阿卡邁科技 (AKAM) 2005 Q3 法說會逐字稿

Good afternoon.

I will be your conference facilitator today.

At this time I would like to welcome everyone to the Akamai third quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] Thank you.

Ms. Smith, you may begin your conference.

Thank you.

Good afternoon, everybody, and thank you for joining Akamai's investor conference call to discuss our third quarter 2005 financial results.

Speaking today on behalf of Akamai will be Paul Sagan, Akamai's President and CEO and Bob Cobuzzi, Akamai's Chief Executive Officer.

George Conrades, our Executive Chairman, will also be available during the question and answer portion 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 revenues.

Inability to realize the benefits of our net operating loss carry-forwards, inability to effectively integrate Speedera Networks into our existing business or realized expected benefits of the acquisitions.

Delay in developing or failure to develop new service offerings or functionalities and if developed, lack of market acceptance of such service offerings and functionalities.

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 statements represent our estimates only as of today and shouldn't 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 shouldn't 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 the 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 Paul.

Thank you Sandy and thank you all for joining us today.

We had another record quarter at Akamai with our highest ever revenue and earnings.

Our results for the third quarter included revenue of $75.7 million, a 17% increase over Q2 and a 42% increase over the third quarter of last year.

In addition, normalized net income was $22 million or $0.14 per diluted share, a 29% quarter-over-quarter improvement and an 80% increase over the third quarter of last year.

GAAP net income was $272.3 million or $1.71 per diluted share for the quarter.

Up significantly due to the one-time release of the tax valuation allowance against our NOL's.

As you know, on our past two earnings calls, we've mentioned releasing the valuation allowance in the second half of the year, primarily due to our sustained profitability.

Bob will review our net operating loss carry forward and valuation reserve when he takes you through the financial results in detail.

On the customer front, I am pleased to report that we added 94 net new customers to the platform in the third quarter.

Bringing our total customer count at quarter end to a record 1,830 recurring revenue customers.

Our success in growing the customer base is due in part to how quickly we've been able to integrate the Speedera team and their pipeline into Akamai.

We're very pleased with our ability to deliver our 11th consecutive quarter of higher revenue and the ninth consecutive quarter of increasing net income.

I'll be back with my thoughts on the development of our business and our outlook for the rest of the year and 2006 after Bob Cobuzzi reviews the third quarter in detail.

Bob?

Thank you, Paul.

As Paul just highlighted, we had another great quarter, delivering our highest revenue and earnings ever.

As you know, we closed the Speedera acquisition on June 10.

So, this is the first full quarter that includes Speedera's contribution.

Revenue for the third quarter, as Paul mentioned, was $75.7 million.

Revenue from international accounts represented about 20%, down slightly from 21% in the second quarter and up from 18% in the same period last year.

Resellers accounted for 24% of our total revenue in the third quarter.

Down slightly from 25% in the second quarter and 26% in Q3 of last year.

International and reseller revenue were both down due to Speedera's higher concentration of domestic and direct U.S. sales.

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

Our 94 net new customers reflect the benefit of the investment we've made in our sales organization in the acquisition of Speedera.

Churn continued to decline and was approximately 3% for the quarter.

Average revenue per customer, or ARPU, during the third quarter was $14,000 per month, down about 5% from our prior ARPU of $14,700 per month.

As we mentioned on our last call, we had expected at least a 3% drop in ARPU quarter-over-quarter due to the impact of Speedera's somewhat smaller customers.

The difference is due to our second quarter in a row of significantly higher customer additions.

These new customers generally start smaller than the average and grow as they stay with us.

GAAP gross profit margins were 80% for the quarter.

We expect GAAP gross margins to continue at approximately this level for the remainder of the year.

GAAP operating expenses for the quarter were $41.6 million, up from $34.7 million in the prior quarter.

The majority of the increase is due to a full quarter of Speedera's operating expenses, including amortization of intangible assets and stock compensation charges.

Excluding those non-cash charges, our cash operating expenses for the quarter were $37.1 million, up from $32.7 million in the prior quarter.

Adjusted EBITDA for the third quarter was $27.7 million or 37% of revenue.

That's up from 35% in the second quarter of this year and up from a 34% adjusted EBITDA in the same period last year.

So, we're on track with our expectation that full year adjusted EBITDA margins will exceed 35%.

Total depreciation and amortization for the third quarter was $7.5 million, up from $4.9 million in the second quarter.

Our third quarter depreciation includes $4.3 million of net worth related depreciation and $900,000 of G&A depreciation.

Amortization charges of $2.3 million represent a full quarter of amortization of intangible assets related to the Speedera acquisition.

Net interest expense for the quarter was just $600,000, down from $800,000 in the second quarter due to the retirement of the balance of the 5.5% bonds.

GAAP net income for the quarter was $272.3 million or $1.71 of diluted earnings per share.

Our GAAP net income for the quarter includes a non-cash benefit to earnings of $255.3 million related to the release of a valuation allowance against our deferred tax asset.

As we have mentioned on our last two earnings calls, we have been anticipating the release of a significant portion of our tax valuation allowance, primarily because of our recent history of profitability and expected continued profitability.

