Operator: Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 Akamai Technologies Incorporated Earnings Conference Call. My name is Regina and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct the question-and-answer session. As a reminder today's conference is being recorded for replay purposes.
I'd now like to turn the conference over to your host for today, Noelle Faris, Director of Investor Relations. You may proceed.
Noelle Faris - Director, IR: Good afternoon and thank you for joining Akamai's investor conference call to discuss our second 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 involving 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 July 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 Relations 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 very well in Q2 (indiscernible) record revenue of $245 million. We continue to see strong demand for our services across all vertical. The top line growth accelerated for the third consecutive quarter, up 20% from the same period last year.
We generated fully normalized net income of $65 million or $0.34 per diluted share. That was up 18% from Q2 of last year. We have seen continued signs of traction in all of our key markets, especially increasing need for cloud computing optimization services for enterprise clients.
Growing traction in digital video being delivered in high quality at a massive scale over the Akamai HD Network and expanded interest for mobile content delivery solutions in a rapid growing market for smartphones, in area where we made an important acquisition in Q2.
We're also very excited to announce today that David Kenny will be joining our management team as President. I'll be back in a few minutes to talk more about David's appointment as well as other important trends in the business.
First, let me turn the call over to J. D. for the detail on Q2. J.D.?
J.D. Sherman - CFO: As Paul just highlighted, our business performed very well in the second quarter. We grew revenue $5 million sequentially and 20% year-over-year to $245.3 million, coming into the upper end of our expected range for the quarter with solid growth in every vertical.
Media and entertainment, we continue to see strong traffic growth, building on the trend that began in the middle of last year. As a result, media and entertainment revenue grew by 22% from Q2 of last year and 3% from the prior quarter.
In the quarter, the World Cup was a marquee event for us, demonstrating the potential of HD video over the Internet at truly impressive scale. As we have noted in the past, no single event has a significant impact on our revenue growth in a given period, and this is even truer today as we approached a billion dollars of revenue and delivered literally thousands of event, large and small throughout the year
E-commerce continued to demonstrate strong results as well, increasing 21% over Q2 of last year and increasing 4% compared to last quarter. This was a very solid performance in what is generally a seasonally slower quarter driven by increasing adoption of our value-added solutions in this vertical.
The high tech vertical declined 3% from Q1 due to timing of some big software releases that grew 8% year-to-year. We have continued to see growth with our Application Performance Solutions among SaaS vendors in this vertical and public sector was up 51% from Q2 of last year and 9% from last quarter continuing the solid performance we've seen for the past several quarters from government contract.
We're pleased with our continued traction across our portfolio of value-added solution. In Q2, 54% of our revenue came from value-added solutions up from 48% in Q2 of last year. Earnings in the quarter both from new customers and from existing customers that are upgrading and adding additional applications were very strong. In fact the dollar of new customer signings for our value-added solutions was up nearly 36% from last quarter.
During the second quarter sales outside North America represented 28% of total revenue consistent with the prior quarter. International revenue grew 2% sequentially and 20% year-over-year, despite the currency headwind. The sharp strengthening of the dollar had a negative sequential impact of about $3.5 million, and on a year-over-year basis the currency impact was negative by just under $1 million.
The currency impact ended up being about $2 million worst than we assumed back in April, when we gave our revenue guidance. Excluding the impact of currency, international revenue grew 7% sequentially and about 20% on a year-over-year basis. Revenue from North America also grew 20% year-over-year and was up 2% sequentially, and resellers represented 19% of total revenue up a point from the prior quarter.
As expected cash gross margin of 82% was down a point from the 83% level we achieved last quarter. It was up roughly a point from the same period last year. App gross margin, which included both depreciation and stock-based compensation was 71% for the quarter, also down a point from the prior quarter, but consistent with Q2 of last year.
GAAP operating expenses were $116.6 million in the second 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 $88.6 million, up $8.5 million from Q1, and up 28% on a year-over-year basis, as we continue to invest in the business. This included one month of operating expenses from our acquisition of Velocitude which closed in June.
Adjusted EBITDA for the second quarter was $112.1 million, that's up 15% from the same period last year and down 5% from Q1 level. Our adjusted EBITDA margin came in at about 46% as expected even with the acquisition, down about two points from the same period last year, and down three points from the prior quarter.
The second quarter total depreciation and amortization was $34.7 million. These charges include $26.5 million of network-related depreciation, $4 million of G&A depreciation and 4.2% of amortization of intangible assets.
Net interest income for the second quarter was $2.8 million, up slightly from first quarter level and down $700,000 from Q2 of last year, despite a higher cash balance due to lower interest rates on our investment.
Moving on to earnings, GAAP net income for the quarter was $38.1 million or $0.20 of earnings per diluted share. As a reminder, our GAAP net income includes several primarily non-cash items, including $22.1 million of stock-based compensation, including amortization of capitalized equity-based compensation and $4.2 million of amortization of acquired intangible assets.
As a reminder, beginning this year, we are including GAAP taxes when we report our normalized earnings each quarter, although they are primarily non-cash. For Q2, that tax charge was $21.3 million. The supplemental metric sheet posted in the Investor Relations section of our website provides a historical view of our normalized EPS on a fully tax basis for comparison purposes.
