阿卡邁科技 (AKAM) 2007 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Akamai fourth quarter and full year 2007 earnings conference 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) Ms.

Sandra Smith, you may begin your conference.

Thank you.

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

Speaking today will be Paul Sagan, Akamai's President and Chief Executive Officer, and JD Sherman, Akamai Chief Financial Officer.

Today's presentation contains estimates and other 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 and quarterly reports on Form 10-Q.

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.

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.

One other note, as most of you know, our patent infringement trial begins next week.

As the plaintiff in this case, the company remains committed to vigorously protecting our intellectual property.

Legal matters such as this are complex, take a lot of twists and turns, and are not ultimately resolved for a long time.

Our policy is not to comment on active litigation and so we won't be commenting on the matter today.

Finally, before I turn the call over to Paul, he asked me to apologize to you for his voice, which is suffering from a touch of laryngitis.

Paul?

Thank you, Sandy.

Thank you, all, for joining us today.

As you can hear, I probably should be at home recovering from this cold, but I didn't want to miss the opportunity to tell you about our 2007 numbers that were the result of so much hard work by everyone here at Akamai, and I really wanted to be able to share with you our outlook for 2008.

We were extremely pleased with our fourth quarter performance, which closed out another record year for Akamai.

In the fourth quarter we grew revenue to $183.2 million, a 14% increase over the third quarter.

That was a jump of $22 million over Q3 and a 46% increase in revenue over the fourth quarter of 2006.

We generated normalized net income of $75.9 million, or $0.41per diluted share.

That was a 22% sequential improvement and a 60% increase over normalized net income from the same period in 2006.

For the full year 2007, we grew revenue 48% year-over-year to $636.4 million, and we generated normalized net income of $244.4 million, or $1.32 per diluted share.

That's a 58% increase over our 2006 normalized net income, 2007 was another year of significant growth and accomplishments at Akamai.

We successfully integrated three acquisitions, nine systems, Netlee and Red Swoosh.

We introduced Stream OS into our product portfolio, expanding the rich media management tool we can offer to media customers and we released the proprietary Akamai protocol to round our our portfolio of application acceleration services, an exciting new area of business for us.

Fundamentally, I believe our product line expansion and our financial results drive home one critical point.

The Akamai difference enables our customers' businesses.

The hallmark of the Akamai difference is unmatched quality and performance and this difference has allowed us to build strategic relationships with a roster of some of the most successful companies doing business online.

From leading media companies to the top ad servers to the major U.S.

sports leagues, from seven of the top ten social media networks to the top five antivirus companies, and from nine of the top ten auto makers to 75 of the top 100 online U.S.

retailers, the Akamai difference is recognized and highly valued by our clients.

Later in the call, I'll go into more detail about how we've been helping some of the world's leading internet businesses, including working with Apple to support the rollout of its new movie service and what else we're looking forward to in 2008.

For now, let me turn it over to JD.

JD?

Thanks, Paul.

As Paul just highlighted, we had an outstanding fourth quarter to cap off another tremendous year for Akamai.

With our strong Q4, we reached 48% revenue growth for the year and we demonstrated the leverage and scalability of our model, as we significantly expanded our operating margins, as we said we would at the beginning of the year.

For the fourth quarter we grew revenue 14% sequentially and 46% year-over-year to $183.2 million, well above our expectations.

As usual, the fourth quarter was a strong one for our commerce vertical, with the holiday online shopping season.

In fact, we saw stronger than expected growth in this space.

We also saw significant seasonal strength in media and entertainment, more than we had expected, and that was a major contributor to our upside for the quarter.

During the fourth quarter, international sales represented 23% of total revenue, consistent with third quarter levels.

Resellers represented 16% of total revenue, 2 points lower than the prior quarter.

Once again, no customer accounted for 10% or more of our revenue in Q4 or for the full year.

Because of our strong customer relationships in online media and commerce, we benefited from seasonal strength in these markets, which translated into very strong RPU growth in the quarter.

Our consolidated RPU or an average revenue per customer, grew 12% sequentially to $23,000 in the fourth quarter.

That's up 22% year-over-year.

Our average customer now spends more than $275,000 per year with Akamai, and we have over 100 customers who spend more than $1 million per year with us.

We added 29 net new customers this quarter, or 298 net new customers for the year, including our Netlee acquisition, bringing our total customer account to 2645.

This is a lower net add number than we have had in recent quarters, partly due to some expected churn related to completing the nine systems of Netlee customer migration.

Churn is just over 4% this quarter.

This is also partly due to a strategic shift in our sales efforts to focus on further strengthening our deep customer relationships, built on differentiated solutions, quality delivery, and premium support and services, a shift that we've been talking about for several quarters.

As we add customers to the platform, we are focused on the quality of our accounts, rather than the customer counts.

Although we added fewer net customers in 2007 than the prior year, the recurring revenue added from these new customers was up by 30% from 2006 levels.

Our GAAP gross profit margin, which includes both depreciation and stock-based compensation, was 73% for the quarter, consistent with Q3.

And cash gross margins were 82%, also consistent with the prior quarter.

GAAP operating expenses were $82.8 million in the fourth quarter, up $1.1 million from 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 $62.8 million, up $2.3 million from the prior quarter.

Adjusted EBITDA for the fourth quarter was $86.9 million, up 21% from the prior quarter, and up 64% from the same period last year.

Most of our higher than expected revenue flowed through to our operating profit, generating an adjusted EBITDA margin of 47%, up 2 points from the third quarter and up 5 points over the same period last year.

For the fourth quarter, total depreciation and amortization was $20.2 million, up from 19.2 million in the third quarter.

