阿卡邁科技 (AKAM) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 Akamai Technology (sic) conference call.

My name is Jeremy, and I will be your operator for today.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions).

I would now like to turn the conference over to Ms.

Natalie Temple with Investor Relations.

Please proceed.

Good afternoon and thank you for joining Akamai's investor conference call to discuss our first-quarter 2011 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 April 27, 2011.

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, Natalie, and thank you all for joining us today.

Akamai performed very well in Q1.

We posted revenue of $276 million, up 15% from same period last year.

Results include normalized net income of $72 million or $0.38 per diluted share, up 9% from Q1 of last year.

With more and more applications and transactions moving to the cloud, we saw strong demand for our value-added services in Q1, and sales of these services accounted for 58% of our total revenue in the quarter.

We are also pleased to announce that our Board has authorized a second $150 million expansion of our share repurchase program.

Our goal with this program is to offset dilution from our equity compensation plans using a portion of our anticipated healthy cash flows.

I will be back in a few minutes to talk about some of the key trends we are seeing in the market, as well as some important announcements we've made recently.

But first, let me turn the call over to JD for details on Q1.

JD?

Thanks, Paul.

And as Paul just highlighted, our business performed well in the first quarter.

Our revenue came in just above our guidance range at $276 million, and that's up 15% year over year and down 3% sequentially.

During the quarter, we saw strong demand for our value-added services across all verticals.

And as Paul mentioned, these services reached nearly 60% of our total revenue now, up 4 points compared to Q1 of last year.

We also delivered year-over-year growth in our volume-driven solutions, even with the impact of a significant number of renewals with some of our largest customers in Q1.

Revenue from our enterprise vertical, which is our fastest-growing customer set, grew 31% year over year and 8% sequentially as our customers moved more of their business to the cloud.

Our commerce vertical increased 25% over Q1 of last year.

As expected, commerce revenue declined 8% compared to Q4, primarily due to the seasonality of our advertising decision solutions.

Revenue from our media and entertainment customers grew 15% year over year and declined 4% sequentially in the first quarter, driven by contract renewals at lower price points from some of our largest media customers.

Value-added services revenue in this vertical actually grew 7% sequentially.

The high-tech vertical was down 3% year over year and down 3% on a sequential basis, driven by lower software download volumes in Q1 compared to an elevated Q1 last year.

We saw continued traction among Software-as-a-Service customers purchasing our application performance solutions.

And value-added solutions now account for over 50% of the revenue in this vertical.

And the public sector revenue grew 16% year over year in Q1 and also grew 2% sequentially.

During the first quarter, sales outside North America grew to 30% of total revenue, up 3 points from the prior quarter.

International revenue grew 5% sequentially and 22% year over year.

The weaker dollar had a positive sequential impact of about $750,000, and on a year-over-year basis the currency impact was favorable by about $3 million.

And excluding the impact of currency, international revenue grew 17% on a year-over-year basis.

Revenue from North America grew 12% on a year-over-year basis, but was down 6% sequentially, driven by seasonality in our advertising solutions, as well as the large renewals which were predominantly in the US.

And resellers accounted for 18% of total revenue, consistent with the prior quarter.

Our cash gross margin for the quarter was 80%, down 1 point from last quarter and down 3 points from the same period last year.

GAAP gross margin, which includes both depreciation and stock-based compensation, was 68% for the quarter, down 2 points from the prior quarter and 4 points from last year, driven by depreciation growth as we continued to invest in the platform.

GAAP operating expenses were $114.1 million in the first quarter.

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

Excluding these noncash charges, our operating expenses for the quarter were $91 million, and that's down $9.7 million from Q4, a slightly larger decline than we expected as some expenses did slip from Q1 to Q2.

Debt to EBITDA for the first quarter was $129.2 million.

That's up 9% from the same period last year and roughly consistent with Q4 levels.

Our adjusted EBITDA margin came in at 47%, up 2 points from the prior quarter and down 2 points from our record level in Q1 of last year.

For the first quarter, total depreciation and amortization was $41.1 million.

These charges include $32.7 million of network-related depreciation, $4.1 million of D&A depreciation, and $4.3 million of amortization of intangible assets.

Net interest income for the first quarter was $3 million, and that's roughly flat with fourth-quarter levels and with Q1 of last year.

Moving on to earnings, GAAP net income for the quarter was $50.6 million or $0.26 of earnings per diluted share.

As a reminder, our GAAP net income includes several primarily noncash items, including $17.8 million of stock-based compensation, including amortization of capitalized equity-based compensation, and $4.3 million from amortization of acquired intangible assets.

We are including GAAP taxes in our normalized earnings, and that tax charge was $24.1 million for the quarter based on a full-year GAAP tax rate of about 32%.

Based on this methodology, our normalized net income for the first quarter was $72.2 million, up 9% from Q1 of last year and down 6% from Q4.