Based on this methodology our fully taxed, normalized net income for the second quarter was $65 million, up 18% from Q2 of last year and down 1% from Q1. In the second quarter, we earned $0.34 per diluted share on a fully taxed normalized basis, coming in at the top-end of our guidance range, that's up $0.05 from Q2 of 2009 and down $0.01 from Q1 of last year – of this year.
Our weighted average diluted share count for the second quarter was 190.5 million shares. Cash generation continue to be very strong. Cash from operations for the second quarter was $86.4 million and year-to-date we have generated $174.1 million of cash from operations or 36% of revenue.
At the end of Q2, we had $1.1 billion in cash, cash equivalents and marketable securities on the balance sheet. This balance included $178 million of highly rated, federally insured student loan auction rate securities. This amount was down from the prior quarter as we had about $68 million of these bonds redeemed at par during Q2.
In addition, we exercised our right to sell back an additional $30 million of our portfolio at par to one of our money managers on July 1, a change that will be reflected in our balance sheet in Q3 and after that transaction we’ll be left with $151 million in Federal insured student loan auction rate security.
Also, during the quarter, $136 million of our convertible bonds were converted into 8.8 million shares of stock leaving the convertible bond balance at $64 million as of the end of Q2. These shares were, of course, already included in our diluted share calculation, so there is no impact to our fully diluted earnings per share numbers and the results.
Capital expenditures excluding equity compensation were $66.1 million as we continue to build out our network to capture the accelerating volume growth we expect to see as well as increase our investments and capitalize software development.
During the quarter, we spent $20.4 million in share repurchases, buying back about 537,000 shares at an average price of just over $38. Since the beginning of our share repurchase program last year, we had spent $108.6 million buying back a total of 4.7 million shares at an average price of $23. Finally, our day sales outstanding for the quarter was 58 days, consistent with Q1.
I'm very pleased with how our business has performed through the first half of the year and with 20% top line growth in Q2, we're confident that we will achieve our goal of $1 billion in revenue for the year.
While there is still some caution about the macroeconomic environment, we've seen some very positive trends that we think bode well for our near-term and long-term prospects. We see significant opportunity across all of our verticals and we're making substantial investments both internally and externally to capture this opportunity.
Our recent $15 million cash acquisition of Velocitude is a great example of our investment for the future, with this investment focused on the mobile opportunity, we expect that the acquisition will be roughly neutral to our earnings over the next 12 to 18 months. Over the near term, our expenses will exceed revenues from the acquisition as we expect to be less than $1 million for the year.
For the near term, we are expecting Q3 revenue of $242 million to $252 million. At the midpoint of this range, that translates to 20% year-over-year growth. Remember that we have traditionally seen slower traffic growth in the mid-summer months as people head outdoors. Assuming current spot rates, foreign exchange will have a negative impact of approximately $2 million on a year-over-year basis in Q3, so excluding the impact of currency the midpoint of our revenue guidance implies revenue growth of about 21%.
We expect the cash growth margin will continue to be in the range of 81% to 82% in Q3, down slightly from Q2 driven by media growth, but still within the range over the last two to three years. We believe GAAP gross margins including equity compensation to be approximately 69% in Q3 due to investment in the network.
We expect operating expenses in Q3 to grow modestly from Q2 levels and we expect adjusted EBITDA margins to be in the range of 44% to 45% for the quarter, slightly below our long-term model, driven by the investments we are making which we think can drive significant growth for the future. After a large investment in Q2, we expect capital expenditures excluding equity compensation to decline to about $40 million in Q3.
For the full year, on CapEx, we are tracking to about 17% of revenue for CapEx. This is slightly higher than our long-term model driven by the strength we've seen in terms of volumes growth as well as the increased investments in capitalized software development and we plan to continue to add engineers focused on our value-added solutions.
Given our revenue guidance of $242 million to $252 million in Q3, we expect fully taxed, normalized earnings per share for the third quarter to be in the range of $0.32 to $0.34, including the impact of Velocitude. At the midpoint that's up 18% year-over-year. This assumes a full year GAAP tax rate of roughly 35% to 36% or GAAP taxes of approximately $18 million to $22 million for Q3.
Overall, we've had a very solid first half, and we expect strong performance through the second half of the year as well. We see promising momentum across the business, and we're making investments that we believe can drive meaningful growth for Akamai beyond 2010.
Now, I'm going to turn the call back over to Paul.
Paul Sagan - President and CEO: Thanks, J.D. As J.D. just detailed, we had a very strong first half. Looking ahead, we continue to see (proof) points for the three major trends that support our growth strategy, and we're aggressively positioning the Company to benefit from these trends.
Cloud computing, as more and more companies move to the cloud, they experience new performance and reliability challenges that are inherent in using the Internet. To address these challenges, we're partnering with companies big and small to make the cloud work better. One such partnership, for example, is the Akamai Ready initiative that IBM announced at the IMPACT Conference in May. By pre-tuning IBM WebSphere products to leverage Akamai technology, customers can see significant benefits for their enterprise applications delivered over the Internet. These benefits include not only improved performance, but also reduced capital expenditures and faster time to integration.
