阿卡邁科技 (AKAM) 2004 Q2 法說會逐字稿

Good afternoon, my name is Meredith, and I will be your conference facilitator.

At this time, I would like to welcome everyone to Akamai's second quarter earnings conference call. [Operator instructions.] Ms. Smith, you may begin your conference.

Great.

Thank you.

Good afternoon and thank you for joining Akamai's investors conference call to discuss our second quarter 2004 financial results.

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

Paul Sagan, our President, 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 results of various important factors, including but not limited to unexpected network or service interruptions that cause loss of revenues, increased expenses or diversion of resources, 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, failure to maintain the prices we charge for our services, 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, and 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 some 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 relations section of our website, 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.

Thanks, Sandy.

Good afternoon, everybody.

Thank you for joining us today.

We had a great second quarter, the best quarter in the Company's history.

It's the third quarter in a row of record revenue and profitability.

Revenue of $50.8 million, a 5% increase over first quarter revenue, came in near the top end of our guidance.

That's a 35% increase over second quarter last year, and our 6th consecutive quarter of revenue growth.

On the profit side, we more than doubled net income over the previous quarter on a GAAP basis, to $6.8 million, or 6 cents a share, and normalized EPS also doubled to 8 cents a share, exceeding first call consensus estimates by one cent per share.

Adjusted EBITDA was 17.7 million, yielding an adjusted EBITDA margin of 35%, another all-time high.

As we've said, in 2004, we're focused on profitable revenue growth, which is reflected in the growth in our bottom-line results.

We continue to sign up some great enterprise customers on the Akamai platform.

This past quarter, we expanded the number of customers under long-term service contracts by 4% to 1,214.

Some of our new customer this quarter include Business Week;

Expedia;

Frictionless Commerce; the Gallup organization;

Rona, Canada's largest home improvement retailer; the State of Arizona;

Under Armor, the sports apparel company; the United States Department of Labor, and [Verity.] We're also very excited to announce that NBCOlympics.com became a customer earlier this year, and went live in May.

Working alongside our content management partner, Internet Broadcasting Systems, Akamai is providing services to NBC's site devoted to the summer games in Athens.

And we're pleased to announce that Apple computer renewed, once again, under a long-term contract.

We're very excited to be supporting Apple's iTune's music store in the U.S. and now in Europe.

Apple's music store recently exceeded the milestone of selling 100 million songs, all delivered by Akamai.

After Bob takes you through our second quarter financial results in detail, I'll be back to talk about our outlook for the rest of the year.

Bob?

Thank you, George.

As you've just heard, the second quarter of 2004 was another great quarter for Akamai.

Our results last quarter markedly demonstrated the leverage in our business model.

While generating the most quarterly revenue ever, we accelerated our EPS growth and cash from operations.

Now, let me walk you through our Q2 results in detail, covering the following areas: revenue and customers, cost of revenue and margins, operating expenses and adjusted EBITDA, and finally, I'll review of balance sheet highlights.

As George mentioned, we grew our top line to 50.8 million, a 5% increase over the first quarter, and a 35% increase over the same period last year.

This past quarter we added 42 net new customers, bringing the total number of customers under long-term contract to 1,214, representing a 4% increase in customer count over the first quarter and an 11% increase in customer count over Q2 of last year.

The second quarter of 2004 was our 6th consecutive quarter of net customer growth. [Churn] this quarter was flat with the prior quarter and we continue to continue focus us on reduce churn long term with the target of low single digits quarterly.

Our average monthly revenue per customer, or ARPU as we call it, increased to 14,000 over first quarter ARPU of 13.8, and that's up 24% over the same period last year.

International sales were 17% of revenue in the second quarter, down slightly from 19% in the previous quarter, but up from 15% in the second quarter of last year.

Our percentage of sales from resellers was 26% of revenue in the second quarter, down slightly from 27% in Q1, due in part to some public sector business nongoing direct.

Microsoft revenue this quarter represented bout 11% of total revenue, the same percentage as last quarter.

No other customer represented over 10% of revenue.

Our costs of revenue on a GAAP basis declined to 11.2 million in the second quarter, down from 12.2 million in the first quarter and 15.8 in the second quarter of last year.

GAAP growth margins for the quarter increased to 78%.

