阿卡邁科技 (AKAM) 2007 Q1 法說會逐字稿

Good afternoon.

My name is Michelle, and I will be your conference operating today.

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

All lines are placed on mute to prevent background noise.

After the speaker's remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS) Thank you, Miss Smith, you may begin your conference.

Thank you.

Good afternoon, and thank you for joining Akamai's investor conference call to discuss our first quarter 2007 financial results.

Speaking today will be Paul Sagan, Akamai's President and Chief Executive Officer, and J.D.

Sherman, Akamai's Chief Financial Officer.

Let me remind you that today's presentation contains estimates and other statements that are forward-looking under the Private Securities Reform Act of 1995.

These statements are based on current expectations and assumptions that are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially.

Additional information concerning these factors is contained in Akamai's filings with the SEC, including our annual report on Form 10-K.

While we may elect update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so ,even if our estimates change and therefore you should not rely on these forward-looking statements as represents 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 a better understanding of our financial results and operations.

These non-GAAP measures are not prepared in accordance with generally accepted accounting principals.

You can find definitions of these non-GAAP terms and reconciliations of these non-GAAP terms to the most directly-comparable GAAP financial measures under the News and Publications portion of the Investor Relations section of our website.

Before I turn the call to Paul, I would like to comment on the release of our 8K filing this afternoon.

It is our practice to have our 8K filings made after the market closes on the days we announce our quarterly results.

Unfortunately, our financial printer, which handles these filings for us, mistakenly filed the 8K early, posting it with the SEC when the markets were still open.

They have apologized for this mistake.

Now let me turn the call over to Paul.

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

Q1 was another quarter of double digit, sequential revenue growth for Akamai, as we delivered record revenue in normalized earnings.

Our consolidated results for the first quarter include revenue of $139.3 million, an 11% increase over the fourth quarter and a 53% increase over the first quarter of 2006.

Normalized net income of $50.7 million or $0.28 per diluted share, a 7% quarter-over-quarter improvement and a 73% increase over normalized net income from the first quarter of last year.

Building on the robust growth we experienced in 2006, these strong results in the first quarter demonstrated continued momentum across all segments of our business.

Our enterprise customers continue to move significant aspects of their business online.

And Akamai there is to help them with compelling services for companies that want their websites to be users' first stop for news information, entertainment and commerce.

I will be back in a few minutes to talk about the trends we are seeing across the business and offer you an update on the progress we are making with our strategic acquisitions.

Let me turn it over to J.D.

to review our first quarter result in detail.

J.D.?

Thank you, Paul.

As Paul just highlighted, we had a very strong first quarter.

Revenue grew 11% to $139.3 million.

Coming off an exceptional fourth quarter, where we had some seasonal benefit from strong e-commerce, we again experienced healthy sequential growth in all of our core segments.

Media and Entertainment led the way with expanding demand from both large, established media brands and growing, innovative user-generated content customers.

And e-commerce and Software Distribution contributed to our expanding top line, as well.

Additionally our Application Performance sales team helped us to achieve the most successful quarter ever in the applications acceleration market and that's even before adding the benefit of the Netli acquisition, for which we had 18 days of consolidated results and about $500,000 of incremental revenue in Q1.

During the first quarter Akamai's international sales represented 22% of total revenue, one point lower than fourth quarter levels as the revenue we added from the Nine Systems in the Netli acquisition was primarily domestic.

Resellers represented 20% of total revenue, up a point from the prior quarter.

As for overall customer additions, in the first quarter we added 89 net new customers on an organic basis.

And Netli brought an additional 45 net new customers to our business, not including those who are also Akamai customers, bringing our total customer count to 2481.

ARPU, or average revenue per customer, grew to $19,100 in the quarter, which is slightly higher than our fourth quarter ARPU, even after absorbing Nine Systems.

We haven't included any impact from Netli in our ARPU calculation, as we had only 18 days of Netli revenue in the quarter.

As we experienced with the Speedera acquisition in 2005, we expect that the acquisitions will dampen our near-term ARPU growth, but over the long term, the new customers and the new service offerings we've added from Nine Systems and Netli will help expand our revenue opportunities.

Once again, no customer accounted for 10% or more of our revenue in the first quarter.

Our GAAP gross profit margin, which includes both depreciation and stock compensation, was 75% for the quarter, or about 2 points lower than the prior quarter in line with our expectation.

About a point of this decline came from increased depreciation and stock-based compensation, while a point came from cash gross margins, which were 83% in Q1.

GAAP operating expenses for the quarter were $77.6 million, up from $70.7 million in the prior quarter.

These GAAP numbers include depreciation, amortization of intangible assets and stock-based compensation charges.

Excluding these non-cash charges, our cash operating expenses for the quarter were $57.1 million, up from $53 million in the prior quarter.

This includes normal seasonal impact, such as Akamai's annual training sales summit and reset of our payroll taxes, as well as the impact of our acquisitions in the quarter.

Adjusted EBITDA for the first quarter was $58.8 million, up 11% from the prior quarter and our adjusted EBITDA margin was 42%.