These charges include $15 million of network-related depreciation, $2.4 million of G&A depreciation, and $2.8 million of amortization of intangible assets.

Net interest income for the fourth quarter was $6.8 million.

Moving on to earnings, GAAP net income for the quarter was $35.9 million, or $0.20 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 40%.

However, because of our significant deferred tax assets, we are paying -- we are paying taxes -- cash taxes at an annualized rate of only about 2%.

During the fourth quarter, our stock-based compensation expense was $15.6 million, or $0.08 per share on a pre-tax basis.

A breakdown of our stock-based compensation charges by operating department is available in the supplemental metrics sheet posted in 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 $20.9 million noncash tax charge.

Excluding these noncash items, our normalized net income for the fourth quarter was $75.9 million, up 22% over last quarter, and 60% higher than our normalized net income for the same period last year.

In the fourth quarter, we earned $0.41 per diluted share on a normalized basis.

That's a 52% increase year-over-year, and a $0.07 increase over the prior quarter.

Our normalized weighted average diluted share count for the fourth quarter was 186.7 million shares.

Now let me review some balance sheet items.

Cash generation continues to be very strong.

Cash from operations for the fourth quarter was $71 million, and for the full year, we generated $235 million, or 37% of revenue.

That's up 78% compared to last year.

At the end of Q4, we had $634 million in cash, cash equivalents and marketable securities on the balance sheet.

In the fourth quarter, capital expenditures excluding equity compensation were $15.9 million, and for the full year, capital expenditures came in at $100.5 million, or 16% of revenue, excluding equity compensation, in line with the annual guidance we set at the beginning of the year.

Day sales outstanding for the quarter were 57 days, down 2 days from the prior quarter.

With these fourth quarter results, we finished the year at $636.4 million in revenue, an increase of 48% over 2006.

For the year, revenue from international accounts increased to 23% of total revenue and resalers accounted for 18% of our total revenue.

Full year GAAP gross margin came in at 74%, 4 points lower than 2006 levels and consistent with our guidance, and cash gross margin for the full year was 82%, down 3 points from the prior year.

Full year GAAP operating expenses were $324 million, including depreciation, amortization of intangible assets and equity-related compensation charges totaling $83 million.

We have detailed that full year breakdown in the supplemental metrics sheet on our website.

Excluding these noncash charges operating expenses for the full year were $241.1 million.

Full year adjusted EBITDA margin was 44%, up 4 points from our 2006 margin level.

GAAP net income was $101 million, or $0.56 of earnings per diluted share for 2007.

Excluding noncash items, our normalized net income for the year totaled $244.4 million, or $1.32 of earnings per diluted share.

That's a 58% increase over last years normalized net income and a 50% increase over last years normalized earnings per share.

WE ended w007 we a fantastic quarter that rounded out a tremendous year.

With strong customer relationships we have built over the past ten years we were able to take of advantage of the seasonal upside not only in commerce as we expected but also in media and entertainment and as we've grown, we've been able to leverage our scabble network to deliver outstanding bottom line results.

Let me share some thoughts with you about 2008.

When we spoke with you last fall, we guided to 25 to 30% growth for 2008.

Given our strong fourth quarter, this implies a higher revenue number, so we are raising our 2008 full year revenue guidance to between 800 and $825 million, or 26 to 30% annual growth we expect our normalized net income to grow in line with or slightly faster than our revenue growth or 27 to 31% on a year-over-year basis.

This implies normalized EPS in 2008 of $1.65 to $1.70, or 25 to 29% annual growth.

On margins, overall we expect to see the same gross margin trend downward in 2008 as they have in the last few years, although at a slower rate, with the gross margin declines being offset by EBITDA improvements.

Specifically, we expect cash gross margins to decline by roughly 2 points this year, while EBITDA margins will expand by roughly 2 points.

Given the opportunities we see in this high growth market, we want to ensure that we are making the appropriate levels of investment in 2008 to drive our future performance, and we expect to continue to add resources to support our growth.

We expect capital investment levels excluding equity compensation to be about 16% of revenue with most of the expense loaded to the first half of the year consistent with the past two years.

AS I mentioned at our analyst day, this investment level also includes the lease hold improvements that we have planned for 2008, costs which will offset some of the efficiencies we will achieve on the network.

On noncash items, our amortization of intangible assets should be about $13.4 million for the year, up slightly from last year.

We expect equity compensation to be roughly $0.43 to $0.44 per share on a pretax basis, up from $0.36 per share in 2007, as our head count has grown.

Finally, we expect our book tax rate to remain in the 40% range, although as I mentioned before, our cash tax rate will be only about 2% due to our significant deferred tax assets.

While we haven't given a specific forecast as to exactly when we will exhaust our deferred tax assets, we believe we still have quite a ways to go before we get to that point.

Looking more near-term for the first quarter this year, we're expecting revenue in the range of 186 to $190 million.

That translates into 34 to 37% growth over Q1 of last year, and represents 2 to 4% sequential growth off of our seasonally strongest fourth quarter, where we grew 14% sequentially.

As in past years, during the first quarter, we will see a seasonal increase in some of our expense areas such as the reset of our FICA payroll taxes and sales training.

In addition, our patent infringement claims go to trial in Q1 so we expect higher than usual expenses from legal as well.

As a result, we expect normalized EPS in the range of $0.38 to $0.39 per share, up by 36 to 39% from Q1 of last year, but down slightly from Q4.

For capital expenditures we are expecting to spend about 30 to $35 million in Q1, excluding equity compensation.

We've closed out a great year in 2007 with an outstanding Q4 and we're as excited as ever to begin another year of growth at Akamai, our tenth year as a company.