This compares to 75% in the first quarter and 58% in the second quarter of last year.

Declining depreciation continued to drive improvement in our GAAP gross margins; however, we expect our network depreciation expense to level off in the second half of this year.

Historically, we have reported cash gross margins which exclude a depreciation equity-related compensation.

On that basis, our cash gross margin in the second quarter was 86% versus 84% in the first quarter.

As we continue to move towards emphasizing GAAP rather than non-GAAP results, we will no longer report cash gross margins.

Now to review our operating expenses and adjusted EBITDA.

This past quarter, our cash operating expenses were 25.7 million, down slightly from operating expenses of 25.8 million in the first quarter, and up from 23.6 in the second quarter of last year.

Although operating expenses declined slightly in the quarter, we do expect operating expenses to increase on an absolute basis throughout the year as we continue to make investments in R&D and sales and marketing.

What we expect it will remain essentially flat on a percentage basis as revenue increases.

Adjusted EBITDA was 17.7 million the second quarter of 2004, a 19% increase over the previous quarter and more than double Q2 of '03 results.

Adjusted EBITDA margin for the second quarter was 35% of revenue, up from 31% in the first quarter of the this year and up from 20% in the same period last year.

We expect adjusted EBITDA margins to remain above 30% through 2004, but these margins could be slightly lower in the -- than the second quarter, as a result of our plans to increase investment in R&D and sales and marketing.

Our total depreciation and amortization expense declined in the second quarter to 4.8 million, down from 6 million in the first quarter and down significantly from 13.4 million in the second quarter of last year.

This expense included 1.6 million for amortization of internally developed software costs, 2.2 million for the depreciation of network-related assets, and 1 million for other G&A depreciation.

As we indicated on our last call, we expect total depreciation expense to level off at approximately 4 million per quarter by the end of this year.

Reflecting our repurchase of a portion of our 5.5% notes, net interest expense declined to 2 million in the second quarter, down from 3.2 million in the first quarter of 2004 and 4.3 million in the second quarter of last year.

As you know, Q1 was our first quarter of net income on a GAAP basis and in Q2, we're pleased to report that we expanded our net income to 6.8 million, or 6 cents a share.

And that represents a margin of just over 13% of revenue and also nearly 2.5 times our first quarter net income of 2.9 million, or 2 cents a share , a significant improvement over the second quarter 2003 net loss of 14.6 million, or a loss of 13 cents a share.

On a normalized basis, we generated net income of 10.4 million, or 8 cents a share in the second quarter, exceeding the first call consensus estimate by 1 cent a share.

These results are up from our first quarter normalized earnings of 5.5 million, or 4 cents a share, and up significantly over a normalized net loss of 10.1 million, or a loss of 9 cents a share in the second quarter of last year.

A reconciliation of both adjusted EBITDA or normalized net income to our depth GAAP net income can be found on our website.

Our weighted average shares outstanding, used in our basic per share calculation, were 123.6 million in the second quarter of 2004, up from 122.1 million in the first quarter.

Our shares outstanding as of June 30, 2004 were 125.5 million shares, and our fully diluted share count, which includes outstanding 1% convertible bonds, warrants and stock options, unvested restricted stock, and deferred stock units, was 146.4 million shares.

As many of you know, [inaudible] has recently proposed that companies include contingent convertible bond shares in their fully diluted share count, and so we have reflected our bond shares and our fully diluted bond shares this quarter.

In Q1, our bonds were nondilutive.

Also, many of you have been asking about the accounting treatment of our net operating loss carry forwards.

At some point in the future, in accordance with generally accepted accounting principles, we will be required to reduce the evaluation allowance on our NOLs, which will level one time, positive impact on our GAAP earnings.

However, we do not expect that to happen for at least another year.

We'll keep you updated on future earnings calls.

Now a discussion of some of our balance sheet highlights.

You may recall that earlier in the second quarter, we announced a repurchase of 56.4 million of our 5.5% convertible notes.

Late in the second quarter, we repurchased an additional 12.2 million of our 5.5% notes, bringing the total amount of repurchased in the second quarter to just under 69 million.

That brought our total outstanding long-term debt at the end of the second quarter to 295 million. 95 million of that debt was 5.5%, due in July of '07, and 200 million at 1% with a put-call provision in 2010.