That's up five points from the same period last year and consistent with fourth quarter levels.

Total depreciation and amortization for the first quarter was $14.9 million, up from $11.8 million in the fourth quarter.

These charges include $10.4 million of network-related depreciation, $1.7million of G&A depreciation, and $2.8 million of amortization of intangible assets.

Net interest income for the quarter was $4.7 million.

Moving on to earnings, our GAAP net income for the quarter was $19.2 million or $0.11 of earnings per diluted share.

As a reminder, our GAAP net income includes non-cash charge for stock compensation related to FAS 123R and book tax charges at an effective annual rate of 40%.

However, because of our significant deferred tax asset, we expect to pay cash tax assets at an annualized rate of about 2%.

During the first quarter our stock-based compensation expense, including stock-based amortization, was $17 million or $0.09 per share on a pre-tax basis.

You can review the breakdown of our stock-based compensation charges by operating department in the supplemental metrics sheet posted on the investor relations section of our website.

Additional non-cash items and GAAP net income for the quarter include $2.8 million of amortization of intangible assets and an $11.7 million non-cash tax charge.

Excluding these non-cash items, our normalized net income for the first quarter was $50.7 million, Up 7% over last quarter and 73% higher than our normalized net income for the same period last year.

In the first quarter we earn $0.28 per diluted share on a normalized basis, in line with our expectations.

Our normalized weighted average diluted shared count for the first quarter was 185.2 million shares, including the impact of the incremental shares from the Nine Systems and Netli transactions.

Now let me review some balance sheet items.

We ended the quarter with $480 million of cash, cash equivalents and marketable securities, up from $434.5 million at the end of the fourth quarter.

Our cash from operations was $56.3 million.

That's up 70% over the same period last year.

Capital expenditures, excluding stock-based compensation, totaled $31.5 million in the first quarter, reflecting our pattern of front-loading our purchasing earlier in the year to take advantage of volume buying opportunities.

We still expect that full year capital expenditures, excluding stock compensation, will be about 16% of revenue, consistent with 2006 levels.

Day sales outstanding for the quarter were 56 days consistent, with Q4 levels.

Overall we had another great quarter.

Growing revenue 11% sequentially and 53% year-over-year and delivering on our profit growth objectives even as we absorbed two strategic acquisitions.

As I mentioned, we closed Netli late in the quarter, giving us 18 days of impact from that acquisition in our first quarter results.

We also had our first full quarter of Nine Systems in our Q1 numbers.

As we move deeper into the integration of these acquisitions, we are even more convinced that they are important strategic investments that will broaden our solution portfolio and help fuel our future growth.

We experience continued strength in our organic business, as well.

And based on that strength, we remain confident that we will grow revenue between 42 and 46% for the year or between $610 and $625 million, consistent with our previous guidance.

As for our earnings expectations we are re-iterating our guidance for normalized EPS of $1.26 to $1.30, or 43 to 48% year-over-year growth.

Which translates into normalized net income growth of 50% for the year.

On margins, we came in where we expected in the first quarter with our gross margin reflecting increased depreciation costs and aggressive volume discounts we've offered to catch strategic customers in large, multi-year deals that are very profitable on the bottom line.

For the full year we continue to expect that GAAP gross margins will decline by about 3 points, driven in part by these volume discounts and also by increased depreciation.

However, as we said in the past, we e expect to offset any gross margin declines with continued operating efficiency and scalability.

Specifically, we anticipate that adjusted EBITDA margins will improve by four points for the full year.

For the second quarter, we expect revenue to be in the range of $149 to $153 million.

At the midpoint that represents about 8% quarter-over-quarter growth and 10% growth at the high end of the range.

Given the short-term costs we associated with integrating the three acquisitions, we are expecting normalized earnings per diluted share for the second quarter in the range of $0.29 to $0.30, one to two pennies higher than Q1 and a 50% increase year-over-year.

I would then expect normalized earnings per diluted share growth to accelerate a little on a quarter-over-quarter basis as the integrations progress, as indicated in our full year guidance.

As for non-cash items, we expect that the amortization of intangible assets will be approximately $11.4 million for the full year, including $3.3 million related to the Nine Systems acquisition and $700,000 related to Netli.

We expect that the impact for Red Swoosh will be immaterial to full year results.

As for stock compensation charges, we now expect about $0.36 per share on a full year, pre-tax basis, which is a penny higher than our previous guidance due in part to some expenses associated with the acquisitions.

Overall, we had a great start to the year.

We continued our double-digit sequential growth and we made great progress integrating Nine Systems and Netli into our service offerings.

Now let me turn the call back over to Paul.

Paul?

Thanks, J.D.

As you just heard, we had a great start in 2007.

Demand for our content delivery and application acceleration services continued to grow in the first quarter and we believe this trend is continuing as we move into the second quarter.

Given our recent acquisition activity I wanted to give you a little more insight into the ways we've planning and managing our business.

This is an incredibly exciting and dynamic market where customer needs are evolving rapidly to keep up with changing business requirements.

