阿卡邁科技 (AKAM) 2007 Q2 法說會逐字稿

Good afternoon.

My name is Laportia, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Akamai second quarter 2007 earnings conference call.

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

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

(OPERATOR INSTRUCTIONS) Thank you.

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 second 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.

Today's presentation contains estimates and other statements that are forward-looking under the Private Securities Litigation 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 from these forward-looking statements.

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 to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change and therefore you should not rely on these forward-looking statements as representing our estimates as of any date subsequent to today.

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

These non-GAAP measures are not prepared in accordance to generally accepted accounting principles.

You can find definitions of these non-GAAP terms and reconciliation to these non-GAAP terms to the most directly comparable GAAP financial measure under the news and publications portion of the investor relations section of our website.

Now let me turn the call over to Paul.

Thank you, Sandy.

And thank you all for joining us today.

Q2 was another quarter of double digit sequential revenue growth for Akamai as we delivered record revenue and normalized earnings.

Our consolidated results for the second quarter include revenue of $152.7million, a 10% increase over the first quarter and a 52% increase over the second quarter of last year.

Normalized net income of $55.4 million, or $0.30 per diluted share, a 9% sequential improvement and a 55% increase over normalized net income from the same period last year.

Along with delivering our sixth straight quarter of double digit revenue growth, we continued to make good progress integrating our recent acquisitions and expanding customer relationships across the business.

In addition, we're very pleased that Akamai has just been added to the S&P 500.

We believe that joining this index of leading global companies further validates the value of our service offerings as well as the strength of the markets we serve.

I'll be back in a few minutes to talk about some of the trends we're seeing across the business.

Now let me turn it over to J.D.

to review our second quarter results in detail.

J.D.?

Thanks, Paul.

As Paul just highlighted we had a strong second quarter with revenue growing 10% sequentially to $152.7 million.

And we again experienced healthy sequential growth in all of our core segments.

Media and entertainment continue to be our fastest growing segment with eCommerce and software distribution following close behind.

During the second quarter, Akamai's international sales represented 23% of total revenue.

One point higher than first quarter level's.

Resellers represented 20% of total revenue consistent with the prior quarter.

As for overall customer additions in the second quarter we added 74 net new customers bringing our total customer count to 2,555.

Our consolidated ARPU, or average revenue per customer, grew to $20,000 in the second quarter, up 5% over our first quarter ARPU.

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

Our GAAP gross profit margin, which includes both depreciation and stock compensation was 74% for the quarter, or about a point lower than Q1.

And cash gross margins were 83%, consistent with last quarter.

GAAP operating expenses were $81.9 million in Q2, up from $77.6 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 operating expenses for the quarter were $60.7 million, up from $57.1 million in the prior quarter.

Adjusted EBITDA for the second quarter was $65.6 million, up 11% from the prior quarter and our adjusted EBITDA margin was 43%, up 1 point quarter-over-quarter and up 3 points over the same period last year.

Total depreciation and amortization for the second quarter was $17.6 million, up from $14.8 million in the first quarter.

These charges include $12.7 million of network related depreciation, $2million of G&A depreciation, and $2.9 million of amortization of intangible assets.

Net interest income for the second quarter was $5.2 million.

Moving on to earnings.

GAAP net income for the quarter was $21.6 million, or $0.12 of earnings per diluted share.

As a reminder, our GAAP net income includes non-cash charges for stock compensation related to FAS 123(R) and book tax charges at an effective annual rate of 39%.

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

During the second quarter, our stock based compensation expense was $17.2 million, or $0.09 per share on a pre-tax basis.

A breakdown of our stock based compensation charges by operating department is available in the supplemental metric sheet posted in the investor relation section of our website.

Additional non-cash items in GAAP net income for the quarter include $2.9 million for amortization of intangible assets and a $13.4 million non-cash tax charge.

Excluding these non-cash items, our normalized net income for the second quarter was $55.4 million, up 9% over last quarter and 55% higher than our normalized net income for the same period last year.

In the second quarter we earned $0.30 per diluted share on a normalized basis at the high end of our expectation range.

Our normalized weighted average per diluted share account for the second quarter was 187.4 million shares including the first full quarter of the incremental shares from our Netli acquisition.

Now let me review some balance sheet items.

Our cash generation continued to be very strong and we've reached more than $0.5 billion in cash, cash equivalents and marketable securities.

Cash from operations for the second quarter was $37.3 million and on a year-to-date basis we've generated $93.6 million.

That's up 54% over the same period last year.

Capital expenditures, excluding stock compensation, totalled $29.7 million in the second quarter.

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

Overall, we had another very strong quarter growing revenue 10% sequentially and 52% year-over-year and delivering on our profit growth objectives while also integrating our recent strategic acquisition and continuing to invest for the future.

With our strong second quarter results we are tracking to the high end of our revenue guidance for the year and we now expect revenue to be within in the range of 615 and 625 million or 43% to 46% annual growth.

We also expect to deliver on 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 at least 51% for the year.

We concentrated our capital expenditures in the first half the year investing about $60 million in the network as our customers demand for capacity continued to grow.

