阿卡邁科技 (AKAM) 2005 Q4 法說會逐字稿

Good afternoon.

My name is Jeanne, and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Akamai fourth quarter 2005 earnings conference call.

[OPERATOR INSTRUCTIONS]

Miss Smith, you may begin your conference.

Great.

Thank you.

Good afternoon and thank you for joining Akamai's investor conference call to discuss our fourth quarter and year-end 2005 financial results.

Speaking today will be Paul Sagan, Akamai's President and CEO, and J.D.

Sherman, Akamai's Chief Financial Officer-elect.

Bob Cobuzzi, our retiring CFO, will also be available during the question and answer portion.

This 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 realize expected benefits of the acquisition, 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 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 obligations to do so, even if our estimates change, and therefore, you should not rely on these forward-looking statements as representing our estimates as of any date subsequent to today.

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

These non-GAAP measures are not prepared in accordance with generally accepted accounting principles under the news and publications portion of the Investor Relations section of our website, we define these non-GAAP terms and reconcile our non-GAAP financials with the most directly comparable GAAP financial measures.

Now, let me turn the call over to Paul.

Thank you, Sandy.

Thank you all for joining us today.

The fourth quarter was another record quarter at Akamai, capping off a full year of terrific financial results as we grew revenue in excess of 30% for the second year in a row.

Our results for the fourth quarter include revenue of $82.7 million, a 9% increase over the third quarter and a 44% increase over the fourth quarter of 2004.

Normalized net income was $26.2 million or $0.16 per diluted share, a 19% quarter- over-quarter improvement and an 80% increase over the fourth quarter of last year.

For the full year, we grew revenue fully 35% year-over-year to $283.1 million and generated normalized net income of $79.5 million or $0.52 per diluted share.

That's an 87% increase over our 2004 results.

In the fourth quarter, we added 80 net new customers bringing our total customer count at year end to a record 1,910 revenue customers.

Now as we turn to the financial review in detail, let me welcome J.D.

Sherman, our incoming CFO.

As we announced last fall, Bob Cobuzzi is retiring from Akamai in March.

J.D.

Sherman joined us from IBM in November and is transitioning into the top financial position at Akamai.

Please welcome J.D. as he walks us through our fourth quarter and full year 2005 results.

After that, I'll be back to share some of my thoughts about the opportunities we're excited about in the year ahead.

J.D.

Thanks, Paul.

First, let me say, I'm thrilled to be here, and I couldn't have asked for a better quarter for my first Akamai earnings call.

As Paul just highlighted, we had a great fourth quarter, ending the Company's strongest year ever.

Fourth quarter revenue came in at $82.7 million, significantly higher than our forecast, driven primarily by two factors.

First, we experienced seasonal bursting from online retailing customers above anything we'd seen before, even a year ago, consistent with a strong online retail season that's been widely reported in the news.

Second, the explosion of online media continues to gain momentum and provided even greater benefit than we had anticipated in the fourth quarter.

We estimate seasonal bursting from e-Commerce customers added roughly $2 million to our fourth quarter top line results.

Full year revenue of $283.1 million increased 35% over 2004 revenue of $210 million.

During the fourth quarter, international sales represented 21% of total revenue, up from 20% in the third quarter and 20% in the same period last year.

For the full year, revenue from international accounts also increased to 21% of total revenue.

Resellers accounted for 24% of our total revenue in the fourth quarter and for the full year.

Once again, no customer accounted for 10% or more of our revenue in the fourth quarter or for the full year 2005.

As Paul mentioned, we added 80 net new customers in the quarter, making it the third quarter in a row of very strong net new customer additions.

The acquisition of Speedera combined with the investments we made in sales and marketing earlier in the year helped us grow our recurring customer base by 46% year-over-year.

Average revenue per customer or ARPU jumped to $14,600 per month during the fourth quarter, up 4% from our prior quarter.

We estimate that about half of this increase was due to the seasonally strong usage from our online e-Commerce customers and the rest came from increased usage across our entire customer base.

Our GAAP gross profit margin was 81% for the quarter, a slight improvement over the prior quarter.

On a full year basis, our GAAP gross margin was 80%, up from 78% in 2004.

GAAP operating expenses for the quarter were $45.5 million, up from $41.6 million in the prior quarter.

These GAAP numbers include amortization of intangible assets related to the Speedera acquisition and stock compensation charges.

Excluding these noncash charges, our cash operating expenses for the quarter were $40.7 million, up from 37.1 million in the prior quarter.

For the full year, our cash operating expenses totaled $141.5 million.

Adjusted EBITDA for the quarter was $30.6 million, up over 10% from the prior quarter.

Our adjusted EBITDA margin was 37%, consistent with the third quarter and up 5 points from the same period last year.

For the full year 2005, our adjusted EBITDA margin was 36%, up 3 points from the full year 2004.

Total depreciation and amortization for the fourth quarter was $8 million, up from 7.5 million in the third quarter.

Our total depreciation and amortization charges for the quarter include $4.8 million of network related depreciation, $900,000 of G&A depreciation, and $2.3 million of amortization of intangible assets.