In media, online video is creating real business opportunities for our customers. We have continued to serve increasingly large online audiences. We have set records for peak traffic every quarter, there is little doubt that the migration online is happening at an accelerated pace. A highly publicized World Cup was just one example. BBC estimated that 5% of its World Cup audience watched online. It's an incredible statistic. We've talked about being at the 1% line for online video for a while, and now we're seeing events like the World Cup surpass that mark by a wide margin to reach ever larger Internet audience. During the World Cup, we successfully delivered live and online demand content for 24 different global broadcasters into 65 countries, and in most cases, these clients were leveraging the Akamai HD Network, less than a year after we introduced it.
For online advertising, we continue to see encouraging signs of traction. A key differentiator for our Advertising Decision Solutions is the ability to launch targeted ad campaigns for clients without using pixels. This unique Akamai capability enables our clients’ larger campaigns to come to market faster and without draining their IT resources. Already in Q2 20% of the revenue for our Advertising Decision Solutions was on our pixel-free platform introduced just last year.
In addition to these three trends that we've talked about for a while, cloud computing, HD video online and better targeted online advertising, we believe that one of the most exciting future opportunities for Akamai is delivering content and applications to Internet-enabled mobile devices. These devices are expected to outnumber traditional PCs in just three years.
This trend is part of the reason behind our recent acquisition of Velocitude, whose technology helps businesses adapt and optimize their web content for delivery to mobile devices. Many online businesses are embracing the mobile channel to reach customers, prospects, partners and employees, creating a need for easy to navigate mobile websites.
We built a great business optimizing Internet content and applications access over personal computers. We believe that mobile will be an important part of the Internet's growth and is a natural extension of our product portfolio. Now, with solid performance from our entire team, we've got the $1 billion revenue objective firmly in our sight and I expect to get there this year.
We're even more excited about the future opportunities for Akamai beyond 2010, and we're very pleased to be announcing today that we're adding David Kenney to our experienced and successful management team as President to help us drive the next wave of growth here. As many of you know, David is not new to Akamai. He has been a member of our Board since 2007. He knows our industry, our business, our technology, our people and most importantly, our customers. He's one of the most respected and able executives in the online world. David is a great fit for Akamai and I look forward to partnering with him for years to come.
Now, J.D. and I would like to take your questions.
Operator: Michael Turtis, Raymond James.
Michael Turtis - Raymond James: Two sets questions, first you talked about investments that you're making that will impact both the GAAP gross margin, which I assume that flows through on the basis of depreciation, but maybe you can be more specific about that. We will also have an impact on EBITDA, so maybe you can be more specific about those investments, what they are and how they impact OpEx, and then I have a follow up.
Paul Sagan - President and CEO: Why don't you give us both Michael just so we can have in case we lose you?
Michael Turtis - Raymond James: Sure. The other question is just the thing I am always most curious about, which is, that the rate of growth and customers’ consumption of bandwidth, whether that seems to be – where that is relative to, say, a trough we might have had a year or two ago, and peaks we might have hit several years ago, if we're trying to re-accelerate or not?
Paul Sagan - President and CEO: So, let me talk about the kind products that we're working on and investing in across the business and then I'll let J.D. take the impact on the performance and rate of consumption on the network. So, I think if we focus on or you focus on the areas that we believe are the key trends, the investments and the build out aside from the pure network build out for capacity and performance in increasing parts of the world is around each of the functionality that make our services more valuable to our customer. So, if you look at media online, if you look at HD, it's all about paying to customer, this is a very complex world, you have users everywhere across the rescreen sizes there are many, many kinds of devices and you're trying to deliver them in optimal and economic experience. So, the idea with the evolution of the Akamai HD Network is to deliver a high-quality HD picture to any devices with the simplest input. So, today customers have lots of format, lots of bit rates, and lots of effectively a spaghetti mess and we're trying to move them to role that say you can deliver us a file in any format and then we will figure out where the user is, what kind of device, what access capability and deliver them that experience and then give you full data back on what happened. So the investment there is around, easy to use for our customers and managing the complexity for that inside the Akamai HD Network with the TV quality picture with whatever level of interactivity they want to build into the player, whether that player is on a mobile device on a PC or on a big screen. Across the value added services, you really have to look at the industry, in commerce it's around increasing the value to commerce. So, for example, around security like the Web App firewall functionality that we rolled out or the new service around tokenization to help shield and protect credit card numbers, all areas of engineering investments. This is effectively software we deploy and then make available to our customers. Mobile is another where we made the acquisition in Velocitude and we'll work to build out and enhance their technology for transforming standard websites across mobile devices. So, those are the kinds of investment that we're making. Let me turn to J. D. to pick up the impact in the shorter and the long term and the question of usage of network.
J.D. Sherman - CFO: Right. And I would also add on the investment side, that you'll see is making a lot of investments in our go-to-market, that's where most of the new headcount is going in our sales and services and support organizations, particularly as we go into new verticals, that's going to be an important investment, and I think it's one that we're already starting to see pay-off for the traction in places like financial services and healthcare. And then, of course, Michael, on the GAAP gross profit question, that's obviously the timing of when we put servers on and then the traffic grows over time. So, little bit of that as we had a very big CapEx quarter in Q2. Then to your question on the traffic, we've seen the media and entertainment vertical go from this time last year shrinking almost 10% to now growing over 20%. Over that period of time, pricing has been relatively constant. I mean, we actually have seen for a period of time, a little bit more aggressive pricing, I think we've seen that sort of stabilize a little bit. The key thing is the rate of volume growth has continued to accelerate and our bet is that continues with HD over a long period of time, and that's what we're trying to make sure we stay in front of.
