阿卡邁科技 (AKAM) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Akamai Technologies earnings conference call.

I will be your coordinator for today.

At this time, all participants are in listen-only mode.

We will conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today's call, Ms.

Noelle Faris, Senior Manager, Investor Relations.

Please proceed.

Good afternoon and thank you for joining Akamai's investor conference call to discuss our third quarter 2008 financial results.

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

Sherman, Akamai's Chief Financial Officer.

Today's presentation contains estimates and other statements that are forwarded-looking under the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements.

Additional information containing 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.

The forward-looking statements included in this call represent the Company's views on October 30, 2008.

Akamai disclaims any obligation to update these statements to reflect future events or circumstances.

During this call we will be referring to some non-GAAP financial measures that we believe are helpful to better understand 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 metrics to the most directly comparable GAAP financial measures under the news and publication portion of the Investor Relations section of our website.

Now let me turn the call over to Paul.

Thank you, Noelle.

Thank you all for joining us today.

Before we begin, operator, could you make sure that the microphones, including your own, are properly muted?

There was some background noise that was coming through there.

Q3 was a solid quarter for Akamai in an increasingly difficult environment.

Financial highlights for the third quarter include record revenue of $197.3 million, a 22% increase over the third quarter of last year and a 2% increase over the second quarter of this year.

Normalized net income of $74.2 million or $0.40 per diluted share.

That's a 19% increase over normalized net income from Q3 of last year and down slightly compared to our Q2 results.

We generated cash from operations of $93 million in the quarter, giving us year-to-date cash from operations of a $0.25 billion or 43% of revenue.

I'll be back in a few minutes to share some observations on the marketplace in these challenging times and provide context on the launch of our new advertising decisions solutions product line, including our pending acquisition of acerno.

But first let me turn the call over to J.D.

to review our third quarter results in more detail.

J.D.

Thanks, Paul.

As Paul just highlighted, our business performed well in the third quarter.

We grew revenue 22% year-over-year and 2% sequentially to $197.3 million, at the upper end of our expectation range coming into the quarter.

Growth in our commerce vertical continued to be very strong.

Again, it was our fastest growing vertical, growing nearly 40% year-over-year, driven in part by increased penetration of our Dynamic Site Solutions and Application Performance Solutions.

Our media and entertainment vertical again grew roughly in line with the overall business in the third quarter.

The high-tech vertical grew more slowly than in previous quarters, driven by the timing of key customer renewals in this vertical.

We also continue to make progress with our newer value-added solutions such as application performance services, Dynamic Site Solutions, and Stream OS.

These areas have become a significant driver of revenue growth and, in total, roughly 40% of our Q3 revenue came from our value-added solutions.

During the third quarter, international sales represented 26% of total revenue consistent with second quarter levels.

Our international business performed very well, growing 36% year-over-year but on a sequential basis was negatively impacted by about $2 million due to the stronger dollar.

Revenue in North America grew 2% sequentially and 18% year-over-year.

Resellers represented 17% of total revenue, up 1 point from the prior quarter.

Once again, no customer accounted for 10% or more of our revenue in Q3.

We added 83 net new customers in Q3, bringing our total customer count to 2,808.

Our gross adds, brand-new customers to Akamai, increased to 169 this quarter.

We continue to see good quality signings from enterprise-class customers with over half of the revenue from our signings coming from Application Performance Solutions, Dynamic Site Solutions, and Stream OS.

Churn was 3% in the third quarter, slightly down from the last few quarters.

The ARPU of our new customer adds continued to be well above the average revenue of our churn customers.

Our consolidated ARPU or average revenue per customer, was $23,500 in the quarter, down slightly from Q2 but up 14% from last year on the strength of our diverse enterprise-class customer base.

Our cash gross margins for the quarter were 81%, down about 1 point from the same period last year and down about 1 point from last quarter.

As we had expected, cash gross margin have stabilized with the growth in sales of our newer services, which have a higher gross margin than our media delivery deals.

Our GAAP gross margins, which include both depreciation and stock-based compensation, was 71% for the quarter, down 1 point from Q2 and down 2 points from Q3 of last year.

GAAP operating expenses were $88.9 million in the third 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 $69.3 million, up $3.4 million from the prior quarter.

Adjusted EBITDA for the third quarter was $90.5 million, up 26% from the same period last year and down 2% from the prior quarter.

And our adjusted EBITDA margin of 46% was up 1 point over the same period last year and down 2 points from the second quarter.

For the third quarter, total depreciation and amortization was $24.6 million, up from $23.4 million in the second quarter.

These charges include $18.5 million of network related depreciation, $2.9 million of G&A depreciation and $3.2 million of amortization of intangible assets.

Net interest income for the third quarter was $5 million.

That's up slightly from Q2 due to higher invested cash balances.

Moving on to earnings, GAAP net income for the quarter was $33.4 million, up 37% from last year, representing $0.18 of earnings per diluted share.

As a reminder, our GAAP net income includes noncash charges for stock-based compensation and book tax charges at an effective annual rate of approximately 40%.

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

During the third quarter, our stock-based compensation expense was $14.1 million or $0.08 per diluted share on a pretax 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 included $3.2 million from amortization of intangible assets and a $22.4 million noncash tax charge.

Excluding these noncash items, our normalized net income for the third quarter was $74.2 million, 19% higher than our normalized net income from the same period of last year and down 3% from Q2.

In the third quarter, we earned $0.40 per diluted share on a normalized basis.

That's an 18% increase year-over-year and down $0.01 from the prior quarter.

