阿卡邁科技 (AKAM) 2007 Q3 法說會逐字稿

Good afternoon, I will be your conference operator today.

At this time, I would like to welcome every to the Akamai third quarter 2007 earnings call.

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

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

(OPERATOR INSTRUCTIONS) Thank you.

Ms.

Smith, you may begin your conference.

Thank you.

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

Speaking today will be Paul Sagan, Akamai's President and Chief Executive Officer; and JD 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 those 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 with generally accepted accounting principles.

And you can find definitions of these non-GAAP terms and reconciliations of 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.

Paul?

Thank you, Sandy.

And thank you all for joining us today.

Q3 was another record quarter for Akamai with strong revenue and earnings growth.

Financial highlights for the third quarter include revenue of $161.2 million, a 6% increase over the second quarter and a 45% increase over the third quarter of last year.

Normalized net income of $62.4 million, or $0.34 per diluted share, that is a 13% sequential improvement and a 49% increase over normalized net income from the same period last year.

In addition to these strong financial results, we were very excited about the launch of a number of new initiatives and relationships.

We were delighted to announce our expanded partnership with Starbucks and Apple to launch the first instore delivery service for online entertainment content.

We also extended our commitment to the B2B market with the launch of a comprehensive managed service that accelerates the performance of any IP based application across the Internet.

I will be back in a few minutes to talk more about these projects, to offer some thoughts about the latest trends we're seeing across the business but now let me turn it over to J.D.

to review our third quarter results in detail.

J.D.?

Thanks, Paul.

As Paul just highlighted we had a very solid third quarter with revenue growing 6% sequentially, and 45% year over year to $161.2 million.

As expected, we experienced some seasonality in the summer months, but a strong pickup in September got us to the high end of our revenue range.

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

Resellers represented 18% of total revenue, 2 points lower than the prior quarter, we added 61 net new customers in our target markets this quarter, bringing our total customer count to 2,616.

As we invest in our sales and solutions, our primary focus is on attracting and retaining high value customers that will grow with Akamai.

We focus on the overall quality of new signings rather than the volume of signings.

We have also continued to expand the relationships we have built with leading companies across all segments of our business.

Our consolidated ARPU or average revenue per customer grew again to $20,600 in the third quarter, up 3% over our second quarter ARPU and 18% higher than the same period last year.

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

Our GAAP gross profit margin which includes both depreciation and stock-based compensation, was 73% for the quarter, about 1 point lower than Q2.

And cash gross margins were 82% down about 0.5 point from last quarter.

These results put us on track to deliver on our full-year gross margin guidance that we gave you in July.

GAAP operating expenses were $81.7 million in Q3, slightly below the prior quarter.

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

Excluding these noncash charges our operating expenses for the quarter were $60.5 million, also slightly down from the prior quarter.

Adjusted EBITDA for the third quarter was $71.9 million, that's up 10% from the prior quarter, and up 54% from the same period last year.

Our adjusted EBITDA margin was 45%, up 2 points from the second quarter, and up 3 points over the same period last year.

Total depreciation and amortization for the third quarter was $19.2 million, up from $17.6 million in the second quarter.

These charges include $14.1 million of network related depreciation, $2.3 million of G&A depreciation, and $2.8 million of amortization of intangible assets.

Net interest income for the third quarter was $5.9 million.

Moving on to earnings.

GAAP net income for the quarter was $24.3 million, or $0.13 of earnings per diluted share.

As a reminder, our GAAP net income includes noncash charges for stock compensation related to FAS 123R and book tax charges at an effective annual rate of 41%.

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

During the third quarter, our stock-based compensation expense was $16.9 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 on the Investor Relations section of our website.

Additional noncash items in GAAP net income for the quarter include $2.8 million from amortization of intangible assets, and a $17.8 million noncash tax charge.

Excluding these noncash items, our normalized net income for the third quarter was $62.4 million, up 13% over last quarter, and 49% higher than our normalized net income from the same period last year.

In the third quarter, we earned $0.34 per diluted share on a normalized basis, just above the high end of our expectation range.

Our normalized weighted average diluted share count for the quarter was 186.8 million shares.

Now, let me review some balance sheet items.

Cash generation continued to be very strong, cash from operations for the third quarter, was $77.4 million, and on a year to date basis we've generated $171 million.

That's up 56% over the same period last year, at the end of Q3 we had $566 million in cash, cash equivalents, and marketable securities on the balance sheet.

Capital expenditures for the quarter declined to $24.9 million, in line with our guidance for the full year.

Days sales outstanding for the quarter were 59 days, up from 56 days in the second quarter.

We're very pleased with our third quarter results.

As we expected, we saw some seasonality to the traffic growth during the summer months, but a strong September allowed us to reach the high end of our revenue guidance for the quarter and this revenue performance combined with the continued scalability of our overall business enabled us to exceed our expectations on the bottom line.

With our third quarter results behind us, we are on track to meet or exceed the high end of our revenue guidance for the year and we now expect revenue to be between 625 million and $629 million, or 46 to 47% annual growth.

For normalized EPS, we now expect to deliver EPS in the range of $1.28 to $1.29 or 45 to 47% year-over-year growth which translates into normalized net income growth of at least 52% for the year.

Excluding capitalized equity compensation, we continue to expect our CapEx to total just over $100 million for the year, or between 16 and 17% of revenue as we said last quarter.

On margins, for the full year we continue to anticipate that GAAP gross margins will come in around 74%, and cash gross margins will be around 83%.