Operator: Mark Kelleher, Brigantine Advisors.
Mark Kelleher - Brigantine Advisors: Wanted to talk about some of your international investments. Can you maybe break out what you see as an opportunity in EMEA versus Asia, and do you expect that the international might grow faster than the domestic, this quarter it seemed to be at the same rate, and are there any differences in the vertical market concentration in those foreign markets?
Paul Sagan - President and CEO: Sure. Well, I always been cautious to generalize, people starting to talk about Europe like its one country, it's many countries, it's not a bunch of states as we tend to obviously think about the U.S. So, we need to be very careful there the markets have their own dynamic. And I think if you look at the growth you have to also remember the currency headwind was even more severe. So, the growth there if you normalize there it was on par with the rest of the business, and we continue to believe that there is more opportunity, there are just more people on the Internet and in many places, with better broadband. I would recommend you to look at our State of the Internet report offline that came out earlier in the week and you'll see that broadband access and growth fastest cities in the world, most of them are not in North America, as it turns out. So, we see opportunity there and uptake across the board, strong uptake for our application acceleration services, particularly as there are global companies all around the world and they are trying to reach their partners prospects, customers, suppliers around the world, they use our application acceleration services to improve a business process and raise satisfaction with their customers for what they do. At the same time there is our traditional media and video delivery and we were doing HD of the World Cup for, as I said, several dozen broadcasters, there were only I think two with the rights in the U.S. the rest were all elsewhere. So, they were in-country broadcasters with those local rights, or rights in a couple of geographies, and they were using the HD network like never before. So, I wouldn't say it's all on the volume side or the value-added side, it's both. We are doing very well in Asia and in many places in Europe. I think in a macro sense, we're probably a little more concerned with the economies in Europe for all the widely known reasons, and I think that's slowed things down, but not dramatically, but it gives us certainly some pause and some worry. We will continue to invest most of that investment internationally in opening or expanding regions, and then localizing products often that's really a language question. Sometimes it’s a customization of the product a little bit as well to sell it.
Operator: Mark Mahaney, Citigroup.
Mark Mahaney - Citigroup: Just one question please, J.D. you mentioned a little data point there about the dollars of new customer signing for VAS or something like up 36% quarter-to-quarter. Let me make sure I heard that right. Could you put some context around that, what that was like in previous quarters that obviously shows very dramatic growth, but was that over a lengthy period of time, is there a particular reason why that isn't as dramatic as it sounds?
J.D. Sherman - CFO: No, I think we've seen pretty steady growth there. I think, we had a very solid signings quarter with new customers and particularly with the value-added solutions there, that drives revenue out in the future. I don't expect that every quarter, we'll grow that 36%, that will be nice, but I think that was a real strong data point this quarter which is why I shared it.
Operator: Edward Cochran, Jefferies.
Katherine Egbert - Jefferies: Hi, this is Katherine Egbert. You did call out the World Cup, J.D. and you said it was material, but since you called it out, can you just tell us, I know it's not material, but what effect do these one-time events have for you and what do they actually mean in terms of traffic or revenue or any color you can give us?
J.D. Sherman - CFO: I think what they mean is we've seen this over and over with the large event which is, we hit new traffic peaks and then within three to six months, those peaks are normal peaks. So, I think there is sort of a chance for a consumer to have a new and different experience on Internet and then start to demand more of that kind of experience. So, we love those events in terms of what they mean for the future traffic. So, when we thought about building out our capacity for this quarter. We knew that we would want to make sure we have plenty of capacity for the world cup and we knew that very rapidly we would grow into that capacity. So, again, events are very interesting and I think helpful for driving traffic, but their short-term what matters for overall growth of our business and growth of usage on the Internet is sustained usage over a long period of time and that’s what drives revenue, not necessarily these individual events.
Katherine Egbert - Jefferies: Is the reason that they don’t contribute is because they are kind of flat fee or there is no possible overuse or they're part of the broader contracting, why don’t we see a little bit of revenue?
Paul Sagan - President and CEO: Katherine, this is Paul. You do which is that, we seem to have one every quarter, so it's just a normal part of business and no one is just so much bigger than any other, we go from Super Bowl, to March Madness, to World Cup to the Olympics to elections and there are just, sort of, few in every quarter. So they're just kind of our regular part of what we do. Certainly, there is some overage, but they sort of roughly balance out.
J.D. Sherman - CFO: And another comment on that, the World Cup as you know was a June and July event. So, some of it's in our June quarter and some of it is in our July. So it even spreads it out more.
Katherine Egbert - Jefferies: And then one quick one, what assumptions are you using for the euro on exchange for September?
Paul Sagan - President and CEO: The stats that I gave where we think the euro will be or the current foreign exchange will be about $2 million to $2.5 million year-over-year headwind that assumes a spot that is of yesterday.
Operator: David Hilal, FBR.
