阿卡邁科技 (AKAM) 2004 Q4 法說會逐字稿

Good afternoon.

My name is [INAUDIBLE], and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Akamai Technologies fourth quarter and year end 2004 earnings conference call.

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

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

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

If you would like to withdraw your question, press star then the number two on your telephone keypad.

Thank you.

I would now like to introduce our moderator, Miss Sandra Smith.

Ma'am, you may begin.

Thank you.

Good afternoon, everybody, and thank you for joining Akamai's investor conference call to discuss our fourth quarter and year end 2004 financial results.

Speaking today on behalf of Akamai will be George Conrades, Chairman and CEO, Bob Cobuzzi, Chief Financial Officer, and Paul Sagan, President and CEO-elect.

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 of various important factors, including but not limited to: Unexpected network or service interruptions that cause loss of revenues; increased increases or [INAUDIBLE] of resources; failure to increase our revenue, retain our significant customers or keep our expenses consistent with revenue; unexpected increases in Akamai's use of funds; inability to maintain the prices we charge for our services; and other factors that are discussed in our annual report on Form 10-K or 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 to the most directly comparable GAAP financial measures.

Now let me turn the call over to George.

Thank you, Sandy, and thank you everyone for joining us today.

The fourth quarter was our best quarter ever, capping off our best year ever.

Fourth quarter revenue was $67.6 million, an 8 percent increase over the third quarter.

Full year revenue was $210 million, a 30 percent increase over our 2003 results.

Net income expanded to $13.4 million for the quarter, a 19 percent increase over the third quarter, bringing full year net income to $34.4 million, an improvement of more than $60 million from 2003.

GAAP earnings were $0.10 per diluted share for the quarter and $0.25 per diluted share for the full year, a dramatic increase from our loss of 25% -- $0.25 -- in 2003.

Normalized earnings were $0.10 per diluted share for the quarter and $0.31 per diluted share for the full year.

We are clearly benefiting from the expanded use of the Internet by our enterprise and government customers, who value our ability to make the Internet more predictable, scalable and secure for their mission-critical work.

That's also the reason we were able to grow our customer base by 16 percent in 2004.

We added 52 net new reoccurring revenue customers in the fourth quarter, ending the year with 1310 customers under long-term service contracts.

Just a few of our new customers added in the fourth quarter include CondeNet, [part] of Advanced Publications, the media company behind CondeNet; the European Space Agency;

Golden Village, a leading sales, media and entertainment company in the Asia-Pacific region;

Marks & Spencer; and SKF International, a leading manufacturing company.

Now that I've given you some of the fourth quarter and full year highlights, I'll turn the call over to Bob Cobuzzi to provide more details on our financial results; and then I'll ask Paul Sagan, our CEO-elect, to share with you his thoughts and expectations for the coming year.

Bob?

Thank you, George.

As George just highlighted to you, tremendous results in the fourth quarter capped off a great 2004.

Now let me walk you through the income statement, and then I'll finish up with a brief review of some of our balance sheet items.

Our revenue growth of 30 percent in 2004 far exceeded our expectations from a year-ago, when we estimated that we would grow at least 20 percent for the year.

We look back and ask what changed -- we believe it was primarily a combination of three key factors.

First, our existing customers increased their adoption of [INAUDIBLE] on our platform at a faster rate than we had expected.

Second, we benefited from more rapid than expected growth in traffic on our network.

And third, we worked hard to reduce churn; and last quarter, churn improved again to below 5 percent.

In the fourth quarter, revenue from international accounts was approximately 20 percent, up from 18 percent in the third quarter and up from 17 percent in the same period last year.

For the year, revenue from international business accounted for 19 percent of our annual revenue, up from 16 percent in the prior year.

Retailers accounted 28 percent of the reserve in the fourth quarter, up from 26 percent of revenue in the prior quarter, and up from 25 percent in Q4 of last year.

For the year, revenue from our retailers was 27 percent, up from 25 percent in 2003.

For the first time in two years, no customer accounted for 10 percent or more of our [quarterly] revenue.

Proceed revenue from Microsoft, although above contractual commitment levels, was not as high this quarter as in the past.