Although there is some near-term uncertainty in the general economic climate, we are optimistic about the marketplace and as the leader in the high growth area with differentiate solutions we think we are in unique position to capture many of the developing opportunities.

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

Paul?

Thanks, JD.

As you just heard, I still have a cold, and Akamai had a tremendous year in 2007.

The relationships we built with customers across our business drove annual revenue growth of nearly 50%.

That's a testament to the dedication of our employees, and the commitment of our customers to building great businesses on the internet, and as we begin our tenth year of business, I believe the Akamai difference is stronger than ever.

We're optimistic about 2008.

We think that this year will be another great year for Akamai.

Despite the higher level of economic uncertainty, we remain confident that companies will continue to expand their online operation and that quality and performance are becoming even more critical to them.

With any leader in high growth market, we have faced and continue to face competition in many forms, but we've been able to maintain and even extend our leadership position this environment because we offer differentiated solutions that matter to enterprise customers.

We added to our solutions in 2007 both organically through R&D innovation and through acquisition, from the release of Akamai Stream OS to the introduction of the Akamai protocol and the IP based application accelerate.

Leveraging the expertise we've gained from working with so many leading businesses, we're able to transform the internet from a chaotic place with unpredictable performance and scale into a secure, reliable and cost effective place for users and content providers to meet and do business.

In other words, Akamai's turned the internet into a more viable place to inform, entertain, interact and communicate.

That in turn has improved the economics for leading online business across diverse industry.

In media, we've innovate beyond traditional CDM with dynamic site solutions to help customers engage audiences with personalized content enriched media and the latest web 2.0 technology.

We've also demonstrated the flexibility of our proprietary software and solutions through our unique technology partnerships with companies such as Apple and Starbucks, where we work together to enable the wireless delivery of digital music within Starbucks Stores, and now, as I said earlier, we're thrilled to be supporting Apple, as it expands the iTunes stores with a ground-breaking movie rental service.

In commerce, we've helped customers to replicate the in-store experience online with immersive interactive and personalized features, all while supporting advance credit card security standards, such as PCI.

In the world of P to P our web and IT based application and acceleration solution enable companies to over the challenges of remote, excess applications, complicated delivery protocols in expanded communities, global users.

For example, recent testing we have done with SAP demonstrated that our application acceleration service can achieve performance improvement of up to 24 times for user of SAP net Weaver.

Akamai's P to P application acceleration business now is operating at a run rate of over $40 million.

Evidence of our continued traction in this growing market.

Our view coming into 2008 is that we're as optimistic as ever about growth on the web, from rich media to online applications.

We're going to continue to invest in our business, given the opportunities we see.

We remain committed to quality, to providing best of breed solutions to meet our customers' evolving needs and to drive operational efficiency across our business.

With this strong commitment, we approach the milestone of being in business for a decade.

We believe we remain on track to generate a $1billion in annual revenue, as an enterprise software services company.

And we think we have a great shot at achieving this goal by 2009.

The Akamai difference has never been more important in the online world.

Our team has never been stronger or better aligned and as we embark on our next decade of business, we're not going to slow down.

Now, JD and I would be pleased to take your questions.

I'll take them until my voice is completely gone and then JD can finish.

Operator, the first question, please?

(OPERATOR INSTRUCTIONS) And your first question is from David Hilal.

Hello?

Great, thank you.

Yes, I got two questions.

First, the normalized gross margin in the quarter was up sequentially, the first time we've seen that in a little bit.

I know the guidance for next year is downward trend, but can you speak to why we saw that up?

Was bursting higher than usual?

And what attributed to that?

What was the second question, so we have them both?

That was the first question.

Same question, I want you to elaborate on the [P to P] strategy.

We haven't heard much since Red Swoosh was acquired and want to understand where that's going in '08.

Thank you.

Thanks, David.

JD?

Okay.

I'll take the gross margin question, David.

Yes, in the fourth quarter, when you get -- basically scale benefits us tremendously and as we grow very rapidly, in a quarter we tend to see pretty strong gross margin results and really where the pickup was as depreciation as a percentage of revenue was flat to down and I think that's real positive for us.

I think we do expect the gross margins to still trend lower next year although at a slower rate but overall you will still see a bit of a lower trend in there, again offset by scaling at the bottom line and offset by EBITDA margins improvements.

David, on your second question about P to P as you will recall we never said that P to P was a stand alone solution.

We believe that if we could buy or create the right technology for client delivery and marry it to our back end for control right managements the application of business we could expand our capacity at a lower cost over time, actually looking out on the landscape over the last year, as I've gone out and talked to customers and the solutions they want, they have not found anything in client delivery that has been anywhere close to satisfactory for them.

In fact, peer delivery has existed longer than Akamai without any commercials traction, that said we still that we are uniquely suited to add it to our network, we have the technology and we are in the process moving that forward.

WE have never announced a product roll out time line and we are not going to do that today but we are still very optimistic that over the long term it will be an important driver of our business as an integrated solution.

Operator, next question?

At this time, I just want to remind everyone, if you would like to ask a question, please press star-one on your telephone keypad.

Your next question is from Rob Sanderson.

Hi, Rob.

Hi, Rob.

Hi, good afternoon.

Congratulations on a strong quarter and a good year.

Thank you.

Quick question, kind of related to the gross margin question, but what was really the driver of upside to your original guidance?

Was it more based on bursting activity or more projects with new or existing customers, or some of all of the above?

I think it's -- most importantly that we saw strong growth across many verticals.

We had a strategy getting a trusted relationship with the most important brands in the key categories and growing as the internet hit in flexion points with the customers.

