Akamai Technologies Inc. Q4 Earnings Call Transcript

Akamai Technologies Inc (NASDAQ:AKAM) Q4 2008 Earnings Call February 4, 2009 4:30 PM ET

Executives

Paul Sagan – Chief Executive Officer

J. Donald Sherman – Chief Financial Officer

Analysts

Mark Kelleher – Canaccord Adams

Garrett Bekker – Bank of America

Michael Turtis – Raymond James

Todd Raker – Deutsche Bank

Mark Mahaney – Citi

David Hilal – FBR

Katherine Egbert – Jefferies

Jeff Van Rhee – Craig-Hallum

Tim Klasell – Thomas Weisel Partners

Rob Sanderson – Broadpoint AmTech

Richard Fetyko – MCF

Donna Jaegers – Davidson.

Chad Bartley – Pacific Crest

Scott Kessler – Standard & Poor's Equity Research

Steven Freitas – BMO Capital Markets

Derek Bingham – Goldman Sachs

Operator

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2008 Akamai Technologies Incorporated Earnings Conference Call. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions)

I would now like to turn the call over to Natalie Temple, Senior Analyst for Investor Relations. You may proceed.

Natalie Temple

Good afternoon and thank you for joining Akamai's investor conference call to discuss our fourth quarter and full year 2008 financial results. Speaking today will be Paul Sagan, Akamai's President and Chief Executive Officer, and J.D. Sherman, Akamai's Chief Financial Officer.

Today's presentation contains estimates and other statements that are forward-looking under the Private Securities Litigation Reform Act of 1995. 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 4, 2009. Akamai disclaims any obligation to update these statements to reflect future events or circumstances.

During this call, we will be referring to some non-GAAP financial measures that we believe are helpful to better understand our financial results and operations. These non-GAAP measures are not prepared in accordance with the Generally Accepted Accounting Principles. You can find definitions of these non-GAAP terms and reconciliations of these non-GAAP metrics to the most directly comparable GAAP financial measures under the news and publications portion of the Investor Relations section of our website.

Now let me turn the call over to Paul.

Paul Sagan

Usually Noelle Faris, our Senior Manager of IR will be with us, but we are pleased to report that she is home with a healthy baby, a boy born just over a week ago. So, we wish Noelle and her entire family the best. She will be back soon. So, thanks Natalie and welcome to the Akamai IR Team. And thank all you for joining us on the call today. Now down to business.

Akamai performed very well in Q4 capping another record year of significant revenue and earnings growth. Financial highlights for the fourth quarter includes, record revenue of $212.6 million, a 16% year-over-year increase and an 8% increase over the third quarter of 2008. Normalized net income of $82.2 million, or $0.44 per diluted share, that’s an 8% increase year-over-year and up 11% from Q3.

For the full year we grew revenue 24% year-over-year to $791 million. We generated normalized net income of $308.5 million or $1.66 per diluted share in 2008, that’s a 26% increase over 2007 and we generated $343 million of cash flow from operations, 43% of revenue during the year a testament to the strength of our business model.

Even if the external environment became more challenging, we were able to grow revenue and earnings throughout the year, at the same time we continued to make strategic investments that we believe will enhance our product portfolio and increase our ability to make the Internet work better for our customers. I’ll be back in a few minutes to share some observations on the marketplace, but first let me turn the call over JD to review the results in detail. J.D?

J. Donald Sherman

Thanks, Paul. As Paul just highlighted, our business performed extremely well in the fourth quarter and we were very pleased with the results. We grew revenues 16% year-over-year and 8% sequentially to $212.6 million, exceeding our expectation range coming into the quarter with solid performance across the board, but particularly within our eCommerce sector and in our newer value-added solutions, eCommerce continued to be our fastest growing vertical growing 12% from Q3 and 23% over a very strong Q4 of 2007.

These results were driven in part by stronger than anticipated holiday season online, as well as increased penetration of our dynamic site solutions and application performance solutions.