For the full year, depreciation and amortization was $24.2 million.

Net interest turned positive for the quarter, generating $1.3 million of net interest income as we invested the proceeds of our equity offering.

GAAP net income for the quarter was $25.8 million or $0.16 of earnings per diluted share.

Noncash items in GAAP net income include $2.3 million from amortization of intangible assets, $1.6 million from equity related compensation, and a $3.5 million benefit from the fourth quarter of impact from the release of our valuation allowance.

Excluding these noncash items, our normalized net income for the quarter was $26.2 million, up 19% over last quarter and 80% over 2004.

We earned $0.16 per diluted share on a normalized basis.

That's on a fourth quarter diluted share count of 170.3 million shares, which includes two months worth of the impact from our November equity offering.

For the full year, our GAAP net income was $328 million, which included a $258.8 million full year benefit from the release of our valuation reserve.

Normalized net income for the year totaled $79.5 million or $0.52 of earnings per diluted share.

That's an 87% increase over last year.

Diluted shares for the full year were 156.9 million shares.

And we ended the year with 152.9 million shares outstanding.

Now, let me review some balance sheet items.

We ended the year with $314 million of cash, cash equivalents, and marketable securities.

That's up significantly from the end of Q3.

Most of this increase is due to the cash from our equity offering which closed in early November.

As many of you will recall, we sold 12 million shares of common stock and raised approximately $200 million.

In addition, we generated $27.7 million of cash from operations during the quarter or 33% of fourth quarter revenue.

That's up from $19.5 million during the third quarter and up significantly from $15.6 million of cash from operations that we generated in the fourth quarter last year.

For the full year, we generated $82.8 million of cash from operations, up from $51.2 million in 2004.

Capital expenditures for the fourth quarter were $8.1 million, down from the third quarter.

For the full year, CapEx totaled $36.2 million or 13% of annual revenue consistent with our guidance.

Days sales outstanding for the quarter were 53 days up slightly from the prior quarter due to the revenue related to the heavy seasonal bursting.

Revenue we expect to collect this quarter.

Overall, we're very pleased with the strength of our financial position.

We have a strong balance sheet, a positive net cash position, and we're generating positive cash flow each quarter, all while improving our profitability.

We look forward to building on the success of 2005 by improving our performance in the coming year.

As you'll recall, Paul and Bob provided you with some of our early thoughts on 2006 during the October call.

At that time, we expected revenue growth of at least 25% and normalized net income growth of at least 40%.

With the fourth quarter results now behind us and greater visibility into the year, we have increased our expectations for 2006 performance, and we would now like to increase our guidance for both revenue and earnings.

For revenue we now expect to grow top line by 27% to 30% year-over-year, which translates into at least $360 million in 2006.

For the full year, we expect normalized earnings per diluted share to be at least $0.70.

That would translate into EPS growth of at least 35% year-over-year and normalized net income growth of over 50% year-over-year.

Underlying this guidance, we expect that our overall normalized net income as a percentage of revenue will continue to expand.

Network or cause of depreciation will be higher this year due to our increased CapEx investment in 2005, and as a result, depreciation and amortization expense as a percentage of revenue will increase by a couple of points in 2006.

But we expect that productivity improvements in our other operating expense lines will more than offset this increase.

By the end of 2006, we expect our adjusted EBITDA margins to be in the range of 40%.

Near term, for the first quarter of this year, we're expecting revenue in the range of 84 to $87 million.

Adjusting for the impact of seasonal bursting in the fourth quarter, the midpoint of this range would represent growth of about 5% quarter over-quarter.

We're expecting normalized earnings per diluted share of $0.16 in the first quarter.

Remember in Q1 we'll have the impact of a full quarter of the newly issued shares from our recent equity offering and our annual reset of FICA payroll taxes, which increases our labor costs across all operating departments.

Finally, with respect to our EPS guidance, let me remind you that our normalized earnings has a few adjustments from GAAP, including adjustments for the amortization of intangible assets, equity compensation and the noncash portions of our book tax charges.

Also as a reminder, this is the first year that our GAAP results will include a book tax rate of approximately 40% and equity compensation charges consistent with FAS-123 R. We expect equity compensation charges to be around $0.20 on a full year pre-tax basis.

This compares to about $0.17 in 2005 had we reported on the same basis.

For the full year, we expect capital expenditures to remain roughly consistent with 2005 levels as a percentage of annual revenue.

Similar to last year, we expect a larger portion of our network investments to occur early in the year as we plan to take advantage of volume purchase opportunities and continue to optimize our network.

As I mentioned earlier, it was an exciting quarter to join Akamai.

We are extremely pleased with our fourth quarter and full year 2005 results in virtually every area of the business.

These results have given us the confidence and momentum to raise revenue and earnings guidance for 2006, which we expect to be another record year for Akamai.

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

J.D., thanks.

As you just heard, 2005 was a great year.

As we look back, there's a lot to celebrate.

We achieved a number of significant accomplishments that improved the financial strength of the Company and positioned us well for future growth.

