阿卡邁科技 (AKAM) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the fourth quarter 2008 Akamai Technologies, Inc.

earnings conference call.

(Operator Instructions).

I will now turn the call over to Natalie Temple, Senior Analyst for Investor Relations.

You may proceed.

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

The forward-looking statements included in this call represent the Company's view on February 4, 2009.

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 the 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 Publications portion of the Investor Relations section of our web site.

Now, let me turn the call over to Paul.

Usually, Noelle Faris, our Senior Manager of IR, would be with us.

But we're pleased to report that she is home with a healthy baby, a boy, born just over a week ago.

So we wish Noelle and her entire family the best.

She'll be back soon.

So thanks, Natalie, and welcome to the Akamai IR team.

And thank all of you for joining us on the call today.

Now, down to business.

Akamai performed very well in Q4 capping another record year of significant revenue and earnings growth.

Financial highlights for the fourth quarter include -- record revenue of $212.6 million, a 16% year-over-year increase and an 8% increase over the third quarter of 2008.

Normalized net income of $82.2 million or $0.44 per diluted share.

That's an 8% increase year-over-year and up 11% from Q3.

For the full-year, we grew revenue 24% year-over-year to $791 million.

We generated normalized net income of $308.5 million or $1.66 per diluted share in 2008.

That's a 26% increase over 2007.

We generated $343 million of cash flow from operations, 43% of revenue during the year, a testament to the strength of our business model.

Even as the external environment became more challenging, we were able to grow revenue and earnings throughout the year.

At the same time, we continued to make strategic investments that we believe will enhance our product portfolio and increase our ability to make the Internet work better for our customers.

I will be back in a few minutes to share some observations on the marketplace but first, let me turn the call over to J.D.

to review the results in detail.

J.D.?

Thanks, Paul.

As Paul just highlighted, our business performed extremely well in the fourth quarter and we were very pleased with the results.

We grew revenue 16% year-over-year and 8% sequentially to $212.6 million, exceeding our expectation range coming into the quarter with solid performance across the board but particularly within our e-commerce sector and in our newer value-added solutions.

E-commerce continued to be our fastest growing vertical growing 12% from Q3 and 23% over a very strong Q4 of 2007.

These results were driven in part by stronger than anticipated holiday season online as well as increased penetration of our Dynamic Site Solutions and Application Performance Solutions.

Our median entertainment vertical grew 9% year-over-year in the fourth quarter.

As expected, we did see a slowdown in M&E growth in the last quarter continuing the trend we saw in media throughout the year.

The high tech vertical grew 6% year-over-year.

Similar to M&E, our high tech customers tend to be heavily weighted toward large volume deals with more significant volume-based discounts.

Revenue from our Acerno acquisition, which we closed in the beginning of November, was nearly $7 million over the two months showing strength in a difficult advertising market and a great start for what we think will be a very strategic acquisition.

During the fourth quarter, sales outside North America represented 25% of total revenue, down a point from third-quarter levels.

Our international business performed very well, growing 5% sequentially and 25% year-over-year.

The stronger dollar had a negative sequential impact on our revenue of about $5.5 million.

Excluding this impact, our business outside the US grew 16% sequentially and 38% year-over-year in Q4.

North American sales, excluding Acerno, grew 4% sequentially and 9% on a year-over-year basis.

And resellers represented 17% of total revenue consistent with the prior quarter.

Excluding Acerno, we added 50 net new customers in Q4 bringing our total customer count to 2,858.

Our gross adds, brand new customers to Akamai, were over 160, consistent with the run rate of prior quarters.

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

Churn was just under 4% for the fourth quarter, consistent with the last few quarters.

Excluding the impact of Acerno our consolidated ARPU, or average revenue per customer was $24,000 in the quarter.

That is up 2% from Q3 and 4% from last year.

Our cash gross margins for the quarter were 81% consistent with Q3 and down about 0.5 point from the same period last year with most of the year-over-year decline due to the addition of Acerno revenue which has gross margins of around 60%.

This margin performance is a result of the success we have had in reducing our costs as well as the continued growth of our higher margin, value-added solutions helping to offset customer price decline.

Our GAAP gross margin, which includes both depreciation and stock-based compensation, was down 71% for the quarter roughly consistent with Q3 and down 2 points from Q4 of last year, driven mostly by increased depreciation.

GAAP operating expenses were $97 million in the fourth quarter.

These GAAP numbers include depreciation, amortization of intangible assets, stock-based compensation and a $2.5 million charge related to our recent restructuring.

Excluding these charges, our operating expenses for the quarter were $72.3 million, up $3 million from the prior quarter.

Adjusted EBITDA for the fourth quarter was $100.3 million, a milestone for the Company as that is the first quarter we have generated over $100 million of EBITDA.

That's up 15% from the same period last year and up 11% from the prior quarter.

Our adjusted EBITDA margin of 47% was roughly consistent with the same period last year and up 1 point from the third quarter.

For the fourth quarter, total depreciation and amortization was $27.5 million.

These charges include $20.2 million of network-related depreciation, $3.6 million of G&A depreciation, and $3.7 million of amortization of intangible assets.

Net interest income for the fourth quarter was $4.9 million roughly equivalent to third quarter levels, but down $2 million from Q4 of last year despite a higher cash balance due to the lower interest rates on our investments in this environment.

Moving on to earnings, GAAP net income for the quarter was $40.5 million or $0.22 of earnings per diluted share.

As a reminder, our GAAP net income includes non-cash charges for stock-based compensation and book tax charges at an effective annual rate of approximately 38%.

