Akamai Technologies Inc AKAM
Q1 2010 Earnings Call Transcript
Transcript Call Date 04/28/2010

Operator: Good day, ladies and gentlemen, and welcome to the First Quarter 2010 Akamai Technologies, Incorporated Earnings Conference Call. My name is Alisha, and I’ll be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator Instruction). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Noelle Faris, Director of Investor Relations.

Noelle Faris - Director, IR: Good afternoon, and thank you for joining Akamai’s investor conference call to discuss our first quarter 2010 financial results. Speaking today will be Paul Sagan, Akamai’s President and 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 28, 2010. Akamai disclaims any obligation to update these statements to reflect future events or circumstances.

As a reminder, we will be referring to some non-GAAP financial metrics during today’s call. A detailed reconciliation of GAAP and non-GAAP metrics can be found under the news and events portion of the Investor Relation’s section of our website.

Now let me turn the call over to Paul.

Paul Sagan - President and CEO: Thanks, Noelle, and thank you all for joining us today. Akamai performed extremely well in Q1, top line growth accelerated year-over-year as we posted record revenue of $240 million, up 14% from the same period last year. Gross margins improved year-over-year and we achieved our highest adjusted EBITDA margins ever, while generating fully taxed normalized net income of $66 million or $0.35 per diluted share, up 14% from Q1 of last year.

These results came from strong demand for our services in all verticals. Our cash flow generation was also strong, with $88 million of cash from operations in the quarter. And so we’re pleased to announce that our Board has authorized a $150 million extension of the share buyback program we started a year ago.

I’ll be back in a few minutes to talk about some of the key trends we’re seeing in the market, but first let me turn the call over to J.D. for details on Q1. JD?

J.D. Sherman - CFO: Thanks, Paul. As Paul just highlighted our business performed extremely well in the first quarter, and we grew revenue $2 million sequentially and 14% year-over-year to $240 million, coming in above the upper end of our expected range for the quarter.

During the quarter, we saw an acceleration in traffic growth, particularly in media and entertainment, as well as continued solid growth in our value added solutions. We’re particularly pleased with the sequential growth of our business coming off a very strong fourth quarter. E-commerce continued to be our fastest growing vertical increasing 19% over Q1 of last year, but declining 5% compared to Q4 due to normal seasonality primarily in our Advertising Decision Solutions. Excluding Advertising Decision Solutions, e-commerce actually grew modestly from Q4 with growth coming from both Dynamic Site and Application Performance Solutions. These cloud-based solutions continued to gain traction in the marketplace.

Signings in the quarter both from new customers and from existing customers who are upgrading and adding additional applications were very strong. In fact, the dollar value of new customer signings for our value added solutions was up nearly 40% from Q1 of last year. And overall, 54% of our revenue in the quarter came from value added solutions, up from 46% in Q1 of 2009 with 77% of our total customer base using at least one value added solution.

Our media and entertainment vertical grew revenue 5% sequentially and 10% year-over-year in the first quarter driven by accelerating volumes growth and exceeding our expectations. We’re beginning to see media companies offering higher quality video online. And as a result, performance, reliability, and scale are becoming increasingly important for them leading to key wins for Akamai.

The high tech vertical was up 15% year-over-year, and flat on a sequential basis driven by increased software download volumes in Q1. We also saw increased traction among software-as-a-service or SaaS providers with our APS Solutions. We now have over 100 SAS providers leveraging Akamai’s platform to drive their businesses.

Public sector revenue was up 21% from Q1 of last year, and 11% from last quarter continuing the solid performance we’ve seen for the past several quarters from government contracts. During the first quarter, sales outside North America represented 28% of total revenue consistent with the prior quarter. International revenue grew 1% sequentially, and 16% year-over-year. The stronger dollar had a negative sequential impact on our revenue of about $2.5 million, and on a year-over-year basis, the currency impact was favorable by about $5 million.

Revenue from North America grew 13% on a year-over-year basis, and was up 1% sequentially. Resellers represented 18% of total revenue, down a point from the prior quarter. We again performed extremely well on cost and gross margins in the quarter, with cash gross margins of 83%, up slightly from Q4 and up a point from the same period last year. GAAP gross margin, which includes both depreciation and stock-based compensation was 72% for the quarter, consistent with Q4, and up one point from the first quarter of last year.

GAAP operating expenses were $106.5 million in the first quarter. These GAAP numbers include depreciation, amortization of intangible assets, stock-based compensation, and restructuring charges. Excluding non-cash charges, our operating expenses for the quarter were $80.1 million, down about $4 million from Q4, and up 13% on a year-over-year basis. Adjusted EBITDA for the first quarter was $118.1 million. That’s up 18% from the same period last year and up 6% from Q4 levels. And our adjusted EBITDA margin of 49%, a record for Akamai, was up one point from the same period last year and up two points from the fourth quarter.

For the first quarter total depreciation and amortization was $33 million. These charges include $24.9 million of network-related depreciation, $3.9 million of G&A depreciation, and $4.1 million of amortization of intangible assets. Net interest income for the first quarter was $2.7 million, roughly flat with fourth quarter levels, and down $1.4 million from Q1 of last year despite a higher cash balance due to lower interest rates on our investments.

