阿卡邁科技 (AKAM) 2005 Q1 法說會逐字稿

Good afternoon.

My name is Lynn, and I'll be your conference facilitator.

At this time l would like to welcome everyone to the Akamai 2005 earnings conference call.

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

After the speaker's remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS] Thank you.

Miss Smith, you may begin your conference.

Good afternoon, thank you for joining Akamai's Investor conference call to discuss our first quarter 2005 financial results.

Speaking today on behalf of Akamai, will be Paul Sagan, President and as of April 1, Akamai's new CEO.

He will be joined by Bob Cobuzzi, Chief Financial Officer, George Conrades, our Executive Chairman, will also be available during the question and answer of today's call.

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, 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 revenue, inability to maintain the prices we charge for our services, inability to realize the benefits of our net operating loss carried forward, inability to close the Speedera acquisition within our expected timeframe, or at all.

Delay in developing or failure to develop new service offerings or functionalities, and if developed lack market acceptance of such service offerings and functionalities, and other factors that are discussed on the annual report on form 10-K, 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 the 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 understand 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 nonGAAP terms, and reconcile our nonGAAP financials with the most directly comparable GAAP financial measures.

Now let me turn the call over to Paul.

Thank you, Sandy.

Thank you everyone for joining us today.

I'm excited to be speaking to you today, as the new CEO of Akamai.

The first quarter was the best quarter in our history.

Sequential improvements in revenue and bottom line results, nine quarters in a row.

First quarter revenue was $60.1 million, a 4% increase over the fourth quarter and a 24% increase over the same period last year.

Adjusted EBITDA was 34% of revenue, and it increased 10% quarter-over-quarter to $20.4 million, a 37% increase year-over-year.

GAAP earnings were $0.10 per diluted share share for the quarter, consistent with our guidance unchanged from our EPS in the prior quarter, and significantly higher than our diluted EPS of $0.02 in the first quarter of last year.

On a normalized basis, our diluted EPS was $0.10 in the first quarter, in-line with our guidance and First Call's consensus estimates.

We added 50 net new recurring revenue customers in the first quarter.

Bringing the number of customers under long-term service contracts to 1,360.

Just a few of our new customers added in the first quarter include, Connextra Limited, a leading ad agency in Europe, CTS EVENTIM AG, Germany's full-service ticket provider.

Fordham University, software Anti-virus company, F-Secure Corporation, software provided InterSystems, Motricity, a provider of mobile content solutions and services to the wireless industry, 3 Suisses-Gruppe, an international leader in distance selling, the U.S.

Computer Emergency Readiness Team, also known as U.S. CERT.

The U.S.

Department of Agriculture, retailer West Elm, and one of my favorites, the world champion New England Patriots.

Let me turn the call over to Bob to provide more details on our financial results.

I'll be back to give you an update on our progress with the acquisition of Speedera Networks, and our outlook for the rest of the year.

Thank you, Paul.

I'll review our operating results and some of our key metrics with you.

I'll finish up with a brief review of some of our balance sheet items.

At Paul just highlighted, we had another terrific quarter.

We grew revenue 4% quarter-over-quarter, to $60.1 million.

Right in line with the range we provided on our last call.

Revenue from international accounts was approximately 20%, consistent with the fourth quarter, and up slightly from 19% in the same period last year.

Resellers accounted for 25% of the revenue in the first quarter, down from 28% of revenue in the prior quarter and 27% in Q1 of last year.

No customer accounted for 10% or more of our quarterly revenue.

Our average revenue per customer, or ARPU, was consistent with the prior quarter at $14,900.

That's up over 8% year-over-year.

Cost of revenue for the first quarter was $11.5 million.

Up slightly from the fourth quarter cost of revenue of $11.2 million, and down from $12.1 million a year ago.

Our GAAP gross profit margin was 81%, essentially unchanged from the fourth quarter, and up significantly from 75% in the fourth quarter of 2004.

Operating expenses in the first quarter were $32.2 million, up slightly from the fourth quarter operating expenses of $31.8 million.