We also believe that we are on track to deliver adjusted EBITDA margin improvement of 4 to 5 points year-over-year, again as we guided last quarter.

Given the increased pace of customer demand in September and October, and given that Q4 has typically been a strong quarter for us, we expect our sequential growth to accelerate in the fourth quarter.

Specifically, we anticipate revenue in the range of 172 million to $176 million.

At the midpoint of the range, that represents about 8% sequential growth and 38% year-over-year growth.

We're expecting normalized earnings per diluted share for the fourth quarter of $0.37 to $0.38.

$0.03 to $0.04 higher than the third quarter.

Driven by normalized net income improvement of at least 10% sequentially, and 43% year-over-year.

Looking further ahead, Akamai will celebrate its 10th anniversary in 2008.

And for 10 years we have been a trusted partner for the most innovative businesses online.

And as we enter our next decade, we're more excited than ever about the new developments and opportunities across all of our segments.

With the recent launch of several new capabilities, such as large file optimization, network advancements enabling high definition content and the introduction of our IP based application accelerator, we continue to support our customers most challenging initiatives and demand for online content continues to grow with exciting early signs of traction for new video opportunities some of our customers are pursuing.

It is still very early to project our financial performance for 2008, and we will have much more visibility after we see our Q4 results.

But we are optimistic about the marketplace, and we think we are in a unique position to capture many of the developing opportunities.

We think it is imperative to invest in areas that will extend our leadership in performance, quality, scalability, and innovative solutions that help our customers succeed online.

As for early guidance, we believe that we will grow both revenue and normalized EPS by 25 to 30% in 2008.

We expect the trends on gross margins and operating margins to be similar to what we're seeing in 2007.

Namely, continued unit price declines, particularly in the median entertainment segment offset by continued cost reductions and operating efficiencies in our model.

We will provide more detail on our 2008 expectations as well as our long-range model when we update you about the entire business during our investor summit and simultaneous webcast on October 30.

And we will further update you on our full model as we always do on our fourth quarter earnings call early next year.

Now let me turn the call back over to Paul.

Thanks, J.D.

As J.D.

just detailed, the third quarter was another strong quarter for Akamai.

Revenue came in at the high end of our expected range, as we benefited from strong demand during September as the summer seasonality moved behind us.

As business accelerated, we were able to drive operating efficiencies and generate earnings above what we were expecting.

These solid results position us to finish the year strong and support continued progress toward our goal of becoming a $1 billion software services company.

Last year, we set out to achieve the $1 billion revenue goal by the end of the decade.

With the financial performance we've delivered to date, we believe we are well on our way to achieving that goal by 2010, or even 2009.

We've demonstrated a disciplined focus on building value for the long term through a commitment to innovation which we believe is critical to supporting the rapidly-evolving needs of leading enterprise customers.

To date, Akamai's innovative capabilities are enabling our clients to launch and support some of the most challenging online initiatives.

We have delivered some of the largest software and media files to an increasingly massive globally distributed user base.

Akamai has supported groundbreaking viewership for live events over the web and we have helped to enable immersive shopping experiences that are personalized for each consumer.

Because our customers keeping finding ways to build new businesses on the Internet we responded by continuously developing new solutions to meet their unique and distinctive strategic challenges.

All while setting the highest standards for quality, performance, speed, and reliability.

One of these exciting new initiatives is the recently announced partnership between Apple and Starbucks.

This revolutionary product will help transform the way people discover and buy music and it's being enabled by Akamai.

By powering content delivery service right in the coffee house, Akamai is shrinking the distance from users and the content they want down to the last 10 feet.

That is far closer than the last mile or the thousands of miles that historically separated Internet users and the content and applications they wanted to reach using other delivery methods.

This raises the bar on the user experience by providing a new level of personalized and compelling features for online commerce, and entertainment.

And it is R&D and operational excellence from Akamai that are making it possible.

Significantly, we're able to support initiatives like this as an extension of our existing capabilities.

That is because the investment we've made in the scalability and flexibility of our highly distributed network, and the software that makes it work is extended to support new ideas from our customers.

In addition to exciting customer initiatives, Akamai also announced several new product innovations this quarter.

Through our direct experience serving the most -- most of the leading online entertainment sites, we have been evolving with our customers as they shift to higher and higher video quality.

We believe the next big change is the jump to high definition video.

Put another way, we're starting to see the introduction of video entertainment online that can be a substitute for old-fashioned TV.

In this technology is -- as this technology is broadly enabled, we believe we will see the next inflection point in the use of the Internet.

And Akamai is helping to lead this transformation in a number of ways.

Most recently, we introduced enhanced technical support to enable the delivery of consistent high definition video experiences.

To showcase these capabilities we plan to launch HD web later this month.

An initiative that brings together a number of powerful online brands at the forefront of rich media experiences.

Akamai will work with participating customers to power a collection of high definition entertainment offering Internet users a glimpse into what the Internet of tomorrow will look like.

We believe it will demonstrate an experience that only Akamai can power using our unique scale and capabilities.

We are very excited by this development because we believe that the requirements to deliver an HD experience online to television-sized audiences can best be enabled using Akamai's highly distributed network, to place its content near end users in thousands of locations at the edges of the Internet.

In a related development, we also announced the launch of our large file optimization technology.

This allows software, gaming, and media, and entertainment companies to better manage and deliver very large files.

By dividing these files into smaller pieces, Akamai can now offer extremely flexible storage, delivery, and management options that ensure a high quality user experience while also providing greater flexibility and efficiency to content providers.

In the area of application performance services, we have just announced the availability of our new IP-based application accelerator.