Akamai's net deferred tax at the end of Q3 is about $320 million.

This asset will allow us to offset taxes on future earnings.

Beginning in the first quarter are of 2006, we will be recording a book tax expense of approximately 40% of pre-tax income each quarter.

About 2% of that is for cash taxes.

The remaining 38% represents the non-cash charge we'll be able to offset against our deferred tax asset.

As you know, in addition to our GAAP earnings, we track normalized earnings, so we can better demonstrate the operating performance of our business.

GAAP net income for the quarter included some other non-cash components in addition to the release of the valuation reserve.

Specifically, $2.3 million of amortization of intangible assets. $1.4 million of charges for equity related compensation.

And $1.4 million of charges related to the early retirement of 5.5% debt.

Excluding these non-cash items, our normalized net income for the third quarter was $22 million, up $0.14 of diluted earnings per share, meeting first call estimates for the quarter.

We ended the quarter with 139.7 million shares outstanding.

Weighted average shares for the quarter were 139.2 million.

And diluted shares were 160.4 million.

Now, let me review some balance sheet items.

In the quarter, we redeemed the balance of our 5.5% convertible debt, using $57.5 million of cash and ending the quarter with $86.5 million of cash, cash equivalents and marketable securities.

We generated $19.5 million of cash from operations during the third quarter, up from $16.9 million in the second quarter.

On a year-to-date basis, we've generated $55.1 million, as compared to $35.7 million over the same period last year.

That's an impressive 54% improvement year-over-year.

CapEx spending in the third quarter was $8.5 million or 11% of revenue.

As indicated on our last call, we expect to invest 12% to 13% of revenue on CapEx this year.

Days sales outstanding for the quarter were 51 days, consistent with the second quarter.

Overall, we're very pleased with our strengthening balance sheet.

I'd like to highlight the fact that our total shareholder equity has improved from a deficit of approximately $126 million at the end of 2004; to positive shareholder equity of approximately 378 million at the end of Q3.

This significant improvement in shareholder equity has been driven primarily by three factors.

First, the release of valuation allowance.

Second, the issuance of equity related to the Speedera acquisition.

And third, and most importantly, our improving profitability.

In summary, we had a great quarter, delivering record revenue in earnings and taking steps to strengthen our balance sheet.

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

Thanks, Bob for wrapping up a great quarter with revenue up 42% year-over-year.

I'm very excited about the 94 net new customers added in the quarter, bringing us to a record level.

This step up demonstrates strong demand in the marketplace for Akamai's content delivery and application performance services.

Three important factors helped contribute to these strong customer additions.

First, businesses and government agencies continue to shift key functions online.

And when they do, they often learn they need Akamai's performance and reliability to support their objectives, including enhancing their brands.

Second, the investments we made in sales and marketing, including the acquisition of Speedera, are really paying off.

And third, we're doing a better job at tracking high quality enterprise customers and then keeping them through successive renewals.

I'm also very pleased with our efforts to maintain momentum in our business while integrating Speedera's employees and customers.

We're on target to move the vast majority of Speedera customers to the Akamai platform before the end of the first quarter of 2006.

Now, before I talk about where we see the business going forward, I want to comment briefly on some senior management changes I announced last week.

Bob Cobuzzi, our CFO for the past three years, has announced his intention to retire after he completes all of the financial reporting requirements for this year.

That means you'll see Bob at investor conferences through the fall and you'll hear from him one more time on our call next February to report our full year 2005 results.

So, while we thank Bob today for his record of great service, we'll have ample opportunity to pay tribute to him later.

I also announced that Bob's successor will be J.D. Sherman.

Who comes to us from IBM, where he was the Chief Financial Executive for the Company's more than $21 billion systems and technology group.

J.D. is an experienced executive and we will benefit greatly from his financial acumen and his knowledge of the information technology industry.

We're especially fortunate that J.D. and Bob will overlap for several months to ensure a smooth transition.

Now, a few comments on what we're seeing in the marketplace.

The growth drivers for our traditional content delivery business are clear in several key verticals, including; media and entertainment, online software delivery, online commerce, and the public sector.

In media and entertainment, we continue to see innovative developments that capitalize on the growth of broadband access and leverage our platform.

Apple Computers' recent announcement of the video iPod and the distribution of music videos and TV shows in the iTunes music store is just one example of the rapid change in this marketplace that benefits Akamai.

Internationally, rediff.com, an India based online entertainment, news and shopping site recently chose Akamai's media delivery and our digital rights management services to help launch their online music store.

Because our services help Rediff securing download songs only to authorized users, Rediff can effectively monetize media assets online, protecting them against loss from piracy.

Likewise, use of our global platform for software delivery continues to expand as companies shift from CD's to the Internet as a more effective and efficient way to get their products to consumers.

For example, in July, we announced that we're helping Sun Microsystems lower cost and improve performance for the users of the Sun download center.

And recently, [Asaqua] a data security company in Finland chose Akamai's electronic software download service in part for our record of reliability.

But also because our platform enabled them to seamlessly handle traffic loads that were 20 times their average without putting any additional strain on their origin infrastructure, actually lowering the total cost of ownership.