Moving on to earnings, GAAP net income for the quarter was $40.9 million or $0.22 of earnings per diluted share. As a reminder, our GAAP net income includes several primarily non-cash items including $21 million of stock-based compensation, including amortization of capitalized equity based compensation, $4.1 million of amortization of acquired intangible assets, and $27.8 million of tax charges at an annual rate of approximately 40%. As we continue to exhaust our NOLs, we expect to pay cash taxes at a rate of only about 6% for the year. However, as we talked about last quarter, beginning this year we are including GAAP taxes when we report our normalized earnings each quarter, again for Q1 that tax change was $27.8 million. The Supplemental Metrics 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 normalized net income for the first quarter was $66 million, up 14% from Q1 of last year, and up 5% from Q4. In the first quarter, we earned $0.35 per diluted share on a fully taxed normalized basis, that’s up $0.04 from $0.31 per diluted share in Q1 of 2009, and up $0.01 from $0.34 in Q4. This was above our guidance range coming into the quarter as the increased revenue growth and higher margins drove an outstanding bottom line result. Our weighted average diluted share count for the first quarter was 189 million shares.

Now let me review some balance sheet items; cash generation continued to be very strong. Cash from operations for the first quarter was $87.8 million or 37% of revenue. At the end of Q1, we had $1.1 billion in cash, cash equivalents, and marketable securities on the balance sheet. This balance included $244 million of highly rated federally-insured student loan auction rate securities. Capital expenditures excluding equity compensation were $35.2 million, a bit lower than our plans coming into the quarter due to the time of some expenditures that pushed into Q2. During the quarter, we spent $21.9 million in share repurchases buying back about 834,000 shares at an average price of just over $26. Approaching the one-year anniversary of the share repurchase program, we have spent a total of $88.2 million buying back 4.2 million shares at an average price of about $21. And as Paul mentioned, our board has authorized an extension of our share repurchase program authorizing an additional $150 million over the next 12 months. As with our existing program, we intend to fund it out of our strong cash generation and with a goal to offset dilution from ongoing equity grant. And finally, our days sales outstanding for the quarter were 58 days, down one day as compared to Q4.

With these Q1 results following a strong Q4, we’re even more optimistic about the prospects for accelerated growth. We’ve witnessed an acceleration in volumes in media, and as a result, we’ve seen a return to solid revenue growth in our media vertical. We’ve also seen continued traction with our value-added solutions as customers move more of their business transactions online and adapt to cloud computing models. And we executed our business model very well in Q1 with great performance on cost and expense management on top of the record revenues. Looking forward, we’re becoming more confident in our ability to generate double-digit annual top line growth throughout the year, and we’re committed to making the investments that we expect will drive Akamai’s growth beyond 2010.

For the near term, we’re expecting Q2 revenue of $236 million to $246 million. That represents between 15% and 20% year-over-year growth accelerating from the 14% growth rate we saw in Q1. We expect the currency headwinds will continue on a sequential basis in Q2. Assuming current spot rates, foreign exchange will have a negative impact of approximately $1.5 million compared to Q1 but a slight positive impact of about $1.5 million compared to Q2 of last year. We expect the cash gross margins will be approximately 82% in Q2 and GAAP gross margin, including equity compensation, will be approximately 71%.

In Q2 we plan to increase our investment levels given the positive growth outlook for the year. On the OpEx side, we expect to grow OpEx by about $7 million to $8 million on a sequential basis as we continue to invest in R&D and go-to-market initiatives that we believe will yield important near-term and long-term benefits. We expect adjusted EBITDAR margins will be back in the planned range of 46% for the quarter as investments catch up with our top line growth. With the acceleration we’ve seen in media volumes and the increasingly large really TV size events online, we’re planning to ramp up our CapEx spending in Q2 to approximately $65 million. For the full year, we expect CapEx will be at the top end of our long-term model range of 13% to 16% of revenue. We think this is a very positive sign about our confidence in the prospects for growth across all areas of our business.

Given our revenue guidance of $236 million to $246 million in Q2, we expect fully tax normalized earnings per share for the second quarter to be in the range of $0.32 to $0.34. This assumes a GAAP tax rate of roughly 39% or GAAP taxes of approximately $21 million to $24 million for Q2. Overall, we’re very pleased with how the business performed in Q1. Our value-added solutions continue to be a significant growth driver and with accelerating traffic growth, our Media business returned to revenue growth as well. Given our strong Q1 financial results and balance sheet as well as the trends we’re seeing in the marketplace that continue to favor our uniquely differentiated services and delivery platform, we plan to continue making key investments in 2010 that will drive our growth for 2011 and beyond.

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

Paul Sagan - President and CEO: Thanks J.D. As J.D. mentioned, we believe there are exciting trends taking shape across our business; trends that I talked about on our last call and emphasized at our Investor Day in December. We think we are still in the very early days of these positive developments, and we are already starting to see their impact on our business performance. To reiterate, we believe cloud computing is revolutionizing IT and driving more and more business processes online.

Video distribution on the Internet is now fundamentally changing the media industry, and online advertising is transforming marketing strategies. Let me begin with the market opportunity for optimizing enterprise cloud computing. Improving the performance of mission critical online systems and applications; this is an area where are differentiated and highly valued by our customers. So we are increasing our focus here. More and more business functions are moving online as end users expect to access applications anytime, anywhere, and from any device. However, moving from a traditional enterprise IT model to the cloud introduces new performance and reliability challenges that are inherent in using the Internet. This is particularly true as computing resources are centralized and users are more and more global and mobile. Akamai’s cloud optimization services are designed to help businesses realize the full potential of their cloud strategies without compromising on performance or security. A great example is how Akamai’s cloud optimization solution benefits (out prefers) exchange service by reducing connection times and increasing performance by 50% to end users including mobile users.