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

During the fourth quarter, our stock-based compensation expense including amortization of capitalized equity compensation was $16.7 million.

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 items in GAAP net income for the quarter included $3.7 million from amortization of intangible assets, $18.3 million of non-cash tax charges, $2.5 million related to our recent restructuring, and a $400,000 non-cash loss on investments.

Excluding these items, our normalized net income for the fourth quarter was $82.2 million, 8% higher than our normalized net income for the same period in 2007 and up 11% from Q3.

In the fourth quarter, we earned $0.44 per diluted share on a normalized basis.

That's up $0.04 or 10% from the prior quarter and a 7% increase year-over-year.

Our normalized, weighted average diluted share count for the fourth quarter was 186.5 million shares.

Now, let me review some balance sheet items.

Cash generation continued to be very strong.

Cash from operations for the fourth quarter was $92 million and for the full-year we generated $343 million of cash from operations or 43% of revenue.

That is up 45% from 2007.

At the end of Q4, we had $772 million in cash, cash equivalents, and marketable securities on the balance sheet.

This balance included $250 million of AAA-rated, federally-insured student loan auction rate securities which we continue to treat as long-term investments in Q4 and we continued to value, using a cash flow model per FAS 157.

In the fourth quarter, capital expenditures, excluding equity compensation, were $20.4 million.

For the full-year capital expenditures came in at $115.4 million, just under 15% of revenue excluding equity compensation.

Days sales outstanding for the quarter were 57 days.

That is down one day from the prior quarter.

With these fourth quarter results, we finished the year at $791 million in revenue, an increase of 24% over 2007.

For the year, revenue from sales outside North America grew 37% from 2007, increasing to 26% of our total revenue while US revenue grew 21%.

Resellers accounted for 16% of our total revenue.

Full-year cash gross margin was 81%, down about a point from the prior year.

GAAP gross margin came in at 72%, 2 points lower than 2007 levels.

Full-year GAAP operating expenses were $356 million, including $11.5 million for depreciation, $13.9 million for amortization of intangible assets, $55.5 million for equity-related compensation charges, and $2.5 million for restructuring-related costs.

We have detailed the full-year breakdown of these items in the Supplemental Metrics sheet on our website.

Excluding these charges, operating expenses for the full-year were $272.6 million.

Full-year adjusted EBITDA margin was 47%, up 3 points from our 2007 margin levels.

GAAP net income was $145.1 million or $0.79 of earnings per diluted share for 2008.

Our normalized net income for the year totaled $308.5 million or $1.66 of earnings per diluted share.

That's a 26% increase over last year.

Overall, we were very pleased with how our business performed in Q4 and in 2008.

The macroeconomic environment has clearly worsened, impacting all of our customers' businesses as well as our own.

However, we have continued to grow even in the face of this downturn.

The strong cash flow generation of our business model has allowed us to continue to invest in innovative, new solutions that extend the value of our offerings and have become an increasingly important driver of our revenue and profit.

As we head into 2009, we remain very optimistic about the long-term growth prospects of business on the Internet and at the same time, we are also pleased with the strength of our own business in the short-term coming out of a solid Q4.

However, it is still anybody's guess as to when the global economy will recover.

So, we are taking a cautious approach to the year.

In this context, we think it is prudent not to give full-year guidance as there is just too much macroeconomic uncertainty.

For the near-term in Q1, we are coming off our traditionally strongest quarter where we saw holiday bursting in our e-commerce segment and, in 2008, seasonally higher revenues from our new Advertising Decision Solutions offerings.

Given all of this, we expect revenue of $205 million to $212 million for Q1.

At the mid-point, this represents 11% year-over-year growth and a slight sequential decline from Q4.

We also have several significant operating expense items in Q1 as we do most years including the payroll tax and 401(k) match resets, as well as our annual sales trends.

In addition, we have a full quarter's worth of Acerno expenses in Q1 versus only two months in Q4 of last year.

Taken together, these items add up to about $7 million of sequential OpEx growth.

We expect these increases to be partially offset by the savings from our Q4 restructuring where we reduced our headcount by about 110 people, generating an estimated $15 million of annualized savings.

At this revenue and given these expense items, we expect normalized earnings per share for the first quarter of $0.39 to $0.41.

Underneath this, we expect cash gross margin to be roughly consistent with Q4 levels and GAAP gross margins to decline by roughly a point, primarily due to increased depreciation.

We expect EBITDA margins to decrease by about 2 points from Q4 to about 45%.

We expect capital expenditures in the quarter, excluding equity compensation, to be in the range of $25 million to $30 million coming off a lighter-than-average Q4.

Also on a couple of non-cash metrics for the full-year, we expect equity compensation net of capitalization to remain roughly flat with 2000 levels and we expect amortization of intangibles to grow by about $3 million from 2008, driven by the Acerno acquisition.

Our very solid Q4 performance gives us good momentum as we head into 2009.

And underneath our 2008 results, we are pleased to see our strategic initiatives beginning to show results.

As we've grown our newer value-add solutions, our profitability has improved even as growth has slowed in the volume-driven areas such as digital media.

Partly as a result, we closed the year with EBITDA margins very close to the model we set out to achieve well before we reached the $1 billion revenue threshold.

Our focus on cost efficiency and scale can be seen in our Q4 gross margin performance where margins were basically flat on a year-over-year basis, excluding Acerno.

And, we have continued to generate significant cash flow which has put us in a position to make both internal investments and timely strategic acquisitions to expand our portfolio.

So, while we are cautious about the current macroeconomic conditions and how that will affect our clients in the near-term, we believe our business is fundamentally stronger than ever and well-positioned for the long-term.

