阿卡邁科技 (AKAM) 2003 Q2 法說會逐字稿

Good afternoon my name is Lynn and I will be your conference facilitator today.

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

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

After the speaker's remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star and the number one 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, operator.

Thank you for joining Akamai's investor conference call to discuss our second quarter 2003 results.

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

Paul Sagan our President, Mike Ruffolo our Executive Vice President, Global Sales Service 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 Akamai's future expectations, plans and prospects that constitute forward-looking statements for purposes of the safe harbor provision under the Private Securities Litigation Reform Act of 1995.

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

As a result, a variance in important factors including but not limited to general economic conditions, as well as the specific Internet related industries, the dependence on Akamai's Internet content delivery service, and on our outsource key business structure services and soft ware, unexpected increases in Akamai's use of funds, failure of our services to achieve market acceptance or timing of acceptance, the inability to collect amounts owed by Akamai customers, (inaudible) to service or repair outstanding debt and other factors 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, forward-looking statements are estimates only as of today and should not be relied upon as representing our estimates of any subsequent date.

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 measures are not prepared in accordance with general accepted accounting principles.

A reconciliation between non-GAAP and the most directly comparable GAAP financial measures appears on our website in the investor section under the heading "reconciliation of non-GAAP to GAAP financial measures."

These nonGAAP financial measures including the following.

Adjusted EBITDA, defined as net losses before equity related compensation, restructuring charges and benefits and certain gains and losses on equity investments.

Free cash flow, or net cash consumption, defined as net change in cash and cash equivalents restricted cash from marketable securities quarter over quarter, normalized net loss, reported net loss amortization, equity compensation, restructuring charges and benefits and certain gains and losses on equity investments.

Normalized net loss per share defined as normalized net loss divide by the weighted average common shares outstanding.

Free cash flow net of restructuring settlement payments, defined as the net change in cash and cash equivalents restricted cash marketable securities, quarter over quarter, net of payments made to restructure impaired long-term real estate.

Network costs including equity compensation, defined as costs of revenue less depreciation, and equity related compensation, capital expenditures, defined as purchases of property and equipment in capitalization of internally (ph) software development costs.

Cash gross profits, gross profits before network related depreciation and equity related compensation.

Cash gross margin, defined as the percent of cash gross profit over revenue.

Cash operating expenses, defined as the sum of research and development, sales and marketing and G&A, excluding depreciation amortization and equity related compensation.

Finally I'd like to call -- to turn the call over to George.

Thanks, J.C.

Good afternoon, everyone.

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

We had another solid quarter, growing revenue sequentially and, year over year, while demonstrating continued improvement in our business fundamentals.

Quarter to quarter, revenue grew 3.3% to $37.8 million.

Our second sequential quarter of revenue growth.

And for the first time in two years, an increase in revenue from the comparable quarter one year before.

Significantly, revenue from our flagship EdgeSuite offering grew to 57% of total revenue.

Our record addition of 88 new EdgeSuite customers reflects the converted effort to add enterprise customers by offering an entry level EdgeSuite offering we call EdgeSuite Delivery.

We also are working to improve our earnings per share.

Net loss for the first six months of this year in accordance with U.S.

GAAP was $23.3 million, or 20 cents a share.

That compares very favorably with the same period last year when the net loss was $101.3 million, or 91 cents per share-- an improvement of $78 million.

For the first six months of this year, adjusted EBITDA was $14 million, or 19% of revenue, versus a loss of $14.1 million for the first six months of 2002 and an improvement of $28.1 million.

For the third consecutive quarter, we reduced our net cash consumption to $13.6 million, ending the second quarter with $96.3 million in cash and cash equivalents, restricted cash, and marketable securities.

You'll recall that during our last quarter call, we told you that the company had successfully negotiated favorable settlements of our impaired, long-term real estate leases, requiring $16.1 million in cash payments.

These settlements were completed and paid in the second quarter, saving Akamai more than $8 million per year starting in 2004, and a total of more than $50 million, by the end of the original lease periods in 2010.

I'd like to point out the net of these real estate restructuring settlement payments, Akamai would have generated $2.5 million in free cash flow in the second quarter.

And given the steady improvement in our operating performance, we believe the company is on track to reach our stated objective of generating positive free cash flow for the fourth quarter.