This new solution allows enterprises to improve their performance and availability of applications used by employees, partners, and customers.

Whether those applications use a web-based or any other IP protocol.

We believe this is a significant strategic extension of our existing capabilities in supporting online applications, and it leverages the technology we integrated with the Netli acquisition.

As enterprises push more business processes on to the Internet, Akamai's managed service approach is designed to create a secure, reliable, and high quality environment for mission critical applications.

We remain very excited about the potential for our B2B acceleration services and solutions.

And we will be providing an update on this market as well as on our traditional content delivery business at our investor summit next week.

As J.D.

just detailed we believe we are well on the way to completing an outstanding year at Akamai.

We're also very excited about the potential to continue expanding our business in the coming years, as enterprises migrate more and more critical processes on to the Internet.

And a common set of principles tie together our long-term strategy.

Akamai is committed to investing in innovation that helps our client's online business model.

Akamai will relentlessly search for ways to continuously improve Internet performance and Akamai's ecosystem of customers, networks, and technology will continue to drive differentiated value for our customers and shareholders in a way that is extremely difficult to match.

In our first decade of business, we believe we put ourselves on track to reach $1 billion in revenue.

And we're looking forward to talking to you next week about some of the innovations and opportunities that we believe will help to continue driving our growth even further.

Now, J.D.

and I would be pleased to take your questions.

Operator, the first question, please?

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster.

Your first question comes from Tom Watts with Cowen and Company.

Hi, Tom.

Tom?

Operator, we're not hearing Tom.

One moment, please.

Mr.

Watts, your line is open.

Why don't we take the next one and come back to Tom.

Your next question comes from Todd Raker with Deutsche Bank.

Hi, guys.

How are you?

Can you hear me?

That's better.

Hi, Todd.

Can you guys give us a sense, cash gross margin, deteriorated a little bit more this quarter.

You guided to a bar for the year.

But if we look longer term I think the biggest concern that I hear from investors is relative to your competition, your cash gross margin is quite a bit higher.

How do you think strategically over the long run we should be thinking about that, and just kind of quantify your ability, if you continue to drive EBITDA margins higher as the cash gross margins decompressure.

All right, Todd, why don't we take that and maybe you can mute in the background.

J.D., why don't you pick that up.

All right, we've -- really, the history of Akamai, we've seen price declines, we're in an IT business, and that has continued, but I think if you look over the life of it, there are probably periods where price declines are a little bit faster, sometimes they're a little bit slower and we don't see any fundamental changes in that.

I think the M&E space is a particularly price sensitive space really driven by volumes, bigger volumes driving lower prices, and so that has driven a bit of an uptake here, but I think there are three points that I have made with investors and would emphasize.

The first is while there is plenty of competition out there, the fundamental market driver here is the rate of volume growth.

And I really believe there is a natural relationship between price and volume.

That also drives the EBITDA relationship that we've talked about.

So you get more volume onto your network, you're able to scale better on the bottom line.

And we've seen that over the last few years.

The second point--.

J.D., one second.

Todd, I think if you could mute, I'm not sure if that static is drowning us out or not.

Hi, guys, I am on mute and I can hear you fine.

Good.

I don't know where the static is coming from but if you can hear us, we will keep going.

The second point, really an extension of that is when we think about profitability and margins, we're focused on improving the profitability on the bottom line as we scale.

And then the last point, probably more directly to your question, is we've continued to command a premium for the solutions that we offer to our customers, which are significantly differentiated, and in many cases, they're entirely unique, there are things that our competitors really are just simply unable to do based on either their architecture or their capabilities or the amount of investment that we've made in the software, and that's something that we'll -- we have spent a lot of time educating our customers, our investors, and we will spend a lot of time talking about that on our analyst day as well.

So hopefully that answers the question fairly broadly.

And let me just add that I think the most important is that we don't bring a plain vanilla one size fits all solution to market.

We understand our customers' businesses, what the levers are to increase their revenue, or drive costs out of their business, and our solutions are targeted to that, and I think our customers, while they're always interested in what are relative price, they measure us against how much we improve their business and I think that's why we've been so successful for nearly 10 years.

In the face, frankly, of continuous competition the entire time.

Operator, next question?

Thank you.

Your next question comes from David Hilal with Friedman Billings Ramsey.

First, on your margin comments for '08, I think you said the trends will continue for gross margin, and operating margin, I guess as I understand the direction of the trend, obviously, gross margin has been coming down, operating margin has been going up, but I wanted to see if what you also meant was the magnitude would be similar, right, so this year, gross margins look like they're down about 400 basis points, while operating margins would be up maybe 200 to 300 basis points.

So when you say those trends will continue, are you talking directionally or are you also talking about the magnitude will be similar in '08 than what we saw in '07?

David, we're really talking directionally at this point, it is still pretty early to lay out a full model for 2008, we're comfortable talking about top and bottom line growth and directional trends on the income statement, but at this point, we're not going to give any more detailed guidance on where we think the magnitude is on the ups and downs.

Okay.

And let me ask you on your costs for bandwidth, can you comment a little bit about the trends you're seeing from your cost standpoint?

We don't see any really significant changes in that environment.

Keep in mind that we're a pretty unique bandwidth buyer because of A, the quantities we buy, and B, the relationships and the way we work the traffic with our network partners, and network providers, and C, the relationship we get with some of the ISPs where we actually don't pay for the traffic.

So a little bit different than the overall transit market, I would say.

Okay.