Today, we would like to announce that we have signed another definitive agreement to repurchase another 13.1 million of our 5.5% notes.

When that closes, it will reduce our long-term debt to 282 million.

So our debt repurchases in total will result in our interest payments dropping from 16.5 million in 2003 to just 6.5 million annually going forward, a savings of 10 million in annual interest payments.

All 4.6 million capital expenditure investment in Q2 was up over 3 million we spent in the first quarter, but we continue to expect capital expenditures to remain at 10% or less of revenue for the full year as we selectively upgrade or replace servers in our network and expand our footprint.

You should understand that the level of investment will vary each quarter as we grew purchases to maximized our buying leverage with hardware suppliers.

During the second quarter, we generated 12.5 million of cash from operations.

This compares to 8.6 million of cash from operations in Q1.

At the end of the second quarter, taking into account all of our debt repurchases, our cash balances was 122.1 million, which includes cash, cash equivalents, and marketable securities.

Day sales outstanding, or our DSOs, for the second quarter of 2004 were 46 days, up from 43 days in the first quarter.

At the end of the first quarter of 2004 -- the end of the second quarter, I'm sorry, we had 14,916 servers inside 1,016 networks in 69 countries throughout the world.

Now I'm done taking you through our second quarter financial highlights, let me turn the call back over to George.

Thanks, Bob.

Earlier this year, we set ambitious goals for 2004 with revenue growth of at least 25% over 2003, and GAAP earnings per share of at least 25 cents.

Based on our second quarter performance, with revenue at the high end of our guidance, and our earnings per share doubling over the prior quarter and exceeding our guidance, we're clearly on track to achieve these goals.

Now let me talk to you briefly about our expectations for the next quarter of 2004.

In the third quarter, we expect to generate GAAP earnings of 8 to 9 cents a share, an improvement of at least 50% over the second quarter.

And we expect that normalized EPS will essentially be the same as GAAP EPS to the extent we don't have any significant restructuring charges in the quarter.

Based on our strong, recurring revenue customer base, we expect to again grow revenue, quarter-over-quarter, to at least $51 to $53 million.

Now, to help you understand this guidance, I would like to comment that we usually experience a slowdown in traffic every summer that affects bursting revenue from some high traffic customer websites.

And as we told you last quarter, because bursting activity is not generally predictable, we tend to be conservative in estimating bursting revenue from such things as software downloads or events.

As we look forward into the rest of 2004 and beyond, we continue to be focused on growth.

We've seen demand in the marketplace as enterprises have increasingly used the internet to sell their products, reduce costs, and reach out to widely distributed customers, suppliers, and business partners.

With broadband access continuing to grow rapidly in the United States and overseas, we believe that increased consumer use of the internet will encourage enterprises to seek more sales per second, while offering rich media experiences to attract and retain customers over the web.

Major industry vendors such as IBM and EDS are continuing to drive the shift toward on-demand computing, and w enterprises become more serious about reducing infrastructure costs and improving the performance of their mission-critical internet applications.

And that's where Akamai comes in.

We already help over 1200 of our customers reach their customers world-wide, with improved performance and lower infrastructure costs.

Our customers represent a virtual "Who's Who" of major enterprises and government agencies.

For example, more than half a dozen of our customers each generate more than $1billion of sales a year online and rely on Akamai's services to make their mission-critical web-based applications perform.

Just to give you some examples of ways that we helped create value for our customers who are doing business over the internet, we recently helped a credit reporting agency improve the scalability and performance of the agency's portal.

With our secure extranet deployment solution, we're helping them ensure better performance and better adoption of their portal without the need for increased infrastructure.

In another case, by accelerating secure application delivery, we've helped a major aircraft manufacturer maintain critical security within their global supply-chain network, while improving performance, which of course encourages their suppliers to move online, and optimizing our customer's procurement cycle time while driving down their costs.

And by using Akamai, a major apparel retailer has been able to improve its time to market with new campaigns to boost revenue without having to add costly infrastructure or overload their existing infrastructure, and they're realizing a 40% increase in performance.

We continue to deliver record traffic for enterprise customers, serving more and more unique IP addresses across in the globe.

As the internet increasingly becomes an integral component of the business model for enterprises and government agencies, we're very optimistic that demand for our services will continue domestically and internationally.