Normalized net loss declined quarter to quarter, by approximately 24% to $10.1 million, or a loss of 9 cents per share, versus consensus first call estimates of a normalized net loss of 10 cents per share.

Our capital expenditures in the second quarter totaled $1.9 million in line with our long-standing guidance.

And after Bob gives you a deeper look into the numbers, I will share some additional thoughts about our business performance and our strategy.

Bob?

Bob Cobuzzi Thank you, George.

We believe our second quarter results continue to demonstrate our success in growing and improving the quality of our customer base and operating the business on a cost-effective structure.

Thereby moving ever closer to our goal of being free cash flow positive for the fourth quarter of this year.

We are pleased to report revenue of $37.8 million for the second quarter, an increase 3.3% over the previous quarter's revenue of $36.6 million.

This is the first time we have seen two consecutive quarters of growth in over two years.

Revenue of $37.8 million also compares favorably to Q2 '02 revenue of $36.3 million, representing an increase of 4.1% and reflects, for the first time in two years, an increase in revenue from the comparable quarter a year earlier.

Our second quarter net loss in accordance with the U.S.

GAAP was $14.6 million or 13 cents per share.

This compares to a net loss last quarter of $8.6 million, or 7 cents per share, and a net loss of $42.2 million, or 38 cents per share, in a comparable period of 2002.

These results include a restructuring charge of $1.3 million in the second quarter and (ph) the real estate restructuring benefit of $9.8 million in the first quarter.

The normalized net loss for the quarter was $10.1 million or 9 cents per share, versus a consensus first call estimated loss of 10 cents per share.

This compares favorably to a normalized net loss of $13.3 million or 11 cents per share in Q1, and a normalized net loss of $32.8 million or 29 cents per share in the second quarter of last year.

Weighted average shares outstanding, used on a per share calculation for Q2 for 117.1 million, compared to 116.4 million in Q1, and 112.3 million in Q2 of the previous year.

Our outstanding share count on June 30th was 118.8 million shares while the fully diluted share count, which includes outstanding warrants and stock options was 135.2 million.

In the quarter our net cash consumption of 1$3.6 million declined once again.

Despite making real estate settlement payments totaling $16.1 million.

This reduction reflects the benefit of continued improvement in our overall operating performance.

As a result, we ended the quarter with $96.3 million in cash, and cash equivalents, restricted cash and marketable securities.

As George indicates in his opening remarks, excluding real estate settlement payments we would have generated positive free cash flow of $2.5 million for the second quarter.

And with the expectation of ongoing improvement in operations over the balance of the year, we fully expect to be free cash flow positive for Q4, in line with our previous forecast.

Now I would like to walk you through our Q2 operating results and metrics, addressing the areas of revenues and customers, network costs, operating expenses, adjusted EBITDA and interest expense, and capital expenditures.

As previously mentioned, revenue for the quarter increased 3.3% quarter over quarter to $37.8 million.

This growth in revenue reflects the effect of four consecutive quarters of positive net monthly recurring revenue bookings, and an increase in the number of recurring customers.

We define net monthly recurring never knew bookings as the committed monthly contract value for new customers entering into, or existing customers upgrading or committing to, new services under contract that are 12 months or greater-- less turn customers and downgrades.

EdgeSuite (inaudible) accounts of 57% of our revenue--up from 53% in the first quarter and 36% of revenues in the second quarter of the last year.

We ended the second quarter with 434 EdgeSuite customers, up substantially from 346 at the end of Q1--a 25% increase.

And that is up from 211 EdgeSuite customers 12 months ago.

In Q2, average revenue per EdgeSuite customer declined to approximately 10% or to just over 18,000 per month.

This decline reflects the concerted effort to add more EdgeSuite customers by offering an entry level service EdgeSuite delivery.

We believe this strategy provides us with a significant opportunity to increase the value of these customer relationships over time, by upselling the extensive benefits of the full-fledged EdgeSuite enterprise offering.

Our recurring customer base increased again this quarter to 1001 from 994 the previous quarter.

A net gain of 7.

However, our overall customer count grew by 22, before being offset by 15 customers in Australia that we excluded, because they are part of the restructuring of our Australian joint venture which I will discuss in a moment.