Adjusted EBITDA was $20.4 million, a 10% quarterly increase, and a 37% annual increase over the first quarter of 2004.

Adjusted EBITDA margins were 34%, up from 32% in the fourth quarter, and up from 31% in the same period last year.

We were able to limit the increase in operating expenses by deferring some hiring, in anticipation of experience professionals from Speedera joining us after the acquisition closes.

Total depreciation and amortization for the first quarter was $3.9 million, up slightly from $3.7 million in the fourth quarter.

And significantly less than our total depreciation of $6 million in the first quarter of 2004.

Network depreciation costs were $2.9 million, which included $1.6 million for amortization of internally developed software.

That compares to network depreciation costs of $2.7 million in Q4, and $4.5 million during the first quarter of 2004.

Net interest expense for the quarter was $1 million, down from $1.3 million in the fourth quarter.

Due to the fully, full quarterly benefit of the bond buyback we completed in Q4 of last year.

As for our long-term debt, we currently have outstanding $200 million of 1% convertible senior notes, and $56.6 million, of 5.5% convertible subordinated notes.

The 5.5% debt becomes due in 2007.

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

The 1% debt, which is not callable until 2010, is convertible into 12.9 million shares of our common stock, which are included in our diluted share counts.

GAAP net income increased 5% in the quarter, to $14.1 million.

Up from $13.4 million last quarter, and up significantly over our GAAP net income of $2.9 million in the first quarter of last year.

As Paul indicated, diluted EPS for the first quarter was $0.10.

On an normalized basis, we earned $0.10 of diluted earnings per share.

Meeting the First Call Consensus estimates for the quarter.

At the end of the first quarter, we had 127.4 million shares outstanding.

Weighted average shares for the first quarter were 127.1 million, and diluted shares were 147.3 million.

Finally let review some balance sheet items.

We ended the quarter with $118 million of cash, cash equivalents, and marketable securities.

Up from $108.4 million in the fourth quarter of last year.

We generated $18.7 million of cash from operations during the first quarter, that's up from $15.6 million in the prior quarter, and well over the $8.6 million of cash we generated from operations in the first quarter of 2004.

As planned, we grouped some server purchases in the quarter to take advantage of volume buying power.

And spent $9.7 million on CapEx in the period.

We will continue that buying strategy in the second quarter.

We set our annual CapEx budget at 10 to 12% of annual revenue.

We are still working to manage that target and will re-evaluate any potential impact of this pending Speedera acquisition when the deal closes.

Day sales outstanding for the quarter were 49 days, up from 47 days in the fourth quarter.

The nominal increase in our DSOs was caused by a couple of large customers paying right after the quarter closed.

Before I turn the call back over to Paul, let me take a moment to discuss the valuation allowance on our net operating loss carry forward.

You may recall that we have a $1.4 billion deferred tax asset.

Primarily related to net Operating loss carry forwards.

You don't see this large asset on our balance sheet, because it's been fully reserved due to our previous cumulative losses.

Under GAAP, we're required to reevaluate the need for maintaining the valuation allowance on a quarterly basis.

And we're pleased to say that because of our continued profitability, we may no longer need the valuation reserve, as early as Q3 of this year.

As a result, we would reverse the valuation allowance, resulting in an immediate one-time income tax benefit of approximately $300 million.

The components of this net income are explained in full detail in our recently filed scheduled 10-K.

In subsequent quarters, we would then record a tax provision that would be a non-cash charge to earnings of approximately 35 to 40% of pre-tax income.

We will have more to say in this on our next earnings call.

As for our first quarter results, we're off to a good start.

And our on track to meet the goals we set for ourselves at the beginning of the year.

Now let me turn the call back over to Paul.

Thanks, Bob.

You just heard we had another record quarter.

I've had a full and first exciting first 4 weeks on the job as Akamai's new Chief Executive.

I didn't have to move offices to assume my new role, so there really weren't many surprises.

The transition has gone very smoothly.

Everyone here is very excited and optimistic about our direction.

As we continue to grow our business beyond content delivery services.