David Hilal - Friedman, Billings, Ramsey: Want to dig a little bit deeper on gross margin, up year-over-year which was good, sequentially down I think as expected. But because value-added services were so strong in the quarter, I would have thought that maybe that would have offset some of the gross margin decline. Am I thinking about that right? Maybe you can just share why that wasn't the case this quarter.
J.D. Sherman - CFO: Yeah. Well, I think last quarter was sort of an exceptional quarter in terms of gross margins. The percentage of our business that is value-added solutions, actually it was about flat quarter-over-quarter. We had such a strong growth in our media business. So, in fact, the mix change there was pretty – there wasn't much of a mix change from Q1 to Q2.
David Hilal - Friedman, Billings, Ramsey: Let me ask you about new customers. Obviously a big number, the biggest in quite a while as I look back, but maybe you can share a little bit the composition of those customers. Obviously ARPU was down because of that, but maybe you can just share, maybe where there was particular strength, either product wise or vertical, but what contributed to the large (count ARPU)?
J.D. Sherman - CFO: Yeah, definitely. I mean, it's ironic that at the end of last year we said we're not really going to talk about new customers and emphasize it on the call because it has less meaning as we really diversify and then, of course, we have two unbelievable quarters in terms of new customer adds. But I think the important thing when we think about new customers is how many new customers are we signing in new industries where we're selling our value-added solutions, really driving into new revenue opportunities, and now it's a very strong quarter in terms of the focus on the value-added solutions. Of course, that's going to bring down the ARPU for the business, and so there is always a – when you're talking about this double-edged sword, but we felt very positive about the traction we saw in the field.
David Hilal - Friedman, Billings, Ramsey: Now, let me ask one final question on the commerce business. This has been able to grow at a faster clip than general online commerce transactions, I think, as people have been refreshing their stores and putting more multimedia out there, et cetera. But when does it get to the point where maybe that refresh has caught up and then you would expect your commerce business to track with a higher correlation to just general online commerce business?
Paul Sagan - President and CEO: I think, one, the commerce market just keeps expanding. So if some number of years ago we could target the top 50, then on the top 100 now we can target the IR top 300. We can now go to the other parts of the world. That's one thing the market, I think the addressable market for us is expanding rapidly. The other is we keep adding services. You talked about some of them, but you think about service mitigation, you think about web app firewall, now you think about the tokenization opportunity, bringing the mobile to them, going to those customers with our ADS solutions, saying, how about if we also target and find in-market shoppers for your product that you're not selling. So, we have an expanding portfolio and the ability to go back to them, existing ones and try to get more wallet share and expand as they grow online, whether they are pure online retailers or commerce sites or people who are bricks and clicks and trying to shift more of their business online from the physical world. So, I don't know that that actually have to slow kind of a commonality with the rest of the business.
Operator: Rob Sanderson, ABR Investment Strategy.
Rob Sanderson - ABR Investment Strategy: A question on the high tech vertical, just the deceleration you saw there sequential, that's been driven by cloud computing, I think J.D. mentioned APS for SaaS, but is the volumes part of that business really falling off quite a bit? Or what's going on there? You also mentioned some timing of software releases, how might that trend in Q3 and Q4?
J.D. Sherman - CFO: Basically, there are two moving parts in there. One is very large, software delivery business, which we have a great market position in and therefore the timing of rollouts of new software from our customers are going to move that around on a quarterly basis. Underneath that, we are also tracking how we are doing with APS in that vertical, particularly with the software-as-a-services guidance. I mentioned last quarter we now have a base of over a hundred software-as-a-services companies using our Application Performance Solutions and we continued to have good traction there. But, yeah, you're going to have those two parts, two moving parts. As far as going forward, those will be the dynamics. We'll continue to see good growth with software-as-a-service and you'll have a little bit more ups and downs in the software delivery space but we don't give specific guidance by our verticals.
Operator: Scott Kessler, Standard & Poor’s Equity.
Scott Kessler - Standard & Poor's Equity: I wanted to know a little bit about when we should expect – it was highlighted, for example, I think J.D. you referenced financial services and healthcare being two verticals that you guys are targeting. When do you think those areas or other verticals might join the spreadsheet in terms of revenue by vertical breakout? Is it next year? Is it a couple of years out? In addition to that, obviously, you guys are in investment mode, you made, from what I can count, at least three pretty high profile, executive hires over the last, say, month and a half or so and I am wondering, how long you expect this kind of aggressive investment mode to continue. So, I guess two timing related questions, but you get the gist of what I am trying to get at.
Paul Sagan - President and CEO: Sure. Well, we did see opportunity and the need to speak more and more to the customers at scale in their language. So, today we already have more than half the top global banks on our platform at one level or another with I think much more opportunity to go in and offer much greater benefit to them for, obviously, more revenues to us and I think half of the online – the top 10 online brokerages in a similar fashion. So, I think we are really penetrating there extremely effectively and most of that is within the last year and a half or two years, which frankly was a devastating time in their business overall and what they did was make an investment in online. So I am very pleased with that. You are right to note that we've made a number of great hires. I think it says a few things; one, we are building for scale. We are approaching the goal of being $1 billion business. We’ll be one of five companies in technology that’s tripled their revenue over the – five public companies that’s tripled their revenue in the last five years and that puts us in some pretty rare company among global technology companies. We are preparing to scale beyond that, and I think it’s a great testament to the opportunity, the level of people that we've brought back into the Company, whether it’s bringing in somebody of David Kenny's experience as President or Chuck Neerdaels as VP Cloud Engineering, these are really, really top notch executives who could really have their pick of anywhere they want to work and they are picking Akamai, and I think it’s a great statement about the confidence the outside world has about our potential.