Now, in that regard, I would like to excellent on some recent additions and promotions we've made in sales and marketing leadership to take advantage of this opportunity.

We're delighted to announce the promotion of the Bob Hughes as Executive Vice-President, Global Sales and Services.

Bob has been with Akamai since 1999 and has steadily increased his responsibility and his contributions to the business.

As Vice-President, North America sales, Bob led the sales force to 6 quarters of revenue growth.

I'm also pleased to announce that John Melon is now Vice-President North American Sales, moving up from his most recent position heading up our western U.S. sales division.

On the international sales side, we recently announced that Carlos Ramon joined us as as Vice-President of International Sales.

Carlos has a strong record of 15 years of technology sales and management experience overseas including at PeopleSoft, where he was the vice-president of international sales and business development.

And as we said a couple of weeks ago, Lisa Arthur has join us as our Chief Marketing Officer.

Lisa brings with her an impressive 20 years of marketing experience.

She comes to us from Oracle, where she was most recently vice-president of on-demand and services marketing, and is already off to a fast start, working closely with the field and our customers.

We've had a great first half of the year, and we expect continued progress in the quarters ahead.

And with this strong and experienced global sales and marketing team, we believe Akamai is well-positioned to take advantage of the exciting opportunities that we see in the marketplace today.

Paul Sagan, our President, Bob Cobuzzi, our CFO, and I, will now be happy to take your questions.

Operator, let's have the first question.

Thank you. [Operator instructions.] Your first question is from Vick Grover with Needham & Company.

Hi, guys, great quarter.

Thanks for taking my question.

It's good to see he higher ARPU.

Can you give us a little bit more insight into that trend?

I know you're not breaking out freeflow from [inaudible] any longer, but can you talk about whether that's more a function of attrition of legacy products, or is it more of a function of greater spending by your customers and better penetration of those accounts?

I think, to answer your question Vick, it's really a penetration of existing accounts.

As you know, when we bring on new accounts some of them tend to be at a lower price points, so I think to look at the growth, the growth is really coming from the existing customer base.

And then a couple of follow-ups.

Can you give us an update on the Microsoft relationship?

Where are you with regard to pricing or terms with Microsoft?

Has that been officially renegotiated?

And should we take your guidance as an affirmation of your full year guidance of earnings greater than 25 cents?

Thanks a lot.

Well, on the latter part, you should take that as an affirmation of that guidance.

And we'll let Paul Sagan respond to the Microsoft question.

So as I know you're aware of, Vick, and others might be, a copy of our Microsoft contract was filed previously in a 10-Q, so it's the for everybody to read.

That contract is scheduled for a price renegotiation window this September.

We have a great relationship with Microsoft and we'll work hard with them to reach a mutually beneficial arrangement going forward.

Other than that, I really can't comment on a customer negotiation.

All right.

Thanks a lot.

Thanks, Vick.

Your next question is from Henry Naah with Lehman Brothers.

Hi, guys.

Hey, Henry.

A couple of questions here, thanks, George.

In terms of revenue guidance of 51 to 53 million, you said that you guys are being somewhat conservative in your estimation on contribution for bursting revenues.

I was wondering if you could talk a little bit about how much, in terms of contribution bursting revenues, have contributed over the last couple of quarters?

Well, the first thing I want to say, Henry, is congratulations on your new son, Joshua.

Thank you very much.

That's more than happy than anything in this business world, right?

Without a doubt.

Yeah, I think our estimate for the third quarter is prudent, as we always try to be, and it is challenging to forecast bursting.

There's no question about it.

So we elect not to lean into the wind very much on that.

And if she comes our way, as I said the last quarter, then all the better, and in fact, we've we've exceeded some quarters when that's happened.

So I think that the insight that we have here is we give you our best shot based on the customers we have under contract and their commitment, and then we think about things that could happen in the quarter and we treat that fairly conservatively, because we can't literally predict it.

Henry, to look back over the last several quarters, if you look at our total revenue for the quarter, as you know, about 99% is recurring in nature.

And again, 70% is committed revenue, which is, again, customers under long-term contracts.

The other 30% tends to be bursting; that changes slightly, so it could be 29 to 31, but 30 is a pretty good number to look at and that's where it was this quarter.