As a result, Microsoft represented 7 percent of our fourth quarter revenue and 10 percent for the full year.

Our 8 percent revenue increase quarter over quarter reflects growth in a number of existing accounts, as well as the 4 percent increase in the number of new accounts.

We were pleased to see the continuing diversification of our revenue in the fourth quarter.

Our average revenue per customer, or ARPU, increased by 5 percent over the third quarter to $14,900.

Increased revenue from our existing customers continued to derive ARPU gains during the fourth quarter.

Compared to 2003 levels, we increased ARPU by 7 percent year over year.

ARPU revenue for the fourth quarter was $11.2 million, down slightly from the third quarter cost of revenue of $11.7 million, and down 14 percent from $13.1 million a year ago.

On an annual basis, cost of revenue was $46.2 million, a reduction of 24 percent from fiscal 2003.

Our GAAP gross margin for the fourth quarter was 81 percent, up from 78 percent in the third quarter, and up significantly from 71 percent in the fourth quarter of 2003.

On a full year basis, GAAP gross margins -- gross profit margins -- increased to 78 percent in 2004, up from 62 percent in 2003.

We expect to maintain GAAP gross margins in the low 80s throughout 2005.

Operating expenses in the fourth quarter were $31.8 million.

During the quarter, we had increased sales and marketing costs from higher commissions, on increased revenue, and investments in training and marketing.

In G&A, the increase quarter over quarter was primarily driven by significant Sarbanes-Oxley 404 compliance costs.

On an annual basis, operating expenses for 2004 were $114.9 million, down slightly from $117.8 million for 2003.

Higher payroll costs associated with increased head count and commissions were more than offset by lower depreciation costs in 2004.

Adjusted EBITDA was $18.6 million for the fourth quarter, a 4 percent quarterly increase and a 32 percent annual increase over fourth quarter of 2003.

Adjusted EBITDA margins in the fourth quarter were 32 percent, in line with our guidance.

For the full year, adjusted EBITDA was $69.1 million, and adjusted EBITDA margins were 33 percent of revenue.

We expect to see an expansion of adjusted EBITDA margins in the second half of 2005, as our revenue growth offsets the targeted investments in R&D and sales and marketing that we plan to make in the first half of the year.

For the full year 2005, we expect adjusted EBITDA margins in the mid-30s.

Total depreciation amortization for the fourth quarter was $3.7 million, down slightly from $4.1 million in the third quarter, and less than half of our depreciation amortization of $8.1 million in the last quarter of 2003.

Network depreciation costs were $2.7 million, which included $1.6 million for amortization of internally developed software.

For the year, total depreciation was $18.8 million, compared to $47.5 million for 2003.

The significant progress we've made to reduce our 5.5 percent debt this year enabled us to reduce annual net interest expense by more than half, down from $17 million in 2003 to $8.1 million for 2004.

On a quarterly basis, net interest expense declined to $1.3 million, down significantly from $4.2 million in the fourth quarter of last year.

As you may recall, we currently have outstanding $200 million of 1 percent convertible senior notes, and $56.6 million of 5.5 percent convertible subordinated notes.

The 5.5 percent debt becomes due in 2007.

But we have the right to redeem the bonds at any time over the next two years.

The 1 percent debt is convertible into 12.9 million shares of our common stock, which is now included in our diluted share count in our 2004 operating results, as required, in our EITF 0408 accounting pronouncement, effective December 2004.

GAAP net income increased 19 percent quarter over quarter, to $13.4 million.

That's a significant improvement over our loss of $2.1 million in the fourth quarter of 2003.

For full year 2004, we generated $34.4 million of GAAP net income.

That compared to our 2003 net loss of $29.3 million, a more than $60 million improvement year-over-year.

As George indicated, diluted EPS for the fourth quarter was $0.10.

And for the full year, diluted EPS was $0.25.

That's after charges of $0.06 per share related principally to our debt repurchases and equity based compensation.

The guidance we provided in our last call for full year GAAP EPS of $0.25 per diluted share does not include the impact of the 12.9 million shares of our 1 percent contingent convertible bond.