J.D. Sherman - CFO: Just to answer your question specifically, Scott, on the breakout. You remember, we broke that out at our last Investor Day. We split the commerce vertical into sort of B2C online commerce and B2B, which would be the (catch out) for all the other enterprises. We'll do that again this year, and then we'll look going forward, when it makes sense in the sizes. They got to be meaningfully enough sizes in and of themselves of breaking it out further.
Operator: Kerry Rice, Wedbush Securities.
Kerry Rice - Wedbush Securities: Just most of my questions have been answered, so I'm digging a little deep here, but related back to the application performance services, as you J.D. mentioned that you broke it out between B2C, B2B at the Analyst Day, did you also – I don't remember you're doing this, but any kinds of margin profile for that business? Is it the same? So I think, should we think of it as the same, as kind of the corporate overall is a little bit higher, little bit lower? I would just say my other two questions are how the Advertising Decision Solutions are tracking? Then, finally, the growth that we saw in the media and entertainment, how much of that traffic – and I think you did at least mention this somewhat, how much of that traffic growth was on the HD Network versus kind of the, I don't know if you call, older network, but the other network maybe?
Paul Sagan - President and CEO: Let me take the last two, and I'll let J.D. take the APS question. So, we had growth in video across the board, including if you will, traditional formats and the HD Network. Probably the bigger piece was on the HD Network, I don't have an exact stat, but I am just guessing based on the adoption for World Cup, for example …
Kerry Rice - Wedbush Securities: So there was Infinity year-over-year…
Paul Sagan - President and CEO: On the HD Network there was Infinity, exactly. On ADS, good growth there, but that's an end of your seasonal business, so that's a Q3, Q4 question when we really see how that's done. But the uptake on the pixel-free which is a unique platform has been great and we think that that's a tremendous benefit because if customers like that, they can't buy it anywhere else and that gives us a great advantage, and we're saving them money when they use it. I'll let J.D. talk to the APS.
J.D. Sherman - CFO: Right. Yes, we did break that out and the point we made was if you look at the commerce and the enterprise verticals which are 70%, 80% of the revenue from those verticals comes from our value-added solutions. Those solutions basically leverage the massive scale platform we've built on the media side and have software like gross margins, high 80s, even low 90s and that's, drop to the bottom line, so you end up having higher overall operating margins. Our media business is still very profitable business, because although it has lower margins – gross margins it scales very well. It scales like it has a network affect to it, but you really have two almost separate side of coin there.
Operator: Tim Klasell, Stifel, Nicolaus.
Tim Klasell - Stifel, Nicolaus: A quick question and congratulations on the quarter. The advertising solutions and decision support stuff do relative to the other value-added services?
Paul Sagan - President and CEO: It did fine, again as I said that that's really a Q3, Q4 business. It's a back-to-school and then shopping business, primarily because it's about finding in market shoppers and that's when most of those budgets get spent disproportionately, but it performed as we expected, and we saw as I said, strong traction in the new technology we offered, which we think is really a benefit to customers as they begin to see how much faster they can bring campaigns online and do it with fewer resources.
Operator: Sri Anantha, Oppenheimer.
Srinivas Anantha - Oppenheimer: J.D. or Paul, we saw a big uptick in the number of new servers added. Are you guys potentially ramping here for some demand that you're expecting in the second half and later part of 2011? And Paul you also talked about strong demand from the enterprise vertical. If you were to look out over the next three to five years, what do you think is the biggest opportunity here for Akamai? Is it more on the media entertainment front or more on the enterprise front as we begin to see cloud computing begins to gain traction?
Paul Sagan - President and CEO: Yes, so on the server side it's just the continual build-out as we see demand and opportunity some of it, to make sure that we are ready for the World Cup, and some of it, as J.D. said, whatever our peak is, certainly is the new average not that far down the road and we just expect increasing delivery of rich media long form like movies online, television shows online, special events and increasingly using the Akamai HD Network. In terms of best opportunities over the next three years, I think that they're going to equally balanced between the media opportunity with the explosion of video that could come. We talk about the 1% opportunity over and over again, 1% of video in the home being over IP to 15 years to get to that point. I know it will double much more rapidly and double again even more rapidly. I'm just very confident of that. We're positioned to capture value from that. And on the cloud optimization side, we continue to see expansion of people using infrastructures as a service, platform as a service, and software as a service. And effectively we're then providing network optimization to the service in all three of those layers and we continue to see increasing in inquiry demand from individual SaaS players to giant infrastructure players trying to make that infrastructure as the service actually work for their end-users. I think that that's just a tremendous opportunity going forward because we have this unique footprint of service around the world, the ability to route between any two endpoints in real time to pick the best route, route around congestion, and do it much, much more efficiently than any dedicated network infrastructure you'd ever put in. Frankly, for infrastructure or SaaS, software to service, dedicating infrastructure makes no sense, because it's about saying to any user you can come here without telling me where you are in advance across any device. So, I think our opportunity to optimize and build the business there is fantastic. So, I wouldn’t pick either. I think they are both very, very strong legs to support our growth long-term.