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

Paul?

Thanks, J.D.

Clearly, we have good reason to be pleased with our record 2008 results.

It's important to note that our customers continue to invest in their online businesses and they recognize the critical role that Akamai plays in making their online businesses successful.

There is no question in anyone's mind that while the rate and pace might change, businesses of all kinds are moving to leverage the Internet better, even amid the economic turmoil.

It is true in commerce, B2B applications, online media, advertising, and even the new frontiers of cloud computing where Akamai is already a player.

In the e-commerce space, for example, we still saw growth in online transactions in Q4, even in a difficult consumer spending environment.

Forrester estimates that US online retail sales grew 13% in 2008 and projects a further 11% increase this year.

Our own online retail index recorded that online retail traffic on Cyber Monday was up 39% from what was a very strong Q4 in 2007.

And e-commerce sites have continued to become more dynamic, immersive, and personalized.

Our customers recognize that performance matters more than ever as they try to differentiate themselves online.

And that helps them to understand the value of and to adopt Akamai's Dynamic Site Solutions.

In the world of advertising, we are witnessing a flight of marketing dollars to accountable media even with the recession battering traditional media buying.

And that is nowhere more true than on the Internet where online ad spending is focused on pay-for-performance solutions.

According to E-Marketer, online advertising is a $23 billion market today in the US alone, and still less than 10% of the overall advertising spend.

So as marketers look for the most efficient ways to spend their media dollars, we believe they will increasingly turn to more targeted, accountable models.

Today, E-Marketer estimates that about $1 billion of online advertising revenue is behaviorally targeted.

But that is projected to grow almost fourfold to nearly $4 billion by 2011.

That's why we spent the last couple of years developing our Advertising Decision Solutions and why we bought Acerno last quarter.

By combining Acerno's targeting capabilities with our own, we are now able to offer businesses unique solutions designed to help them successfully drive their top-line results.

In the applications space, we have seen continuing traction for our Application Performance Solutions, even some of the hardest hit industries.

One great example is in the financial services vertical where we recently signed a deal for more than $1 million a year with a major institution that recognizes the importance of improving the performance of its online applications.

We have continued to invest in security and availability capabilities to support application acceleration and we are focused on providing these solutions to industries where these concerns are paramount.

At the same time, online audiences have continued to grow.

We believe we are evolving toward a world where most consumers will access the Internet over very high speed connections capable of supporting high-def video experiences.

And, we are already getting glimpses of what usage of the Internet will be like in the years ahead.

Most recently, for example, during the inauguration of President Obama, we registered 5.4 million visitors per minute on our net usage index for news.

That is an incredible television-sized audience.

And as we have learned in the past from events such as March Madness, one year's record usually gives way rapidly to even bigger peaks the next year.

So it's getting easier and easier to imagine a day when many of our media customers will expect us to support online audiences for them that compete with or even exceed the viewership they can generate over more traditional channels of distribution.

Many of these clients are among our closest strategic relationships.

Some have been with us for our entire first decade in business.

One relationship with one of these partners, Apple, has been raising questions for many of you recently as it seems to every year or two, right around Groundhog Day.

We continue to have a very close relationship with Apple including support for all of iTunes.

Given our respect for our client's confidentiality needs, we won't be commenting further except to note that we recently extended our long-term relationship for another multi-year term.

We are looking forward to supporting their creative uses of the Internet for a long time to come as we map out plans for a second decade of our partnership together.

So as we look back on our strong results from last year, I believe our most important effort was continuing to position the Company for the future.

I want to thank everyone at Akamai for contributing to our record performance in 2008 and preparing Akamai for the next ten years.

In addition to growing revenue and earnings and investing in new solutions, we took a hard look at our highest priority investment areas and committed to them for 2009.

At the same time, we took important steps to reduce expenses wherever possible.

It's never easy to see valued colleagues leave the Company but I think the actions we took last year better position us for long-term success.

We have a very strong balance sheet, approaching $800 million of cash and equivalents, and a senior management team that has led this Company through some very tough times before.

We are not going to try to guess when the macroeconomic situation will recover.

But we think that the long-term prospects for growth of online business remain very promising and we believe Akamai is uniquely positioned to capitalize on this opportunity.

Now, J.D.

and I will take your questions.

I'd like to remind you to please keep your questions brief and to the point.

And no more than one follow-up so we can try to get everybody in the queue on the call.

Thank you, Operator, the first question please?

Our first question comes from the line of Mark Kelleher with Cannacord Adams.

Hi, guys.

Congratulations.

Another great quarter.

Sometimes, you give us the percent of revenue that comes from those value-added services.

Could you break that out?

We will do that on a periodic basis.

We talked about it being 40% plus.

And when we were talking last quarter.

I wouldn't be surprised if by year-end with the Acerno acquisition, we're talking about that being 50%.

But we'll just break that out on a periodic basis.

And on a quarterly basis, what we're going to do now is talk about the verticals.

As the quick follow-up, can you tell us who is your competition there?

In advertising, or where do you mean?

Specifically in the value-added services.

Who else is out there trying to do what you're doing?

Well, I think that we have a series of value-added services and a broad product portfolio.

So, in the area of application acceleration we really run the only service model today.

People try to do this with hardware but it doesn't solve the network layer problem which is why we are so uniquely positioned to leverage the original Akamai investment in R&D and network to a whole new space.

Even in the area of media, we have value-add from our rich media content tools to our download management and reporting capabilities.

So, they are really value-added solutions that we add to our customer bundles in virtually every market.

Okay.

Thanks.

Thank you.

Operator?

Our next question comes from the line of Mark Mahaney with Citi.

