阿卡邁科技 (AKAM) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Akamai Technologies Inc fourth quarter 2009 earnings conference call.

I will be your operator for today.

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

Later, 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 conference over to your host for today, Ms.

Noelle Faris, Senior Manager of Investor Relations.

Please proceed.

Thank you.

Good afternoon, and thank you for joining Akamai's investor conference call to discuss our fourth quarter and full year financial 2009 financial results.

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

Before we get started, please note that today's comments include forward-looking statements, including statements regarding revenue and earnings guidance.

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 filing 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 February 3, 2010.

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

As a reminder, we will be referring to some non-GAAP financial metrics during today's call.

A detailed reconciliation of GAAP and non-GAAP metrics can be found under the news and events portion of the Investor Relations section of our website.

Now, let me turn the call over to Paul.

Thanks, Noelle.

And thank you all for joining us today.

We are pleased to report record quarterly results, highlighted by the largest revenue quarter in Akamai's history, and a return to double-digit top line growth.

Financial highlights for Q4 2009 include revenue of $238.3 million, a year-over-year increase of 12%, and a 15% increase over the third quarter of 2009.

Normalized net income of $85.4 million or $0.46 per diluted share.

That's up 21% from Q3, and up $0.02 from Q4 of 2008.

And extremely strong cash generation, with over $124 million of cash flow from operations in the quarter, and nearly $425 million for the year.

For the full year, we grew revenue to $860 million, a year-over-year jump of 9%, and we generated normalized net income of $312 million, or $1.67 per diluted share in 2009, up $0.01 from 2008.

I'll be back in a few minutes to talk about the year ahead, but first let me turn the call over to JD to review our results in detail.

JD?

Thanks, Paul.

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

We grew revenue 12% year-over-year and 15% sequentially, to $238.3 million in the fourth quarter, exceeding our updated guidance.

E-commerce continued to be our fastest growing vertical, up 23% from Q3, driven in part by a very strong holiday season, but also continued traction with our value-added services.

On a year-over-year basis, e-commerce increased 21%.

Revenue from our media and entertainment vertical grew 10% sequentially, as we saw continued healthy volume growth during the quarter.

On a year-over-year basis, the media and entertainment vertical returned to growth with revenue up 4% from Q4 of 2008.

The high tech vertical also performed well in the quarter, growing 18% sequentially and 13% on a year-over-year basis, as we saw volume increases in software downloads, as well as traction with our application performance solutions into this vertical.

And the public sector continued to generate solid growth, jumping 31% from Q4 of 2008 and up 1% sequentially.

During the fourth quarter, sales outside North America represented 28% of total revenue, roughly consistent with the prior quarter, and up three points from the prior year.

International revenue grew 26% year-over-year, and grew 14% sequentially.

After providing a headwind through the first three quarters of the year, foreign exchange had a positive impact on Q4, on both the sequential and year-over-year basis.

Excluding this impact, our business outside the US grew 10% sequentially and 15% year-over-year in Q4 on a constant currency basis.

North American sales grew 16% sequentially and 7% on a year-over-year basis.

Resellers represented 19% of total revenue, consistent with the previous quarter.

Our new contract signings in the quarter were again very strong at over 200 in Q4, continuing the trend we've seen over the last few quarters.

And after a slight improvement in Q3, we also saw customer churn return to more normal levels of about 4%, and as a result we added 91 net new customers in the quarter.

Our consolidated ARPU, or average revenue per customer, was $25,600 for the quarter, up 13% from Q3 and up 5% year-over-year.

While we're pleased to see the continued strong new customer signings, as well as a return to a more typical churn level, we believe the consolidated customer metrics are no longer as helpful as a measure of the health of our business.

When we look at our business today, we have a much broader and more diverse set of products and customer base than even a few years ago.

Going forward, we're going to continue to focus our analysis and commentary on the industry verticals, and we won't be reporting these customer metrics as we have in the past.

On costs, we again performed very well on gross margins in the quarter, driven both by our focus on managing our network efficiently as we scale, as well as the increasing portion of our revenue coming from value-added solutions, which have more software-like margins.

GAAP gross margin, which includes both depreciation and stock-based compensation, was 72% for the quarter.

That's up two points from Q3 and up one point from Q4 of last year.

Our cash gross margins for the quarter were 82%, up a point from the same period last year, and roughly consistent with the prior quarter.

GAAP operating expenses in the quarter were $180.5 million.

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

Excluding these charges, our operating expenses for the quarter were $84.3 million, up $11.7 million from the prior quarter.

Adjusted EBITDA for the quarter was a record $111.6 million.

That's up 11% from the same period last year, and up 16% from the prior quarter.

And our adjusted EBITDA margin of 47% was roughly consistent with the same period last year, and up one point from the third quarter.

For the fourth quarter, total depreciation and amortization was $32.6 million.

These charges include $24.6 million of network-related depreciation, $3.8 million of G&A depreciation, and $4.1 million of amortization of intangible assets.

Net interest income for the fourth quarter was $2.8 million, consistent with the third quarter, but down $2 million from Q4 of last year, despite a higher cash balance, due to lower interest rates on our investments.

Moving on to earnings, GAAP net income for the quarter was $40.1 million, or $0.21 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 38.5%.

