt less interest income earned on our average cash balance.

Net interest expense in Q4 was $4.1 million, and $3.6 million in Q1 of '02, due to more interest income on a higher average cash balance for reporting periods.

Now regarding capital expenditures.

Cap X for the quarter, which includes capitalization of internal use software development costs was $2.2 million versus $900,000 in the previous quarter.

Although Cap X spending for the past two quarters has been below our target we expect over the balance of the year spending levels for the full year will more closely approximate to our target of 10% or less of total revenues.

In summary we ended the quarter with 109.9 million in cash and cash equivalents, restricted cash and marketable securities .

Our competitive cost structure, has significant momentum towards reaching positive free cash flow by the end of this year.

Achieving that goal will require continued revenue growth, working to minimize loss in churned accounts and diligence on cost controls.

We will now continue our practice of not providing quarterly financial guidance.

However, as you can see we are making progress in each of the critical areas necessary to meet and exceed our business objectives.

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

Thank you, Bob.

Akamai stands today as a young, vibrant technology leader that is successfully weathering the global economic downturn.

Like many companies in our industry, we've been challenged to grow revenue.

But we are encouraged by recent sales performance.

We also have improved our fundamental operating and liquidity metrics in recent quarters as we continue toward our goal of generating positive free cash flow by year end.

In doing so we believe we have taken the necessary steps to align our cost structure with today's reality and to position [inaudible] to take full advantage of the expanding market opportunity for our services.

And with the continuing increase in EdgeSuite sales, the growing penetration of key verticals and recent gains in overall number of customers, we are opening considerable ground on the competition.

We are achieving success in the high volume object delivery market of content delivery and pioneering the emerging market for processing and delivering applications at the Edge, an important component of what the industry is now calling on-demand computing.

Recent world events have high-lighted the important role Akamai is fulfilling for customers that require mission critical, high volume, high stakes delivery of their content and application while extending and protecting their brands on the Internet.

Our considerable network reach and capacity has enabled some record-breaking statistics this past quarter.

In fact, on a single day, the Akamai network responded to over $20 billion user requests, or hits, on behalf of our customers.

It is this robust platform, our sheer capacity unmatched in the marketplace combined with our advanced services and Internet know-how that make us the chosen partner for the most demanding enterprise customers on the Internet today.

For example, Apple computer, which considers Akamai a trusted partner to support its many online initiatives turned to the EdgeSuite platform to support Apple's new online music store that you have been hearing so much about.

There's a great article today in the Wall Street Journal about it.

Microsoft, our largest customer, recently chose Akamai to deliver Steve [inaudible] keynote address, launching their next generation digital streaming server Windows Media Services 9 series.

As you can imagine we carried this live webcast using the new Microsoft servers deployed globally.

And with IBM, a technology partner and reseller of Akamai, we continue to pioneer on-demand solution that combines the unique capabilities of IBM's web [inaudible] and on the Akamai Edge computing.

Edge computing eliminates time to market constraints for businesses that need to rapidly turn their application ideas into reality, enabling quick response to new opportunities, competitive challenges and changing market conditions.

In affect, Akamai is breaking the application deployment bottleneck by virtualizing the data center with our distributed computing platform.

We believe the processing and delivery of applications from within the network close to users and scalable on-demand rather than from centralized data centers is the future of enterprise computing.

Early examples of on-demand computing that Akamai is delivering today include revenue generating applications like online promotions and contests.

Relationship building applications like site visitor registration.

Self service applications like retail store locators and a whole host of other applications and ideas for using the web that heretofore, companies have lacked the budget, time or people to deploy.

We deliver these applications with the same value proposition, high performance, reliability, scalability and capacity that our clients have come to expect from our content delivery services and at significantly lower cost to the customer than building capacity in their own data centers.

I hope you can all understand why we are so excited.

We are building a great business in content delivery and application processing on-demand.

And I believe there are many exciting opportunities ahead of us.

Thank you very much for your continued interest and support of Akamai and for your participation on our call today.

Bob and I will now be happy to take your questions.

Paul Sagan, our President, Mike Ruffalo, our EVP of Sales Services and Marketing are also with us this afternoon.

Operator, first question.

At this time I would like the remind everyone in order to ask a question, please press star then the number 1 on your telephone key pad.

We will pause for just a moment to compile the Q and A roster.

Your first question comes from Doug Campbell with Barrett Capital.

