Akamai Technologies Inc AKAM
Q4 2010 Earnings Call Transcript
Transcript Call Date 02/09/2011

Operator: Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 Akamai Technologies Incorporated Earnings Conference Call. My name is Kathy and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to host for today's call Ms. Natalie Temple, Investor Relations. Please proceed, ma'am.

Natalie Temple - IR: Good afternoon and thank you for joining Akamai's investor conference call to discuss our fourth quarter and full year 2010 financial results. Speaking today will be Paul Sagan, Akamai's Chief Executive Officer; and J.D. Sherman, Akamai's Chief Financial Officer.

Before we get started, please note that today's comments include forward-looking statements, including statements regarding revenue and earnings guidance. These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these factors is contained in Akamai's filings with the SEC, including our Annual Report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking statements included in this call represent the Company's view on February 9, 2011. Akamai disclaims any obligation to update these statements to reflect future events or circumstances.

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

Now, let me turn the call over to Paul.

Paul Sagan - President and CEO: Thanks, Natellie, and thank you all for joining us today. Akamai performed very well in Q4 posting another record quarter. We also achieved our goal, our top line goal of more than $1 billion in annual revenue, major milestone for the Company. Financial highlights for the fourth quarter include revenue of $285 million, 19% year-over-year increase and 12% increase over the third quarter of 2010.

Fully taxed normalized net income was $77 million or $0.40 per diluted share. That's up 22% from Q4 of last year and up 19% sequentially. For the full year, we grew revenue 19% year-over-year to $1.024 billion, generated fully taxed normalized net income of $272 million or $1.43 per diluted share. That's an increase of 19% in 2009.

We continue to have strong cash flow generation. Full year cash from operation is coming in at just over $400 million. I'll be back in a few minutes to talk more about the trends we're seeing in the marketplace, but first, let me turn the call over to JD to review our results in detail. JD?

J.D. Sherman - CFO: As Paul just highlighted, our business performed very well in the fourth quarter. We grew revenue 19% year-over-year and 12% sequentially to $284.7 million. Coming in at the top end of our guidance for the quarter, all of our key verticals saw solid growth. As a reminder, we have begun to breakout our revenue in the five verticals with commerce now split into commerce B2C and enterprise B2B.

We saw a healthy online holiday season in our commerce B2C vertical as revenue grew 28% from Q3 and 21% from Q4 of last year. Contributing to the growth in this vertical was the seasonal strength in our Advertising Decision Solutions business as well as continued traction of our Dynamic Site Solutions.

Revenue from our Enterprise B-to-B vertical grew 13% sequentially and 26% year-over-year as applications continue to shift to the cloud and we saw increased demand for optimization, performance and security solutions.

Media & Entertainment delivered excellent growth driven by continued adoption of online video at higher and higher quality levels. During the quarter Media & Entertainment revenue grew by 25% on a year-over-year basis and 10% sequentially.

Revenue from our High Tech customers grew 4% sequentially and was roughly consistent with Q4 2009 levels. Underneath this we continue to see strong penetration of our application performance solution offsetting lower revenue for our traditional software delivery.

Public Sector revenue grew 30% year-over-year and was down 1 point sequentially in Q4 continuing the solid performance we saw all year from our government business.

We also experienced very strong growth for our value-added solutions, the percentage of our business attributable to these solutions increasing to 55% in Q4 from the prior year. While the percentage of total revenue for our value-added services didn't change as much as we anticipated. The good news is that this was primarily due to our return to solid growth in our media delivery business.

During the fourth quarter sales outside North America represented 27% of total revenue down 1 point from the prior quarter and from Q4 of last year. International revenue grew 17% year-over-year and 11%, sequentially.

Foreign exchange had a negative impact on revenue of about $1 million on a year-over-year basis and a positive sequential impact of about $3 million. Excluding the impact of currency, international revenue grew 18% on a year-over-year basis and 6% sequentially. Revenue from North America grew 20% year-over-year and was up 13% sequentially. Resellers represented 18% of total revenue consistent with the prior quarter.

Our cash gross margins for the quarter were 81%, consistent with last quarter and down one point from the same period last year. GAAP gross margins, which includes both depreciation and stock-based compensation was 70% for the quarter, up one point from the prior quarter and down two points from last year.

GAAP operating expenses were $126 million in the fourth quarter. These GAAP numbers include depreciation, amortization of intangible assets, stock-based compensation, and acquisition-related charges. Excluding these charges, our operating expenses for the quarter were $100.7 million, up about $10 million from Q3. Adjusted EBITDA for the fourth quarter was $129.2 million, that's up 16% from the same period last year and up 13% from Q3 levels. Our adjusted EBITDA margin came in at 45%, consistent with the prior quarter and down two points from the same period last year.

For the fourth quarter total depreciation and amortization was $39.1 million. Charges include $30.8 million of network related depreciation, $4 million of G&A depreciation, and $4.3 million of amortization of intangible assets. Net interest income for the fourth quarter was $2.8 million.