We continue to see growing adoption of our technology to improve the performance of online retailing sites, seeking to raise conversion rates, transforming more browsers into buyers.

For example, our eCommerce solution helped Sierra Trading Post, an online retailer, increase their conversion rates and raise their average order size.

In addition, I'm very pleased with the introduction of our new Web application acceleration service.

It's clear when you talk to customers about application performance that they are already searching for a solution to improve their applications online and to lower costs.

Akamai's Web application acceleration service has a unique advantage over other options, primarily because it runs on our vast global network of servers at the edge of the Internet away from an enterprise's origin infrastructure.

Our offer is not a point solution,it's a global service.

It scales as users need around the world, providing better performance, greater reliability, and higher security.

All at a lower total cost without up-front capital expenditures.

We're starting to see traction in the marketplace with customers like Brass Ring, an on-demand recruiting and talent management software provider.

Brass Ring wanted to ensure that their corporate customers could access their application from all points across the globe without experiencing performance degradation caused by Internet latency.

And that's where the Akamai solution comes in.

Another customer, this one a major manufacturer of automobiles that already uses us for its dot-com sites, recently added our Web application acceleration service to help improve the performance of its dealer content management system.

The application allows dealers across the globe to develop regionally specific content online.

While the firm's centralized application at headquarters ensures that regional content fits into the global brand image.

Using Akamai's Web application acceleration service, dealers can create new pages quickly with data transfers between Europe and Asia occurring significantly faster with Akamai.

While it's too soon for us to provide detailed financial targets for this important extension of our technology, I can tell you it is a service that we are very excited about.

Certainly, application performance services is a category that's attracting a great deal of attention these days.

Especially from the enterprise market, where we are convinced that our distributed services based approach will continue to be well received.

Of course, at this time, the majority of our growth continues to come from our core content delivery business, where demand is expanding.

So, let me share our thoughts with you about our expectations for the rest of this year, 2005.

For the fourth quarter, we expect revenue to be in the range of $77 to $80 million.

And we expect earnings on a normalized basis will increase again to at least $0.15 per diluted share.

That brings our full year revenue target to $277 to $280 million, representing a growth rate in excess of 30% over last year.

That would make two consecutive years of 30% or greater top line expansion.

For the full year, we expect to generate at least $0.51 of normalized diluted earnings per share, up 65% over last year.

As for next year, it's a bit early to see to the end of 2006.

But we're comfortable targeting top line revenue growth of 25% or more over 2005.

And we expect normalized net income to grow even faster by at least 40% over this year.

We're looking forward to updating you at the end of this quarter with our results for the full year 2005.

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

Operator, the first question, please?

[OPERATOR INSTRUCTIONS] Your first question comes from Michael Turits of Prudential.

Hi, guys, good afternoon.

Hi, Michael, how are you?

Good, thanks.

On the application acceleration fees, is that responsibility for any of the net adds in the quarter and what do you see for that going forward just on a net add basis?

It certainly is in some of the net adds.

In some cases it's an upsell to existing customers, so we wouldn't count that as a new customer.

In other cases, there are pure net adds of Web application acceleration business primarily in a vertical manufacturing that we weren't in before.

Because, primarily our customers were using us to deal with their B-to-C relationships.

And Web application acceleration now allows us to go to existing customers and whole new sets of prospects and really talk about a B-to-B audience.

For example, accelerating a business portal to some number of partners or prospects around the globe.

So, it is part of the net adds.

We're not breaking it out separately.

And it's certainly not the majority of the business today, which is still the growth in content delivery.

And how is the - - on the pure WAA adds, how are they coming in relative to your average for entry level ARPU?

It depends, but in general, I was going to say on an apples-to-apples comparison, but they're really different things.

In general, the ARPU has been higher for entry level application acceleration customers as opposed to an entry level content delivery customer.

So we're very encouraged there by the pricing we've seen early on.

Okay, and how are you doing in terms of retaining the Speedera customers in particular?

We've done very well, as Bob mentioned, churn was really a historic low in the quarter.

That includes, of course, Speedera.

We've now had an opportunity - - their customer contacts are fairly evenly spread through the year.

So, we now have almost four months of experience.

So, we've gone through renewals roughly on 1/3 of their customer base already.

We've done very well there as well as renewing our own customers.

And we're very pleased with where we both see churn in general in the business.

But also that the model that's behind the thesis for the acquisition has held up very well in terms of holding onto the business we purchased with the Speedera acquisition.

Lastly, just a clarification.

You said 40% growth in net income.

So should we think about this - - no reason not to think the same basis on EPS?

You'll have to build your own model, obviously on EPS.

You know we have added historically about 1 million shares per quarter because of options, so there's some natural growth there.

There's also the issue of the Speedera shares are only in for half a year in '05 and you'd have a full year's impact in '06.

So you'll have to do a little bit of modeling to build that out, build your own assumptions.

So you can't straight line the 40% number over.

So, approximately about 1 million shares additional per quarter, you said?

That's what we've been trending.

Thanks, guys.

Thanks, Michael.

Thank you.

Your next question comes from Jeff Van Rhee of Craig-Hallum.

Hi, guys.

Great quarter.

That new customer add number is just really out there.

Can you talk about I guess two things?