Congratulations on the increased of signing on EdgeSuite customers.

I was wondering whether George Ruffalo could talk about the vertical markets a little bit which presumably played a role in that and have it on the evolution of marketing efforts in that direction.

We will either give it to George Ruffalo or Mike Conrades, but I think I'll go with Mike Ruffalo.

I think that's me - I would be happy to answer that question.

First off, I think as you heard, our frozen EdgeSuite in Q1 was our best in the sense of add adding a net 77 new customers in Q1 and now it's 50 percent plus of our revenue.

The vertical markets that we've described before tends to be the areas that really use the Internet as a mission critical area of their businesses.

So it's not just the web-centric kind of businesses, like media and entertainment but tends it to be our key verticals like financial services, retail, automotive segments, and the technology segments as well as pieces of the consumer biz business.

And that's separate from, of course our public sector business which is in itself very strong area of our good and market strategy.

The good news is across all those industries there are seven industries we've had good traction with across our EdgeSuite customers.

We are starting to see more and more adoption deeper into the vertical from the earlier adoption customers we began working with a couple of years ago.

Thank you.

Your next question comes from Chris Lord with Criterion.

Good afternoon.

A couple of questions again regarding EdgeSuite.

Did you -- the average pricing you said was about $19,000.

Is that on a blended basis?

Or is that for new contracts?

What is that.

I think we said it's about $20,000.

$20,000.

And how does that compare to the prior quarter?

It's up slightly.

Up slightly.

Is that a blended number across all accounts or does that take into account [inaudible] in a rampup-- just walk me through.

It's blended across all EdgeSuite accounts.

Are you typically seeing a smaller sale initially and then increasing over time as clients utilize the EdgeSuite service more and more.

Particularly in Q1 we did manage to convince a number of the enterprise customers to begin with us at a certain price point that we fully anticipate getting larger as they get more traction within their own enterprise.

Right.

But historically it's been one where we begin with a certain area of their business and it typically spreads to other parts of their business.

Can you -- I know it is a lengthy answer, but can you briefly walk me through when you add a customer for if first time with EdgeSuite, at a high level, how you market the payback, the benefits.

Obviously from a technology perspective it's useful and I agree with you that [ ] computing is the future, from an economics perspective...

But how do you get people to buy the service.

What kind of return on investment do you pitch, payback do you pitch?

And then, are you seeing people now use it more deeply in the organization for more than just standard applications like configuring a automobile preferences, show me a green or a yellow car.

Are you seeing people moving toward putting proprietary obligations out towards the end of the network?

A rich question.

This is Mike Ruffolo.

Let me try to give you a flavor for what our customer selling experience is really all about.

Okay.

First of all it has a lot to do with who we are selling to within the enterprise.

We are focused on the largest web-centric businesses, leading web businesses, public sector accounts and the enterprise.

Let me focus on the enterprise to keep it simple.

Our customers tends to be at the intersection of the CIO organization and the revenue producing or marketing organization because of the nature of how they use the Internet in their businesses.

As you can imagine, depending on who the decision maker is, we tends to model our return on investment around business, operational, and financial benefits.

And so on the business side it tends to appeal to people looking for top line revenue growth, retention of customers, acquiring new customers, thing of that nature,we use metrics that help in that area.

In the case of operational, around the area of cost reduction, the whole notion of not building infrastructure that could otherwise be used on a pay as you go utility using Akamai.

And then in terms of the financial [inaudible], the CFO in any enterprise today has a very big role to play to make sure that the payback is in the 6 to 18 month time frame as opposed to a three or five year time frame which they may have been more satisfied with in the past.

As we go forward with Edge computing it opens a whole different set of return items on investment.

Because now we're talking about reducing the backlog of applications that are trying to be deployed that aren't going to get deployed given the backlog in those IT organizations and the payback there is anything from specific events where somebody is promoting something on the web to something that's more of a systemic process like registering and voting that are going to be on a more current basis.

So we're seeing with Edge computing a whole new dimensions of applications that frankly start out quite simple then become more and more mission critical to the enterprise.

Two quick follow-up.

And I apologize [inaudible]...

On the expense reduction side, just to drill down there a bit, is it primarily -- you won't have to buy more servers or the servers you currently have deployed in the data center you can redeploy for other purposes?

And the second, do you see the Edge computing gaining momentum on the acceptance side where you can start deploying more traditional applications like ERP and so forth.