Among the highlights, we launched our web application acceleration service at midyear, opening important new market opportunities.

We closed the accretive acquisition of Speedera in June, adding over 300 customers.

We bought back the remainder of our 5.5% percent debt in September, reducing our overall long-term debt to only $200 million of 1% convertible notes and then we raised approximately $200 million in equity in early November, bringing our balance sheet to a net cash position for the first time since early 2001.

And last but not least, we grew revenue, customer accounts, and normalized net income sequentially each quarter, making 2005 the most successful year in Akamai history.

This success was a result of very hard work.

Many long days and sometimes nights by the folks who work around the world for Akamai.

And I want to thank them.

Their efforts have benefited you, our shareholders, immensely.

Now, as we look forward to 2006, we're very excited about the momentum we see across a number of our verticals, especially media and entertainment, online commerce and technology firms and we expect to see continued traction from our application acceleration service offerings, which is still in the early stages of market development.

We're particularly excited about the rising demand for online distribution of digital media.

We have all witnessed the success of online music sales to consumers.

And now we're beginning to see content providers migrate their video offerings online as well.

Akamai benefits from this growth of online media distribution because content providers value the higher quality consumer experience over the Internet that we enable.

As our enterprise customers recognize the success of the Internet as a distribution channel with media depends on the consumers' experience.

As we help more and more content providers to deliver rich media online, we will continue to target the premium content that drives profitable business models for our enterprise customers.

Often advertising supported or subscription-based content.

We believe our network architecture uniquely qualifies us to most effectively enable the high quality distribution of media over the Internet.

Several recent customer wins have helped to validate our strategy.

In the fourth quarter we started working with Clear Channel to deliver more than 400 radio stations to 8 million unique online listeners.

Over time, we plan to help Clear Channel bring all of their 1,200 radio stations online.

We're also helping Starz with their new movie downloading service called Vongo.

With Vongo, subscribers have access to over 1,000 feature-length films.

Starz chose Akamai because they needed a solution that would help them deliver high quality to large volumes of subscribers.

Several of you have been asking about one of our most high profile customers in this category, Apple Computer, where we provide worldwide support for iTunes.

As you know, Apple is one of our longest standing relationships.

I am pleased to tell you that we recently signed a new multi-year contract extension with Apple and look forward to continuing to support their ground breaking online efforts.

Now, as J.D. mentioned, part of our fourth quarter success was due to higher than expected bursting activity from our online commerce customers.

With an estimated $2 million seasonal revenue boost from online shopping activity, e-Commerce clearly remains a big driver of our business.

While we don't expect as much revenue in the first quarter from commerce customers, the long-term outlook in this category appears very strong.

According to a recent Forrester report, e-Commerce will take a 13% share of total retail sales by 2010, up from single digits today.

We expect to continue benefiting from this trend because online merchants recognize that better performance translates into higher sales.

As we move into 2006, we believe further expansion of our content delivery business will drive the majority of our growth.

At the same time, early response to our new web application acceleration offering is very encouraging.

It indicates that customers understand the need for improved web-based application performance, a need that we believe will grow as more companies migrate even more business applications online.

Since we began offering this new performance service, we've closed business with several dozen customers.

Importantly, about two-thirds of the contracts are with new accounts and we're really pleased that application performance services are bringing us into new markets such as manufacturing.

We won't be providing metrics each quarter on the number of application acceleration service offerings we sell, but we wanted to give you a six-month update on our progress.

We believe strongly that over the next several years, more and more applications will move to the Internet, and our expertise in reducing network latency will be more critical than ever as businesses look to improve the performance of their apps.

In addition, we believe Akamai is uniquely positioned to offer a best of breed solution.

Our service 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 that scales as users need it around the world, providing better performance, greater reliability, and higher security, all at a lower total cost.

And without upfront capital expenditures.

Finally, before we wrap up, let me take a moment to thank our retiring CFO, Bob Cobuzzi, for all his efforts to help us build Akamai into the successful Company it is today.

From the time Bob joined Akamai over three years ago, we've more than doubled our revenue, turned cash flow positive, become profitable, and in just the past year grown our normalized net income by over 85%.

We've been very fortunate to have Bob and J.D. overlap at the Company for the past few months to ensure a smooth transition for employees and investors.

So thank you, Bob.

You've helped Akamai achieve phenomenal results and positioned us well to exceed those results as we move into 2006.

Now, J.D.

Sherman, Bob Cobuzzi and I will be happy to take your questions.

Operator, first question, please.

[OPERATOR INSTRUCTIONS]

Your first question comes from Aaron Kessler with Piper Jaffray.

Thanks, guys.

Hi, Aaron.

Hi.

How's it going?

Good.

Thank you.

Couple things on the ARPU.

Average revenue per user.

Should we expect it to go down a little in Q1 given the e-Commerce dropped off a little?

Do you feel Q4 or I guess Q3 was the bottom for that?

In the customer additions, also it seems like you continue to grow those at a nice rate of 80 plus.

Is that kind of the right level?

To think of going-forward here?

