阿卡邁科技 (AKAM) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Third Quarter, 2010, Akamai Technologies Incorporated Earnings Conference Call.

My name is Melanie and I'll be your coordinator today.

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

We will accept your questions at the end of this session.

(Operator Instructions).

As a reminder, today's call is being recorded.

I would now like to turn the call over to Miss Natalie Temple, Investor Relations.

Please proceed.

Good afternoon and thank you for joining Akamai's investor conference call to discuss our third quarter, 2010 financial results.

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

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 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 October 27, 2010.

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

As a reminder we'll 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 Natalie and thank you all for joining us today.

Akamai performed very well in Q3.

Revenue growth accelerated for the fourth consecutive quarter and we delivered strong results across the entire business.

Revenue was a record nearly $254 million, up 23% from the same period last year.

We generated fully-taxed normalized net income of $64 million, or $0.34 per diluted share; that was up 23% from Q3 of last year.

Cash flow generation in Q3 was very strong with $118 million of cash from operations in the quarter and $292 million year-to-date.

We continued to leverage our profitability to make investments that are designed to help our customers expand their online businesses into the cloud.

I'll be back in a few minutes to talk more about some of the key trends we're seeing in the marketplace, but first, let me turn the call over to J.D.

for details on Q3.

J.D.?

Thanks, Paul.

Thanks a lot.

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

We grew revenue $8 million sequentially, and 23% year-over-year to $253.6 million coming in just above our expected range for the quarter.

We delivered solid growth across all of our key verticals.

Media and Entertainment remained our fastest growing vertical for the second quarter in a row.

We again saw strong traffic growth, especially among the largest, most strategic accounts.

During the quarter, Media and Entertainment grew by 26% over Q3 of last year and 6% over Q2 of this year.

ECommerce revenue growth accelerated to 24%, compared to Q3 of last year, and grew 3% sequentially driven by continuing adoption of our Value Added solution.

With new product introductions in the Mobile and Online Security markets in the past few months, we continued to add to our portfolio of solutions targeted at this customer base.

Revenue from our high tech customers grew 13% year-over-year, down 2% sequentially.

We have a very strong software delivery business at the core of this vertical and we also saw increased demand for our Application Performance solutions from Softwares and Service customers.

Public sector revenue was up 28% from Q3 of last year and up 5% from last quarter, continuing the solid performance we've seen for the past several quarter from government contracts.

Across the board, we are pleased with the continued growth of our Value Added solutions.

In Q3, 55% of our revenue came from Value Added solutions, up from 50% in Q3 of 2009, and 78% of our customers are buying at least one of our Value Added solutions.

During the third quarter, sales outside North America, represented 28% of total revenue, consistent with the prior quarter.

International revenue grew 20% year-over-year and 3% sequentially.

Foreign exchange had a negative impact on revenue of just over $1 million on a year-over-year basis, but a positive sequential impact of about $2 million.

Excluding the impact of currency, international revenue grew 22% on a year-over-year basis, but declined 1% sequentially.

Revenue from North America grew 24% year-over-year and was up 4% sequentially.

Resellers represented 18% of our total revenue, down one point from the prior quarter.

As expected, cash gross margin of 81% was down one point from last quarter and from the same period last year.

GAAP gross margin, which includes both depreciation and stock based compensation, was 69% for the quarter, down two points from the prior quarter and down one point from last year.

GAAP operating expenses were $116.7 million in the third quarter.

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

Excluding these non-cash charges, our operating expenses for the quarter were $90.6 million, up $2 million from Q2 and up 25% on a year-over-year basis as we continued to invest in the business.

Adjusted EBITDA for the third quarter was $114.1 million; that's up 19% from the same period last year and up 2% from Q2 levels.

Our adjusted EBITDA margin came in at 45%, consistent with our prior guidance, down one point from the same period last year and from the prior quarter.

For the third quarter, total depreciation and amortization was $36.5 million.

These charges include $28.3 million of network-related depreciation, $4 million of G&A depreciation and $4.1 million of amortization of intangible assets.

Net interest income for the third quarter was $2.6 million; that's down slightly from second quarter levels, and from Q3 of last year, despite a higher cash balance due to lower interest rates on our investments.

Moving onto earnings, GAAP net income for the quarter was $39.7 million, or $0.21 of earnings per diluted share.

As a reminder, our GAAP net income includes several primarily non-cash items including $20.4 million of stock-based compensation, including amortization of capitalized equity-based compensation and $4.1 million from amortization of acquired intangible assets.

As a reminder, this year we are including GAAP taxes when we report our normalized earnings each quarter, although they were primarily non-cash.

For Q3, that tax charge was $20.6 million based on a full year GAAP tax rate of about 37%.

Supplemental metric sheet posted in the investor relations section of our website provides a historical view of our normalized EPS on a fully-taxed basis for comparison purposes.

Based on this methodology, our fully-taxed normal net income for the third quarter was $64.2 million, up 23% from Q3 of last year and down 1% from Q2.