In response to security concern with cloud-based applications, we’ve seen strong demand for the web application firewall solution we introduced in December. This service enabled online businesses that require advanced security for their websites to access it from our distributed cloud. One of our customers, a top luxury retailer, was looking to protect its sites and applications from information theft and downtime while also meeting strict PCI compliance standards. With the Akamai Web App Firewall solution this retailer was able to add an essential security element without additional internal IT build out. And so our new cloud optimization solutions are leading us into new industry verticals and enterprise customers. Already today we count as customers six of the top 10 global banks, five of the top 10 online brokerages, nine of the top 10 global pharmaceutical companies, 13 of the top automakers, and the top accounting firms, and we aren’t stopping there as we continue to develop new capabilities to improve the performance of our customers’ cloud-based initiatives.

Also getting a lot of attention these days is the online video revolution and that’s having a positive impact on Akamai’s business. Successful online model such as Netflix, Hulu, and iTunes are emerging for distributing recorded entertainment. These models are pushing the Internet forward as a new medium of choice for consumers looking for premium or HD content. Equally exciting are live events distributed over the Internet in HD, events such as the Masters and March Madness. These are demonstrating the web’s ability to reach increasingly large audiences in new and innovative ways.

During the week of the Masters, for example, we set a record for peak traffic on the Akamai network, exceeding 3.4 terabits per second. Put another way on our busiest day, our network responded to more than 0.5 trillion request for content. That’s 1 trillion with a ‘T’ and that’s a figure equal to serving content to every person on earth, every 20 minutes all day long. That’s an impressive record but one that we don’t expect will stand for long. Demand like this demonstrates why it takes Akamai’s distributed approach to deliver large events effectively.

On that record day, we delivered TV like HD video streams from more than 500 locations in the U.S. alone on behalf of a single major client. We don’t believe any other approach comes close to matching our scale, quality or efficiency. And as the Internet continues to transform and revolutionize business around the world, we intend to further enhance the Akamai HD network. Our strategy is to continue investing in this platform, so we can deliver our customers’ premium content to their end-users at scale, at the highest quality, with reduced complexity and increased accountability.

Finally in a newer area of our business, using data to improve the performance of online advertising, we believe we’re continuing to see an improving climate for advertising, an increasing acceptance of leveraging shopping data to power better ad campaigns. We had a record number of new customers signings for Advertising Decision Solutions in Q1.

So in summary, we are very pleased with how Akamai performed this quarter. Five years ago, when we were about a $200 million business, we set a goal for ourselves, one that seemed audacious to many at the time. We set out to reach $1 billion in annual revenues, something that very few independent software companies have managed to do. Even more boldly, we declared we’d get there by the end of the decade. While it’s still early in the year, I think we have a good chance of achieving that goal in 2010 just as the decade ends. And as we drive to achieve that goal this year, we’re investing in the future for the next billion dollars in revenue. So, as Akamai continues to help transform business online in the Internet itself, we’re even more excited about the long-term.

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

Transcript Call Date 04/28/2010

Operator: Sterling Auty, JPMorgan.

Lauren Ye - JPMorgan: This is Lauren Ye for Sterling Auty. Just had a question around the media and entertainment line. Obviously, you guys did really well there. Just wanted to understand how much of this upside is really HD versus what you’ve mentioned that there might have been some events that were pretty strong, obviously they probably are HD as well that kind of pushed it over the top?

Paul Sagan - President and CEO: Sure, I think, one of the keys there is a lot of it is HD, not everything. People are still delivering video at variable bitrates and some of them more standard, like we’ve been seeing for a number of years. But we are seeing increasingly HD video, both for on-demand higher quality things like movies and TV shows delivered that way and especially for live events, not just because of the picture quality but because of the instant replay and the effectively built-in DVR or digital video recorder functionality that we provide right in the player and I think that’s very exciting. So, it doesn’t account for all of the upside. We saw strength across media, across software and high-tech, we saw it across e-commerce. But I think HD was a piece of the pleasant surprise and I think will be a big driver for us over the next several years, because what we are seeing from customers is much greater interest at adopting the Akamai HD solution faster than we had expected.

Operator: Mark Mahaney, Citi.

Mark Mahaney - Citi: Two quick questions; first, could you just update us on the churn or the gross customer adds? And second, the international growth, if you adjust for FX, was 5% to 6% year-over-year on against a tough comp granted, but it’s not the double-digit growth I think you’d like to see? Could you talk about the steps to get that growth faster in international markets?

J.D. Sherman - CFO: Yeah, last quarter we disavowed talking about the broadly based churn and customer account numbers and ironic that we then went and had a quarter there. Our gross new customers were up. Our churn was actually below 3%, which is very low. But I still think the right way to look at the business is to break it down by vertical. We talked about it in the commerce vertical, the signs that really do matter there. We’re looking at the dollars coming in the door from brand new customers who are signing up to our value-added services, particularly DSA and APS, and that was up 40% year-over-year. We saw the revenue from our value-added solutions go from 46% to 54% as a total of our business from Q1 of ’09 to Q1 2010, and we continue to get really good up-sell of our existing customers to the point now where 77% are buying at least one solution. We continue to have really good traction there.

Paul Sagan - President and CEO: One value-added solution.

J.D. Sherman - CFO: One value-added solution, correct. So, I think we are very, very pleased with the signings that we saw in the quarter particularly around the value-added solution. Then your question on international, you were right, last first quarter we had a very large quarter in international and so there are some tough compare timing type impacts. I think also what you’re seeing in international is something similar to what we saw in North America last year, particularly the economies there haven’t recovered as fast, the digital media business is not turned like we’ve seen yet in the United States, so the results are a little bit dragged down by that, but we continue to see really good traction of our value-added solutions over there. And I do believe that in the long term and even in the relatively near term here we’ll see an acceleration there and international will continue to be our fastest growing geography.