And then my final question, when you look at your ARPU, which has been nicely increasing on a consistent basis, if you had to split that out roughly between how much of that is increased volume, versus cross-selling some of the other value-added services you provide, I'm just trying to understand what is really driving that ARPU increase?

Sure.

It is really, Todd asked this question before but it is difficult to really split those because of the way we sell by solutions but our rule of thumb is it's roughly half and half, maybe it's leaning a little bit more to the traffic side but roughly half and half is about as best as we can quantify it.

All right.

Thank you.

Operator?

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster.

Your next question comes from Aaron Kessler with Piper Jaffray.

First, on the HD adoption, how early do you think we are in what stage of HD adoption?

And then a couple of follow-up questions.

Well, we're in Boston, so we will use some baseball analogies.

And we're not even in spring training, I think, on HD.

Which is the really exciting part.

It is about to get going.

We've seen a steady increase of video over the last 10 years on the web.

And we're starting to see the first events that compete with television.

In audience size.

And in sort of comparable TV quality.

And I think that what the content providers are understanding is that for the Internet to compete, to compete with TV, it has the -- any content, anywhere, any time advantage, but it has to have a comparable quality, meaning big screen quality so that it competes with the standard TV screen in the home.

And just beginning to see that emerging, and I think that based on the conversations that we're having with our customers, you're going to see DVD and HD offers coming this fall and into next year.

So I think that we're going to see some really interesting developments over the next 6 to 12 months, we're going to feature some of those in the initiative that we're going to launch soon, with some of our customers, really showcase what is available on the Internet because I think people will be really surprised at the quality that can be delivered.

And I think we are going to see inflection points over the next several years, and some really exciting developments.

But we are very, very early.

And I think one of the keys for Akamai has been identifying these trends early, like application acceleration and the migration of applications to the Internet, and video to the Internet, and now television quality Internet, and enabling that for our customers, and I think that has done very well for our business, and we expect that it will be a real driver going forward, Aaron.

And just a couple of questions for J.D.

If you can give us a sense of the churn rate or directionally where that is headed, the organic growth for Q3, as well as if you can just clarify, I think the guidance you gave, you said it would be roughly 25 to 30% growth at least for '08 for revenue, and pro forma EPS.

Is that correct?

That's correct on the guidance, and churn was again between 3 and 4% which is where it has been for a while and that seems to be a structural rate for us and it tends to be the smaller customers who churn out.

And then finally the organic growth?

Mostly organic in the quarter?

Well, we did have acquisitions in the quarter that we didn't have in the fourth quarter of last year, but there are no new sequential acquisitions.

So I think if you went back and looked at Q4 last year, we had less than $1 million from nine systems, and now, we have two businesses that kind of are on a 25 million to $30 million run rate.

So it is still primarily organic growth, obviously.

Great.

Thank you.

Operator?

Yes, sir, your next question will come from Mark Kelleher with Canaccord Adams.

Hi, Mark.

I had a quick question on competition.

There is a new entrant coming into the market soon and I just wanted to get your thoughts on the possibility of bundling transports with the CDN.

It seems like that logically might give an advantage to the owner of the transport, if they own both, and help on the gross margin side and maybe the pricing side.

Can you just give us your thoughts on that?

Well, that's not a new model.

That has been around and tried for the last 10 years.

We've had lots of single networks that have had one or more CDN offers, and we think that that is a great story for us to go into a customer and talk about, because the truth is that the largest single network in the world delivers single digit share of dated end users and pretty rapidly you go down to networks who deliver almost no end user data and in fact some of the largest transport networks have almost no end users.

So if you're a content provider, you're sitting there saying who is going to deliver my content to the end user, well, it is ISPs, it is actually not transport network.

So the person that you're going to buy data center connectivity to and you need that if you're going to be on the web at all for all sorts of things is not the person I think you want to talk to to deliver content to end users reliably around the globe and the Akamai model of distributed delivery inside nearly 1,000 networks in thousands of locations gives us a differentiated performance and scale that our customers recognize.

So that bundle doesn't really work very successfully in my model and in our experience, we've seen it for really almost a decade, so you know what I always say is we take competition really seriously, the water is fine, come on in, there is plenty of people here in the pool already but if others want to come in with that pitch, that's fine.

I think we will do really, really well because it just doesn't satisfy what the content producer really needs.

That's helpful.

And then switching gears onto acceleration.

Sorry if I missed it, but did you size that for the quarter?

The growth, the percent of revenue?

We did not and we historically haven't, we have given updates once a year at our investor summit and we will be providing some insight into the scale of that business where we think it will exit the year and some exciting initiatives there that really follow onto the recent announcement that we now can support any IP-based application.

We think that that is really significant.

We certainly started with web-based applications because that is the space that we were in and we understand the web-based protocols and had been supporting that as a fundamental tenet of Akamai service.

So it took a little bit more R&D, a little work integrating technology for the Netli acquisition but we think now it really completes the portfolio, if you will, to go into an enterprise customer and say let's talk about your applications on the Internet regardless of the protocol they're using, we can make them work better which means we can drive your adoption up and therefore drive more revenue into your business or costs out as you move to the Internet and off of a call center model or a dedicated network model.

So we're very pleased with the traction this year, and we think this sets us up to do even better as our customers are starting to understand that no matter how many appliances they buy, no matter how well their data center is provisioned, frankly, no matter how good the transit is they bought to their data center, they can't solve the network layer problem for outperformance and that's the name of the game to drive adoption and we have really the only managed service today that handles this in such a unique and simple way and cost effective way.

So we are really encouraged by what we've seen.

We think we've got a good update for you next week and we look forward to sharing those details then.

