阿卡邁科技 (AKAM) 2003 Q4 法說會逐字稿

Good afternoon.

My name is Jeff and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Akamai 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. (OPERATOR INSTRUCTIONS).

Thank you.

I would now like to turn the conference over to Sandy Smith, Director of Investor Relations of Akamai.

Please go ahead, ma'am.

Thank you.

Good afternoon and thank you for joining Akamai's Investor Conference Call to discuss our fourth-quarter and year-end 2003 results.

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

Paul Sagan, our President, and Mike Ruffolo, our Chief Operating officer, 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 provisions 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 of various important factors, including but not limited to failure to increase our revenue, retain our significant customers or keep our expenses consistent with revenues, general economic conditions, as well as those specific to the Internet and related industries, inability to service and repair outstanding debts, unexpected network or service interruptions that cause loss of revenue, 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 statement represents our estimate 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.

Therefore, you should not rely on these forward-looking statements as representing our estimates as of any date subsequent to today.

During this call, we will be referring to non-GAAP financial measures that we believe are helpful to an understanding of our financial results and operations.

These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles.

Under the News and Publications portion of the investor section of our Web site we define these non-GAAP terms and reconcile our non-GAAP financials with the most directly comparable GAAP financial measures.

Now, let me turn the call over to George.

Good afternoon, everyone!

Thank you all for joining us.

The fourth quarter of 2003 was the best quarter in our company's history.

The most revenue -- $45.2 million; the most cash generated from operations, $7 million; the highest adjusted EBITDA margin, 31 percent, and the most important improvement in our five-year history, we generated positive earnings per share on a normalized basis.

These great results capped a year of consist revenue growth and rapidly declining losses.

The fourth quarter's revenue of $45.2 million is 8 percent growth quarter-over-quarter and 28 percent growth year-over-year.

Full-year revenue was 161.3 million, an increase of 11 percent over 2002.

Our total count of customers under long-term service contracts increased to 1,126, the highest level in more than two years.

We continue to experience strong demand for our flagship EdgeSuite service.

New EdgeSuite customer adds in the quarter included Audi, Bayer, Knight-Ridder Digital, Christian Dior, Americanas, the major Brazilian portable -- portal -- Breyer Lane (ph), a leader in specialty catalogs and E-commerce, and OfficeMax.

After Bob takes you through the detailed financial results, I will be back to review some of our goals for 2004.

Bob?

As George mentioned, we had our best quarter ever.

I will walk you through some of the fourth-quarter and full-year operating results in detail, covering the following areas -- revenues and customers, cost of services, operating expenses and adjusted EBITDA, balance sheet highlights, and finally, I will review our successful raise of additional capital with the new convertible bond offering and the steps we're taking to significantly reduce our interest payments starting in 2004.

Q4 revenue of 45.2 million was our fourth consecutive quarter of topline growth, propelled by six consecutive quarters of positive net monthly recurring revenue bookings.

We define net monthly recurring revenue bookings as a committed monthly contract value for new customers entering into or existing customers upgrading or committing to new services under contracts that are twelve months or greater, less churn customers and downgrades.

By the end of 2003, we had 1,126 total recurring revenue customers.

That's an increase of 7 percent from the previous quarter and it is our fourth consecutive quarter of growing our customer base.

For the full year, our customer count increased 18 percent.

Churn was unchanged from the previous quarter.

We continue to focus on reducing long-term churn with a target (indiscernible) of low single digits.

Our average revenue per customer increased again in the fourth quarter to 13,700.

That's a 3 percent growth in ARPU quarter-over-quarter and a 16 percent increase in ARPU from the same period last year.

The fourth quarter is always reflect (inaudible) the incremental benefit of some seasonality accounting for approximately 2 percent of our quarterly revenue this year.

International sales accounted for 17 percent of business in the fourth quarter, up from 15 percent in the previous quarter.

The impact of a strong euro was immaterial to our results.

Resellers accounted for 25 percent of revenue in Q4, up from 22 percent in the prior quarter, reflecting a positive trend with almost all of our major resellers showing growth.

Microsoft continues to be a significant customer, accounting for 15 percent of revenue in the fourth quarter, down from 20 percent in the third quarter.

You may recall that our third-quarter business with Microsoft benefited from about 2 million in incremental revenue from the Blaster Worm.

No other customer represented 10 percent or more of our revenue in the fourth quarter, or for the full year 2003.