In the third quarter, we earned $0.34 per diluted share on a fully-taxed normalized basis, coming at the top end of our guidance range.

That's up $0.06 from Q3 of 2009 and consistent with Q2 of this year, and our weighted average diluted share count for the second quarter (Sic- See Press Release)was 191.3 million shares.

Cash generation continued to be very strong.

Cash from operations for the third quarter was $118 million.

Year-to-date, we've generated $292 million of cash from operations or 40% of revenue.

At the end of Q3, we had $1.2 billion in cash, cash equivalents, and marketable securities on the balance sheet.

This balance included $150 million of student loan backed auction rate securities.

As for our convertible bonds, issued back in 2003, we recently notified the holders of our intent to call the bonds on December 15 of this year, the first opportunity to do so.

As a result, we expect the remaining $59 million of those bonds to be converted to equity in Q4.

The impact of this conversion is already reflected in our fully-diluted share count, but we're pleased that we will be formally debt free by the end of the year.

Capital expenditures, excluding equity compensation were $42 million as we continued to build out capacity to support the accelerating volume growth on our networks.

This number also reflects increased investment in capitalized software development.

During the quarter, we spent $22.7 million on share repurchases, buying back about 522,000 shares at an average price of about $43.50.

Since the beginning of our share repurchase program last year, we have spent $131.4 million buying back a total of 5.2 million shares at an average price of just over $25.

Finally, our Days Sales Outstanding for the quarter were 58 days, consistent with Q2.

We're very pleased with the accelerating growth we've seen during the first three quarters of the year, both in terms of traffic growth and Value Added Solution traction.

We believe the industry trends underlying this growth remains strong and we remain confident that these trends can continue.

Q4, holiday seasonality also plays a role in our performance, particularly in online retail and advertising.

As a result, the fourth quarter tends to be our strongest quarter, but also the most impacted by the external macroeconomic environment, which remains somewhat hard to predict.

Given this, we are expecting Q4 revenue of $272 million to $285 million, a wider range than our normal -- than our normal guidance reflect this variability.

If the holiday season is as strong as it was last year, we'd expect to be at or near the high end of this range, with 20% growth on a year-over-year basis.

If the online retail and advertising seasons are not as strong as they were last year, then we would expect to be toward the lower end of the range.

The midpoint of our revenue guidance translates into 10% sequential growth and 17% year-over-year growth.

At current spot rates, foreign exchange should be roughly neutral on revenue growth on year-over-year basis and provide a roughly $4 million benefit on sequential basis.

We expect gross margins to remain relatively stable, with a bit of downward trending driven by the seasonal growth in our Advertising Decision solutions.

Cash gross margin are to be expected in the range of 80% to 81% and GAAP gross margins, including equity compensation, will remain around 69%.

We plan to continue investing in the business in the quarter, particularly in the areas of staffing and network capacity.

With the normal expense items we see in Q4 such as year-end commissions, we expect adjusted EBITDA to remain at about 45%, consistent with the prior quarter.

At this level of revenue, and with the investments we're planning, we expect to see fully-taxed normalize EPS of $0.35 to $0.38 for the quarter or 9% year-over-year growth at the midpoint of the guidance.

This assumes a full-year GAAP tax rate of about 35% or taxes of $21 million to $25 million in Q4.

This is lower than the full-year tax rate we have accrued for in Q3, as we expect the R&D tax credit to be reinstated in Q4.

In CapEx, we expect to spend around $50 million in the quarter, excluding equity compensation, which takes our full-year investments to around 19% of revenues reflecting our focus on investing to stay ahead of the growth that we expect on the network and making up for some lower spending in 2009.

This investment would temporarily put us above the model levels we've previously discussed; however, we believe our long-term model goal of 13% to 16% of revenue still holds for CapEx.

On a full-year basis, even at the lower end of the guidance we're providing today, we expect to deliver on our goal to reach $1 billion in revenue for the year.

With our Q4 guidance, this implies full-year revenue in the range of $1.011 billion to $1.024 billion, up 18% from last year at the midpoint and normalized earnings per share of $1.38 to $1.41, up to 15% at the mid-point.

We think the momentum we've demonstrated in 2010, coupled with making key investments in the year, positions us very well for future growth.

While it's still too early to predict 2011 performance and while we traditionally haven't done so at this point, we do believe that the current street consensus of 15% top line growth is probably a conservative estimate.

We look forward to having an opportunity to go into more details with you about the business and future trends in the industry at our upcoming investor summit later in the quarter.

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

Paul?

Thanks J.D..

As our Q3 results demonstrate, we've been seeing the benefits of more and more businesses of all kinds move into the cloud.

We're pleased with the growth this shift has brought to Akamai and we're very pleased that we'll hit our $1 billion dollar revenue goal this year.

To ensure that we remain well-positioned to capture future opportunities for growth, we've made some significant investments in 2010 including $150 million in capital spending to expand our network by the end of the year; adding over 400 new employees overall this year, mainly focused on engineering and go-to-market roles; and, a strategic technology driven acquisition earlier in the year in the mobile market.