Great.

Thanks.

And congratulations on a really good quarter.

Thanks, Mark.

Your next question comes from Michael Turits with Raymond James.

Hi, guys.

Hi, Michael.

You gave guidance for next year on the top line of 25 to 30%.

It looks like your guidance for the fourth quarter give you an exit rate from this year of about 38% top line growth.

So at least in the guidance, you guys are decelerating..

What are the drivers to that deceleration, I mean, just price and quantity, are you seeing traffic growth rates decelerate?

Or are they the same and it is more of an effect of pricing?

So we're still seeing, Michael pretty incredible traffic growth rates, but not at the rate we were seeing when we hit this first inflection point of broadband.

That really kind of carried us through '06 and the early part of '07.

So I do think while we're seeing tremendous growth, that rate of growth has slowed a bit.

The question that we all have, and we have talked a lot about is what is that next inflection point.

We think it is obviously go be to be driven by a push toward higher quality video and in most of our minds it is not a question of if that happens, but when that happens, and so that's the thing we look at, the most.

And it is really early, frankly to be talking about what we think is going to happen in 12 to 15 months down the road, in terms of growth, and certainly the impact of that inflection point with video could change a lot of things.

But at this point, with what we see, and given that we have seen a bit of a deceleration into the back half of this year, we think 25 to 30% is a pretty good growth number.

And are those decelerations across the board?

Or are they -- how do they stack up on your sectors?

Is media decelerating as well?

Well, media is the one that is most price sensitive on the business model and also the very highest volume.

So it is different -- we will share with you some interesting data on gross margins and then bottom line margins next week, which I think explain the leverage in our business in a way that is very positive.

It is also very early next year and as you know, we tend to try to only call what we can see.

We're not predicting the shift to television happens next year.

We think it is just beginning, this HD world, as we call it, our HD web for television, and so we're really pleased with what we're seeing, and we will call it for what we can see going forward.

Okay.

And then if I could just sort of just stay with -- sort of arithmetically obvious from the guidance of 25 to 30% both revenue and EPS growth but that pretty much implies that your EBIT growth will be in line with revenue growth, so in other words, margins kind of flat year-over-year on an EBIT basis, and then since depreciation is accelerating, I would assume that that means that you actually can get an expansion in EBITDA margins.

Does that basic arithmetic make sense to you guys?

That's the trend we saw this year.

This year, we will end up with kind of 46, 47%, revenue growth, and EPS growth, with EBITDA margins expanding, and even EBIT, our normalized net income margin expanding because we have share count growth as well.

2007 was a year where we made significant investments and in addition three acquisitions, and absorbed that into the model, and I think 2008, as I have talked about and Paul has talked about, we think it is really important to keep investing for the growth of this business, and we spent a lot of time challenging ourselves to make those investments, make them as productive as possible and then drive efficiency in the model so we can drive bottom line growth as well.

Okay.

Guys, thanks very much.

Thanks, Michael.

Talk to you later.

Your next question comes from John Walsh with Citigroup.

Hi, John.

How are you?

Paul, can you talk about the monetization that you're seeing on your customers on the media and entertainment side?

Where do you think they're at with that?

And could that be the inflection point that everybody is looking at if they get a call at the advertising base support model, into their delivery of their video content?

I think that is one of the crucial chickens and eggs here that is going on, which is the monetization is beginning.

There are some models that are really working.

But it is still pretty early.

The bulk of the marketing dollars are still offline, not online and even the online ones, most of them are not in video.

But that is changing.

We're seeing that with a real rise in the rich media advertising servers and how their businesses are growing, but again, not all of that is true video.

And I think people are still playing around for what model works.

And here the consumer is pretty impatient with the 15 second preroll that comes before the 45 second clip, that is a worst ratio than watching TV without the ability to fast forward out the commercials, if you will.

So I think people are still playing around with that and it is just beginning.

We're certainly seeing it with entertainment and sports content, and I think that it is a little less clear in some of the web 2.0 models.

We're seeing some of those players, particularly those that are user generated content and video intensive with large traffic, but very questionable models, so we've been pretty cautious in those spaces.

We like to have customers who we know have models and will grow with us and pay us over the long term.

And so I think that you're going to have some consolidation at some point with so many new entrants coming in with unproven models, but overall, I think that you're going to see this as a big net positive, as the audience moves, clearly the marketing dollars have to go with it.

The other interesting thing is that we're seeing a lots of, if you will, brand sites that are rich media experiences as marketers don't necessarily like to put their commercials in the middle of somebody else's TV program, they can create compelling reasons, content, competition, contests, if you will, that drive people to their own sites, so a lot of our business, in, if you will, the commerce space, or the enterprise space is people who are creating rich media experiences with video and audio and if you will original programming and that is pretty exciting where they can -- if you will, get a captive audience and give them their message that isn't just an interstitial in somebody else, and I think that is a big piece of the video migration and also good for our business, especially with enterprises who want great reporting, analytics, security, and then at the end are doing a transaction and need to capture the commerce dollar, our dynamic capabilities which I think are really unmatched in the industry, give us the ability to provide a much more compelling solution to people who are really content providers even though you wouldn't really traditionally think of them as an M&E customer, and they have to richen up their sites, not just because there is an upside potential in their business but if they don't have a rich media site it would be like running a black and white TV commercial the audience would just think you weren't keeping with the times and that would hurt your brand.

So we think those are overall positive trends for us.

And then just one on the non-media and entertainment.

Or the E-commerce and advertising side.