Excluding capitalized equity compensation, we expect our capital expenditures to be lower in the second half of the year and in total we now expect to spend just over $100 million or between 16% and 17% of revenue.

On margins we came in where we expected this quarter with cash gross margins consistent with Q1 levels.

However, with our increased CapEx investment, we expect to see the impact of increased depreciation costs on GAAP gross margin in the second half of the year.

For the full year we now anticipate the GAAP gross margins will decline by about 4 points year-over-year, about half driven by depreciation and half by cash gross margins.

But as we've said in the past, we expect to offset any gross margin declines with conditioned operating efficiencies and scalability.

Specifically for the full year, we anticipate that adjusted EBITDA margins will improve by about 4 to 5 points.

We do expect to see some seasonality returns to the business after an unusual summer last year where content growth on the Internet overtook the normal seasonal trends we have seen in the past.

As a result, we expect less revenue growth during Q3 and a stronger growth in Q4.

For the third quarter we anticipate revenue in the range of 157 to $162 million.

At the midpoint of that range that represents about 4% to 5% sequential growth and 43% year-over-year growth.

We're expecting normalized earnings per diluted share for the third quarter in the range of $0.32 to $0.33, two to three pennies higher than the second quarter driven by normalized net income improvement of at least 8% sequentially and 44% year-over-year.

Overall, we're pleased with the progress we're making on the integration of our recent acquisitions and we expect to reach the high end of the growth expectations that we set for ourselves at the beginning of the year.

We also see exciting opportunities for growth beyond 2007 and we're continuing to invest to capture those opportunities.

We look forward to talking about some of these things that our analyst summit and webcast scheduled for later this quarter.

Now let me turn the call back over to Paul.

Paul?

Thanks, J.D.

As J.D.

has just detailed, Q2 was another strong quarter for Akamai.

Our content delivery and application acceleration businesses performed very well for us.

As we talk to our customers and learn more about their plans for their on-line businesses, we hear requests that are consistent across categories.

How can you help us improve the performance of our business model?

What customers want are partners who help them drive revenue up and costs down.

They want partners who can provide high quality solutions that are extremely reliable and flexible.

And that is what we aim to deliver across markets as diverse as media and entertainment, on-line commerce, high tech, gaming, business to business applications in the public sector.

That's why we believe it's so important for us to continue to invest in our services.

We believe a hallmark of our success is an ongoing research and development and a commitment to innovation.

This commitment allows us to keep up with our customers as their on-line business challenges evolve so we can provide them with high quality and new solutions.

Let me give you several examples of how some of our advance services help our customer's businesses.

One of the capabilities we recently added to our suite of service is Stream OS the rich media management solution we acquired with Nine Systems.

One of our clients, a major sports league in the U.S., uses Akamai not only to deliver its web content but also to integrate video production with Stream OS to organize highlights so they can be distributed to affiliate sites.

With Stream OS they can do it even before a game is over.

The league quickly and easily makes different versions of high up yields applying different publishing rules for affiliate partners who distribute clips to an extensive network of sites in near realtime.

In other innovative services our new live flash streaming capability.

Clients are using this technology to deliver in-stream advertising and other rich media ads that achieve higher flip through rates.

And to complement and enhance our new offerings we're constantly looking to exploit one of Akamai's clear advantage, our highly distributed highly redundant global network.

We believe that the scale we provide is extremely important to our customers as they seek to serve ever larger on-line audiences worldwide.

For example, we worked with NASA recently to stream live coverage of the space shuttle's 11-day mission to the international space station.

And just a couple of weeks ago, Akamai supported Live Earth, the global event highlighting the critical issue of climate change.

In addition to supporting the Live Earth website, we worked closely with MSN to deliver live and on-demand concert events, artist interviews and backstage footage.

According to MSN, the event was the largest global entertainment event in history with more than 30 million live streams and an on-line audience of over 8 million participants.

By leveraging our live and on-demand capabilities producers know they'll have the on-line capacity and quality to support a successful production without having to build out their own costly infrastructure and risk over or under estimating demand.

eCommerce, our ability to accelerate the performance of dynamic sites improves page download times, the speed of search queries and the performance of shopping cart applications.

All of these dynamic features help increase customer conversion rates and typically boosts site revenue.

One of our eCommerce customers, a top motorcycle producer that runs a leading on-line destination for enthusiasts, experienced a 15% improvement in conversion rates after implementing our dynamic site solution.

This led to a 10% increase in the number of visits and a 37% increase in page views and they helped to contribute to a 30% increase in revenue, not to mention savings of over 60% in infrastructure cost for our client.

Finally, in an important and emerging area for us, application performance services, we're helping many companies improve their customer experience.

Once again we were pleased with another strong quarter of growth in this new market.

One example is GXS, a leading provide of B-to-B eCommerce solution.

They deployed our web application acceleration solution into their trading grid, which supports 35,000 customers in the world's largest on-line trading community.

Using Akamai, thousands of trading partners and supply chain communities experienced a 40% decrease in response time worldwide.