Our normalized weighted average diluted share count for the third quarter was 188.3 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 $93 million, and year-to-date we've generated $251 million of cash from operations or 43% of revenue.

That's up 52% from the same period last year.

At the end of Q3 we had $789 million in cash, cash equivalents, and marketable securities on the balance sheet.

This balance included $263 million of AAA rated federally insured student loan auction-rate securities, which we continue to treat as long-term investments in Q3 and we continue to value using a cash flow model per FAS 157.

During the quarter, we recognized an additional $9 million of unrealized loss on these securities, based on this model, driven by the changing interest rate environment.

The remainder of our cash and investment portfolio remains sound relative to the difficult market conditions.

We think that the combination of our very strong cash generation and our solid balance sheet puts us in a good position to make timely strategic investments such as acerno, even and perhaps especially in a market downturn.

In the third quarter, capital expenditures excluding equity compensation were $36.4 million.

And days sales outstanding for the quarter were 58 days, consistent with the prior quarter.

Let me also say a few words on the financial aspects of our pending acquisition of acerno.

We anticipate closing the acquisition in early November.

As we said in our press release we do not expect the business to have a material impact on our near-term normalized earnings.

Since we have not officially closed the acquisition, we are not able to give much detail beyond that but we look forward to discussing it at our upcoming investor summit.

Overall we delivered a solid Q3.

We were pleased with our performance in what is clearly becoming a more difficult external environment and we were especially pleased with the traction across our new solutions.

These solutions are becoming increasingly important driver of our revenue and profit.

Moving into the fourth quarter, it is clear that on-line advertising and consumer spending trends are softening, while the strengthening dollar also creates a headwind for our international growth.

In this environment, we think it is prudent to be cautious over the short term about our revenue growth and particularly expectations for holiday bursting in Q4 from our commerce sector.

We also expect to see the short-term pressure on our media delivery and download solutions continue in this environment but we believe that the scale of our network and our software-based architecture give us both a performance and a cost advantage that positions us very well.

At the same time, we expect to see continued traction for our newer solutions.

In this environment we expect revenue of $202 million to $210 million for Q4, which is wider than our normal range given the variables of currency, seasonality and our pending acquisitions.

At the midpoint this represents 4% sequential growth and 12% growth over our tremendous fourth quarter of last year.

This guidance includes $4 million to $5 million of revenue from the pending acquisition of acerno.

As for currency, at current levels the negative impact on our Q4 revenue would be about $4 million to $6 million on a sequential basis which we factored into this outlook.

At this revenue we expect normalized earnings per share of $0.39 to $0.41.

Underneath this we expect Q4 cash gross margins to remain roughly consistent with Q3 levels while GAAP gross margins will decline by about a point due to increased depreciation.

EBITDA margins will decrease slightly as Q4 expense levels increase due to year-end skewing of some of our expense items, such as sales compensation as well as expenses associated with the integration of the acquisition.

For the full year this implies revenue in the range of $780 million to $788 million, up 23% from last year at the mid point and normalized earnings per share of $1.60 to $1.62, up 22% from last year.

Underneath this we expect our full-year gross profit margins to be about 72% and full-year EBITDA margins to be about 46%, consistent with our guidance from the beginning of the year.

Capital expenditures in the quarter, excluding equity compensation will be in the range of $25 million to $30 million, down from Q3.

For the year we expect CapEx to be in the range of $120 million to $125 million, or 15% to 16% of revenue.

As for 2009, we expect many of the trends we are seeing in the second half of 2008 to continue with slower growth in our media and download solutions being offset by continued traction in our newer solution.

It is anybody's guess as to when the external environment begins to improve, so we are taking a cautious view as we look towards next year.

And recognizing the significant uncertainty, at this point we are not comfortable giving specific guidance beyond Q4.

Our approach in this environment is one of balance.

We want to be cautious about near-term prospects and manage the business accordingly.

Our model has scaled very well as we have grown and we continue to focus on efficiencies, costs, and expense management.

At the same time, we want to ensure that we are continuing to innovate and we are driving the success of our newer solutions with strategic investments both internally and externally.

While the near-term picture is less certain, we remain very confident in the long-term prospects for our market and our business.

Now let me turn the call back over to Paul.

Thanks, J.D.

As J.D.

said, we're taking a cautious approach, but we also recognize that in every downturn there's opportunity for well-positioned innovators.

Certainly most enterprises are being affected by the economic climate and we expect they will adjust their investment levels accordingly.

Fortunately, most of the industries and consumer verticals -- or customer verticals where we focus, permanent economy businesses have indicated that the internet is a critical part of their future.

Exactly how much our customers will have to trade off one investment over another in the short term isn't clear today.

Many of these customers have been in business for decades.

They have been through tough financial times in the past as have we.

And we're working together to help them gain as much advantage as possible from their on-line assets.

As J.D.

mentioned we ended the quarter with nearly $800 million in cash, cash equivalents and marketable securities.

We believe our strong balance sheet will enable to us weather this economic downturn and offer stability to our customers.

Our position stands in sharp contrast to unprofitable and underfunded competitors, large and small.

In past downturns, such firms have failed.

We expect we'll see a similar trend in this bear market.

To give you some perspective, in the last downturn, while our competitors were pulling back we introduced EdgeSuite and it became our flagship service, fueling many years of growth.

Perhaps most important of all, we have a diversified product portfolio now that allows us to offer [fueling] solutions across a number of diverse industries, including such value-added solutions as our Dynamic Site Accelerator, our rich media management tools, and our application performance services.

Another example of our ability to innovate and create new value for our customers is the recent announcement of our Advertising Decision Solutions product line.