Without those shares, our EPS for the year would have been $0.26.

As compared to our 2003 loss of $0.25 a share, we've improved our diluted earnings by $.050 a share in one year.

We are extremely proud of the progress we have made.

On a normalized basis, we earned $0.10 of diluted earnings per share for the quarter; and for the year, we earned $0.31 of normalized earnings per share, meeting First Call estimates.

Without the dilution from the 12.9 million shares related to our 1 percent bond, our normalized earnings for the quarter and the year would have each been a penny higher, exceeding First Call estimates.

At the end of the fourth quarter, we had 126.8 million shares outstanding.

Weighted average shares for the fourth quarter were 126.3 million, and diluted shares were 147.3 million.

For the full year, weighted average shares were 124.4 million and diluted shares were 146.6 million.

Finally, let me review some balance sheet items.

We ended the year with $108.4 million of cash, cash equivalents, and marketable securities.

The decrease from our prior quarter cash balance of $119.8 million is due to the repurchase of approximately $25 million of 5.5 percent bonds during the fourth quarter.

We generated $15.6 million of cash from operations during the fourth quarter.

That's up from $14.5 million in the prior quarter, and more than double the $7.7 million of cash we generated from operations in the fourth quarter of 2003.

We spent $7.1 million in capital expenditures in the fourth quarter.

For the full year, Cap Ex was 10 percent of revenue, in line with our guidance.

This year, we expect capital expenditures to be 10 to 12 percent of revenue.

We plan to group many of our purchases in the first half of the year to take advantages of volume buying power, as we install next-generation servers that allow us to serve higher volumes of traffic much more cost effectively.

Day sales outstanding for the fourth quarter were 47 days, unchanged from the prior quarter and unchanged from the fourth quarter of last year.

Overall, we are extremely pleased with our results for the fourth quarter and the full year.

Year over year, we grew revenue 30 percent, expanded our adjusted EBITDA margin by 800 basis points, improved bottom line results by over $60 million, increased our cash from operations by almost $70 million, and reduced the 5.5 percent debt dramatically by the year end.

Now let me turn the call back over to George.

Thank you, Bob, for that thorough summary.

On top of those impressive 2004 financial results, I'm very proud of what we've accomplished in just six years.

We've developed industry-leading technology and an unparalleled global infrastructure, achieved market leadership with a premier customer base, and reached sustained profitability and positive cash flow in one of the most challenging high-tech spending environments ever.

Even so, building a company of over $200 million in annual revenue and GAAP profits of $0.25 per share in just six years is only the beginning.

The market opportunity for our on-demand platform, our growing customer base, our demonstrated ability to innovate, will continue to drive our success.

Most importantly, I believe with Paul Sagan as our next CEO, we have the right leadership and management team in place to drive the next phase of our company's growth.

Paul's been at my side every step of the way over the past six years, and I have enormous respect for his intellect and integrity.

He knows our business cold -- the industry, our business model, our technology, our people, our key customers and shareholders, and he's helped to chart the course for virtually all of Akamai's strategic accomplishments to date.

I look forward to continuing to work closely with Paul and this fabulous team of people.

I'm not retiring, but now I get to have all the fun while Paul does the heavy lifting.

So now let me turn the call over to Paul, who will tell you more about the plans he's put in place for 2005.

Paul?

Thank you, George.

I am so pleased and honored to become Akamai's second CEO.

And I want to thank George for his leadership.

We all owe him a great debt of gratitude, and it is an honor to take the reins from him.

One of the most consistent and important factors in our success to date has been George at the helm, and I'm thrilled he'll remain as Executive Chairman.

George and Bob [said], Akamai has made tremendous progress over the past six years.

2004 was the year we really delivered on the promise of the Akamai business model.

Selling software as a service, with high margins under recurring revenue contract, with low capital expenditures, to generate significant profits and cash flows.

I want to talk to you about how we're going to continue to build on the strength of this model, and our strong Edge platform for content delivery.

There are three specific areas where we are expanding our service offerings that have a combined market opportunity for services alone in excess of a billion dollars a year by 2008, according to reports from [Gartner, Forester] and IDC.