We will look at cost of services.

Our cash cost of services -- that is our cost of services, excluding depreciation and equity-related compensation -- was up slightly on increased traffic to 7.3 million in Q4 from 6.7 million in Q3.

Gross margins for the quarter were unchanged from the previous quarter at 84 percent of revenue.

On a GAAP basis, which includes depreciation and equity-related compensation, gross margins for the quarter were 71 percent, as compared to 66 percent in the third quarter of 2003.

For the full-year 2003, our cash cost of services totaled 27.4 million, compared to 38.4 million for 2002.

That's a decline of 29 percent, even though we carried more traffic -- more network traffic -- in 2003 than we did in the prior year.

Cash gross margins for full-year 2003 were 83 percent of revenue, compared to 74 percent the year before.

On a GAAP basis, gross margins for 2003 were 62 percent, up from 41 percent in 2002.

Looking forward to 2004, we expect cash gross margin percentages to remain relatively unchanged from 2003 levels.

However, we expect GAAP gross margins to improve year-over-year as depreciation continues to decline from the build-out of our network.

Now, some comments on operating expenses and adjusted EBITDA.

Cash operating expenses were 23.7 million in the fourth quarter, essentially flat quarter-over-quarter and down 14 percent from the fourth quarter of 2002 and down 25 percent for the full year.

On a GAAP basis, operating expenses declined from 28.6 million in the previous quarter to 27.5 million in the fourth quarter, reflecting the lower depreciation and equity-based compensation charges.

On a year-over-year basis, operating expenses dropped 54 percent from 242.2 million to 111.3 million.

As we head into 2004, cash operating expenses may trend up on an absolute basis due to selective product development investments, commissions on expected increased revenue and general inflation.

On a percentage basis, however, we would expect cash operating expenses to remain relatively constant year-to-year.

With revenue growing 11 percent, gross margins expanding for the year, and operating expenses decreasing 54 percent year-over-year, we are clearly seeing the leverage in our model.

Adjusted EBITDAR (ph), which is defined as net operating loss before interest, taxes, depreciation, amortization, equity-related compensation, restructuring charges and benefits, loss and early extinguishment of debt and certain gains and losses on equity investments, was 14.2 million in the fourth quarter.

That's a 21 percent increase over the previous quarter's 11.7 million and an eleven fold increase over the adjusted EBITDA (ph) of 1.3 million in Q4 of 2002.

In fact, we improved adjusted EBITDA almost 60 million year-over-year.

Adjusted EBITDA margin for the fourth quarter of 2003 was 31 percent of revenue and 25 percent for the full year.

We believe that our adjusted EBITDA margin for 2004 will exceed 30 percent for the full year.

Total depreciation and amortization for the quarter was 8.1 million, compared to 10.8 million for the third quarter of '03 and 17.1 million for the fourth quarter of 2002.

Our depreciation and amortization expense of 8.1 million for the fourth quarter includes 4.4 million for depreciation of network-related assets, 1.4 million for amortization of internally developed software costs, and 2.3 million for other G&A depreciation, such as leasehold improvement.

For the full year 2003, our depreciation and amortization expense was 47.5 million as compared to 78.5 million in 2002.

We expect depreciation expense will continue to trend down to approximately 4 million per quarter by the second half of 2004.

Net interest expense declined slightly in the fourth quarter to 4.2 million based upon our higher cash balance.

I will comment on this further when I review our recent debt financing.

We made significant improvement this quarter in reducing our net loss on a GAAP basis to 2.1 million, or 2 cents per share, down from 3.9 million, or 3 cents per share, in the third quarter.

If we exclude the cost associated with repurchasing some of our bonds, we would have reported a net profit for the period of approximately $18,000.

On an normalized basis, we achieved positive net income for the first time in the Company's history of 1.5 million, or 1 cent per share, in the fourth quarter.

That's an improvement of 5 million, or 4 cents per share, over our third-quarter results.

For the full year on a GAAP basis, net loss declined to 29.3 million, or 25 cents per share, from a loss of 204.4 million, or $1.81 per share, and an 86 percent improvement year-over-year.

The full-year 2003 normalized net loss was 25.3 million, or 21 cents per share, versus a 2002 normalized net loss of 113.8 million, or $1.01 per share.

That represent a 78 percent improvement year-over-year.

A reconciliation of adjusted EBITDA and normalized net loss to our GAAP loss can be found on our Web site.