In one country, China, latency was cut in half using our services.

This sort of performance gain lets our clients achieve greater utilization and adoption of their on-line applications by enterprise customers, partners and affiliates no matter where they are.

Fundamentally, we believe our customers work with us not only because of our ability to deliver the content quickly and reliably across the globe, but because we can continue to develop services that go beyond basic content delivery.

These advanced services help our customers make more money while limiting their on-line operational costs.

And with continued expansion of the Internet as a vehicle for on-line commerce, media, B-to-B applications, software distribution and so many other endeavors we believe in investing in innovation is critical to serving the needs of our enterprise cost customers and at the same time to growing Akamai.

We remain as excited as ever about the opportunities for our business and we look forward to updating you on our continued progress later in the year.

Now J.D.

and I will be pleased to take your questions.

Operator, may we have the first question please?

(OPERATOR INSTRUCTIONS) First first question is from the line of Tim Klasell with Thomas Weisel Partner.

Yes, good afternoon, everybody.

Hey, guys.

So you're growing the top line obviously a bit better than we had thought, but the margins aren't quite matching that.

Can you talk to us a little bit about what you're doing or seeing in your new deals and in your customer activity?

Is it the media guys who are growing so quickly?

Are those contracts under -- are those little bit lower margin business?

Or is this deal size as deals get larger, because obviously you're beating on ARPUs to, as the deals get larger is that continue to sort to press the gross margins a bit?

I think overall we were pretty pleased with our margin performance this quarter.

We came in at the high end of our range on revenue, the high end of our range on EPS and we saw our cash gross margins be about flat quarter-to-quarter.

So kind of a continuation of the trends we talk about, maybe even a little bit of a moderation there.

I do think as you pointed out though that and as we've talked about for several quarters, these big large volume deals we do get more aggressive on the prices and the prices are lower and the media growth where those deals kind of mostly emanate from is driving a lot of that.

But we've been able to leverage that to the bottom line and keep improving our bottom line profitability.

And I think that's a trend we expect to continue at least through the rest of the year.

Okay.

And then just one quick follow on question, on the application performance services I know you aren't giving us a lot of detail on that revenue, but can you give us an idea of what percentage of your customers are currently taking the APS and maybe give us some metrics around that?

We will report more on it in the fall.

But it's still a small percentage.

It's a new service.

And one of the things we've been pleased with is not only does it allow us to go to distant customers and offer them this new capability, but it's also letting us go to new customers and new markets like manufacturing and we've seen an increase every quarter over the last year in sales in this area and really strong traction increasing recognition by our customers that it's not just about their web page performance but the Internet layer, if you will, creates real drag on application performance and often the applications are where the business dollars are and that they need to find a solution and that our service base approach is easiest most effective way for them to deal with the problem of launching an application on the Internet and then not having it work to the user at the other end.

Okay, good.

And then I want to quick follow-up on the Cap Ex, you're spending a bit more there.

Anywhere in particular, is continue to be storage?

Or is there other things that you're need to invest in?

It's generally across the networks so it's what's mostly there is servers and storage and then of course you need to keep in mind that we also capitalize a lot of our development work.

Okay.

Very good.

Thanks a lot guys.

Thanks.

Your next question is from Todd Raker with Deutsche Banc.

Hi, Todd.

Hi guys, how are you?

Good.

So first off, can you guys just talk competitively in the last 6 to 12 months, do you think your competitive position has changed in the industry and what do you thinks really kind of two or three key differentiating features versus some of the emerging competitors?

I don't think the landscape has changed terribly much.

As you know we've had competitors for the almost nine years we have been in business.

We continue to see it in all of our areas we operate around the world.

It's starting with customers who say I have a website I can do it myself.

Tell me why I should outsource.

I don't think our competitive position has changed.

I believe we're the market leader in the area of content delivery and really the innovator now in the emerging area of application performance as a service.

So we hear the same kind of questions from prospects and customers and I think there are a number of things that differentiate us certainly skill and capabilities, reliability and security but also the advanced features we bring to the market that help our customers business models.

Our goal is to help them make more money or drive costs out of there operations faster.

And so whether it's the Stream OS functionality that we've added in the media category or the performance enhancements that we're adding through the Netli acquisition or our own internal R&D in the area of supporting Web 2.0, functionality of Ajax or the innovation that has made us a leader supporting social networking sites including many that moved to our platform in the last year because of our ability to, for example, most effectively handle the performance of user generated content and video.

I think all of those things add up to really setting the pace in the marketplace.

Okay.

And then as you look at the growth profile and clearly you've moved the guidance toward the high end of the range here.

But this is the first time we seen net new customers or sales decline year-over-year.

How should we be thinking about customer growth versus ARPU growth as we go forward?

I think our customer growth has been pretty consistent quarter-over-quarter, especially after normalize for the acquisitions.

We don't target a specific number, one of the things we have done year-over-year is really raise our expectation of kind of a minimum size of a customer.

We want to make sure we are going into quality markets and quality customers and those with the potential to grow.