These investments are targeted in helping our customers grow their online businesses by using more and more of Akamai Shared Services in the cloud.

I wanted to take a couple of minutes to tell you about the customer conference we held earlier this month because the turn-out was so strong and the feedback from clients was so positive.

We had about 500 attendees, including representatives from more than 250 customer companies, 26 partners from our ecosystem, and more than 25 countries.

These attendees came together to talk about best practices for their online businesses to give us valuable feedback on how we can do even more to help them succeed.

It was a great event.

We're seeing incredible innovation from our customers as they leverage the cloud in new and exciting ways as they innovate.

The performance, scale, reliability, and the security that Akamai provides matters even more to their future success.

Speaking with our retail customers, it's clear just how important Akamai Technologies services are to their businesses.

Online eCommerce has grown to $0.5 trillion worldwide according to eMarketer, with about $150 billion of that in the US alone.

Today, 260 of the top 500 US internet retailers use Akamai.

Looking at it another way, we estimate that around two-thirds of all that online commerce transactions in the US happens over the Akamai network.

Top retailers rely on us to accelerate and secure their transactions because they know that better performance like you get with Akamai Dynamic Site Accelerator translates into more revenue for them.

The enterprise, today we measure the number of applications running across our network in the tens of thousands.

Many of these applications are mission critical functions that require performance, reliability, and security levels that simply can't be delivered over the regular old public internet without Akamai Application Performance solutions.

The world is changing online.

As our customers innovate and their businesses grow, stakes get higher for them, particularly around security.

Unfortunately, as the amount of online activity increases, the number of threats to online assets is also going up.

We believe a key part of smart defense for our customers on the web is to take advantage of security in the cloud by moving their parameter defenses far from their data centers and their data.

This is a principle behind our Web Application firewall offering.

This service is designed to detect and block attacks before they reach our customer's origins because once that happens, it's often too late to stop them.

Several clients spoke at our conference about how they are taking advantage of the Web Application firewall from Akamai to protect their online businesses.

One in particular is Motorcycle Superstore.

They talked about choosing Web Application firewall in combination with our Dynamic Site Accelerator and Akamai SiteShield to protect origin infrastructure; this helps them apply with the evolving PCI requirement imposed on internet retailers.

Another important new area for us is Akamai Edge Tokenization, electronic payment security service.

We unveiled this in Q3.

This solution can significantly decrease PCI compliance and fraud costs for our commerce customers by reducing the amount of sensitive credit card information a retailer needs to handle online.

Another focus area for many of our customers is mobile.

As the number of mobile devices continues to increase, our customers want to make sure their businesses can easily reach users on these devices, cost effectively and with high performance.

Akamai helps by handling the complexity of optimizing how content is displayed on different devices.

Hard Rock International for example, faced this very challenge and is using our mobile optimization service to deliver relative content from their main website to mobile user on their handhelds.

In online marketing, we continue to see advertisers demanding more effective and more accountable campaigns that can be delivered quickly and efficiently.

This is why we launched our Pixel-Free Advertising solution and why customers as diverse as Kroger and Boston Apparel are using this service from Akamai.

Already in Q3, 30% of the revenue for our Advertising Decision solutions come from our Pixel-Free offer.

Media, the Akamai HD network, enables the delivery of TV quality experiences to audiences rivaling the size of those for many TV shows, and audiences today expect a high level of quality on the internet or they won't watch your programming.

Studies with many of our customers and comparisons have shown that user engagement is significantly higher when video quality over the internet matches the quality on TV and higher levels of engagement translate into more opportunity to monetize programming online.

All of these examples demonstrate our commitment to expanding our portfolio of services to meet our client's current and future needs.

In summary, I'm very pleased with our third quarter results and very energized about the feedback we received from our clients at our customer conference.

We came away more committed then ever of our strategy to helping client accelerate the growth of their online businesses by leveraging Akamai's unique, highly-distributed computing platform.

As J.D.

said, we're looking forward to talking more about our strategy at our upcoming investor summit here in Cambridge later this quarter.

There I'll also have an opportunity to introduce many of you to our new President, David Kenny.

Now, J.D.

and I would like to take your questions.

Yes, sir.

(Operator Instructions).

Our first question comes from the line of Sterling Auty with JPMorgan.

Go ahead.

Yes.

Thanks.

Hi, guys.

Hi, Sterling.

When you look at the Value Added services business -- there were some headlines from AT&T and partnership and some talk about Limelight -- can you just give us some color as to what you're seeing in the competitive landscape and is there any actual change in the pricing dynamics in the Value Added services part of your business?

No changes that we've noticed in the areas you've talked about right now.

We've embraced being in a competitive market for over a decade and we know that in growth markets, especially in technology, there really, really competitive.

And I think what we've done is position Akamai as the innovator.

We use our massively distributed network, our unique asset, and differentiated technology and ten years of development to have, we think, the most complete portfolio; and over and over again, over the years, we've seen people try to take a single centralized network and extend it to reach users everywhere anytime with great performance and we just don't believe that that works.

So in growth markets, there tends to be a lot of noise.