For the fourth quarter, our weighted average shares outstanding used in basic and diluted per-share calculations were 120.2 million, compared to 118.6 million in Q3 of this year.

For 2003 fiscal year, our weighted average shares outstanding were 118.1 million, compared with 112.8 million shares for the 2002 fiscal year.

Our share count December 31, 2003 was 122.2 million shares, while the fully diluted share count, which includes outstanding warrants and stock options, was 137.7 million shares.

Now, let's talk about some of the balance sheet highlights.

We ended the year with 208.4 million of cash, cash equivalents, restricted cash and marketable securities, up from 99 million at the end of the third quarter.

This increase includes cash generated from operations in accordance with GAAP of 7 million, net of a 2.1 million loss on early extinguishment of debt, and compares favorably to cash generated from operations of 610,000 in the third quarter.

In December, we raised 175 million in new convertible debt and in January, we added another 25 million of convertible debt with the exercise of the underwriters' over-allotment option.

The new debt carries a 1 percent coupon and a $15.45 conversion price, representing a 41 percent conversion premium over our stock price at the time of the transaction.

As we've already announced, we have repurchased some of our old 5.5 percent bonds, leaving us with 201 million in 5.5 percent Notes due in 2007 plus 200 million of 1 percent Notes callable in 2010.

As a result, our annual interest expense will drop by 3.5 million, from 16.5 million in 2003 to 13 million in 2004.

Days Sales Outstanding, or DSOs, in the fourth quarter were 47 days, down from 52 days in the third quarter.

This was driven by strong collections activity.

Capital expenditures for the fourth quarter were 2.7 million, which included 1.7 million of capitalized costs for internal software development -- well within our guidance.

For the year ended, we spend 8.9 million on capital expenditures, significantly less than the 14.2 million we spent for 2002 and on target with our goal to keep capital expenditures less than 10 percent of revenue while supporting the growth requirements of the Company.

At the end of 2003, we had 14,733 servers (ph) inside 1,072 networks in 71 countries throughout the world.

Now, guidance -- finally, a few additional comments for our 2004 financial expectations.

We are increasingly confident about our ability to grow the business by at least 20 percent year-over-year.

We expect revenue in the first quarter to be in the range of 46 to 48 million.

That represents a 4 to 6 percent growth over fourth-quarter revenue, normalizing for seasonality.

We expect to be profitable on a GAAP basis in the first quarter of this year.

For the full year, we are forecasting at least 20 cents of GAAP EPS.

Normalized earnings per share will be slightly higher because equity-related compensation charges are expected to trend down.

Now, let me turn the call back over to George.

Thank you, Bob.

Before we take your questions, I want to offer some comments about how we're going to achieve our ambitious goal. 2004 is all about profitable revenue growth and continued technology innovation with a sharp focus on customers and new market opportunities.

We stated that we plan to grow at least 20 percent in 2004.

We're going to do that by leveraging the virtuous circle of the Akamai business model.

Those of you who have been following us for awhile are familiar with the positive correlation between customers, network and technology innovation in our business.

We are investing in sales operations to generate high-quality leads among enterprise prospects and to win new business from permanent economy customers.

We've been especially successful in industry verticals where EdgeSuite functionality provides clear ROI, so we will continue to focus on automotive manufacturers, travel and leisure companies, media and entertainment firms, government agencies, Financial Services entities and high-tech companies.

In the E-commerce and traveling hospitality markets, for example, we improved browse-to-buy conversion rate up to 15 percent, helping customers protect their brands and most importantly, grow their revenue.

Our increasing success with customers means increasing the already significant portion of all Web traffic we carry on a daily basis.

This allows us to continually improve the deployment of our servers around the world while growing our capacity and lowering our cost of operation.

At the same time, our success with customers continues to improve our ability to increase our value to our channel partners.

Today, we have strong relationships with many premier firms, including IBM, EDS, MCI, Telefonica, NTT and Internet.

In 2004, we expect to be working with several of these partners to embed our technology into their new go-to-market offerings, further establishing Akamai as the preferred enterprise platform for the deployment and management of content and applications distributed across and delivered over the Internet.

Companies such as IBM and EDS are beginning to offer their customers on-demand computing solutions within the data center.

Akamai is poised to work closely with these industry leaders to extend their offering across the Internet.