In the first quarter, we earned $0.38 per diluted share on a normalized basis, $0.01 above our guidance range.

That's up $0.03 from Q1 2010 and down $0.02 from Q4.

Our weighted-average diluted share count for the first quarter was 191.4 million shares.

Cash generation continued to be very strong.

Cash from operations for the first quarter was $88.5 million.

And at the end of Q1, we had $1.26 billion in cash, cash equivalents and marketable securities on the balance sheet.

Capital expenditures excluding equity compensation were $46.2 million.

This number includes both investment in the network as well as capitalized software development.

During the quarter, we spent $42.8 million on share repurchases, buying back about 1 million shares at an average price of about $42.

From program inception in April of 2009 through last quarter, we've spent a total of $201 million, buying back just under 7 million shares at an average price of just under $30.

And as Paul mentioned, our Board has authorized an additional $150 million in share repurchases over the next 12 months.

As a result, we expect to continue our buyback program with the goal of using a portion of our operating cash flow to offset dilution from our equity programs.

Finally, days sales outstanding for the quarter were 57 days.

Q1 was a very solid start to the year.

We saw strong demand for all of our value-added solutions, and we expect continued adoption of these services as our customers expand their online businesses.

As expected, we did see a moderation of traffic growth in our volume-driven solutions off a very strong 2010, a trend we anticipate will continue in Q2.

We are also projecting that the large volume-related renewals we had in Q1 will impact our second-quarter revenue growth as well.

We remain optimistic about the long-term growth for our volume-driven solutions, but it's still too early to predict the exact rate and pace of traffic growth for the rest of the year.

Specifically for Q2, we expect revenue in the range of $270 million to $280 million or 10% to 14% year-over-year growth.

At current spot rates, foreign exchange should be about a $3 million benefit on a sequential basis and about a $10 million benefit on a year-to-year basis.

We expect cash gross margins to remain roughly stable at about 80% and GAAP gross margins to come in at roughly 67% to 68%.

We also plan to continue investing in our long-term growth initiatives, as well as catch up on some of the investments that slipped out of Q1.

We expect Q2 operating expenses to increase by about $7 million to $8 million from the prior quarter, which will include the annual impact of budgeted salary increases.

With the increased investments, we expect adjusted EBITDA margin to come in at about 44% to 45%.

We expect normalized EPS for the quarter of between $0.34 and $0.37.

This includes a tax charge of between $17 million and $21 million, based on a full-year GAAP tax rate of about 32% to 33%.

On CapEx, we expect to spend about $50 million in the quarter, excluding equity compensation.

And for the full year, we still expect CapEx to be at the upper end or slightly above our long-term model of 13% to 16% of revenue.

We continue to get requests from some of you for us to provide specific annual guidance every quarter.

But we are going to maintain our practice of only providing guidance on a quarter-by-quarter basis.

In summary, we were very pleased with our Q1 performance.

We were especially pleased with the overall strength of our value-added solutions, where we've seen increasing adoption as our customers rely on our expertise when leveraging cloud computing across their businesses.

And while traffic growth in our volume business has moderated after a very strong year, we remain confident in the long-term growth potential of that business as well.

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

Paul?

Thanks, JD.

Our performance in Q1 reinforced our belief that the technology behind and the capabilities of Akamai's intelligent platform are vital to the success of online businesses today.

Over the past several quarters, we've outlined some of the growth areas where we are investing in supporting online commerce, especially the emerging trend of mobile commerce, IT security, and online media, all of it through cloud computing.

We are very pleased with the traction we've started to see in all of these areas, with our own invention and with some of the industry partnerships we've announced recently.

For example, in mobile, we announced a strategic alliance with Ericsson focused on mobile acceleration.

Akamai has always offered solutions to address the problem of making content owners' websites work at high performance and scale, while Ericsson is the leading provider of mobile technologies and services to carriers.

By collaborating, we believe we can help solve the performance, availability and scale problems that have resulted from the rapid increase in the use of smart devices to access data and applications.

With Ericsson, we believe we can provide better solutions for mobile operators and content providers, while creating an enhanced experience for mobile users.

Another example, this one in enterprise cloud computing, is our partnership with IBM, which we recently expanded.

This month, IBM announced its WebSphere application accelerator for public networks and hybrid networks.

These products integrate Akamai's application acceleration capabilities with IBM's WebSphere technologies.

Together, our joint solutions address the security and scale problems that arise as delivery of mission-critical applications moves across a hybrid cloud environment from the private data center to the public cloud and back again.

Notably, this is the first commercial product offer that extends Akamai technology beyond the Internet and behind the firewall.

In the area of Internet security, which is a top priority of CIOs everywhere, we announced our new suite of cloud defense solutions.

The Akamai DDoS defense architecture is designed to help customers prepare for, monitor and mitigate the impact of distributed denial-of-service attacks.