The launch of Akamai's Advertising Decision Solutions represents nearly two years of internal development.

We're very excited about this opportunity and believe it will allow us to offer services to a broader part of the Internet advertising market.

As a result, we think we'll open up significant new revenue opportunities for Akamai.

Overall, on-line advertising is a $45 billion industry worldwide, with $21 billion of that spent in the US alone according to studies by IAB, PWC, and Piper Jaffray.

To date we have addressed this market primarily by delivering ad banners and rich media advertisements for our ad network and on-line publishing customers.

Now through our Advertising Decision Solutions we can offer enterprises a critical leap forward, the ability to efficiently target the most appropriate advertising messages in real time across any number of sites.

At the same time, we'll do in this a trusted manner using completely anonymous data and processes that protect the privacy of end users.

We already work with many of the web's largest publishers.

Now we can provide them with the ability to offer their advertising clients more targeted access to the right audiences.

Advertisers will also benefit by seeing greater return on investment through improved performance of ad campaigns, while cutting waste from ad budgets and reaching exactly the right audiences at the right time.

To greatly enhance our capabilities in this market we're acquiring acerno, the industry's leading on-line shopping data cooperative.

We intend to leverage acerno's unique data co-op and predictive modeling to improve the capabilities of our Advertising Decision Solutions.

Watch for customer and product announcements from us in this area in the coming weeks.

In another example of continuing innovation from Akamai, we have worked with Microsoft to create what we are calling AdaptiveEdge Streaming for Silverlight.

The significance of this new solution is it allows our clients who want to deliver higher quality video to leverage enhanced Silverlight technology from Microsoft.

This technology allows video quality to adjust automatically based on a user's connection speed.

As a result, consumers with high bandwidth connections can experience near HD or HD quality.

You can see a preview of this compelling technology at the demo site we've created, www.smoothhd.com.

In summary, the challenging economic environment is a reality that affects us all.

We are certainly going to be more cautious in the short run, but we also believe there is immense growth potential for business on the Internet.

We want to ensure that Akamai is well positioned to capitalize on this opportunity over the long run.

Our recent introduction of an entirely new product line around advertising as well as our continued leadership in media delivery as evidenced by our work with Microsoft, are just two examples of our commitment to make strategic investments.

Akamai's experienced management team has successfully navigated downturns before, and I'm confident that we will manage through this one as well.

We expect to emerge stronger than ever when the external environment turns around.

We look forward to continuing to update you on our progress and sharing more detail about industry trends and value-added solutions at our investor summit next month.

Now J.D.

and I will take your questions.

Operator, the first question, please.

Operator, can we have the first question, please.

Yes.

(Operator Instructions) Questions will be taken in the order received.

And your first question comes from the line of Michael Turits from Raymond James.

Good evening.

One just clarification.

I want to get on the fourth quarter guidance, I understood -- just want to make sure I got it right, that you expect $4 million to $5 million of sequential currency headwind.

And it sounds like that's equally offset by $4 million to $5 million from acerno.

I like how you pronounced acerno, by the way.

That is the correct pronunciation in truth.

It's actually the spot rates are bouncing around a little bit.

I said $4 million to $6 million, but yes, basically roughly offsetting the acerno pick-up.

Thanks on that.

And then on the -- just on the general trends on the real drivers for your business, you talked last quarter a little bit about trends in traffic growth rates and trends in pricing, as well as what's happening with some of the more -- like on the edge new business model type of companies that had been seeing weakness.

So those three issues, traffic growth rates, pricing, and what's happening with some of the companies that were having more difficulty monetizing the service they were buying from you.

So traffic continues to grow.

We talked earlier about a moderation in the rate of growth, not that it shrank, and I think that was consistent, and we don't expect to see a rapid pickup in broadband end user speeds, particularly in this economy and how that affects consumer credit going forward.

Pricing dynamic remains as we've talked about before.

Unit pricing, particularly in high volume media space will continue to go down.

We have seen that.

We expect it will continue.

It's been a ten-year trend.

No reason to see that -- or expectations that that will change.

We are starting to see some of the newer web 2.0 businesses, particularly in the social space, that are not well established get into distress.

I think we've done a very good job limiting our exposure there, so that I don't think it's a big exposure for us at all.

But we have picked up on some of those businesses, really running into trouble, not ones who are customers, fortunately, but probably affecting others in the industry.

I think we've heard some of that from other public companies in some of their statements as well.

I think what's really important is our drive to move toward value-added services.

We've talked about 40% of our business coming in the value-added category in the past.

Our goal is to drive that up.

And our whole movement to build our application acceleration service over the last two years and now to introduce our advertising decision solutions is to move into higher value areas where we're helping our customers make more money on-line.

We think that can continue to be both a growth driver for us and keep us in the area of where people actually make money on-line, not where they're speculating with on-line ideas.

Don't know if I get a follow-up here, but if I do, you talked about --

You've got a quick follow-up.

You talked about a de-coupling last quarter of price declines from -- of price decline rates from traffic growth rates, where in the past when you had seen growth moderating, you had seen price easing, too.

Is that still the case that pricing is not moderating with the decline or the easing of unit growth?

Yes, that's what we talked about, that in a period normally when traffic growth tends to slow, price declines tend to moderate.

I think what we're seeing in the media and entertainment space is prices are still coming down even as traffic growth is moderating.

I think certainly the economic overhang has put a lot of pressure on the budgets and the cost consciousness of our customers.

Also, they are thinking about the next wave here of HD and focused on making sure that their costs are in line so when that model does take off, they can take advantage of it.