That means not only do we have to deliver for our customers every day, but we also have to keep our eyes on where the marketplace is headed.

Several key areas that we've been focusing on for long-term product leadership include: first, meeting the growing need of media companies to manage, monetize and deliver the digital assets in the fast-moving online entertainment world.

Second, helping to accelerate the migration of performance-sensitive, business-to-business applications on the Internet.

And third, realizing opportunities to continue to improve the cost and effectiveness of our delivery capabilities by extending our massive Edge server deployments.

This deployment already extends to about 1000 partner networks and several thousand physical locations, and we want to take it further into end-user devices, such as personal computers and set-top boxes.

I'm very pleased with our progress in each of these three development areas, progress we've achieved through both internal investment and through strategic acquisition.

The purchase of Nine Systems directly addressed the first product development area I mentioned, the media and entertainment market.

CBS's recent interactive audience network announcement is instructive.

This ambitious, multi-partner initiative will require a robust set of controls to capture the explosion of opportunities to deliver content online to users where they want it, when they want it, in the format they want.

This is a great example of a trend we are seeing across the industry, the use of syndication to increase the market opportunity for content producers.

In the case of many customers, Akamai has been selected as the delivery platform, partly because of our leading content delivery capabilities combined with some of our new media asset management functionality.

With the integration of the Nine Systems technology, we plan to continue to develop our capabilities and offer more of the functionality and tools we believe the market will require over the next few years.

The acquisition of Netli addressed developments in the second area I mentioned: the movement of our customers' key applications online.

The progress we're making to incorporate Netli's protocol for application performance optimization into our network will further enhance Akamai's differentiated offerings in this area.

We believe our easy-to-adopt managed service is often the best way to improve application performance.

This is because customers can avoid expensive hardware purchases and additional network management burdens.

At the same time they benefit from our vastly-deployed network, which is uniquely designed to avoid inherent Internet latency that degrades application performance.

And the new technology from Netli comes at a great time for us, because we have been seeing growing sales momentum that validates our decision to expand into this exciting market.

Finally, by acquiring Red Swoosh, we believe we can extend our industry-leading delivery capabilities and further enable content owners to pursue innovative and profitable online business models.

Customer experience and market research tells us that any successful client*side application for enterprises must include three critical components.

First, it must be able to deliver quality of service and (Inaudible) control.

Second, it must be imbedded with a robust back-end system that incorporates functionality as dynamic mapping, quality of service optimization, authentication rights management and security.

And third, it must be combined with an Edge network capable of handling large volumes of traffic while maintaining performance.

We believe that only Akamai can deliver on all three of these components.

Akamai made significant investment over many years to develop an intelligent, controlled overlay Edge network that offers enterprises superior reliability, performance and scalability over the public Internet.

As we explored how to extend this capability further to end users, we identified only one other group with the same vision for developing technology and meeting customer needs to control and deliver online assets, and that was Red Swoosh.

That's why we were do delighted to make the Swoosh team and technologies a part of our initiative in this area.

Underlying these three acquisitions is Akamai's fundamental belief it's critical to use a decentralized approach to ensure optimal online content delivery and application performance.

We found that Akamai's highly-distributed architecture -- it enhances content distribution and application performance, has significant advances for customers over other solutions.

These other solutions often rely on more traditional hosting and mirroring of content in a few locations, far from where end users really need it.

Because of this fundamental difference in approach, investment and expertise, we are confident that Akamai's model and capabilities have uniquely positioned us to provide the tools and services enterprise customers will want to achieve their own online business objectives.

The Internet plays a critical role for thousands of businesses today and that opportunity is expanding.

Akamai's goal is the same as it's always been: to make the Internet more reliable, more scalable and more secure for business.

And we are as excited as ever about the way the Internet continues to develop and the opportunity we have to offer enabling technologies and services to businesses worldwide.

In short, we're working very hard to offer innovations that meet the growing needs of our customers today and to develop the innovations that will address the needs of our customers in the future.

So, we look forward to updating our progress later in the year.

Now J.D.

and I will be pleased to take your questions.

Operator, can we have the first question, please?

Yes, sir, your first questions comes from the line of Tim Klassel.

HI, Tim.

This is Jeff Peck actually sitting in for Tim.

Hi, Jeff.

It looks like you guys are pretty positive about the application acceleration market.

Can you briefly just go over what types of applications you are seeing demand for that for and what does the sales cycle look like?

Are you still in the evangelizing stage, trying to convince people to outsource to you or are you seeing people really just come to you and demanding that yet?

Well, it's still fairly early in the development of the market and I think most buyers still think appliance first and service is a second idea, often when the box solution isn't working.

It is and I think will always be, an enterprise sales cycle.

So it's not an overnight sale.

It's probably a six month sales cycle, but it certainly does seem to be going in the direction we'd like it.

We are seeing a wide range of applications.

Business-to-business applications as companies put more and more of their mission-critical processes online.

But it is everything from, say, a fairly unique B-to-B portal application to something more standard, such as an SAP installation that someone wants to run over the public Internet.