Generally speaking, there are a lot of talks recently from web companies that they're increasing their investments in more interactive sites.

Can you give us a sense of what you're hearing from customers in terms of increased bandwidth requirements that they need when they redesign these sites?

Thank you.

Sure.

Let me lump the first two together, because we don't provide guidance on ARPU or customer addition.

We have often said that ARPU could move sideways to down quarter-over-quarter depending on customer ads and seasonal traffic.

We were certainly pleased with the results in Q4.

We were pleased with another strong quarter of customer ads.

Increasingly, we're going to focus on the quality of customers and upselling within those corporate opportunities.

So we don't try to manage that or focus on it in too much detail or try to provide guidance for you on it.

In terms of what we're seeing from new customers, clearly people are trying to richen up their sites.

They understand that to remain competitive, whether they're a media site or a commerce site or what have you, they have to compete to get audience and get business have a rich site and that often includes rich media, interactivity, audio and video, and all that can drive usage of our services.

I think that's the activity we saw in a lot of '05 and certainly expect that that trend will continue in '06.

It's really being enabled by what I call, you have heard me refer to in the past is "Primetime is Broadband".

Clearly, the proliferation now is Broadband connectivity to the home.

In enough homes that at any one time a site can find its niche audience to build a business on, and that certainly is driving some of the expansion that we've seen in our business.

Finally a quick model clarification.

If you take pro forma net income of about 26.15, divided by a share count, I’m getting to $0.15, or about $0.154?

Am I missing something?

You're missing adding back the interest for the 1% offering when you did the diluted share account on the 1% convertibles.

Okay.

Great.

Next question, please.

Your next question comes from Michael Turits with Prudential Equity.

Hey, guys.

Good evening.

Hi, Michael.

How are you?

Good, thanks.

First question, you mentioned media in general.

I think you mentioned video, in particular.

Is video now becoming a material portion of revenue?

And how much of a contributor do you expect that to be?

Well, we don't break out segments that way.

We're certainly seeing more and more video.

We have certainly always done video.

We've been in the screening business for a long time.

I think the fundamental change that we're seeing is pay models that allow people to monetize video.

We've talked about some of these examples before.

Major league baseball is a great example with a pay model.

Certainly, now, ITunes is a great example with a pay model. for video.

I think that is encouraging content providers and producers, if you will, to put up video offerings because they now believe they can make money on it.

It's not just a little bit of marketing on which they have to make an investment and hope it somehow gets returned in another way.

Did you guys comment on churn at all.

I know there’s good net add numbers, what's the direction on churn?

We didn't comment in the text, but churn was still under 5% in the quarter.

It was up a little bit quarter over-quarter.

A lot of it was driven by some of the Speedera customers who are coming to the end of their contracts and for either they’re a small customer that we don't want to renew or with acceptable use policies we have, we've not renewed those.

Churn peaked up a little bit for that, but it is still under 5%.

Are we getting through those Speedera customers?

Should we start to see that go down?

Another way of saying that also is ex- those Speedera customers, do you still think you're in the 3% or less range?

I think so.

Our goal was to migrate all the customers within a year.

That will take us into Q2 of '06, so there's some more of that to go through.

Again, very small customers who we don't think makes sense to keep long-term or people whose businesses, let's say, don't meet our acceptable use policy for doing business with Akamai.

So there will be a little bit, but I think, if you will, sort of the core churn is pretty close to our target in staying very well under control.

Last question if I could get one in.

You're above, I think, a little bit above 10%, CapEx as percentage of revenues in '05 and we kind of thought of you guys as 10% long-term.

That sounds like that is a bit above again for next year?

What are your thoughts on that long-term and where is that CapEx going next year?

I think it'll stay probably close to where it was as a percentage of revenue in '06 as compared to '05.

We're just seeing such explosion of usage on the Internet, the growth of video, the growth of traffic in a lot of interesting geographies outside the U.S.

So we're going to continue to make the appropriate investment in new service and in our network.

Of course, some portion of our software development is capitalized as well.

It's not just for hardware and the network.

And we think that's prudent right now.

Even at 12%, it's a very small percentage of our revenues compared to the typical service provider model.

Thanks, guys.

Thank you.

Your next question comes from Katherine Egbert with Jefferies.

Hi, good afternoon.

It was a very good quarter.

I have to ask Paul, probably for you, about the impact of tiered pricing.

This is something that is being talked about in the government right now.

Can you comment on that that might do if it passes to balance prices and therefore, to your cost of goods.

Well, you're referring to the debate that some of the ISPs are having about trying to charge premium pricing for the delivery of certain kinds of content.

I don't think that that will impact us directly.

I frankly think that it's a pretty bad idea, because I think, it can over time slow down overall Broadband adoption for consumers which wouldn't be good for the Internet in general.

As you may have noticed, there were hearings literally today on Capitol Hill about it.

This has got the attention of both Congress and the regulators.

I think they view that these efforts by some of the ISPs as very anti-consumer.

So there is some possibility that they will weigh in and block this development.

It's certainly being opposed by many content sites because they're concerned that it could advantage one over another and really change the landscape of choice for the consumer.