But as I look at the kind of net adds, it's roughly in the first half of this year versus last year almost the same number.

It's actually higher you look at the first half because we signed up 89 net new customers in the first quarter which is a bit higher than the range.

If you went back to last second quarter we signed up 79 net new customers, a bit lower than last first quarter.

But if you look at it on a first half out it's going to bounce around a little bit.

We're still very pleased with the new customer signings.

And last question just following up on Tim's question on CapEx, this 16& to 17% of revenue level, if you had to guess at a steady state model, is that the pretty good benchmark or do you think you can get more efficient than that over time?

I think we continue to get more efficient in the use of technology and our software.

We've had explosive traffic growth in the last year and always felt that we should stay ahead of that.

We never want to tell customers go away.

It has been higher than we had targeted a few years ago and our expectation is over time it will come down a little bit.

But given the explosive nature of the market we're not going to be caught short on ability to handle customer.

Okay.

Thanks, guys.

Your next question is from Rod Ratliff with Stanford Group.

Hi Rod.

How are you?

Good.

Paul, can you speak anecdotally at least about where you might be seeing strength in the software download market, any particular sort of vertical within software that you guys were seeing any extraordinary strength?

Well, we continue to see -- just the whole industry has shifted from shipping diskettes to downloading software online.

We're seeing it really across the board in enterprise software, in desktop software both to the business and the consumer space and another area that's really emerging is in the gaming space.

So that is essentially software being downloaded either to PCs or to consoles.

So we're seeing that evolution of the business just continue across the board.

Then you've got the Wii business with Nintendo, correct?

We talked about that awhile back.

Right.

On the Apex sales front, it seems that the press releases have picked up in the past calendar quarter or so announcing a lot quarters.

You indicated earlier on the call that you were going to be probably giving a little bit more granularity around that particular product line in the second half, was that correct when I heard that?

Yes, I think we'll give an update in the fall.

We've been very pleased obviously.

We make announcements when we would think it contributes to the dial or sometimes our customers want to make announcement for themselves.

We've been very excited about the growth and acceptance of this.

And so we'll talk a lot about it at our analyst day.

Okay.

One last one.

If you can or will, Paul, any particularly strong vertical bursting in the second quarter?

Just off the top of my head it would seem that media and entertainment what with the sports networks that you're broadcasting for over the web, that would tend to support bursting in the second quarter.

Can you give color there?

We work with so many different leagues that I think we're in every season.

So I really don't think that there was anything unusual in the second quarter.

It was very much a business as usual I think across all of our verticals.

Okay.

Great.

Thanks.

Thanks, Rod.

Your next question is from Aaron Kessler with Piper Jaffray.

Hi, guys.

Couple questions.

First on the CapEx side, could you give us a little more detail into what you'e investing or is it just more storage on the specifically on the rich media side?

Any more details?

What percentage roughly maybe have your servers today can be used for kind of the larger digital media files versus maybe your more traditional content delivery network?

And I have one follow-up question.

First of all, just to reiterate what I said before, most of the spending on CapEx is hardware which is servers or dedicated storage.

The entire network can be used very flexibly for any kind of content maybe that you have a misconception that there's kind of an old technology and a new technology.

But one of our hallmarks has been, if you will, a plain vanilla commodity infrastructure that's enhanced through software.

So our ability to handle large file, live event, user generated content is really done through the magic of the software it create, not essentially the hardware itself.

And so we take the CapEx and can spread it across commodity relatively low price devices and then effectively enable them to put software and the functionality.

Whether we're handling small objects kind of on an average webpage or enormous files, high-def type movies or very, very large software patches or even real full game or operating system installed, the network is flexible and capable of handling that and allowed us to do the largest distributions ever of software over the net.

Great.

And one follow-up.

There's been a lot of success, a couple of your competitors in the web application area and keeping it behind the file, any indications companies are becoming increasingly willing to let their data go across the Internet which could accelerate your application offering?

Thank you.

That's exactly what we're seeing.

Because as you know we're not trying to operate behind the firewall today or in the data center in the traditional device or appliance space.

That's in fact what we're seeing is that more and more customers are saying I'm going to the web or the Internet, the public Internet with my application and all of a sudden I'm not getting the performance I need.

And so we're finding them increasingly open to the discussion and recognizing that they've got a real problem to address.

Great.

Thank you.

Thanks, Aaron.

Your next question comes from Phil Winslow with Credit Suisse.

Hi, guys.

I wonder if you could talk about a contract link that you saw this quarter.

You discussed how late in the second half of last year you saw lengthening of contracts.

Wonder if we get a sense for what you saw this quarter but also some of those contracts that you were signing.

let's say the second half of last year, when do you think those start to come up for renewal again?

You talked about the contract link going to 18 months.

Does it last a full 18 or do you think it renews sometime before that?

Most go the full length.

Most do.

And we have seen that trend towards lengthening in the 18 to 19 month range.

We saw a continuation of that in the first quarter and the second quarter.

I haven't crawled through precisely all of our contracts in the second quarter.

But we're definitely seeing a lengthening of those contracts.