Great.

One more question, if I may.

Bob, you had mentioned that in terms of EBITDA margins for the second half of the year, you expect them to be flat to slightly down from where they were in the first half.

And yet operating expenses, you made the statement that you thought they would be relatively constant as a percent of revenues.

I was wondering if you could help us reconcile the difference there?

Yeah, when I said slightly down, we were 35 this quarter.

We'd been 31 last quarter, slightly down.

On an absolute basis, we're looking at an increase but I think on a percentage basis, it could change slightly.

And again, 1 point, one way or another, I'm just looking at as being on operating expenses, relatively flat.

I mean, I think that's where I'm -- do you understand that?

Yeah.

Clear.

I mean, it's -- you know, operating expenses will, on an absolute basis, will trend up percentage-wise.

It could be certainly in the level of around 52% where they've been, and EBITDA could be off one point or two points, somewhere in that range.

Okay.

Great.

Thanks, guys.

Your next question is from [Maria Louis Kussmaul] with America's Growth Capital.

Thanks very much.

First a quick follow up to the last question.

Just kind of eyeballing the model given your guidance on the third quarter, it would seem that with a conservative trajectory on revenues from there for the year, that you would likely have to have a slight expansion in EBITDA margins to make the better than 25%.

So you wouldn't consider that as counter to the margin guidance?

The 25 -- I'm not sure on the 25%, Marie.

I'm sorry, 25 cents per share.

Okay.

Okay.

As you look at -- again, we reiterated that we expect to achieve, certainly, greater than 25 cents on a GAAP basis for the full year.

Correct.

All right?

We are making investments, as we've indicated, in R&D and sales and marketing to position ourselves going forward beyond '04, looking at '05 in terms of maintaining our leadership position.

That could impact EBITDA slightly on a percentage basis.

On an absolute basis that will continue to grow, but on a percentage basis, it could go down slightly.

And we're looking at it on a conservative basis at that stage.

Okay.

And then relative to tone of business in the quarter, given the high concentration of technology-related and internet-related companies that you serve, there's been a mixed bag of quarterly results coming out of many of those firms, some of which saw spending intentions drop off in both enterprise and government customers at the end of the second quarter.

Given the amount of traffic that you carry now -- you're a pretty good barometer on the overall tone of business generally -- can you give us a sense whether you saw any change in tone late in the quarter and if so, whether that might imply any additional conservatism to your third quarter outlook?

Well, we've read the same reports and seem seen the same results that you're referencing, Maria, but we are making great progress against our growth objectives.

We've got a solid pipeline of prospects and our existing customers are continuing to expand their use of our platform.

That's really one of the beauties of a recurring revenue service, you know, and that is in contrast to a lot of the software product companies that we've been reading about.

And the other component is the transfer expanding the use of the internet are strong, and I think there's a long way to go there.

The internet is growing at at least 40% per annum by some estimates.

We think we're growing at about 100% on traffic because of the nature of our customers.

And so we expect to take advantage of that and continue to grow our revenue and our profits in the third quarter.

Okay.

And then lastly, with the promotions on the sales side and the expectations for somewhat higher sales and marketing spending, can you talk about any new initiatives planned on that front, either in the way of account rep hiring, channel partner development or other programs, to give us a flavor for where that spending is heading?

Sure, on the R&D side, I think Bob already referenced as we look forward, we're looking forward to 2005 and beyond but we don't have any shortage of demand for new and enhanced functionality, that's for sure.

We've got -- we've got great customers who have some great ideas and we're continuing to invest in industry-leading standards such as [dot net], which we are hoping to have in beta by the fourth quarter.

And also our other Edge computing initiatives such as accelerating application performance on our network, providing support for solutions such as E-commerce, extranet and business continuity --those all have specific road maps.

We're also investing in additional quality assurance measures to to further protect our customers from the vulnerabilities of the internet, which, by the way, aren't getting any better, and that just makes us more valuable.

With respect to sales and marketing, you've already heard about some of our recent promotions and new hires, but we're adding additional, direct reps, along with technical consultants and some professional services staff, to help our sales leaders close more deals and get customers on the platform more quickly.

And we think that's a great investment, especially given what I just said before to your first question, which is that we see expanding use of the internet by major enterprises and government agencies

Terrific.