So, we're seeing a wide variety of companies.

One of the really nice things we've seen is it opens up some new verticals, like manufacturing where traditionally we didn't sell as effectively as we did in our traditional categories.

So we've been very pleased and seen pretty steady acceleration, as J.D.

had mentioned.

Q1 was the best we had seen for new deals in the space.

And that was before Netli even came into the fold, so it adds to our optimism about that space and the value that we can bring.

We're still pretty early and so that there's a lot of opportunity where we haven't even begun too scratch the surface.

OK.

And then just one more question.

Any changes to your sales force plan to approach that market?

Are you going to do any hiring or change how you guys sell that product?

I think that the job that the sales force has done aligning to sell that, to train people, to work with overlays in the right market, to find the right kind of prospects and frankly, even the lead generation work and trial work we've done to demonstrate value to prospects has been terrific.

And I'm very pleased with it.

So, I think we'll stay the course in the way we've been going.

OK.

Thank you.

Your next question comes from the line of Mark Kelleher.

Thanks.

I just wanted to go into the ARPU number a little bit.

If I do my math right, am I adding 125 new customers for Nine Systems?

Is that a ballpark number?

That was the number we gave last quarter, Mark.

That's right.

And can you -- is it possible to give what the ARPU would have been without those?

With the core ARPU numbers sort of?

I don't have the math right here in front of me, but when we did it it was about 4% sequential growth, excluding the Nine Systems adds.

So, instead of about 1% including those 125 customers, 4% without.

Thanks.

That's helpful.

And then just following up on a little more on that sales question, the last sales question.

Are you integrating at all these sales teams?

How are you cross-selling between these different acquisitions?

We run the company on a functional basis.

So, in every acquisition we fully integrate people into the existing Akamai teams.

They don't stay separate groups.

So engineers go into the engineering effort.

So, in the case of Application Acceleration, we had an engineering team.

The engineers from Netli were incorporated directly into that team.

The product management people were incorporated into our product management effort and the sales folks are incorporated into the sales team.

And we've also not bought things that were in completely new spaces, so it didn't really make sense to keep them separate.

We're going to stick with the functional management structure.

As we do acquisitions, we let people know very quickly when we close what their position is going to be in Akamai and then we train them and make them part of the existing organization.

Okay, great.

Nice quarter.

Thanks.

Thanks, Mark.

Your next question comes from the line of John Walsh.

Hi, John.

Good afternoon, guys.

Could you talk about the competitive environment, if anything has changed?

Obviously a competitor has filed to go public and if you could just talk about the dynamics, pricing, different market segments maybe that you've seen any changes in the competitive landscape.

Well, I think things are pretty similar.

We've always existed in a very competitive environment.

You've been on these calls before.

You've heard me talk about really three layers of competition.

The first is really do-it-yourself.

When we have a prospect, it's not that they don't have a website, they always have something sophisticated up and running and the first question is why should I outsource it at all?

The second level of competition is the managed service provider, where the pitch is basically, "I can do a little of everything and maybe that should be good enough." And the third is the direct competitor who says, "Look, I'm a specialist, too." I think we do very well competing against all three categories.

Some of those competitors are public.

Some of them are private.

Some are very, very large companies -- are bigger than we are.

Some are much smaller.

I think we focus on what our customers need, on meeting their needs to make their business models work in a few core segments.

And we love competition.

It keeps us very sharp and we've had it for nine years and my guess is we'll have it for 90 more.

But, I don't see a fundamental change out there.

And could you give a sense of the burst revenue, with that mix pretty similar to 70/30 and if any of the events like the March Madness, were they above what you had planned for in the quarter or any other again, kind of one-off, burst events that maybe you could highlight as above expectations?

I would say that the bursting came in right in our expectation range.

Not as high as it was in the fourth quarter where you have a lot of seasonal bursting.

But still, in the range of 70/30.

And as usual, we had events as we do every quarter.

March Madness is one of them.

None of the events are going to swing the quarter one way or another, because we seem to be having these events almost in every quarter now.

Great, thank you.

Thank you.

Your next question comes from the line of Todd Raker.

Hi, Todd.

Can you hear me?

Yes.

So, can I turn to guidance?

You guys started your guidance 610 to 625.

You've now acquired Netli, which admittedly didn't have a huge impact this quarter, but on the revenue run rate, it's a pretty significant impact for the full year.

I guess the question have I for you is what has changed here in terms of your growth expectations to your business?

Is something going on?

Well, Todd, we had factored in the Netli into our guidance in the last call, you might remember.

We talked about including both Netli and Nine Systems and that we were bringing both businesses in and they had something between a $25 and $30 million run rate.

So that's baked into the guidance that we gave last quarter and reaffirmed today.

So, really, we think the first quarter has put us right on track for that guidance, both with the performance we are seeing out of the acquisitions and the early signs, as well as continued strength on our organic business.

Really pleased with the growth we saw in the first quarter off of a really strong fourth quarter, where you have a little bit of seasonal wind at your back.