First on the new customer count.

Well, is this level sustainable?

And I know you're not running them as separate businesses, but can you give us a taste of how much of this came out of the Speedera pipeline as opposed to the core Akamai pipeline?

Well, we generally don't give guidance on customer adds.

It's little hard to know quarter-over-quarter.

We've had two terrific quarters in a row.

We're very pleased by that.

I do think that the result in Q3 were helped by the integration of the Speedera team and terrific sales folks that we added.

The sales management team worked very hard to innovate people very quickly, clean up any territory overlap in issues and continue to execute.

So we saw.

I could certainly like to think that that will continue into the fall and winter, but we don't have a specific number.

I don't think it's reasonable to keep thinking it keeps ramping every quarter as it has.

It would certainly be a nice result if it happened.

But I think it's probably a good idea to use a rolling average over the past year and to try to build a model and just see where it moves.

We don't really separate out the Speedera versus the Akamai pipeline.

We merge them.

Obviously in some cases we both had the same prospects.

Often we had different ones and we're just continuing to now manage that as one global pipeline and one set of sales folks in the field.

Can you - - would you give us a hand on the pricing front?

You gave us a sense last quarter, because you were bringing Speedera into the change, you expected change in ARPU.

And can you give us a taste of directionally or even more, hopefully a little more specific than that, what to look for on the pricing front?

It's a little hard to give you that.

I know you'd like something more specific.

We did tell you to model a little drop in ARPU because of Speedera.

And that came in about where we had expected.

There was a little bit more.

And that was frankly because of the large new customers in both quarters.

So it's probably on balance flat going forward for a quarter or two, if the number of new customers remains strong.

That would be my best guess for a model, but it's a little hard to be exact quarter-over-quarter.

Can you - - I guess lastly, and I'll let somebody else on.

On the pricing front, would you just talk, now that you're into the app accelerator space and being on the service front out there is in many ways a greenfield opportunity.

But can you just talk about both in that market space as well as your core market space, what you're seeing in terms of the general pricing environment and pricing drivers?

Whether there's a cost for substitute solutions?

What are the key drivers that we really ought to focused on to get a taste of what's going on out in the marketplace as it affects your pricing?

Well, customers are very costcentric and focused.

I think everybody has learned their lessons over the last five years about IT buying.

So, people are very focused on total cost of ownership, generally in the first year.

Which is a great opportunity for us.

There's no upfront capital investment to use any of our services.

People can get on the platform very easily and relatively inexpensive.

There's no large professional services or massive integration work to begin using our entry level services in the content delivery or the app acceleration space.

So, it allows people to come on and try it without a big risk.

They obviously, make a commitment to us over at least a year, to sign a contract.

And the larger the commitment the better the pricing is in general.

But that said, I think customers focus on performance - - increase in performance, reliability, scalability, security, and cost.

And you've got to be able to check all five boxes, and one of them has to be lower priced.

Nobody says do as good a job as my other solution and charge me more.

Frankly, nobody will say do the same job for about the same money.

It's not worth the conversion trouble.

They're looking for improvement in performance and savings on the cost side.

And fortunately in both of these product areas, we've been able to demonstrate significant improvement in performance and significant cost savings.

Okay.

And last, I promise, did you say the churn was 3%?

Yes.

Is that a record?

That's the lowest I can see going back for a while.

It's certainly - - I'm not sure I can see all the way back before the end of the bubble period bursting.

But it may be at least - - it's certainly a record over the last five years, I think.

And it's really terrific.

I still think we can get it down a little bit more and there's a lot of pressure in the system to try to do that.

But it's really for recurring services business at a terrific level.

Of course, it doesn't mean those customers went to a competitor.

We almost never have a competitive loss.

Sometimes customers get bought, sometimes they go out of business.

So there's always some of that involuntary churn.

And sometimes as we've discussed on these calls before, we get bought and paid by a agency on behalf of a customer doing a large media launch.

And a year later that ad campaign is over so there is no recurring budget.

So, the amount of loss from somebody who just says "I don't like you" or whatever, is really, really small.

So I think we're doing a great job in the marketing and the field organization finding good customers and supporting them as well.

Thanks, nice quarter.

Your next question comes from Jeff Englander of America's Growth Capital.

Hi, good afternoon, guys.

Quick question.

Can you give us a little more color on the opportunities you're seeing in the app acceleration in the manufacturing vertical?

And why you think you're having some success there?

Sure, and again, it's early, so I don't like to get too far out in front of our headlights.

We're trying to get a lot of data and really analyze it.

But I think what we're seeing there is that a lot of people in industry, in the B-to-B space who we haven't dwelt with before have thought of the Web as kind of interesting, but not critical when it was their dot-com site.

And then what's happened over the last several years is there's a fundamental shift to some mission-critical aspect of their business online.

Often, it's a partner portal where they're sourcing materials or dealing with suppliers.

And they said don't call an 800 number anymore, don't mail in forms, don't fax us orders.

We want to go directly online.

And so they're dealing with widely desperate partners around the world.

And it's often a small number but too large a number for a hardware solution.

So if you're dealing with three offices, you can install an appliance and maybe solve some of your problems.