One of the things you saw in the fourth quarter was strength in eCommerce that we expected but continuing on expected strength in media and entertainment, which as you know is our biggest vertical.

As more and more entertainment content and games are going online, it drove really tremendous results for us and we saw it across many other verticals as well, but the two most important were eCommerce as expected and the media and entertainment even beyond expectations.

A couple of quick follow-ups.

There seems to be an awful lot of activity in that vertical, meaning entertainment specifically with movies this year.

How would you characterize the state of the pipeline, coming out of '07 versus coming out of previous years?

I think that we're seeing a steady growth of entertainment content moving to an IP world.

I don't think there's a single event that's going to transform that world.

It's a number of things.

It has content and rights having to be available, and users have to have fat enough pipes and people have to have compelling business models and applications.

More and more we're seeing all of those things grow, as you know we launched a high-definition last year to demonstrate that you can go all the way to HD in certain homes with tremendous results over the internet.

I think that got a number of our customers very excited but the truth is most end users still can't consume it at that bit-rate.

So I think you're going to see steady growth over the next three to five years of compelling video and audio and music going to the internet, whether it's songs, albums, TV shows, entire movies, or console games or PC games all going at increasingly rich media format and I think that will continue to drive (inaudible) -- especially again in Q4.

Quickly if I could, application acceleration, could you update us on your initiatives there and perhaps on the level of run rate, anything you could share with us?

As you know, that's a relatively new business, the application performance, about two years old.

We really completed that portfolio in 2007, with the addition of the Netlee acquisition and then releasing the Akamai protocol and being able to accelerate both web-based and other IP-based applications.

We gave some update at our fall analyst and as I said earlier it's now a $40 million run rate business for us growing very fast and very profitable and we're very excited about continued growth in that business.

Great.

Thanks a lot, and congratulations, again.

Thank you.

Thanks.

Operator, I think you need to reprompt the crowd to log in for questions.

Yes, sir.

(OPERATOR INSTRUCTIONS) Your next question is from Aaron Kessler.

Hey, Aaron.

Hi.

How's it going?

Congratulations on the quarter.

Couple questions.

First, on the writers strike, be interested to get your impact if that's having any negative impact in Q1, how much of that offset by more people spending time online, also then I have one follow-up after that.

So we haven't seen any impact from the writers strike, at least in anything that we can perceive either a downturn from less new stuff or people, seeing not enough news stuff on television, going to the internet.

That's been imperceptible, we really dont' any data on the writer strike having any impact at this point.

In terms of the quarter-over-quarter growth, you saw an acceleration versus last year.

Was that do to the media and entertainment strength you cited or is that something else?

Yes, I think we did see a, a, almost a new seasonality in the media and entertainment space, more so than we had seen in the past.

Fourth quarter's generally a strong quarter across the board, but I do think we saw a new level of seasonality.

Some of that is, as I've talked about before, kind of throughout 2005 and 2006, we were kind of impacted by this inflection point of broadband, broadband adoption driving more and more rich media content.

Now as you kind of work your way through that, it's not surprising to see a little bit more seasonality creep in.

But it was -- as Paul said, a very strong quarter as we got good upside from the customers where we were really tightly integrated in our strong relationships, so we really pleased with that.

Finally, I guess there has been recent speculation about you maybe looking to get into the ad serving space.

You're kind of in that already, more in a partnership route.

Can you comment at all as an interest of getting more of ad serving platform?

That was one of those UFO rumors that came flying by.

We partner with our customers.

We make ad delivery better.

There are a number of things we do, especially in rich media.

I think it's one of the reasons that we've grown a very successful business in the delivery of online advertisements, obviously a very critical piece of the growth of the internet, but we have no plans to become an ad server per se and compete with any of our customers.

Great.

Finally, JD, do you have the organic growth in the quarter?

Just want to grab that.

We grew 46% overall, probably 5 points roughly speaking of that was driven by acquisitions.

I mean it's hard to precisely measure because we've completely integrated those, but I would say it's in the low 40s.

Great, thank you.

Thanks, Aaron.

Your next question is from Todd Baker.

Hey, Todd, how are you?

Hi, guys, this is Brian (inaudible) for Todd.

Brian, how are you?

Doing well.

Good quarter.

I think the only area that relative to our expectations that maybe came in a little bit lower than we had been thinking was cash gross margins.

I'm just trying to get a sense for how much of that was product mix due to the strong M&E and did you see any change in the cash gross margin with,M&E versus the rest of the business?

Yes, I think that was really driven by the product mix.

As we said, the upside in the M&E, we were very pleased with seeing that in the quarter, but that does come in at a lower average gross margin, as we pointed out, on our analyst day.

In fact, I'm really pleased with our gross profit performance, given how the product mix came in.

Okay, and one metric you gave out, Jay, in terms of new customers coming in at 30% higher this year, or '07 versus '06, can you give a sense in terms of how much of that is larger traffic coming in from them versus taking additional services?

Yes, I think, it's probably the types of solutions that we're really focused on selling out there rather than a small deal with smaller customers that can be, a couple thousand dollars a month or even less.

We're focused on larger deals around our rapid acceleration business or larger deals around our media solutions, et cetera.

So it's probably has to do with, the solutions selling, and our focus on really driving high value customers that we think we can grow with over time.

So generally we've signed up fewer customers, but larger customers based on that solution selling.

Okay, and then one last question.

How -- I'm not sure you guys can talk about this, but in terms of how important do you view your patents relative to your competitive position?

We win on performance.

We win on services that we deliver and we win on the quality of the people we put in front of our customers.