OK.

And then you guys have said on the adjusted EBITDA margin side, you think that's going to improve several hundred basis points here.

It's been relatively flat the last few quarters.

What's the big driver in your mind that's going to start to move that up?

So it's actually a trend that you can see if you went back to our first quarter of last year and the back half of last year.

The EBITDA margin started to flatten out a little bit.

In the first quarter we had some pretty unique expense items, like our payroll tax resets and we spent some money on sales force training.

Then, in addition, we're absorbing a couple of acquisitions and the initial expense that goes with that as we bring those over.

We've talked about that we expect Nine Systems to be an accretive acquisition, Netli to be roughly neutral and Red Swoosh to be fairly immaterial.

But the early expenses associated with those we have in the early period.

So I think a combination of the normal trends we've seen, absorbing the acquisitions and then continuing to drive scalability and efficiency as we grow the top line is really what is going to drive our growth in the back half.

And one last question for Paul.

Just from a high-level perspective, I think you've trained the streak here, that you guys put up good result and then typically there's an expectation to see the numbers move up.

If you look back at this quarter -- is there something that surprised you in the market?

Are we kind of going through the hyper-growth phase of this?

Is there some change, fundamentally, out there?

No, actually.

I was very pleased with the results.

We said last year, in the first half of the year, that we were surprised how fast the market was accelerating.

Frankly, I think if you look at our guidance this year it was for some pretty bold growth.

If you look at the mid-range, it's almost 45% revenue growth and now that we are reported a quarter, almost a third of the way through the year, we still feel very comfortable that we're going to see what I think is exceptionally strong growth of a very large number last year and even stronger expansion on the bottom line.

So, no, I don't see anything fundamentally different and extremely pleased with the performance.

I think that some people may have gotten very comfortable with the fact that we kept feeding the guidance early last year and decided, "Well that's just the way the world works," and we kept saying over and over again we used the same methodology, we're very conservative, we're trying to understand what's going on in our business.

We moved the guidance up very strongly back part of last year, because we had confidence in the numbers and we continue to have confidence in the numbers and people should listen really carefully to what we say.

Okay, thanks, guys.

Thanks.

Your next question comes from the line of Katherine Egbert.

Thanks.

Can you tell us, J.D., exactly what did Nine Systems contribute in March, what was the actual number?

In March, we had Nine Systems for 18 days or 19 days --

Did you mean Netli or Nine Systems?

No, Nine Systems.

Oh, I'm sorry.

Nine Systems -- I was going to give you the December when we had equivalent, kind of 18 and 19 days was about $800,000.

But we're not going to break out what Nine Systems was in the March quarter.

In fact, basically as I said, our strategy there is to take the Nine Systems solutions and accounts, and imbed them right into our business in our Media and Entertainment sector, and basically roll the two together.

And we took their existing business, which was effectively a CD-end business, and moved it to our network to get the efficiencies of our network (Inaudible).

So more Akamai customers.

Okay.

And then if I could follow-up on Todd's question.

This is the first quarter in six quarters you haven't been over the high end of guidance for the quarter.

And I heard what you just said about, you say over and over you can't keep beating and raising -- I'm just wondering, was there any disappointment for you internally in this quarter?

And did anything change between the time you gave guidance in January, when presumably some of the prices were set and the renewals in December were set and the current time in April?

Let me stop you right there.

No, we always tell you exactly what we think is going to happen.

We got some very pleasant surprises last year and we explained why the phenomenon that we thought was going on that we then captured in our guidance going forward.

We gave what we thought was accurate guidance and actually we came in exactly there.

So, we were very pleased.

In fact, I'd like to be exactly right on.

I would love to give you an exact dollar and exact penny number and then hit it, because it says we can understand everything that's going on in our business.

We came in near the high end of the range.

I thought it was a very strong quarter and we continue to be very optimistic about the year.

OK.

And then if I can, J.D., can you just dig in to a little bit more -- I think you alluded to the fact that you'll get margin expansion more in the back half of the year.

Can you just explain that a little more?

Certainly as we further integrate the acquisitions, that will help because we have some initial costs associated with doing that.

We've always talked about the first quarter being a little bit -- having some unique expenses.

And then you can see the pattern and the way we have kind of progressed last year and the year before.

Basically, the fundamental driver for us is getting more scalability, more efficiency as we grow the top line.

And as our guidance says, we expect to grow the top line very aggressively for the rest of the year and achieve that.

Really that's the drivers.

And that's historically been true.

We always have the payroll reset in Q1 and we always have larger sales training expenses in the first half of the year than the second half of the year and that's been consistent.

And then the difference this year over the last year and a half has been not just one acquisition, but three to integrate and a lot of the synergy we get out of taking down their network cost and adding our efficiency takes a couple months to roll their customers on to our network and unwind their network relationships and we have to do that with both Nine Systems and Netli in the first half of this year.

OK.

And this (Inaudible), do you think you've seen the bulk of the gross margin compression for this year?

Meaning are we going to start to see flatter gross margins?