You may proceed.

Mark, are you there?

Operator, let's take the next one.

Our next question comes from the line of Garrett Becker with Bank of America.

You may proceed.

Thanks for taking my question.

Paul or J.D., I just wondered, did you mention bursting in the quarter?

I may have missed that.

We didn't mention it and as usual as you would expect, we saw higher than average bursting particularly in our commerce sector in Q4.

It is always hard to say exactly how much of that growth is bursting.

But we saw 12% sequential growth in commerce and that's an indication that we definitely saw some holiday bursting.

I think we're roughly still -- that 70-30 ground rule still holds.

We get a little bit higher in a seasonally strong quarter.

But overall, we didn't see anything extremely unusual.

And I would also say, what we saw in Q4 of '07 where it was a really enormous online holiday season there was certainly more bursting last year than there was in 2008.

Great.

Thanks.

That's helpful.

And maybe just a high level one.

It seems to me that there's been a little bit of an increase lately in some of the different methods in which people can get online videos whether it's through the VUDU box or through the Blockbuster announcing a new partnership.

Just wondering if maybe you could give us your thoughts, could that potentially be a catalyst for this year or how are you thinking about that?

Thanks.

I think it's more examples of what we have been talking about for several years which is we're really moving to a world where television is over IP in lots of forms and you're starting to see easier and easier ways for people to get that on the screen they want which is the widescreen in the home not the laptop.

But they are all second, third, fourth-box solutions.

We aren't to the point where your one set-top box does that for you.

That's coming.

Ultimately, some of that capability may be in the television or the screen itself.

But these are all indicators that the rights' holders, the content providers recognize that there are substantial audiences for them to find and monetize available over the Internet.

And they need to reach them.

And we think many of those things will be certainly catalysts for growth because those companies as they understand that quality matters snd that scale is difficult, if not impossible to achieve for them using centralized approaches.

They come to Akamai because of our deep deployment in Edge ISPs.

And so we think those are good drivers for us.

How much impact they will have in '09 versus two and three and five years down the road, that's a little hard to guess.

That's as much dependent on end-user broadband connectivity as anything else, but it is an encouraging sign.

Great.

Thanks very much.

Thank you.

Operator?

Our next question comes from the line of Michael Turits with Raymond James.

You may proceed.

Hey guys, good evening.

Very strong quarter, obviously, in e-commerce.

Maybe you can help us understand the correlation between a couple of factors.

Most of the measurements of online business in the fourth quarter this year were pretty negative.

I think e-commerce may have even been down on a year-over-year basis.

So, what is the correlation between the revenues for online business in general?

And, what happens with bandwidth which may have driven your usage -- your revenue this quarter?

And then your overall e-commerce revenues?

I think that actually there are different statistics out there.

And we quoted some Forrester statistics that talked about year-over-year increases and many of our customers I think had strong Q4.

Maybe not what they had hoped when they were planning off of '07 but still increases and very strong.

And clearly, consumers were there looking and browsing.

Maybe a lower percentage converted to buyers than in the past.

I don't really know that.

It might explain it partially because we saw and I talked about very strong traffic growth across -- and it was across a wide variety of customers.

It wasn't in just sort of one niche product area or another.

So, I think there is clearly a macro issue, and consumer credit is a problem.

But, it's a bigger problem in the malls, if you will, in physical stores, than it is online.

And we have seen growth there and our customers are talking to us about their plans to try to expand their online commerce initiatives this year as well.

So I think, if anything, it propels people to move to the more efficient online selling model.

Customers like it.

We think that's good for us long-term.

Given the macro uncertainty, it makes it harder to project where '09 will be.

It's why we're being much more conservative about trying to give guidance that far out because I think that's hard for someone to truly know.

I think we saw increases in Q4, certainly in our business, and a lot of that translated to many of our customers.

Now, a lot of those customers have hybrid models.

They have got bricks and clicks.

And the brick and mortar is really hurting in a lot of cases.

And for some customers, it isn't enough online to overcome their problem in their traditional model and I think that's why we are seeing some of the business failures out there.

And so my follow-up question is, I think, Paul, you said 39% increase in total traffic you saw on Cyber Monday.

Is that an acceleration from last year?

And would those two numbers be representative of the traffic growth for e-commerce vertical overall this quarter versus last quarter?

So, that's again, that's only retail index traffic.

It is not overall network traffic.

I think that's a smaller increase year-over-year than '06 to '07.

We were giving you the '07 to '08.

I don't have the full month just by commerce customers but it's probably roughly indicative.

Okay.

Great.

Thanks very much.

Thank you, Michael.

Our next question comes from the line of Todd Raker with Deutsche Bank.

You may proceed.

Hey guys.

Nice quarter.

Thank you.

I was wondering if you guys could give us some insight in terms of what you're seeing in terms of traffic volumes versus pricing?

Clearly, everyone is very concerned about pricing and the competition.

But, I'm just curious if you can give us any sense for the two drivers here?

We lost the second part of the question there, Todd.

Just trying to get a better sense for what's going on in terms of unit volumes versus pricing in the business.

Well, I think I will comment first and then J.D.

will.

We don't give out network traffic statistics in general.

I think we are seeing a similar trend which is our customers are very interested, particularly those who use large volumes in driving down unit pricing.

We are very focused on driving down our own unit cost.

It's how we have been able to grow revenue, drive down cost to our customers but maintain very, very strong profit margins.

Volume discounts are nothing new in our business and we continue to drive toward being able to provide them to our customers.

I think qualitatively, the pricing environment that we find ourselves in is pretty similar -- has been consistent for the last 18 to 24 months.