These areas are: Application performance services, on-demand managed services, and business performance management services.

Application performance services improve performance and reliability of highly dynamic enterprise application content, whether delivered [via the web] or corporate wide area networks.

This results in higher adoption of enterprise applications, increased branch office productivity and more efficient global supply chain management.

Traditionally, this market has been addressed primarily by hardware and software products.

But we believe customers want more comprehensive and cost-effective service solutions that solve their problems without requiring significant capital outlay.

Our evolving application performance services will leverage the global deployment of our Edge platform.

Our 15,000 servers are in over 2400 locations around the world, offering a unique and superior means to enable fast and reliable routing over the public internet.

By combining this capability with new investments we're making in R&D, we are significantly enhancing the end user experience with applications running on corporate extra net and wide area networks.

One early example is Cafe Pacific, the international airline, which uses Akamai's web application accelerator to improve global performance of the company's online reservation website.

With Akamai's help, usage by travel agents on the Cafe Pacific's CX agents.com site increased 30 percent in 2004.

And passenger hits on that cafepacific.com site increased by 50 percent, while online bookings expanded by 100 percent.

With increased online adoption in 2004, they have reduced call center expenses and saved approximately $1.5 million.

The second area where we're expanding our service offerings is on-demand managed services.

This includes a combination of our Edge computing, our network storage, and a managed web hosting offering that enable enterprises to dramatically reduce the need for origin infrastructure.

Unlike a typical hosting solution, our managed web hosting services are automatically provisioned, and supply on-demand in whatever geography our customers need capacity.

Customers need only to publish directly to our platform, quickly launching applications without making upfront investments in []fixed data center infrastructure, while being billed only for what they use.

Sony Ericsson, Logitech and the FBI are examples of existing Akamai customers using our platform in this way.

Hosted IFC applications are another example.

One of our customers, a national retailer, uses an Akamai hosted search engine optimization solution to improve product rankings in online services -- I'm sorry, online searches -- without any additional infrastructure build out.

Immediately after implementing this on-demand application, search engine results improved for over 30,000 products, increasing traffic from the most popular search engines, and increasing online revenue to our customer by millions of dollars a year.

Just as Akamai changed the way content is delivered on the internet, Akamai is now moving to change the way web applications are hosted and delivered over the internet.

The third area I mentioned, business performance management services, includes our network data feed and our web analytic service, which provides customers with real time data about the performance of their content and applications over the internet, and on Akamai's platform.

For example, the Canadian Broadcasting Corporation uses a web services fee from our customer portal to create an executive management dashboard that enables them to easily manage their cost and to stay on budget.

In addition to providing incremental revenue opportunities, our business performance management solutions also help us develop deeper connections with our customers, a strategy that is particularly critical in a recurring revenue business.

These three areas I've just described are very exciting new opportunities, and complement our flagship and suite service.

Throughout 2005, we will roll out new industry-focused offerings that combine our EdgeSuite capabilities with the new functionalities I've just described.

For example, we are now offering vertical targeted solutions especially tailored to the high tech industry for software downloads.

The media and entertainment companies, for digital medias delivery, and for retail enterprises for online commerce.

In summary, each of those areas -- content delivery, application performance acceleration, on-demand managed services and business performance management -- are large and growing.

They build on the capabilities we've developed over the past six years, and they solve some of our customers' biggest problems.

You can learn more about all of this on our newly updated akamai.com web site.

Now let me talk about our expectations for this year.

For the first quarter, we're anticipating revenue will grow to $59 to $61 million, and we expect GAAP earning of $0.10 per diluted share.

Remember, first quarter expenses always run a bit higher due to the cost of our annual world-wide sales and marketing kickoffs in January, and the yearly reset of payroll taxes.

And as we've indicated before, we're making incremental investments in sales and marketing and R&D.

For the full year we expect to grow revenue by more than 20 percent again, and to generate earnings of at least $0.46 per diluted share.

That EPS calculation does not include any estimate for the expensing of stock options nor any benefit from potentially reversing the valuation reserve on our tax net operating losses.

To sum it up, we had a great 2004, and we are very optimistic about 2005.