Operator: Tim Klasell, Thomas Weisel.

Tim Klasell - Thomas Weisel: Just want to touch a little bit on the CapEx. You’re going up to the high end of your 13% to 16% range. What is driving that? Is it the media volumes, is it efforts related to cloud computing, and do you think that the 16% will be the sort of the go-forward for maybe a few years as growth accelerates?

Paul Sagan - President and CEO: No, I think it’s a little hard to make the long term call. We’ve had a range, which we’ve been very successful staying within as part of our model, and we believe the model holds. We just see so much growth opportunity right now by geography around the world, by vertical whether its performance enhancements and application acceleration or the rapid adoption of HD and the size audience that the customers are beginning to talk to us about delivering with high quality video with interactivity. So we just think it’s prudent to make sure that we’re out ahead of it, so that we’re not turning customers away or disappointing them, and we think spending a little bit more and frankly grouping those purchases and getting even stronger possible discounts from our suppliers on the hardware side is a prudent step to take. I’ve gone through this before, but just for the benefit of people who may be new to the story, we’re not making long-term multibillion dollar bets on some new manufacturing plant. These are quarter-by-quarter decisions. If we remain as upbeat, we can continue to expand capacity. If we think that there is a turn in any part of the world, we can pull back a little, and it’s not a stranded resource. So we think we’re doing the right thing to stay a little bit ahead and encourage the network group to build out faster. But it’s not a fundamental shift. It’s not a fundamental shift in product type. It’s just our consistent build for where we see demand, which geographies, which networks, which services around the world, and making sure we stay ahead of the opportunity.

Tim Klasell - Thomas Weisel: And then just a quick comment on the margins in the media business. I know it’s hard to separate them all out, but is your feeling as that business accelerates that customers are getting a little bit less price sensitive and may be margin’s getting a touch better there?

Paul Sagan - President and CEO: I think that this is a competitive field in technology. Unit prices go down every year. We have always worked with that thesis, and it’s been true for over a decade and frankly our ability to drive our own unit pricing down and share that with our customer allows them to expand their use to things like HD. So I think that’s just a given. And since I think we’re at the 1% line today of exploiting the market opportunity, I don’t worry about it. If you look at how much video in the home today comes over the Internet, it’s little over1% to 15 years to get there. I don’t think it will take 15 years to double and double again. So, there’s plenty of volume to go after. And it’s key that we’re going to drive price down and share some of that with our customers. One of the things that I think it’s been terrific over the last several quarters has been our ability to drive more business for our customers to do more and continue to improve the profitability of the business, whether you look at cash gross margin, GAAP gross margin, adjusted EBITDA, they were all up and strong this quarter, and at the same time I think we were doing a better job delivering value for our customers.

Operator: Michael Turits, Raymond James.

Michael Turits - Raymond James: First of all, any thoughts on your strategy for pricing, which initiated about a year ago in terms of getting more aggressive on price? Are you pretty much through that? Do you feel like now that that’s played out and has that worked in a sense of both driving more demand as your customers and also maybe winning share? And I’ve got a couple follow-ups.

Paul Sagan - President and CEO: I think that one we’ve dealt with before, Michael. I think people, A, made more of it than there was over a year ago. We were more aggressive in some cases. It was at the right time because it unlocked demand. We found some elasticity that we’ve either missed or frankly it wasn’t there before. And I think it’s regular course of business. Our customers want to do more. Their businesses are improving. Their monetization options are increasing and they’re turning to us for quality, scale, reliability, and security, and we’re pricing it fairly and I think that’s working for both parties, us and them, and so there is really I think much less to be made of what people thought was (undeclared) radical new strategy.

Michael Turits - Raymond James: Second question is this quarter you expect the cash flow gross margins to be about flat, which they were. They’re up a little, but you expected GAAP gross margins to be down a point, and it seems like you had less of an uptick in depreciation than you thought you would. Now you’re increasing CapEx, and so although it seems like you’re in a good direction as far as the EBITDA margin, should I be concerned that we’re going to see one, two, three points more of increased depreciation per year, and that will drag down my net income margin?

J.D. Sherman - CFO: Michael, I think, the reason that we saw an uptick there was really on the top line, the accelerated revenue growth helps the numerator there, and I think, if we continue to see very solid growth on the top line, then basically our investments in the CapEx have paid off, and that’s not a big worry. If we see the top line start to level off, then we’ll have to pull back on our CapEx. As Paul said before, we’re making 90-day decisions here, we’re not making one year or two year out type decisions. But the way I look at it or the way I would recommend that you guys think about it is it’s an investment, because we see things starting to look very positive for us in the near-term, and that bodes well for our top line as well as the model.

Operator: Mark Kelleher, Brigantine Advisors.

Mark Kelleher - Brigantine Advisors: I was just wondering if you could address the possibility as HD ramps and the bitrates increase, are there any bottlenecks in the network that are beyond your control, I know that was an issue for some of the initial HD deployments, but particularly in the last mile, are there any things that can catch you that are sort of beyond your control?