That might be a dumb question but seems if you can get to that point seems like there would be a ton of demand for this stuff.

On the first part, on infrastructure cost reduction, both of the values you talked about reducing the requirement to buy more servers or expand Davis center and collo centers, or re=deploy existing servers, both of those are relevant.

And also some are thinking about expanding data centers or building data centers, like international locations.

So it is the whole avoidance of the whole investment.

So, all three of those are relevant depending on the enterprise, where they're at, their infrastructure, their investment.

It kind of varies from account to account.

Okay.

In case of Edge computing, clearly our long term vision is to move complex applications to the edge of our Internet delivery network.

And we are starting off with what we would describe as more simple applications.

But the broadest enterprise application has the you hear from the leading ERP and CRM vendors, that's clearly in our long range road map.

And you are right, it would offer us a lot of pent up demand for applications that aren't currently distributed today.

Let's go on to one more -- another person, please.

Your next question comes from Shawn [inaudible] with [inaudible].

Guys, nice quarter.

Thanks.

Wanted to get a sense from you as to the conversion of -- and association you might have addressed this earlier, but the conversion of you know traditional free flow customers into EdgeSuite customers.

And you had a great uptick in the number of subsequently increases in EdgeSuite customers.

And I'm wondering -- Bob I know you are not talking about guidance but I'm wondering what we can see there in terms of trends as we go through the year.

Is there some seasonality around that.

And I have one other question if you would bear with me.

This is Mike Ruffolo.

On the -- first off, I think it's important to know that our sales force and our channels are focused on selling EdgeSuite, not free flow: And so a lot of the encouragement of Q1 was that we were able to penetrate a number of new logos who had done no business business with us in the past.

And then just around the seasonality of the business.

Do you expect, you know, kind of a -- maybe a little bit of a slowdown because you've got some benefit from world events this quarter?

And did you break out that one-time benefit in this quarter?

We broke that out at $500,000 of $36.6 million.

Okay.

We would attribute to that.

And we are not going signal the seasonality subject.

Once again, nice quarter.

Thank you.

Your next question comes from Andy [Strofer] with Tier One Research.

Hi, I've got about four questions here.

Rumors aside in the marketplace, are you even looking to raise capital from a strategic investor?

We are always examining ways to structure our financial health.

So, I don't know about the rumors, but we constantly think about it.

Would that be more of an interest to you than paying down debt?

No, all of these options are considered all the time.

Fair enough.

If you were to look at the EdgeSuite customers that you had in first quarter '02 that are still with you at first quarter 30 what could you say the average growth would be if you were to pick a percentage in that customer base, year-over-year?

We actually don't do that.

It's something we track, not something we are prepared to give out.

Fair to say it is up meaningfully though?

Well I would have to answer the question if I gave you the information.

We've got to try to ask the questions, that's our goal..

Two more here.

Can you give the gross customer addition or the total amount from the EdgeSuite base in the quarter?

I think the overall customer count is up 4%.

And we basically said that churn has declined and the overall customer count was 994 at the end of the quarter.

You are not going to give out the gross numbers?

No.

I don't think it's important.

I think the overall customer growth is there and that's what we are focusing on.

We will have some which will come and is the net increase we are focusing on.

Was the down tick in churn meaningful on both revenue and customer accounts, though?

Yeah.

Last question.

You mentioned two data points that seemed to conflict a little bit.

One was that you still have a lot of servers in inventory.

And then you also said that Cap X is going to be going up.

I assume the servers in inventory could be Cap X - free.

Can you talk about what your Cap X is going to be used for?

I think what we basically said is that overall our Cap X for the year would be 10% or less of revenue.

We've been a little under and certainly in the first couple of quarters for this particular quarter.

But we have inventory.

We've got -- you know, we've certainly -- systems.

We've got certainly the internal development costs which we are focusing on.

And we had some credits also, relative to this current facility which is 8 Cambridge Center, the corporate headquarters.

So that drove it do you know little.

If you take that out and normalize it, we are pretty much spending at the level that we expect over the balance of the year.

We did not say I don't believe that Cap X was going up overtime.

I think we made a point that it grew quarter to quarter, but normalized.

Or if you look at it over, say, a year long period we are saying it's 10% or less of our revenues.

So do you still have thousands of servers in inventory?

We have servers in inventory.

But the servers we have deployed today I can assure you give us plenty capacity for the foreseeable future.

Excellent, thanks, guys.