Our EdgeComputing capabilities are designed to enable enterprises to deploy applications closer to their end-user customers anywhere around the world for higher performance and with an on-demand provisioning and pricing model.

For example, just recently with IBM, we announced a click-to-deploy feature that is now available through IBM's development tool called WebSphere Studio.

With this capability, software developers who are programming Java applications to run on IBM's WebSphere server can, after appropriate security and authentication checks, simply click a button to deploy these applications across the Akamai network.

We have already demonstrated our development partnership with Microsoft by deploying their streaming technology running on windows in the Akamai platform.

As many of you know, we are developing a .net service for distributed applications.

Our strategy is to position Akamai as the business Internet, the predictable, scalable and secure computing platform for businesses to make their computing initiatives work outside the firewall, across the Internet and around the world.

Of course, continuing to grow our customer base and our network reach depends on continued technology innovation, which is the third component of the virtuous circle leveraged by our business model.

Our platform of distributed servers and fault-tolerant proprietary software is uniquely capable of helping to mitigate the all too frequent denial of service attacks on customer Web sites.

Our detailed understanding of Internet performance, advanced traffic management and our secure SSL capability add an important layer of security to online business transactions and give our customers increasing confidence to use the Internet for mission-critical applications.

To that end, we recently began offering our customers and partners visibility into their information and applications running on the Internet.

Through our Edge Control Management Center and now through integration with leading systems management tools from IBM, HP and others, customers can monitor their applications to understand what's going on with their business running over the Internet.

These new capabilities, which we call EdgeControl, raise the bar on alternative approaches by offering enterprise-class management of our enterprise class Edge platform to deploy, manage and run applications on the Internet.

All of these advancements support our goal to grow profitable revenue throughout 2004.

Now, we'd be happy to take your questions.

Operator?

(OPERATOR INSTRUCTIONS).

Henry Naah of Lehman Brothers.

Congratulations on a great quarter!

Can you talk a little bit about the results in the quarter in terms of revenues and how we can think about revenues from existing customers and how that grew during the quarter?

Then I have a follow-up, if you will.

I think Henry is indicating, we saw growth in our overall ARPU, which is average revenue per customer effectively, about 3 percent quarter over quarter; it was up to 13.7 from 13.3 the last quarter.

Customer growth was up 7 percent -- again, both of those certainly records for the Company.

Year-over-year, in terms of ARPU, it's up 17 percent.

Does that help?

Yes, that definitely helps.

Then, in terms of gross margins, another strong quarter of gross margins here at 84 percent, which is running probably a little bit higher than your target of 80 percent.

I was wondering if you could talk a little bit about that, what we could expect in 2004.

Yes.

What we're indicating at this point is that -- yes, 80 percent -- we've given that pretty much the target for the year.

We exceeded that.

What we believe we're looking at (indiscernible) somewhere -- our average for all of '03 was 83 percent, and we believe that's a good target for us, going forward.

Okay, great.

Then one last question, regarding resellers -- it looks like you guys saw a nice uptick in business through resellers in the quarter here at 25 percent.

It sounds like you guys are working a lot with resellers, going forward.

I was wondering if you guys had some sort of target in mind as to what we could expect in terms of percent of revenues from resellers?

At 25 percent, we certainly think we can do a lot better with that over time, but we've been averaging in the 22 percent the last quarter, 25 percent this quarter.

We are certainly going to.

Certainly, as the products continue to get more complicated and, you know, EdgeComputing and things of that nature, we certainly expect that to grow over time.

I wanted to also just add one comment to Bob's response to your first question.

You asked about our existing customer base and how much of the revenue is coming from that.

Obviously, in our business, recurring revenue is the way we run our business model so naturally, our current customers are the ones who drive our revenue on a quarter-to-quarter basis.

But there's a couple of trends that I think you'll be interested in as you think about modeling our business.

As you can see, for the last several quarters, you've seen the business growing overall, but the customers who've been with us for at least a year are using, on average, more of our services and paying us more today than they were a year ago.

That's a trendline that we expect that we want to continue to maintain, going forward.

Certainly, reseller partners will be part of helping us do that.

Great.

That's what I was looking for.

Thanks, guys.

Great quarter.

Michael Turits of Prudential Equity.

Hi.

This is Mark Griffin standing in for Michael.

Just a quick question -- the interest expense that you gave, that was for all of '04 dropping by 2 million?

I indicated 3.5 going from (indiscernible) be the 13.