Paul Sagan - President and CEO: Well, I think, one of the things that (lost) the potential for HD was the massive expansion of last mile broadband and end users capable of getting several megabits a second, and we see that increasing and creating more bottlenecks on the other side of the internet across pairing points and in the first mile. And so, as you know the Akamai distributed mile solves that problem as we did with some events recently delivering HD video from literally over 500 locations in the U.S. alone for customer. So we actually think we are in exactly the right spots. There are certainly networks that get under provisioned, we’ve seen that to some extent in some wireless networks, and the end users wind up with a disappointing experience. I think, the challenge there is those providers either have to expand their capacity or they’re going lose subscribers somewhere else. So you’re right, we can’t do better than the last mile in the ISP networks. We partner with them to help them expand their capabilities and be more efficient. We do a lot for ISPs there, but ultimately the last mile is only as good as the last mile that you are in, and I think, we’re going to see consumers going more and more to the best network providers, who can give them a great first mile connection to the internet, and then our goal is to be in those networks and deliver its scale. So there is no technical limitation. There certainly will be places with poorer performance and countries with slower networks, but by and large we’ve seen a dramatic improvement there over the last five years and we’ll continue to see it I believe going forward.

Operator: Todd Raker, Deutsche Bank.

Brian Thackray - Deutsche Bank: It’s Brian Thackray pinch hitting for Todd here. First question just to drill down a little more on the media side, can you give us maybe help us quantify what percent of video delivery today is higher resolution, and around that can you maybe compare this adoption cycle in higher resolution compared to the previous cycle in ’06-‘07, are we tracking faster, slower than that, how should we think about that as we think about the adoption?

Paul Sagan - President and CEO: Yeah, I don’t have a scientific way to measure that. I can give it to you sort of anecdotally as we see it. I certainly think we are seeing more interest in HD faster from a broader set of customers than we saw before and expected. I think, there was a long period where people were in 300 kilobit, 500 kilobit, 700 kilobit, and once in a while experimenting with something more. And it’s pretty typical now, if it’s a professional sports league or studio or somebody with premium content talking about much higher bit rate files making 1 Meg and 2 Meg, and up streams or formats available, and one of the interesting things is, we’re seeing that when its available often more than half the users are going to highest available and we’re seeing that the engagement levels are much higher. So the large sporting events are very interesting, because you can get a true A/B comparison real-time, how long people stay at different bit rates. We’ve done some events recently, and the engagement time or the amount of time people stay watching is often double or more to standard bit rate, and so that just raises huge new monetization opportunities for the distributors and the content producers. And I think that that’s why they are so excited about it, and we’ve been able to show them examples of that. And I think that that’s a very powerful message in driving at least anecdotally faster interest and faster adoption. At the same time, there’s certainly plenty of standard bit rate video, and I’m sure you’ve been to many websites where that’s all you get, so I think there’s a long way to go, which is great opportunity for us.

J.D. Sherman - CFO: I would just add Brian that I don’t think while we’re seeing that happen and the interest is moving a lot faster than we thought, we still haven’t seen that sort of inflection point that broadband adoption drove back in late 2006 or early 2007, that huge ramp up. I still think we’re in the early – maybe it’s not the 1% point anymore, but it’s certainly the 5% of less point.

Paul Sagan - President and CEO: Agreed.

Brian Thackray - Deutsche Bank: And the incremental expenses you talked about J.D. for next quarter, can you give a little bit more color in terms of where they’re going to be, maybe what products they’re attached to?

J.D. Sherman - CFO: Yeah, sure. So this quarter we added about 90 people, largely our expenses are associated with people and 90% of those adds were in two places, go-to-market, meaning sales, services, and support, and R&D. And we’re going to continue to invest in there. I think, we scale pretty nicely in terms of network support and G&A, et cetera. Obviously, we’ll have to continue to grow in scale to handle more customers and more network traffic, et cetera. But our primary focus is building out our services and support in sales, particularly around value-added solutions and building out our capabilities in R&D to add additional functionality, again particularly around our value-added solutions, but also the HD network, we’re investing heavily there.

Operator: Kerry Rice, Wedbush.

Kerry Rice - Wedbush Morgan Securities: Maybe another way to ask about gross margins, and you may have already kind of, implicitly implied the sustainability of those or kind of, what’s driving the growth or the positive upside in that number. I don’t know if can break it down, but was it primarily revenue, was it the reduction in unit cost or is there something else, as we should think about that, and maybe relate that to pricing in the industry, because I assume that’s still coming down and with media and entertainment being a lower margin business, we’d see some pressure there. So, it seems like you’re able to offset that pretty easily. And then a follow-up question, Advertising Solutions, can you – not necessary to break it out or get much detail, but did that grow year-over-year or can you give any kind of insight into that business?

J.D. Sherman - CFO: Yeah, sure. So, let me answer that question first. And obviously, it’s going to go down sequentially, and it did, about a $6 million sequential decline, but it grew very nicely sequentially, it’s our fastest growing product area. Not surprising, because it’s also one of our newest and still smallest in terms of value on year-over-year basis. So, we’re really pleased with the continued traction we’re getting with that solution. And back to your question about gross margins, I think, there’s two things going on fundamentally. One is we’re doing a great job taking cost and expense out of the network and matching that with the price benefits or the cost benefits we’re passing on to our end customers, and that’s particularly placed out in the volume driven areas of media, software download, et cetera. At the same time, our mix is changing very dramatically towards the value-added solutions. And we’ve talked about how the value-added solutions particularly DSA and APS are much more software-like, and have much higher gross margins on average. So, the results of those two things has been a mix – actually a gross profit margin on the cash line has actually crept up a little bit recently, and I think, as we look forward for the year, we’ve talked not specifically about guidance, but we think we can sustain in that same kind of range based on those trends.