In particular, you should look for an important launch announcement from us next month in the area of application performance services.

As we mentioned on the last call, application performance services is a category of Akamai offerings, that extend beyond content delivery services.

These services improve the performance and reliability of highly dynamic enterprise application content.

Whether delivered via the web or other wide area networks.

We'll be announcing first the general availability of a service to help companies accelerate their web-enabled applications, increasingly, our enterprise customers are moving critical business processes online.

Including customer service and support, training and education, supply chain management., Collaboration, and information distribution.

When these centrally located and managed applications are pushed to the worldwide web, IT managers face complaints from users about slow, unreliable, unpredictable performance.

All problems that impact user adoption, user satisfaction, and worker productivity. [Forester] estimates that the total market for application acceleration will be over $1 billion in 2005.

About half of that for web-enabled applications.

Right now that market is served piecemeal by disparate products and appliance-based vendors.

But these products require integration and management.

Ultimately they don't scale to meet the needs of a global user base, as well as we can.

One of the benefits from our continuing investment in our global edge platform, is that our customers will be able to accelerate their web-enabled legacy applications, cost effectively by leveraging our new capabilities, and our shared infrastructure.

We hope you'll keep an eye out for this exciting new service announcement.

Now let me turn to our outlook for the Q2.

For the second quarter of 2005, we expect to grow revenue to 61 to $63 million.

And profitability to increase to $0.11 of GAAP earnings per diluted share.

We continue to be optimistic about our full year performance.

We expect that revenue will increase by at least 20% year-over-year.

And that we will generate at least $0.46 of GAAP earnings per diluted share.

That's before taking into account any impact from the possibility of reversing our valuation allowance on our NOL, and before any contribution from the impending acquisition of Speedera.

As many of you know, in mid-March we announced that we'd reached an agreement to acquire Speedera Networks, a private company based in Santa Clara, California.

We're advancing through the various stages of our regulatory filings, the timing of those proceedings is not under our control.

However, our goal is to close the transaction by the end of the second quarter.

We've made good progress on our internal planning, and believe that we'll be prepared to move forward with the integration, as soon as all of the closing conditions that have been met.

Speedera will enable us to expand our business through significant customer acquisition and profitable revenue growth.

Beyond just the opportunities for upsell, we believe the acquisition of Speedera will open up a new market for us.

Specifically India, where they have a strong presence with an operations center based in Bangalore.

When we announced the acquisition, we expect the transaction will be accretive to normalized earnings, and when the deal closes, we will provide you with details on our integration plan, and our specific expectations for the financial outlook for the combined Company.

So, as our Q1 results demonstrate, we're off to a great start in 2005.

I look forward to updating you on our progress on our next call.

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

Operator, the first question, please.

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

Your first question from Jeff Van Rhee, Craig-Hallum.

Nice quarter, guys.

How are you?

Doing well.

First of all, if you would just comment, I guess I'll start at a very high level.

You talked about your application acceleration initiatives.

Some major new launches coming.

There was a major vendor out there that acquired a couple other players to essentially try to offer something similar, primarily through using hardware.

Can you just comment on that combination, and what you see as your competitive advantages against solutions like that?

I assume you're referring the announcement by Juniper, that they were going to acquire [Serapid] and Red Line.

I am.

I think that's terrific.

It clearly shows that there is an exciting market opportunity for application performance acceleration.

Certainly I think, validates Forester's report.

We think that announcement, and that acquisition is great for us.

It's an endorsement of the category, it's an endorsement of the investment that we've been making.

And of our upcoming announcement.

It reinforces that there are two approaches to problems on the web.

You can install more hardware and try to manage your network yourself.

Or you can also look at the problems of the global web, and understand that you can't manage them yourself.

You're not going to throw hardware all around the world to try to guarantee performance of your applications.

You can look to an outsourced managed service like we provide, that can bring those benefits to a company.

I think it's great to see more traction in the space.

You'll increasingly see it.

Akamai is really differentiated, because of our software as a service solutions.

Okay.