Our markets have grown pretty dramatically over the decade as you know, now approaching $1 billion dollar in revenue for Akamai this year, and so there's a lot of attention, a lot of people who have tried to come up with competitive offers, but in general, these less distributed network architectures just face performance problems that they can't overcome regardless of the technology they deploy, let alone, we don't believe they have the same kind of technology for say, dynamic routing that Akamai can bring to the equation.

So we think our Dynamic Site Acceleration capabilities are differentiated; we welcome the competition, but we think those solutions still stand alone in the marketplace.

Okay.

One follow-up -- in terms of CapEx level of investment in year, is that going to be necessary to be sustainable into 2011 or is there a point where you get a little bit of additional leverage, because I want to think about how that flows through to the expense line as we think about 2011?

Yes, I think we can, -- we're pretty comfortable that over a sustained period of time, we'll be below that level and into our model range.

It's tough to say exactly how rapidly we decline into that range.

As long as traffic keeps accelerating, we're happy to keep investing to capture that traffic and support our customers.

If you look over the last couple of years, and the revenue to CapEx equation, we're right in the range, if you look over the last five years, if you look over the history of the Company.

So, I think going forward you'll see it in that range.

How quickly, Sterling, it declines into that range, it's hard to say.

All right.

Thank you.

Sure.

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

Go ahead.

Great.

Thank you.

Paul, could you talk a little bit about the Securities solutions and the success you might be having selling that into the commerce vertical?

And, specifically, when I think of Edge Tokenization, what percent of the commerce base do you think are applicable customers for that type of solution?

Well, great question a great topic.

I think what we're seeing is that as there's more and more at stake and more and more bad guys trying to take a piece of it and our customers are having to pay more and more attention to security online, because they just have more to protect, so you may recall we started with DDoS Mitigation Services for denial of service attacks, which doesn't apply to just commerce sites, but often to high profile sites of all kinds.

We continue to offer those services, then we added Web Application firewall, which you can think of as effectively filter traffic before we send it back to our customers origins to run against their database and their applications there.

There they can apply their own rules to filter the traffic which is different than just filtering a DoS deck, which is a series of actually legitimate requests, and we've taken that a step further with Edge Tokenization, now.

That service was just introduced, so I'm sure you would assume we haven't sold that to a lot of people yet.

We've been testing it and now have really strong interest.

And that probably applies to all of our commerce customers who are dealing with credit cards today, because the challenge is, they take the credit card number, they really don't want it, but if they don't have something that they can take to the bank to get paid, they can't get their money for having shipped the product.

The way Edge Tokenization works is we interact at the edge with their customer online.

We can immediately and securely turn the credit card number into a random digit which can be used by that merchant who wants to go get paid, but if anyone ever stole that number, it's completely useless, because it's not actually a person's credit card number.

You can think about that in terms of lowering the complexity of security, lowering the cost of PCI compliance, and if we can help our customers lower their security cost as they get more secure, that means they can be more efficient with their customers.

I think this whole range of security and probably more things that we can offer over the coming years from the Cloud apply to a wide range of Enterprises, but right now they're dead center on what our commerce customers need today and I think will increasingly need over the next few years.

It's one of the things that our distributed deployed network is so good at because the shortest path there, direct connection to the end user, that credit card number can effectively be destroyed then and there; it doesn't have to sit somewhere being vulnerable.

And then the high tech sector, that was down sequentially.

Given the proliferation of SaaS, I would think that would just be a natural tailwind, so what would cause that business to be somewhat soft in the quarter?

It was also down sequentially last Q3, so there's a little bit of seasonality there.

A lot of that business -- still a majority of that business today is software downloads.

A lot of is the antivirus guys -- you download the new antivirus software when you log onto your laptops and that seasonal usage, we see that there.

Certainly the growing use of software as a service in that vertical is a tailwind and the share of software that service customers of that vertical is growing; and I think that's what's driving the year-over-year growth and, in fact, if you look at that vertical from Q2 to Q3 the year-over-year growth actually did accelerate.

Okay.

And then finally, on cash gross margins -- so they were down a little bit.

How much of that is due to M&E just doing really well and it's the cost of doing business in that high volume sector and just a necessary part of business?

And how do we with think about it going forward for 2011?

Yes, if you look at the M&E vertical, in last Q3, that vertical was shrinking.

It was shrinking 7% or 8%.

Now, it's growing 26%; that vertical as we talked about has lower gross profit margins because it's just so heavily volume-oriented.

On top of that, we're seeing the growth with very largest customers, which is great news -- they're our strategic customers -- but, we also have the most aggressive prices there.

A combination of those factors has put the downward pressure a little bit open our margins, but margins still -- we've been in the 81% to 82% range for quite some time.

I think there's a natural balance going on with our Value Added solutions and the Volume Driven solutions.

Let me remind folks, let's try to keep in one question and one follow up so everybody can get in the hour and we don't have to be the bad guys and cut you off.

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

Go ahead.

Hi, guys.