Thank you very much.

You bet.

Your nest question is from [ Michael Turrets] with Prudential Equity.

Hi, guys.

Hey, Michael.

So we've got guidance for next quarter of 8 to 9 cents, both GAAP and non-GAAP, right?

Yes.

And you're still [inaudible] the full year is just 25 cents or greater?

Yeah, we say greater than 25 cents an a GAAP basis.

So if you do 8 cents next quarter, that could mean just 6 cents next quarter?

So it could be on the fourth quarter -- so you could be down in the fourth quarter?

Why aren't you willing to go to at least flat with the fourth quarter at 8 cents?

I mean, I haven't worked through the -- you know, through the outbacks in the model, but that suggests that that's possible.

We could see down sequentially into the fourth quarter?

I'm not sure.

Arent' we talking about a GAAP basis, not on a normalized basis, right?

Yeah.

You've got 4 cents, 8 cents.

No, we had 2 cents.

Two cents, six cents.

Okay, so two cents, six cents.

Even if you go 2, 6, 8.

So where would you be on a non-GAAP basis?

Where do you think you'd be?

We haven't given that guidance out, but I mean, in Q1, we had to buy back the bonds, which, certainly the difference between I think it was 5 and 2 this 3 cents, and you have another 2 cents in this quarter, again, so you can add that 5 cent the number and you get better than 30 cents

Do we'll feel comfortable saying that you should see sequential EPS growth each quarter?

Yes, we do.

Yeah.

And we'll see you a next quarter, Michael

And again, I'm sorry to be on obtuse on the margin guidance, but do you expect OpEx margin up slightly over the next two quarters but EBITDA margin -- with EBITDA margin down slightly?

Is that correct?

No.

I think we said OpEx, on a percentage basis, will remain relatively flat, although OpEx spending will increase.

EBITDA margin, which was 35% this quarter could go down a point or two.

So that would have to mean that the gross margin goes down a little bit?

Well, it could be gross margin a little and it could also be operating expenses.

So when we're in the range we're in, we have very high gross margins, as we've indicated, operating expense, we are making invests.

Again, we're making investments for the long haul and will continue to show improvement quarter over quarter.

I think we want to look beyond just the percentages and really look at the absolute contribution we're making.

Right so just to clarify, you said that you bought back another 13 million shares of the converts this quarter.

Yes, 13 million in bonds, right.

Okay. 13 million in bonds.

And then at this point, you just got around the [cocoa] issue and you're including the additional 13 million from the other conversion [inaudible].

Yeah.

I mean, [inaudible] has already indicated that they're going to be take that to vote, the likelihood it will be approved, they're going to make it retroactive.

It did not impact us in Q1, it was not dilutive; therefore, certainly, looking at it retroactively, so we decided to be just pro active and reflect it in Q2.

And you're backing out the [inaudible] converted method, backing out the interest expense as well?

Yeah, we've made the appropriate calculation.

Okay.

On a fundamental basis -- sorry to tweedle all of these and thanks for straightening me out on the GAAP versus non-GAAP issue on the EPS -- it looks he's you're looking for a bout 2% sequentially gain into the September quarter.

Last year, you forecast it to be flat, so I guess things are feeling a little better but seasonally slightly weak.

But at the same time, it seems as if there are a couple of identifiable bursting events.

I know you want to be conservative about looking at them, but in theory, as you get something out of the XP service pack two, which it still sounds likes it's being delayed.

You've got the conventions this quarter, so it sounds as if there's a number of events.

Is that part of why you are forecasting at least some kind of growth, or how does that fit in?

Those are the unknowns and so we don't build them into our model.

We build in what we have a high degree of certainly about.

Michael, this is Paul.

There are a lot of unknowns around software releases and there are lots of reasons why they change or even when we see them or what we see.

So we don't build [inaudible] around the Olympics.

This is the first time we've really been involved it in and there's a lot of uncertainty around it and unknown around how much will get used on the internet and even what will happen with the games themselves.

So we take a very conservative position around the upside possibilities from those, and we'll be back in three month speaks to tell you how they turned.

You've got both conventions, also, right?

They are, and we've announced that we're supporting the streaming this week for the DNC, but again, I don't expect those to be -- in fact, that I don't believe will be material to our financial picture at all.