Three and a half, Okay.

That's all year.

Can you give us any drop for next quarter?

Is there anything going for next quarter?

What's the plan with the -- (multiple speakers)?

What I think you can do is basically take the savings on the 99 million and basically extrapolate that over the year.

Is there any more savings (sic) to come?

Do you think that there'll be any more buybacks in the bond area?

You know, we consistently look at that as an opportunity.

We believe we had an opportunity to buy it back.

We bought back 99 million, as you know, in December and early January.

If there's an opportunity out there, we will look at it, but nothing at this stage.

Okay.

For share guidance, going forward, I know you gave us some.

I didn't quite get that.

Was that in there?

Did I miss it?

The share guidance?

What I indicated -- right now, we are 122 million is the number of shares and our fully diluted would be 137, I believe.

I'm just wondering.

You guys talked about some of the customers -- you're saying current customers that have been there for more than a year, the ones that you're seeing using more and more of your service.

What type of customers are they?

Are they more, you know, through IBM?

I know you're just saying resellers, but are the music customers -- are they using, in general, more and more, not just Apple but other ones that you've had out there?

What kind of customers are using more services?

Okay, as George mentioned in his comments, we are very much taking our suite of services and solutions to the vertical markets where the Internet is business-critical to the business operations of those verticals.

So, (inaudible) mentioned High-tech, media and entertainment, retail etc.

Music is an important growth area for the Internet; you're certainly seeing a lot of news about that, not just Apple but other people in that space.

But I would just say that, even though we don't break out our results by vertical, the verticals that George mentioned are the ones where we are seeing a lot of significant progress -- not just in once they are a customer but actually getting some new customers.

We are very much into, as we discussed last quarter, penetrating into these big enterprise verticals and then growing them once they become customers of our platform.

In this particular case, that continued in Q4, both on a direct and through our reseller partners.

Vic Grover of Needham & Company.

Hey, guys.

Great quarter!

Good way to come out of the gate.

I know you don't want to break out customers by EdgeSuite and I guess Legacy anymore but is there anything more you can tell us about customers on the margin?

I know the question has already been asked.

What are customers using?

But what are seeing in terms of incremental demand?

What's moving the needle for some of your new customer wins I guess maybe just by product or whatever you can tell us?

Then I guess, getting more granular in terms of Microsoft, you've been backing out the 2 million and bursting in the third quarter.

It looks like Microsoft grew sequentially.

Can you tell us, where do you think Microsoft can go in terms of size?

Any kind of color on their potential to renegotiate with you guys?

The last question related to that -- in the first quarter guidance, are you factoring in any kind of growth from this My Doom (ph) outbreak or any other exogenous event?

Okay, you asked several questions, so let me try to group Microsoft-related questions together first.

You are right; if you do the math and you took out $2 million out of Q3 results, you should have seen, in your math, an improvement from Q3 to Q4 sequentially.

We're very happy about that result in terms of our business relationship with our largest customer.

At the same time, we are very comfortable that our relationship with Microsoft continues to be more and more positive mutually.

Though we will continue to grow that business, I think you can anticipate that they will represent over 10 percent of our revenue on a going-forward basis as the rest of our business grows as well.

You can see, from our numbers, that growth outside of Microsoft was (inaudible) as well and we expect that to continue.

As it relates to the My Doom virus, you probably saw, in several papers -- but I know I read the Wall Street Journal, as an example -- that they clearly talked about the impact of My Doom on Microsoft.

Fortunately for everyone, that was a non-event for Microsoft.

I think the way in which the hackers actually did the work that they did didn't actually cause much of the significant impact on Microsoft.

I think they mitigated it quite nicely.

It was a nonevent; it wasn't like Blaster was last year.

Your first question I think was around breaking out where our customers are coming from.

You know, we don't break out EdgeSuite any more because it's more than 50 percent of our revenue, but the fact is that, as I mentioned earlier in an earlier question, we continue to penetrate with EdgeSuite with a lot of our entry-level EdgeSuite delivery capabilities and upselling the customer from there.

But at the same time, our traditional services, like streaming and others, continue to have very good traction in the marketplace.

As we take our business more upstream to selling solutions around key business problems, EdgeSuite and EdgeComputing both will be important parts of that portfolio.

Thanks a lot, guys.

Doug Campbell (ph) of Spirit (ph) Capital.

Thanks.