As we move into the shopping season, the holiday season, anything that you're seeing as far as online retailers trying to do more things, and is it the same pace of innovation or do you see some interesting things coming down the pipe, whether it's traditional retailers more focusing on the web or on the online channel?

Any color you can give us on that?

I think everybody is very focused on it.

It is a real channel.

Our customers have early lockdowns.

Their sites are locked and loaded.

They're expecting to do billions of dollars of commerce and they're not joking around any more.

As I talked to the leadership of our biggest commerce site, they are often the biggest channel now, or certainly the fastest growing, so they have big plans, I wouldn't say that there is a fundamental new trend, or something there, but they are increasingly concerned about security.

One of the big issues is going to be PCI compliance, and how the online world adapts to that.

And I think that is going to be just a gigantic question for commerce sites, not so much this year, but next year and people who bring PCI solutions to market, I think are going to be unusually well positioned to capture opportunity there, I think in terms of this, if you will, Christmas selling season, it is a little early to know, as you know, they get ramped up into November, and then there is the crucial Monday after Thanksgiving to Christmas season.

We certainly think we're really well positioned, that our customers are optimistic, and that one we will just have to see how it plays out in the quarter.

Okay.

And then just real quick on the CapEx for next year, how should we think of it, at least directionally, J.D.?

I would say again, it is very early, and it is one of the most difficult things to predict because you're also predicting growth into 2009 when you think about your CapEx.

But I don't see a tremendous uptick, particularly in the area of network assets.

We will likely have some uptick in our, kind of a once in a decade facilities upgrade, which we will talk a little bit more about as we go here, but we will continue to get the efficiency and productivity out of the network, and I expect that to be kind of at consistent levels.

Okay, great.

Thanks, guys.

Thanks, John.

Operator?

Your next question comes from Tom Watts with Cowen and Company.

Hi, Tom.

We said we would get back to you.

Is it working working this time?

I think it is if you can hear me.

Yes, we can.

Good.

Good improvement.

Two additional questions.

One, it seems that you've been very effective at getting some exclusive contracts with some of your major customers.

At the same time, people have talked it and treated it as a trend in the industry toward multi-sourcing of content delivery services.

Could you just comment on that?

And then whether you see multisourcing as a major factor versus your thirst for exclusivity.

And the second contract, the second question, there have also been some comments that you may be working on a peer to peer product.

If you could just comment where you see peer to peer within the industry, if you see that becoming a major -- playing a major role in content delivery?

Sure, this is Paul.

I will take both of them.

We actually don't push for exclusive contracts, it doesn't very often, it doesn't often come up, we think the quality of our services speak for themselves, where they can help our customer, we want them to use them, and where there are other things that they want to do, they should make the right choice for their business.

We want to go in and demonstrate our value, we think we do, and we think we do extremely well.

Certainly, there are lots of ways that people provide back-ups, or alternatives, including do it yourself, and we work with our customers to master -- I'm not sure that there is a change in that market at all.

And we haven't made a secret about our interest in using client delivery as an aspect of an offer that we will bring out in the future.

You will recall that we purchased Red Swoosh earlier in the year.

We were very optimistic about that client technology becoming an addition to our content delivery networking.

I would say that while there seems to be more hype about peer to peer than ever before, that technology, and solutions have been around longer than Akamai without getting any traction in the commercial marketplace.

Really because of the lack of QOS and direct ties to piracy and lack of digital rights and all sorts of problems with not just the content providers rights but end user machines and performance et cetera, but we're very optimistic that you can marry some client delivery with a robust back end for control, and analytics, with our content delivery solution to really a best in breed offer that really raises the bar on scale and cost parameters.

But that is going to take a while to bring into the market and test.

I also think that it is pretty simple math that people ought to go through that explains why peer to peer doesn't solve the content delivery problem.

And even if you take piracy and all of those other issues off the table and that is that bandwidth that people have at their home for example isn't symmetrical so the amount that you can upload is much smaller than what you can download and so say the degradation is 5 to 1and that means you need 5 users feeding everyone who wants the content and then those users have to have the peer, they have to have the peer turned on, and they have to not be using their machine themselves, or not using it much, and then they have to have the right content.

So it is not as simple as just saying if everyone who wanted to watch TV could do it over peer to peer because you just wouldn't have enough machines that could do it with the bandwidth that would make it work.

So we think it is an add-on to what we're doing.

It's not a replacement for any of the solutions that we ave brought to market.

There has also been a lot of interesting exchange lately around the ISPs who don't like this traffic because it in their view I think abuses their network resources.

And often they stifle that traffic or don't allow it to happen.

Our situation is very unique.

We're embedded deep inside these networks and have a partnership.

So we think that we can use edge technology in a way that helps their networks, doesn't degrade their networks, or skew their economics.

We actually look forward to being maybe the only Company that can effectively partner with ISP's to use an edge solution and marry it to our traditional content delivery and distributed network.

So that is a long-winded answer to say we're interested, we're involved, we've been very public about that, but we don't have any product or service announcements to make right now.

Operator, next question?

Your next question comes from the line of Colby Synesael with Merriman.

Hi, guys.

I noticed that your reseller revenues actually dipped for the first quarter in a while.

I was wondering what the reason behind that was?

I guess Internet was one of your bigger resellers at that, if that finally just impacted your income statement?

And then I will have one more question after that.

Why don't you give us both just in case we lose you.

We have had obviously a little trouble with the phone bridge technology today.

Sure.

The other question had to do with your product strategy, obviously you've been making a lot of announcement to expand out beyond just content distribution.