And again that's something if you go back and look at 1Q of '06, our margins did decline a couple points and then level out for the year.

So, that's another pattern you see and obviously the acquisitions affect that, as well.

We're still confident that in our guidance that we should see about three points of gross margin decline this year and will more than offset that or more than offset that with EBITDA improvements.

I think you saw this quarter, a couple points sequential decline, but still EBITDA margins flat from 4Q and up five points year-over-year.

So, we're pretty pleased with the progress we're making.

Okay, thanks, J.D.

Sure.

Your next question comes from the line of Phil Winslow.

Hi, guys.

Just wanted to ask a quick question along the lines of the multi-year contracts that you talked about with the customers, some of it pressuring the gross margin side.

When you also do look at your revenue line, any effect from that that was different than you anticipated coming into the year or could you just step us through that?

I think that's a trend we've been seeing really for several quarters, that the deals keep getting bigger and bigger, and we keep getting more and more aggressive with our customers.

I've said for a while the primary driver for us of price is volume and we are very happy to get aggressive when the big deals come along and give us a chance to win those deals and add a lot of value on top of those.

And for us the fundamental driver is, "How do we scale that on the bottom line and drive bottom line profitability?" I don't think we saw any major changes there.

There's a bit of focus about where we came in on the guidance range.

But, if you look at where we came in on actual growth performance, I think it's consistent with what we have been seeing in the past.

Great.

Then when you do look at leverage going forward in your model and you start to think of longer term, what do you think is a more stable gross margin range?

Then I guess Cap Ex as a percentage of revenue, to?.

Well, we haven't set out a target or an ultimate model there and we looked at the individual deals, in terms of a bottom line profitability.

But clearly as the media business grows and the large deals grow, we will be seeing some margin declines.

We talked about three points for this year.

And I think that's something that we'll continue to be able to offset with improvements in our overall scalability, because as we -- there is a lot of leverage in our business model, as I talked about.

As the revenue grows, we continue to improve our profitability despite the fact that the gross margins have come down a little bit.

Great.

Thanks.

Sure.

Your next question comes from the line of Harry Blount.

Hi, Harry.

This is Roberta, in for Harry.

Hi, Roberta.

How are you doing?

Good.

I apologize if this has already been asked, because I had some issues connecting.

I wanted to ask -- previously, I know it had been said in fiscal '07 that the acquisitions, Nine Systems and Netli, would contribute $25 to $30 million in the year.

So, would it be fair to look at $6 to $8 million per quarter contribution from acquisitions?

Let's see, we talked about the Netli being only $500,000 in the first quarter.

Obviously, like the rest of our business, we hoped that -- what we talked about there was a run rate.

We hope those are part of continuing to drive sequential quarterly growth.

So the run rate is probably in a roughly flat range.

Then hopefully we take those customers and we up sell them with Akamai products and services, they grow natural, we take the solutions from Nine Systems and sell them into our existing media customers, etc.

I think that's part of our strategy to fuel our growth for the rest of the year.

Great.

Thank you.

Your next question comes from the line of Bob Stimson.

Hi, Paul.

Hi, J.D.

How are you today?

Good.

Just a couple of quick questions.

Given the fact that, obviously, the treasury method and the stocks really appreciated well in the last 12 months, does that affect the size of the diluted share count going forward and can you give us some help on what we should be thinking for the rest of this year in terms of share count.

Obviously, the stock price goes into the treasury method.

It's not a huge impact, especially since a lot of our equity compensation is based on RSUs, which has less to do with the treasury method than when you're calculate options.

It's not a huge driver.

We talked -- the biggest driver has been the roughly 3 million shares with each of the acquisitions that we have done and the roughly 300,000 shares with the Red Swoosh acquisition.

Then we have the normal growth that's been roughly a million shares a quarter -- a million and a half.

And we don't expect any major changes there.

Great.

And then just on the CapEx number, I want to follow-up with what someone said before.

I think the number I say in the financials was about $27 million for the quarter.

Is that kind of the run rate (Inaudible) or do we have a little bit more incremental spending in Q1 and Q2, and we will not have as much in the back end of the year.

Right.

Exactly.

$27 million is what we spent on equipment and about 4 million on top of that for cap labor.

So, just to tie it out, it's about $31 million in total.

If you add that up, that's about 23% of revenue.

Last first quarter, we did a similar kind of spend-to-head and spent 21% of revenue.

And so based on that, it's kind of the way we like to use our purchasing power and we still expect to be in the range of 16% for the year.

Great.

And then just real quick.

When -- this is kind of a million dollar question I think people have to start focusing on a little bit -- when the NOL issue (and again everyone knows what that is) I'm just trying to get a sense of if you back out that number, when do we have to start thinking about that?

Is that an '010 event?

An '011 event?

Just can you give a sense of the time line of that?

Well, it's certainly going to be into the next decade.

We haven't given a specific time when we think it is, but our estimates put us into the next decade before we're a taxpayer.

Sorry, working off a cough here.

Coming off another red eye.

Operator?