Thanks.

You do have a follow-up from Doug Campbell with Barrett Capital.

Thanks.

Sorry about the George and Mike situation.

That's right.

I'm in a phone booth and I don't have my file with me.

But just on the business of having enough servers out there, which I thought you just meant as being deployed out there gave you plenty of capacity for the foreseeable future.

It seems to me like there was a much sharper jump during the quarter in the number of deployed servers, like a jump of 10 or 12% whereas the last couple of quarters I think had been more of a stable number; is that correct?

And if it is correct, what drove that?

This is Paul Sagan.

I apologize for my squeaky voice.

In the past couple of quarters maybe you didn't hear that we discussed that we had redeployed servers from bankrupt networks so the level of deployment of working servers was probably consistent quarter over quarter with the stabilization of the network environment what you saw was us deploying some out of the inventory.

So the level of activity has not changed substantially in the number of quarters.

Okay.

And we learned we're supposed to stay tuned on web [inaudible], butt I recall from looking at the recent 10 K that it's mentioned there that --

that's correct.

We stated that publicly.

If there is more to be said on, that I would be interested.

And also possibly as part of it, it's been a few months since you refocused and concentrated the effort of the R&D on solutions that would sort of help customers in the current and medium term.

Could you talk about what you have done and what you are doing in terms of functionality and, as I asked, add anything you can on web sphere at this point.

We continue to add functionality to our services.

And I would say that -- well, you have to -- there is so many components, I think I will not go into that on the call.

You will have to -- you can get on our web site and you can see the capabilities that we have.

But to help you a little bit on the kinds of things we are doing is to make our services ever more scalable, easier to use, and with even greater security.

As we add new functionality in the context of a new service.

But at the same time, the platform is being enhanced in the ways that I just described.

Okay.

And web seer?

Anything further on that?

No.

I -- we're -- there is just more to come.

Okay.

I have an unrelated question if there is time now.

Doug, just quickly.

Okay.

I think in the proxy statement George Conrades's salary is now running about $20,000.

Correct.

And established larger option position.

Is there -- what should we learn from that in terms of the general compensation scheme and perhaps Mr. Conrades's scheme in particular -- scheme is considered to be -- I'm using that as a structural word not as a descriptive word.

Well, I think you have to remember that I was an early investor in this company and joined the board when it was founded and became the CEO a few months later.

And in doing so, I acquired a great number of shares.

And I believe as we have been structuring our business, aligning our operations, particularly when we were laying off people that there were several of us, founders, Paul Sagan, our founder, Tom Layton, our president, Paul Sagan and myself.

We took our salaries at $20,000.

We owned millions of shares, if you will.

Our love is for this company.

And it's certainly -- any economic benefit is going to come from, you know share appreciation.

So I think -- I don't think you can read too much into that other than we were early participants, investors, and builders of this company.

Others in the senior management team are compensated much more consistently with what you would find in the industry from a salary and a stock options point of view.

Thank you.

Yeah.

Operator, we have time for one more question.

Your next question comes from Michael Malarkey with Marston.

Yeah.

I think your assistant counsel has stated publicly in the last 12 to 18 months that the size of the obligation that you are owed from K1 wireless is nine figures which I guess is $100 million.

Could you comment?

Should we expect -- given the new management at K1 wireless, should we expect a resolution of that situation in the next 12 months?

Or is it more likely in the next 3 years?

First I'd like to clarify that counsel has suggested that's what our claim might be.

For people who aren't current on the trial or status we expect to go to trial late this year to determine the level of damages the cable and wireless should pay Akamai as a result of a patent infringement verdict that we won in 2001.

Of course, we can't predict how it's going to turn out.

And frankly we can't predict how fast will it go to trial, through trial and through what's probably expected to be a fully appealed process.

So I don't know how to calendarize that, nor can I predict the exact outcome.

Could you give us ten seconds on [inaudible]?

In what regard?

Well, has anyone gone to jail yet?

Currently, there is real malice involved.

Just what is the status of the situation?

We continue to press our patent infringement assertions against [inaudible] as well as our trade secrets claim against [inaudible] that was filed last summer.

As you may recall, we filed an injunction against [inaudible] in that case and they can no longer access our trade secrets.

The court put that in place.

They have not set a date yet for trial and I cannot predict the outcome of that trial.

Thank you very much.

That's a very impressive performance.

Thank you very much, everybody.

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