What we have had a lot of success doing is, number one, driving our cost down and that has allowed us to be very aggressive where it makes sense to win a big volume deal.

And then number two, selling our value and selling our features and functionality and basically getting more out of the deal and selling up performance, selling DSA, selling APS, selling additional functionality.

The combination of those two things -- that has basically been what is offsetting the price declines.

Okay, and then my follow-up.

I was hopeful you guys could give us some sense for what Acerno should look like here in Q1?

Just so we get a better feel for the organic growth profile of the business?

So Acerno, as we have said in the whole Advertising Decision Solutions is going to be an even more seasonal business.

It is not uncommon for ad spend to be approaching half in the fourth quarter.

In some businesses, we expect it to be heavily weighted to Q4 which is where advertising dollars get spent and lightest in Q1.

And, I think we will have a similar model for Acerno going forward.

Okie-doke.

Thanks.

Thanks, Todd.

Our next question comes from the line of Mark Mahaney with Citi.

You may proceed.

Great.

Thanks.

Two questions.

Could you talk about the Advertising Decision Solutions segment?

I know you just talked about Acerno there.

But, just in the marketplace now what kind of traction you think you're seeing for an integrated product?

And then secondly, just in terms of thinking through long-term EBITDA margins near-term?

You've got these negative issues related to the Acerno acquisition.

But, any particular reason, post that integration, post the resurgence in growth that you will eventually get as the recession fades at some point?

Any particular reason why margins -- EBITDA margins wouldn't expand somewhat in the future?

Maybe, Mark, I will take the second question first and then I'll let Paul answer your ADS question.

We have basically hit or very nearly hit the model, our billion dollar model as we called it in 2008 with revenue obviously on sort of an $800 million run rate.

So we kind of achieved that profitability level before we expected and I think that is great.

I still believe that our overall billion dollar model holds here.

What we want to do even as the business has slowed down a bit is continue to invest.

And we generally see that impact as we go from a Q4 which has a lot of growth to a Q1.

But I think our long-term model generally still holds even with the addition of Acerno which tends to have a bit of a lower margin profile at least as they are now.

Our view is that that business will scale over time as well.

So let me talk about what we call the ADS business so ADS, Advertising Decision Solutions.

But our ADS business is very exciting to us because we are not a new player in the online advertising ecosystem.

We have been delivering online ads for most of the major portals, virtually all of the major ad networks for many, many years.

The key for us was how could we add a lot more value and hopefully earn more from our customers.

And so we looked at what could we build on our own and where could we either build partnerships or make acquisition.

And what we've seen is that the spend, whether it is spent by an agency on behalf of a market or a marketer or the other end, the publishers.

Everyone is trying to get to audiences not impressions.

How do I get the segments I want that are going to be interested in buying my products?

Or if I have an audience, how do I sell the segments to the right marketer or customer?

We believe that we can take a variety of the technology that we built and combine it with Acerno's data co-op and expertise and create a full suite that allows us to add value to all of the players whether they are publishers, advertisers or the ad networks.

And we have products now to partner with each one to raise the efficiency of their business and we hope then share with them.

The obvious first synergy that we'll try to exploit with Acerno is the strength in e-commerce.

Their business was built primarily on mid-tier commerce customers and their data co-op data from those customers.

As you know, we have a very strong practice in e-commerce particularly in most of the e-tailing Top 100.

Our goal is to introduce the Acerno products into those top-tier customers which we hope will grow the Acerno business.

At the same time when we do that get some of those customers to join the data co-op and improve the overall performance of all of our ads business.

So we think it's a very large market, as I said, over $10 billion spent or actually $20 billion spent on online advertising.

Increasingly, those dollars are only going to go to accountable media.

And that means how do I find an audience not just make a random impression.

And we think we have a great suite of services now augmented by the Acerno capabilities.

And we are having very exciting conversations with again, all those layers, the advertisers and agencies, the ad networks and the publishers.

And we think that we are going to be able to develop a very good business over the course of the next couple of years even in this incredibly difficult general advertising marketplace.

Thank you, Paul.

Thank you, J.D.

Thanks, Mark.

Our next question comes from the line of David Hilal with FBR.

You may proceed.

Great.

Thank you.

My first question is on the verticals.

Median entertainment was down sequentially and I wanted to get some color on that.

And then I wanted to confirm that the Acerno revenues mostly are all following the commerce vertical?

David, the statistics we gave you excluded the Acerno revenues for this quarter.

We kept that out separately so all those statistics on the verticals excluded the $7 million of Acerno which in truth, yes, when we roll that in it will mostly at the beginning be a commerce vertical play.

And we did see media growth slightly down sequentially as you point out sort of continuing a trend of slower media growth that we saw all through the year.

A bit slower in the fourth quarter than we saw in the first half.

I think the trends really haven't changed.

We still continue to see traffic growth in that area.

Not at the rate that we saw last year or certainly the prior year but pricing continues to decline at roughly the same rate that we have seen in the past.

We're in that kind of an environment particularly in some of the areas where there is less value added content or the business models are a little bit more speculative.

There is a lot of pressure to either pull back on your business model or get more aggressive on pricing.

So, your comment, J.D., on Acerno, I mean those metrics that you gave add up to $212 million of revenue which is what you did in the quarter.

So I would think Acerno was included in this.

You are saying it's not?

No, the Acerno revenue -- I don't know how that adds up to $212 million but the Acerno revenue on the numbers I quoted was excluded from the percentage growth.

Okay.

I am looking at your metric sheet.

Okay well, we probably did include it on our metric sheet and it is primarily -- it is primarily going to be in the commerce segment.