We're off to a great start in the first quarter, and I look forward to updating you on our progress throughout the year.

Now, operator, let's take 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 1 on your telephone pad.

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

Your first question comes from Michael Turits from Prudential Equity Group.

Hi, guys, how are you doing?

Good.

Hi, Michael, how are you?

Good.

You've said in the last quarter or two that you're making some changes based on investments in sales and marketing as well as in R&D, and you had results in the quarter, which showed an acceleration in customer adds, as well as an acceleration in your ARPU growth.

So maybe you could, you know, talk a little bit about what you think drove those, and are they sustainable?

Are we up to a level of 50-plus customer adds that seems sustainable, and how did you get there in the quarter?

And was it sequential growth in ARPU -- did that result from anything you were doing specifically in development or in bringing products to market?

It's a multi-part question.

I'll try to keep track of all of the parts.

First, we haven't included net new customers in our guidance, and we don't provide that number.

But I can tell you that the investments we're making in sales and marketing are designed obviously to grow the top line and customer adds, and the fourth quarter was terrific.

We're seeing ARPU driven -- or ARPU growth driven by increased adoption of features on our platform by existing customers and increased traffic.

So clearly, the investments that we're making to add features and functionality and to apply ourselves better to have better solutions to industry verticals is paying off.

I don't really want to comment on the pace of ARPU growth going forward, but I will say that I think that the investments we've made and efforts in R&D and engineering are going to help us increase top line growth in all four areas that I talked about -- content delivery, where we have even more targeted offers to that market expand, application performance acceleration, on-demand managed services and business performance management services.

Is there -- I haven't thought that there was, but is there any seasonality to customer adds -- you had a huge customer add quarter in last fourth quarter, in '03, and then a nice bump this quarter.

Is there anything in the sales incentives or anything that should make for seasonality?

No, we've seen that pattern.

It was a little higher in Q4 two years in a row; but frankly, we really haven't seen anything that would explain it seasonally.

And then, just one question on expenses.

So for what it's worth relative to my forecast, gross margin was a little bit better than I had expected it to be.

You said that sounds like it's sustainable at this level.

Cap Ex was a little bit higher than I expected it to be.

So does gross margin -- how is it that you're able to sustain gross margin at this level going forward; and on the outback side, shouldn't some of that come down as you roll past Sarbanes-Oxley?

I think operating -- operating expenses, you know, after Q1 will probably start to level off, even though we're making investments.

Sarbanes-Oxley this quarter, to be honest with you, is about $700,000 of incremental costs as we, you know, prepare to get the process in place at our internal testing, and our auditors go through do their testing.

Certainly as you know, they're going through like three audits, which are being performed at this point.

So that's driving a lot of the operating costs in the short-term.

We also made investments, as we indicated, in sales and marketing and training during the quarter.

So we do expect that gross margins will maintain at this level throughout '05.

Michael, I think we can all hope that Sarbanes-Oxley costs will level off or go down.

Okay.

Thanks a lot, guys.

Thank you.

Your next question comes from Henry Naah with Lehman Brothers.

Hi, guys.

Paul, congratulations on your new position.

Thank you.

I was wondering if you can talk a little bit about churn rate, where we saw an improvement this quarter.

Seems like you guys have done a fantastic job on this metric over the last year.

So wondering, you know, what you thought drove the improvement here, you know, how much more improvement can we see on that front?

I think what we're clearly seeing is one of the investments paying off.

One of the things that we decided to do was invest in our account management group last year, to pay a lot more attention to customers earlier on in the process, identify those who were in trouble and we would lose no matter what because they were in distress, and obviously not put the time in there.

But more importantly, to focus on those where we saw opportunities to make sure that we renewed them very favorably and in fact to go in and upsell them.

One of the things that's driving the increase in ARPU is the increased usage of features by our customers.

So I think it's one of the areas where, as we regrouped, if you will, after the cut backs of a couple of years ago, really understood our business and customers and the quality of customers on a relative basis, that we made an investment and we started to see the benefit.

You've certainly heard us talk for years about thinking that overall in a business like ours you should have single digits in churn on an annual basis, which would be 2 percent to 3 percent per quarter.