We have since transitioned most of these Australian customers to direct contracts this quarter.

We will have them included in our Q3 overall customer account.

During the second quarter we added 88 EdgeSuite customers.

Approximately half were up graded to EdgeSuite Delivery, so they are not counted as new customer additions.

Turn for the quarter was essentially unchanged from Q1 of this year, and significantly lower than Q2 of last year.

Monthly service revenue was 97% of overall revenue.

Our largest customer continues to be Microsoft, accounting for 12% of our revenues.

No other customer accounted for 10% or more.

Resellers accounted for 27% of revenues in Q2, versus 24% in the prior quarter.

International sales account for approximately 15% of sales for the quarter, consistent with the previous quarter, and 13% in the second quarter 2002.

During the second quarter we discontinued our joint venture in the Australian market.

And now we're directly providing service and support to our customers, and to expanding the reseller organization in Australia Asia.

Under the terms of dissolution, we were entitled to an earn out in the value of any customer contracts assumed by Akamai.

The assumption transfer of certain contacts to the new entity resulted in a one-time payment to our former partner of $472,000.

With the change in structure to a more focused market approach, we do not anticipate the need to provide significant additional funding.

Our day sales outstanding increased to 52 days, up from 48 days last quarter-- the results of several large customer payments being received at the end of the accounting period.

We do expect to show improvement in this area, however, in Q3.

Now let's review our net worth costs.

Network costs excluding depreciation, equity related compensation was $6.6 million for Q2, versus $6.9 million in the prior quarter, a 4% decrease, even though we carried 20% more traffic at peak this quarter.

Recall just one year ago our cost was $10.9 million on significantly lowered levels of traffic.

Cash gross profit was $31.2 million, or 83% of revenue.

Up from $29.7 million, or 81% last quarter, and up from 70% in the second quarter of last year.

Once again our cash growth margin includes certain credits associated with successfully renegotiating several network contracts.

We expect future gross margins will remain in percentage range of the high 70%s to low 80%s.

We have focused on sustaining our cash growth margins through continued effective band width procurement and network management as well as an improvement in our product mix towards the higher end EdgeSuite enterprise business.

Our global network at the end of Q2 consisted of 14,372 servers, 1134 networks, in 70 countries.

Versus 15,307 servers in 1134 networks in 68 countries last quarter.

The lower server count reflects in (inaudible) ordinary course of business server count fluctuates from period to period.

The geographic reaching capacity of Akamai's network is unprecedented in its ability to serve the needs of enterprise customers, government agencies and major webcentric businesses.

This overall deployment continues to provide us with significant capacity to amply serve the global needs of our multinational enterprise customers.

More importantly, it provides our customers with improved local and global performance-- a significant competitive advantage.

Now some comments on operating expenses, adjusted EBITDA and net interest expenses.

Cash operating expenses were $23.5 million, essentially even with the $23.4 million we spent last quarter, And an improvement of 30% from the prior year level of $33.7 million.

Adjusted EBITDA was $7.7 million a 22% increase over the previous quarter of $6.3 million and an improvement over the adjusted EBITDA loss of $8.3 million in Q2 of last year, or $16 million improvement year over year.

Our improved adjusted EBITDA results underscore our success to date in penetrating new enterprise markets, achieving a higher level of efficiency and network management and successfully managing operating expenses by the use of effective cost controls.

We are pleased with our improved adjusted EBITDA performance in the quarter, which represented over 20% of quarterly revenue.

Overall depreciation for the quarter was $13.4 million, of which $9.2 million was for network related assets, and $4.2 million related to all other assets.

Depreciation decline from $15.2 million (inaudible) in the first quarter and $20.6 million in Q2 of 2002.

We anticipate depreciation expense will decline further at the level of capital expenditures remains at levels more consistent with our business model of 10% or less of annualized revenue.

Amortization of intangible assets was essentially 0 for the quarter, versus $2.2 million in Q1, and $2.2 million in the corresponding quarter of 2002, reflecting the fact that intangible assets have been fully amortized.

In the quarter we recorded a restructuring charge of $1.3 million due to the settlement of long-term real estate lease obligations.

As a result, the company has been able to reduce its ongoing operating costs by relocating the smaller more cost effective facilities.