Kerry Rice - Wedbush Morgan Securities: And I think about value-added solutions, have you guys thought about starting to break out the mix of those value-added solutions? I’m assuming DSA is still primarily the biggest component of that, but any thoughts on that?

J.D. Sherman - CFO: Yes. What we’ve started to do is talk about on a percentage basis where we are. It’s something that we’ll dive into at least on an annual basis, when we get to our investor day, just as we did last year, and give a little more granularity there.

Operator: Katherine Egbert, Jefferies.

Katherine Egbert - Jefferies & Co.: How much of your revenue now is non-variable i.e. the platform fee?

J.D. Sherman - CFO: Well. It’s not always platform fees, right. It depends on the structure of the deal. But we’re still in the ballpark of – and of course, there’s a time element to this as well right, Katherine, but we’re still in the ballpark of 70% coming into a quarter being non-variable.

Katherine Egbert - Jefferies & Co.: 70% non-variable, okay. And then on the CapEx, what exactly you spending additional money on this quarter?

Paul Sagan - President and CEO: Some of it is servers in the network, and some of it is drives and cloud storage for our media customers. And then, as you know, we capitalized a certain amount of our R&D as well.

J.D. Sherman - CFO: But the ramp up is really capacity in terms of servers and storage in the network, not on the R&D side so much.

Katherine Egbert - Jefferies & Co.: Capacity in what areas? What’s specific, because usually your servers are dedicated to a certain function at least when they are initially rolled out?

J.D. Sherman - CFO: Well, it’s actually quite flexible in terms of, we deploy the servers out there and we provision them real time, automatically, software based to respond to the requirements and needs of our customers. So, literally, the same server that is delivering traffic for the HD network, one day may be serving Edge Computing content in the next 15 or 20 minutes.

Paul Sagan - President and CEO: And one of the keys in moving to the HD network on the HTP standard is it makes more of the network available to be flexible and do more things.

Katherine Egbert - Jefferies & Co.: Sure, I guess, my question was, what initially are these new servers targeted at?

J.D. Sherman - CFO: The driver for the capacity is clearly media volumes and HD video. There’s no question about that. And the point there is it’s not – we don’t have to make a bet about this capacity here, and then if something else takes off, we have to respond differently. That’s the beauty of our network. In some sense, that media, that big footprint that we build out for these massive volumes in media, we can leverage to deliver our value-added solutions on top of that footprint.

Paul Sagan - President and CEO: And so, in fact as we grow the capacity, they can also do software delivery, and those volumes are growing. And as we expand the footprint, there are more nodes getting more data of real-time internet congestion or condition, so on that day I talked about serving over half a trillion request, the more location we’re in and the more data points we get every second, the smarter our routing is not just for delivering jitter free video, but for accelerating SaaS function for some B2B corporate function as well. So, the deployment gives us benefit across the board. The big catalyst is the growth of the volume business around media and software.

Katherine Egbert - Jefferies & Co.: And then, just quickly last one. Paul, you said $1 billion in revenue this year. I mean, should we take that as guidance?

Paul Sagan - President and CEO: You should take it as made claim for the senses in trying to get the team motivated to make the (indiscernible) by the end of the decade. I’d say we’re going to give you formal guidance on Q2, which we did. And then you could do your own calculations for the rest of the year. I see a way we could get there. We could do better, we could do worse, but it’s certainly within our grasp to meet the goal we’ve set out. And I think, the other point is we’re now looking for the second billion in revenue as well, and that’s why we’re making the investments in all of these areas.

Operator: Sri Anantha, Oppenheimer.

Srinivas Anantha - Oppenheimer & Co., Inc.: J.D. in your prepared comments you sounded absolutely confident about double digit growth. How much of that is predicated just on higher media entertainment as opposed to the opportunities that you folks are also seeing in cloud computing services?

J.D. Sherman - CFO: I think, the way I look at it is what we’re seeing with our value-added solutions which are a lot around the cloud optimization services, those have been growing 20% plus for quite some time, and we see that continuing, in fact, as I talked a little bit about the demand, particularly with our customers signings is actually increasing. It grew almost 40%, which is faster than even our revenue growth in that area. What’s different and what we’re seeing change and drive the acceleration is that media business primarily which was, had slowed down in terms of growth, and even showed a couple quarters of decline last year. We’re seeing solid growth there driven by the return to very positive volumes growth.

Srinivas Anantha - Oppenheimer & Co., Inc.: And just one quick question. Paul, is it possible in any way to maybe give us a little more color. How the nature of the conversations are going with the media and entertainment, I know people are focused on pricing and volumes, but as more content in some form or fashion is getting monetized here, and media entertainment customers more increasingly focused on – A, the value-added services, which gives them better ways to monetize the content; or is there is something else that they’re looking for from you guys rather than just the pricing?

Paul Sagan - President and CEO: The discussion we’ve had with them for over a decade is about scale and quality, and how do they find their audience, how do they get them to stay longer, and how do they monetize their content. And so whether that’s the HD network and built-in functionality like DVR and the ability to put multiple video streams and camera angle in a live event keep people there longest, so they see more advertising or interact with advertising. Our media analytics that helps them to how to monetize better, both historically and real time. Our advertising decisions solutions that raises the value of advertising for a certain set of our customers, or our digital media acceleration capabilities that takes the dynamic aspects of a media site and makes it more reliable and engaging are all the kinds of things that these customers talk to us about. And increasingly I think they are the value added pieces on top of video, because that’s how they’re going to make money, and I think, we’ve got a great portfolio and a growing portfolio of services that meet their expectations for how do they build profitable businesses.