But I don't expect it will have any impact on our business or affect our costs of goods sold because of the advantageous way that we work with about 1,000 networks today to deliver content and bring them incremental benefit.

Can you talk then more broadly about online media?

Can you give us any sense of what you think the market is there for you any size or penetration rate?

Give us some qualitative information about what iTunes and some of the other video and audio services are doing for you?

Well, you know I don't break out specific customers and won't give you -- can't really give you any specific on any accounts.

That's their proprietary information.

As a provider to so many of these sites, we really respect, obviously, their business confidentiality.

But I can tell you that we're just seeing more discussion of delivering rich media content.

Sometimes that's video.

Sometimes that's music.

Sometimes it's just a much richer website than ever before in the years that we've been working.

And we work with virtually every premier website, certainly in this country, and many of them internationally as well.

They're all moving towards figuring out how to do richer media, which we think is an opportunity because there is the need for performance.

And quality goes up because if you've got a live stream, you can't have latency in the middle.

We really excel at solving that problem for our customers.

In terms of giving you a total market size, I think, the industry analysts, the Forresters and Gartners and other firms like that are probably much better places to get estimates.

Our view is that, as more people do it, it opens up more opportunity for us to and allows to us grow our business.

We think that's some of the growth we saw in '05 and one of the reasons that today we're so bullish about our opportunities in '06.

Last question specifically on Apple.

You mentioned that you just renegotiated a multi-year contract.

Can you tell us how long that is?

And then, I think we all have done math, and we come up with something that's very small per mega-bit price for Apple.

And even at that, it seems like they should be a 10% customer because they release periodically how many videos or how many songs are downloaded.

Can you just tell us whatever you're able to about your relationship with Apple?

Well, I'm afraid I'll disappoint you.

We have a great relationship there.

We're doing more today than we've ever done with them, and we're really proud to support their efforts.

They have succeeded and executed magnificently over the last few years.

We've been honored to be a part of that, to serve iTunes, as well as, their websites and their software delivery.

But, no, I'm going to respect the confidentiality of our relationship with them, and any data they want to release is up to them.

The relationship is as solid as ever, and we're very pleased with all of the terms, and we think that we deliver a lot of value and get paid very fairly for it.

Obviously, if we had any 10% customer, it's our policy to release the names.

If we did, we'd let you know who that was.

Did they burst in Q4?

And will they burst in Q1?

I'm not going to comment on that.

Thanks.

Your next question calms from Henry Naah with Lehman.

Hi, Henry.

Hi, guys.

Definitely a good quarter.

Thank you.

Welcome, J.D.

Thank you very much.

One question for Paul and one question for J.D. if I may.

Paul, I think a couple people have kind of touched on this a little bit earlier.

Customer ads, 80 this quarter and 94 last quarter, obviously a marked increase over where it had been in 2004 and 2005.

What do you think is driving the new customer adds.

Is it web application acceleration products?

Is it just the more rich media?

Can you kind of point to what the key drivers of that are?

Is it productivity of the sales force?

And then I have one for J.D. if I can.

I'll answer first, and then you can ask J.D. the second question.

I think it's a combination of the investments that we've made in our market-facing organization, as well as, just a general acceleration of demand in the market across a number of verticals where we are well established and well-known.

I think, we've really worked to establish ourself, content delivery networking, application performance are really well recognized.

I think that as sites think about expanding the use of the Internet, going to business critical functions, using Akamai I think is an accepted part of the way they work.

I also think we've had great execution by the sales organization led by Bob Hughes to really train people well, go after great prospects, and demonstrate the value to our customers.

At the same time, I want to caution you and not have people focus on the net customer adds every quarter.

We try to sell to new business, but we also try to find great customers.

We also try to upsell and think that we have a long way to go to fully penetrate accounts.

And so there's a tradeoff of resources every quarter.

I'm going to defer over time to Bob and his staff to think about where should we focus every quarter.

Sometimes it's going to be going for more new logos and sometimes it's going to be for mining the accounts that we're in, because we're in 1900 premier places today.

I think in most of them with the opportunity to sell more, if you will, to drive same-store sales up.

We'll just try to balance that over the long-term to grow the business.

So far everything's been working really well for us, and I'm optimistic that it's going to continue and we'll be able to balance doing both increasing in current accounts as well as selling new.

But quarter to quarter, it's not a number that we sort of focus on too much and try to target a specific result.

Are there new verticals that you're penetrating better?

And you’re getting some low-hanging fruit there?

Or is it just kind of broad based?

Well, technology sales in the last few years, I don't think you can describe anything as low hanging fruit.

After Y2K and the web bubble, people are very skeptical about spending technology money.

I certainly know the way we spend it is pretty skeptical.

And that's what we face when we go into an account – so I think it's a great testament to our organization and our product offers that we've been so successful in the last few years.

But we are seeing that more and more companies are expanding their use of the web and more and more businesses who maybe didn't think of the web as critical from a public facing marketing or media point of view are adopting it for the way people deal with their businesses, as an extranet portal, for example.