A couple of questions -- I think, in the past, you mentioned that streaming revenues out around 2007 could be $500 million.

I'm not sure whether you're talking about streaming revenues for Akamai or all streaming revenues managed by vendors such as yourself.

Could you clarify that, please?

Yes.

I don't think we ever said anything close to that, certainly not for Akamai.

You may have read that as an industry number from someone else, but we've never made any kind of forecast about components of our business out over time like that.

Sorry about that.

I had it in an old pile of notes here from someplace.

Then, kind of another market-oriented question -- music downloading really appears just to be getting started, but it's coming from all directions with the video downloading over the Internet very, very nascent right now but undoubtedly going to come along.

You are working with telcos and other communications companies.

Do you expect to be participating in some of these streams, going forward?

Let me take that one, Doug.

Music is already a very important part of our business; we've been talking about it for at least a year.

We see it coming in different ways.

We are providing services to the music industry in several manners.

Let me just talk about a couple.

One is streaming terrestrial radio stations over the Internet; the other is downloading music that's being sold now by a number of sites, including Apple -- (technical difficulty) -- music store.

Apple is one of our oldest and largest and best customers, and we provide infrastructure that delivers the song previews and downloads to anyone who goes to the I-Tunes music store.

So I think that music already is an important piece of our business and we're serving that industry and that it will probably grow over the next couple of years because I think people have really found a model for digital media online, particularly with music, that is starting to pay off.

Our platforms ideally position us to support those kinds of businesses.

On the customers like Verizon, would they be expected to be streaming video over time here?

Would that fall into your (indiscernible)?

Well, I think we have to be careful not to separate two issues.

We partner with networks to place our technology inside their infrastructure and there, there they are a partner.

In addition, Verizon is also an Akamai customer for some of our services but we're running their online operations as opposed to being an ISP and delivering content to end-users.

Finally, it's already been touched, I think, by George, but could you go into a little more detail on what you think the trends appear to be for on-demand computing?

Doug, I think that we are just at the beginning of that.

I credit IBM and others with the pointing to the future with the potential of on-demand applications that are supported by Web services.

It's especially attractive, in a world of increasing complexity, partnerships and the need for quick response to business partners, to customers, to threats from competition -- that type of thing.

That being said, I think there are a lot of people that understand the potential for on-demand computing supported by grid computing and network computing, if you will.

But we're just at the beginning.

What's going on now are people are beginning to design, develop the application in new ways.

That's a terrific opportunity for the major industry players, and it's a terrific opportunity for Akamai to support them -- enable those applications to run globally, around the world if you will, on our platform.

So, we're just at the beginning, and I think a lot of it's going to depend on the whole industry defining and developing and moving customers in that direction.

Thank you very much.

Michael Turits of Prudential Equity.

Hi, guys.

Michael Turits.

I hope you can hear me okay.

It's not a great connection.

A couple of things -- first of all, what has changed from last quarter that you're more optimistic in terms of your guidance? (indiscernible) 15 to 20 percent growth, up to over 20 percent?

As you know, the way we've been giving guidance in the last year or so is we decided to focus primarily on the bottom line.

So at first, we gave you only really EBITDA guidance and we beat that by 25 cents.

Then we focused on free cash flow and we beat that by a quarter.

Our rationale in doing that was that we were making adjustments to our business, both in the top line as we changed from a .com customer base to a permanent-economy customer base and even in doing so, we were able to hold recurring revenues relatively flat.

But at the same time, we were making significant changes in our operating expenses and our focus on the most productive opportunities.

We felt the questions before us from the investor community were largely during that period -- are you guys going to make it?

So, we felt that, to give any guidance, the right guidance were those that were bottom line related and a point in time, because we felt confident that we could achieve those goals, and that was really the answer to the question then.

As we progressed through 2003 and we grew sequentially every quarter in revenues -- and you saw that -- and we also signaled that we were, every quarter, booking positive -- recording positive revenue bookings -- we are starting to build a growth trend.

Then, as we turn into 2004, we are on the -- as you saw, on a normalized basis -- we are profitable and as we gave guidance, we are on the verge of GAAP net earnings profitable in the first quarter of 2004.

So, we thought, you know, we now have enough points on the line that we can give a more complete picture on guidance.

We are more confident about our customer base now, the demand for our services, our ability to keep spending at appropriate levels, including our CapEx.

As a result -- and I think we are better planners as well as budgeters, if you will.