So I think when you combine that in the space, the same -- we're seeing the same trends we have seen over the last couple quarters there.

Thanks very much.

Sure.

Operator, next question.

And your next question comes from the line of Todd Raker from Deutsche Bank.

Hi, guys.

It's Brian for Todd.

Hi, Brian.

Nice quarter, revenue coming in a little bit above expectations.

When I look at margins, though, it came in a little bit below.

Given you talked about the value-added higher margin businesses driving some of the upside, I'm just trying to reconcile those comments in terms of the higher margin business driving upside, but margins overall coming in a little below where you had guided them to.

Can you speak to that?

Brian, I thought, as far as I could tell, we guided to gross margins being down about a point quarter over quarter.

Remember, in Q2 our margins had gone up from 81 to 82%.

We've seen them come back down to the 81% range here in Q3.

So I think that what we've seen is our cash gross margins stabilize a bit.

We do have a depreciation increasing based on some of the capital investments we made over the last couple years.

That's driving cash gross margins down, but I think we're basically on track in terms of where we thought margins would be.

In terms of our overall margins, we had talked about sort of our $1 billion model saying we'd expect when we get to $1 billion, that EBITDA would be in the kind of 48% to 49% range.

We hit that last quarter and we've come off of that a little bit.

But I think that's just a matter of course, and we feel like the transition or the evolution that's going on with our value-added services are helping us to get there even as we see the pressure in the software delivery and the media delivery areas.

And in terms of the fourth quarter, obviously it's a tough economic environment.

Can you give us a sense for where the value-add solutions percent of revenue you expect that to be for the fourth quarter?

Maybe kind of compare that to the fourth quarter from a year ago.

I think we'll give you some update at the investor conference next month, and then report at the end.

I think that's one of the areas like e-commerce where there's heavy use of value-added capabilities.

Frankly, we just don't know because our customers don't know where e-commerce is going to come in.

There is some level at which our business can go up even if people are just window shopping and not buying but that's not a sustainable model.

A strong robust consumer e-commerce economy is good for our customers and that's good for us.

Where that will settle out I think is one of the big unknowns for folks, and November and December are the crucial months.

We're just going to have to wait and see how that plays out.

I would say last year at our analyst day, we talked about roughly a third of our revenue coming from these areas.

Now it's roughly 40% so that's sort of the dynamic trend we've seen.

You can also see that in the really the success in our commerce area which has a high affinity, particularly toward the dynamic solutions, so I think that's a positive trend.

And as Paul said, we'll lay that out in a bit more detail next month.

All right, thanks for the insight, guys.

Operator.

Your next question comes from the line of David Hilal from Friedman, Billings, Ramsey.

Great, thank you.

First, a follow-up on the value-added services.

I specifically wanted to talk about APS and Dynamic Site Accelerator.

When you look at your installed base, what percent of that installed base do you think are likely candidates for these add-on services, and where do think you are today in terms of penetrating that available base?

I think, I'll take them each separately.

When we think about Application Performance Solutions, if you are a major enterprise running any kind of web-based application or looking at taking any of your applications outside of your database over the public Internet, then you ought to be -- you are a candidate for Application Performance Solutions, and so that is a very large majority of the kind of customers that we have.

And I think our penetration is improving there.

I don't have the exact statistic in front of me and the number of customers that are taking -- that are buying APS from us right now but I think there's tremendous amount of potential there.

And a similar story in DSA.

Dynamic Site Solutions has a strong affinity in the commerce sector, but really also we see pockets of early adoption and aggressive adoption in places like social media where there's a very dynamic experience and the most important aspect of a website is the dynamic aspect.

And I think our penetration there -- we're making a lot of progress, particularly in the commerce space.

I did happen to look at the percentage of our top customers that are buying these services, and it's well over 50%.

Okay, then let me ask about CapEx.

A little higher than we thought in the quarter so I guess I wanted to ask, how much of that $36 million or so was from the kind of one-time facilities expansion?

And then for '09, while I'm sure you won't give me specific guidance, has your overall thought about CapEx spending in '09 come down from where it was 90 days ago due to potentially slower demand because of the economy?

Yes, I think on the CapEx we actually were a little bit under where we thought we'd be in 2Q and sort of caught back up.

We did spend a little bit -- a bit of the bump in the 3Q was based on timing at some of our facilities expenditures.

In fact, we were pleased last quarter to announce the opening of our new facility out in San Mateo.

Office facility, not network.

Yes, office facility, right, exactly.

But I'd say overall we're still on track for exactly where we thought for the full year.

Looking forward, again as you guessed, not a lot of specific guidance I'll give you there, we did talk about a model in the 13% to 16% range and that we talked about as revenue growth would tend to slow we'd be towards the low end of that model.

I think that fundamentally still holds.

Okay.

Thank you, guys.

Thank you.

Operator.

Operator, next question.

And your next question comes from the line of Rod Ratliff from Stanford Group.

Thank you very much.

Nice quarter.

Thanks.

Paul, given what you said referencing this week's press release on the Microsoft Silverlight work that you're doing, I know that you are really kind of loathe to speculate about a customer relationship, like I'm about to ask you do, but could you foresee a role for Akamai in potential buildout of Microsoft as your initiative?

I'm not going to speculate.

I think you anticipated it.

We don't speculate on customer stuff.

We have partnered with them on various technologies now for a decade and we'll continue to where it makes sense for both of us.

J.D., would you say that the ARPU falling off sequentially is a direct result of the slowness in the media and entertainment challenge?

It think there's two things.