They may be dealing with a small number of users, but it's also a log-in secure site in critical business processes.

That's where web application acceleration has gotten us into accounts where we hadn't been in and into categories like manufacturing, chemical manufacturers, for example.

One example of a company that signed up never probably would have bothered with our CDM service.

Not because it didn't work well, but it just wasn't a priority for them to have their .com site work better.

They didn't really care that much about users and had a lot of other priorities for their IT efforts.

They're very concerned about their extranet portal working over the web, and we solved that problem for them.

Certainly, the innovation that we've worked on and the investments that we've made in R&D over the last two years have started to pay off by opening up some new avenues.

I think that's helped accelerate our growth and hopefully, will do the same for the next several years.

For J.D., in terms of operating expenses, they've been ramping probably 4 million a quarter the last couple quarters here.

Just wondering if you think -- where you think that's going to go and where is the pace of hiring going to top out?

I think if you look at last year, we continued to expand our overall margins, and that's really where we're going to focus this story.

I believe we can continue to expand through productively our operating margins at the bottom line.

It's not unusual if you look at fourth quarters in the past, we see a bit of a spike up in the sales and marketing expense.

We had a very good quarter in terms of revenue.

In addition to that, we had a good quarter in terms of new logos and signings as you saw, and that drives a lot of commissions expense.

So we did see a bit of a spike up there.

But as I said before, I think in 2006, we'll continue to see our operating margins improve as revenue grows faster than we make investments in sales and marketing and R&D.

Great.

Thanks, guys.

You asked about headcount, and maybe we can give you a little bit of our thoughts about that as well as you build your model for this year.

We ended 2005 with close to 800 employees and probably, by the time we end 2006, we'll be 10 to 15% higher.

Right.

Thanks, guys.

Thanks, Henry.

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

Hi, Jeff.

Hi.

How are you?

Good afternoon.

Let me follow-up kind of on Henry's question a little bit.

In the sales and marketing line, is there anything else in there, maybe other than commissions and accelerators that's driving that at slightly greater rate than maybe we expected?

Nope.

We had a great quarter.

It drove some additional commissions and accelerators, but there's nothing beyond that that was unexpected in any way.

Great.

And, Paul, can you talk for a minute about the contrast between your opening remarks and the need for sites to drive more interactive content, more heavy pages, if you will, and some of the speculation that's been out there about Google and moving into your space and effectively commoditizing your business?

Cause those two don't necessarily agree, and I wanted to get your thoughts.

Sure.

Well, I certainly stand by what I said before and believe that we're going to see increasing demand for our services and a high value placed on it by our customers.

We don't view Google as a competitor in the marketplace.

They're a great company.

They're very focused on the consumer and the advertising business.

They have a lot of technology demand on their side to keep their business going.

And I don't think they're interested in competing in our space at all.

Last question is, can you talk about, in the acceleration space, who, if anybody, you're running into?

No.

Well, what we see mostly in this market, which has already taken some form in the last couple of years, and there are some estimates a billion dollars is already spent broadly on application performance.

What we see mostly is that people have tried to solve this with a hardware solution, with a point solution of deploying appliances in their data center.

And it certainly provides some -- excuse me.

I'm fighting a little bit of a cold here.

It provides some benefit in the data center, but it does not solve the fundamental problems that the network layer provides or creates.

And that our service as a comprehensive global service provides benefits that no other solution really solves, and that that differentiates our service model from the hardware approach, and I think it's why, even as a new interest in the market just in about the last six months, we've met with, I think, considerable success, and that's because the customer's have already identified that there's a problem and that they're trying to figure out what they might do about it.

We have credibility as an expert in Internet performance, and when we show them how we can apply some of our old technology and some new engineering to solve this problem they're having, they're willing to sign up.

Great.

Thank you very much.

Thanks, Jeff.

Your next question comes from Todd Raker with Deutsche Bank.

Hi, Todd.

Hey, guys.

Nice quarter.

Thank you.

Just a quick financial housekeeping.

Could you guys actually give us the actual interest add back to get to your $0.16 number?

And while you’re scrambling around for that, from a higher level perspective, Paul, you’ve commented a lot on the online distribution in media and the driver.

Can you give us a feel in terms of your core business how much revenue momentum is coming from mature customers just growing their business organically, i.e., the Apples of the world, versus you guys signing new initiatives in the space?

If you had to kind of quantify what percentage of the growth in that space is coming from established players – I’d be curious to just trying to know what that market is growing organically at?

So just quickly -- I'll turn it over to Paul to answer your broader question.

But it's $710,000 a quarter or $2.8 million a year of interest income off the 1% convertibles.

Great.

Thanks.

And then I think -- I'm just back of the envelope-ing it.

But I think it's probably about 50/50.

New customer business driving growth and, if you will, same-store sales.

So it's probably half driven by just existing customers continuing to grow their businesses online and half over time are bringing on new customers.

Intuitively, my guess is that that will switch, because new customers represent a smaller and smaller portion of the whole, as the customer base has grown large and so probably more of it over time will be, if you will, same-store sales growth, but we really haven't modeled that too precisely.