Our distributed computing platform is designed to protect our customers' sites from malicious threats by absorbing large-scale attacks, and at the edges of the Internet, not at the back door of a client's data center.

Finally, we were really pleased to announce and showcase the Akamai TV Everywhere demo at the recent NAB show.

Although still in its early stages, high-quality video delivered over the Internet has quickly reached an important level of scale.

We continue to see exciting examples of this on a regular basis, a recent event being the distribution of college basketball's March Madness tournament over the Web.

It reached almost 2 million unique visitors per day on broadband sites and nearly 700,000 daily visitors through mobile sites.

That's a 63% increase in total visits over 2010.

This year, the quality levels were even higher over the Akamai HD Network.

It wasn't long ago that an event like this could have exceeded the capacity of the Internet.

Now, broadcast-TV-sized audiences online are commonplace.

We think this is indicative of the tremendous growth we've seen for online media, characterized by periods of very rapid growth driven by inflection points.

Now, the first such point was broadband penetration over five years ago, and the most recent one over the last couple of years driven by HD quality.

While difficult to predict the exact timing, we believe the next inflection point will come as more and more premium content moves online to meet consumer demand.

As online content evolves, we are also seeing changes on the business side of media as our client address the increasing demand for more content, accessible anywhere and from any device.

TV Everywhere is one model to address this challenge.

Our clients want a solution that makes a simple, single integration point among operators, programmers and subscribers, that delivers a great end-user experience.

We believe that our capabilities in this area, combined with our strong relationships with content owners, networks and technology providers, put us in a very strong position to bring solutions -- business solutions such as TV Everywhere to market.

We believe all of these trends -- cloud, mobile, commerce, security and online video -- create growth opportunities for Akamai.

You'll see us continue to make investment in these areas, both organically and potentially through acquisitions.

We also expect to continue to build strategic industry partnerships that we believe will position us very well for future growth.

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

Operator, the first question, please?

Mark Kelleher, Dougherty & Company.

Thanks for taking the question.

You've got a couple of interesting partnerships ramping.

You've got Ericsson and IBM.

Can you just give us some more color on when those begin to factor into the revenue stream?

How should we look at those ramping up over the next few quarters?

Well, I think you ought to think about them over the next few years, because these are emerging opportunities.

Ericsson is a new relationship in a new space.

That will take longer, we think.

IBM, as you know, is a long-standing partner, long-standing one of our best resellers.

We think this is additive probably over a shorter time frame to our business.

Okay, great.

Thanks.

Mark Mahaney, Citi.

I just wanted to ask a question, please, on the domestic revenue growth results, the 12-ish percent year-over-year growth.

Was that mostly dragged down by the media vertical, or would there have been other factors in there that would have dragged that down below kind of a preferred growth level?

Yes, Mark, that was largely -- most of the big renewals that we talked about last quarter were in the US.

In fact, yes, almost every one of them was in the US, so that was the biggest impact.

And then, of course, on the sequential basis, our advertising business is a US business, so that drives some of the sequential decline there.

Adam Holt, Morgan Stanley.

Did we lose Adam?

Adam, are you on mute?

Operator, why don't we go to the next and see if Adam comes back?

All right.

Kerry Rice, Wedbush Securities.

Just a couple questions, maybe JD, on the margins.

Was the kind of step down from Q4 just primarily because of the lower price pullings on these renewal contracts, and so that drags kind of over into Q2 as well?

And then can you give us maybe a percent or a number of the expenses that you thought were going to recognize in Q1 that fell into Q2 on the operating expenses?

Yes, sure.

I think, to answer the latter question, it was probably just in the sort of $1 million, $1.5 million range on what we didn't spend in Q1, and that really just a matter of timing, nothing unusual there.

And then on your questions on the margins, yes, that's what led to the step-down.

We obviously reset some of those contracts.

Traffic growth was still there.

And so that's what created the step-down.

And that's why we think in Q2 we will see sort of a leveling out of the cash gross margins.

But you wouldn't characterize it as a competitive issue per se, or, you know, obviously prices declined generally, but as far as acceleration in those declines or a step-up in competition driving those prices down?

Yes, when we talked about those renewals, I don't think there was any sort of a step-up in the rate and pace of price declines, although, as we've talked about for a while now, it's a very competitive space out there, particularly in the volume-driven solutions.

So I think, obviously, competition had something to do with it, but we are not really seeing any dramatic change in the rate and pace of price declines.

All right, thank you.

David Hilal, FBR Capital Markets.

Great, a little follow-up on the margins.

First, on EBITDA, that number came in I think ahead of probably most expectations, yet guidance going forward is for that to step down a little bit.

So I just wanted to understand -- I would have thought the biggest pressure would have been this quarter and it starts to at least flatten or get better.

So why the sequential decline in EBITDA margins for 2Q versus 1Q?

Yes, so we had a -- we did about 45% EBITDA margins in Q4, and we had a lot of expenses associated with the year-end, with sales commissions, etc.