We've got a great track record, over 10 years of offering great solutions and great service 24 hours a day in every geography, and that's the most important to why I think people are buying from us and do business from us.

Intellectual property is very important to the company.

I think it provides great shareholder value, but that's not what customers have to look at.

They want to know quality of what we deliver and we voter then, with their dollars.

I think they voted on where they see a great value in the market.

All right, guys.

Thank you.

All right, thank you.

Operator, do you want to ask them to refresh?

I know we're having a little bit of trouble with the queueing system today.

Yes, sir.

(OPERATOR INSTRUCTIONS)

Okay.

Why don't we take another question.

And your next question is from Catharine Egbert.

Well, she's not there.

Let's move on and maybe she'll come back.

Next one, please?

Okay.

Brian, your line is open.

Brian?

Okay, and your next question is from Catharine Egbert.

A little trouble with the lines, so why don't you move on to a different line and then we can come back.

Catharine, your line is open.

She's obviously not there.

Let's move on.

(inaudible) -- your line's open.

Operator, we're not hearing anything in the room here from these questions.

Operator

Hold on one moment, ma'am.

For those of you patiently waiting, we're patiently waiting with you and assuming we'll get the phone line problem worked out so we can take more questions, because we know many of you are waiting to ask them.

Michael Turtis, your line is open.

Michael Turtis, are you there?

Can you hear me?

Michael, hey.

Can you hear me?

Yes, yes, we hear you.

That line's working.

Please, ask us the question.

This is like the first Trans-Atlantic call.

Okay, so question, two sets, one, revenue actually accelerated slightly in the quarter.

You commented earlier that you had actually seen traffic growth rate start to moderate a little bit this year.

Isn't that reversed and where are you seeing that?

And then I got a second question.

Well, traffic was very strong all year in many verticals.

I don't recall the context in which you talked about moderation on traffic growth, but it was very strong and obviously some of that translated into the revenue expansion in the fourth quarter.

Okay.

So I guess one thing you talked about in maybe more general terms is that you had seen a big acceleration in growth in '06 on the initial movement of video launches onto the web and you were looking for another influxion point next year.

In other words, are we starting to see something that's picking up that rate a little earlier than you thought?

Yes, I would just add to that, I would attribute the fourth quarter upside not to, the HD web becoming a reality.

That's something I think is an important catalyst that's going to impact our business over a three to five-year horizon, but I don't believe that, Michael, was the catalyst for the fourth quarter.

I think what we just saw was a very strong seasonal quarter that extended beyond commerce, which is what we normally see.

And so we had a very good sequential quarter.

To your question before the year-over-year growth rates of our traffic has moderated a bit from what we saw in 2006, where we were hitting that broadband influxion point and obviously with slower growth in 2008, we're expecting to see kind of a trend towards normalcy, if there's such a thing on the web in terms of traffic growth, and not factoring in any kind of HD web kicker.

So the--

But we're kind of steady as she goes in our estimate of how fast that will come.

And then second question is around the churn.

So I think you commented that you saw about 4% churn in the quarter.

I think I had you at around 3% before, so if it picked up a point, did you read that it's excluding the unusual churn from the acquisition this quarter and maybe, so much this quarter, would we be back in the kind of 70-ish range for net adds?

I think there are a couple of different things there.

I think on the churn side, a little bit of pickup as we get to the end of the year, so you've got a lot of kind of the final cleanup on acquisitions.

Again, we're churning very small customers in general, not our target.

As we've been talking about for six to nine months, we're very much focused on penetrating much more deeply the enterprise customers where there's the most opportunity to grow, and you saw that, I think the results not just in the top and bottom line in Q4, but the big jump in RPU.

There's so much potential in the customers we have great relationships with.

We're certainly focused on adding more good ones, but we're not looking at adding customers, small customers by the bushel.

That's not a scalable model for our services, and we don't actually think that that's the way to drive shareholder value or performance for the business.

So if you were to -- so I guess if you were to look at it post the unusual churn, I would assume you're thinking probably (inaudible) -- kind of 70-ish level would be--

No, you're mixing two things.

We're not looking to drive a growth or even a net specific number.

We're focused on acquiring the high value customers and then managing off those that really don't provide much value, and so we're not targeting a specific number of customers.

We've said over and over that that's not we think a relevant metric and it's moved a lot over the years and it's not one we think a good indicator.

Thank you, Michael.

Thank you very much.

Operator, next question?

Your next question is from John Walsh.

Hi, John.

Can you hear me?

Yes, first time.

Great.

First question's on international growth.

Just any update, any, any differences on go to market, any -- is it a similar strategy as far as the verticals, and where do you feel that penetration is?

Obviously China is big, the Beijing Olympics S there a buildout that needs to happen around that?

Broadly an update on the international side.

Sure.

Broadly we think it's an important growth driver to the future.

The U.S.

has definitely led internet growth and predict the outsource services, software to service.

We've not been unhappy at all with our international growth.

We will continue to invest in additional head count in a variety of our international offices in Asia and Europe as we see lots of potential there.

I think the only thing that's sort of on a relative business seems to have held it down is that the U.S.

business has continued to grow so fast and so as a percentage of the international business is growing rapidly, but it's not gaining, if you will, share in the business.

I think over time that it will and that increasingly our business will shift more to international, although we certainly expect to be a dominant U.S.

business for a long time because of the strength of the internet economy here, in terms of the go to market, this strategy is pretty similar around the world.

We go to market in country.

We sell very similar solutions, but tweaked in country.

We sell them in language, we service them in language to customers, so there certainly English is the main language of business internationally, but when we are in a market we sell in language, in country whether it's France or Germany or parts of Asia with specialized -- and in many places with our website translated into the local language as well.