Moving onto earnings, GAAP net income for the fourth quarter was $52.5 million or $0.27 of earnings per diluted share. GAAP net income include several primarily non-cash items, including $20.5 million of stock-based compensation excluding amortization of capitalized equity-based compensation, and $4.3 million from amortization of acquired intangible assets. This year we are including GAAP taxes when we report our normalized earnings each quarter, although they are primarily non-cash. Q4 that tax charge was $21.5 million based on a full year GAAP tax rate of about 35%.

Supplemental metric sheet posted in the Investor Relations section of our website provides a historical view of our normalized EPS on a fully taxed basis for comparison purposes. Based on this methodology, our fully taxed normalized net income for the fourth quarter was $76.5 million, up 22% from Q4 of last year, up 19% from Q3.

In the fourth quarter, we earned $0.40 per diluted share on a fully taxed normalized basis and $0.02 above the high end of our guidance range. About $0.01 of that was due to a more favorable tax rate associated with the reinstatement of the R&D tax credit, $0.01 was due to slightly better margin performance. Our weighted average diluted share count for the fourth quarter was 191.8 million shares.

Now, let me review some balance sheet items. We generated $110.4 million in cash from operations in the fourth quarter. For the full year, we generated $402.5 million of cash from operations or 39% of revenue.

At the end of Q4, we had $1.24 billion in cash, cash equivalents and marketable securities on the balance sheet. This balance included $137 million of student loan-backed auction rate securities. We expected all of our remaining convertible bonds are converted to equity in Q4 leaving us formally debt free at the end of the 2010, another milestone for the Company.

Capital expenditures excluding equity compensation were $49 million in the quarter. Number includes both investment in the network as well as capitalize software development.

During the quarter, we spent $26.9 million on share repurchases, buying back about 560,000 shares at an average price of approximately $48. Beginning our share repurchase program in 2009, we've now spent $158.3 million buying back a total of 5.8 shares at an average price of around $27.50.

Finally, our day sales outstanding for the quarter were 53 days and that's down five days from Q3. Our solid fourth quarter results, we finished our first billion dollar revenue year. We have a finally tally at $1.024 billion in revenue, an increase of 19% over 2009.

Here sales outside North America grew 18% from 2009. Constant currency basis, sales outside North America grew 17% year-over-year, while U.S. revenue grew 19%. Resellers accounted for 18% of our total revenue for the full year.

Looking at our performance by industry vertical for the year, e-Commerce continue to show outstanding growth at 23% from 2009, enterprise continue to see strong value-added traction growing 20% year-over-year, media and entertainment revenue rebounded dramatically growing 21% compared to the prior year, high tech revenue grew 8%, while the public sector grew 34% from 2009.

Full year GAAP gross margin came in at 70%, down 1 point from 2009 and cash gross margin was 81%, also down 1 point from the prior year. Full year GAAP operating expenses were $465.9 million including $16.1 million for depreciation and $0.7 million for amortization of intangible assets and $73.7 million for equity-related compensation charges.

Including the non-cash charges, operating expenses for the full year were $359.9 million. Full year adjusted EBITDA was $473.6 million, up 17% in 2009. Full year adjusted EBITDA margin was 46%, down 1 point from the prior year.

GAAP net income for the year was $171.2 million or $0.90 of earnings per diluted share for 2010. GAAP net income included $84 million of stock-based compensation expense, including amortization of capitalized equity-based compensation and $16.7 million of amortization of intangible assets.

Excluding these items, our fully taxed, normalized net income for the year was $271.7 million or $1.43 of earnings per diluted share, up 19% from 2009. That will include the full year GAAP tax charge of $91.2 million based on a full year GAAP tax rate of 35%.

Overall, we were very pleased with how our business performed in 2010. We've got strong traction for our value-added solutions across the board. We also saw sustaining growth throughout the year in our volume business particularly from our large media customers, and while delivering accelerating growth, we made key investments in our network and across our business. We believe these investments will enable us to stay ahead of the demand received from our enterprise class customer base as their online businesses evolve.

With solid Q4 and a strong 2010, we're optimistic about our long-term growth. In Q1, we do expect to return to more normal seasonality for the business, different from what we saw last year when we were just beginning to see a recovery from the recession in our customer base, especially in media and entertainment.

Last quarter we had a strong holiday season in commerce and advertising solutions. As a result, we expect to see a sequential decline in revenue in Q1. In addition, we've closed some significant long-term renewals with top customers, particularly in media and entertainment. Over the past three to four months, we've renewed long-term deals with eight of our top 10 media customers including Netflix.

We expect these contracts to drive significant growth later in the year, but they will represent a step down in revenue for Q1 due to normal renewal price adjustments. Regarding Netflix, we recently signed a multi-year agreement to continue to support their streaming needs in North America and international markets. As part of our new multi-year agreement, we expect to work closely with them to leverage our globally distributed network for their market expansion.

Considering all these factors, we are expecting Q1 revenue of $265 million to $275 million, up 10% to 15% from Q1 of last year. At current spot rates, foreign exchange should be roughly neutral on a sequential basis, about a $2 million benefit on a year-to-year basis.

We expect margins to remain relatively stable with cash gross margins in the range of 80% to 81%. GAAP gross margins will be in the range of 68% to 69%, declining mostly due to increased depreciation from our 2010 investments. We expect operating expenses to decline sequentially and adjusted EBITDA margins of 45% to 46%, roughly consistent with the prior quarter.