But let's say you're just dealing with your 500 most important suppliers, so they're obviously not part of your global network.

You're not going to go put hardware into even 500 locations to get realtime performance online.

And therefore, a globally distributed platform like Akamai is exactly the right answer.

I think one of the other reasons is the strong move towards outsourcing in Asia.

So a lot of these applications are run either in the States by an American company or in Europe by a European company; suddenly dealing with suppliers of one form or another spread across Asia.

And the Internet latency problems are severe across the oceans in either direction.

And therefore our services model is very economic and high performing.

I can give you one example of a customer that I've dealt with.

I can't name them, but they are a very large chemical company where we had some context and we were able to have terrific high level introduction a couple of years ago.

And they said, "you know, you guys are great, this is really neat stuff, but nobody really visits our Website a lot.

You can go there, but you know, we don't sell anything.

It's not revenue generating, so it's just not worth integrating what you do, even though we understand why it has value."

Suddenly, they moved an important business process online to key partners and it just didn't work very well.

And they were spending a lot of money maintaining it and their old off-line channel.

They became a great application acceleration customer because suddenly a B-to-B process had to be fixed online.

And we were the only solution that they could find that would do that.

Can you talk about - - thank you.

Can you talk a little bit about, obviously the business is still young, in terms of where you feel you are in maturity of the model and any sense of when you feel you'll be comfortable enough to gain more predictability?

You're referring to application acceleration, not the business in general, right?

Yes.

I really think that we'll learn a lot over the next year.

I think 12 months of really selling will teach us a lot about lead generation, managing the pipeline, time to close deals, who are the best prospects.

So that we can be really efficient with our sales force.

And that we'll be able to build a very good model over the next 12 months.

I do think that it will become a significant driver of the business.

That it will embed us more deeply in our traditional customers and open up a new market of customers over the next year.

So we're very focused on it.

A lot of the field activity is focused on it.

And I think we're benefiting from the rising awareness that there is a network performance problem.

That there have been in and are a lot of hardware manufacturers trying to sell point solutions that do good things in certain situations but they don't solve a lot of problems.

And Akamai's distributed computing platform is the ideal approach for solving this for a large segment of the people feeling pain here.

Great.

And last quick question is, in reference to the Speedera customer base, maybe contrasted with your own.

You've always mentioned that new customers start small and they grow as they stay with you.

Can you talk about any success you've had in terms of upselling those customers?

And also what you're seeing in terms of them growing larger with you, since you're about 1/4 of the way - - or 1/3 of the way through the renewals?

Right, well, certainly they start smaller but as you saw from their ARPU, not dramatically smaller.

So Speedera was doing a good job getting a quality customer base.

Their customers were slightly more domestic and sold direct than Akamai's.

We are seeing just their traffic grow.

We've had some up-sell successes so far.

But frankly, it is pretty early on.

And one of the things we wanted to do first was make sure they migrated flawlessly to the Akamai platform.

And not walk in the door and say "hi, we're the new guys.

You want to give us more money?"

Before we've proven to be the reliable partner.

So the first focus is, if you will, to love them up.

Show them what our platform could do, how it's more scalable, more services and features.

Move them over, get them comfortable, and then we'll talk about additional things that they could do.

Great.

Thank you very much.

Thanks, Jeff.

Thank you.

Your next question comes from Mark Kelleher of Adams Harkness.

Thanks.

Great quarter, guys.

Thank you, Mark.

Going back to the new customer adds for a second.

Was there a particular vertical or verticals that were driving that?

I know you mentioned manufacturing for the applications - -.

No, it was pretty spread across our traditional five or six key verticals.

We continue to just see strong demand across all of the places that we've been selling.

With the addition of manufacturing as really a new sector that we can talk to.

With you hazard a guess as to the overall growth of the content delivery market that you're seeing out there?

I don't think I've seen anybody give estimates that's growing nearly as fast as you are.

Well, I think yes, then, we've been finding demand that people didn't recognize.

I think we've done a great job of finding opportunity, being able to go and explain to people what we do.

You've seen two years of 30% or greater growth.

I think we're the recognized market leader.

And we either find people or they come to us and say "we understand what Akamai does, can you help us?"

All right.

And I know you're not giving out - - you're not breaking out the applications performance piece of the business.

But can you maybe give a sequential increase, growth increase, something like that?

No.

It's really too early.

We're doing it off of a very small base month over month.

So, I think any of those numbers would probably really distort things and make it very difficult for people to build a model.

What I would say at this point, do what we're doing, which is being very conservative in modeling it as a piece of the business.

I think over the next 12 months we'll be able to give you more information.

At some point we might even do segment reporting but we're nowhere close to that today.

The CDN business continues to grow at a very good clip, and standalone is a terrific thing business.

I think the addition of application acceleration over the next couple of years is a terrific compliment, is a directly adjacent market.

And I think we're well positioned to get a piece of it as it grows.

Okay, great.

Thanks.

Thanks, Mark.

Thank you.

Your next question comes from Henry Naah of Lehman Brothers.

Hi, Henry.

Hi, Paul.

Couple questions here.

First one is, in terms of the Speedera business, can you give us some sort of sense as to what kind of revenues you generated from those customers here in the quarter?