One is a just a mathematical thing, which is when you add -- when you spike up and 83 net new customers, those customers aren't -- they come into the customer count, but really they start generating revenue significantly next quarter based on our model, so there is that.

So you kind of look at the 14% year-over-year, which is down a little bit sequentially.

I think, yes, that's basically the volumes falling off and the pressure we have talked about in the large media delivery deals.

The nice part about that is more of the ARPU growth is coming from up-sell and value-added solutions.

So I think that's a positive, even though we have seen the rate of ARPU growth come down a bit.

One last comment.

Paul, my hat is off to you, George, and the rest of the board for having the vision to embrace the product breadth that you have.

I think it's going serve you well in the downturn.

Thanks.

That's always been our plan, and we try to build for the long term, and we make these decisions about investment when you don't know exactly what the world will look like 18 months later, but we still think they're the right thing to do and we are going to continue to do it.

We think it's the right thing for our business and for our shareholders.

Operator, next question.

And your next question comes from the line of Kirk Materne from Banc of America.

Please proceed.

Yes, thanks very much.

J.D., you had some comments just on the on-line commerce business and some of the trends we have heard about on some of these other conference calls on the third quarter.

Was there actually an impact this quarter or is it -- or were your comments mainly reflective of trying to be cautious heading into the fourth quarter?

I was just trying to get a sense, have you seen things on that side of the business already or are you just trying to be cautious heading into sort of the holiday season?

I think we have seen really good performance in the commerce sector this year, driven by the strength we saw towards the back half of the year and then also selling into that sector particularly Dynamic Site Solutions.

Really, our comments are based on if you looked last year, we saw a very significant up tick into Q4 from holiday bursting in the commerce sector.

This year we're just a bit cautious about that, given the economic environment.

So we did see kind of high 30s growth in that sector, in that vertical in Q3.

It was close to 50% in the early half of the year, so that's sort of a natural slowing down there.

But really most of our focus is on, frankly, the uncertainty about what the holiday season is going to bring.

That's fair.

Then just my only follow-up question is really, you also talked a little bit about sort of your balanced approach, and it's pretty clear that you guys, despite the tougher top-line environment have managed the cost structure well, especially cash flow.

Could you just talk about how that sort of translates, or at least your thinking as we head into '09 around sort of the capital structure?

You guys are generating a lot of cash.

I think it seems that you have made some really positive acquisitions, but is there room to I guess, expand the capital management structure?

Two things, either paying down some of the converts or buying back some stock.

I'm just trying to get your sense on, given that we don't know a whole lot on the top-line environment, that's going to be very volatile.

I'm just trying to get a sense on, does that change your thinking on the capital structure and what you should be doing with it?

Right.

I think certainly when you are in a volatile economic environment, you want -- and you find yourself in position with a pretty solid balance sheet like we are, you can think about that both prudently and opportunistically.

There are certainly a lot of opportunities out there as ways for us to use our cash.

I think we're going think about that sort of in a pretty cautious way in this environment.

We don't want to run out and spend all of our cash and find ourselves in a situation where later on we wish we hadn't.

But I think the options are pretty wide open for the kind of things that we can do.

We don't have a share authorization -- share repurchase authorization in place right now.

It's certainly something that we can and will consider.

But most importantly, I think, as we enter this environment, this puts us in a really strong position to make some opportunistic investments, both internally and externally.

That's fair.

Thanks very much.

And your next question comes from the line of Mark Kelleher from Canaccord Adams.

Please proceed.

I want to talk about that jump in new customers.

Was there products that were driving that?

Was it vertical segments?

Was it an effort on your sales force?

What drove that up this quarter?

I hope there's an effort every quarter by our sales force.

They certainly have an incentive to get out there and close deals.

And as you know, we don't give quarterly guidance or targets on new customer acquisitions.

I do think, and again, we are really trying to not get out in front of our headlights on good news, but I think it demonstrated -- because this was a quarter where there was a lot of economic uncertainty, there was bad news out there and people are not throwing money around cavalierly, that people are still investing in the Internet and they see a lot of value in our services and it allowed us to have really the best net new add quarter in a long time.

So I took that as encouraging, but we are not going to get ahead of ourselves on thinking that there aren't tougher times out there across industries and we are going to be prepared to deal with that.

But I think a lot of what drove it was value-added services and our customers' ability to realize that we can help them make money on-line.

I think roughly probably over half of those deals included some sort of value-added service.

So would you be selling the value-added service without the CDN, or you sell -- so most of the new customers are CDN that you would then pull onto the value-added services?

I think to understand, at the end of the day we fill the screen with something, so there's always some level of content delivery, so even if you think about a pure B-to-B application that we're accelerating, we're accelerating the dynamic traffic back and forth but we're also delivering a page.

There may not be rich media in that user of some internal business application isn't watching a funny video or something but there is some content delivery that goes with it.

So at the base level, we're always doing content delivery even when we're doing some very high-end value-added stuff for people.

My last question is where do you think the percent of value-added solutions could get to from 40%?

Could it be 60%?

We are not going to give any specific guidance but our goal is always to be driving up the ladder to higher value for our customers and the area we launched two years ago, Application Performance Services and now in the advertising ecosystem, are all around value-add for our customers.

So we will continue to certainly push content delivery, particularly in the high-volume media and software areas where we also offer some value-added monetization tools, but volume and helping our customers with the cost is probably job one.

In those other two categories, we're really leading always with the value-added opportunities.

Okay.

Thanks.

Thanks, Mark.

Operator.

And your next question comes from the line of Rai Archibold from Kaufman.