And then I just wanted to ask about CapEx.

I know you are not talking about the full year from the revenue side.

But CapEx you have given in the past at least percent of rev, how you are building that out.

Is there any reason to think that would differ from past guidance for calendar year '09?

I think we've talked about this 13% to 16% range for a long time.

And we've said as traffic accelerates we get to the high end of that range.

And as traffic growth moderates a bit we get toward the low end.

We were down a little bit below 15% this year.

That includes some facilities work that we did.

I would expect -- in an all-else-being-equal's world here without giving any full-year guidance that we would again be at or below that 15% level.

But as long as we are in the 13% to 16% range, we are comfortable in terms of our business model that we have got the right level.

It is also important to understand that we do a lot to drive more out of our network and a lot of that is software, not buying the hardware.

And some of that is step function as we release that functionality.

So there are years where we get more pick-up or less out of our own development work as well.

And that has some play in the CapEx spend.

Okay.

Thank you, guys.

Thank you, David.

Our next question comes from the line of Katherine Egbert with Jefferies.

You may proceed.

Hi.

Good afternoon.

If you are not going to give us guidance for the year, can you circle back on your billion dollar plan?

You had said awhile ago that -- I think it was at the Analyst Day, that basically that plan was pushed out by a year.

Is that still the case, would you say?

Katherine, that is asking for two-year-out guidance.

I don't know how to do that.

(Inaudible - multiple speakers) Can you still get to a billion dollars say in the next two years?

You have to tell us what you thought about the economic environment.

I think we know how to do it.

What we don't know is how bad and how long the recession is.

If you said this was a classic 18-month recession and we knew by Labor Day this year it was ending, I think we could lay out plans to know how to predict our growth.

We are living in a world where every day the unemployment numbers get worse.

Everyone says we haven't seen the bottom of the credit situation.

And we're only a few months past a weekend where people told me the banking system worldwide was literally going to collapse.

And I think in that kind of environment it is pretty hard to look out that far.

So we think we know what the billion dollar model looks like.

It's just a little harder to figure out your own growth on the way.

But we're extremely confident about the value that we provide to our customers and the long-term growth of the Internet.

But we don't know what some of the hiccups are going to be, generally, out there.

So, we are being a little bit more cautious about this year.

So, I certainly can't tell you what next year will be.

If you could tell me what the GDP and the world is going to be like, then I could give you a swag at it.

I will call you on the follow-up with that.

How about on the EBITDA margin on that longer term plan?

Do you still think you can be in the high 40%s?

Yes.

Okay.

Great.

Thank you.

Good job.

Thank you.

Our next question comes from the line of Jeff Van Rhee of Craig-Hallum.

You may proceed.

Two questions, if you would.

One, given the conditions we are in and it kind of being a very unique environment and as you look at your mix of core CDNs versus the value-added offerings, thus far in a really difficult selling environment have you noticed any particular characteristics about the urgency and the willingness of customers to follow through on purchases of core CDN versus the value-add?

I mean, any characteristics that you have observed in the ability to just get those deals done and what is increasingly difficult?

Obviously, the value-add has been a big growth engine and certainly I think many are very curious how recession-resistant that component might be?

We certainly see, and we are talking about it with the field more often, a few anecdotes where a deal takes longer or gets pushed.

But we had very strong signings of quality deals in Q4.

We didn't have people running for the door saying, I am just not buying anything.

Also, we are not a budget flush kind of spend.

Sometimes people have a little money at the end of a month or a quarter and they say ship me some product.

But with Akamai you are signing up for twelve more bills or 24 or 36 months of bills.

So if you sign up with us, you are spending the money later.

So you really have to be confident.

And we had very strong customer adds in Q4 and I think the quality of those adds was very strong.

I talked about the tremendous financial services vertical deal we signed very recently.

So even in a really battered sector we are seeing people invest.

And I think overall we have to remember that the IT economy is what a trillion dollars or something.

So, even in a static or even a shrinking world there is a lot of wallet spend for us to go after.

And what we see is customers saying, I want to reduce my facilities.

I want to reduce the number of data centers.

I want to consolidate.

My utilization of what I bought is unbelievably low.

We come in with a -- you don't need to buy more data centers.

You are effectively virtualizing part of your Internet infrastructure on Akamai.

And you are not building for peak.

And so, we can demonstrate a very strong ROI.

And so I think for people who are saying how do I do more for less or more for even the same spend we have a compelling answer.

And I think that that continues to translate, particularly in the value-added services world where the business models are very strong because they are often e-commerce or B2B.

And they are not just dependent on ad dollars or revenue per viewer where business models can be more challenged.

We feel pretty good about it.

We are still being very cautious in the current macroeconomic situation.

But, we continue to have strong pipeline, to have lots of appointments and lots of people interested in the value-added services.

And we are going to continue to go full-force after those opportunities.

Okay.

And I guess just lastly then, J.D., it seems to me although I don't have my notes in front of me when you acquired Acerno you had said something under $20 million or just under $20 million for '09.

Maybe just refresh me if that is what you said.

And then along those lines, you certainly had outperformance this quarter relative to the expectations.

Does that lead you to any revisions in your expectations for '09 relative to what you originally said?

We are really pleased with how they did.

We expected that their full-year would be about $20 million and they --.

In '08.

In '08.

That's correct.

We didn't give any '09 numbers.

They beat that number by a little bit.

You'll recall we gave -- I believe the range was $4 million to $6 million of revenue for Acerno in the quarter.

We signed the deal a bit quicker than we thought.

We signed it at the very beginning of November.