Is that a sign that the content distribution by itself isn't necessarily going to be enough to support where you guys want to take this Company from a strategic standpoint or is it just a matter of you think there is just a lot of value you you can get from an incremental margin standpoint by adding these products?

I will take the first question on the resellers.

We have been, as you know, transitioning away from Internet as a reseller and shifting some of those -- or some revenue from a reseller model to direct.

And that has gone pretty well.

The big driver though in this quarter was resellers in the government public sector, because we do all our business in public sector through the government.

We had one particular custom deal with a government agency that we wrapped up in the last quarter, and so that led to a bit of a revenue decline.

As you know, public sector revenue tends to be a bit more lumpy than other revenue because it is based on a lot of custom contracts.

So really that was the big driver on resellers.

We haven't changed our reseller strategy at all or anything like that.

I will take the product strategy.

Actually, you set me up for a great history lesson, so I appreciate it.

I think actually one of the things that people do, especially if they're newer to the Akamai story is oversimplify and think that we actually set up to be a CDN or a content delivery network company which is what a lot of other people have done and are trying to do, and actually the idea at Akamai to go all the way back to the founders, Tom Leighton our Chief Scientist and the late Danny Lewin, was a much, much bigger idea, it was this idea of using distributed computing to change the way businesses compute and move to a network model and build, if you will a distributed computing capability across the Internet, across the public network that would be leveragable by businesses of all sorts of applications.

So content delivery and video was one idea.

Dynamic content applied to commerce was another.

The whole idea of application acceleration leverages all of our intelligence about the network, what we know about network performance and realtime and our ability to do routing across the public Internet that we don't believe anyone else can do.

So we're looking for logical extensions because one of the powers in the business model is have, if you will, the plain vanilla hardware platform, and then by adding software and making that available to service, we can provide bundles of capabilities to all sorts of business categories, to grow their business, and it is why we think that we've been able to develop a business that we believe is on a trajectory to get to $1 billion, there are very few, a handful of $1 billion software companies and we believe that we will be one of them and one of the first ones to do that with a software to services model, an so CBN is a great opportunity and as you know, that -- the lion's share of our business, we will talk a little bit more about that at our summit, next week, but we think as acceleration leverages the technology we had, enabled us, or let us develop some more software and added to the same network and opened up whole new markets that are extremely attractive for us, and highly differentiated.

So it is not a question of saying to you we're tired of CBN, we're investing a lot in solutions there, you've seen us make acquisitions, even as recently as the Nine Systems acquisition for some really important capabilities there that we're now rolling out and making available to our entire customer base, but we think that adding applications for acceleration and frankly, we've got other things in the incubation stage that we're extremely excited about that we think will be great stories for the second decade leaves us really believing that Tom and Danny were right from day one, now really the original idea, over a decade ago, and that there is really no end in sight for what we could do with the distributing capability across the massive and ever-growing public Internet.

Operator, we will take the next one.

Your next question comes from the line of Harry Blount with Lehman Brothers.

A couple of quick questions for you.

First of all, JD, on the commentary you said about the 61 net new customer adds and focusing more on quality, does that mean then that the new customer adds ARPU, if we compare the ARPU of these new customer adds to previous customer adds in general are higher?

I mean, I know that the new customer adds are lower -- ARPU are lower than the embedded base but?

Honestly, Harry, I have to admit I didn't look at what the ARPU of the new customer adds were.

That would be a reasonable premise.

But I didn't really -- I haven't looked at that.

The broader point is that we're not going to -- we're not running like a telemarketing job shop just to sign up any small customer base.

Because we don't think we can turn those into profitable customers and we don't think -- it doesn't help us scaling our model.

So we focus on winning key customers in targeted industries.

And some industries obviously customer adds are very important to us, like with, in the application performance area where we continue to add customers, in other areas, the customer adds are kind of less important, where we already are very well penetrated in certain sectors.

So that is the broader commentary.

I'm sorry, I don't have a great specific answer on your direct question.

Harry, it is Paul.

From a strategic point of view, we think of ourselves, like a leading software company, like an Oracle an SAP or an IBM that focus on an enterprise class of customers, and understands all that you can mine out of them, and then try to penetrate them broadly and deeply and don't try to move into downscale markets where the customers don't really value differentiation.

And I say that is our strategy, with the caveat that you identified that the new customers still tend to start smaller than average and then we try to grow them up.

Right.

I guess where I was going with is I'm thinking about the longer term model, should we be thinking about probably lower average net new customer adds, i.e.

things that are more in the 50, 60s, but with higher net new ARPUs?

That's essentially the direction of the question I was going?

Well, I don't know that we have a set number to expect every quarter.

Frankly, we don't try to target that.

But I think as a percentage of the base, that will go down, because we're not going to try to grow the volume.

And also the summer quarter though, so a difference of 5 or 10 or so off of what might have been a rolling average.

I don't really see as significant.

And we've definitely seen that trend in terms of the source of our revenue growth, has really shifted towards growth in our existing customer base over the last couple of years.

Got it.

And then Paul, on the Starbucks announcement, I believe that is your first significant client deployment, if memory serves?

And if that is--?

You mean in a specialized sense?

Yes.

That is true.

It really is -- certainly the first time we've been involved in something like this, where we've done specific deployments for a specific customer in the commercial space into, if you will, public location, like that.

You've got two very leading edge companies who understand the entertainment market and the experience market and how performance and place matter a great deal.

And we were able to leverage our existing technology, do some custom R&D and I think roll out something that will be really, really exciting.