If you look at the same-store sales portion of that, can you give us some commentary in terms of, as contracts are renewing, what you're seeing in terms of pricing?

What we've really seen for the last several years, there's always price pressure in technology, but we two things.

One, we drive growth in those accounts so they're just using more, so volume often makes up for it, and we sell them our more advanced services.

It's always been our effort for the last seven years is to add value to the platform and sell people increased functionality, web application acceleration is just one example, but we really have a portfolio of things we offer our customers.

As their online efforts become more and more mission critical, they're more concerned with reliability, security, protection from denial of service attacks, global load balancing, reporting, and realtime metrics of what's going on with their traffic.

And those are all things that we offer to add value that go beyond the traditional bandwidth pricing.

So it continues to be something we focus on, because it's the nature of selling a technology product or solution, but I think that our ongoing efforts in innovation and engineering keep us ahead of that.

And then switching gears on you, three more questions for you.

First, can you just comment on the profitability of bursting revenue versus kind of core revenue?

No.

We really don't break that kind of metric out.

Is it just generally more profitable?

Less profitable than core?

In general, it's probably more, because we often get a premium, and we can try to manage it very efficiently.

Second question.

Can you just give us a feel for where the web application acceleration ARPU is coming in?

Is it kind of below the average?

Above?

I assume it'll a little smaller deal size initially.

I'm not going to give you a specific number, but we're very encouraged by the value that our customers are seeing and therefore their willingness to pay for it.

It's really sold as a solution.

It's not sold as a data delivery model.

So it's really a solution sold as value based on what the customer's business problem is and the scale of that.

So we have been able to really position that very successfully in the market, because the customers are both seeing value for it and comparing it to much more expensive potential solutions, such as building out a network of global data centers.

And then the last question for you, can you just update us in terms of the ongoing relationship with Microsoft and where that stands?

They are also one of our longest standing customers.

We have a very strong relationship with Microsoft.

They haven't been a 10% customer in a while, so we don't break out their numbers, but we continue to have a very good relationship with them on a number of fronts.

Is it still basically a month-to-month relationship or is there a chance that they will kind of resign an annual contract at some time?

I don't comment on their contract, but we have a very good relationship there, and I'm not concerned about it.

Thanks, guys.

Yes.

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

Hi, Jeff.

Hey, guys.

Couple questions.

I think everybody's been answered, so I'll be very brief.

On the web app accelerator, can you give us any context in terms of a broader goal a year or two out in terms of where you'd like to see is as a percent of the revenues in general?

Secondly, in correlation with the CapEx questions, Speedera brought you some infrastructure, servers, and a number of other things.

The CapEx, does that assume the ability to use the Speedera servers, particularly once people are mapped over?

Sure.

The Speedera migration plan is moving along the path that we've outlined before.

We certainly expect after we finish the migration to recover some infrastructure and to be able to reuse some of that investment.

It's not massive, but we certainly will reuse some, everything we can, that's worth salvaging there.

In terms of web application acceleration, I certainly have put down some markers, if you will, for the sales and the marketing organization as internal goals, but as long as all aspects of the business grow, I'm not so concerned about what percentage web application acceleration grows to as a piece of the overall.

Thanks.

Your next question comes from Erik Zamkoff with Morgan Joseph.

Hey, guys.

It's Erik Zamkoff with Morgan Joseph.

Congrats on a great quarter.

Thank you, Eric.

I was wondering if we can focus on a couple of big picture topics.

We hear a lot of talk and there have been some questions about Google and possibility of commodization of the business, et cetera, but can you talk to how Moore's law impacts you on the cost side, i.e., your CapEx that you spend in 2006?

You should be getting more storage, better memory, better performance in a server than what you bought previously.

And how does that figure into the whole equation in terms of maintaining gross margin?

And then number two, given that Speedera at the time of acquisition was the price aggressor and one can argue was the largest direct competitor, who would you state right now is your -- the competitor that you see the most in the marketplace and of course, CDM business?

Let me answer those in reverse order.

We actually covered the Speedera competition at some length in the past, but I'm happy to review it again.

If you looked at their customers and the revenue they brought over, I think what people were fairly surprised about was that their ARPU was very healthy and that by and large they had a strong customer base as well.

And so the pricing difference was not what people had necessarily thought they would see at the time, which is one of the reasons, when we did our due diligence, we were so pleased with the acquisition, and that turned out to be really one of the highlights of last year leading into this year.

What we see in terms of competition is really what we've seen consistently.

The main competitor remains do it yourself.

Somebody saying why should I outsource this problem?

I've got a big infrastructure, a big budget, and an Army of people.

Why can't I just keep figuring out how to run my network problems for my network myself and solving the problems on my own?

Our biggest challenge is still showing people how we can make their online efforts more reliable, more scalable and more secure.

And then I think you really helped me answer the first question.

Moore's law certainly helps us.

The server we buy today is far more powerful and far less expensive for that power than the one we bought six or seven years ago when we started to build out the network.