We still have a pretty even distribution of our contracts over our customer base.

And almost any quarter we have some portion of our customer base up for renewal.

And I think that will just continue to be relatively an even split over the quarters.

Great.

Thanks, guy.

Sure.

Our next question comes from Harry Blount with Lehman Brothers.

Hi, guys, this is Roberta in for Harry.

Just wanted to ask, can you talk about how you see your growth opportunities going forward in terms of how many large customers are out there or if you think you'll be relying more on existing customers and also if you could give a few comments on how you see ARPU trending for the rest of the year?

That would be great.

Thanks.

Sure.

One of the exciting things about doing business on the Internet is that there are so many opportunities and so many emerging areas.

And even in traditional Internet spaces, the majority of business isn't on-line today.

As you look at the amount of video that's consumed, most it's done on a television in the living room not attached to the Internet.

If you look at most advertising dollars the vast majority is offline not on-line.

As you look at applications most are not available across the Internet or outside the firewall.

And so we think, we're very excited that you probably have at least a ten year trajectory now of steady migration from the old method to an Internet method.

So it gives us a lot of opportunity to go after customers and find growth.

We've always looked at both increased volume from existing customers by selling them new services or penetrating them more deeply with new offers.

Or frankly just their own organic growth in traffic and we still see no reason that those trends won't occur.

At the same time there are also new possibilities worldwide to find customers and we see very strong demand and very long lists of qualified leads in our system that we want to go after and talk to.

All of them don't turn out to be customers once you get in and find out all of the details.

But certainly a lot do.

And so we're encouraged by that.

I think we will continue to look for both new and managing the accounts.

Probably fairly equally split between the two as we go forward.

And one of the things we look at when we take on a customer because they tend to start smaller than ARPU is do they have a potential to grow, do they have a stable business model, do they understand the Internet?

We try to go after those that have the highest likelihood.

Then around ARPU we don't give specific guidance on ARPU.

What we say is it can go up, down or sideways.

It's not really how we try to manage the business.

We've been extremely pleased with the steady improvement in ARPU over the last several years.

Really the thing that's mitigated it is been when we have done acquisitions several times and we've done that with a history of bringing in often smaller customers who had access to fewer services and then over their first year or two with us having an opportunity to sell them more services.

Therefore seeing the total ARPU grow again as soon as we've done an acquisition integrated customers and there's no reason to believe that trend won't continue over time as well.

Thank you.

Thanks, Roberta.

Your next question comes from John Walsh with Citi.

Good afternoon.

Can you talk about the international side, you saw an uptick as far as percentage of revenue?

What are do you doing, what kind of efforts are made there and maybe is there any color you can give on the type of customers that are starting to use it overseas?

Yes, we've been seeing an uptick pretty much every quarter as we think the international opportunity is actually growing faster than the North American opportunity.

And last quarter because we integrated a couple of the acquisitions particularly managed systems that were primarily North American bases we didn't see an uptick but it's been a really positive trend.

and I think the interesting thing we're seeing is that particularly with some of the things that occurred in the North American market around media and entertainment, last year and even the year before, we're really starting to see those types of initiatives gain traction in the international marketplace and we feel like we're really well positioned to help customers in that environment.

We had the advantage of very broad global footprint already in place and we're investing internationally in our sales force and our go to mark capabilities to be able to handle those customers.

So we're very positive about the potential for growth internationally.

Okay.

And then the application acceleration that you said you'd more color in the fall, but could you tell if it was a drag on ARPU for this quarter?

I think probably the average application acceleration deal is a bit smaller than our average ARPU.

But the interesting thing is the first deals that we tend to sign there are bigger than the first deals we tend to sign on in our traditional kind of CDN business.

I think over time it's going to be a very healthy business for us and not necessarily a drag in ARPU but a real key for our growth.

Then, of course, a piece of that business comes from signing up new customers so they tend to be a bit small and a piece is adding advanced services on top of an existing customer.

So obviously that has to boost your ARPU if you take a customer who's already using your for media delivery or software downloads and then you extend into application acceleration.

And that's a boost for the ARPU.

And the terms of those deals, are they same type of deal, certain amount committed per month, for example, in the trading exchange, is that a commitment per month?

Right.

We don't price those deals on kind of a bandwidth or megabits per second type basis.

It's much more like an enterprise software sale where we price on a per application basis or occasionally with a customer who has had a unique application where we'll come up with another pricing algorithm but it's not a volume based thing.

It's more of an application sale like an enterprise software sale.

Okay.

Great.

Just one follow one.

Mix between committed and first revenue, is it about that 70/30 or is there any change there?

Yes, it's stayed roughly in that range this quarter.

Nothing unusual.

Okay.

Great.

Thanks.

Next question comes from Tom Watts with Cowen and Company.

Hi, Tom.

Hi, good afternoon.

Two quick questions.

First on the gross margin guidance.

You increased your guidance for GAAP gross margins to a 400 basis point decline from the 300 basis point.

Can you just expand a little bit further what changes you've seen to drive that?