We continue to evaluate similar opportunities, whereby we can reduce operating costs and improve operating efficiencies if the return to the company is positive.

During the second quarter, a former officer with the company agreed to repay his long-term promissory note earlier than scheduled.

In return for the company discounting the note to maturity.

As a result (inaudible) the company has received in Q3 approximately $1.8 million in cash, and recorded an equity related compensation charge in Q2 of approximately $1 million, to reflect the full impact of the discounted value of the promissory note to maturity.

Net interest expense in the second quarter are $4.3 million.

It represents the accrued interest in the convertible debt, less interest income earned on our average cash balance.

Net interest expense in Q1 was $4.2 million, and $3.7 million in Q2 of 2002.

Now, for capital expenditures.

Capital expenditures for the quarter, which includes capitalization of internal use software development costs was $1.9 million, versus $2.2 million in the previous quarter.

We continue to expect that our annual capital expenditures will be less than 10% of our annualized revenue.

To recap some of the highlights of the second quarter, we generated $2.5 million in positive free cash flow, net of restructuring, real estate restructuring settlement payments.

Thereby moving towards our goal of funding future growth with cash generated from operations.

Most importantly, the steps we have taken to strengthen our business allowed us to end the quarter with adjusted EBITDA that now stands at 20% of revenue, $96 million in cash and cash equivalent, restricted cash and marketable (ph) securities.

A competitive cost structure and significant momentum towards achieving positive free cash flow for the fourth quarter.

Achieving the goal of free cash flow will require continued revenue growth, working to minimize loss to accounts and tended diligence on cost controls.

We will continue our practice of providing limited guidance.

As you will recall, last year our guidance was to achieve positive quarterly adjusted EBITDA by Q1 of 2003.

We actually achieved that milestone in Q4 of 2002.

This year we are focused on achieving positive free cash flow by Q4 of 2003.

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.

Thanks, Bob.

Well, as you've heard we had a good quarter, especially in this economic environment.

We are pleased by our ability to grow revenue quarter over quarter and to generate net positive monthly recurring bookings.

In a business that's based on recurring revenue contracts of 12 months or longer that's a good indicator of future revenue levels.

Our sales activity, for example, customer calls, proposals, customer briefings and the like, is at a high level, as evidenced by our record quarter of EdgeSuite customer ads.

What's really exciting is that over 60% of our growth EdgeSuite customer ads are new logos, including ATI technology, BBC technology, Bering Point, the Dow Chemical company, Fuji TV, Fuji Heavy Industries, the Subaru Division, the Princeton Review, Red Hat, and Reebok, among others.

While we don't see any meaningful improvement in overall IT spending we do see an opportunity to establish new customer relationships by solving immediate customer needs.

And we've had good success in getting in to visit C-level executives and prospect accounts.

At the same time, you've heard us talk about the length of the sales cycle being longer than we'd like, especially in this economy.

So, we've adopted a penetrate and grow strategy, creating an entry level offering called EdgeSuite Delivery that's easier to sell, and consume.

Our goal, of course, is to get customers on to our EdgeSuite platform, establish our value, and then grow with the customer in both volume and additional services as the economy eventually improves.

This also dovetails with our plan for basic content delivery.

That is, object delivery and streaming, which remain an important part of our business, and where we also are the clear market leader.

There is price pressure at this end of the market.

EdgeSuite delivery helps us by going beyond simple object delivery and streaming to support delivery of STP and secure content for the whole site, and has the benefit of being easy to upgrade to our EdgeSuite enterprise addition.

We're seeing some truly advanced uses of our EdgeSuite technology for such mission critical work as Apple's highly successful launch of I-2 (ph) and some innovative applications for Core Street and a major automobile manufacturer to mention just three.

You all know about I-2.

Core street developed a pioneering application for satisfying the security and performance requirements of a distributed public key infrastructure solution.

Partnering with Akamai to manage their application on Akamai's distributed platform.

A major automobile manufacturer turned to Akamai to increase the performance of its dealer network by including websites for hundreds of individual dealers, increasing the likelihood that potential customers who go to the manufacturer's website will visit the local dealerships.

We also are enhancing our relationships with customers and resellers with the rollout of our new portal.

Our goal is to provide enhanced functionality in provisioning, managing and controlling content as an additional benefit of using the Akamai platform.