So, we got two full months and then they performed better than their own plans.

And I think that's a real positive sign.

Just one last follow-up, since we have no history can you give us anything else on Acerno?

If it slightly outperformed?

We have got a baseline of '08, but we do not have a good semblance of even a wide range of potential growth trajectories to layer on to what is a core business I think most have a pretty good handle around?

Well, I think you should just take that guideline from '08 and remember that this is going to be a very tough year for advertising overall.

And we are optimistic.

But we are not going to give a specific guidance for it.

I wouldn't run away with anything in the current environment.

But we are going to push them hard to overperform internally.

Okay.

Thank you.

Our next question comes from the line of Tim Klasell with Thomas Weisel Partners.

You may proceed.

Yes, good afternoon everybody.

Sorry about that.

Most of my questions have been asked.

I would like to go into the contracts that you are signing with your customers.

Are the contract lengths changing at all?

I also recall, maybe middle of last year, a lot more customers were going with capacity-type contracts or sort of total bit type contracts?

The contract length seem to be pretty stable.

In the enterprise they tend to sign longer ones in general.

So, again no running for the exits in the market there.

I've been very encouraged.

And most of the contracts are on a monthly committed basis, occasionally quarterly and sometimes, if you will, a bucket of dated delivery but those are still the exception.

Yes we have similar to what we talked about last quarter.

Roughly about a third of our revenue comes from period buckets or however you want to describe it, longer than the monthly commits and about two-thirds comes from the traditional monthly commit model.

Okay great.

And finally just real a quick one an update on the ARPU.

You gave us some details on the ARPUs by vertical at your analyst day.

Were there any substantial changes in there?

Are you seeing one grow at the expense of the other?

I haven't looked that closely at it yet, Tim.

But I don't expect in one quarter that we saw a significant move one way or the other.

Obviously, where we saw the slower growth was in our large volume media and entertainment areas and some high tech areas.

So you would tend to expect that that would be a bit more of a moderation.

And we continue to get great traction in commerce, particularly selling in our new solutions.

So if anything ARPUs are expanding in that area and sort of growing closer to where they are in the media and entertainment space.

Okay.

Great.

Thanks a lot, guys.

Thanks.

Let's keep the questions tight and we will get everybody in before the hour is up, please.

Our next call is from Rob Sanderson with Broadpoint AmTech.

Thank you very much.

Hi, good job on the quarter, guys.

My question is related to pricing strategy and particularly in the non-value-added products.

Does the balance of price versus share change at all in an economic recession as your customers' IRRs on their planned projects are perhaps harder to achieve and your competitors are likely to get weaker.

Does that balance -- do you look at that a little different given the macroenvironment?

I think we understand some of our customers are under more pressure than others.

We try to work with them with suitable solutions in their industry.

And I think one of the strengths we have with our balance sheet and having the lowest cost infrastructure is that we can be flexible to meet our customers' needs.

And we always have for 10 years and we expect to continue to be.

Our customers are also concerned about viability of their suppliers and I think we are the premier brand and that resonates well with many of them.

Just looking at the growth and the revenue per customer, it's been on a steady decline obviously from great growth.

But now it's starting to really low single digits.

What should we think -- how should we think about that?

Is it just up in the air completely for the new year or what do you expect on the revenue per customer front?

I think that is heavily influenced by what we have seen in the media and entertainment area so that's gotten it to moderate.

But we still think that a significant source of our growth is going to be selling into our customers new services and solutions.

And as well, I think that if you looked out longer term in the media and entertainment industry you'd still have to say that that it is going to be a rapidly growing opportunity.

So, we will have to see how that plays out.

And a lot of that depends on what the macroeconomic condition looks like.

The other thing I should also mention is that we gave you the numbers without Acerno obviously this quarter.

We will roll Acerno in and short term that will have an adjustment downward of our ARPUs because the average ARPU of an Acerno customer is lower than ours.

But long term, we think that is an additional opportunity to grow ARPU with additional features and functionality and solutions into our customer base.

Thank you, gentlemen.

Operator?

Our next question comes from the line of Richard Fetyko with MCF.

You may proceed.

Hey guys.

Just curious about your cash position and whether you are going to be acquisitive this year and what sort of areas or directions would you be considering acquisitions?

As they say, cash is king especially in this environment.

And I think this is one of the reasons we built it up and it allowed us for example to make the Acerno acquisition in Q4.

It was very strategic.

And then we basically replaced almost all that cash in the same quarter which is the strength of the business model.

So we are going to continue to be opportunistic and look.

My guess is that over the next year or two prices will be very attractive.

We just have to find the right additions to our portfolio and we will wait until we find the right thing.

In the past you have seen us do multiple deals in one year and some years none at all.

And we will just take it one case at a time.

But -- thanks for that.

Just curious.

Is there any specific direction?

Is it more - are you more focused on the value-added services or would you consider buying a competitor in the media and entertainment sort of mass volume download business as well?

We will look at anything that we think will be smart for our business and drive long-term growth and obviously shareholder value but beyond that I am not going to speculate.

Thanks.

Operator.

Our next question comes from the line of Donna Jaegers with Davidson.

You may proceed.

Thanks for taking my question.

Any update on the auction rate securities and working towards a settlement to get those to be closer to cash?

Yes, sure, Donna.

We actually did close on a settlement with one of our fund managers that restored liquidity to about $75 million of our auction rate security portfolio.

Basically, we've agreed if those things are still illiquid by 2010, they will buy them back and in the meantime they will set up a credit line at no net cost, if we want to draw down that on the full $75 million.

So for that part, we've sort of restored liquidity for that.