Is it primarily in the media and imaging area , is it specific products and do you expect -- could we see -- what's your expectation seeing that further change in that during the course of the

I think the 4 points year-over-year we talked about 3 points year over year the fundamental -- the main fundamental thing is that we did accelerate our CapEx spend into the first half of the year so we expect to see more depreciation in the back half of the year.

And that leads us to see that.

We do see the trends we've been talking about which is the very large deals in the media space.

And in other spaces like in high tech as well where we get lower price points and therefore lower gross margins.

Still, at a premium to kind of a commodity or a hosted solution, but lower on the gross margin line.

But we're able to leverage those very positively in the bottom line.

And so as a result we expect that our operating margins are going to still continue to be about where we expected.

And second question, in terms of long form video, 30 minutes or longer, are you seeing much demand for that?

And also some of your competitors are focusing specifically on that.

How do you think you're positioned to capture that sort of traffic?

Do you see it as a big market?

I think it's going to be a big market.

I think if you look at the average viewing time on websites with video, it's still very short.

It's still the short attention span theater of a minute or two or three.

Now there are exceptions.

There are cases where people are watching movies and full TV shows but I think the bulk of the experience is still very short.

The exceptions being some movie sites, some television sites and sporting events, clearly, where people are watching a live game as opposed to clips.

What we found is that we're really well suited for it because performance really matters in the user generated category, the ability to handle high upload rates and fast turnaround of massive amounts of files from many, many different contributors, if you will, are all things that are flexible network and software we've developed have really helped us with and allowed us to win some key business in that space.

And our ability to handle large files very, very efficiently both to store then and deliver them.

Whether it's cold content which meaning the long tail something that not too many people want or hot content something that's in demand and suddenly you huge run on or set of requests for.

I think we're very well position there and we can see that with our relationships with many of the studios, the major networks, the leagues and other producers.

So I think there's a lot of growth opportunity there.

I think we're very well positioned.

At the same time I think the bulk of usage still remains short clips.

Thanks a lot.

Thanks, Tom.

Your next question is from Colby Synesael with Merriman.

Hi, Colby.

Hey, guys.

In terms of customer churn, have you guys seen an increase in customers coming from other CDM providers?

Or do you guys continue to see most of your customers coming from do it yourself towards you guys?

And then vice versa, have you seen any of your customers leaving of late really to go more towards a different type of provider?

And then my second question is more a little bit more on macro basis.

How are you guys positioned in terms of wireless opportunity?

Seems like we're going to continue to see a lot more demand coming from the wireless space.

I haven't really heard you guys talk much about how you are positioned for that.

In the of case churn no real change this quarter.

Nothing significant there in the pattern.

I think we've done a very good job managing churn.

We don't lose a lot of customers.

Certainly not competitively.

What we see is often a business model changes.

Often they end a project or something like that.

In terms of where we are getting customers from, we certainly win from our competitors.

But I also think that a lot of it is new opportunity as we just talk to people who are moving their businesses on-line increasingly.

Again, churn was under 4%, kind of close to the target range we've had.

And that's raw customers not revenue the customers we tend to churn tend to be very small relative to average ARPU so they represent an even smaller fraction of revenue than customer account.

In the area of wireless, we have talked about wireless on a number of calls.

We're every excited about it because if yo're accessing a website that we deliver whether on a wireless device or a broadband big screen device in your home, it's probably being accelerated by Akamai.

We deliver a great deal of the video to wireless devices in the states.

For example, that's often done under the covers.

It's not branded Akamai, of course.

And we're seeing more and more going on there.

Again, really reflecting back on the comments or my answer to Tom's prior question, most of the video there and audio is definitely short attention span theater.

People are not watching entire movies over a live cellular connection today.

So again it's short.

What we're seeing is some growth there.

Significant growth.

But again on a small number.

And I think that we're very well positioned because in wireless because if you were the last mile, it's so small and so narrow, there can't be any latency or performance problems upstream and we can help the both content provider and the wireless network to make sure there is no upstream problem.

And in fact we are doing that today for several of the largest carriers.

Okay.

I can just get one more question in.

In terms of Nine Systems and net Wii, are those acquisitions tracking to what your expectations were when you first announced them?

We're very pleased with the integration efforts.

We're a functionally oriented Company.

so we don't leave -- tend to leave an acquisition sort of hanging out there as a separate operating group.

We incorporate all of the functions.

We find it's much more efficient and try to tuck in the customers, transfer them on to our network.

And we are very pleased with how those have gone so far.

And our ability to take some of the technology or offers and start to roll them out to the broader set of Akamai customers.

Operator?

Your next question is from Darren Aftahi with ThinkEquity.

Two quick questions.

Can we get an update on Red Swoosh on relation to your comments about long form content?

And then my second question is, with Google acquiring DoubleClick, has your relationship with DoubleClick changed at all in terms of customer?

We don't tend to comment on individual customers.

So I have no change there to tell you about.

In the case of Red Swoosh, we really haven't made any public product announcements.

Sorry to disappoint you on that one as well.

I don't have anything to announce today.

We think it was a terrific acquisition for us.