And last question.

Anything on the -- any effects from the service outages, either in terms of penalties or in terms of any slowing of customer adds or any reticence for existing customers to add more business?

The service issue did not have a material impact on the financials in the quarter.

The issues were short lived, but reliability and security are our highest priority and we've gone to great lengths to understand what happened with our and software development and quality assurance process to minimize the chance that it would ever happen again and that our customers are protected.

And to our knowledge, we haven't lost any customer or a prospect to a competitor as a result of either of those things.

Okay.

Any change in the competitive landscape?

No.

Not significantly.

Thanks guys.

Thanks, Michael.

Your next question is from [Jean Ohr with Nutmeg Securities.]

Thank you.

Did your 42 net-new customers meet your objectives for the quarter, and what kind of objectives do you have for the coming quarter?

Jean, we'd always like more customers in a quarter.

So we have again some -- you've seen some trends from us that they're in the 40 to 50 range per quarter, just achieved that.

We also talk about wanting -- these are net-new customers, so we always want to reduce turn.

Good news there is that those customers go out at far less of value than the ones that are coming in, and we've got a lot of emphasis on acquiring new customers, so we're happy with 42.

We'd be a lot happier if it were higher and we're working on that.

And that's part of the reason why we're adding -- we're making investments in sales and marketing and one reason we have Lisa with us and these announcements we made today by putting our top performers in the leadership positions.

Did I understand you correctly that you didn't see any impact of a slowdown in the last few weeks of the quarter as we've seen in a number of the enterprise software companies?

You have to remember we're a recurring revenue service business, so we don't see -- and these are under recurring, committed contract rates, so it's not like products, which have that -- can have that spike, that hockey stick in revenues at the end of a quarter that you're used to in a product business.

Ours -- that may occur with net bookings but you don't see that, because then they get implemented and then the revenues flow month to month over the 12 month or greater period.

So we don't see it like that.

Is that clear?

Well, I thought you might see some reluctance on the part of customers to make new commitments during that period or something like that.

Oh, well that -- okay.

We actually did not see that.

That's an interesting -- I understand your side of the question now.

Yeah, so from a revenue point of view, that doesn't affect us that way.

From a bookings point of view, I think we had a -- I think we were very pleased with the quarter.

Thank you.

Operator?

Your next question is from [Arrol Redman with Redman Capital Management. ]

The revenues issue, you mentioned were up 35% and you gave some of the force behind it, to increases your customers, increase ARPU, increase usage.

Could you help us understand the magnitude of the 35 better by maybe giving us a little bit more granularity with respect to these factors behind the revenue increase?

Arrol, do you mean the 35% year-over-year?

Is that what you're referring to?

Yes, that's what I was referring to.

This is Paul.

I think that the trend that you've seen for the past year has been both an increase in customer accounts every single quarter, ARPU going up, which is an increase in same-store sales, and I think it's a combination of an increased quality of the customer base allowing us to bring on stronger customers who can grow.

And an increase, and, if you will, the quality of what we're offering; more value-added services that offer a higher value to the customers.

I was trying to relate it in terms of like the new customers who were up 4% and the ARPU was up a few percent.

So would the rest be coming from increased usage on in a general way?

So you're seeing a combination of all three of those things and you see the cumulative effects because of the recurring nature over now four quarters of additional customers ever quarter and increasing ARPU every quarter, and then additional usage on the network every quarter from the average customer.

Okay.

And I wanted to understand the size of the tax loss carry-forward, both -- just in terms of -- I don't care when you will be accruing for taxes, but what is the magnitude of that loss carry- forward, and maybe actually you could touch on when you might start to accrue for taxes so that we can -- and give us some arithmetic so that we could understand for each dollar of nominal pretax reported, how much that might eat up in terms of the loss carry-forward.

Arrol, this is Bob Cobuzzi.

Currently we have a full valuation of allowance on the books.

NOL is about 1.2 million.

All right?

And, you know, now that we've become profitable, we have to continue to evaluate the need for the full valuation allowance and look at it on a quarterly basis in accordance with GAAP.

We've done that.

We've concluded that it would be likely, at least a year, before we have to meet the criteria to release that allowance.

But once we do, the tax effect is that we will run that NOL impact through the income statement and set up an asset on the balance sheet.