However, because of our significant deferred tax assets, we paid cash taxes at an annualized rate of about 3%.

During the fourth quarter, our stock-based compensation expense, including amortization of capitalized equity compensation, was $18.6 million.

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

Additional items in GAAP net income for the quarter included $4.1 million from amortization of intangible assets, and $22.6 million of noncash tax charges.

Excluding these items, our normalized net income for the fourth quarter was $85.4 million, up 21% sequentially, and 4% higher than the prior year.

In the fourth quarter, we earned $0.46 per diluted share on a normalized basis, $0.03 above the high end of our guidance range.

That's up $0.08 or 21% from the prior quarter, and up $0.02 year-over-year.

Our normalized weighted average diluted share count for the fourth quarter was 188.6 million shares.

Now let me review some balance sheet items.

We generated $124.9 million in cash from operations in the fourth quarter, and for the full year we generated a record $424.4 million of cash from operations, or 49% of revenue.

That's up 24% from 2008.

At the end of Q4, we had $1.1 billion in cash, cash equivalents, and marketable securities on the balance sheet.

This balance included $254 million of federally insured student loan auction rate securities.

In the fourth quarter, capital expenditures excluding equity compensation, were $29.2 million, and for the full year capital expenditures came in at $108.1 million, just under 13% of revenue excluding equity compensation.

During the quarter, we spent $15 million in share repurchases, buying back about 650,000 shares at an average price of just over $23.

For the year, we spent $66 million of our $100 million buyback authorization, buying back 3.3 million shares at an average price of about $20.

Day sales outstanding for the quarter were 59 days, down seven days from the prior quarter.

With these strong fourth quarter results, we finished the year at $859.8 million in revenue, an increase of 9% over 2008.

For the year, sales outside North America grew 20% from 2008.

On a constant currency basis, sales outside North America grew 26% year-over-year, while US revenue grew 5%.

Resellers accounted for 18% of our full year revenue.

Looking at our industry verticals, e-commerce showed outstanding growth for the year, growing 24% from 2008.

And with a strong finish to the year, media and entertainment revenue was essentially flat compared to the prior year.

High tech revenue grew 5%, while the public sector grew 24% from 2008.

Full year GAAP gross margin came in at 71%, one point lower than 2008 levels.

Cash gross margin was 82%, up a point from the prior year.

Full year GAAP operating expenses were $386.4 million, including $15.3 million for depreciation, $16.7 million for amortization of intangible assets, $56.6 million for equity-related compensation charges, and $500,000 for restructuring-related costs.

Excluding these noncash charges, operating expenses for the full year were $297.2 million.

Full year adjusted EBITDA was $405.2 million, up 9% from 2008, and full year adjusted EBITDA margin was 47%, consistent with the prior year.

GAAP net income was $145.9 million, or $0.78 of earnings per diluted share for 2009.

This GAAP net income included $65.2 million of stock-based compensation expense, including amortization of capitalized equity-based compensation, $16.7 million of amortization of intangible assets, and $84.2 million of noncash tax charges for the year.

Excluding these items, our normalized net income for the year totaled $312 million, or $1.67 of earnings per diluted share.

That's up $0.01 over last year, even as interest income declined by about $9 million, or $0.05 per share from 2008.

During 2009, we paid cash taxes at a rate of about 3%, or about $7 million.

As we mentioned at our investor day in December, we expect to pay cash taxes in 2010 at a rate of about 5% to 6%, as we use up the remainder of our NOLs and we expect to become a full taxpayer in 2011.

So going forward, we will begin reporting our normalized earnings per share using the same methodology as we have in the past, but on a fully taxed basis beginning this year.

On that basis, and for apples to apples comparison purposes going forward, our normalized net income for 2009, which still excludes equity compensation and amortization of intangibles, but would include the $84.2 million of noncash tax charges.

As a result, our normalized net income on a fully taxed basis for 2009 would be $227.8 million, or $1.22 of earnings per diluted share.

Overall, we were very pleased with how our business performed in 2009.

In a tough economic environment, we grew revenue, improved our cash gross margin, and generated over $400 million of cash from operations.

And with our Q4 performance, we returned to double-digit revenue growth in what tends to be our seasonally strongest quarter.

Looking forward, we're not out of the woods from the macroeconomic downturn that began 15 months ago, and we will not be providing formal full year guidance.

However, we are cautiously optimistic about the prospects for continued double-digit top line growth for the full year of 2010, given our momentum coming out of Q4.

For the near term, we're coming off our strongest seasonal quarter, where we saw e-commerce growth driven by holiday traffic, substantial growth in media volumes around the new TV programming season, and notably, a significant seasonal uptick in revenues from our advertising decision solutions.

Also, we expect currency to have a $2 million negative impact on the first quarter revenue on a sequential basis given the recent dollar strength, assuming foreign exchange rates stay roughly where they were at the end of January.

As a result of the seasonality and foreign exchange impact, we expect to see revenue decline moderately this quarter from Q4 levels.

For Q1, we expect revenue of $224 million to $233 million.

This would represent growth of 6% to 11% from Q1 of last year.

We expect our GAAP gross margins to decline by about a point from Q4 levels, while cash gross margin should remain roughly flat.

We expect adjusted EBITDA margins to decline by about a point in Q1 as well, given the seasonally lower sequential revenues.