Yes, sir.

Your next question comes from the line of Rod Ratliff.

Hi, Rod.

At least you guys got the name right.

We knew it wasn't Rad Ratliff.

Sweet.

Guys there was a jump in deferred revenue in the quarter.

Is this germane to operations and should we for some reason start looking at total bookings, including deferred revenue, rather than just revenue growth?

No, there was a bit of a jump.

There was a bit of a decline actually in the fourth quarter if you looked at it.

And it bounced around a little bit based on some strategic deals or customers that do prepays.

But, it's not a significant driver for us.

It's not something that we have in a major structure.

As you know, we do some strategic custom deals both in -- mainly in the government, but some commercial deals -- and a lot of times for those we defer some of the revenue until the work gets done.

Paul, if you are resetting multi-year contracts, will some of them actually be coming up to more market normal rates now?

Are these deals that you might have made back in the dark days of '01, where you might have had to make a little more of a concession, so we might be looking at marginal revenue coming up?

Are you looking at resetting to the positive is what I'm getting at?

We are not resetting anything out of the ordinary at all and we certainly don't get any six year deals in 2001.

They were probably six minute deals than anything else in 2001.

What we talked about over the last several years is the deal length has been increasing pretty much every year.

I think that's continued to happen.

What we are seeing is that's probably happening a little bit in the media space, in addition to the enterprise space.

These companies are getting more serious about their online bets and they want to bet on infrastructure and they want to use Akamai.

Usually they're talking about much greater volumes and those are all, I think, positive trends for the business.

But quarter-over-quarter I don't think there is -- there's nothing unusual about Q1 or Q2 in terms of what's come up or which customers.

And just on the margin in terms of bursting revenue, I still have some industry data over the past couple of weeks, and it looked like online software sales kind of fell off a cliff in February and March.

Did anything like that, did you see anything like that and was there any dampening of marginal bursting revenue related to a phenomenon like that?

Didn't see that at all.

Don't know where that data came from.

I don't see it.

Nope, nothing on our radar.

Great.

Thanks.

Thanks, Rod.

Your next question comes from the line of Aaron Kessler.

Hey, Aaron.

Hi, guys.

How's it going?

Good.

Couple questions.

First on the Netli -- sorry, on the international media market, can you give us a sense for how far you think come of the media and entertainment category is behind the U.S.

market?

And then on the Nine Systems acquisition, any chance you can give us a sense of any revenue synergies you are starting to see between the Nine Systems and Akamai, in terms of adding on the additional software functions might give you some more deals on that side?

The international market I think we talked about.

Not just on the media side, but probably one, two years behind development here, just for hosting, for outsourcing, the normal trends.

I'm actually just back on a trip from Asia and there's some very exciting media stuff going on there, but certainly not at the scale yet that we're seeing and I think long-term there is a lot of potential because of really the proliferation of broadband and the much larger audience potential in international markets, just dwarfing the U.S.

market longer term and it's why we like being in those markets and selling in country.

And servicing in country gives us, I think, a strong relationship with what those customers are doing.

We're starting to see, I think, some strong traction with all of our digital media management functionality, both stuff that we already had and the tools from Nine Systems.

We had a great launch of stream OS at NAD.

Last week the CBS deal that was announced that we were part of, I think is very instructive.

The real interesting syndication, link syndication functionality is significant and we've tried to play a leadership role there and Nine Systems will add to that capability.

And we are starting to see that in some deals already.

Great.

Please remind us on the international revenues, is that just from companies located internationally or is that multi-nationals, as well, that you count for revenues there.

We count where the contract's written, not where the traffic is delivered.

We will call it U.S.

revenue if it's a U.S.

contract, even if some of the traffic goes outside.

So, a higher percentage of the traffic is delivered outside than the revenue.

Thank you.

Your next question comes from the line of Darren Aftahi.

Hi, Darren.

It's Darren.

Don't feel badly - they've butchered every name here.

We've got a perfect run going.

Just a follow-up.

What are your initial customer traction or reaction to your syndication products?

Has that given you more of a stickiness in sort of people in the media and entertainment sector?

And then my second question is, can you talk a little bit more specifically about how the government sector trends in the quarter and your outlook for that for the rest of the year?

Sure.

The syndication capabilities -- it's still very early as that market is developing.

But the conversations we've had are very exciting.

We are seeing some deals get done, I think partly because of that.

But it starts with our, we believe, superior ability to deliver quality with control.

And that the media management tools on top of it are just an enhancement.

A lot of exciting discussions at NAD last week, with a lot of particularly U.S.

media companies migrating more and more of their business online.

But that's, I think, a multi-year evolution.

It will take a couple of years to see how strong those new business models are, but so far, very encouraging signs.

The government business continues to be a strong component of what we do.

I don't think any fundamental changes there.

Mush longer buying cycles, because of just the way the government gets around to funding initiatives.

But that continues to be an important component of our business.

Just to follow-up on the syndication, does this put you competitively in a position to go after the video ASPs?

Or is that something that's really not part of your strategy long-term?