And then going forward, it won't be a cash impact, but it certainly will be a charge reflected on the income statement.

And as a result, what we'll do is we'll start showing EPS on a book basis as well as on a cash basis.

But that's at least a year out, we believe.

But simplistically, can I assume that that 1.2 billion -- taxes carried forward -- would shelter pretax income generated of the same magnitude?

Well it depends where it happens.

I mean, you've got some domestic and some international as well, so --

Okay.

And some of it doesn't, just because of the nature, there's some basically stock-based compensation which wouldn't run through the income statement, it would run through the balance sheet as such.

So not all of it would run through the income statement.

So maybe without disclosing all of the details, can you give us a rough idea of how much it would protect the income state on a tax basis?

No, we're not going to give guidance at this point, I think it's too early.

And again, I think it's fair to say that we don't expect to have any impact on our results for at least a year.

And as we get further along and we see the need to start addressing that, we will certainly give you more guidance at that time, but I think it's too early to do that at this stage.

Okay.

And the loss, the million dollars or so that was on the cash flow statement from the loss on the early retirement of the extinguishment of the debt, I take it -- does that imply -- then there was a 2 million of the total charge of three-plus was a cash charge.

No, it wasn't at all.

Some of it was a premium.

We have premium which we've paid to buy back the bonds.

As you know, the call price is 102357;

I think, on average, we bought it back at less than the call price.

And then there was some deferred financing costs we had to basically run through the income statement as well.

If I can just go back to my first question with respect to the magnitude of the return increase, would you expect , going forward, that the major driver will continue to be increased usage by the existing customer base, or do you think that it could come from -- that the mix of these forces might shift going forward?

The importance of them?

I didn't say that the major force was increasing use of existing services by the existing customers.

It's a combination of that as measured as traffic.

It's also upselling of new services as we renew or extend contracts, and the third piece being additional customers.

So you get the combination of the three accounts for the strong, year-over-year growth.

And you probably have a pretty equal mix between just traffic and upselling of existing customers on the existing customers side.

So I think we probably aught to let someone else have questions since, I think, Arrol, you've had a quite a few, if that's all right.

Operator?

Your next question is from [ Bill Zuchi from Zebra Fund. ]

Hi.

Thanks for taking my call.

Could you give you give us a sense of what you expect the share dilution from options going forward, now that the number has changed dramatically because of the new rules.

But just to have a sense on an annual basis roughly what we can expect?

Yeah, I think we've seeing that the number of shares increasing on a quarterly basis, excluding the dilution around the converts and so forth, is about a million shares a quarter, something of that nature.

Okay.

Operator, I I think we'll take one more.

Your next question is from [Doug Campbell from Spirit Capital.]

[Inaudible] -- that sales force productivity has plateaud, at least for now, based on net new adds during the last six months or so.

Is that something that you anticipated?

If not anticipated, what are some of the obstacles for signing new accounts?

And perhaps, subjectively, with well-publicized DOS attacks and [my doom], I guess the prospective buyer could range across the spectrum from saying, "Hey, this world is too complicated for today's solutions; we'll wait for a better solution," to "It's a jungle out there.

We better have Akamai on our side."

So those are kind of two questions blended into one.

Yeah, Doug.

I don't think you should conclude that productivity plateaud.

I think the sales force has been very productive over the past, really, more than a year, continuing to penetrate higher and higher quality enterprise and government accounts, and continue to do that.

In fact, I think that our comments earlier about adding reps going forward is a good investment.

And we've spoke in the past about it taking a while to get a new rep up to speed, continues to show our enthusiasm and belief that there are lots of opportunities for new bookings.

The area that you talked about, if you will, the "jungle of the internet," is one thing that continues to draw attention to our offers and opportunity for us with customers because the internet is so complicated and no single customer is able to really handle all of the problems themselves or to build out an infrastructure to handle it or to have the engineering solutions to tackle it.

And I think it's one of things that makes us essential to many of them, and they're much better off with Akemai than trying to go it alone out there.

Thank you.

Okay.

Thank you very much for your attention on this call.

We look forward to seeing you next quarter, and again, thanks so much for your support.

Bye-bye.

Thank you.

This concludes today's conference call.

You may now disconnect.