Operator: Sameet Sinha, JMP Securities.

Sameet Sinha - JMP Securities: So, you’ve spoken about the cloud and cloud optimization, is there a way to quantify how big that market is, because if you look at all the projections for cloud computing as a broadly defined term, it goes into tens and billions of dollars, but the optimization piece which you specialize in, how big would that be? And secondly, just on expenses sequentially we saw G&A come down a little bit, sales and marketing come down quite a bit. Should we use that as kind of the baseline, and then track it throughout the year?

J.D. Sherman - CFO: Well, so let me answer the second question. I would expect that we’re going to have sequential growth probably across the board in all of our areas, but it’s going to be highly focused in R&D and sales and marketing. So, I don’t have specific guidance for you by line item, underneath the totals. But we’ll have some natural growth as the business grows in the G&A area, et cetera, but the primary growth is going to be in engineering and in sales services and support. And then to your first question, I’ll take a shot at it. The cloud – there a lot of people define cloud computing very broadly, and give it very big numbers. The way we think about cloud optimization is how we’re helping our customers them deploy cloud solutions or deploy into a cloud based model the applications that they’re running today in a more centralized datacenter model and customers today spend a lot of money optimizing the way their applications work in that model. And there’s a lot of cost savings to be had there. So, we kind of focus on the parts of the market that where customers are spending money to optimize solutions today, and that’s probably a $2 billion to $3 billion market defined narrowly. And then obviously you can have even broader discussion as you go farther out into the cloud optimization world and get into the billions of dollars.

Operator: Michael Olson, Piper Jaffray.

Michael Olson - Piper Jaffray: Talking about the kind of second billion of revenue, you’ve said in the past that you have 95 of the top 100 e-commerce sites using VAS, is there any change in how you’ll kind of go about tackling the next 100 e-commerce sites to that size of that opportunity for the next 100 (indiscernible) significantly or is the opportunity for Akamai really similar to what it has been with the top 100, and then secondly as part of that VAS was 54%, where does that kind of top out as a percent of the mix? Thanks.

Paul Sagan - President and CEO: So I think you mean DSA, Dynamic Site Acceleration?

Michael Olson - Piper Jaffray: Yes, Value-Added Solutions.

Paul Sagan - President and CEO: Right. Value-added solutions, so that’s right a little over 50% overall with commerce being the biggest piece of that. I think, there are two great parts to commerce. First, as e-commerce has just grown overall, the second 100 and the third 100 sites are becoming big enough online businesses that we think that they can benefit and pay for our services. So, we’re going after the next 100 and the 100 after that with the original suite of services, because we think we can help them sell more and improve the ROI, but we’re not done with the first 100, either where we have over 90 of them. We’re adding functionality, we’re adding features like Web Application Firewall, where we can go sell and raise the wallet share that we get, and we have a roadmap of additional features. Some will just be enhancement that they will get with their current service, but many will be new services that we believe will help them sell more and have more successful online businesses. So we’re going to focus on continuing to add value, and hopefully getting paid more from our existing great customer set, and going to the next 100 and the next 100 after that, with the current offers in e-commerce to help them grow and be more successful online and we think that that’s a great category from us. It’s starting to benefit, for example, from our Advertising Decision Solutions, and our ability to help online retailers find more end market customers, and drive sales they weren’t going to get otherwise for example. So we’re very optimistic about that portion of the business.

J.D. Sherman - CFO: And as far as the share of our business that that will become, it’s hard to say long-term because it depends also on how volumes grow on our media business. The nice way to grow the share would be to have both parts of our business growing very rapidly. We’re at 54% now, that’s up seven or eight points from where we were this time last year. I wouldn’t be surprised if we’re talking about 60% type number by year end, but we’ll have to see how all the pieces play out.

Operator: Donna Jaegers, D.A. Davidson.

Donna Jaegers - D.A. Davidson & Co.: Just to try to drill down a little more, you guys have had a number of press releases recently about the software-as-a-service contracts that you’ve been getting for web for optimization, can you give us sort of what’s the average size of one of those contracts?

Paul Sagan - President and CEO: Well, we’ve done some press releases. We’ve also done a number of partners ones, where we’re being embedded or providing a solution as they grow, so to some extent as they sign up more customers, their business grows, and they’re effectively sort of a channel. So I don’t think there’s one answer for what’s the size of those customers, it really depends on the use case and whether they’re a single customer, or there really are way to get to many others.

J.D. Sherman - CFO: Yeah, it’s hard to say. It’s hard to give an average, and have that be meaningful, because we have some very large deals with very large SaaS guys, and relatively small deals with SaaS guys who are not as big, and their user base is not as big.

Donna Jaegers - D.A. Davidson & Co.: Okay. Can I try to pin you down on another thing then. On HD, obviously, I had people calling me about the Masters and just, look at the dogwood tree, you could see everyone blossom on it. As far as revenues, did that add $3 million, $4 million, can you give us a little more specifics on how much that might have added to the quarter?

Paul Sagan - President and CEO: Sorry. We won’t comment on a specific customer. The one thing we have said for a while and I think this is also important is, in our side no single event is that important to the result. We certainly care about every customer. We want everyone to go well. But no single event is a large piece of our quarterly revenue. But I won’t give you obviously the specific revenue for a customer on an event. Nice question but can’t go there. I’m not sure, how you’ve modeled it in any way because no way to really calculate, how many events per quarter per year. (Funny thing’s) we always have it. There are always a few per quarter. They’re always pretty interesting, but they are regular course and speed of our business by now.