We probably think a lot of those players as customers or partners.

We certainly are not going to have applications that do everything that our customers want to do with video.

We are also not a professional services shop.

We want to add core functionality that allows our customers to control and monetize their assets that they want us often to store and always to deliver.

Great.

Thank you.

Thank you.

Your next question comes from the line of Colby Synesael.

Hi, Colby.

Hi, guys.

How are you?

Good.

Real quickly on the margin that we talked about a lot.

The acquisitions of Nine Systems and I guess, a little bit of Netli, was that part of the reason that the margins came down in this quarter?

And I guess what I'm looking at is what is the gross margin difference between the core Akamai business versus the acquisitions you made?

I know you won't give us that exact number, but you can give us an idea if those are drastically apart or very similar?

I think clearly our core margins are better than the companies we are acquiring and part of the synergy as, Paul referenced and is quite clear to us, is getting that traffic on to the Akamai network.

And that's a process that takes time because you migrate the customers.

So, some of the impact, and therefore some of the improvement going forward, comes from completing the integration of the acquisitions.

OK.

And then real quickly -- you guys mentioned on the call, I think Paul you did, when you guys were talking about expanding Edge services to set-top boxes and computers.

Were you guys talking about Red Swoosh?

Or was there something out there that you guys strategically are looking at going forward?

No, I was talking about our own development and then Red Swoosh.

So, how does that get involved with set-top boxes and actually putting that on, I guess, computers from the download standpoint, but how does set-top boxes fall into that?

Well, if we look at Edge devices that have IT connectivity that will be used to view and access media, the world is going to (Inaudible) pass the personal computers to mobile devices, what we would think of as a set-top box, or effectively an IP box, that will be moving entertainment content to a big screen as opposed to a small screen.

And we think the need to control content with -- control the rights and who can view it, but with huge capacity, is going to grow over the next five years and that by taking our massively-scalable Edge network and back-end control and marrying it with the ability to do more at the client, will add significant value.

We already do some of that with our download manager.

And we're just looking to expand those capabilities over the next couple of years to meet our customer's needs and we think one of the areas to expand it will to be move from the PC to other kinds of devices where people are going to want to consume rich media with an IP connection.

So, essentially you would be expanding out your own network of, I guess, about 25,000 servers using some type of peer-to-peer technology to combine with your traditional CBN network?

Part of that depends what you mean by peer-to-peer.

We're not going to launch a service that allows piracy and sharing illegally.

We think of our network already in many ways as a peer network.

Those servers, those tens of thousands of servers, peer with each other and connect end users.

You can think of just extending that capability to other devices over time for capacity performance and cost savings.

Great.

Thank you.

All right, operator, why don't we take one more question?

Yes, sir.

Your next question comes from the line of Jennifer [Adams].

Hi, Jennifer.

Hi.

Jennifer?

Jennifer, your line is open.

Think we lost her.

Let's move to the next.

Your next question comes from the line of Ben [Ebble].

Hi, Ben.

Hey.

Sorry about that.

I just want to make sure -- you guys have done in this quarter we would have two acquisitions, Netli and Nine, is that correct?

Those would be the only ones of acquired revenue either --

In our Q1 results, the Red Swoosh acquisition closed in April.

And we --

And it's not material.

But also all of those were built into the guidance we gave in February for the year because we had visibility to them.

Right.

And as we think about those layering out in the back half of the year, I guess I'm trying to understand the difference between this quarter, where your organic growth was around 50% this quarter year-over-year, is that right?

Year-over-year, that's probably in the ballpark of three points from the acquisitions, yes.

I'm sorry --

You had full benefit of Nine Systems and you only had a little less than one month of Netli and we broke out the Netli numbers so you can put a run rate in there and project that forward.

And then, in your full-year guidance, you're continuing to assume $25 to $30 million from those acquisitions, (Inaudible) the 42 and 46, and the organic numbers are actually something lower, is that right?

That's right.

So, should we think about that deceleration being something driven by ARPU or renewals or less events?

How do we kind of think about that.

Last year we did see a tremendous increase in the ARPUs and we were seeing 7, 8% in the back half of last year.

We certainly haven't factored in that level of ARPU growth into our guidance.

I think fundamentally what we are doing is we're driving $10 to $12 million of additional revenue on a quarterly basis and the numbers are getting larger and that's dampening our growth rates a little bit.

But still pretty strong growth.

We are at the midpoint for the range -- close to 45%.

And I would take that as a phenomenal year off of last year's phenomenal approximately 50%.

A much larger number.

Fair enough.

And thought process on the deferred revenues, those all role onto the P&L at some point in the year?

We aren't going to exit the year building that up?

As J.D.

said, it goes up and down a little bit.

Some of that will roll on in the year.

Some of it is over a multi-year deals.

But there's not really a fundamental change in that.

It went down a little last quarter.

It went up a little this quarter.

Fair enough.

Thanks.

Thank you all.

We will see you at the end of the next quarter.

Bye-bye.

This concludes today's conference call.

You may now disconnect.