At this level of revenue, we expect to see fully taxed, normalized EPS of $0.35 to $0.37 for the quarter or flat to $0.02 above Q1 last year. This assumes a full year GAAP tax rate in the range of 31% to 33% or taxes of $19 million to $23 million in Q1.

On CapEx, we expect to spend around $50 million in the quarter excluding equity compensation. For the full year, we expect CapEx to be at the upper end or slightly above our long-term model of 13% to 16% of revenues.

As for our longer term outlook, we plan to continue our practice of not giving specific guidance beyond the current quarter. We are maintaining our objective of 15% plus growth for the year. The seasonal step down of revenue in Q1 combined with the timing of a large number of renewals, achievement of that objective is dependent on an expected business growth in the back half of the year.

Longer term, we think the traction we demonstrated in 2010, up over the investments we've made, positions us very well for growth in the second half of the year and beyond.

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

Paul Sagan - President and CEO: Thanks, J.D. Our Q4 results were strong finish to 2010. $1 billion in annual revenue with Akamai lead Company with only about a dozen public software companies in the U.S. of this size. I want to take a moment to thank all of our employees worldwide for their efforts to get us to this milestone.

Our 2010 performance was bolstered as the continuing shift of IT investments moving to the cloud. Our portfolio of value-added services that leverage Akamai's unique ability to offer enterprise of scale, security and performance from our globally distributed cloud infrastructure grew at about 30%. At the same time, we benefited from a significant recovery in online media which returned to double digit growth last year.

As Media & Entertainment companies start recovering their business as the recession began to fade, they poured more resources into their online efforts often relying on the Akamai network for scale and quality delivery of their digital assets.

Over the long term, we believe media traffic on the Internet can grow 100 volt acquiring the massive scale that Akamai can provide. This growth will play out over several years. After a bounce back here for media in 2010, we expect traffic growth to return to more moderate level this year. We remain very positive about Akamai's prospect as we head into 2011 and we are setting our sights on the next goal $5 billion in annual revenue.

We outlined this objective at our Investor Day in December. Those of you who weren't able to join us, I encourage you to watch the replay of our webcast. You will find it on the investor page of our website. We saw last year enterprises are working to shift more and more of their computing needs on to the Internet and into the cloud, often in hybrid and public cloud environment. They do Akamai's ability to improve the performance and security of their business applications is clear and demonstrable across many different industries.

In addition to selling our dynamic site and application acceleration services directly to leading enterprises, we're partnering with some of the leading technology firms to create joint offers.

Latest example is our new relationship with Rackspace. We were pleased to announce last quarter. Rackspace is embedding Akamai's technology into their cloud infrastructure services, provide improved application performance and availability, lower support cost and enhanced security.

Another example is our longstanding relationship with IBM. Last year, we jointly announced that our web application acceleration solution was WebSphere Ready, supporting IBM's growing WebSphere customer base. We continue to work very closely with IBM and other major players around their cloud strategy.

Another great example of the shift to the cloud is our work with the U.S. treasury department which is now utilizing a public cloud infrastructure for its site. That's a first for cabinet level agency in Washington. Akamai's dynamic site acceleration solutions is providing the performance reliability and security they require.

Security is a top concern of every CIO looking to leverage the cloud. It simply cannot sacrifice contents that their application data are safe, as they transition to the Internet. Because of that worry, we've seen more and more customers deploying Akamai's Site Shield solution provide an enhanced layer of protection from within our cloud near where tax may originate rather than trying to rely on traditional security measures at a customer's data center.

Akamai's site shield capability helps us to protect site from a tax that have unfortunately become all too common on the Internet and are growing by the day. At the same time, if the threats are increasing the stakes are growing larger.

Over the holiday season, we saw elevated levels of attack on many e-commerce customers. Five sites in particular experience attack traffic that was up to 10,000 times normal – above normal because they were using Akamai's cloud security services, these retailers were able to keep their websites up and functioning saving an estimated $15 million or more in possible loss revenue.

Another trend we have been seeing is a fundamental shift in consumer behavior to embrace mobile computing with the smartphones and tablets. Our most recent state-of-the-Internet report show that the average monthly volume of content downloaded from the Akamai network to mobile devices doubled in a year. We believe this trend will likely accelerate.

Customers are looking for way to provide an optimize experience for the content and applications on a variety of mobile devices. One example from the recent shopping season is (Aldo Shoes) which began using our mobile site transformation service to meet customer demand for mobile shoppers.

In addition to online retailers, we expect to see customers in other verticals focus on mobile computing and the cloud in coming years as well and we are investing to meet their needs.

Finally, in digital media, we have continued to see strong growth in traffic volumes as more and more high quality and long form entertainment keeps moving online. Increasingly it's getting easier and easier for consumers to access digital video over the Internet and watch it right on their large screen TVs at home as well as their PCs and mobile devices.