I just came back from a European tour and was very excited about, by what I see there in terms of the expansion of online businesses, not just sort of more traditional web media business, but business processes going online and being I think great targets for our application acceleration business as well.

So similar pattern to here and the same with network buildout.

We focus on where there will be demand, where the audience is growing, how much broadband there is and we grow the network in each country as we think about growing it in the United States in a very similar matter in using an identical network model.

Okay.

One of the great things I would just add to that is just by virtue of the way we're designed as a massively distributed network and by virtue of the fact that we deliver a lot of traffic international our U.S.

customers, we've already got the footprint worldwide that doesn't require a massive buildout in order to enter a market and so we can enter basically on an incremental basis by adding go to market resources.

We're already deployed in over 70 countries, so we have a pretty broad footprint.

Another question, operator?

Your next question is from Brian (inaudible)

Hi, guys.

Can you hear me okay?

Yes, we can.

All right, it works.

Yes.

All right.

First question I had was around CapEx.

Seemed like it was bit light in the quarter relative to what I was expecting.

I was wondering if you have a view into, in what was, maintenance CapEx versus growth CapEx and how you expect that to roll into next year.

Yes, so we came in right literally, we said we would spend just over $100 million for the year.

We spent $100.5 million in the year.

We came into the quarter knowing that we weren't going to spend quite as much in Q4 and we group, as we do very often, front load our purchases in the first half of 2008.

So we'll spend significantly more in 1Q, 30 to $35 million.

So really, no, no particular trend or anything there, just optimizing our buys for the network.

In terms of maintenance versus expanding our capacity, it's really difficult to separate those two, because very often what we're doing is we're putting in new servers and replacing old servers and when you do that, you get the benefit of having the new server obviously that breaks less often and needs less care and feeding, but also you get more throughput for the same rack space and that's very important to us.

So it's really difficult to separate those two things.

Okay, and then just a follow-up on the IP acceleration product.

Do you intend to -- I understand you're still in the early stages of that rollout, but do you intend to focus primarily on application oh-specific solutions like the SAP example that you gave, or would you maybe compete with other solutions where you have, for example, appliance and other service providers where you have acceleration as the service being provided to customers?

Well, what we're finding is that customers are buying a lot of appliances and putting them into their data centers, sometimes with good effect locally, but often with no effect externally outside the firewall, because those devices can't control through the network layer, where packets move from one end to the other.

And that's where our service model works and we're very compatible with whatever appliances they are using to optimize their data center performance.

So we see ourselves as solving a different problem, that is customers are moving from optimizing their local area network and their wide area network with devices in the data center and on their network.

They have a problem taming internet performance and volatility, and that's what our IP acceleration and our web-based acceleration service do so well.

So we don't find ourselves, if you will, in head to head shootouts at all really with those boxes in most cases, we're really solving a different problem.

Often it comes after the customers poured a lot of money into the data center and still can't get the results they need and we're finding that our service works extremely well.

It works for whether it's a package application like I mentioned with the SAP example, or it's their own Portal that they run on their own and they are moving to a web based access to a browser, for example.

We think there's a wide applicable built in the market, which I think has helped fuel two years of strong initial growth and we're optimistic about where we can take that business over the next several years.

So you go to market strategy, is that primarily a channel-driven effort, direct effort, or ISE-driven effort?

It's been primarily direct, as in any new business, a channel needs be led to water and then directed on how to drink it.

So we had to establish that there really was business model there.

I think with the run rate we've created, we've now done that and we're working on adding channel partners.

Over time I think it may be more of a channel-driven business than our traditional TDN business has been, but we'll stay direct in that market for the foreseeable future for sure.

Okay, thank you very much.

Thank you.

Operator?

Your next question is from Mark Kelleher.

Hey, Mark.

Hi.

You can hear me, too?

We can.

This phone technology might catch on.

We're cooking now.

You talked about the product mix into gross margin.

Could you talk about pricing trends in the quarter, and how that effected gross margin?

Yes, we saw kind of consistent pricing trends with what we've seen in the past.

No major changes there.

There's still plenty of competition, still same kind of dynamics.

We still are fundamentally differentiating ourselves and selling based on solutions rather than competing on price.

Kind of the same landscape that we've been seeing.

And I think you see that with the results, particularly the great Q4 results, that the markets recognized that our customers want value and they want to see their business accelerated and improved.

And that's what we're doing.

We're driving revenue in and costs out for them and they are willing to pay us for that.

With the RPU jump, does that connect into a higher bursting rate, or is that still around 30%?

Well, we are clearly at the high end of the range.

As we usually see in the fourth quarter, that you get to a bit higher range in the bursting, and so this was a particularly high from that perspective.

Another aspect that we see particularly in the media and entertainment space is, often now we're doing deals with customers that have longer-term commitments and monthly commits, so there will be an annual commit rather than a monthly commit.

What that allows is a little more flexibility in terms of when they use those dollars and allows for a little bit more seasonality in our business.

But we have to take that into consideration as we think about forecasting going forward, but fundamentally, no big changes, just, we saw a bit more seasonality in the media space.

Yes, that kind of leads into my next question.

The application acceleration, the media management, those contracts are shorter, right, than the CDN contract, so is that effecting your ability to have visibility?

Actually I would say that on average, this they are a bit longer -- acceleration contracts.

Particularly they are often multiyear deals.

So you were just mentioning quarterly deals.

What was that again?

No, if they are quarterly commitments, they may be a long-term contract, but rather than a month over month commitment for usage, they are quarterly, so customers can have dips and peaks spread over a quarter of their usage, but, no, we don't count them as a customer unless they sign at least a 12-month contract and now in the ad space particularly we're seeing longer contracts.