We're not quite there, but that's still our goal, and we're going to work awfully hard to get there.

And again, I think that's where some of the investments that we've made and are continuing to make on the engineering side pay off in all of the four areas I talked about, by providing more benefit to our customers, both in services they pay for and in the more intangible things like the data that we provide them that really make them see the differentiated value of working with Akamai.

Okay, and one question around gross margins, I think was just asked, but we didn't really get an answer to it.

What do you think drove the improvement in gross margins here?

We've worked really hard to control costs and the cost of providing our goods, and our network group is extremely aggressive at managing network costs and negotiating the best possible rates and routing traffic, both for optimal performance and controlling costs.

And I think what you're seeing is really the power in the business model, the ability to aggregate the traffic of 1300 customers and move it advantageously, that allows us to have, you know, very, very strong performance.

Great, thanks, guys.

Thanks, Henry.

Your next question comes from Maria Kussmaul with America's Growth Capital.

Yes, hi, a couple of quick questions.

Can you talk about, you know, about your Cap Ex this year was at 10 percent, now you're saying 10 to 12 percent.

Assuming that your net worth [INAUDIBLE] our guess is that they're running at low utilization rates.

What's the need for adding more sellers and spending more on them.

Okay, is that for me?

No, that's for me.

Maria, hi, how are you today?

Good, how are you?

Good.

There's always maintenance that's required.

Also, we're getting the advantage of the terrific improvement in the performance of servers.

And one of the things that we're seeing as we managed network costs so effectively, is that it's not just the band width cost, but also the [INAUDIBLE] cost that go with it.

And one of the operatives that we see to maintain the great profit structure we have is to decrease our footprint by using far more efficient machines, so today you can by effectively at a fraction of the cost of what we bought machines for before.

That was the balance the need to maintain servers, because they certainly wear out and stop operating sometimes, and the ability to manage, if you will, our footprint even more effectively, we think it's a prudent use of -- spend.

Now, we're not necessarily decreasing the number of places we are, but we can decrease our footprint in those locations and therefore manage costs very effectively.

And we also think that it's prudent to clump these expenses so that we get the maximum buying level.

And I would say whether it's 10 percent or 12 percent, as a communication services model, it's an extremely low rate of capital expense.

So, okay.

Second question, you spoke about some of the new initiatives, and looking at this, can you talk about how much -- how – open are companies to letting you in within [INAUDIBLE] fire wall applications, or is that an area that you're not targeting at this point?

Okay, at this point, as you know, we only provide service on product and we're not trying to go behind the fire wall.

What we're doing is accelerating the performance of their applications that move on a wide area network, move on the public internet, and therefore cross the fire wall barrier.

And once they move into that arena, our services offer them a great deal of value for scalability, reliability, and security.

And last question, can you give us an update on the [INAUDIBLE] litigation?

Well, as you know, we have two trials pending this year.

One at the trade secrets lawsuit in California, the other is the patent infringement suit here.

The judges in both cases delayed those trials slightly, so the trade secrets case will go to trial in California in the second quarter, and the patent infringement case will go to trial in Boston in the fourth quarter of this year.

Thank you very much.

Thank you.

Your next question comes from Hampton Adams with IRG.

Hi, guys.

Nice quarter.

Thank you.

Couple of questions.

Just on the pricing environment, there's been a lot of noise about pricing.

I know you can't be real specific about it, but can you give us just a feel of what pricing is like in some of the areas you guys are able to differentiate your services and really drive nice, attractive pricing?

And the second one would be, also on the rumor front, a lot of talk about some larger companies entering this space.

Can you give us your thoughts on what that potential competition means, whether it, you know, further emphasizes the strength of the market or if you think it's going to change the dynamics at all?

And sort of what your thoughts are there.

Well, I think both of those questions fall into the rumor category, and we don't really like to comment on rumors, but let me answer them both this way.

First on the competitive front, we have had many, many competitors, large and small, for years.

And we love competition and thrive on it.

So I'm not sure specifically who you're talking about.

Certainly lots of large players in the telecom industry who actually have been competing with us or might compete with us are pretty busy these days trying to figure out who they're going to merge with.