The recent Consumer Electronics Show major content producers were talking about their plans to make more content accessible whenever, wherever and on whatever screens the consumer wants. Same time, the device manufacturers and service providers are building in more ease-of-use capabilities to link the Internet over the top devices and ultimately on to everyone's big screen TVs.

We believe our unique and globally distributed network architecture is optimally suited to provide the quality, security and scale necessary to reach ever larger online audiences. One example that we look forward to every year is March Madness on Demand, which this year will be delivered online for the first time using Akamai HD Network.

So with all these opportunities in front of us, we feel very positive about the progress and investments we made last year and about Akamai's prospects for 2011 in the years to come.

Now JD and I will be happy to take your questions. Operator, the first question please.

Transcript Call Date 02/09/2011

Operator: Mark Kelleher, Dougherty & Company.

Mark Kelleher - Dougherty & Company: I had one quick number question, JD. I think I might have missed it. Did you give out the new customers, new recurring customers in the quarter?

J.D. Sherman - CFO: We did and I think it's on the press release. Of the top of my head, I don't even know the number because I'm seeing it's – 45 is the answer.

Mark Kelleher - Dougherty & Company: I was wondering about the value-added services side, that's 55% for the last four quarters really. Do you think that that really begins to make a move next year and what particular services would be driving that within that segment?

J.D. Sherman - CFO: The interesting thing that's going on there is it has gotten great continued growth and value-added services. The value-added services into 2009 as a portfolio grew 30%, but particularly in the back half of the year we saw a great growth in our volumes-driven services with strong growth in volumes, particularly with the big media customers. So that's what's really kept the balance from shifting and changing. I still believe that over time, that percentage will go up and hope it will go up for the right reasons that we're seeing great growth on the value-added solutions. I think Paul highlighted and he can comment in addition, some of the things that we think are going to drive that, certainly adoption of cloud computing, the shift of folks using mobile, and some of the mobile offerings we have, security being a big issue, and that's going to play into the portfolio solutions around our DSA and APS as well as other function now that we continue to add in that space.

Operator: David Hilal, FBR Capital Markets.

Michael - FBR: This is (Michael) on behalf of David. I am curious about the M&E contracts that you signed in the quarter and specific to that contracts, are you seeing any change in the contract terms or the length of these terms with a larger media companies? It seems as if M&E will slow down their growth in the near term with regards to year-over-year, but if the terms are longer, you could see that reaccelerate in the back half of the year and into 2012?

Paul Sagan - President and CEO: I think that's what we expect to see. I think we're seeing pretty similar trends. We certainly are signing some long-term multiyear deals which is terrific. I think what it really represents is those customer having more confidence to make bets on their online strategy. They were pretty shell-shocked in 2008, in 2009 and saw a lot of improvement in the overall environment, particularly the marketing and advertising market which is (what funds) a great deal of their businesses and you are seeing them now make increasing investments. In terms of the terms they have probably stayed fairly standard for us but we are seeing that scale of request, the quality of the video, the length of a lot of the programming that's put up all growing and those have been very positive.

Michael - FBR: Just as a quick follow-up. Are these customers continuing to leverage multiple vendors for their content delivery needs?

Paul Sagan - President and CEO: It really depends. In most cases, I believe we are by far the majority supplier. In some cases, we're the exclusive suppliers. Some customers use a multi-vendor strategy, but our goal is to drive growth in these accounts and be the primary provider of scale reliability quality and security for them.

Operator: Mark Mahaney, Citigroup.

Neil - Citigroup: This is (Neil) on behalf of (Paul). Question in terms of the enterprise business, we saw nice acceleration there. Was that primarily through the value-added services side? Then, on the mobile front, are we starting to see a tipping point where more commerce companies are using your mobile solution and even more media companies are now starting to think about streaming mobile through Akamai?

Paul Sagan - President and CEO: Well, let me take the second question, the second half and JD will take the first half. There is a tremendous amount of excitement about mobile. We believe that most of the growth is yet to come because you got to remember that the amount of available bandwidth to mobile devices is still much less than a wire connection, especially if we mean mobile in terms of cellular as opposed to WiFi connections. Even with the excitement about mobile in commerce in North America, the majority of the purchases are still done online but not on a cellular device, but we're seeing great growth, and I think what you're beginning to see is that if a company doesn't have a mobile strategy in presence, they will look like they are not competitive to their customers, so everybody is moving there, that's driving a lot of interest in our products. At the same time, we're having a lot of interesting conversations with our network partners about how do we help them with improved performance of the delivery of content to their end users over mobile network. So, it's an area of a lot of focus. It's been an area of new business for us for sure, particularly with the acquisition we made. But we think we are at the very, very early part of the growth that we are going to see there over the next 5 to 10 years with the proliferation of smartphones and smart wireless, particularly, cellular connected tablets that everybody is projecting will come.

J.D. Sherman - CFO: I think your first question Neal was on the Commerce vertical. Is that right and advertising, in particular?

Neil - Citigroup: Yes, both Commerce and the Enterprise side?