We think integrating that technology into Akamai's content to deliver capabilities and back end control system to protect the rights and business rules of our customers will lead to some really interesting new capabilities.

But, at the time we did that acquisition earlier in the year, in Q1 we said we didn't have a product announcement then.

We're going to integrate the technology and add it to our offers over time and that's exactly the path that we're on.

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

Yes, two quick questions.

First of all, the commentary about the seasonality for Q3, can you just talk to -- it sounds like it's coming to more clarity for you or with more conviction that you'll see seasonality in that quarter.

Can you just talk to what's giving you that increased conviction of seasonality?

And then the second question goes to the net customer ads.

Understanding there's lumpiness there and you don't want to pin it down on any given quarter.

Can you talk to us on a two or three quarter rolling average where you think we might be six, nine months out in terms of net adds?

In other words are we generally in this category as you see it or is there a longer term trend one direction or the other?

Thanks.

Just go backwards.

On the customer adds, if you go back literally over the last eight or nine quarters we've done between 70 and 90 net new customers every quarter.

That's kind of a consistent add rate that we've seen.

And we're comfortable with that rate and while we don't project it going forward, looking at the traction we've gotten there we're very pleased to see that kind of customer adds every quarter.

So I think that's positive.

If your first question was on seasonality.

Right.

Your comment of the Q3 seasonality seemingly with a little more conviction or clarity that we're going to see it.

I was curious what is giving you a little more conviction or clarity on that?

I will let J.D.

answer more fully but one thing is that it is actually July so we're in the season so we have real data.

And first thing I will point out that third quarter beat the first quarter in the last couple where we haven't had a acquisition to add to our gross.

So obviously that contributes a little bit.

Last year which was exceptionally strong growth and kind of major macro trends going on in the media space.

We also had the tailwinds of the Vista download in the third quarter that kind of bolstered the whole software growth industry.

And we've alway prior to last year seasonality is kind of a way of life in terms of Internet usage and so we're just expecting to see a return to that and that -- what that means for us generally is a little bit slower growth in Q3.

But much stronger growth in Q4.

So that's kind of what we're expecting for the back half of the year.

Sure.

Okay.

Thanks.

Your next question is from Sameet Sinha with Kaufman Brothers.

Yes, thank you.

In terms of speaking about Red Swoosh, can you give elaborate on your strategy there?

What are you expecting to do with that acquisition?

Is it totally going to be focused on media and entertainment vertical or are there other applications?

Secondly, in terms of your international opportunity, can you talk about how you're targeting your customers there?

Is it direct sales force or mostly resellers?

Sure.

Sameet, this is Paul, I'll take both.

Again, I'm not going to add too much color to the Red Swoosh acquisition, we talked about in some detail when we closed the deal and first announced it.

And when we're really ready to make product announcements we will.

Clearly it can apply to large file delivery especially non-live events.

So that lends itself to large media files and also potentially lends itself to software and gaming and any kind of a large payload that where you need lots of capacity and it can be done potentially in non-realtime where you can use some edge resources combined with more traditional content delivery resources.

And as we grow this capability we'll make product announcements when we are ready.

I'm sorry to disappoint you on this call, but this is not the forum for us to make product announcements.

Our international strategy is a mix of direct and channels, they're much mirrors what we've done here.

Looking at the same markets as they emerge, what we've seen is access Internet services like we provide tend to take off first in the U.S.

and then a little more slowly or lag behind a little bit internationally.

We've used resalers very effectively in some markets and others direct has been more successful for us.

And I think we'll continue to look at it as a case by case basis across Asia and Europe primarily of whether we'll go direct or channel.

And in some markets we do both as we do in the states.

Very similar pattern.

Okay.

Thank you very much.

Thank you.

Your next question is from Katherine Egbert with Jefferies.

Hi, good afternoon.

I have a question regarding the price decreases you talked about a bit on a call.

What is coming from, are they your own doing or is that something that you're getting for competitive reasons or customers pushing back?

Well, as you know with the history of our business, one of the things that we've done effectively is drive cost out of doing business on the Internet.

And we've been able to reduce unit costs every year for the last nine years and frankly it enabled peoples business models.

So the prices that were charged, not just by us, but even more sort of traditional purveyors of Internet capacities that are just pure transit for example were much higher a decade ago.

And we come to business models that are gaining traction, as to particular in the media and the entertainment space would not have worked ten years ago.

That's what we saw in many ways with the first bubble when it popped because there was no support for the business models in the cost structure.

So we work really hard to drive unit costs down.

Share that with our customers and it's led to really the dramatic growth of business you've seen every year over the last several years.

And we see continuing the offset for us is we're very effective at driving our own costs out.

And as customer volume has increased as it has for the last several years, especially consistently as w've been in business it's allowed us to grow accounts and grow profitability while driving costs down.

And that pattern continues, our customers understand what goes on with the cost of raw ingredients, if you will, bandwidth, servers, et cetera, and they compare what we to lots of competitive offerings including the cost of doing it themselves, so that dynamic has remained very consistent.