At this revenue, we expect normalized earnings per share on a fully taxed basis to be in the range of $0.30 to $0.32 in the first quarter.

On a fully taxed basis, that compares to $0.31 in Q1 of last year, and $0.34 in Q1.

This earnings per share range assumes our first quarter tax rate is approximately 39%, up slightly from 2009 levels due to the R&D tax credit that expired in December, and has not yet been renewed for 2010.

Additionally, we expect capital expenditures in Q1 excluding equity compensation to be in the range of $35 million to $40 million.

So to sum up, we're very excited about our prospects for 2010.

The world hasn't returned to full economic health, but we continue to believe that we are very well positioned to capture growth of business on the internet, from media and entertainment, to enterprise class cloud computing for many years to come.

And while we're still operating with a prudent sense of caution, we are also focused on making investments to build on the momentum we established in the back half of 2009.

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

Thanks, JD.

These results are a testament to the best in class team we have here at Akamai, and I want to thank all of our employees around the world for their tremendous work in 2009.

Thinking back to the beginning of the year, it was really anybody's guess how things were going to play out.

So our emphasis for 2009 was on three areas, increasing focus on costs and efficiency as we scaled our platform and our business, shifting the mix of our business towards value-added solutions, and continuing to invest for the future.

Winners in business are often determined by the steps they take in times of extreme turmoil and uncertainty, and that's why we focused on these priorities.

So beyond the year's financial performance, we're also extremely pleased with how we performed against these objectives.

As a result, we think we are in a stronger position than ever as we enter 2010.

Naturally, our performance this year will be somewhat dependent on how the world economy recovers and how quickly, but as JD said, our focus this year is on extending our momentum coming out of Q4, with a goal of delivering double-digit revenue growth in 2010.

Perhaps more importantly, we believe we are seeing exciting and fundamental trends taking shape in the key areas of our business, trends that I talked about at our investor day in December.

We think these trends bode well for our long-term prospects for growth.

Specifically, we believe video distribution online is changing the media industry.

Online advertising is transforming marketing, and cloud computing is revolutionizing IT.

On the first point, we believe momentum is growing for the delivery of more video over the internet, especially around the availability of HD programming.

We're now seeing the beginning of what we started talking about in earnest last year.

Successful implementation of HD video on the web, and that's a game-changer, because we expect that video over the internet will be on par with traditional TV distribution for the first time.

A great recent example is the live webcast of the Hope for Haiti telethon.

We enabled the delivery of the event using the Akamai HD network.

This live event combined the reach of TV with the internet, greatly extending the audience and the massive fundraising effort to help relief work in Haiti.

We were honored to be selected to play a part in this humanitarian effort and ground breaking webcast.

Second, with even a mild recovery in the advertising industry, we believe that billions of additional marketing dollars are poised to move online, following an ongoing shift in audience behavior.

And we anticipate that the availability of targeted accountable advertising solutions will help to drive that trend.

We've seen this thesis playing out in the early traction we've been experiencing with our advertising decision solutions.

Third, and perhaps even more significant than HD video, or the migration of so much advertising to the internet, is the potential for growth in cloud computing.

This is an area where we have been playing an increasing important role to improve the performance of mission critical application in systems online.

We've been experiencing strong demand for our value-added services from customers adopting cloud computing models.

Enterprises want to gain the cost efficiency and the agility offered by cloud services as they move more and more functions online.

At the same time, they can't afford to sacrifice performance and security.

Our cloud optimization services help to close this gap, addressing performance, scalability, and security limitations inherent on the internet, in a cost effective manner and scale.

For example, we're very excited about our recent announcement of the industry's first distributed cloud-based web application firewall service.

We believe this new solution adds an essential security element for cloud computing.

So in summary, we're very pleased with how the business has been performing in the near term, and even more excited about our prospects for growth over the long term.

Our ability to enable new business models on the internet, from HD entertainment to cloud computing, puts us in a unique position to capitalize on the next wave of growth.

JD and I would now be happy to take your questions.

Operator, the first question, please.

(Operator Instructions).

Your first question comes from the line of Mark Kelleher with Brigantine Advisors.

Please proceed.

Hi, Mark.

Thanks, hi, guys.

Congratulations, great quarter.

Thank you.

Let's start with the value added services, can you give us maybe an indication of what percent of revenue those are, I know they were ticking up over 50%.

Yes, we're not going to specifically break it out every quarter, but we did hit the over 50% in Q3, and in Q4 the share of value added services grew from there, and I expect it will continue to grow.

Q4 of course is a big quarter for our advertising decision solutions, we see 40% of the revenue from that set of solutions will always hit in Q4, so that will help drive the value added services up in a Q4.

And besides the advertising solutions, are there -- can you highlight some others that were doing well in the quarter?

I think we're just seeing really continued traction with DSA, our dynamic site solutions, and with application performance solutions, and in fact, that's a little bit less cyclical than or seasonal than the advertising or the media businesses.

So what you're seeing there is just the continued traction that we really started to see in earnest I would say late in 2Q with some of the great signings there and we continue to get good traction.

Okay, great.

Thanks.

Thanks, Mark.

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

Please proceed.

Hi, Michael.

I'm sorry.

You started to talk something, talk about volume growth a little bit.