So, that's the reason that we think we can be more forthcoming about our prospects and help you build your model.

Okay.

Is there something that has changed from the last quarter's report that makes you more optimistic -- just very specifically -- or is it just that you have better visibility?

To raise from 15 to 20 aggregate over (indiscernible), has demand improved such that you feel that you can give higher guidance?

I think I just said we've seen demand improving throughout 2003 by our sequential revenue growth and our six quarters of net positive bookings.

So, it's a matter of points on the line, and we see nothing that says it's going to go south on us.

Okay.

Next question -- regarding next quarter, you guided to 46 to 48 million.

I can get to that number basically (indiscernible) guidance, keeping your customer count flat and your ARPU flat just by the fact you roll in the new customers.

Aren't you being awfully conservative for next quarter?

You have to back out the seasonality, and our goal is to be conservative and make progress and to be predictable.

What was the effect of the seasonality?

Was that volume, or volumes in terms of bandwidth or e-tailing, or where was the seasonality?

It was seasonality among e-tailing customers in the fourth quarter.

Probably 2 percent impact on the quarterly results.

So for that reason, would you expect that ARPU (indiscernible) same kind of gains next quarter or possibly goes down?

We had a 3 percent increase this quarter, as I indicated; part of that was (indiscernible) additional bursting -- probably 2 percent because of seasonality.

You know, I mean, those were the data points at that point.

Okay.

Then in terms of the EPS guidance, did you give it for the -- I think you gave me GAAP EPS guidance for the year.

I think it was up 20 cents.

Right.

What was it on a pro forma basis?

What should we expect in terms of EPS, GAAP and pro forma for next quarter?

We just said we would be EPS positive in Q1 on a GAAP basis, alright?

I didn't give any specificity around that, but I think there's enough data points you can probably do that but we don't want to do that at this point.

We indicated it's greater than 20 cents next year on a GAAP basis, and we said that, on a normalized basis, it would be a little higher than that -- because right now what you have is you have equity-based compensation continuing to decline at this point.

Just a last general question on pricing -- my observation -- for what it may be worth it -- is that you probably had some pricing declines in the last year on a per (indiscernible) basis and yet your ARPU is going up.

Can you quantify what those per megabit pricing declines have been?

How have you offset that in order to get rising ARPU?

Okay.

On pricing, I think you talked about some of the transit or the bandwidth pricing as one of the elements of our pricing model.

We've actually started to see bandwidth prices from our suppliers stabilize somewhat.

Certainly, they were declining pretty rapidly the last few years, and it looks like they are stabilizing.

Obviously, you know, on our side, we manage our network costs and optimize the delivery of that traffic very, very efficiently.

Fortunately, as we go forward, our services are becoming less and less dependent on the bandwidth component, and so our ARPUs and our pricing are becoming less correlated to the price of raw bandwidth.

Fortunately, that's a trend that allows us to feel pretty confident about our ability to differentiate versus our competition.

Relative to competition, there's sort of low-end providers out there with less bells and whistles that may be able to take -- you know, willing to take less margin.

Is that not creating some price pressure for you?

As you know from earlier calls, our key competitor is Inertia.

Certainly, we have some low-end competitors that compete for some of the more price-sensitive deals, and we compete very effectively there because our cost structure allows us to.

But the reality is that our value is in the software, not in the actual bit delivery economics.

So from that standpoint, our strategy continues to be to go after the enterprise, the government and the large Web companies that appreciate the value that we uniquely provide.

So you know, pricing pressure exists in every market but we are feeling more comfortable with our ability to differentiate.

Thanks a lot, guys.

Phil Zucci (ph) of Zebra Find (ph).

Thanks for taking my question.

I saw, just a few days ago, that you guys struck a partnership with Equinix.

Now, there's some talk out there that within the cross-connect that Equinix sets up, you guys may be losing some of those customers -- at least for what our bandwidth services, which is what I understand you guys are trying to get away from.

Can you give any color on that?

Also, my take is that only Speedera is out there trying to compete with you.

Anything else on the competition front?

We don't sell bandwidth services; we don't sell conductivity.

We deploy our technology inside more than 1,100 networks worldwide.

That happens to be one of them, but it's not competitive with our services because what's key to our customers -- major enterprises and government agencies -- is that we deliver their content and applications from close to where their end-users are worldwide.