It also gives our customers an unparalleled view into how the realtime performance of the global Internet, and how their specific applications are performing on the Akamai network.

We believe such insight helps engender confidence to commit mission critical applications to the Internet.

Additionally, we're beginning to see demand for our unique monitoring capabilities that enable us to identify Internet vulnerabilities that can lead to theft of corporate or consumer identity, hours of down time, or theft of sensitive customer information.

We believe that these capabilities offer an upsell opportunity into existing EdgeSuite accounts, as customers develop additional web-based applications and as we continue to build long-term trusted customer relationships.

Our partnerships with IBM, EDS and others are also helping to penetrate larger enterprises, especially with our high end EdgeSuite enterprise edition offering, where these premiere services providers have long-standing customer relationships.

For example, this quarter EDS helped us sell advanced feature EdgeSuite configurations to several fortune 500 accounts, including a significant Multi- year EdgeComputing solution.

We're working closely with these high level integrators to support their on-demand computing initiatives, and you can expect to hear more about customer progress from these partnerships in coming quarters.

In closing, I'm very pleased with the way this business is performing.

While there is no perfect quarter, especially in this environment, revenues have grown we generated positive adjusted EBITDA, and we believe free cash flow in the fourth quarter is in sight.

And now we can begin to focus the full attention of our business on achieving positive earnings per share.

We are very excited about the prospect for our business, and the opportunities that we have to grow with larger and healthier customers who continue to challenge us to develop innovative new services in response to their requirements.

So thank you for your continued support, and for your participation on our call today.

Now, Bob and I will be happy to take your questions.

Paul Sagan, our President, Mike Ruffolo, our EVP of global sales services and marketing, are also with us this afternoon and will chip in as the questions demand.

Operator, the first question, please.

At this time I would like to remind everyone if you would like to ask a question please press star then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Our first question comes from Harry Blount of Lehman Brothers.

Yes, good afternoon.

This is actually Greg Koebrich for Harry.

Sounds like you sue a nice uptake with the EdgeSuite delivering offering.

Could you provide a little more granularity on the mix of EdgeSuite, versus other EdgeSuite customers and if you could discuss how you may be tailoring the sales process for the different offerings?

And secondly if you could comment on how many quarter carrying sales reps you ended the quarter with and if you saw any change in productivity levels in the quarter.

Thank you.

On the sales rep and productivity answer, the last part of that, we believe that we continue to see improvement in our productivity as we have with more time over target.

I made customer calls last week for two solid days in California, and these are with reps who have been with us for a year or so.

And I must say, they're doing a good job at knowing where to go, what to say, and getting us in to high levels.

So their productivity is definitely improving.

You can see it in the activity, but you can also see it in our numbers.

On EdgeSuite delivery, that mix, we don't break that out, at this time, and I'm not sure that we will.

But we're very pleased with the ability of that offering to shorten our sales cycle and penetrate a new customer logo.

Okay, thank you.

Do you have an approximate number of sales reps?

George Conrades Yes, the direct sales reps at the end of the quarter are 64.

And we have indirect salespeople at about 12.

Thank you.

Our next question comes from Andy Schroper of Tier One Research.

Hi, two quick ones to start with.

Can you give the price point that EdgeSuite delivery starts at?

What's the other question?

The second one is the number of EdgeComputing deals that you have at the end of the quarter.

The price point for EdgeSuite delivery can vary.

Depending on the volume of bits (ph) that they will be pushing.

And so it is certainly less than our EdgeSuite average.

But I would say that it can be between $5,000 and $10,000 per month.

Okay.

And on the number of EdgeComputing deals that you have at the end of the quarter?

I don't have a specific on that.

But I'd say it's in the range of 8 to 10.

All right.

And a little more thought provoking stuff.

Worldcom announced an enterprise delivery model this week.

I know you're at least a partner with them, either through Digix or indirectly, are you involved with the enterprise CDN offering they have?

I'm aware of the activity that they have.

I should just concentrate on what we do with them.

We have a very good relationship with Digix.

We have a very good relationship with Worldcom.

And we are not involved with that enterprise CDN offering at this time.

Although, we certainly offer EdgeSuite and all of our services through Digix and Worldcom.

Excellent.