What's that in terms of the rate of growth of volumes for you guys in terms of bandwidth?

I know that's kind of a median down (inaudible) central question, but still, what's happening with it, and then if it is going up, is it a function more of share gains or of customers increasing their rate of growth of band consumption?

I think when we talk about volumes, we're talking about really the half or less of our business that's volume-driven.

And we have seen an increase in the rate of volume growth that we noted back in Q3, and again at analyst day, that led us to take up our guidance and then really exceed our guidance based on the back of volumes growth.

I think that we're starting to see sort of a general uptick there, although again, it's still early to call.

I think the inflection point that we all think is coming.

As far as how much of it is just natural volume uptick versus us taking share, I think both are happening, and it's very difficult to separate out, but I think the trends in both areas are good.

And I would just add onto that, that we don't sell pipe.

And our customers don't come and ask us for that.

They come and look for a solution to make their online experience work well.

So in video, they are coming to make a television like experience work.

They can buy bandwidth from a lot of players to connect to their data center or use somebody's back bone.

That's not how they optimize the performance of online media distribution.

So as we look to our customers who want to deliver a TV-like experience with interactivity and HD experience, they are looking at the complete solution, our capacity, the quality, the scalability, the security, and the tools that we provide them that helps them monetize what they are doing.

And I think that's driving a great deal of the growth in that space, and our competitive advantage around the world.

Thanks.

Could I get a follow-up, middle of last year you announced the quote, more aggressive pricing strategy.

How far through that process are you, if your pricing is coming down for a certain portion of your target revenues, how far getting through that target portion are you, and what do you think has been the impact?

I think it's a little misnomer to sort of think it starts and stops, because our goal is to drive the costs out of units every year and share that with our customers, so that they can go to HD and they can go to long form programming.

And I think what you saw is that we were very direct with our customers last year, that that's what we're going to do, it's helping to drive the flood of HD, and I think frankly it's helping us in the competitive environment and it's helping in our results.

Because you are seeing growth on the top line and at the same time you are seeing us actually improve our margins.

So we have the scale to help ourselves and help our customers, and you're seeing that in our results.

Thanks, guys.

Thank you.

Thanks, Mike.

Your next question comes from the line of Phil Winslow with Credit Suisse.

Please proceed.

Hi, Phil.

Hi, guys.

Good quarter.

Just wanted to get a sense for what sort of trend you're expecting, and just the revenue breakout when you think about sort of your main verticals, just in media and entertainment, e-commerce, high tech.

Maybe, I know you're not giving full year guidance, but as you look over the course of the year, and even Q1 for that matter, what are you thinking about those lineups?

Thanks.

Yes, sure.

I mean if you look at the trends we're seeing now, I think it's helpful as you look forward.

Commerce growth, even in a very tough economy, we still maintained 20% plus growth there.

And really driven by not, somewhat by a healthy Q4, but also traction with our value-added solutions and selling into those, into our strong enterprise class customer base there, the new solutions, and that's a big part of our strategy going into 2010 as well.

In the media space, what you saw was, media actually declined in the middle part of the year, in the early part of the year, and it has returned to growth.

That will be very much volumes dependent, and if we continue to see the volumes growth there, we're optimistic for our media vertical.

And in the public sector, which was our fastest growing vertical last year, that tends to be a little bit bumpier and lumpier given the kind of deals that we're doing with the public sector, it's also a bit of a smaller aspect to our model.

But I think the key trends are drive those value-added solutions.

That really drives commerce and to some extent the high tech business.

And then let's see how the year plays out for video on the web, really, which is a key driver for volumes growth in the future.

Great.

Thanks, guys.

Yes.

Your next question comes from the line of Derek Bingham with Goldman Sachs.

Please proceed.

Hi, gentlemen.

Congratulations on the quarter.

I had a question on advertising decision, and I was curious if you could give us a sense of how the early uptake for that product has compared with the kind of ramp and uptake you saw with app acceleration a year ago or whenever it was that that was taking off.

Yes, well I would say we're very pleased with how that's gone this year.

You know, we largely, that's an acquired business that we acquired back in October of last year, and we had what I thought was an aggressive plan and of course the economy didn't exactly cooperate for commerce businesses, but business tracked pretty well to that plan.

It's a little difficult to compare it to an APS-type deal because it was a business that had, when we acquired it, it was already at sort of a $20 million run rate.

So I think the traction has been good.

Again, it's a pretty difficult comparison to make, but I think we're really pleased with how it's gone.

They are a very different sale, but they provide direct value to help customers monetize their business more effectively, and we were very pleased with the results, especially as JD said, trying to take on and aggressively grow a new advertising business in the middle of the advertising meltdown last year, the team did great.

Can you give us a sense for how the mix or the penetration of value-added solutions compares overseas versus domestically?

Yes, I think we probably see a little bit less penetration overseas versus domestically.

For one major example, we actually -- the advertising decision solution is focused on the US, so we don't yet have that solution available for our international customers, although that's a focus area for the future for us.

But I think it's still pretty broad.

You know, we talk about over 50% of our revenue coming from value-added solutions.

I think another important statistic is that over three quarters of our customers buy at least one value-added solution from us.

So even if they are primarily consuming a volume-driven solution like media delivery, they are using other parts of Akamai's technology and that's very important from (inaudible) and from a customer relationship standpoint.