Interesting.

Okay, great.

That's all I have.

Thank you.

Operator?

Your next question is from Rod Ratliff.

Hey, Rod.

Hey, guys.

Congratulations.

Excellent, excellent numbers you put up there.

Thank you.

Paul, i can normally get you excited in talking about a particular vertical and you actually mentioned with some glee in your voice but did you see particular strength in the games vertical in the forth because the com score data said that that was a particular strong vertical in eCommerce in the fourth quarter.

So any color you can give there?

I didin't see the com score data specifically--

Off the chart, Paul.

We certainly saw with a number of the gaming companies very strong growth in their online usage of software updates, and increasingly, these devices in the home, you know, are network attached, and so people are playing live games against their neighbors, updating or downloading new components of games, both console games like Play Station, or a PC-based game and that was another strong driver in Q4, as I think these devices were probably under the Christmas tree, et cetera, and then been used more than ever before.

Okay.

Also, JD, you -- is the way you spoke about the bursting trend in the fourth quarter and in the guidance that you gave for the first quarter, that leads me to believe that the bursting trend so far that you've seen in the first quarter have settled down a bit.

Is that a fair statement?

We don't have a whole lot of visibility yet to the first quarter, as we're just closing the first month.

But, that's our expectation, is -- usually you see in a business a large fourth quarter.

We've seen that in several -- in the past several years, and then a slower first quarter.

So we're anticipating a similar trend here.

This fourth quarter obviously was, very, very good and so coming off of that, you would expect to see a little bit more slower sequential growth.

But still in the high 30s year-over-year in terms of, of revenue growth and the other thing to keep in mind is that high 30s year-over-year, our acquisitions are now wrapping around.

So, that's even faster--

So it's organic.

That's exactly right.

One last one.

I'm sorry I missed it.

I wasn't typing fast enough.

What did you say that the equity comp projection was for '08?

Between $0.43, $0.44.

Okay, thanks, and congratulations, again.

Thanks, Rod.

Operator?

Your next question is from Tim [Telow]

Hey, Tim.

Hi.

The gross margin side, you mentioned that media was strong in the quarter.

Typically that's obviously a little bit lower gross margin, but are you seeing the media take more value-added services so that maybe it is not as impactful to the gross margins as it was maybe even just a few quarters ago?

We certainly are seeing them uptake things like -- other value-added services.

They are running very complex business models online, and they are getting more and more serious about how they make money.

So we focus on the leading players, the best content, who have real monetization strategies.

Okay.

Very good.

That's very helpful.

Real quickly on the RPUs, obviously that's probably the best sequential jump we've seen maybe in a long, long time.

How much of that was just due to attrition of the smaller, the Netlee guys and stuff who had fallen off and how much of that was,organic and what should we be thinking going forward?

Yes, it was very small contribution from moving up, because there was just a small number of the little guys.

It was low percentage.

So it's mostly just driving usage among -- across the customer base.

Okay, good.

Thank you very much.

Thanks, Tim.

Operator?

Your next question is from Colby Synesael.

Hi, Colby.

You guys talked about focusing more on your current customer base and how that might have been a change in your strategy since the last quarter perhaps.

Can you just talk about why that is?

I mean is it because you're seeing that there's just more competition going for new customers, it's just not worth it from a revenue standpoint?

No, that's not it at all.

Is it that you have the customers out there already that you want within your base?

Just a little bit of color to understand what changed that change in the strategy.

It's not an abrupt change.

We've been talking about it for at least half a year, so maybe we weren't clear or it got missed, but that's been a pretty deliberate strategy.

We spent 10 years getting a great customer list across all the verticals and you see how many of the top brands we have in every vertical we play in.

But what we also knew is that we weren't deeply penetrated into many of them, that they were just starting their web businesses.

They were just starting to use our services and then there was a huge opportunity to grow what we were doing in those accounts to sell them more value-added services and migrate more of their business online and it's just a much more efficient use of our resources.

Doesn't mean that we're not selling new accounts.

You saw that we added many in the quarter.

We'll continue to do that.

A lot of that will probably come from international as there will be more uptake of new internet business models there.

But, no, it's a slight tweak to the strategy.

It is not a wholesale change.

It's something we've talked about probably now three quarters and we'll continue to.

It's really a tried and true strategy take It's really an IBM-type strategy.

There are some customers who really matter, go get them.

You get deeply embedded and you grow as their businesses grow.

We're seeing that.

We saw the dividend of that in Q4 particularly.

And, one of the other questions I have is, your analyst day you talked more about being a distributed, the distributed platform more than being a CDN.

Obviously you guys mentioned the acquisitions of nine systems in Netlee.

How many of your customers now and since those acquisitions are actually taking more of a bundled service, that involves some of the solutions that you got from some of those companies that you did acquire?

Well, the answer is more and more and the best part of it is not very many yet because it's been less than a year, and first we had to bullet-proof those services to get them to Akamai's scale and roll them out, so we've got huge opportunity I think to increase that bundling and to go and really help drive that strategy of more deeply penetrating the great accounts that we have with the value-added services, and then we've got more in R&D right now that we'll continue to roll on the over the next three years.

So I feel very good about the portfolio that we have to take into market in '08 and then what's coming behind that in future years.

Great, thank you very much.

Congratulations.

Thank you.

Your next question is from Jeff Van Rhee

Hey, Jeff.

I'll go through these as quick as I can.

The churn sounds like nine and Netlee were part of the reason for the boost.