But frankly, anyone is welcome to enter this space.

As we move into these three new areas of application performance acceleration, on-demand web services and business performance management services, increasingly, we're going to face all sorts of competition, and we're eager for it.

In the area of pricing, we obviously don't comment in great detail on that.

And I'm not sure exactly what noise you refer to in the market.

Certainly the technology marketplace overall over the last several years has been a difficult one to sell into.

Enterprises are very stingy with their dollars.

And I think we've been very effective at selling into that market and continuing to, and you see that both in the growth in the customer base consistently and in the strong growth in ARPU.

And just to -- just to push a little bit further on the pricing front, I guess there's been a lot of rumors about pricing being very difficult for some just pure basic cashing services, and I would imagine as you guys upsell the products, it gives you a lot of pricing leverage there, and I wanted to get a feel for sort of the validity of that view and whether you're able to do that.

Well, I'm not sure of those rumors.

They're just rumors, and you haven't been very specific.

But by and large --

Microsoft.

Microsoft is our largest customer.

We have a great relationship with them.

We've renewed our contract with them last year.

Very large customers always get volume discounts and we're very comfortable with that, so we're very happy with that relationship.

And beyond that, we always try to sell advanced features as part of our offer and move away from what you might call commodity pricing.

Great, thanks.

Thank you.

Your next question comes from the line of Catherine Eckerd [PHONETIC] with Jefferies & Company.

Catherine?

Hi.

I'm sorry about that.

Good afternoon.

Good quarter.

My first question is about Microsoft.

They did below a 10 percent customer for the first time in quite some time.

Was that primarily the result of the recent contract renegotiation, or was there another reason for that?

No.

They had less software distribution in the quarter, and that's what lies their usage above their contract minimums with us.

As you know, we have a long-term contract that calls for certain minimums, and the revenue above that has always driven their 10 percent or greater contribution has come from, if you will, that bursting from software distribution that was less in the fourth quarter.

Frankly, we were pleased that they maintained themselves as a very large customer, and for the first time, one to 10 percent customer.

We want as much diversification in our base as possible.

And you can't have it both ways.

And so I would like to have them as a very large customer and we're happy to take as much business as they want to send our way.

At the same time, we're very pleased to see that customer base continue to diversify.

Okay, great.

And then what about Apple?

I think everyone knows you distribute iTunes.

Did you see expansion -- I know they've not been a 10 percent customer, but did they grow this quarter?

And if you can just provide an outlook there, given the phenomenal success of the iPod?

Well, Apple has been a customer of ours for six years.

We've got a very great relationship with them, and we appreciate it, and we respect, you know, their strict rules about confidentiality.

So we don't break down any customer who's below 10 percent.

I won't break out Apple's numbers at all.

But I can tell you that based on the success that they've had selling music, it's been good for our business.

Okay.

And then I might have missed it.

What was the percentage of revenues from bursting?

We don't break that out exactly.

What we've always said is that historically our revenue, our -- you know, 99 percent is recurring services contracts, and roughly 70 percent comes from the committed contract, and about 30 percent comes from bursting.

And it was pretty consistent in the last quarter again.

Okay, very good.

And then last question.

How many salespeople did you add in December and how many do you expect to add in the first half of '05?

I don't know what the number of the new hires was in that department in December.

I would expect to add a handful of them in the first quarter of this year, building on the 65 direct reps that we had last year.

Okay, thank you.

Thank you.

Your next question comes from the line of Rod Wackler [PHONETIC] with Stanford Group .

Hi, Rod .

Hey, guys.

Fabulous job.

I feel vindicated.

Thank you.

Back to Microsoft, since Catherine opened the can of worms there, I have noted in press releases and other sources here recently that they have been shipping downstream a lot of patches over the past month or so.

Do you think that there's a possibility -- and maybe you addressed this in your prepared remarks -- that they could pop above 10 percent again?

I didn't address it in the prepared remarks.

We don't give customer by customer guidance going forward.

I can tell you that our estimates for all customers are baked into our guidance for the first quarter.

Okay, good enough there.

The rest of my questions have been answered.