More on the margin side -- why should -- I think you mentioned something briefly, but why should the cash gross margins head down sequentially in the fourth quarter?

I think, pretty sure they were up last year in the fourth quarter.

And then, to follow-up on David's question, what are you thought where cash gross margins will go into the next year?

I think the margins will be roughly stable.

The ones that drag on a quarter-over-quarter basis in our Q4 is the Advertising Decision solutions business, which has a lower margin on average than our overall business; it is in the 50% range, so we do expect to get sequential growth out of our advertising business and that impacts the mix a little bit.

Of course, you go the other way with scale to the extent we have a lot of growth in the quarter that it will help offset that.

As far as going forward, we haven't given any specific guidance going forward, certainly not to next year.

Our long-term model does assume that the Media business continues to grow and therefore we see our cash gross margins tick down a little bit, but as we talked about, the nice thing about that is that business scales differently and we think we can maintain our EBITDA margin in the 45% to 47% over long period of time and that's our long-term model.

That's fine.

My follow-up -- J.D., I don't remember, did you guys mention anything about what the pricing environment is like?

Well, I think we got a question on the pricing environment in the Value Added solutions and the answer was, not very different.

I would say that's the same answer on the Volume Driven side; very similar pricing environment to what we've seen for a while now.

Great.

Thanks.

'Bye, Mike.

Yes.

Our next question come from the line of Scott Kessler with Standard & Poor's

This is Scott Kessler with Standard & Poor's.

I knew that.

Yes.

It was a trick.

Thanks a lot.

Other Expense was a lot more than we had projected.

Can you provide --

Other what, Scott?

Other Expense item, the Other Expense item.

You mean in operating expenses?

Yes.

It was $1.4 million, which --

Oh, Okay.

I'm not sure exactly what you projected, but one of the things about foreign exchange is it obviously drives a benefit sequentially to our revenue, but it also causes us an impact in the operating expenses in re-valuation of some of the balance sheet items.

We've got a $2 million benefit on revenue, but almost over $1 million impact on the re-valuations and balance sheet items, so that's what it was driving that.

So, just the impact of the hedging program, essentially?

Yes, well, we actually -- we don't have a hedging program, as of today, so --

Okay.

So it's basically just the impact of the ForEx on your model as it appears the way you've presented it?

Yes, sure.

All of our assets overseas, such as accounts receivables, get re-valued based on the dollar.

Right.

Understood.

Okay.

And the second question I had is, when you think about your verticals and, obviously, there are a lot of puts and takes, but I've been thinking a lot about the public sector which is a place that you guys have been focusing on and having some success.

Can you give us a sense of where those revenues are coming from in the context of domestic, International or say, federal versus state or anything along those lines that can give us some insight as to really where these revenues are coming from?

Thanks.

Sure.

It has been a very good vertical for us, not just for stable and growing business with great long-term clients, but also frankly where we've developed some of our newest services, because there's some pretty critical needs there and pretty creative customers.

By and large it is domestic US and by and large of that it is federal national business, both if public facing G to C agencies or the military -- if we were to talk about all the branches of the military, for example, use our services so I take weighted US and weighted Federal, certainly I think there's a lot of need for performance enhancement at the state level, but the state's have just been reeling so much in the last few years.

I think they're stuck in keeping I know efficient processes rather than being able to invest in some of the new automation and web services they might be better off using long-term.

Great.

Thanks a lot.

Thank you.

Our next question comes from the line of Mike Olson with Piper Jaffray.

Go ahead.

Thanks, good afternoon.

As we talked to some of our customers, we hear a lot of them using Akamai for more important components of their content delivery, but then using lower tier providers for less critical things.

Is capturing some of that lower tier business a potential growth opportunity or is it lower margin revenue that would, ultimately, be detrimental to the model or how do you think about that?

Well, Mike, you've probably always heard about -- our main competitor is first, Do It Yourself.

Our customers are big, sophisticated businesses and internet is a portion of their IT, so they always have capacity to run a website.

And we certainly don't tell people that you can't run a website without our help.

So the hurdle is what's high value and where do we demonstrate value and then we have to compete with do it yourself with managed service providers and with point competitors who try to be, say, just in the CBN in a niche or a vertical.

That's a constant for us, and we don't provide some basic service.

We don't do ISP services; we don't do hosting.

Some of that base capacity, which, frankly, is low margin to no margin business, isn't where we focus.

I think there's always that middle ground where we might be able to help somebody in the context of a bigger relationship.

We might take on a little more than we might going after a greenfield opportunity, but that's a pretty constant evaluation we do and our but that's a pretty constant evaluation we do; and our goal is to have premium, high performance, always available, highly secure services with the best companies online with the best business models, see the value, in and want to invest in use it.

I would also add on that, Mike, we've seen a lot of growth of that kind of content that you've referenced becoming more and more important over time as businesses get more and more profitable online.

I think it's a trend that we're seeing in the Media space as some of the those business models start to take hold.

And then would you be willing to share what you expect the AS will be as a percent of revenue in 2011.

I certainly -- my guess is it's going to continue to grow.