For the remainder, the remaining $175 million or so on our balance sheet, that still remains pretty illiquid.

Our view is we will hold that until the market -- liquidity returns to the market or we can find another solution.

But certainly we are not having a major liquidity need that we have to rush into something that doesn't make sense.

Is there a chance that you could go back to your suppliers for pieces of the $175 million that is still remaining?

I think we will work with every avenue possible because obviously when we are investing our money here and earning 3% interest that is not a great exciting use of our money.

We want to be able to use it to invest in the business.

so we are working every avenue we can to restore liquidity to that.

Great thanks.

Sure.

Our next question comes from the line of Chad Bartley with Pacific Crest.

You may proceed.

Hi.

Thank you.

A couple questions on the restructuring.

Have you already reduced the headcount by the entire 110 employees in Q1?

Should we see kind of the full benefit of that annualized $15 million in savings?

And then as you look out, should we expect the headcount to stay roughly flat with that Q4, '08 level.

We took out about 80% or 85% and the rest will come out this quarter.

We expect, and those people were all notified and they are just in a transition, so there is no overhang in the Company.

Everybody understands what is going on and then we will get there.

Then, we did -- you should just remember, we did say we would take some the savings and invest back into the business and that it would be possible that we would end '09 with more head than we go into it with.

So there is some flexibility there?

I think at one point you said you would invest all of the savings.

Now are you saying not necessarily 100% of the savings but a certain amount?

I think the approach we are taking is a sort of a phased investment approach.

We want to continue to invest in the business and we are going do it over -- on a quarter by quarter basis and see how things go.

But we are very confident in the long-term direction that we are going in.

And we think the investments that we are making are the right ones for the long term.

So you will see us make investments.

That was really the reason why we took the restructuring was to put ourselves in a position to do that.

Okay.

Thank you, guys.

Our next question comes from the line of Scott Kessler with Standard & Poor's Equity.

You may proceed.

Thanks a lot.

The tax rate in Q4 seemed to, according to my calculations, fall.

I am assuming that has something to do with the R&D tax credit.

I'm wondering if you could talk a little bit about the tax rate in Q4 as well as what you are looking for from 2009.

And I have a follow-up.

Thanks.

Okay sure, Scott.

The tax rate was lower in Q4 because you are catching up for the full year where we ended up at 38%.

The R&D tax credit was part of it.

Another part of it is equity compensation on the GAAP books for FAS 123-R is different from a timing perspective than your tax books.

And so it bounces around.

Last year we ended at 41%, this year at 48%.

But nothing's fundamentally changed there on the tax rate.

Okay.

Any thoughts about 2009?

I mean should we expect kind of consistency?

Filing in 40% is a reasonable assumption and maybe plus or minus a couple of points.

And my second question, there has been a lot of --.

We have to move to the next one or we're not going to get everybody in.

So operator, next question.

Sorry.

One question.

One follow-up.

We said we would be done in an hour.

Our next question comes from the line of Steven Freitas with BMO Capital Markets.

You may proceed.

Hi and good afternoon.

Nicely done again this quarter.

Thank you.

I was just wondering -- I know you are not providing too many specifics on the dynamic side the house.

But I was just wondering if you could talk a little bit about the rate of growth in the Application Performance Solutions or has there been any meaningful change?

And the reason I ask is that some of the equipment-based vendors are facing some deceleration there.

But I would think that they -- your solution with lower upfront cost and kind of a pay-as-you-go model may be holding up a little bit better in this environment.

I think that is a major selling point when we are selling it is you turn that into an operating expense that you spend the money while you are earning the payback and therefore we are a little bit, as Paul mentioned before, we are a little bit insulated from the budget flush or the IT budgets that have been absolutely cut because we are more of a subscription-based service.

There are anecdotal -- IT budgets are definitely being cut.

There's no question about that.

And there is -- we have anecdotal situations where sales cycles have gotten pushed out longer.

But we still think fundamentally we are getting traction and it's nice to see us get traction in industries which are really having a very tough time and making significant cut-backs on their IT investment but still investing in their online applications and using Akamai to solve a problem that they really can't on their own.

I also think that our customers see that our solutions work.

They have invested in a lot of hardware and a lot of optimization in their data center.

And then their traffic hits the internet and that hardware doesn't do any good.

And so I think what they are really seeing is they may have reached the limit of what optimization of the data center behind the firewall can do and this network layer is wreaking havoc with their QOS.

And the Akamai acceleration services takes that away the minute they turn it on and they get long-term recurring benefit from using the service.

So I think that is helping propel that business for us.

Any benefit from the partnership with Systrix so far?

I don't think this is the time to talk about specific channel partners.

But we continue to try to develop channel outlets for that service.

Fair Enough.

Thank you.

Operator, one last question.

Our final question comes from the line of Derek Bingham from Goldman Sachs.

You may proceed.

Hi.

This is Geo John on behalf of Derek Bingham.

Could you give some color on the pricing of bandwidth in the quarter.

Was there any change in pricing expected going forward?

We continue to drive down the cost of acquiring network capacity.

That's a combination of bandwidth that we acquire through a 1000 different partnerships approximately, as well as the efficiency that we drive in our software.

We think we are the lowest cost provider and it gives us a real strategic advantage with our clients.

But as you know we don't sell bandwidth.

We really are not a bandwidth purveyor, so I think that is probably a question, in a macro sense, better addressed to those people in that hosting and mirroring and bandwidth business.

Anyway, thank you all for calling.

It was a great year.

We are looking forward to '09 and we appreciate you tuning in.

And we will talk to you again in a -- another three months.

Bye.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.