And it's consistent with the trend we've talked about for years, which is that adoption of leading services has picked up first in the US, spread to Europe, and then to Asia.

So I think it's pretty consistent that we see a slightly higher uptick overall in North America, followed by Europe and then coming behind, Asia.

Great, and just one more quick one on the model, JD, you were a little bit sub 13% on CapEx as a percentage of sales.

You know, 9, can that stay below that 13% level, is there any reason this year that ought to tick back up higher above that 13 threshold?

I think we're going to be in the range of our long-term model, which is 13% to 16%.

You know, we dropped a little bit off this year, and I think that was really driven by great work on efficiency across the network, did a great job on that.

We actually spent, I think $10 million less on network CapEx in 2009 than we did in 2008, which is just fantastic work.

I think that will grow in total dollars, but we'll be in the range of our long-term model.

I don't see that changing.

Okay.

Thanks a lot.

Yes.

Your next question comes from the line of David Hilal with FBR Capital Markets.

Please proceed.

Hi, David.

I'm sorry, one moment, please.

Hello?

David, are you there?

Yes, I'm on.

Are you guys on?

You're live.

Alright, this is Michael on behalf of David.

Couple questions.

Can you discuss the visibility of the business and how it's changed over time, and then specifically touch on, are there changes in the pricing dynamics, increased uncertainty projecting volumes, or is it more just leverage to the economic conditions.

And then the second question is, qualitatively can you discuss ADS revenue growth and the relationship that revenue growth and the magnitude of that revenue growth to consumer spending?

Maybe I'll try the first one, and you try the second one.

So I think our visibility, Q4 is a quarter where there's going to be a little more leeway in where our results are going to come in because you have more bursting in Q4, so you'll be more dependent on the commerce season, certainly advertising in that business is usage based and performance based, so that is more dependent on economic factors.

So I think from that standpoint and particularly in Q4, we're a little bit more of a seasonal business than we've been in the past, as we've talked about.

So that adds a little bit more of a predictability issue, I guess you would say, although the business still remains fairly consistent and predictable, and most of our revenue, we still have 70% ballpark of our revenue that's under, that's committed in one form or another.

So I think we're seeing it change a bit, but overall, the trend still sort of holds.

So is it real -- to interrupt, is it really the economic activity and the direction of the economy then that's driving a lack of, say, full year guidance, JD?

Yes, and also I think we're going to focus on our objectives for the long-term, which is to get to double-digit revenue growth, but we're not going to give formal full-year guidance there.

Okay.

And on the second piece, I think the connection to macro consumer spending in the advertising business has less to do with the top line of it than the margin, and the ability to find in-market shoppers for the ADF solutions.

Thank you, guys.

Thank you, Michael.

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

Please proceed.

Hey, Mark.

Hey, Mark.

Good afternoon.

Two questions, please.

First, any more color on the international, any particular segments of international that look strong or weak, stuff that still needs to come back nicely or stuff that's surprisingly robust at this point?

And then secondly, I wonder if I could ask more of a technical question.

There's some major changes probably brewing in terms of Google's algorithm and the likely inclusion of the speed of webpage loading into the relevancy of search results, which could have a pretty material impact on just about anybody with a website.

Do you notice that as a factor out in the marketplace now, do you have customers asking you about that, and do you feel like you have a solution directly to help that?

I'll let JD take the international trends, and I'll take the--.

I'm all over that technical question, but I think internationally, Mark, we see, we have a pretty similar mix of customers internationally that we do in the US.

We have seen our growth moderate a bit in international, but we're still growing faster outside the US than we are in the US.

One of the things that we've noticed for a long time is that a lot, and as Paul referenced to an earlier question, a lot of the trends that begin in the US start to roll their way out to international.

So I think when we talk about the adoption of HD, et cetera, it's happening first here and later in international.

And then of course, unlike in the US, there are some real green fields and some emerging economies where broadband access is starting to pick up and we're getting more users and that's driving more growth.

So I think from a geographic basis, you'll see more growth sort of in Asia-Pacific where we see more green fields and in some of the emerging economies.

And then on your question about search engine results being influenced by performance, first I want to say I'm not in a position to make a product announcement for Google, and I wouldn't dream of doing that.

That's up to them.

But first I would say, I think it's great for a leader like Google to be talking about one of the key factors for website is pure performance, and that's been our pitch for over a decade, which does performance really matter to end users?

We've talked about now going to a two-second rule, which is a site that doesn't load every page on average under two seconds is considered underperforming by end users.

I think those kinds of thoughts about ranking search results based on performance is very consistent with that.

Our customers have talked to us about it for a long time.

And yes, customers now are asking about, what can I do to be even faster if it's going to affect my search rankings, because that leads purely to traffic, which could mean audience sales, et cetera.

So I think it's a great trend just that it's even being talked about by other opinion leaders, and I think it would be even better if that started to influence search rankings on our business because I think there would be more sites focused on performance, and I think we have one of the best solutions available out there.

Thanks, Paul.

Thanks, JD.

Operator, next question?

Your next question comes from the line of Kerry Rice with Wedbush.

Please proceed.

Thanks a lot.