J.D. Sherman - CFO: Yes. So clearly, Commerce grew 28% sequentially, that's really a holiday shopping season-driven phenomenon. We see it both in the Advertising business which does 40%, 45% of total year revenue, basically right around that holiday season. I think that went very for us and we are pleased with the results. I would say what was – especially, putting we had a very strong December, normally you see a bit of a drop off there, but we had a very strong December there. So, that is very positive for the Advertising business. We saw a lot of transactions moving online and supported by our DSA solution into the Commerce customers. That Commerce vertical is 80% driven by value-added solutions between advertising, DSA, and our other solutions. So, I think that was a real positive sequential quarter. On the Enterprise, a little bit less is driven by holiday seasonality. Obviously, there is some just basic web traffic, but traction with DSA and APS, in particular, with the Enterprise customer base and that continues to be very strong.

Operator: Phil Winslow, Credit Suisse.

Philip Winslow - Credit Suisse: Just very quick question about CapEx, J.D., you mentioned that we'd be towards the upper end of (potentially is) slightly above that long-term range as a percentage of revenue. It is the second year in the row of that, how should we think about this volume trends, obviously near term sort of outpacing the pricing that you all receiving or is it just simply so much volume growth versus something else in the business?

J.D. Sherman - CFO: I think we're going to move down towards that full year model this year from the 19%, we spent in 2010. We spent 12% or 13% in the prior year. So, it all tends to balance out. The real question will be the traffic growth that we see, particularly in the back half of the year. We want to always make sure, we stay ahead of that. As I've said a lot of times, we'll always make the bet of having capacity online a little too soon rather than too late and chasing high and then we know we get a return on that investment, and we know over a long period of time it fits within the model. So, I think the reason I gave – it's a little bit of room on top of the model this year, it's just, if we get great volume growth that we hoped for in the back half of the year, we may ramp-up the investment a bit in the back half.

Operator: Todd Raker, Deutsche Bank.

Todd Raker - Deutsche Bank: Just digging into some of the prior questions here. If you look at the top 10 media deal, can you give us a sense in terms of what you're seeing on average in terms of unit growth versus pricing degradation, and what sounds like you guys clearly expect the dynamic to improve over time here. Just kind of (comparing Contra Asset) through some of the cycles we've seen historically?

J.D. Sherman - CFO: We always are very careful not to be specific on what we're seeing on price degradation. Let me give you a couple of sort of characterization to that. One thing on unit growth, we are seeing very positive trends there. In fact, there are a lot of the reasons why we're doing some of these renewals is because the growth has been so fantastic that customers have grown right through the commitments that they made to us in their last contract. I think the other positive associated with that is now as Paul referenced to in earlier question. The customers are much more comfortable making longer term commitments because I think they are more comfortable with the direction that business is heading and we're not in the same environment that we saw in 2008 and 2009. As for on the pricing side, I'd say we're seeing pretty consistent trends on pricing, now we've seen over the last four to six quarter we're not seeing anything unusual happening there but of course when a lot of the big deals happen all of once, you do get a step down and then you basically count on the growth that you and your customer both believe it's going to happen.

Todd Raker - Deutsche Bank: The second question I have for you is, it's been a pretty consistent theme that you guys have significant international opportunities, and it always seems like the growth in the U.S. has kept the international business kind of pretty consistent or constant as a percentage of revenue. What is limiting the international business from really taking off and growing faster than the U.S. business?

Paul Sagan - President and CEO: We've had very strong growth in the U.S. there is a big piece of it. You also have to remember the seasonal advertising decisions business is all North America, we don't sell that service today outside of North America at all. So that really weigh strongly on the North America versus other markets EMEA and Asia-Pac comparison. We've been pleased with the growth in international, but frankly I think we can do better and one of our goals is to drive that even harder over the next few years.

J.D. Sherman - CFO: I would just add to Paul's, one of the areas that we've invested in pretty significantly in 2010 was in international and I think in some sense it was an investment year and we hope that those investments start to pay off in 2011. There is still a tremendous amount of growth, particularly we're seeing tremendous growth, albeit, it's still small in some of the emerging markets. And the place where we're seeing a little bit less growth are in some of the mature markets, particularly in Europe where the economy is a little bit more difficult for our customers than seen in other places.

Operator: Ed McGuire, CLSA.

Ed McGuire - CLSA: On your high tech vertical, could you comment about the mix of volume versus value-added services there. That's been one of the verticals that hasn't had as strong growth as some of the others and what you might expect going forward?

Paul Sagan - President and CEO: Well, I think we're still in a transition there. There is a lot of traditional package software that continues to get updated online and we still packaged software businesses that haven't moved online together. We think the even more exciting, though, opportunity is that mix or the move to software-as-a-service and software coming from the cloud and being provided to end user is effectively where people rent. They don't buy licenses and install it on their own boxes. They are renting functionality (by the seat) and I think maybe JD can add a little more color about the mix.

J.D. Sherman - CFO: That vertical which is a very strong vertical for us and we have great market position in has a big legacy business of delivering those software downloads and still about 60% ballpark of that vertical comes from that business. That part of the business is not really growing like we are seeing the volumes growing on the media side. So as it moderates and actually we saw some declines in the revenue in the back half of the year, it's being offset by a growing APS business there and that's how you are getting the balance where you are getting.