If you look out across the network landscape, what you see among the 15,000 network providers that make up the Internet is that not a single one of them has a very large market share of the actual data or bit that gets delivered to end-users -- not Equinix, not anyone else.

The value that we provide in our technology is the ability to move content applications close to end-users and to provide high availability, high speed, great reliability with security.

So, no one of those network providers, particularly a CrossConnect provider, provides the benefit to a customer that we do for the delivery of content applications.

So, they are really apples and oranges.

As far as Speedera is concerned?

There are a couple of small private companies out there who provide some basic content delivery services.

We see them in the market from time to time and we believe that we can compete very effectively against them.

Most of our conversations, though, with enterprise customers are around high value-added application delivery services, whereas Mike mentioned the real competition there is Inertia, when they are ready to make a change and how they work on the Internet.

I think the difference over them as well is in the additional functionality we offer.

But to really be a legitimate CDN (ph) (indiscernible), you have to be able to scale on demand; that includes being able to absorb denial of service attacks and so forth that customers experience on a regular basis on the Internet.

So, one of the challenges the low-end services have is the ability to handle that kind of traffic.

The challenge, of course, is that it's on demand, so you don't know when it's coming.

That's also an appeal to major enterprises.

They know with Akamai they have plenty of the headroom and that we have experience and can handle all kinds of traffic -- legitimate and illegitimate loads.

If I can ask one more quick question?

Are you guys seeing any move by your customers or any interest by your customer to basically -- at least, in the future, off-load, outsource to you guys all those non-mission-critical type Web sites that are there for the marketing but they are not critical to their businesses?

Because they may just be more of a headache than anything else for them.

I would say that's a trend that's been going on for some time now, where there is more and more interest in understanding what exactly the customer is trying to do with their Internet presence.

If it is a largely passive site where there is not a lot of activity going on, many times customers determine that it makes sense to have that become an outsourced service, where they don't have to put much time and energy into maintaining the delivery and management of that site.

We obviously play well to that approach.

But frankly, more and more often, our customers are doing more important things with their Web sites, and that even plays even stronger to the importance of having somebody that has the scalability and reliability that we do.

So, either type is appealing to us.

I think the trend is to do more things on the Internet, more business-critical activities.

We have time for one more question.

Harry Blount of Lehman Brothers.

Just one question I'd like for you to expand on.

You guys touched a little bit in your commentary about continued work you're doing with Microsoft on distributed applications within the .net framework and continue to evolve with IBM.

I was wondering if maybe you could give us a little more flavor as to any change in traction you are seeing towards distributed applications being deployed within the enterprise and some of the other progress benchmarks maybe we should look for, going forward?

I tried to refer to that earlier, Harry, but the point that the IBM and Microsoft and the other industry leaders are working closely with their customers to define and develop new on-demand applications.

We are, of course, working closely with them to enable those applications outside the firewall.

So, I really believe we are at the beginning of that.

We certainly have, now, a small-but-growing number of customers running Java applications at the Edge and we commented that we would be invaded with .net during 2004.

I think that's kind of consistent with where the majors are right now in the implementation of their offerings.

The thing that is really important is that they are putting a lot of their wood behind the on-demand arrow, if you will.

I think that's good; it's good for customers because customers need this, and it's good for the industry and it's good for Akamai.

I think we're just at the beginning of that.

George, are you seeing any particular verticals or specific applications where the on-demand distributed functionality has taken hold?

One example I can think of would be something like a sales force .com.

Is there any specific areas (sic) that you're seeing a lot of customer actual spending right now?

I think it comes in at least two general buckets; one of them is if there are applications that exist on Web sites today where you might click a button to initiate application functionality and some of that -- say it's a marketing campaign -- if there's great demand could, just like content, you can get a spike in content delivery; you can get a spike in application processing.

Those kind of existing applications can, if they are programmed, if they are J2EE compliant, for example -- can be moved out onto our network, run in the distributed mode and provide the benefits of improved performance, reliability and scalability.

So, we are seeing that today in the initial applications that are on our network, frankly.

But there is an increasing trend to provide software as a service.

I think that's a major opportunity in the industry that the IBM's and the Microsofts and others see.

We have an on-demand provisioning and pricing infrastructure that can help enable that kind of capability.

So I think that's the big opportunity yet to come.

Okay, great.

Thank you.

Thank you all very much.

We will see you next quarter.

This concludes today's conference call.

You may now disconnect.