So we saw a step-down on an operating expense from Q4 to Q1 that was pretty dramatic -- $10 million.

And that was a little bit more than we anticipated.

We also got to the high end of our revenue range, which was helpful to the EBITDA margins.

What we're trying to do is make sure that we are investing in long-term growth initiatives that -- some of the things that Paul referenced, and that involves a little bit of a catch-up from Q2.

But also, we are just ramping our hiring, and also, we have a salary increase that happens effective basically April 1.

So that's -- what's driving the EBITDA from quarter to quarter, since the gross margin is relatively stable, is that revenue -- or I'm sorry, is that OpEx growth.

And then on the cash gross margins, it sounded like the traditional CDN business was impacted by lower volumes, but the value-added part was quite strong.

And I would have thought with that mix contribution we might have seen upside to the cash gross margins, but we didn't.

And so what was the dynamic there?

Yes, I think we got a positive mix benefit.

But the renewals that we took in the Q4 and Q1 timeframe took our pricing down for some of our biggest customers, and particularly in the media space, and so the offset to that mix benefit were those big renewals.

All right.

And then my last question is, on those renewals, I know you had a handful of them that you were expecting in Q1.

Are there any other material ones, or of size, that you would expect to encounter in Q2 or Q3?

You know, we have them all the time.

I think the point we made was that an unusual number had all run into each other at one time in the last quarter.

But customers generally cycle through on a pretty regular basis distributed across the year.

The change in this case was a number that all collided at year-end, for once.

Okay, understand.

Thank you.

Phil Winslow, Credit Suisse.

This is [CP Bonigrade] for Phil Winslow.

So, could you give us some more detail about how you are thinking about the sequential growth trend for Q2 in terms of your guidance for segments, such as media and entertainment versus commerce?

And what's driving that?

Yes, we don't generally give any sort of guidance by vertical.

I think what you see in general happening in the business is still very strong traction in all of our value-added solutions.

And we are particularly pleased with that, given the size of that business is getting larger and larger.

So it's coming off of a larger number.

And the verticals such as commerce and enterprise, which are heavily weighted towards value-added solutions, we're seeing very good growth there.

This quarter, we saw 25%, 30% growth in those verticals.

On the other hand, we are seeing a bit of a moderation in the rate of traffic growth, after very big growth numbers in 2010.

And that is impacting the rate of growth of our volume business.

And the verticals that are weighted towards those businesses -- media and entertainment and high-tech in particular -- we are seeing a bit slower growth now than we saw last year.

So, hopefully, that helps.

Operator?

Michael Turits, Raymond James.

I'm going to ask a question.

I apologize, I've been jumping on and off if you already said it, JD, but just a little bit more maybe on why you think that the traffic growth is moderating.

Is it just the tough compares, or is there anything fundamental?

And then also, if you are guiding to 10% to 14% for next quarter after you did a strong 15% this quarter, are we still -- I know you're not giving the real full-year guidance, but you had said greater than 15% for the year.

So are we still on track to do that?

Well, Mike, it's Paul; let me take the second one.

We can't not give guidance and give you guidance, so we are going to stick to our policy.

We were very pleased with where the quarter came in, and now we have to do it again.

On traffic growth, you've heard us talking about sort of these major inflection points that create more difficult year-over-year compares when you hit one of those accelerations, which we certainly saw in '09 and '10.

I think we are seeing normal growth, which still means there's more and more use of the Internet.

We sort of see these cyclical accelerations for things that catalyze people to do more and businesses to do more.

They are a little hard to predict, but we seem to be in this never-ending increase in the use of the Internet to deliver media content, which I think is where your question is around.

I think we are continuing -- we are seeing continued expansion of use of our network, larger audiences, bigger events, larger distribution of media, higher and higher quality, and it continues to grow.

It just doesn't grow at the same pace all the time.

And I would say, not to give guidance, but just the way we are thinking about the year and talked about it last quarter is there's sort of three elements to it.

One, we wanted to get off to a really solid start to the year.

Number two, we want to keep getting traction with our value-added solutions.

And then number three, we want to see volume growth in the back half of the year, triggered by some of these big renewals that we executed on in first quarter.

I think we are really pleased with the start to the year, so that's a good point.

We are really pleased with the traction in our value-added solutions.

The open issue which remains to be seen is what happens with volume growth.

Great, guys.

Thank you very much.

Tim Klasell, Stifel Nicolaus.

My question has to do with the large media companies.

As we begin to see more and more of them move on to delivery over the Internet, are you seeing the top 10 or top 20 of your customers become a greater share, particularly in the media space?

Are we seeing any more increased customer concentration, I guess is the question?

No, I think in the overall business, you are seeing that part of the business as a diminishing share, which I think is the great for the long-term trends of diversification and high-value services.

And we've seen a lot of, in addition to the top broadcasters, top media companies, top studios, the emergence of the social network sites as just one example of a new category of provider that wasn't a top 50 player five years ago are top 10, top 20 sites in many geographies, not just North America.