As you've given Q1 guidance, I don't know if you can talk a little bit about the trends that you've seen from the beginning of the year to date regarding maybe some pricing trends.

And I would assume that volume ticks down after such a strong Q4, but can you maybe talk about what you've seen so far in the quarter, and then I have one follow-up question.

You know, it's really way too early to know, and also really a recurring revenue business, so the business that came before the quarter is far more influential besides the bursting piece, and it's still pretty early to know.

We're just counting up traffic in January, and that's only a third of the way through.

But we had strong signings throughout the year.

We think that bodes well for the year, and why we've talked about aiming for double-digit growth this year on top of, we thought really great performance last year in an even more uncertain environment.

I think, two key factors that you see in a Q4 to Q1 seasonality are the advertising business and currency.

You know, our ad business will see a decline there probably in the $6 million to $7 million range sequentially.

We'll still have great growth year-over-year, but that business is very seasonal.

And then currency, if spots stay where they are right now, that will be a couple million dollars of a sequential decline.

Really those two factors are the major driver of Q4 to Q1.

Then you think about the seasonality, certainly there's a lot of traffic around the holidays in the commerce vertical, et cetera.

That will be a downtick, but then the natural growth of the business will be somewhat of an uptick as well.

And we'll just have to see how those two factors play out.

Okay.

And then the second question is, can you talk a little bit what you think is the opportunity to deliver video to mobile devices?

Is that near term or will it take a long time to materialize, and where you believe your position is there?

Well, both.

We're already doing it.

If you look at our announcement of the Akamai HD network, included the delivery of video to the iPhone, which we're already doing for a number of our customers.

Clearly there are today more people with a broadband connection to a PC than broadband connection to a PDA, despite the very large number of people who have cell phones, the number who have a video-capable device is still small but growing very rapidly.

And we are ideally situated because of our distributed network and the ability to direct video into mobile networks in a very unique way, I think positions us extremely well.

And we've been talking to our customers that the key for them, is they need to be able to deliver to three screens over IP seamlessly.

And that's what the Akamai HD network does, whether it's delivering to a broadband computer, an IP-enabled or connected TV, whether that's through a direct connection, Wi-Fi, a gaming console, or some other device, or a cell phone or a PDA, they need to be able to reach their users anywhere, any time, in the format that the customer wants to get it.

And we think we have a very unique set of capabilities there, and we're starting to see that in some of the delivery we're doing with customers, particularly in the sports category, who are really thinking about this as, how do I reach the three-screen user over IP.

Great.

Thank you very much.

Thanks, Kerry.

Your next question comes from the line of Sri Anantha with Oppenheimer.

Please proceed.

Good evening, thank you.

JD, I know you talked about pretty strong growth, subscriber growth especially.

Is there a way that you could quantify in terms of bookings, and how those booking trends, trended throughout 2009?

And second question is on the expenses.

We saw a pretty strong uptick in expenses, especially sequentially in sales and marketing and G&A.

How much of those are growth focused, as you're targeting new growth opportunities in 2010 and beyond, and how much of them are really one-time in nature?

Thank you.

Okay, let me do the expense first.

A big portion of the expenses are the sort of Q4 wrap-up expenses with the bonus and the commission accelerators, et cetera, and that's what drove such growth in Q4.

We did add about 50 people in Q4, and I think over 200 in the year, even in a difficult economy.

So those investments are geared primarily in sales and marketing and in R&D, and they are focused on delivering on innovation and in new markets, and we're going to continue to make those types of investments in 2010 as well.

But there was an aspect of the expense growth that's sort of year end items.

On the bookings, I'll give a little color on that.

We don't give a bookings number, and it obviously is going to be -- it varies in importance relative to the solutions and the verticals, but I would say that we saw a slow start to the year in terms of bookings as people -- as Paul said, it was anybody's guess what was going to happen for the year.

But really around sort of the June timeframe, we saw that pick up and the bookings were really solid.

And the other thing we've seen is over the last three or four quarters, very strong bookings in our value-added services, with over half of the new customers that we're bringing on, we're bringing on with value-added solutions.

So I think that's -- both of those are positive trends from a bookings perspective.

Got it.

And just one quick question.

I know, Paul, you talked about the long-term opportunity, especially with cloud services.

Is there any way that you could quantify what the near-term market opportunity for Akamai is?

I know in the past you guys talked about just being a neutral guy in the middle, and trying to partner with pretty much all the three layers of cloud computing.

Where are you with respect to that process, and how many vendors are you actively working with today?

Thank you.

So we have partnerships at all three levels -- today some are with multiple layers at the same time.

Most of the activity today is really at the top layer, software as a service.

And we have dozens of partners and customers there.

We announced on the last call for example how we partnered with Force.com on the middle layer.

And really in infrastructure as a service, that's a really nascent area, and we're looking for ways to partner, but that's the area that really in the market is least developed.

We still think remaining as an enabler of performance with multiple partners is exactly the right strategy in place to our unique network assets.

Thank you.

Your next question comes from the line of Rob Sanderson with ABR Investments.

Please proceed.

Hey, Rob.

Good afternoon, everybody.

Quick question first off, just (inaudible) your target double-digit revenue growth doesn't really anticipate a real inflection in any of your three incremental growth opportunities, more of a grinding forward there.

Is that a fair interpretation?