Operator: Derek Bingham, Goldman Sachs.

Derek Bingham - Goldman Sachs: Two just quick finance related ones, J.D. First, just on the headcount, as you said, you added 90 people in the quarter. I mean is that the kind of pace you expect in Q2 and as we go through the year? And then also, you mentioned what you think the cash tax is going to be this year? Any view right now on how that’s going to flow into calendar ’11 in terms of cash tax?

J.D. Sherman - CFO: I’ll answer that one first. I do think there’s always timing impacts in any year on the tax rate and obviously we have to deal with that. I do believe that will be 39% or lower this year on tax rate. And I think over time as our business shifts into more international, that tax rate will come down gradually over time. There won’t be a step function, but we will have a gradual decline in our cash rate over time. We’re never going be the kind of company that has a 10% or 12% tax rate, because we don’t make anything that we shift offshore, but what we’ll be able to do is, is just manage that a little bit better as our business shifts internationally.

Derek Bingham - Goldman Sachs: But does it bleed into next year at all or is it like as soon as the year begins, suddenly you’re paying full cash taxes?

J.D. Sherman - CFO: I see on cash taxes, you make an estimate you start paying based on where you think you’re going to come out and based on the way we see this year playing out, we’ll be through our NOLs this year. We’ll be a full cash tax payer in 2011.

Derek Bingham - Goldman Sachs: Okay, alright. And then headcount?

J.D. Sherman - CFO: Headcount, yes, so we added about 90 people this time. I actually think that if anything we’ll ramp that up a bit in the second quarter. We tend to have – significant hiring happens towards the end of school years and second quarter is a little bit slower and the third quarter during the summer months. But I do think we’ll ramp that up a little bit.

Derek Bingham - Goldman Sachs: Yeah, probably up in Q2, down in the summer, and then we will see about Q4 when we get there?

J.D. Sherman - CFO: Yeah.

Operator: Jeff Van Rhee, Craig-Hallum Capital.

Jeff Van Rhee - Craig-Hallum Capital: Just one remaining question. As you look back to the February call, you were pleased with Q4 and yet very hesitant about Q1. Obviously, it’s turned out to be much, much better. Can you talk to the progression through those months? When you really started to see that visible improvement and how progressed from February to now where we’re sitting here at the end of April?

Paul Sagan - President and CEO: Yeah, the nice thing about our business is the recurring revenue. So you can start to see the build, but there are lot of variables in the business, and so it was hard to say exactly how things were going to look after seeing January or even in February results, but it looked after or even the January results came in that it was going to be a strong quarter and we kept that momentum up through the quarter.

Jeff Van Rhee - Craig-Hallum Capital: But you wouldn’t say it was just a steady build through those intervening months. There wasn’t any real hockey stick once we got into March, and then just that surge continued into April. I mean any other color would be great?

J.D. Sherman - CFO: I don’t think there is any hockey stick or any one event or anything like that. The really nice thing and then the hardest thing to predict obviously is what happens after you see a very large seasonal quarter in Q4 and to see some sequential growth off of that, particularly as our advertising business declined naturally, was a pretty good surprise.

Operator: (Mark Clark, FBR).

Mark Clark - FBR: I have two questions for you. First, with respect to the growth in the (MB) and volume space, do you attribute that more to Akamai taking market share or to the overall growth and just consumer consumption that’s benefiting the CDN industry as a whole? And if it’s a combination of the two, can you give us kind of a composition? And then the second question is, in the value-added service market and I guess specifically whole site delivery in DSA, can you talk about the competition in that market and what you’re seeing? I know that Limelight (on its second iteration) of its whole site delivery product and you have other smaller CDNs like Cotendo that are focused on DSA, and so I’m kind of curious what you are seeing in that market with regards to the competitive makeup.

Paul Sagan - President and CEO: We are seeing a lot of press releases. You’ll have to ask them about their traction, because we don’t see them with our customers. I think it’s one thing to talk about when you do this as a hosting company and I think it’s really different to accelerate people’s content and applications and handle their mission-critical businesses online when billions of dollars are at stake, and we have spent 12 years working with our customers to deliver their sites reliably in order to optimize the performance of their applications and building proprietary technology using a distributed model, and other people are in the hosting business and the mirroring business and trying to run a backbone to figure out how to (pier) their content through the congestion on the Internet and that just doesn’t work very well. We saw that in spades with live sports. Recently we see it with e-commerce and we see it with acceleration. And so fundamentally, we take a different approach. We think our customers recognize it and other people take a different approach, which we don’t think really applies to what we do. So, we don’t think it’s the best-of-breed solution, and we think that’s why we’ve done so well. Other people will come out with other solutions and frankly they’ll have to prove the ROI to their customers. Anyway thanks for the call and…

Mark Clark - FBR: (Do you mind to) answer quickly the M&A part of that.

Paul Sagan - President and CEO: I would do it really quickly, because we’re gone over an hour, and we told people (getting off now).

J.D. Sherman - CFO: So, Michael, I think over the last three or four quarters, we had some nice wins in the M&A space, but I think largely what we’re starting to see now is the organic volumes growth that those wins have led to.

Paul Sagan - President and CEO: Alright, so with that one, we’re little over our time. Thank you all for dialing in. It was great to give you an update. We’ll see you back here in another quarter. Bye, bye.

Operator: Ladies and gentlemen, this concludes the presentation. Thank you for your participation in today’s conference. You may now disconnect.