I think last quarter you generated $2.5 million, which was kind of running at a $11 million a quarter run rate?

Well, no.

We're not going to break it out, which I know might frustrate folks, but we said last quarter we wouldn't.

What I will say is that there was certainly no significant loss.

There's been sort of normal growth on the regular traffic side of their business continues to grow, as ours does, just through increased use of the Internet.

We're certainly not bringing on any new customers there.

Those have all been moved into the Akamai channel.

So, anything that might have been in the pipeline were just managing as one Company and moving every day more and more of the revenue over to the Akamai network.

And we're just treating it now as one giant base of customers.

So there really is no - - we're not tracking it separately going forward.

So there's really no easy way to do that.

Okay.

Then in terms of bursting, can you help us out with bursting?

I know it typically runs around 30% of total revenues?

It was roughly the same in the last quarter.

It moves around from customer to customer.

But it's really - - I think kind of a remarkable trend that year after year that 70/30 split is roughly correct and we expect it probably will be again in the winter or this fall quarter.

Okay.

And then I guess two questions for Bob here.

It looks like allowance for doubtful accounts picked up a little bit here in the quarter.

I was wondering if you can you kind of help us with that?

Yes I mean, we go through and review doubtful accounts every quarter and look at it across the entire universe of accounts.

And if we see customers that are slow in paying and there's some concern about collectability, we certainly deal with it.

This quarter a little higher than past but still not material in nature and certainly have no reason to be concerned in any way.

Anything that kind of drove the uptick?

Well, again - - (talking simultaneously).

Review.

Next quarter it could be down to virtually nothing.

So, it was just a normal review cycle we go through every quarter.

Actually, every month, to be honest with you.

Okay, and then in terms of head count, looks like it ticked down a little bit here in the quarter.

How should we think about that going forward?

I mean, what happens - - you certainly have a certain amount of attrition on-going, and if people leave before you are able to replace them, you may have a gap of several weeks involved.

I think you'll see a little uptick over the balance of the year.

We'll probably end the year at somewhere around 800.

As we transitions some Speedera folks, that may have some little impact as well.

But we should end the year around 800.

Henry, I think what you saw there was some of - - we had some Speedera employees who knew that they didn't have long term jobs, but they certainly didn't leave in those 10 days of June.

And so they were there at the end of the quarter and then were gone over the next 90 days.

And then one last question, if I may.

Sounds like you guys have kind of sketched out some rough 2006 targets.

Anything in terms of operating margins or adjusted EBITDA targets we could be thinking of in?

We've indicated operating margins have been running, I think last quarter, it's been running in the mid to high 20's.

We think over time that will certainly trend up and we should be able to scale with this model into the low to mid-30's.

But that's going to be over time.

And I think we've shown progression over the year and we think that will certain;u continue as we go into '06.

Great, thanks, guys.

Thank you.

Your next question comes from Rod Ratliff of Stanford Group.

Very happy with the '06 forecast.

Very proud of you guys.

Now we just have to execute.

Well, that's the big issue. (laughter) I've only got one question - -

You know we love a challenge at Akamai.

For sure, for sure.

I've only got one question left that hasn't been asked already.

And it's sort of a forward-looking operational question.

As you get to delivering larger bags of bits with video files and things like that, do you foresee anything problematic with the amount of storage capability on network?

No.

We continue to scale it.

It's one of the uses of CapEx, certainly with all of the growth of media and entertainment online and business models and broadband that work, storage demand has grown for us probably a little bit ahead of expectations a year ago.

But we have a very scalable, distributed system.

As you know, a lot of the content we don't keep persistently in the network.

We pull it from our customers' Websites.

But for a lot of these media assets, we have persistent copies where they say, "we want you to hold the media and deliver it."

And we keep it in secure replicated locations so we're not relying on any one point of presence for it.

So it's very high availability, very reliable.

And distributed globally to optimize performance for customers who may care specifically about performance of media content in Europe in addition to the United States.

I certainly think that it's an area where we'll focus some R&D to develop increasingly sophisticated offers over time.

But no, I don't worry about it in any particular way.

Outstanding.

That's all I've got.

Congratulations again.

Thank you.

Thank you.

Your next question comes from Aaron Kessler of Piper Jaffray.

Couple of quick questions for you.

The churn rate obviously nice, 3% now.

Is that the long term rate we should now be thinking about or are you still kind of thinking maybe the 2% to 4% range?

How should we think about that going forward?

I guess 3 would put us in the 2% to 4% range.

I'd love to have a long term model that's 10% or less a year, which would say 2.5% a quarter.

I've always thought that we could manage it to that point, where we're getting awfully close.

So, you could have a quarter where you beat it.

You could have quarter where you miss it by a little bit.

But it's just in that range where it's manageable and it's not the boat anchor that it certainly was four years ago.

And then on the Web accelerator, how much of that is in the guidance for '06, is it very little if any for the '06 guidance?

It's in there conservatively.

We always try to model the business conservatively.

We use exactly the same forecasting methodology for the public guidance that we give you that we use for our internal model.

So, we don't have two sets of numbers that we're trying to hit and fool anybody.