Thank you.

Most of my questions have actually been asked.

I was just curious, though, when you look at the competitive environment and talking to the de-coupling of pricing relative to traffic growth I'm just curious.

Are you seeing any specific vendors who are being particularly egregious, or is it sort of more of a hit or miss?

And, one, I'm just curious, in terms of your own pricing discipline, how are you being able to affect that in this kind of environment where you have been able to maintain your margins even with this kind of aggressive pricing?

I wouldn't want to put an adjective on anybody else's pricing.

That's their own decision about there own business and whether it's sustainable and whether they can actually build a sustainable business and shareholder value.

That's up to them.

The discipline we have is that we believe we have the lowest cost structure, the ability to make money while continuing to drive the cost down for our customers, and so we continue to do that -- continue to look for ways to do that with our clients.

I think we've been very successful.

It's also where scale helps us a tremendous amount.

We have the ability to bring on tremendous amounts of traffic and new customers at fairly economical terms, and we pass that along to our clients, so I think that's worked very well.

And as long as we stay disciplined on the kind of deals we sign but also our target to drive our own costs down year in and year out, we'll continue to be very successful both in more modest times, I think we're going to have the next year or so, through this difficult economic climate, and then on the growth side that we know will come on the other side of that curve as the clouds lift.

And if I could just ask one follow-up, with renewals that you booked this quarter can you give us a context in terms of what the tenor was in terms of volume commitments, pricing that you had to -- pricing concessions, perhaps, that you gave to retain business?

I think we're -- terms were -- terms that we've had in the past.

As you saw, churn was down a point, which was a positive, but again, that's usually with small customers who are churning, but, again, like to see us maintaining as many as possible, as long as they're good clients who are paying their bills, so I think it was fairly solid in that regard.

Thank you.

Operator.

And your next question comes from the line of Mark Mahaney from Citi.

Please proceed.

Thank you.

I wanted to ask about the Advertising Decision Solutions product you talked about a little bit.

Could you talk about how much traction you've had in the marketplace already with this, the number of customers that have expressed interest in it, and maybe a little bit discussion about the pricing model for it.

Thank you very much.

Sure.

We won't be saying a lot.

We will be making announcements over the quarter that I think people will find very helpful.

To some extent, the first announcement we made was required because we were doing an acquisition.

We'll now be making product and customer announcements over the coming weeks and months.

We have been working very closely with a selected number of publishers and advertising networks to form partnerships.

I can tell you there is a high degree of interest both on the publisher side and the advertiser side.

We expect to get paid as our customers make more money from more efficient advertising, so we think it's a business that scales very nicely with growth and success, so it's not a software license model where we'll sell them a -- some kind of process and they can run it as much as they want.

We expect to grow as our customers grow with more efficient on-line advertising.

Clearly think there's a large addressable market.

Now we have to chip away at it one piece at a time.

But we will be approaching both the publisher side, so that they can offer better advertising buys, and the advertiser's side, or if you will, the marketing side so people can place more efficient advertising, and as they recognize more efficient buys, or if you will, more success through their ad dollars, whether that's expressed as higher sales or higher CPM, we expect to capture a percentage of that uplift.

Thank you, Paul.

Thanks, Mark.

Operator.

And your next question comes from the line of Tim Klasell from Thomas Weisel Partners.

Please proceed.

Good afternoon, everybody.

Just a quick question on the acerno acquisition as well.

These behavioral targeting networks have always had a difficulty with scale, getting the algorithms accurate so that you get a solid return.

Can you sort of walk us through how you plan on getting a scale with this and do you have existing customers already signed up -- large existing customers already signed up to be able to address this?

I think you are on a great point, and I think you have hit at the heart of one of the things that Akamai does really well, and that's scale and real time.

Today our network for content delivery and acceleration responds to literally hundreds of billions of requests a day -- that was billions -- hundreds of billions of requests a day in real time.

So as we design our first products and our road map in the advertising ecosystem, we understood that what we needed to bring or could bring as a differentiator was huge scale and the ability to do things in real time.

Not historically or I'll get back to you tomorrow with a recommendation, but real-time capabilities.

So what we've built is technology to allow publishers and advertisers to make smarter decisions around how to place ads in gigantic scale instantly.

And so we think that's a core competency of Akamai that may not have been a core competency of others who tried to enter the space.

We certainly brought learning to it.

One of the things we looked at with our colleagues at acerno was what was their technology and could our scale and network capabilities accelerate their business potentially to grow what they were doing.

And our conclusion was absolutely, and I think that's one of the reasons it's a very good fit between our two businesses.

So I think it's something we have that maybe others who have tried in the space didn't have was the kind of scale and operational excellence that we've built in the ten years running our network.

So we think that we can overcome what you have, I think, correctly identified as one of the challenges that people have had in the past.

Great.

And J.D., the new customer adds, obviously a good number there.

Can you give us sort of a profile of what's in those new customers?

Are they more e-commerce, or can you give us an idea how that is evolving?

Actually, off the top of my head, I can't do that.

Generally what we have seen is it's a fairly broad and fairly consistent with the install base.

The one thing that we do watch very closely is the amount of the new dollars coming in the door that are coming from our value-added services, like APS and Dynamic Site Solutions.

And that was about 50% of the revenue coming in.

So from that perspective, I think they were really quality signings.

Great.

Thank you very much.

Thanks, Tim.

Operator.

And your next question comes from the line of Kerry Rice from Wedbush Morgan.

Please proceed.

Nice quarter guys.

Quick question on linearity.

Kind of going back to the customer adds, can you talk a little bit how those were added?