So I think there are lots of positive trends of certain kinds of diversification, why you continue to see other consolidation.

And all the big broadcasters continue to be major providers of content, growing their online audiences.

Okay, and then one quick follow-up.

Have you seen Amazon show up in any of your deals yet?

You know, generally, as we've talked about it, we've talked about how it has led to new business for us as people have put things into cloud providers and then realized that what they are really doing is centrally hosting content and then worried about performance or availability.

And so we actually have sold to a lot of their customers when what they care about is performance and scale.

You know we don't provide pure hosting, and that's really an offer for -- an alternate for the hosting market.

So that is generally how the conversations have gone for us.

Okay, great.

Thank you.

Colin Sebastian, Lazard Capital Markets.

Yes, this is [Greg Oshara] for Colin Sebastian.

Coming back to the traffic growth projections for this year, I know you guys were saying basically you saw very strong traffic growth in the '09 and '10, but my understanding is still that we are still in the low single digits of demand of video that is transmitted over the Internet.

Certainly -- well, the amount of video over the Internet is becoming the majority of Internet traffic for a lot of carriers.

I think the point that at least we've tried to make is that the majority -- the vast majority of video entertainment content in the home is still over traditional delivery method like cable or satellite.

So we think that there is, at least from our perspective, a great deal of growth opportunity of IP video into the home, which today -- I haven't seen the latest numbers, but for a long time was just at that kind of even 1% number, almost trivial.

And so we think there's a lot of opportunity for growth long term in that space, if that's what you're talking about.

Yes, that's exactly what I'm trying to get at.

And what you're saying is, and it makes sense conceptually, that there would be carriers in which there is an inflection point, and growth accelerates, and then maybe sort of decelerates for a period.

But just given that, if it is still -- if online video or video transmitted by the Internet is still about 1% or thereabouts of the total amount of video that's being consumed, it seems somewhat surprising that there might even be sort of these periods of deceleration, given that it's still such a nascent stage.

(multiple speakers) I think sometimes jump to deceleration, people believe that we've suggested that it's shrinking.

We've never suggested that it's shrinking.

Right, I understand.

(multiple speakers) how fast is it growing, and it's grown in some years doubling or more, really incredible rates.

Partly that's we get some of these stairsteps in quality, where the same five minutes winds up being much more data because people have moved from standard depth to HD.

Then sometimes it is moved from sort of short-attention-span video, which was the Web of five years ago or more, to longer-form, which we've started to see as some long-form libraries, both TV shows and movies, have come online.

But again, there, in many cases, the vast majority of the premium content isn't even available, at least not legally, over the Internet.

So there are a lot of factors that tend to either drive the acceleration or buffer the pace of growth.

We've always seen it grow at a pretty dramatic rate.

The question -- sometimes we've just seen it skyrocket, and I don't think that's a realistic pace.

It's sort of, if you will, to say it's at steady state, because we've never seen it at steady-state in 10 years of growth of video.

If you go back to the earliest sort of postage-stamp video of a decade ago, to now delivering HD movies or entire sporting events, there have always been greater and lesser periods of those growth rates.

Right, okay.

And just to be clear, so your assessment that this is sort of an industrywide trend, not just specific to the traffic that you're seeing?

Well, we see a pretty wide variety of video customers in almost every major geography around the world.

So we think we have a pretty good view of it, but we certainly won't speak for everybody else.

They will have to talk for themselves.

Okay, great.

Thank you.

Mike Olson, Piper Jaffray.

Regarding the ongoing mix shift in the business, for value-added services, do you think you will exit the year over 60% and then stay there into 2012, or is that mix shift going to slow down?

That was the question I answered in the first quarter last year, as absolutely, we will exit the year at 60%, only to fall well short because the volume business really took off.

So, you know, we are certainly -- that business is on track to grow faster than the volume side of the business.

But what we've seen, as Paul was just sort of referencing, is that the volume business has been a little more cyclical based on the trends we see in overall volumes.

And what happened last year was that business actually accelerated and for a while was growing as fast or faster than our value-added solutions.

So I think I'm a little shy to answer that question in the absolute affirmative.

I would say it depends on how rapidly we see traffic growth accelerate in the back half of the year.

But I think over time, as we think out two to three years, I think that our value-added solution business becomes a larger portion of our business.

Okay.

And then I know you guys never suggested any one event could be material to the numbers, but I would imagine for the royal wedding on Friday, it's going to result in some pretty massive online video consumption.

Do you suspect that will have any impact on your business?

I think it's one of those things that will be another great indication of the power of online video.

But because of the short duration and everything, and because we are close to $300 million of quarterly revenue, it is a pretty immaterial impact now.

Richard Fetyko, Merriman Capital.

Just curious if the mix shift of value-added services versus the volume business in Europe is different from the US.