Even in this year, where our Media business, which is largely Volume Driven, has accelerated to being our fastest growing vertical outside of Public sector, we've seen it grow go from 50% to 55%, so I think there's really strong momentum there, number one.

Number two, that's where you're seeing us making some of our strategic investments and strategic acquisitions.

I won't pick a number, but I do think we'll see a positive trend.

I said in the fourth quarter I wouldn't be surprised.

Earlier in the year ,I said in this 4th quarter, I wouldn't be surprised if we're close to 60%.

We'll see about that given the strength of the Volume business, but we're certainly headed in that direction.

Okay.

Thanks a lot.

Operator?

Our next question comes from the line of Jennifer Swanson with Morgan Stanley.

Go ahead.

Hi.

I just wanted to drill into the commentary around calendar '11 and I know you're probably not going to give us a lot of detail at this point, but I was curious as you think about 15% being a conservative target for next year as you look at the different components of the business, Media versus Commerce versus Application Acceleration within high tech.

Where do you see the biggest opportunities that give you comfort that that 15% is conservative?

I think, and we're not going to be specific because, frankly, our crystal ball isn't that precise at this point.

We see opportunity in all of them and pretty balanced; what's a little hard to predict is the rate and pace and you've heard us talk on video if 1% of video in the home is where we are today, there's lots more opportunities for growth and we think the growth rate is accelerating.

Same with growth in the online advertising space.

We're just seeing an explosion of interest among commerce customers here and across the board and it's -- and the guys lower on the list are getting bigger, so someone who's an internet retailer of 300 to 400 was too small five years ago is a great target today.

So really across the board we see opportunity and we've been growing at greater than that rate this year, so we think it's a conservative lower end, only because, we got past the worst of 2008, 2009, and our performance is significantly better than that now, so we don't see any reason, we shouldn't be able to have a strong year next year.

That's not to predict that will be exactly as good or better than this year, it's too early to know, but that 15% range, which is where the street seems to be, seem to us just to be a pretty conservative number based on when we've seen so far and that we don't think any of the verticals should fall out of bed and they all have potential for us.

I would just add if you look at our business by Value Added solutions versus the Volume Driven solutions, this year and even last year, our Value Added solutions have been growing at a pretty, close to a 30% clip.

That's part of our business is 30% grower.

What's really changed for us in 2010 versus 2009 is the Volume Driven solutions have returned to growth after being flat to actually slightly down in the prior year, so as I think forward into 2011, I'm very confident that we'll see continued growth in the Value Added solutions.

We're very focused on that with our investments.

The more of a wild card where you need a crystal ball is what happens around the volume stuff.

Great thank you.

Sure.

Our next question comes from the line of Tim Klasell, with Stifel Nicolaus.

Go ahead.

Good afternoon, everybody.

Two quick questions.

First on the Value Added services, can you give us a color or any particular services or verticals that are driving that growth?

You know, I think it's across the board Enterprise, SaaS, Commerce, clearly strong Commerce interest, some strong new deals through the summer, but also just Enterprise across the board.

Interest in the new security services, interest, but early on in mobile, as well.

And just real strength in the portfolio of Dynamic Accelerator services offers from Akamai.

Okay.

Great.

Great.

And the follow-up question -- on the extra CapEx that they are spending, is there any particular area?

I know you few years ago you spent a lot of on storage.

Is it sort of across the board?

It's network build-out, which still includes storage particularly driven by what we see in the Media vertical and then delivery capacity, servers in the network, both expanding capability in existing regions, and continuing to build out more capacity in markets that might have been smaller outside the US previously and are continuing to grow too.

Okay.

Great great.

Thank you very much.

Thanks Tim

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

Go ahead.

Hi, guys.

Can you hear me?

Yes.

Yes.

This is [Seeti Ponangri] for Phil Winslow.

I wanted to ask about the pricing in Public sector, if there have been any changes with other IT vendors supporting a tougher selling environment?

Also how do you think about the growth of this business over the next 12 to 15 months?

Well, the pricing in the public sector, very consistent, there.

Great customers.

Obviously, we have to subscribe to the rules of selling to the Federal Government around the pricing standards and contract standards that all vendors have to pay, but we believe what we offer there is very differentiated, particularly with the security aspects we offer, and that is a big concern in the Public sector space, so great market for us and we'll look for ways to continue our growth there.

And I really don't have much more color than we had on the last question from Jennifer around expectations for 2011, and I think we've really said about what we ought to say and know to say on growth trends for the 15 months.

Okay.

So just follow-up on high tech business, did you say what's the mix between the SaaS relative revenue versus traditional software download.

The last time I looked, about 60% of that vertical was driven by Volume Driven stuff and 40% was driven on the Value Added side.

So it's not purely straight software downloads in SaaS.

A lot of our big software download customers are DSA customers and APS customers, but I think the key driver on the 40% side would be SaaS.

Okay.

Great .

Our next question comes from the line of Derrick Bingham with Goldman Sachs.

Go ahead.

Thanks.

Hey guys.