Some of those first 300 servers are still out there running just fine, and many of the new servers that we have deployed really put the performance of the old ones to shame, and so that benefits us.

It allows us to manage our physical footprint very efficiently and frankly, to meet the demand of increasing traffic that we've seen grow over the last few years in many ways driven by the Broadband content of our customers.

One last follow-up.

You raised a good point.

If your competition today -- and I agree with you -- is in-house, do it yourself guys, are you having an easy -- would you characterize it as an easier sell today than it was a year ago or two years ago when you walk into a potential new customer and present your value proposition?

I think there's a greater understanding today of our value proposition, but as I said earlier, nobody throws money around today in technology purchases.

You have to prove the return on investment of your offer.

You have to prove the performance.

Fortunately, we have, I think, a great reputation in the market, a great brand, so people understand that we're reliable and that we have a reputation for doing what we say we'll do and trying not to overpromise.

But I think it's wishful thinking for anyone to believe that we're going to get to a state of people just call you up and throw money at you for technology purchase.

Customers believe they have choice.

They want to make sure they're not completely locked into any one solution.

They've been there, and it wasn't a lot of fun.

But we’ve been very successful at partnering well, showing the value, and obviously, winning the confidence of many, many leading brands.

Our goal is to continue to do that.

Operator, I think we have time for two more quick questions before we wrap up.

Your next question comes from Bob Stimson with WR Hambrecht.

Hi Paul.

Hi J.D.

Just a couple quick ones.

One is is the Microsoft OneCare is going to be part of the Microsoft contract?

Can you comment on that or not?

No.

Sorry.

I really can't give you any specifics by customer.

It's our policy not to do that.

Another question is was the Super Bowl traffic this year a lot bigger than what you saw last year at this time?

You know, I didn't do that kind of comparison.

We obviously carried the majority of the Super Bowl advertisers.

You may have seen our online index that tracked usage, and there was really some interesting stuff that came out of that, including some great PR for Akamai in a number of newspaper and online reports.

But we didn't do an aggregate comparison year-over-year.

My guess is it was higher this year just because you've got more Broadband use, but haven't looked at that.

J.D., real quick, op margins, where do you think, if you had a much higher revenue run rate, what are peak op margins?

What can they get to?

Are we talking 40% plus or where do you think those numbers could go if we’re running at $400 million in revenue, et cetera?

We haven't talked about kind of peak out very far in the future, but as I said in my comments, we do see the margins getting in the 40% range by the end -- the EBITDA margins by the end of 2006.

So I think this business has shown that it has a lot of scalability in terms of improving margins over the last couple of years.

I think we still have the capability to continue to expand those margins.

I'm not going to kind of project beyond that in terms of where we'll end up, but we clearly are going to be able to drive some productivity.

Real quick on the CapEx number that you gave.

How much would you say is kind of -- how much would you say is kind of CapEx for SAN storage buildout?

I know you guys have been spending a lot of money incrementally to deal with some of your digital media versus traditional servers.

Is there a bigger mix going on there?

On the SAN side versus the traditional server side?

Thanks.

We haven't really broken out, so I'm not sure where you've drawn that conclusion about how we spend the CapEx by type of hardware.

And we're not going to break out those numbers, because I think frankly that's proprietary information and doesn't help us to put that into the marketplace.

Hey, thanks, everybody.

Thank you.

Operator, why don't we take one last question.

And your final question comes from Douglas Campbell with Spirit Capital.

I'm guessing that the companies that have a lot of content delivery business to do know about you and you know about them and many of them are already your customers.

On the other hand, you mentioned that, in the app accelerator business, two-thirds of the signups were customers new to Akamai.

My guess would be that there are a lot more -- I mean, this is more of a green field opportunity for you, and there are probably a lot of extranets out there that need to be spruced up a little bit.

Just sort of in a broad framework, is there -- is this an opportunity that could equal your current business a few years down the road or how do you look upon it?

Well, I look on it as a great opportunity.

We think it could develop into a large market for a service provider like Akamai.

Our guess is that, because it is such a large opportunity, you will see lots of different solutions in the market.

You'll see other service providers trying to put solutions into the market.

You'll certainly have the appliance players who have been consolidating among some of the big hardware companies pushing very hard into the market.

That's going to be great for us, because it's really going to raise awareness, and then we really believe we are going to be unique because we're one of the few companies able to offer a service.

And then on top of it, we're really the only one who can give you the whole portfolio that starts with content delivery, then does app acceleration and then finally can actually do distributed computing virtualizing your data center.

So we think we're very well positioned.

I don't want to speculate on whether it's as big or bigger than our current business.

If the current business continues to grow, then I'd be happy for them to just both chase each other in growth and we'll continue to have more happy results.

At this point, we're just focused with our head down on the business and trying to meet our objectives for this year and to continue to innovate and have things that our customers want to add to the order form, if you will, in years to come.

So why don't we stop there.

Thank you all for joining us.

Looking forward to reporting back in another quarter.

We were all thankful for your support in '05 and look forward to reporting back to you again in '06.

Bye-bye.

This concludes today's conference call.

You may disconnect at this time.