And then on the ARPU front, you've shown sequential ARPU growth for six quarters.

It's been a little while since you've seen a flat ARPU quarter.

Can you just comment in terms of what was driving the sequential improvements in ARPU and prior quarters that may not have taken place this quarter?

It's been climbing steadily for about 2 years.

The prior quarter it jumped 5% sequentially.

Extremely strong.

We've always said that we wouldn't surprised if it went sideways or even down for a quarter or two.

We continue to believe that our strategy of offering more value on our platform, will offer us to continue to penetrate more accounts and then to upsell over time.

We'll stick with the strategy.

It's working.

We're not overly concerned by one quarter where it went -- that was consistent quarter-to-quarter.

Particularly after the growth we had just the quarter before.

Huh huh.

Okay.

And last, just a quick housekeeping, Bob, on the CapEx.

What was the capitalized software for the quarter?

$2.1 million.

Okay.

Thanks.

Nice quarter, guys.

Thank you, Jeff.

Newer current next question from Henry Naah, Lehman Brothers.

Hey, guys.

Hi, Henry.

Two questions if I may.

Can you talk about the churn rate, and I was also wondering if you could talk a little bit about the decreased revenues in reseller channels?

Looking at the churn, the churn was below 5%.

We're making progress in that area.

The second quarter in a row that we've been below 5%.

We're still trending down.

We like it.

We believe that certainly room to improve going forward.

The trend is in the right direction.

Looking at the resellers, I mean when you look at overall first quarter revenue was strong.

The challenge from the reseller area is that we have a couple of large contracts, which were delayed in being renewed in the public sector.

That had an impact certainly in the overall decline from 28% to 25%.

Was there any mix in terms of your four big resellers as to one dropping off more than the others?

Or was it kind of across the board?

No.

Most of the government business comes from a variety of smaller ones, not from the larger ones, who've traditionally pushed in the corporate space for us.

Really just a timing of procurement in the government space.

Okay.

Thanks, Henry.

Your next question comes from Hampton Adams of IRG.

Hi, guys.

Congratulations on a quarter.

Thanks, Hampton.

Just a few questions.

You mentioned group purchasing on the server side.

I assume that's why there's such a big increase in servers in the quarter.

Just want to get sort of a guidance, you mentioned continuing in the second quarter?

That's right.

We certainly tried to group it for buying power so we expect to group purchases in the second quarter.

We didn't give a specific CapEx number for the quarter.

We're still targeting the 10 to 12% range of revenue for the year.

We'll take a new look at that as we close the Speedera acquisition and see if we need to make any adjustments, but we wouldn't be doing that for another quarter.

Any particular area that you putting these servers in?

Or general all over?

A little bit it is replacement.

A lot of it is geographic as traffic continues to grow in different parts of the world.

Okay.

Second thing would be you mentioned the Speedera transaction going on schedule.

But I want to ask, could you be a little more specific.

Have you guys gone through Hart Scott Rodino yet on that one?

Sorry, if we weren't clear enough.

Well underway with that process.

We've made our initial filings, we've begun the dialog with the Department of Justice.

We're certainly doing everything on our end.

We believe that our colleagues at Speedera are as well, to get all of the information that Justice has requested in.

We're confident that the deal will be approved.

But obviously the timing is not under our control.

That's under the DOJ's control.

Our goal remains to close the deal by the end of Q2.

If you'll recall, back to our original announcement, there are really two approvals we need.

The California Securities hearing, which takes a couple of months.

That can't conclude until later in this quarter.

Then there is the HSR portion being handled by Justice.

We're working those in parallel, and we're hopeful we can both of them done in this quarter.

If we do, we'd be prepared to close very quickly.

If either of those goes longer, we obviously will see them to the end.

Perfect.

Thanks for the details there.

Just two last things.

Can you give us the contribution of Microsoft, and also the impact from the expensing of stock options?

How that's going to effect the results going forward?

With all the uncertainty about the expensing of stock options, the nice thing we can say is it will be a full year impact in '06.

Because of the decision to delay that until next year.