We are seeing largely the same trends there.

You know, I think our business in international overall is a little more weighted towards the volume side.

But the trends underneath that are very similar.

And we are getting -- we're pretty pleased with the traction of our value-added solutions outside the US as well.

One caveat to that is our advertising business, at least today, to date, is a US-only-focused business, so that's a big part of the mix difference as well.

All right, thanks.

Jennifer Swanson, Morgan Stanley.

I noticed a lot of people have asked about this, so I apologize for sort of -- for piling on.

But just in terms of sort of the trajectory of media and entertainment growth throughout the year, I think last quarter, the tone had sort of been that there was a reset in pricing, but the volume commits or the expected volume associated with those renewed contracts would drive an acceleration in growth throughout the year.

It sounds like the guidance for Q2 suggests that we could see some additional deceleration in media and entertainment.

I know you're not giving guidance for the year, but just in terms of how you are thinking of the back half of the year, do you still feel comfortable that there is going to be that acceleration, and Q2 will be kind of the trough in terms of the growth rates in media and entertainment?

Or do you think that can continue to decelerate?

I think the real question is, what's the growth in traffic?

The Internet video business is pretty similar to, in many ways, television.

You have lower audiences in the summer.

You have new releases in libraries in the fall.

The advertising market is so driven by late Q3 and Q4, and that fuels a lot of the media because most of those businesses today still have an advertising or an exclusively advertising-driven component.

That's the pattern that we've seen pretty much year-in, year-out, except when we got this huge inflection from really the recovery of the economy over a year ago.

So that's the pattern we expect.

I think JD reminded you of the three things that we said we wanted to look for this year.

We've seen two, and the third one only plays out when we get to the second half.

I think we have history with us, but it's a little hard to know.

We are very optimistic about what we've seen and the customer reaction, and the kinds of conversations we've had, and the continued growth in signings, particularly of the value-added, and that we maintain we are well positioned with the top providers on the volume side, both on the media side and the software delivery side.

And then it's a little bit about, how do their businesses play out and what do we see?

But I think they are planning for growth.

And we think we've set ourselves up very well in those accounts to see the normal patterns that really have benefited us pretty much year over year throughout our history.

Great.

And just one more quick one on the value-added services side.

As you look at the strength there, is that primarily coming from sort of the traditional dynamics, that acceleration-type product and application performance acceleration, or are you starting to see some traction with EDGE tokenization and security and some of the newer offerings as well?

We are starting to see traction on the security side.

I would say just greater traction today on the denial-of-service side, because that's such an obvious threat to people.

We saw really high profile disruption of businesses in the second half of last year, so those are kind of ready, willing and able conversations with CIOs or their security teams.

But we are very optimistic about that whole portfolio of security opportunities and are having some really good conversations with some companies today around things like EDGE tokenization.

Jeff Van Rhee, Craig-Hallum.

Two questions, guys.

First, I guess you undershot me on expenses by a fairly wide margin.

I'm curious, maybe JD, if you can walk through -- or Paul, I guess -- walk through the hiring intentions on the sales and R&D side at this point as you look at this year, and have those expectations changed at all since the start of the year?

Yes, so we definitely are hiring -- I think we only added 25 or 30 people across the whole business in Q1 after adding almost 500 people last year.

So, the hiring happened more slowly than, frankly, we anticipated.

I think that's more of a timing and a rate and pace.

We haven't really changed our investment plans or our objectives for the year.

Okay.

All right, great.

And then the second question -- as you look at the long-term relationship you had with the local ISPs, with the ability to locate free of charge, has anything in those discussions with those partners changed as far as the cost model?

I know they've always wanted you there for better service to their end customers, et cetera, but just curious if anything has changed in terms of those relationships and the economics.

No, the basic value proposition is there.

We continue to add the number of networks, actually, I think as we are seeing more newfangled networks out there and the value proposition holds.

And so I think that no basic change in that pattern after many years of building really strong relationships.

Okay, thank you.

Scott Kessler.

So, obviously, it looks like the volume business could decline sequentially in Q2.

And, obviously, there's been a lot of discussion about the difficult comparisons and such, but could there be some cyclicality to this business that perhaps we're not fully aware of or accounting for?

I think a lot of us are just trying to figure out how to track the specifics.

And, honestly, if pricing, based on your gross margins, would suggest that maybe pricing is more attractive, perhaps you would have more consumption.

So I think maybe some details about what other drivers beyond simply consumption and volume would be really helpful.

Thanks.

You know, I do think that what you're seeing is periods where traffic is growing faster than sort of the normal trendline and periods where it's growing a bit slower.

And if you look on a year-over-year basis, last year throughout the year, and really starting in Q3, Q4 of 2009, we saw an acceleration in traffic growth.

And I think, as Paul was referencing, the primary driver there was our customers going from kind of 300-kilobit, 500-kilobit type quality up to 1 meg, 2 meg per second, close to HD quality.