Operator: Sameet Sinha, JMP Securities.
Randy Kaps - JMP Securities: This is (Randy Kaps) calling in Sameet. Just another question on the Advertising Decision solutions. Can you talk about, give us an update on what the uptick was like within the media and entertainment segment versus commerce, and perhaps speak to what growth perhaps you are seeing between those two segments? Second question would be as it related to the media and entertainment segment, obviously price compression was a norm in that industry and ultimately to really see the next leg of growth, we had a seasoned discount given just the dramatic increase in traffic to make economics work for some of your content partners. So, as we look at some of your value added solutions, do you see any road blocks down the line that perhaps you would need to move out of the way, whether it'd be pricing regulation size of customers to help continue the same rate of growth you are seeing there as well?
Paul Sagan - President and CEO: I'll let J.D. do the M&E pricing and the value-add. On the ADS, just to be clear, the service we're offering today is a data called for online shopping, so it works to target in-market shoppers for commerce site. So, today it's an offer to the buy side, to go find customers online. So, it's not directed to media and entertainment sites, we're certainly interested in expanding the portfolio of products and expect to over the coming years, but today it's an offer to commerce sites, and so that’s the place it gets applied and I'll J.D. respond to the M&E pricing question and we'll try to move quickly to the last few questions to make sure we get everyone in before the hour is over.
J.D. Sherman - CFO: Yeah, I think the one thing you hit on Randy, which is important I think we're starting to see in the marketplaces, you asked the question, customers have to be able to make money on this. And we're starting to see that rollover if you will, and start to see some profitable models and customers starting to – really this is becoming an integral part of their business, and I think that's been really important in the evolution of our media and entertainment growth. You obviously had the demand from end consumers, but now we say our customers are pushing aggressively to meet that demand. I think that's really important. And then, I think the second part of your question was some about if there are any regulatory hurdles or anything like that. I'm not aware of any.
Operator: Jeff Van Rhee, Craig-Hallum.
Jeff Van Rhee - Craig-Hallum: Two brief questions, and J.D. can you just give us more color, the expense line specifically the S&M line, revs are up, $5 million – expenses are up $5.4 million, sequentially. Can you quantify what you did there, who you hired, how many heads where?
J.D. Sherman - CFO: Yeah, we are hiring rapidly there and really it's across the board, because what we're trying to do is build out the capability to address a lot of new enterprise verticals. We have an enterprise class-focused sales force. And when you're doing that you have build out services, support and the capabilities that these customers need to be comfortable with their – because what we're starting to do here is bring on customers at their mission critical businesses online. In addition to that, we're building that out particularly internationally, where internationally in the past we've been largely geographically focused, because we haven't gotten the scale there. We're quickly getting to scale because we think the opportunity to go to the banks in Europe, the banks in Asia for example is enormous and so we'll continue to build out that capability.
Jeff Van Rhee - Craig-Hallum: Then just one last question on the CapEx, although a minor tweak I believe in last quarterly call the range was 14% to 16% and you're now talking 17%, at the margin what gave you the increased confidence to invest incremental dollars?
J.D. Sherman - CFO: Well, I just think we continue to see traction on the volumes, there is no sign that, that's going to slow down. In fact even when we started to talk about this in Q4 we said that, we don't want to let one point make a trend, and then in Q1 we said, we don't want two points to make a trend. Well, we're starting to see a trend here on that. The other aspect that I emphasized in my opening remarks, which I want to reemphasize here is we're also investing in R&D, and as we roll out new services, we capitalized the software development for that, and that's adding to our capital expenditures as well.
Paul Sagan - President and CEO: I do think that – we're hearing from the media customers is that they're going to start making bets on video that we're significantly different than they were talking about a year ago. I was talking to one of the largest (sports) broadcasters in the world and they just said that the experience with the World Cup changed their view of the Internet as part of their business going forward forever, and they not just that number and size of the audience is online, but how people are also using their computers and accessing this broadcaster site, while they were watching TV at the same time, allowed them to create monetization models and usage models that were new. So, I think we're just going to be ready for what we think is going to be new expectations for video and data online in these markets.
Operator: Richard Fetyko, Merriman & Company.
Richard Fetyko - Merriman & Company: With the M&E now up 20% growth in that business accelerated, just curious if you think you're growing in line with the market or taking market share in this segment, and then curious about the impact of smartphones and tablets and other mobile devices as well as other Internet connected devices like Game Boxes. Can you discern what sort of impact those are having on your growth?
Paul Sagan - President and CEO: Sure. I think on share, I don't have an exact number. We leave share to the outsiders to try to estimate, but I think we have done great in our conversation with customers, for example, with the HD Network. It's not a (stream as a stream as a stream). They understand that this is a different offer that they cannot get this quality and this scale anywhere else and that really, really matters and is really important. On the smartphones, there are smart devices. Lots of interest to delivery of video and applications there. We're so excited about it. We made a technology acquisition with Velocitude to help our customers. More and more conversations about the potential and the reality of mobile and we think that that’s a long-term driver. Today, it's not a large driver of bits because, obviously, the bandwidth to that device is smaller and there are more people still accessing on the traditional computer or the big screen to an attached gaming type box, but smartphones are a big driver. You did mention those gaming devices and you may have heard me in the past refer to them as really the Trojan Horse in the home, it connected the TV through the Internet. What we found was because suddenly tens of millions of TVs, big screen TVs were connected to the Internet for reasons of gaming, suddenly the movie business online over the Internet started to take off and we saw big traffic there. So that was the first way people connected to the Internet in a new way on the big screen and the smartphone is now the way they're doing it on the small screen. So this world that we’ve talked about for a long time of the three screen option is really now a reality for many of our customers and they are turning to us for optimized solutions.