So we've now got several months of experience.

We had many more months before that of beta customers, so we have some idea.

We're trying not to carried away with our sales, so some of it is in there.

There is always possibility for upside because it's still a small number.

Great.

And on the product also, how much of your sales people timing about selling that product versus the core content delivery business?

I don't know how to - - we don't do a time management on it or punch the clock around it.

The majority is still certainly going to the content delivery business and a specialization in the verticals.

I would say that not everyone today is trained to sell Web acceleration.

And one of things that we're going look at is further special sales team over time.

Because at the end of the day you don't want somebody trying to sell too many things that they don't understand well.

You want them selling a few things that they know against a customer base that they're expert in.

And finally, can you give us a sense for what you're seeing in terms of the environment for the volume upgrades from current clients?

You mean in terms of content delivery?

Right.

Certainly, Internet usage and traffic still seems to be growing strongly, is still growing strong in Asia.

Traffic, though, is growing in Europe and the U.S. as well.

We continue to see very exciting discussions with a lot of media and entertainment company prospects.

We're talking about very ambitious online products, which would drive lots of volume potentially.

But I, as a former media person, am a little skeptical about how many of those become hits and how many don't make it.

But we seem to be the place that most prospects come to early with an expectation that they'd like to work with Akamai.

And I think that we'll see more and more of that over the next couple of years.

Great.

Thank you.

Thank you.

Your next question comes from Heather [Lockman of BE] Investment Research/

Hi, Paul, Heather Lockman.

I'm just curious if you - - even though it's early days, any difference in the sales level between the Web accelerator product and CDN?

And then a follow-up question.

Hard to know.

Both of these are enterprise sales, so you're not talking about a two week sales cycle.

In the content delivery space, selling our flagship EDGE suite product, we were really seeing a six to nine month sales cycle.

We obviously haven't been in a nine month cycle on Web acceleration.

So, you could say that everything we're seeing is better than average.

But again, these are early prospects, maybe people that we had really targeted.

People we had great relationships with and we knew going in the door.

So while the data today would suggest that the cycle is shorter, I think it's way too soon to model that on average going forward.

That said, there is a real appreciation that there is a severe problem with application performance across the Internet.

And more and more people are relying on the Internet to run their applications.

So, I do think that the education threshold is lower, if you will.

That people kind of get it when we come in the door.

And they don't say "why are you here?"

They say, "well it makes sense that Akamai would be involved here and we would like to hear about your solution."

So there's some encouraging reason to think that the cycle could be shorter.

But I also know that when you're going, you're asking people to sign a long term contract to part with a lot of their money.

They bet it very, very carefully.

Okay.

My follow-up question is, do you see a difference in the sale cycle between the Speedera and the core Akamai base?

No, I think it's pretty similar.

They were selling largely to enterprise customers.

A little more domestic, a little less government than we were, but to core enterprise prospects.

And so I think it was a pretty similar sales cycle, pretty similar pipeline kind of management.

And we kept a large number of the people in their sales organization.

And they've ramped up very quickly to selling the Akamai catalog.

Because they only sell Akamai services now.

Okay.

Thank you very much.

Really nice quarter.

Thank you.

Your next question comes from Bob Stimson of WR Hambrecht.

Just a couple quick ones.

Speedera integration, now, is that going to be - - is that network going to be consolidated and kind of closed into the Akamai networks, so there's cost savings from that in Q4?

Not in Q4.

There's - - actually there was expenditure up front, because to migrate traffic over, we had to build out the Akamai network.

We're moving the customers over last quarter, this quarter, and next.

Then we'll be able to, if you will, decommission their service and move them onto the Akamai network probably next summer.

So in the short term, there was actually a bit of higher cost.

The savings will come next year.

Is that quantified at all or not necessarily?

No, it's not.

In reality, what you have here is if you have bandwidth for both companies in order support the user buildout or to run the platform.

So, you're going to have traffic migrating over from one platform to another.

So you're going to have just - - moving that bandwidth over.

We're building out, as we have built out this past quarter, a lot more service to expand our geographic footprint.

So you're still going to have increasing colo costs, so you're not going to be savings there.

Savings will be around, less people involved in probably running the day-to-day platform but that's not material in nature.

Okay, great.

Quick other question is, can you guys comment on the Qwest announcement that was out there with networks?

And your name was obviously brought up in that announcement.

And is that just; we're working with the government here so sit back and relax?

Or is there a real potential for some business from the Qwest announcement?

Well, I think there's potential from that RFP from the government.

But it's a long process, so any upside would be in the back half of '06.

A number of major telecom providers are bidding on that project, responding to the RFP.

We are actually named as a potential sub in several of the bids.

One of the bidders chose to put out a release announcing that they were bidding and including Akamai.

We really don't have any control over that.

We hope that one of the successful bidders will be one that includes Akamai and we are in several.

We can't name the others because they would be up to them to decide if they wanted to release their name.

And so we're hopeful that it will be part of upside in the pipeline but it would be near the end of next year and carrying into years forward.

It's a very long term government bid.

Do you have a high probability because you're on two of the three vendors, so there's like a 70% probability you'd get business from this?