J.D., a question for you on the investments that are required to go after the Enterprise opportunities.

Could you just give us an update on where we are in that investments phase versus when you get to more a harvesting mode?

Yes, I think we're a long way, hopefully, away from the harvesting mode when we're talking about getting into the Enterprise and Cloud computing.

I think in terms of characterizing those investments, it really comes in two flavors.

One is innovation and the second is supporting Enterprise class customers, because obviously as these guys move more and more mission critical applications over the internet and count on Akamai, they expect a higher level of service.

The good news is they're also willing to pay for that higher level of service, so I think that works out to be a really great investment.

Where you're seeing the investments from us are on the go-to-market side, both on industry-driven sales and on the support side and also the investments we're making in engineering.

Almost all of our incremental spend in the engineering organization as well as the acquisitions we've made is focused in that space.

My follow-up is related to that.

On the International space, it looks like, if I'm looking at it right, the mix of International business has been pretty stable for a good while now and so just curious what your thoughts on what's happening in the International market -- if there's a time that you foresee when that's going to start pick up and become a greater percentage of your mix?

Well, I think there's always a potential for that.

There are just more users of the internet and more business on a global basis, but we've also talked many times about the development and acceptance of outsource internet services.

It lags Internationally and, frankly, we've had such great growth domestically that International has to run even harder and believe me, I tell the teams that, and they say, "Oh, great if the US guys would just slow down, we'd look better."

I say, "It doesn't look that way, fortunately."

I think there's even more opportunity Internationally and we're well-positioned in most of promising markets to go after either directly or through some great partners, and I would expect, long-term, International will contribute a bigger percentage to the business as will channels, but as long as we keep finding as much opportunity in our first market in North America, we may see this pretty stable balanced growth.

Thanks, Paul.

Thank you, Derrick

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

Go ahead.

Hi, Catherine.

Hi, good afternoon.

Good quarter.

You had a large receivable from a customer last quarter.

Was all of that collected this quarter?

Sure was.

And it was a one time event right?

It was not a one time revenue thing, Catherine.

That's revenue that we'll recognize over several period going forward, but the receivable was all collected.

Okay.

Great.

And then with David Kenny coming on -- he's got an interesting background; he was, obviously, at a French company, and he's also from the advertising area.

Can we expect more solutions that cater more to an international audience or perhaps are more advertising-centric.

Well I don't want to detract at all from David's global experience and I am thrilled to have him here as an executive, but I just should remind anyone who doesn't know, he's a Boston-based guy.

He was at [Stain] and then with -- CEO of Digitas, that is headquartered in Boston, and one of the companies that really revolutionized online marketing; and Digitas was sold to Publicis and so then he was part of a giant, global company based in France and he learned how to speak French in addition to English.

He is a great executive across the board as a strategic thinker and operator and understands really all aspects of how companies have leveraged online to grow their business, so he's certainly going to bring what top of line in his expertise from the advertising and marketing world.

He's certainly going to bring his expertise about growing global markets.

I think in his last role at Publicis, he had responsibility for businesses in over 100 countries, and so I think, really partly responsive to your question and Derrick's previously, he is tasked with helping us to grow even more internationally.

He is a balanced executive with responsibility for operations across the board.

Okay.

Got it.

Thank you.

He really understand how the Cloud is going to revolutionize businesses not just Media and not just International businesses.

Thanks Catherine.

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

Go ahead.

Thanks.

Just want to follow up on Derrick's question about International.

Are there still certain products you want to roll out in those markets?

Do you think there's still a little bit of macro pressure there that is not here?

International growth rate you have is pretty good.

You would expect it be higher than the US at some point.

Is it just a matter of product cycles?

First, I think there is particularly in Europe there is a macro pressure.

The economy's there were hit pretty hard and demonstrated less growth than some of the Asian markets.

I think there was just a macro piece

It's not as much new product development as in some ways, it's customization and localization that takes long.

Some of that's the basic blocking and tackling and translation and training people to sell the same thing in a different language, and some of is just allow the people to customize the functionality on the network, to do something that may apply on more specific and often smaller than US market overseas.

Thank you, Paul.

Thank you, Mark.

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

Great, thanks.

One question for you guys, quickly.

The CapEx numbers, again, you bumped them last quarter from 16 to 17 and now we're going to 19.

I'm just curious at the sort of the delta there, what is it in the last quarter or two that's really led to the incremental investment.

We can see the outperformance here; you've been on the high end of the ranges and putting up good numbers and good guidance, but it seems like what you're doing here on the CapEx side is really pointing to something we're not necessarily seeing.

Can you put that in a context of what specific capabilities or what specific verticals or what's new at the very leading edge of that delta?

I'd say first a lot of that is around capacity for the Volume business, but also expansion of our services and Performance services worldwide in getting closer to end users.

But, I think one of the things to really think about, and I would just underscore the point that J.D.

made before, which is we gave you a long-term model.

If you look at the last couple of years or the last five years, we're really right inside that model and sometimes our spending has been lumpy and sometimes it's been low and now it's been a little higher, but I think overall it's very consistent and we still believe that you can use those long-term models as a long-term guide on the business.