On the joint venture in Australia, I don't think that was going on for too long.

So any comments on why you decided to disband the joint venture?

Basically I think it's fair to say that the two partners had differing investment objectives, and how to really develop the market.

So rather than continuing something which would have an impact on the business going forward, we decided to go our separate ways, and again, under the contract we provided them with $472,000 in earn-out, and have transferred those customers substantially over to our paper, and are now running the business under Akamai 100% going forward.

The server fluctuation quarter to quarter was 1,000 servers.

I can understand the fluctuations.

But is that going to be a normal type of fluctuation going forward?

It could be.

It's no big deal.

It's just the ebb and flow.

We had some deconstruction.

We added in some new countries and that was just the net number for the quarter.

Operator, next question, please.

Our next question comes from Michael Turrits of Prudential.

A couple questions.

First of all, how many customers did you churn in the quarter, and can you give us some idea of the customer losses?

Well, as we started last quarter, we're really not giving the trend.

I'll tell you it's consistent with last quarter down substantially from a year ago.

What we've indicated is we had 22 new customer adds on a net basis, really.

It shows the 7, but 15 of those we put on what we call revenue reserve until we have actually transferred the Australian customers to Akamai paper.

That has happened in Q3.

Therefore as we look at it, it was 22, we had 37 adds in Q1 -- 39 in Q1 and two again in this quarter.

So again, what we are showing is that we're growing the business.

Churn is certainly part of the business, but certainly we think it's a manageable situation at this point.

Is it bottoming in some sense?

And are we kind of like single digit range?

In terms of churn or how should we think about how much there is to go here?

Bob Cobuzzi I think you'll always -- I think the business almost by definition, recurring revenue like this will have churn on a quarterly basis.

You know, I think it's consistent with where we see us going forward, they'll always be built into the models.

It is our intent to just continue to grow the customer basis on a quarter to quarter basis.

That's really how we're going to measure ourselves going forward.

Okay.

The EdgeSuite delivery, can you be a little bit more specific, about exactly what it is and how it's different from free flow and how it's different from EdgeSuite, the full offering?

George Conrades Yeah, Mike, why don't you take that?

This is Mike Ruffolo.

Yeah, I think it's important just for everyone's benefit that we're clear on the definitions of the various products we have.

Free flow is the original Akamai service (inaudible).

And it's the one that distributes objects only by modifying the URLs embedded in the page.

EdgeSuite Delivery and EdgeSuite Enterprise edition are the two going forward services that we actively market to our customer base, EdgeSuite Delivery is the entry level offering for EdgeSuite.

But that includes delivery of any type of file without requiring modification of the URL.

And it can also be used, as George said, to deliver whole sides including objects, pages and streams.

Applied share part of EdgeSuite or EdgeSuite itself is EdgeSuite Enterprise edition, that's our premiere offering.

As George mentioned earlier, we are very interested in getting customers to purchase EdgeSuite enterprise over time, even if they begin with EdgeSuite Delivery.

EdgeSuite Enterprise includes all of our advanced platform features including secure content delivery, dynamic content assembly, sure route, and other features that provide the benefits of scalability, reliability and predictable performance.

So, Free Flow, EdgeSuite Delivery and EdgeSuite Enterprise division those would be our basic content delivery services.

Does it shorten the sales cycle simply because it's a smaller bucket at a lower price so people are more willing to make the additional monthly payment commitment?

Is that why it makes for a shorter sales cycle?

I think that's certainly a factor in it.

The way it works in the enterprise market and I'm sure you're seeing this, as well, is that clearly when you're introducing new technology and new vendors into a major fortune enterprise anything to enable that to occur within an existing budget cycle and an existing departmental responsibility, price is certainly one of the factors.

But also, many times the EdgeSuite Delivery environment is used for very specific area of the business, and an expands from there and requires some of the more advanced services of EdgeSuite Enterprise.

Now, I know that you're not giving detailed guidance, but is there any seasonality to the business that should give us some indication of what we should expect for third quarter?

No.

I mean, there's just probably little around the Christmas season, certainly we see a lot of online activity.

But I think it's fair to say, you know, I think as George indicated and I indicated, we're actually looking for (inaudible) we'll just leave it at that.

I'm sorry, say that again, I apologize.