Was it pretty linear through the quarter, if you could give any color on that?

Similarly, I don't know if you can talk about just the strength in revenue, obviously not from the new customers, because that's not coming in yet in Q3, but maybe the strength in traffic growth and how that related -- was linear through the quarter.

Sure.

So our customer adds are fairly linear by quarter but not by day.

I think as much as -- we sell a recurring service.

They have to buy it, then provision it and turn it on.

So it's not the book, ship, and bill model of a hardware company or a packaged software company.

That said, most people still get used to signing their deals near the end of the a quarter.

We tend to see that more.

As we look at the customers, one of the things that's been happening in the application acceleration space, is our ability to enter new verticals for us.

So, for example, expand from the core original customers of M&E or software, into industries like manufacturing, travel, leisure, et cetera.

Great strength there.

But we tend to add them as we go through each month in the quarter.

And then in terms of revenue strength going forward, we've given you guidance on Q4, but we are going to be very conservative and say, look, we just don't think anyone has visibility into businesses in '09 and we're not going to give you any specific projections for that.

Can I ask one follow-up question?

Sure.

Can you talk a little bit about the bursting and how that was for the quarter and if you are seeing less bursting just in general as contracts maybe shift in terms from more monthly commitments to annual commitments?

Sure.

I think the 70/30 bursting versus committed still holds for us, but as we've talked about for a couple of calls now, a portion of our business is shifting towards longer period commitments.

In fact, as of the third quarter, about 30% of our revenue is coming from contracts that have longer period commitments than monthly commitments.

So you can think about it almost in the two pieces.

The 70%, which is sort of the traditional contract, where you have a monthly commit and a burst, we see that same kind of ratio where 70% of our revenue comes from the monthly commit and 30% comes from burst or usage over that.

The 30% which is a longer period, I want to say an annual commitment or a quarterly commitment, I would say that on average, 70% -- if you sort of drew a straight line on that and said how does that annual commitment play out per quarter, 70% of the revenue comes from that sort of annual -- annual commitment, and then 30% comes from people being above that commitment.

The one part that we have noted is that that 30% is more volatile than the standard deal because if the usage is actually lower than what that average commitment would be, then the revenue is a bit lower because we recognize based on usage.

So that has allowed for a bit more volatility and seasonality in our model, as we've noted.

Coming into Q4, as Paul said earlier, we're being very sort of cautious and prudent about what to expect in Q4 from bursting, and so we've factored that into our outlook.

Operator, I don't know how many are left in the queue, but if the questions stay brief we'll try to keep the answers tight so we can try to fit everybody in in an hour or less.

Operator?

Next question comes from the line of Katherine Egbert from Jefferies & Company.

Hi, this is [Greg Oshara] for Katherine.

You don't sound like Katherine.

I know.

It would be a little scary if I did.

Earlier you had some remarks about pressure that you were seeing on the media delivery and download side and we're hoping that maybe you could just expand on that a little bit more.

I think the question -- or posed it that way.

What we said was that our customers have consistently expected to us drive unit price down because their volumes have increased dramatically year-over-year, and that pressure has been continuous for a decade and we would expect that it would continue.

I think we'll have to keep an eye out in really rough economic times, if that pressure on their business expands.

We certainly talked about some of the newfangled sites that really haven't demonstrated a solid business model or monetization model, expressing some distress.

We've heard others in the business talk about seeing shrinkage in that business.

We don't have much exposure there.

I think we have a very solid customer base and we're pretty careful about the terms under which we take clients, but I think it's a risk in the Web 2.0 world, and we've certainly read that funding is probably drying up in that area as well, so probably more distress there.

Those people would obviously be turning around probably to their providers saying, hey, give me a break because I can't pay my bill otherwise.

But fortunately, we don't see a lot of that and we've tried to limit our exposure.

Otherwise, it's really been pretty much the continuous effort to try to take costs out, expecting that over time technology unit pricing comes down and volumes grow.

Right.

Okay.

And if you have a second, just a quick question regarding the acerno acquisition.

The one thing we imagined would be somewhat problematic is that some of your customers now might also view you from a competitive perspective, so some of your bigger customers basically have their own advertising networks.

The nice thing is that we actually have worked with them to build these new services, and our goal is to enhance their business models on-line, because if they are someone selling ads, they want to do that most efficiently and charge higher CPM, and one of our new services that will be done in conjunction with acerno does that.

If you are someone else who is buying ads, you are trying to place the most efficiently so you get the maximum return from your dollars.

And that's another thing that one of our new services in the Advertising Decision Solutions suite does.

So actually we think at both ends we help this ecosystem, and we've really been do that in a lesser way to date by delivering ads more effectively for people with higher reliability, greater scale and performance.

This is just for us a logical next step.

And we think what it does is make the entire marketplace more efficient, and we've worked very closely, as I said, with publishers, with advertisers, and directly with ad networks.

And we're partnering with several of those ad networks, where they're actually the frontline representative of one of our new services in the advertising space.

So we actually think that this acquisition is going over very well.

We have talked to our partners about it.

They understand what we're doing.

And actually I think it's going to be maybe even more positive than I was cautiously optimistic about before we closed the deal.

So, no, I actually think it's a little bit counterintuitive and that it is going to serve us extremely well.

Thank you.

Thank you.

Say hi to Katherine for us.

And your next question comes from the line of Sri Anantha from Oppenheimer.

Please proceed.

Thank you for taking my question.

I will just try to keep it brief.

J.D., I think you mentioned that the -- you saw nice acceleration in -- especially the newer services or the APS acceleration services.