No, I think it says we expect good growth this year.

We saw strong growth, especially the second half of '09, and we're optimistic that we can keep driving it forward, but visibility is certainly lower as we go out in the year, and the economy is still a very uncertain place, although certainly a little more stable than a year ago.

And we've got very strong internal and aggressive goals, but sort of an outward statement, our goal is to drive into double-digit growth and to keep going from there.

Can I ask a follow-on, just what should we be looking for as real tangible signs of big acceleration in HD video, like what would you say the key milestones are to watch through the year?

And then a second part, do you expect this to be more content producers going direct to consumers of service offerings, or do you see the real growth drivers being more aggregators like iTunes or Hulu or NetFlix or something like that?

Well, I think the milestones will be continuing events done in HD, and more and more on demand content available in both.

And I think that's just going to grow over the next three to five years significantly.

And I think the spread is going to be across the board, and I think that you're going to find the rights holders are looking to do direct distribution.

The internet gives them that.

And also clearly having to piggy back or wanting to piggy back with the aggregators who will bring eyeballs and effectively discovery engines to be able to say, if you watch that, now that much this, will be very important, and we're well positioned with most of the major players on both sides of that equation.

Okay, thank you very much.

And congratulations on a great quarter, guys.

Thank you.

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

Please proceed.

Hi, Todd.

Hi, guys, nice quarter.

Thank you.

Can you guys talk about the impact of IPv6, and does that have any impact on traffic loads on your network, and does it increase the incremental revenue opportunity for you guys?

It's really not a near-term opportunity.

It is an emerging standard that has been talked about for a long time.

To not be terribly technical, it's really about adding lots of IP addresses so that far more devices can connect to the internet.

In the long-term, that's good because we think that a lot of those will have applications, even when they are machines talking to machines and there's not a human where performance will matter a lot.

And we'll be able to find new markets to enter with our performance acceleration services, APS, what we're doing in the cloud space, et cetera.

But it's really a technology adoption that's going to take a while.

There's still a lot of discussion of exact implementations.

We certainly from an engineering and network point of view, we'll be completely ready to support it, but today it's really not significant.

And just to be clear, when it is adopted, does it have any direct impact in terms of traffic, or does it just increase the number of IP addresses out there?

It should increase traffic because more addresses presumably will get assigned skews by more devices.

Some will be consumer devices where you're connecting your phone or your laptop, and many of them will be machine to machine communication, but those, that interaction will require performance.

We won't have a solution for every niche in the market, but we think overall it will drive growth.

But it doesn't, on the face of it, suddenly mean everyone will go to HD video, for example.

That's not a requirement there at all.

It's really about increasing the number of, if you will, addresses or devices that can have a unique identifier and be on the internet.

That's interesting, because there have been some articles recently talking about YouTube going to IPv6 and some traffic pickup there.

It sounds like that could be just erroneous data points.

I haven't seen those, and it really shouldn't influence it.

Okay.

Thanks, guys.

Yes, thank you.

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

Please proceed.

My question has been answered, thank you.

Are you there, Colby?

Yes, my question's been answered, so thanks.

Okay,great.

Next?

Operator?

I apologize.

Your next question comes from the line of Richard Fetyko with Merriman and Company.

Please proceed.

Hey, gents.

Thanks for taking my question.

On the topic of HD, I can see how HD content improves consumers experience obviously, but from a content owner's perspective, I don't see how HD video will monetize much better.

So I'm not sure if they will be willing to pay two or three times more for delivery of HD video files.

So just curious, the only way I see them moving forward with HD is if prices decline.

That's where I think you're missing the key.

Okay.

Because for the programmer, the key is engagement and how long people stay.

One of the problems with so much HD video has been that it's really short attention span theatre.

And if you've got an average viewing time of two minutes, there's just not so much commercials that you can put in there or rapidly, if you will, the audience trade-off of how many minutes of commercials for how many minutes of viewing gets worse than television very rapidly.

But if you've got longer engagement and people will watch longer, you can move to something that's more like a TV model, especially if you can personalize the messages.

And what we've seen is, as you get to higher bit rates and higher quality, viewership will go up for the same programming.

So this recent Haiti webcast is a great example that as you move from standard video to a megabit and a half and then 3 megabits a second, you saw measurable double-digit percentage growth, up to 50% longer viewing time.

So obviously at the same event, live, as you went to the higher bit rate.

So the real opportunity for content providers is to put up long form programming like TV shows, sporting events and movies, get people to watch for the whole length, and have lots more opportunity to monetize within.

Rather than a poor quality video that plays for 90 seconds and the best you can do is 10 seconds of pre-roll commercial before really limits your monetization opportunity.

Now, a piece of that is driving down the unit cost of delivery of HD video.

We're very focused on that, and we've had a great deal of success with our customers, we think that helped drive stabilization of digital media in the second half of the year.

But the real key is higher quality and interactivity, so things like instant digital video recorder, functionality in the player, drives engagement and much better opportunity to monetize for rights holders.

So we're very excited about what higher quality will do, and that's what we're hearing from the rights holders, the producers, the media companies, which is, now we've got the opportunity to engage people and have them watch a whole show, and that gives us multiple opportunities to insert personalized messaging.

That's a fair point.

Thanks for clarifying that.

Sure.