We won't have a mid-year reset, which I know will be confusing to people.

That change in the guidelines was very helpful to companies.

Regarding Microsoft, as you heard Bob say, we had no 10% customers in the quarter.

That would include Microsoft.

We don't provide details on anyone below 10%.

But the relationship and the business with Microsoft continues to be strong, and under contract.

Even a directual impact?

No.

Our policy is that for people below 10%, we don't.

We continue to do a lot of business with Microsoft.

They're which have our biggest customers.

We have a very good relationship.

I can't give you any numbers.

Okay thanks.

Michael Turits of Prudential.

Hi, guys, how are you?

Hi, Michael.

Just a clarification, Bob, on the tax situation.

So, do I understand that third quarter will be the first quarter in which you show an effective tax rate?

It's not certain at this point.

We believe given the progress we've made in terms of profitability.

We expect to continue to be profitable.

The likelihood is that Q3 we'll take back into income the evaluation reserve, which could be about $300 million.

And then going forward, we'll have a tax provision somewhere between 35 and 40% of pre-tax income.

You think the reversal in the third quarter and then the first time we see an effective tax rate is likely in the fourth quarter?

Right.

But Michael, we don't know for sure.

The accountants make that determination.

I promise I won't hold you to it.

We just believe we're getting close, if we continue to perform well.

And then once it does happen, you have some options there.

You do report a normalized GAAP number.

Is -- any thoughts about whether or not, the pro forma that adds, or talk about cash EPS, or anything in that direction?

We'll probably talk about cash.

But GAAP income will include the tax provision.

That's just standard GAAP reporting.

You think you might talk about a cash EPS number?

We'll certainly talk about it.

We'll talk about the cash being generated from operations.

Not cash EPS.

You'll just talk about cash flow from ops.

Right.

And then separate subject.

You've been talking for a while about increasing the investment in sales and marketing, and R&D.

You have had a nice pickup in net ads.

Some of that is from churn, but I assume some of that's more of a gross add story.

Is it, and what's happening in terms of your efforts to improve the sales and marketing?

I think you're seeing some of the dividends in both areas.

You're certainly seeing continued strong customer adoption and adds of new customers.

I think that that's reflective on the adds in the investments on the sales and marketing side.

And the other piece are the new offers such the as the one I mentioned that will come out shortly.

That clearly a dividend of the investment on the engineering side, and the R&D work that we've been doing.

It certainly takes a while to harvest that.

We're just introducing some of these enhancements.

The sales force will be trained and be out selling it.

I think that that is very positive.

Sales reps were up a little in Q1 from the investment.

One of the things we said last year, when we signaled we were going to make those investments, we don't see much yield from them in the first six months to a year.

You have to bring them on, get them trained, and bring them up to speed.

So the real positive benefit ought to be in the back half of the year, but certainly we're pleased with what we're seeing out of the sales staff so far.

Where are you in terms of hiring, are you going to continue hiring at this point?

What's the plan?

We'll continue hiring.

One of the things that caused us to take a second look at that, was the Speedera acquisition.

Clearly there we're getting access to a large number of very experienced, successful people in our space.

We were able to defer some of the hiring we thought we might do, because we'll wait until those people join us, and get the benefit of that as part of that transaction.

Given all the progress you've made, -- I haven't run through the numbers to see what the implied OpEx is for next quarter.

But does it seem that you could start to flatten out OpEx, it's been growing at 2 to $3 million a quarter.

This quarter was less, but do you think that is going to flatten out next quarter?

It will.

Up slightly next quarter.

It will start to flatten out for the second half of the year.

Again, if we do the consolidation, that will certainly change with the Speedera, just because of the overall consolidation of the two companies.

In terms of Akamai standing on its own, you'll see operating expenses start to flatten out.

Okay.

Thanks very much, guys.

Thanks, Michael

Your next question from Rod Ratliff of Stanford Group.

Most everything has been asked and answered.

I have two questions for you.

Were market conditions just not favorable to buyback any bonds in the quarter?

I think we'd say we look at it opportunistically.