Could you just talk about how much did they grow year-over-year and sequentially?

And secondly, Paul, I know you had pretty cautious comments on the macro environment in general, but as you go around and talk to your clients, what do you -- what are you seeing in terms of their commitments in terms of the spending levels for on-line initiatives now and how much has it changed just during the past three months?

Thank you.

I'll take the second one first and then J.D.

can pick up.

What I'd say is we don't have specific numbers from our customers.

They're just much more concerned, and they have less visibility into their budgets for next year.

That said, I don't know anyone who doesn't still view as -- the Internet as the most important growth channel for them, either to drive business in the future up or to continue to change processes and take costs out.

The real question is what level will they be able to spend at, how fast can they drive that change in their business versus sticking with something they've been doing even if they don't think it's the optimal long-term solution.

So we don't have, what I say, overall specific guidance of customers saying, look, my budget for IT or Internet will only go up X or it might cut or held flat.

People are just very cautious.

They're not talking about doing the year-end budget flushes, which you'd normally hear about, which doesn't affect us too much, because we tend to sell service.

It's not a product you can buy and move on.

But we're still seeing them be cautious.

At the same time, they are very, very bullish on accelerating applications on-line, moving processes to the Internet.

It's only a question of whether the pace may moderate in the future.

The only clarification I was trying to get, Paul, was I think it's pretty clear nobody has visibility, but in a difficult environment like this, you would probably expect some people to spend more rather than less.

That's probably one way of lowering their costs of delivering the service.

That's what I'm trying --

That's right and we're seeing that but one of the challenges is for some of these, often you have to spend to mount the new application, retrain people, and change them over, and then take out what you were doing.

So for example, if you want to move to web self-professioning and close a call center, you have to make some upfront investment, you probably to have run both for some period.

So for some period, even a short period, you actually may spend more and then see the savings on the other side.

Even if the pay back is in a year, and often we see that the payback is 12 months or less, people are in position where it's, I can't spend more even for a month let alone six months, so I am going to be a little cautious to make sure I have permission in the budget dollars to do that.

And I think that's the uncertainty that people are feeling.

They are certainly not panicked.

They aren't slamming the doors closed.

But I just think people are being very cautious, and therefore we're going to be very cautious as we think about '09 until we see how it unfolds quarter to quarter.

And Sri, on your question about APS and our newer products, we'll lay that out in a bit more detail on our analyst day, so I'm looking forward to doing that.

Just qualitatively, I would say APS is our fastest growing solution segment.

It's going to be well over 5% of our business.

And we said we'd start talking about it in a little bit more detail once it reaches that.

So I think we're seeing really good traction there.

As Paul said, you have the anecdotes of someone saying I realize this saves me money, but I can't spend the initial outlay now, so there's certainly some headwind there.

But given that headwind, we're very pleased with the uptake in these areas.

Thank you.

Operator.

And your next question comes from the line of Steven Freitas from BMO Capital Markets.

Please proceed.

Hi, good afternoon.

Thanks for getting me in under the wire here.

Nicely done again this quarter, by the way.

My question has to do with edge computing, that's something we haven't heard you talk about in quite a while.

And at the same time, there seems to be more interest in terms of putting more application logic into the cloud, particularly with services like Amazon EC2.

I'm just wondering how you think about that market these days and on a going forward basis.

Sure, we continue to offer advanced services and continue to sell advanced services.

We really are in a different space than some of the other things like, that you had mentioned, which are really about selling shared assets, processes and a data center.

We are really looking at people who want to distribute applications and launch it close to where users are, as opposed to sharing a centralized infrastructure, which is what really the other offers are about.

So we're in a very different space offering something to a different type of client, but we continue to enjoy a nice business there -- what we've said in the past, was in some ways real edge computing of truly distributing [applications] was a little ahead of the game.

What people are trying to do first is consolidate existing processes into fewer locations and then maximize performance, which is really why we started to lead with application acceleration two years ago as opposed to the edge computing offer.

But we do offer both, and both are profitable offers and products for us.

Thank you.

Clearly a bit ahead of your time where that is concerned.

I have other questions but given the late hour, I'll ask them off-line.

Operator, do we have one more left in the queue?

Yes, and your next question comes from the line of Chad Bartley from Pacific Crest.

Didn't want to leave you out.

I appreciate that.

Thank you very much.

Two quick questions around the e-commerce vertical.

Curious, in terms of unit pricing, have the year-over-year declines been fairly steady in recent quarters and a little bit better than what you are seeing in the media and entertainment side?

And then I'm curious what percent of your e-commerce customers take the dynamic site acceleration solution.

Yes.

Actually I don't know that statistic just for that vertical off the top of my head.

I apologize about that.

Certainly when you talk about the commerce vertical, there is -- the competitive landscape is quite different than it is in the media vertical because, frankly, the competitors that we normally see for bit delivery don't have a lot of the functionality that is really required in the commerce vertical, including being able to handle the dynamic transactions, including PCI certification, being able to handle SSL traffic, et cetera.

So it's quite a different -- quite a different environment, and I would say that, from that standpoint, we're not seeing the same pricing dynamics.

In fact with DSA, in most cases we actually -- the pricing is based on a different algorithm altogether.

It's not about the bits delivered, it's about the page views, which is what the customers care about anyway.

So there really is a different dynamic when you get outside of media and to some extent software downloads.

So thank you everybody for dialing in and for your perseverance in hanging on.

We look forward to seeing some of you on the -- at our investor day or joining us on-line, and then the rest of you at the end of the next quarter.

Bye.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.