Ed McGuire - CLSA: Just a follow-up question, more housekeeping on the balance sheet. There was a pretty big hit on the provision for deferred income taxes. JD, what do you expect next year in terms of the deferred or tax management implications for operating cash flow?

J.D. Sherman - CFO: So, basically, next year we'll be a full cash tax payer. This year, we were still majority of – a vast majority of our GAAP tax bill was non-cash and we are using up our NOLs. Next year, we're basically through our NOLs and we'll be a full cash tax payer. As I mentioned, we think the rate depends on a lot of actors obviously, but the rates should be somewhere in the 31% to 33% range for the year.

Operator: Jennifer Swanson, Morgan Stanley.

Jennifer Swanson - Morgan Stanley: I just wanted to walk through a bit on how you're thinking about the linearity of the year and what the growth drivers behind that 15% plus guidance for the year is. The 12% midpoint guidance for the first quarter suggests that it should be sort of an acceleration throughout the year. Just curious, is that a media and entertainment driven acceleration as that business starts to scale off of the one-time reset in pricing with the contract renegotiations or there are other things that we should be thinking about that could potentially accelerate growth throughout the duration of the year?

J.D. Sherman - CFO: I think certainly those driving the renewals and driving volume in the (media pace) in particular, will drive growth in the back half of the year and that's what we expect. Also, our business, clearly, with the advertising business has become more of a seasonal business and more backend loaded as it is. So that's the second factor. The third factor is continued growth in our value-added solutions, which we should see even strong growth throughout the year, but we're looking for continued growth really throughout the year for that business. So I think those three factors and you end up with a year that should see more backend loaded than we've seeing in the past.

Operator: Derek Bingham, Goldman Sachs.

Derek Bingham - Goldman Sachs: Question on the cash gross margin line, JD. Is this kind of 80% to 81% for everything you can tell or what you're expecting in the ongoing mix volume versus (rest). Is that the range you're expecting for the year or anything else we should be thinking about?

J.D. Sherman - CFO: We haven't given any guidance for the full year on that. We've been in the 81% to 82% range for three to four years now, so I wouldn't expect any major shifts one way or the other, unless, I think if the media business really takes off , there may be some downward pressure on that which would be actually a positive. If the media business doesn't really takes off , there may be some downward pressure on that which would be actually a positive. If the media business doesn't, there'll be upward pressure, frankly, and that would be a negative ironically. So, I don't see any major shifts, but still that 80% to 81% that we guided for the first quarter is still above our long-term model. We have a long term model that suggest we should level off in the 77% to 79% range, but we've over achieved on that model largely based on the success of our valued added solution.

Derek Bingham - Goldman Sachs: Just a follow-up on investments, as you are thinking about some of the younger value added services that you've got or either your outdoor that you have in mind to launch. Is there a requirement for a passive increased OpEx either on the sales marketing line or the R&D line in the early part of the year to kind of prime the pump or grow those young businesses?

J.D. Sherman - CFO: I'll answer and Paul can add color. Since he get to the side mostly what we spend with my assistance. I think clearly we're going to continue to invest primarily in two areas; one, in innovation, particularly in engineering and around our network etcetera; and second, in go-to-market. I think what you're seeing us do and what you are seeing us successfully do in building a value added solution portfolio is bring new products to market and continue to enhance them and we'll continue to do that. In addition you've heard us talk about expanding the sales force outside of the U.S. you've heard us talk about establishing partnerships to go-to-market with joint offers and you'll see us invest in those areas as well. So, last year we added somewhere around 450 people to the business largely in those two areas, we'll certainly be continuing to invest in 2011 probably not quite at that level of growth because we think a lot of the investments we've already made will start to pay off, but we think there is tremendous opportunity and also we continue to look for acquisitions as well.

Paul Sagan - President and CEO: I will just say that we believe there is so much opportunity that people move more of their business to the Internet than the cloud, but we're going to look for places to make smart investments. Last year, we delivered very balanced growth on the top and the bottom line. We certainly think we can continue to grow both lines, but we always see more opportunity in the medium and long term, we're certainly going to make investments where prudent either for organic growth or acquisition growth, with an eye towards the long term opportunity but we've set out long term targets that you've seen us hit for a long time and we're going to continue to drive towards those.

Operator: Mike Turits, Raymond James.

Michael Turits - Raymond James: I'm just trying to understand that the seasonality into the first quarter where you have down 5%. I think certainly it's been a long time since you actually had that much down in the first quarter. As I look at it, Commerce is typically down 5%. So, how should I think about what's actually happened so is it that Commerce is down about the same amount as usual or more and that's just a Media & Entertainment is now down because of the reset on the renewals because typically, media continues to go up sequentially. I'm trying to understand the dynamics there?

Paul Sagan - President and CEO: Maybe we'll both make comments but it's also important to not have amnesia about history. We sort of think long-term planning as green banana is in memory it's sort of similar. This has traditionally been a seasonal business last year because of the acceleration coming out of the recession that didn't happen. We think that seasonality is more normal, but it's normal in Commerce, it's also very normal in Advertising and you have to remember that that industry got crushed for two years and so we have a real return to that. As J.D. said, about 45% Q4 business. You've got a number of things plus some of the reset on a larger number than normal large contracts and that's where we come out. I don't know if J.D. wants to add?