Congratulations again.

Thank you.

Your next question comes from the line of Jean Orr with Nutmeg Securities.

Hi, Jean.

Hi.

Thank you.

First of all, can I just get a clarification, I'm getting a little interference and I didn't fully get the guidance for 2005.

Could you just repeat that, please?

I'm sorry, you didn't get the guidance for 2005?

Sure.

In the first quarter the guidance was top line revenue of $59 million to $61 million.

And GAAP earnings of $0.10 per diluted share.

And for the full year, that revenue will grow year-over-year by more than 20 percent again, and it will have earnings of at least $0.46 per diluted share.

Okay.

And the 1 percent will be in the diluted number -- the conversion number will be in the diluted number -- ?

That's right.

Going forward according to the accounting pronouncement in December.

So the diluted shares are in that account going forward.

The EPS calculation does not include an estimate for stock option expensing or its possible benefits if we have to reverse the valuation reserve on our NOLs.

Okay.

And going back to the competition question, could you just talk about any changes you've seen in the competitive environment over the last, say, six months or so?

I would say it's remained pretty constant, sort of the usual suspects acquired in the streaming space and the basic content delivery space, and in the advanced services area.

So the main competitors are the ones that you've heard us talk about quarter after quarter, and that's inertia (ph).

That's the challenge of getting our customers to adopt a new outsource model and to use our services as opposed to continually trying to add onto their infrastructure and do it themselves.

Thank you.

Thank you.

Your next question comes from Van Brady with Precedial Management.

They've all been answered except for this one.

Fully diluted shares, how would that progress during the quarter and what would you end up with for the year -- for the quarters, I should say.

I think it's fair to say we’ll probably add somewhere a million shares per [quarter] and we'll end up around 150, 151 million next year, of '05.

And your 146 is based upon the 150 million?

Yes.

Okay.

Thank you.

Thank you.

Operator, why don't we take one more question?

Your next question comes from the line of Doug Campbell with Baird Capital.

Hi, Doug.

Hi, thanks very much.

I'm really intrigued with the three distinct new applications related businesses that you're entering.

I wonder whether you could dove tail comments of that with your comment also that you've been investing in additional sales and marketing, and whether sort of on an anecdotal basis customers are able to readily recognize the value of these new services, or whether it's a little too early to get a read on that.

A lot of them are seeing it, as you saw.

I gave you customer examples in every category -- we're already using some of this functionality.

They certainly never get it as fast as you want.

And they don't call you and say, I want to throw money in your direction.

But I'm very pleased with the success that we've had.

We've got great early adopters which gives us very strong case studies and testimony to go after new opportunity.

And I think the thing that we recognized was that there was additional engineering that we could do to make these offers more obvious and better, and that's why we've made that investment.

And frankly, we also know that it takes a while to get a new sales rep up to speed.

You can't hire somebody and say, close deals this week.

It takes often a year to get a rep fully matured, and so we felt, knowing we were moving into these spaces, that we already had traction there and that we would have more compelling offers coming out in 2005, that we needed to start bringing on those reps in late 2004 and early 2005 so that they would learn the Akamai methodology and what our technology could do and that they could then sell the value into the customer base.

As part of that, it seems to me that you're going to be offering services in a different manner than competitors.

You mentioned moving into a new set of competitors as you add different functionalities.

Do you feel that broadly speaking you'll be advantaged by your approach versus existing competitors who offer various ad hoc services?

We're going to have the same -- we have the same base of customers and we have the same opportunity and we're building off the same technology base, which is a huge advantage for us.

So that as we move into this new space, the competitors don't have the advantage that we do.

They don't have the internet intelligence, they don't have the network informed by over 50 billion data requests a day.

And so we think we have a really unique opportunity as other people recognize the value here -- or frankly, feel challenged by the opportunities and the offers that we bring, we really think that we have, if you will, a strategic high ground to compete there very effectively, and we're looking forward to it.

Thanks.

I look forward to watching that unfold.

Thank you.

Well, thank you everybody, and we'll be back in another quarter.

Bye-bye.

Ladies and gentlemen, this concludes today's Akamai conference call.

You may now disconnect