Where I'm going with the question is, is does this, A, allow you to deliver non-Starbucks applications and realize non-Starbucks or non-Apple related revenue as well?

And if so, any sense of what you can provide us in terms of thinking about?

Because I think this is really an interesting opportunity to extend the network.

So great question.

Which I will duck a little bit because I won't talk about any of the specific details, vis-a-vis our two partners.

I will say that this announcement is only about being in Starbucks locations, so we obviously can't access anyone outside of them because it will be access over the Wi-Fi connection in the store.

Okay.

Great.

Thank you.

Operator?

Your next question comes from Rod Ratliff with Stanford Group.

Hey, Rod, and I would love for people to try to keep the questions tight because I know we had a slow start with the technology and people always say don't run over an hour and we're already over an hour.

You know me better than that, Paul.

I know how to keep my mouth shut.

Go right ahead.

I have got two questions quickly here.

To extend Harry's question just a little bit, are you looking at any other types of wireless web applications at all, Paul?

If you can give me an answer without tipping your hand about anything that you might want to talk about at analyst day or whatever?

Sure, we've always been excited about the wireless market.

We've talked about in the past that we think we do a large amount of the wireless video, for example, that is delivered to handsets already in the States.

I think -- I'm a little perplexed because people talk about the Internet and then wireless like they're two markets and in this converging IP world those are just more end points on the Internet and they are very low bandwidth last miles relative to a wired model and they move around a lot.

But then the opportunity to do personalization, play space content, and video or audio is really, really exciting so we think it is just one of those drivers, it's different than say the HD web, because it is not an HD experience but one of those drivers that our customers are finding really cool ways to monetize like the announcement of our partners made recently.

It just perked me up that you were -- that T-Mobile was involved with the hot spot technology.

Anyway, on to my next question.

With regard to the HD TV over the web announcement, is there any sort of involvement with the tiny Red Swoosh acquisition there, any of that technology involved?

We will be making the HD announcement next week and when we're ready to make Swoosh-based announcements, we will let folks know.

Okay.

Shut up, Rod.

No, no, it is just -- you know, whatever.

Outstanding quarter.

Very happy for you.

Good job.

Thank you very much, Rod.

Next question, operator?

Maybe one more.

Your next question comes from Darren Aftahi with ThinkEquity.

Hi, Darren.

How are you?

Two questions.

As you think about high definition going forward, how is that going to impact your CapEx, say in 2008, and is some of this sort of front loaded first half of '07, baked into that?

And then my second question is directionally over the next, call it two to three years, I know you gave 25 to 30% topline growth in '08 but could we see a deceleration of growth and then an inflection point after that, because there is at least in our view not enough devices out there to deliver, broadband video to the home at your living room, and when that does start to track up, your business could actually reaccelerate?

Well, let me just handle it this way, which is in a high growth market I think there is a lot of fluctuation.

We saw that with a huge inflection point last year.

I think a great year this year but at somewhat lower rate.

I think there are inflection points and they wilt have a bearing on revenue and profitability growth where you can see swings and the same on CapEx, as J.D.

indicated, CapEx is a function of expected traffic growth is one thing and also what we think of the year after.

So where HD for example takes off next year, will set the table probably more fundamentally for '09 and that will affect both our view of revenue and CapEx probably in '09, '10 and that is pretty far out to model too closely, and we certainly don't try to give guidance that far out.

Operator, why don't we take one or two more real quick ones if we can.

Apologies that we've run over the hour to folks..

Yes, sir, you have time.

Your next question is from Tim Klassel with TWP.

Hi, Tim.

Hi, guys.

Just a real quick question, you mentioned the mix on ARPU being a little bit more than 50% on the content delivery.

Going forward, how do you expect that to trend as you add in application acceleration and other value-added services?

Well, I think that the issue with ARPU is how much is new services and how much is traffic, and with the massive traffic growth at the inflection point, it probably ticked a little bit above the 50/50 in favor of traffic.

We could go back to 50/50, hard to know, I think that traffic will probably be a slightly larger driver going forward than the other value-added services but we're very optimistic about those, and they have some terrific margin profile to them as well.

So we're happy to expand the business, the same store sales, if you will, with both, equally, or frankly, if it winds up being distorted one way or the other I think we win either way.

Okay.

Good.

And first the vertical markets are concerned, obviously we saw an uptick in the M&A space, are you -- what are you expecting going into '08?

Is there any one vertical where you're a little more optimistic than the rest?

No, I think they're all very, very strong.

We see great strength in the commerce capability.

Government is probably the one that is the hardest to call and tends to be lumpier.

With so much resource being plowed into the war I think that slowed down some of the civilian development there.

But that business remains strong and going well, as well, and we will give you that segment view next week, and you will see a little bit better our view and really strong stories everywhere.

Very good.

Thanks.

One last question, operator.

Your last question comes from Rob Sanderson with American Technology.

Hi, Rob.

Great.

Thanks.

Good afternoon, gentlemen.

Thanks for taking the question.

Most have been asked and answered so I will just keep it to one but any noticeable change in the mix of bursting activity this quarter?

And do you see any reason structurally or otherwise that that might change this relationship going forward?

No change, and don't expect one, either, going forward.

So thank you all for those of you who were here--.

The other piece of guidance we want to give is that we project that the Sox win the series in somewhere between four and seven games before we leave.

And we will be able to tighten that guidance range next week.

Yes, exactly.

Hopefully apologies to those of you in Denver, we will be celebrating here in Boston, those of you who we will see in person, safe travels those who will be joining by webcast, look forward to talking to you again in less than a week.

Bye-bye.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.