J.D. Sherman - CFO: Yes, so I think just to put maybe a little bit finer point on, I think there are three things that factor into that Michael. The first is, our advertising business is bigger this year than it was last year. So, we will see more of a sequential drop off there and it will impact the business more from a seasonality standpoint. The second, as you pointed out, and as we pointed out, the renewals stacked up a bit on us in the Media & Entertainment space, and so that media growth that you see from a sequential standpoint, we don't expect to see in Q1. The third is, we're in a – we're rather than a snapback recovery mode, we are in a more normal if you can call it that environment. So for those three reasons, we think that we can expect to see a bit of a sequential downtick on the revenue.

Michael Turits - Raymond James: Just a follow-up on the volume growth side. J.D., on one hand, you said volume growth looked really good and on the other hand, you said, I think Paul said and you sort of just alluded to now that I think volume growth might be more normal. So, is this – up until now you have each quarter for quite a while you said that volume growth rates and bandwidth have been accelerating. So, are we now on point where volume growth has been to decelerate, or even though it's not a snapback given some of the larger trends on video essentially, I guess I am surprised to see that decelerate meaning a lower growth rate?

J.D. Sherman - CFO: Yes, so I think what we are seeing is, we actually did see it accelerate in Q4 again, but our projection is if that starts to level off, I wouldn't say decelerate, but we have gone, we went from sort of a period where the traffic wasn't growing as fast as it did historically to a period where it grew faster than it did historically, and I think we're going to be in – at least here in the short term, we'll be a cycle where it sort of leveled out. On the other hand, as Paul mentioned, we think traffic grows a hundredfold over pick your time period. So I think there's the potential and possibility for that to surprise a bit on the upside and to the question that somebody asked about CapEx, that's why we want to make sure that we have the capacity in place to meet that demand.

Operator: Jeff Van Rhee, Craig-Hallum.

Saurabh Paranjape - Craig-Hallum: It's (Saurabh) of sitting in Jeff, I had two quick questions, first on the value-add side, could you give us some more color around competition and backspace? We're picking up more and more instances of new competition Cotendo partnering with AT&T or Limelight coming out with value-add solutions. Could you just give us some more color on what you're seeing, has anything changed?

J.D. Sherman - CFO: We think you had two questions and I'm having a hard time hearing you. So why don't you state that second question in case we lose your connection. We'll answer them both.

Saurabh Paranjape - Craig-Hallum: So the first one was on value-add and competition, the second one is around renewals. You talked about eight out of your top 10 customers on the media side renewing, can you give us some sense of how much in terms of revenue this is and how often these types of contracts come up for renewal typically?

J.D. Sherman - CFO: So the second question first and thanks, we'll do the answer off-line since I think you're fading out there. The renewals are of contracts that are one-year or more, sometimes multi-year, and there are important customers, but as you know that part of the business is already less than half of our business and its just a set of the customers in that category. On value-added side, we continue to see very strong interest from our customers. They are looking for security in the cloud that we think we're pretty uniquely able to provide features and functionality like Site Shield or Edge Tokenization or some of the other products that we've announced and more that we have in development, particularly around commerce. Our customers are really looking for outsource solutions like we can provide from our cloud as opposed to traditional hosted solutions or the kinds of things that they or others may have traditionally provided. So, we continue to see we think a very rich opportunity in the market where our services are highly differentiated and our customers understand and that see the value and we can demonstrate it, and that's why we continue to invest there and believe that there is so much opportunity.

Operator: Chad Bartley, Pacific Crest.

Chad Bartley - Pacific Crest: Two (parter), first on value-added services growth. If I am doing the math correct it looks like about 35% growth in the first three quarter of the year. The slowdown is about 22% growth in the fourth quarter. So why did you see that deceleration and should we expect that type of growth going forward? Then I will hold my follow-up.

J.D. Sherman - CFO: I'll try to answer that question. I think the growth is little bit higher. I think I had 24% or 25% and certainly with the slowdown from the growth that we saw at the beginning of the year, still really solid growth and I think we expect that going forward. Lot of it was probably just wrapped around comparisons type analysis but I think we're still pretty pleased with the sequential growth we saw in that area, so I don't think we're seeing a major slowdown or deceleration there and I think the progress in terms of selling in the sales forces and driving it through new partnerships is pretty good.

Chad Bartley - Pacific Crest: Then on the flip side of that, growth in the rest of the business showed a pretty big acceleration, maybe 16%, 17%. What sort of growth is realistic there going forward particularly given some of the pricing pressure on those renewals? So, we should see a slowdown, but is that still a growth business or what sort of color can you give us?

J.D. Sherman - CFO: We are really pleased with the growth on that side of business in Q4. I think there is tremendous of growth, particularly with media. The volume solutions are basically, you can put them into three basic buckets, plus storage. You have media delivery, software delivery and webpage or object delivery or web object delivery. I don't expect a lot of growth on the software delivery or the web object delivery, but media delivery has tremendous amount of growth. As I mentioned, it's driven largely by some of the big customers in media entertainment. We did see a bunch of renewals and I think that's actually – in a short term, it's going to bring down revenue but for the long term, it's very positive because our biggest customers are stepping up to larger deals and longer term commits, so I think we'll see a lot of growth there as for projecting whether 16% or 17% is good range for 2011. I don't want to go there and get myself into more specific guidance.