We spent a little more money, as we indicated, in term of CapEx and it's our position to continue to maintain our cash position over $100 million.

We'll continue to look at it opportunistically as the year unfolds

Okay.

Okay.

One other thing, a pretty, pretty much steady as she goes with the split between contractual revenue and bursting revenue?

Very consistent.

I don't expect you to be more granular than that, Bob.

I'll let it go.

[OPERATOR INSTRUCTIONS] Your next question from Vik Grover of Thomas Weisel Partners.

Nice to have you with us.

Hi, guys how are you doing?

Basically everything has been asked.

What I'm trying to figure out is the landscape of the industry.

Savvis reported a couple days ago, and it looked like they were struggling a little on their content delivery business.

Now you've bought one of the only other competitors.

Do you expect -- what has been your initial feedback from some of the Speedera customers, without getting into the specifics.

Do you expect all of that revenue to come over, I think it was $32 million of revenues or what's left of the competitive landscape, should we expect some of those fringe players to get some business, I don't want to say as a backup to Akamai, but as an alternate supplier?

This is a very competitive market.

It's one of the things I like about it.

It's very exciting and you're challenged every day.

Our main competitor, first, is do it yourself.

It's the IT manager who puts together a solution as they always have, to an IT problem by buying hardware, software, facilities and adding staff and continuing to manage things.

That's something that's available to any prospect we go into.

We clearly go to people who already have large IT operations and are now moving to the web.

And that competition remains as fierce as ever.

It's entrenched in every prospect when we go in there.

The second are the large managed service provider.

Certainly, Savvis I can't comment on the ins and outs of their business.

I'll leave that to them.

But AT&T and many others who go in and say, we'll take all of your problems.

We may not be best-of-breed at any one, but one check, one contract, one guy to scream at solution.

Then there are lots of players who provide content delivery offers as well, not just Speedera, but many, we compete with some who have content delivery, some with other kinds of streaming, load balancing offer, et cetera.

The competitive landscape is very robust.

And our thought is it's a great space, if it's going to continue to be that way.

We have to go in and try to fight and win every deal on the benefits that we'd offer.

In terms of Speedera, they clearly are a separate business today.

They continue to operate that way.

I can't comment on the specifics of their business today.

We're very optimistic that we'll be able to satisfy their customers, and that most will come over.

We certainly alluded on the call when we announced the deal, some customers who have a dual vendor strategy, and want 2 suppliers and we'll have to work to hold onto as much of the combined business as possible.

And there may always be some customers that don't like us for whatever reason, and we'll have another shot at going over and winning them over, but we may not hold on to every one.

We certainly modeled some churn, as a result of the closing of the deal.

We're optimistic that we'll keep the lions share of the business, and customers, and employees that they have.

Particularly as they have a chance to hear us explain the benefits of working with Akamai.

Now, I tuned in a little bit late.

I heard you mention you're going to announce something with Microsoft in the next month.

That the relationship is strong relative to, you're restructuring of the contract a few months ago.

I just --

Maybe I misunderstood it.

I think you may have come in to the middle of two different calls, I'm not sure. [laughter] I declined to provide revenue details on Microsoft in the last quarter, as you know and I reminded some one earlier, we only do it on 10% or greater customers.

We did talk in detail about an application acceleration performance service that we're going to introduce shortly.

We did not tie to that Microsoft in any way.

Well, what is Microsoft working on?

One of your competitors claims to have a major announcement with Microsoft on Monday.

What are some of the areas they are looking at?

Are they looking at --?

I can't speculate that for them.

That's for them to announce if they have an agreement with Microsoft to do so.

I'm certainly not going to give away any of their secrets.

Thanks a lot, guys.

Bye.

Maria Kussmaul of America's Growth Capital.

Hi, Maria.

Hi.

Alicia for Maria here.

Hi.

I just have a question.

How do you expect the Adobe acquisition of Macromedia will effect Akamai delivery with the Macromedia Flash video?

Well, they just announced that consolidation.

So you have to let that play out.