Bob Cobuzzi What was basically said is we're looking for continued revenue growth, without being more specific than that.

But I think, you know, again we are looking to continue to grow the company.

Okay.

And anything in terms of any feelings right now about what you do to convert now that you're close to free cash flow?

No.

You know, as most of you know, we continue to look at that.

We've been approached by a number of people.

We look at, you know, in some cases people propose that we do you know equity for debt, we've done some refinancing and things of that nature.

But we continue to look at it with nothing concrete at this point.

Thanks very much.

Bob Cobuzzi Thank you.

)) OPERATOR: Our next question comes from Errol Redmond of Edmond capital management.

Hi.

A quick question for you on your EdgeSuite customers that you've had for over a year.

What is the actual revenue you've seen, the revenue increase you've seen from those customers specifically?

We're just trying to get a same-store sales number here.

George Conrades We're looking at developing those metrics.

We have the information, but, we're not sure best how to measure it, and we're certainly not prepared to report on that.

As we have a more reasonable approach to measuring those statistics, part of it can be driven by traffic.

Certainly part of it by adding features and things of that nature.

At this point we don't have the metric which we feel comfortable sharing at this stage.

George, can you give us some color on what's going on with your government business?

You're not reporting it as a percentage of revenue so I'm assuming it's still less than ten percent.

But can you kind of size it for us?

Are we in the 5% range?

And if you can just give us some qualitative color, too?

I'm not going to break that out.

But I must tell you it continues to grow.

We're very satisfied with the progress in the government's accounts.

And also with the special work that we do for several of our advanced services.

So, it's an area that we focus on as we do several other verticals.

And we're very optimistic about our future growth.

We have another question, it appears that when you made reference to that your cash flow positive in the second quarter but you hope to get positive in the fourth quarter, that for the uninitiated there's some confusion out there.

And I suspect it's interest expense that you didn't pay interest expense this quarter, but you will by the fourth quarter?

Bob Cobuzzi That's right.

We have a semiannual interest payment due in July and January.

So in this quarter we did not have an interest payment.

We will in Q3.

I think if you go over the transcript you'll see you didn't mention interest expense and it creates a little bit of an understanding gap to the less informed followers like myself.

And also, there's another thing where you include your real estate stuff in the operating statement of the company and I think it would just be much clearer to show that instead of showing by the way you did that the real estate losses were greater in the second quarter than the first it would be better to show it that the operating loss is actually being reduced if you take away these nonrecurring items.

Right.

I think that is part of our definition that we included.

We looked at free cash flow of having more cash in the bank at the end of the period than we actually started the period with.

So that's basically all we're getting into free cash flow.

In, fact, in the second quarter we do not have the real estate payments and again that's something we made, a decision we made to restructure, which will provide better for the company down the road.

If you exclude those we would have had more cash at the end of the period than we started the period with.

I understood it.

But it just takes a little bit of sleuthing to discover what you just described.

And George, Sharmly asked the question about government, and you said the government is encouraging and so on.

Could you characterize whether it's government now as in the 3% to 5% band or 5% to 8% band?

Well, nice try, but --

That's what you told me last call.

That's right.

I'm just not prepared to break that out right now.

This business is only four years old.

We're working on building verticals, and the government is one of them.

And we think of it like we do our other verticals.

It just happens to be an important one.

One of these days when we get big enough and have a federal systems division we might start talking about that.

But right now, it's -- it's just a solid pardon of our business.

Thank you.

Thank you.

)) OPERATOR: The next question comes from Nils Drucker of Sangia.

Nice quarter, guys.

Quick question, last quarter sequentially, that is Q1 over Q4 you added 29% new EdgeSuite customers, and about 25% in EdgeSuite revenues.

This quarter, you added 25% new EdgeSuite customers, but had an increase of only about 11% in EdgeSuite revenue.

Can you give me a little color on what's going on?

Is it back end loaded?

Is there a different average price?

What's behind that?

Yeah, I think the way we answer the question, we've introduced EdgeSuite Delivery, which is a entry-level sort of getting into the EdgeSuite relationship, so to speak.

And that is a price point which is lower.

As George said it's probably somewhere in the $5,000 to $10,000 price point.

It's also a much more focused offering.