Operator: Katherine Egbert, Jefferies & Company.

Katherine Egbert - Jefferies: JD, just to follow-up on what you just said, it seems that with less competitors than ever, why are you signing long-term deals with discounts? Why not hold people with shorter term deals, as we can get more pricing integrity?

Paul Sagan - President and CEO: Our goal is to create long-term relationships with our customers. We always believe we are going to be in a competitive marketplace. I am not sure I'd agree that there are more or less competitors than ever before, because we start with our customers, have great deal of capacity, particularly it's scaled on their own, not just the media but companies was big, IT and enterprise, IT department. So we have to earn our keep everyday and then there are lots of other players, who are offering solutions and trying to claim even if they are not as good maybe they are cheaper. So, our goal is always to do a great job and to build long-term relationships with customers, some of them now have going on for over 12 years and continue to grow, and our goal is to do business with every customer for another 12 years. So, if they want to a make a long-term commitment, we are more than happy to make one back and I think that is always a good business. I think it would be a horrible time to say to someone who says, I want to work with you for years to come, for us to say, well, I am not so sure we will take your business for a little while and get back to you. That's not how you build good partnerships and our goal is always to say to somebody how about longer not shorter.

Katherine Egbert - Jefferies: If my math is right, it looks like there is 45 net new customers out of this sequentially, which is the lowest been in – certainly low for Q4. Is there anything unusual in the demand environment or did the churn rate go up somehow?

J.D. Sherman - CFO: No, I think churn moderated a long time ago as we came out of the recession. We said for a while that net new customers would not as important a metric in fact then we were surprised how strong it was coming out of the recession, but our goal has been to create a bigger and bigger portfolio of services and sell it into our customer base. We have an All-Star list of customers that isn't to say with everybody we could work with and there aren't new regions for example to go into, but the goal is to drive more value as our customers want to do more things in the cloud and where our focus maybe years ago was just signing people up. We continue to look for new opportunities, but probably more important is driving opportunities in our existing customers not just on the volume side of the business, but on the value-added side, in some ways there's more there because they will over time have more and more applications and business processes that move online and give us new opportunity to bring them products and services that they might not have bought from us previously.

Operator: Sterling Auty, JPMorgan.

Sterling Auty - JPMorgan: On the renewals that you dig, can you give us a sense of what the average contract length on those renewals were?

J.D. Sherman - CFO: Of the top of my head, I don't know exactly what it is. Our average contract length for a long time has hovered around 18 months, 19 months, a little bit higher, and we've seen it move up, tends to be on the Enterprise side, you get longer-term deals in commerce, and it tended to be that on the media side, we saw shorter deals, I think the real positive that Paul mentioned and I mentioned was that most of those deals that we signed were longer than – were two years or longer.

Paul Sagan - President and CEO: The latest data as we've gone from an average of 18 months to 19 months, which mean we're signing more two year deals or longer than one year deal. We don't count event contracts in our customer account. So, we're continuing to see, I think frankly that's a sign of the value we bring to our customers, but also they're coming out of the recession and being willing to do what Enterprise will do which is traditionally strike longer-term deals. Two years ago, they were unsure of their future, and they were trying to cut deals as shortest as possible, in fact often renegotiate any vender relationship they could have, not just in IT, but (indiscernible) food, you name it. Now, we're seeing people getting back to normal and understanding that there is a cost to doing contract, there's cost to the bid and buying process and so if they know what they want to do, it makes sense to get a good price and lock it in and make a commitment and move on to the next thing. So we continue to see longer contracts and I think that's a great sign for our business and maybe for at least the Tech economy overall.

Sterling Auty - JPMorgan: One follow-up. The ramp in back half of the year, what gives you the visibility into it? In other words, is it just that you expect the buys to continue on a constant rate that you are seeing now and just takes a couple of quarter to offset the initial price discount on the new contracts? Does there have to be any acceleration or is there any kind of guaranteed minimum or maybe an increase in the number of services that will help that?

Paul Sagan - President and CEO: That's a piece of it. It's also because we're in the recurring revenue business. We know that, especially if the economy stays strong and churn stays low, we'll add more customers month by month on top and you get the month-over-month impact, and also the seasonality we believe is pretty typical of our business of commerce being stronger in the back and advertising being much stronger in the back. We've got another year to continue to add value before we go to market or, if you will, that business comes in late Q3 and Q4, so I think it's really a return to the normal phase of the business that we saw outside of the tip of the recession and the sort of rapid recovery that we fortunately benefited from four or five quarters ago. So I think it's just more typical of the pattern we've seen in our business and it allows for growth going forward and stronger growth in the back half. All right, everybody, thank you for calling in. We've reached the end of our hour. We look forward to talking to you again in another three months. Bye.

Operator: Ladies and gentlemen, that concludes today's conference. Thank you for your participation and now disconnect and have a great day.