I certainly have no reason to believe that they would back away from supporting Flash, we that that's an exciting technology.

We're pleased to be supporting Flash as an offering from Akamai.

And so we certainly expect that it would continue.

We'll continue to build that service over time.

I haven't heard anything contrary out there.

Okay.

Great.

Thanks.

Thanks.

Your next question comes from Fil Zucchi of Zebra Fund.

Hi.

Thanks for taking my call.

One question, just broadly speaking.

What do you see as far as the business environment out there?

Is the push to more and more complicated delivery -- content steering people your way enough to have set what the weakness out there?

What do you see in terms of the macro picture?

Well, we focus on different verticals.

There are different opportunities by vertical.

Media and entertainment has a certain kind of demand today to deliver rich media, particularly streaming of sporting events, or the download of music like iTunes, that's a strong category for us, where we continue to see lots of demand in the technology space, the demand is largely for the distribution of software.

Which has moved from mailing you disks to downloading software updates online.

That's been a strong area for us.

ECommerce has been a great category because of the improvements that we bring to customers who are selling online.

And eCommerce continues to be a strong category, even though Ecommerce traffic was down over the fourth quarter.

Fourth quarter always being the strong online selling season.

Government is a good category for us.

They're needs are somewhat different as we move into areas such as the application acceleration space, we're clearly talking about far more important and complex processes for customers.

Not just the delivery of a marketing website, but an online business process, which is mission critical for them.

They have very high standards and very low tolerance for failure.

One of the reasons they're looking for a company like us to help them net the help them make the internet more reliable and scalable.

So I think the overall environment is good in terms that there's a lot of need.

That said, we're still in an environment where people take their time to make a buying decision.

It's very reasoned.

They compute the whole solution and the cost before they make a commitment.

When they do, it seems to be very solid and long-term.

And one quick question also on the ARPU's.

If you were to back out the new customers.

What was the trend on ARPU's for the older customers, so to speak?

We've always just given an overall.

The thing that's been consistent is, the new customers always come in at a lower price point.

Usually people want to try one aspect of the platform first.

And then we're successful at selling them over time.

That was pretty consistent, that the new customers were smaller.

Okay.

Thank you.

Thanks, Fil.

Your next question comes from Errol Rudman of Rudman Capital Management.

Hi, this is Errol Rudman and Stu.

Hi.

You guys can be the last question.

We wanted to understand -- maybe you could brief us about the loss carry forward for tax purposes, the size of it.

And when do you anticipate that you may actually -- have to dip into that, and have it as a cash expense?

oh, I think that's a lot of years.

We're glad to be profitable.

It will take a long time --

We're trying to understand the value of that, and could you also address it in terms of Speedera.

Because now that the market and you have convinced everyone of your great success, I think it's important to understand how the cash will continue to develop.

You do have to remember it's $1.4 billion in carry forward losses.

Uh-huh.

As I indicated, we believe today as we look at it and based upon our earnings expectations, that it could be Q3 that we'll bring back into the income statement approximately $300 million as a benefit, and then starting in Q4, we will tax effect our pre-tax income to the extent to 35 to 40% of that earnings.

I understand that.

But I'm more interested, or when do you think you might be able to give us -- or maybe you actually have in the sense that since you said $1.2 billion.

$1.4 billion.

Pardon me?

1.4 billion.

Literally we're taxing our profit on $1.4 [million] in losses carried forward.

We're talking years.

So I can't be more specific than that.

Many years.

Okay.

No.

That's very helpful to us.

We appreciate it.

Sure.

I don't give guidance out that far.

We're talking about years of profitability to burn through it.

It helps for cash flow investors, it certainly helps to emphasize the nature of the free cash flow stream.

Not to confuse that with reported income.

Absolutely.

The tax effect will be a non-cash charge or non-cash item for years.

Thank you very much.

I congratulate you on your continued progress.

Thank you operator.

We look forward to talking to all of you at the end of next quarter in about three months.

Bye bye.

This concludes the 2005 earnings conference call.

Thank you for your participation.

You may now disconnect.