And I think that that trend, we're still going to see quality levels increase over time, but that inflection point we are sort of through.

So, basically, what happens is the volume growth still growing, but it has moderated somewhat.

And there's a little bit of discontinuity.

You know, in general, over time volumes grow and prices decline.

It's been the way it has for our business for 12 years, but it's not always in a smooth, straight line.

I think our customers are thinking about, when we talk to them, about increasing not only the quality levels, but the quality of the content that is online.

And they are positioning their businesses and their business models to do more and more of that over time.

And I think that's a very positive development for us.

And when we are having discussions with our customers about what their volume projections are out in the future, that's what they are thinking about.

And they are thinking about it from a business perspective and how we can help them there.

So, the other point I would make on that is the value-added solution growth that we saw, even in the media and entertainment vertical, where the video volume growth trends are really important, sequentially, even though that vertical declined from Q4 to Q1, as we expected, sequentially the volume, the value-added solutions grew 7%, and they make up 35%-plus of that vertical now.

So even in the verticals where volume-driven solutions are very important, we are getting good traction with our value-added solutions.

Operator, as we go to the next question, folks, if you could stick to the new, new questions so that we can get everybody on the queue, that would be great.

Donna Jaegers, D.A.

Davidson.

Thanks for taking my question.

I guess one quick -- one question.

ESPN Sports is now starting to stream live events.

That seems to me to be sort of a new breakthrough with the content companies being willing to stream live sports.

Do you sense other breakthroughs possible with the content companies starting to look at the Internet as a different channel of delivery versus just the cable companies?

Well, I guess I sort of disagree with the thesis.

We've been talking for years about live sporting event as one of the marquee things, both ad-supported and subscription behind subscription wall supported -- done by the leagues, done by broadcasters.

We just talked about March Madness; I mean, that has become an every-year compare.

There are major golf tournaments.

We've worked with virtually every major sports league, both on highlights and then live games.

Many of the cable networks, sports and otherwise, have been doing both live events or live -- news is another example.

So those are positive things and good for our business, but I don't perceive a fundamental change there at all.

I think what we're going to just see is more of the same, meaning more long-form, more high-quality, more premier events online.

But I don't think it is a dam-breaking, I think it's an encouraging continuum.

And, Donna, I would just say, sports, particularly live sports, has been one of the models, the business models that's worked for really the longest period of time.

I think what you're seeing is our customers -- basically, consumers demanding more of that online, and our customers responding to that, and that's very positive.

I think the point we were making before is in addition to that, we're starting to see new models that open up even more premium content to users over IP and over a lot of different kinds of devices.

One quick follow-up, then.

On the media space, what are you guys throwing into the value-added portion of media?

Multi-delivery, geolocation, mobile, the ability to deliver to iDevices and other mobile devices, security, denial-of-service protection from these sites who get attacked.

Media -- we have a suite of media analytics products that many of those customers are now using.

So there's really a whole range of things that we think can bring value to those relationships, particularly as they scale and they become profitable things for them and not marketing.

And so, therefore, real businesses are on the line.

I think we continue to see good traction with a whole range of those things.

Sameet Sinha, B.

Riley & Co.

Specifically on the value-added services side, a couple of times on the call you mentioned it was 60% of revenues, almost 60%.

And I think once you said 58%.

If you can clarify which of the two numbers, and then I have a follow-up.

58%, yes, Paul -- my poetic license.

I said almost 60%, but the actual number is 58%.

That rate, that -- okay, that would mean that year-over-year growth was about 23%.

Seems like it has dropped off pretty significantly from the 31% we saw in the fourth quarter.

Anything specific we should be looking at, whether it's competitive or just tough comps?

I think if you went -- if you look at the data, we're growing about 23% in the fourth quarter as well.

And we had been growing in the low 30s before that.

And the key difference between the rest of 2010 and the fourth quarter was you had a wraparound of a full quarter of our advertising decision solutions, which -- that was the first fourth quarter that was a full year-over-year comparison.

So I think that was the primary driver for the step-down in growth.

Okay.

In terms of the hiring, obviously last year you hired quite a few people as you saw business ramp.

Should we expect a similar sort of a hiring this year as you (multiple speakers)?

No, I think JD just made the point that, no, we are not -- we will certainly grow, but not at nearly that rate.

We were really catching up with the demand coming out of the recession.

And we will continue to grow, but not at the same pace.

Okay, thank you very much.

Edward Maguire, CLSA.

Just a quick question on the broader environment on renewals and your overall customer count, which I didn't see in the press release.

Could you just talk about the dynamics there?

And just one follow-up is, any commentary on international trends outside of Europe?

Thank you.

Sure.

So, let's see.

I think our signings of new customers we were really pleased with.

I think it was in the press release; we added about 65 net new customers, if I'm not mistaken.

The thing that we are focused on, we've not talked about net new customers as a driver for a while, but we are focused on signing new customers, particularly for our new value-added services.