And the really the deal that we made successfully with the marketplace is if you grow your business we'll help you do it more efficiently and you'll help us grow ours and that continues really across every single vertical.

It's not just relegated to the media vertical at all.

It's really in every category as people try to leverage the Internet more, they need to find ways to get efficiency and scale and we've been very effective at helping them do that.

Okay.

Does the leverage mainly in the EBITDA margin come mostly out of sales and marketing?

I'm sorry, I couldn't understand what you said?

The leverage on EBITDA margin?

Right.

Where does it come out of?

Yes, the biggest -- it comes mostly out of the rapid growth on the revenue line and we continue to invest in sales and marketing and in engineering.

But not nearly at the pace of our revenue growth.

And we don't feel the need to invest at that pace.

We'll continue to invest very rapidly, but really the scalability comes from how rapidly the top line is growing.

Thank you.

And last one, can you comment on the court order that was filed post the Markman hearing?

There was no court order post the Markman hearing.

The Markman hearing was one more step in a very long legal process.

We don't comment on active litigation.

We understand that's a very long process to demonstrate with a we think the facts are.

And we'll see how that plays out over the long term.

Okay.

Thanks.

Operator.

Your next question is from David Hilal with Friedman, Billings, Ramsey.

It's actually Michael sitting in for David.

Hi, Michael.

How are you today?

Good.

I'm just curious, what is the average change of price you're seeing for customers whose contract are up for renewal?

We don't give detailed pricing information.

But what we do talk about a little bit is what we've seen in the changes in the raw material costs which has been pretty consistent year over year, in the change in bandwidth, pricing and pretty similar changes, prices remain consistent over the last year.

Pretty much in line with our expectations.

So is it safe to say that on a dollar per bits basis that has been reduced?

We continue to, yes, we continue to drive down the price per bit that it costs us to move data and the price per bit that we charge our customer.

Okay.

Thank you.

Okay.

Your next question is from Richard Keiser with Sanford Bernstein.

Hi, I just wanted to clarify, the guidance you gave for the mid-point of the guidance you gave for next quarter was 159, is that right?

Well, 147 to 1, I'm sorry, 157 to 162.

So I guess it would officially be 159.5.

Okay.

And then the guidance for the end of the year you said was again just clarifying, 615 to 625, did I hear that correctly?

That's correct.

Okay.

So that implies the number of like 170 for Q4 which is about 33% below the Street and maybe 35% year-over-year growth, is that correct as well?

I'm not sure about --

Wouldn't be below the Street, that number you're looking at in.

Guidance is roughly consistent with the models that we saw on the Streets.

Right, no, consensus is 170, but that's immaterial.

174 right now.

The rate year-over-year compare is going to be -- sorry, just for doing it live with you.

126, is that right in Q4 of '06?

That's we did.

So that'd be 35% growth versus like 53% growth or 51% growth this quarter, right?

And I know there's acquisition in there.

But can you talk about what's driving this kind of deceleration?

It seems pretty abrupt.

You have two acquisitions in Q1 and Q2 and last year.

You don't have that here -- I don't think the numbers have been very consistent.

We've talked very consistently about the quarterly numbers and in effect what we've done here is gone to the higher end of our range for the rest of the year.

So we've been pleased with the year and it's really unfolded as we thought going all the way back to late last summer when we started to talk about it.

But that implies those acquisitions are growing faster than your slower than your core organic growth rate, right?

I'm sorry, I don't think we should do this math live because --

Well, I mean if the net -- you understand where I'm going with the questioning, right?

Okay.

Fine.

In terms of the announcement with respect to the board, can you talk about there's been some other chatter in other avenues like Juniper for example announced that it is doing trials with advertising and you recently brought on Mr.

Kenny who was at Digitas.

Can you talk about the opportunity you see and potentially using your knowledge of content streams and who's watching what to pair that with an advertising offering?

The delivery of web base advertising is a very important component of our business.

We worked with 19 the 20 largest ad servers.

Many of our customers in the media vertical they have business model their entire business model is predicated on on-line advertising.

Understanding that and understanding what's important to them, how to do it more effectively I think are all things that we try to do well and need to continue do well and bringing David Kenny on with his understanding not just to the advertising market but the Internet business model, I think will be a good contribution to our board.

I believe we had a strong independent board and David will just enhance that, particularly with his expertise in the era of Internet, Internet marketing and Internet advertising.

Just one thing incremental.

Don't you have very good information about who is receiving which streams?

And if so, are you monetizing that with advertising to any extent at present?

Let's be very, very clear.

We do not collect any personal data on anyone on the Internet.

We deliver content on behalf of our customers but we have no personally identifiable information.

We do not collect data on what an individual does on the Internet or share that in anyway with people.

Okay.

All right.

Thank you very much.

Yes, thank you.

I think operator we have time for one more question.

Your final question is from the line of David Hilal with FBR.

Thank you.

My question's been answer.

Okay.

Thank you, David, and thank you all for calling in.

And we look forward to talking to you next quarter.

Bye.

This concludes today's conference call.

You may now disconnect.