And secondly, if I may, on the M&E side, you've returned to nice growth.

That's great.

Just curious, what should give us comfort that what happened in 2009, just of repricing some of the contracts and kind of stalled the growth in that business will not happen again in 2010?

A lot of that has to do with what happened in the economy.

We drive unit cost down every year.

So it's not as if for a decade pricing was stable, and in '09 or so we had a different phenomenon.

So I really think that our goal is going to be to continue to drive efficiency, share that with our customers and have volumes we hope continue to explode online, especially through HD video.

And that that ought to drive growth in that business over the next several years.

I would also add that I think the biggest variable that impacted revenue in M&E was not actually pricing, it was volumes.

Pricing has come down for a long time.

We talked about being more aggressive on pricing back in 2Q, and we certainly were, but what the biggest variable was volumes, and we have started to see a bit of an uptick there in volumes, which is promising I think for the M&E vertical.

Thanks, guys.

Thank you.

Operator?

Your next question comes from the line of Sterling Auty with JPMorgan.

Please proceed.

Great, if we could keep the questions tight, we can try to fit in a few more and maybe get to the end of the list before we're done.

Okay, this is Lauren Ye for Sterling Auty.

I just had another question around the, I guess, pricing.

In terms of the trajectory of pricing pressure, did it kind of stabilize or increase or I guess just some color around that in Q4?

We think we're the leader in the marketplace.

That we work with our customers to really set the trends in the standard, and we were very happy with where it came out, and I think our customers were, evidenced by the strength in our business and their willingness to put more and more HD into high quality long form video.

And I think that we are going to aim to continue our leadership in this space through the year and work with our customers on models that are successful for both of us.

Okay, and just a quick one.

For 2010, I guess gross margins again, I know you're not giving formal guidance -- can you just help us out on how you're going to fall out on this line item.

Well, we did give guidance in that, in Q1 it should stay flat, and that would be about the eleventh straight quarter that they stayed flat on the cash gross margin line.

So, that's a pretty positive trend and I think a helpful trend.

Okay, great.

Thanks, guys.

Operator?

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

Please proceed.

Hi, Chad.

Hi, thanks very much.

Two quick ones for JD.

On acerno, hoping since you guys acquired it in the middle of Q4 '08, you could give us a sense of the contribution in the quarter, so we could get at organic growth.

And then could you repeat the impact of currency sequentially or year-over-year in terms of dollars?

Yes, so the acerno is basically all organic.

We bought the company in October of 2008 and--

Closed in November.

Closed -- so we had two months of revenue, but October is the smaller of the months.

It's basically organic growth.

Probably a couple million dollars of sort of inorganic tailwind there.

The currency was about a positive, if I remember the number, about a positive $5 million on a year-over-year basis in Q4, and we expect that it will still remain slightly positive on a year-over-year basis in Q1, but it's turned a little bit and now we're seeing the $2 million sequential headwind from FX.

Okay.

On acerno, just a follow-up, can you say if that did in fact grow more than 100% sequentially, given the seasonality?

Seems like you guys expected that to more than double.

Yes, it's in that ballpark, but again, we're not going to break out the ADS business going forward.

Yes, understood.

Thanks so much.

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

Please proceed.

Thanks a lot.

Really quickly, other than the obvious strength from holiday shopping online, could you talk about qualitatively what drove the upside in the commerce business?

Thanks.

Well, I think that was a big piece of it.

It was a very strong E-tailing season.

We were very well positioned with major retailers online around the world.

They realized that the performance that we can bring to their dynamic site is highly differentiated and it turns into revenue, so we are a business builder with them.

It's not a cost center for them, and really you stated the reason was it was a very strong e-commerce Christmas.

Our customers benefited and we grew along with them.

Operator?

Your next question comes from the line of Sameet Sinha.

Please proceed.

I think it will be our last one, thank you.

Great.

Thank you very much.

So just a question on gross margin.

I know during the analyst day, you spoke about how long-term cash gross margins you expect them to go down as acerno scales.

But is there any scenario by which you do HD volumes increase at an exponential rate, which could actually help you keep your gross margins steady or flat from here on?

And--

We're going to work really hard to maintain profitability in the business.

There is the opportunity for mix shift, which we talked before, but I think what you saw last year was, even with the growth in some of the new businesses we did really a terrific job of driving costs out of the business.

We're going to keep trying to do that.

Okay, and second question is, I mean considering that a lot of part of your business now is running on software, software sale kind of thing, would you continue to add servers around the world, can you just talk about in very layman terms what's the need to continue to add servers.

Sure.

We've always thought of this as a software platform, an overlay on top of the public internet that now joins and has always joined private cloud and data centers to across the internet in a more efficient way to end users.

And we are always looking at where there's a need for capacity, where growth of users is on the internet, and work to expand our footprint to meet it while we add functionality and efficiency through the software development, which is really the core IP of the business.

And we balance those and it allows us to scale our ability to handle traffic, and to continue to deliver it faster than other methods at the same time, and it works as a value proposition to our customers.

All right.

We always promise to be on and off in an hour.

We've already run over.

So thank you all for joining us.

We were extremely pleased with the way the year turned out, and we're looking forward to building on that in 2010, and we'll talk to all of you in about another 90 days.

Good-bye.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.