Our model was always you sign a customer for basic services, and then you upsell them.

I think the real positive that we've talked about for a while now is that over half of our new customer signings are coming onto the platform with value-added solutions.

And that's because we are getting great traction in new areas like in the enterprise vertical, where volume delivery is not really a big part of their business model.

So I think from that perspective, that's really positive.

Your second question I think was about trends in international outside of Europe?

Outside the US.

Outside of Europe.

Outside of Europe.

So, at the risk of generalizing, I think we've, particularly in the Asia-Pacific region outside of Japan, which is a little bit of a more mature market, we are seeing very good growth.

In fact, those areas are the fastest-growing part of our business.

And I think there's tremendous opportunity and potential to keep growing there.

Derek Bingham, Goldman Sachs.

This is [Gio] on behalf of Derek Bingham.

A couple of questions regarding the high-tech sector, as well as the public sector.

First of all, regarding the high-tech sector, it saw a small decline year over year.

Do you expect the software downloads to pick up a little bit more later in this year, so that the vertical is about flat year over year for the year 2011?

And you said public sector?

Let me have both your questions, please?

Yes, for the public sector, there's been a step down in year-over-year growth for this vertical.

I'm just curious if there is -- if it's some contract specific, or if you're facing any kind of pressure from federal spending.

So let me -- I will do the public sector one, and maybe Paul can comment on or add to that on high-tech.

So I don't think it's as much the spending in public sector, although obviously that's something that we have to worry about.

I do feel like, even in the public sector, where our business is is the place that you will see investment, particularly around denial-of-service-type solutions and some of the custom work that we do.

Our growth rate has slowed there off of what was a really tremendous 2010.

And really, what drives that vertical is our custom engagements that we do.

And the timing, rate and pace of those is going to go bounce up and down.

That's not as much of a continuous trend as maybe some of our other verticals.

But I still think it's a very strong business for us.

It's one where not only do we drive revenue growth, but we develop technology.

So it's one that we are really pleased with the performance of.

And do you want to comment on --

And I would just add on, we've always talked about public sector as lumpy.

And as JD said, though, I think we are in the right place because there is so much emphasis on moving online government services to the cloud.

And we allow them to do that at scale very efficiently with high security.

And on the high-tech side, I think the most important thing there is the shift to supporting SaaS offers.

And we've talked a lot about that, and we continue to see that trend.

I'd just remind you, we've talked before that last year, Q1 was unusually strong with the release of an unusually large number of antivirus updates that we didn't think would repeat this year, because it was really way out of the norm last year and drove some kind of outsized performance Q1 of last year, which was one of the reasons that made a harder year-over-year compare of the seasonality.

It helped mask usual Q1 seasonality.

And we went back to kind of the normal step there.

We expect to see the amount of download traffic to grow on our network.

It's a very volume-oriented business, much more price-sensitive.

I think that that's probably kind of a normal growth.

But we are not going to give you guidance by that specific vertical.

We talk about really the vertical projections on an annual basis when we get to our Analyst Day and the trends we see there.

But I'll underscore that I think the main trend there is this drive to Software-as-a-Service and how that is shifting the whole delivery of software and updates of software and really processing of that online, which is a good long-term trend for us.

Chad Bartley, Pacific Crest.

Chad, I think you get to be last to close out the hour.

Okay.

Well, great.

You actually answered my second question, but I have to ask this again just to be crystal-clear, because it's not clear to me.

Are you guys backing away from your full-year guidance for at least 15% revenue growth?

Can we just make sure we all understand that?

Thanks.

I will be clear -- we never gave you full-year guidance.

We gave you an outlook last year of a general trend of where we thought we would go, and we said we would give you specific guidance on a quarter-by-quarter basis.

As JD and I both said, there were three main drivers this year.

Two have proven out already positively for us, so we are optimistic about those.

And the other is really traffic growth, the seasonal traffic growth in Q3 and Q4.

We think we are set up with our clients, but there's no way to know how that and the ad business plays out exactly.

Okay.

So I was able to follow the transcript here from last quarter, and it said we are maintaining our objective of 15%-plus growth for the year.

So are you now removing that?

Well, we are not commenting on it.

If you've interpreted that, I think at the same call, we said we don't give guidance for the year.

We talked about an outlook that we'd set for the last year, when we were trying to frame a long-term plan, and that's really our comment on it.

And I know everybody would like us to turn that into an update on annual guidance on a quarter-by-quarter basis.

We stopped doing that years ago, and we are simply not going to do it.

I think it's fair to say we still have an objective.

And I think, as Paul just talked about the three areas that need to happen for us to achieve that objective, and I think we may -- I think Q1 was pretty positive on that.

We just have to wait and see on the volume piece.

All right.

Thanks, guys.

Okay.

Thanks, Chad.

Thank you all for calling in, and we will update you again in another three months.

Bye.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.