One of the advantages we have in full EdgeSuite is a variety of capabilities that also, though, touch different parts of the IT infrastructure and also some of the business units.

So to sell a full EdgeSuite means you've got to have multiple customer parties involved within the account.

And so it's both a price point and a focus point.

And the longer sales cycle is related to taking those additional services to the particular entities and the customers that are most interested in them and convincing them that it's the right thing to do, and then adding those to EdgeSuite.

So the important thing for us is to get them on the platform.

Because to add the services per se, is very straight forward.

It's the selling of them that's the challenge.

And yes, it does reduce our average arc in the current terms by selling more of the EdgeSuite Delivery versions.

But we think in the long run, it's really a smart thing to do.

In this economy, to get a sale is very important.

And to get a sale on which you can grow the base is even more important.

And so, that's what we're doing.

We're making hay while we can, despite the economy.

So that's really the thrust of this.

And our overall revenues are growing, and we are very pleased with that.

And we're very pleased with four quarters in a row of net positive monthly recurring revenue bookings, and so, I think that this new EdgeSuite delivery offering is going to pay off for us in the long run.

So I should continue modeling for the next couple quarters that kind of ratio of new customers to new revenue growth?

Yeah, I think you should.

Okay.

Great, thanks.

Our next question comes from Jonathan Hedinger, a private investor.

Hey, guys, congratulations on the results again.

Just a quick note.

It looks as though the contribution from foreign sales has been maintained pretty steady at about 15%.

And my question is, what can be done to stimulate foreign sales?

Because it seems like given your global footprint, there should be quite a bit of room to grow abroad?

It's true that there's quite a bit of room to grow abroad in -- as a generality.

And also it's true that we have a fantastic global footprint.

That's different from making the investment to sell outside of the United States.

We are focused primarily on the United States, and we have made investments in Europe, and we have made investments in Austral/Asia, that now are predominantly of the reseller nature, including a very promising relationship we have with NTT (ph) in Japan to sell our services.

And so what we're doing is focusing.

I think if we don't want to be deluded, if you will, by our past here achieving our financial goals, and the challenge with overseas investment in marketing and sales is largely one of management and expense.

And right now, we're allowing that to grow commensurate with the ability to pay for itself.

We're not overinvesting it.

And it will be there as we get this -- as we achieve full bottom line profitability.

It will be there for investment in the quarters to come.

Okay.

That sounds like a prudent approach.

Thank you.

Our next question comes from Charles, a private investor.

Yes.

Can you guys tell me a little bit about the competitive environment that you're looking at, particularly for your entry level systems versus the full suite of capabilities you have?

I realize the economy is bad but what about the competitors?

Well, as we've said on prior calls, our primarily competition is customer inertia.(inaudible) That's the sales cycle.

Because there are a lot of fungible alternatives to our services, all the way from hosting and co-load, that type of thing.

A centralized approach to what is essentially, however, a decentralized problem.

So that's our -- that's our largest challenge.

We do have competition.

And frankly, we rarely lose a sale in a competitive situation.

So, we're pretty pleased with our ability to penetrate the market, and at the same time speed competition for new accounts and hold them out of our existing account.

Do you see anything new coming on the horizon in the way of competition?

Someone out there who's just getting started?

Well, no, not that I'm aware of.

Okay, thank you.

Thank you, your last question comes from Chris Cook of Zozovi.

Hi, thanks for taking my question.

I may have missed this, why did sales in marketing tick up, roughly $1.3 million quarter over quarter?

The spending -- the spending in the quarter?

Yes.

Bob Cobuzzi You know, it's driven by higher revenues they have higher commissions during the period.

That's part of it.

I don't know specifically some of the other attributes.

Overall, you know, spending held pretty constant quarter over quarter and I think that's really what I'm focusing on.

Should we model it then that op-ex will continue relatively constant?

We're looking at really it should grow somewhat given inflation and the economy.

Okay.

I'll just follow that, as the revenue grows you get commission on uptick, as well.

So that's not included in that sort of op-ex?

It may be a little higher than the basic inflation.

Got you.

Okay.

Thanks very much.

Okay, thank you very much, folks, for your support, and for being on our conference call.

Bye-bye.

This concludes today's Akamai second quarter earnings conference call.

You may now disconnect.