Are we two-thirds, three quarters, roughly how far through with the churn related to those two entities?

We're probably facing a bit more churn related to that in the first quarter and then tailing off in the second quarter, roughly.

Okay, and then on the RPU, I hate to beat the horse here, but the eCommerce surge, bursting makes sense, but for you media to surge, to drive what was really an amazing RPU number here, you've got to have a lot of people doing the same thing at once and we rarely see that outside of, of eCommerce.

Is there anything else to try to make sense of why so many people would move in a way that they just have not moved in any of the other prior quarter?

I would expect a movement like that might take a longer period to gain momentum, but it just seems to have all of a sudden taken off for a lot of people.

I just think you continue to see adoption of the internet and it creates this virtual spiral upward right now, more people putting up content, more talking about it, more hours spent online, more broadband access at home and especially at home and at work, more advertising dollars, subsidizing a lot of the content, continued growth of some of the pay content, like around iTunes, and you put it together and it just goes really, really well.

And so I think you're just seeing that we are positioned well as the internet grows, we just capture that.

Okay, great.

I'll leave it there.

Great quarter.

Thank you.

Thanks.

Your next question is from Ray [Archbold].

Can you hear me?

Yes, we can.

Great, thanks.

I was hoping you could refresh us on sort of what are the implications of HD content as that starts to come into the stream and particularly in revenues and margins, capital intensity, and then when you look at the guidance for '08 I think you referred to not really baking in too much, but if you could just give us a sense as to what, what are some of the signals that we should be looking for to, in anticipation of some acceleration in HD content going forward?

I think you can look at proxies like the kind of broadband end users have at home.

I think that that's really a part of the trend of entertainment and information video content moving to IP, not first as HD, but first as VHS and then DVD quality, but ultimately it's DVD quality.

The first trend is what you're seeing now, which is people just watching television quality over IP on their laptops, or their iPOD-type devices, and over time probably over the next five years, that will shift to the highest format, like HD and people watching not on a small screen, but on a large screen.

Our assumption of limited growth in HD in '08 is typically because the number of people with Fiber-to-the-Home type connection is still relatively small, but we believe that kind of connectivity will grow over the next five years and we'll really drive growth.

What you'll see there is more and more video and we think you'll see similar trends, which is driving down unit costs and the unit's going up at least as fast, if not faster, and we think that that will be good for our business.

We have a huge effort under way that we always do to continue to optimize our software to allow us to serve more official out of the CapEx dollars we deploy.

We continue to see the benefit of Mores Law-- faster, better, cheaper machines every year.

So we remain confident that the model should remain the same, but we hope the volumes and the results continue to rise.

So, again, your sense is that as HD becomes a bigger part of the bits that there's not going to be a material change in the economic models for Akamai?

No -- talk a bit more about this on our analyst day, as we talk, really for the first time in a while about a longer-term model.

We don't see the need to take our CapEx up another step function to deal with this because it really, it's an incremental change.

It's not a redesign of our network.

It doesn't require any major buildout.

It's just going to be as the volume gross, we'll build out to deal with it.

It's one of the -- it's frankly one of the advantages of the approach we've taken, which is a software-based approach over a massively distributed overlay network.

We're not building data centers and we're not laying, or putting in dark fiber.

We are just adding commodity servers at thousands of locations across the globe.

I think one of the mistakes that's made is that we're compared to the hosting model, which has a very different capital intensity profile than our distributed overlay approach and so we have a very different model, which we demonstrated for a decade now and we see no reason to believe that there will be any significant mix shift there.

Very good.

Thank you.

Next question?

Your next question is from (inaudible)

Can you hear me now?

We can.

You don't even need to feed quarters in.

Wonderful.

Just very brief question.

Did you see any stabilization in the large deal CDN pricing sequentially in this quarter?

And how do you see the trend going on in any light on that?

The pricing trends been very consistent all year, year-over-year and as JD said earlier, we don't expect to see any significant shifts there either.

Okay.

Operator, I think we've got time for one last question, if there's one more in the queue.

Your last question is from Ted Baker.

Todd?

Not sure if Todd's really there.

Okay.

Doug [Campbell], your line is open.

(inaudible) partly addressed, but following your really impressive high-def video demo last year, what you referred to, you mentioned the studios really couldn't utilize it and I guess it's Fiber-to-the-Home is the bottleneck at this point, but in a larger context, the Hollywood studios appear to be trying just a great variety of distribution avenues and in the aggregate they have signed up with a whole bunch of different people to deliver movies in different ways.

Do you think Hollywood is ready to kind of standardize, if you will, on some sort of main stream, consistent distribution, or do you think they are still experimenting?

Doug, thanks for that.

That's a great last question.

No, I think that Hollywood has always had multiple distribution outlets.

Once we move from only having movie theaters and I think they will continue to use multiple avenues to include television, cable, satellite, DVD, but increasingly we'll be looking to IP distribution.

I think you can look at things like the new movie rental service from iTunes that we're supporting, and the very exciting way for people to now have what they really want, which is the choice of any content, any time, anywhere on the device that's convenient for them to share it with their family and their friends.

It opens up tremendously exciting opportunities for us for internet content distribution and application acceleration, and I think that you're going to see steady growth in that particularly as broadband continues to grow to the home and the size of those pipes continue to expand.

So folks, thanks for calling in.

Thanks for putting up with my hoarse voice and also with the little bit of switchboard trouble getting some of your questions in the queue, but I think we got almost everybody who tried to log in.

We hope we answered your questions.

It was a great year.

We look forward to talking to you in a few months as 2008 unfolds.

Thanks, and have a good evening.

This concludes today's conference call.

You may now disconnect.