And the other thing I would just add to that is if we're ever going to err on our CapEx , we're going to err on the side of buying it too soon rather than too late.

Worse case here is the traffic and the growth doesn't materialize quite as fast as we thought.

We're pretty confident we can manage that and manage within

Okay.

Thank you.

Operator one or two more questions.

Yes, sir.

Our next question come from Richard Fetyko with Merriman Capital.

Good evening, guys.

Just curious on the Value Added services side -- if you could give us any breakdown of the revenues by product or perhaps a ranking of the revenues by product, which product is the first, top three products are the most bought or the first ones to be bought versus the follow-on product, and if there's any revenue concentration around any specific Value Added services product?

Sure, Richard.

The single largest product is Dynamic Site Accelerator, which applies most directly to the Commerce customers, which is a vertical that is one of our strongest and most mature verticals.

We're also seeing Application Performance Solutions start to grow, probably the fastest growing of our Value Added solutions as we get more and more into the Enterprise and as these Enterprises start to more and more applications into the Cloud, so that's our fastest growing.

Between the two of those, it probably covers two-thirds of the revenue and, of course, we also have our Advertising Decisions solutions as well as some of the Custom solutions that we do for the public sector, as well -- some of our largest customers.

Thanks and then -- that's very helpful.

The follow-up would be -- sounds like the APS is growing fast and do you think that any other product categories will emerge as significant categories over time like the security, types of products that you mentioned earlier in the call?

Yes, I think the security products and things in the area of protecting data and protecting websites and using the capability in the Cloud to stop attacks before they get anywhere close to your data is another big opportunity for us.

I think another thing that those new solutions bring is, it really bolsters DSA and APS.

They enable customers who, without those security solutions and without the mobile solutions, couldn't extend their applications out into the Cloud and, so I think in addition to driving revenue on their own, those products help us broaden our solutions set and grow the core products, as well.

Yes.

Good.

Thanks.

Thank you.

Yes.

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

Go ahead.

Yes, thanks a lot.

Most of my questions have been answered, but as you think about Value Added services and the suite of services you offer, is there anything out there beyond the security products you announced, that you would like to add or that you're thinking about or strategic to a long-term focus on that?

And then my follow-up question is, give us some sense of how a churn was in the quarter?

Was it a little better or worse than last quarter?

On the first one, frankly, I don't think I want to say more about our future road map.

I think we've got great opportunity in the services we have there.

I think we've talked about -- enhancing the efficiency of advertising and improving security are some pretty broad interesting new categories for us on the Value Added side.

Beyond that I think we do a lot of product development in collaboration with our customers, but beyond that, I'd like to wait and surprise the market with it, as we cope.

And we've talked about mobile, too, and that's another one where we now have offers, and I think we can build on top.

On churn, Kerry, we talked a couple quarters ago.

It's -- excuse me -- returned to the normal levels we saw, that we've seen for a long time and it's been pretty stable at that level.

Okay.

Thank you.

And our last question comes from the line of Donna Jaegers with D.A.

Davidson.

Go ahead.

Hey, getting in under the wire.

On Velocitude and some of your mobile offerings, can you talk a little about what your seeing there and what else -- what other products -- the timing of other products, perhaps?

Well, I think what we're seeing first is real interest in, "how do you optimize the performance to mobile users?" And I think what people don't understand often is how much the internet, itself, makes performance a problem.

People say, "well, there's just not enough bandwidth in that wireless last mile, if you will, so that's the best it gets.

Actually, it gets worse because the internet -- because of the way the protocols work and the way mobile and sites work, any re-transmit problem, any packet loss in the wireless network, then it's susceptible to the internet latency on top of it.

So, we're working on driving -- optimizing deeper into partnership into wireless networks so we can make sure we take any of the latency of the internet out of equation, so all you have to do is optimize, if you will, the mobile last mile, and then with our customers we're working on things like capability we got through Velocitude to do content transformation, so they don't have to think about rebuilding their website for 500 different devices.

They can think about having a website and functionality and then in our network, re-purpose that content, reform that content so it displays correctly on each of so many different kinds of devices, so we're going to push there.

You can then think about Commerce online, Security online and a range of taking our core capability and extending them to the mobile capabilities that we have.

In terms of Velocitude, specifically, that's basically been integrated; as you know it was primarily a technology buy because it was a very young company.

We have had lots of activity with our customers.

We have had some early up-sells and signing of new customers.

A number of our Commerce customers wanted that really quickly so it would be ready for the Q4 selling season, and some of those are already up.

We look forward over the next few years to really growing that part of the business, as well.

And I think that about covers it.

We thank you all for tuning in and we'll see you in about another 13 weeks after we wrap up the year.

Hopefully, sooner, with the investor day in the first week of December.

Good point.

In person, here in Massachusetts.

Thank you very much.

'Bye.

Ladies and gentlemen.

Thank you for your participation in today's conference.

That does conclude the presentation.

You may disconnect.

Have a wonderful day.