I don't know how to handicap that, because ultimately, it's the prime that carries the day.

We believe and a number of the potential primes believe that we add real value, which is why we're in the majority of those bids.

But again, I can't easily handicap today where we'll come out in that.

Of course, our team working that account will track it carefully.

And as we get into next year and later into next year, closer to when it's awarded, I's sure we'll probably have a good idea and we'll handicap it but don't know it.

And it's an RFP today from the government.

It requires getting funding approval as well and that's a year off at the earliest.

Okay.

And then just real quick.

With Microsoft coming out with SQL 2005 and that's supposed to I think come out in - 0 I think in the November time frame.

Is there going to be some incremental patch management work you guys could get out of some of the new Microsoft releases, and is that factored into your numbers in guidance?

Well we certainly try to forecast large customers' traffic.

We have a good insight into what they're doing that isn't an emergency basis and that would be built into the forecast.

I can't comment about one specific customer's very specific project like that one or any other.

But anything that's foreseeable, we have a pretty good handicapping method to include it in the forecast.

Great.

Thanks a lot.

Thank you.

Your next question comes from Vik Grover of Thomas Weisel Partners.

Hi, Vik.

I have nothing to ask.

Everything's been asked many time.

But Bob I wanted to know, when is the tribute? (laughter) I'm sure I'll see you again before this run is over but I just want to say great quarter.

I think everything's been asked and answered.

Thanks, we'll make sure you're invited to Bob's tribute.

Your next question comes from Jim Lee of Morgan Joseph.

Gentlemen.

Just two quick questions.

First, on the Web app accelerator, is there anything out there so far that has kind of surprised you?

Have you seen anything that you weren't seeing before that has come up, any new avenues, those sorts of things?

Well, I think what was a pleasant surprise in the Web application acceleration space was how much people recognized that they had a problem.

And that it was a network level problem that they couldn't solve on their own or with hardware in their own data centers.

Okay.

Can you give us - - everyone's asking for more color.

Is there anything more you can give us on markets, on potential customers, what the pipeline looks like?

Anything out there for that?

We continue to manage the pipeline as an eight stage process.

We try to never get to the point where you've run it dry and you're refilling it at the beginning end.

So, we're pretty conscious of trying to manage a consistent level or a predictable level across all of the stages.

We continue to see very strong demand.

It's why I think the customer adds have been so good over the last several quarters.

And we make ongoing investments in the lead generation activity.

We know that you always have to keep priming the pump and I think that we've been managing that well.

We've made a number of processes changes internally over the last six months and I think that that's worked very well.

We talked six, nine, twelve months ago about increased investment in the marketing sales operation.

And I think you're seeing the dividends of that in the last two quarters' results.

One last thing.

Have you seen any - - can you us an update on how you're doing at like the Fortune 500 level of customer?

Are you getting deeper into that market?

Anything you can give us there?

Well, on the Global 500 list, we have over 20% of those enterprises are Akamai customers today.

So, I think we've done well penetrating those kinds of accounts and continue to, particularly as we've moved into manufacturing with the Web Acceleration project.

Because they are disproportionally probably represented in the Fortune 500.

I'd say on a global basis, we target Global 2,000-type companies.

And I think we've done very well.

And I think we have a really good brand there and are very well accepted.

And now as a successful public Company it's very easy for those kinds of businesses to get comfort working with us.

They know that we have a track record.

That we're very accountable.

And that it's easy to see where we're going over the long term because they can continue the track that we invest in R&D.

We continue to build out the platform to make sure that we can support what they need going forward.

Thanks, guys.

Thanks.

Why don't we take one more question, operator?

Thank you.

Your last question comes from [Wendell Lightly] of RS Investments.

Hi, Wendell.

Hi.

Nice quarter.

Good guidance.

My only question centers around the tax rate.

And there's a lot of precedent within software industry for people using full tax rates once these valuation allowances are leased.

So why not have the Street apply a full tax rate against GAAP, but also pro forma?

Well, I'll let Bob handle that.

Okay.

As you look at our valuation allowance, we have $320 million of deferred tax asset.

That is going to be - - certainly you can project earnings growth over the next several years is not something which we're going to use up certainly in the next couple of years.

It will be some time into the future.

So, as you look at our overall tax provision starting '06, it will be about 40% of our overall pre-tax income.

About 2% will be cash, but the other 38% is really going to be non-cash in nature.

And I think by basically tax effecting that on a normalized basis, you're really penalizing the overall performance of the Company and what we're generating from a cash perspective.

Okay.

And second question is about the guidance for 2006 top line, which is pretty impressive by all measures.

Has that assumed no acquisitions basically organic based on the current product set?

Absolutely, absolutely.

We're very disciplined about acquisitions.

We'd be opportunistic if we ever saw something again.

We spent a lot of time thinking about the right strategy.

I think we made a great acquisition, really well executed in the Speedera case.

Those are hard to find, so we're not in a hurry to rush and do another one.

So the guidance is based on what we can see and handicap today in our business and in the customer set that we know and understand.

Thank you all for calling in and we look forward to talking to you again in about three more months to report on the end of the year results for 2005.

Good bye.

Thank you.

This concludes today's conference call.

You may now disconnect.