Operator: Donna Jaegers, D.A. Davidson.
Donna Jaegers - D.A. Davidson: Just to add on to that, can you talk a little bit more about your mobile capabilities? You already had good capabilities for the iPhone. Now you've added in Velocitude. What else do you need to flesh out your mobile capabilities? Do you want to do mobile ad streaming?
Paul Sagan - President and CEO: Well, we today deliver content including streaming, including ad to devices. What we want to do is offer solutions that our customers find the most useful, whether they are a site trying to deliver entertainment or commerce or frankly, whether it’s an (outdoor) mobile network partners that’s looking for help, scaling their network and dealing with this crush of new data traffic mostly video, that’s clogging their networks. We're trying to work with many of them around the world to effectively optimize the infrastructure that they have, so that their end users have a better experience across these devices. So, we think there are number of opportunities to partner into self services. We will continue to do our own organic engineering on top of what we've had on the video side and now, the transformation side with Velocitude. I think we're building a pretty robust and full set of services, so I don’t envision that we need to do anymore acquisitions there at this point. We will continue to build and work with our customers to see what they need.
Operator: Mike Olson, Piper Jaffray.
Michael Olson - Piper Jaffray: Just two quick numbers questions. The stat that you've shared in the last few calls as a percentage of customers using at least one value-added service, do you have that number for the June quarter? Then also what do you expect will be the normalized tax rate for Q3 and for the year?
J.D. Sherman - CFO: I think we talked about the tax rate, which is our full year projection at this point in the 35% to 36% range. Then on that number, I think it’s right around 77%. More than three quarters of our customers are using at least one value-added solutions.
Operator: Derek Bingham, Goldman Sachs.
Derek Bingham - Goldman Sachs: Just to kind of make sure I was clear on the cash gross margin question. It's been upticking for several quarters in a row, and I think a big driver of that was value-added services mix. The mix was about the same quarter-over-quarter, but it down-ticked. So was there another factor there that I didn't pick up?
J.D. Sherman - CFO: I really think it's just a matter that we had an incredible gross margin quarter in Q1. There's going to be small dynamics in and out in our costs and revenue and customer mix in between quarters. So I think it's more of the fact that 83% was the highest we'd had for probably three years when we hit Q1. So, the fact is that it was up year-over-year and we're pretty pleased with that.
Derek Bingham - Goldman Sachs: Then one quick one just on Velocitude. I mean, any sense for kind of, is there anything significant contribution at the top line near term and any significant dilution as well in terms of your back half expense outlook?
J.D. Sherman - CFO: Yeah. We think over sort of a 12- to 18-month period, it'll be roughly neutral in terms of the bottom line. I think that it's a very early stage Company with a few marquee customers, but not driving a lot of revenue, should be about a little less than $1 million revenue in the back half. At the current run rate we're looking at sort of $3 million of OpEx in the back half of the year. I think that's important investment that we're frankly going to accelerate because we think the opportunity next year to grow the revenue in this phase is pretty awesome.
Operator: Chad Bartley, Pacific Crest.
Chad Bartley - Pacific Crest: Question on the core CDN segments or kind of that non-value-added services piece. We think this is the sixth straight quarter where we saw year-over-year declines. Can you talk about stable pricing pressure, accelerating traffic growth and I assume that the churn continues to ease, so why isn't that business or why isn't that revenue segment growing? What needs to (happen)?
J.D. Sherman - CFO: I think the media part of that segment is growing, but the part that's sort of traditional delivery is not growing, and so as a result the overall business is relatively flat.
Paul Sagan - President and CEO: A bunch of those customers have transitioned to value-added services. So they have gone from static delivery to value-added dynamic sites. So, they didn't go away, they have bought a higher value service and actually are doing more on our platform than they probably were two years ago. So, we've migrated them strategically from something that had closer to it a commodity substitute to something that's much more differentiated in the market in value.
J.D. Sherman - CFO: Right. We are probably still doing their commodity, if you will, put that lower costs…
Paul Sagan - President and CEO: That's lost in the overall deal in the multiple products that they're now buying from us. So, that was a very conscious strategy.
Chad Bartley - Pacific Crest: Should we expect continued declines?
J.D. Sherman - CFO: Well, I think that – it depends on – at some point that business becomes small and the media business starts to grow so rapidly that you could see a turn there. The question I always get is in two or three years what you think that percentage looks like value-added versus volumes. The answer is it really depends on how rapidly we see the growth in the media space takeoff.
Paul Sagan - President and CEO: Thank you all for tuning in. I appreciate it. We will be back in another three months to give you another update. Thank you. Bye.
Operator: Ladies and gentlemen, thank you so much for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.