As expected, we did see a slowdown in M&E growth in the last quarter, continuing the trend we saw immediate throughout the year. The high tech vertical grew 6% year-over-year. Similar to M&E, our high tech customers tend to be heavily weighted towards large volume deals with more significant volume based discounts.

Revenue from our Acerno acquisition which we closed at the beginning of November, was nearly $7 million over the 2 months showing strength in a difficult advertising market and a great a great start to what we think will be a very strategic acquisition. During the fourth quarter, sales outside North America represented 25% of total revenue, down a point from the third quarter levels.

Our international business performed very well growing 5% sequentially and 25% year-over-year. The stronger dollar had a negative sequential impact on our revenue was up $5.5 million. Excluding this impact, our business outside the U.S. grew 16% sequentially and 38% year-over-year in Q4.

North American sales excluding Acerno grew 4% sequentially and 9% on a year-over-year basis and resellers represented 17% of total revenue consistent with the prior quarter. Excluding Acerno, we added 15 net new customers in Q4 bringing our total customer count to 2858. Our growth adds brand new customers to Akamai were over a 160, consistent with the run rate of prior quarters.

Once again, no customer accounted for 10% or more of our revenue in Q4. Churn was just under 4% for the fourth quarter consistent with the last few quarters. Excluding the impact of Acerno, our consolidated ARPU or average revenue per customer was $24,000 in the quarter, that’s up 2% in Q3 and 4% from last year.

Our cash gross margins for the quarter were 81%, consistent with Q3 and down about a half a point from the same period last year with most of the year-over-year decline during the addition of Acerno revenue which has gross margins of around 60%. This margin performance is a result of the success we’ve had in reducing our costs, as well as the continued growth of our higher margin value-added solution helping to offset customer price declines.

Our GAAP gross margin which includes both depreciation and stock-based compensation, was down 71% for the quarter, roughly consistent with Q3 and down two points from Q4 of last year driven mostly by an increased depreciation.

GAAP operating expenses were $97 million in the fourth quarter. These GAAP numbers include depreciation, amortization of intangible assets, stock-based compensation and a $2.5 million charge related to our recent restructuring. Excluding these charges, our operating expenses for the quarter were $72.3 million, up $3 million for the prior quarter.

Adjusted EBITDA for the fourth quarter was $100.3 million, a milestone for the company, as that’s the first quarter we’ve generated over $100 million of EBITDA. That’s a 15% from the same period of last year, and up 11% from the prior quarter. And our adjusted EBITDA margin of 47% was roughly consistent with the same period last year and up one point from the third quarter.

For the fourth quarter, total depreciation and amortization was $27.5 million. These charges include $20.2 million of network related depreciation, $3.6 million of G& depreciation, and $3.7 million of amortization of intangible assets.

Net interest income for the fourth quarter was $4.9 million, roughly equivalent to third quarter levels, but down $2 million from Q4 of last year despite a higher cash balance due to lower interest rates our investments in this environment.

Moving onto earnings. GAAP net income for the quarter was $40.5 million or $0.22 of earnings per diluted share. As a reminder, our GAAP net income includes non-cash charges for stock-based compensated and book tax charges at an effective annual rate of approximately 38%.

However, because of our significant deferred tax assets, we are paying cash taxes at an annualized rate of only about 2%.

During the fourth quarter, our stock-based compensation expenses including amortization of capitalized equity compensation was $16.7 million. A breakdown of our stock-based compensation charges by operating department is available in the supplemental metric sheet posted in the Investor Relations section of our website.

Additional items in GAAP net income for the quarter included $3.7 million from amortization of intangible assets $18.3 million of non-cash tax charges, $2.5 million related to our recent restructuring and a $400,000 non-cash loss on investments. Excluding these items, our normalized net income for the fourth quarter was $82.2 million, 8% higher than our normalized net income from the same period in 2007 and up 11% from Q3

In the fourth quarter, we earned $0.44 per diluted share on a normalized basis, that’s up $0.04 or 10% from the prior quarter and a 7% increase year-over-year. Our normalized weighted average diluted share count for the fourth quarter was 186.5 million shares.

Now let me review some balance sheet items. Cash generation continued to be very strong. Cash from operations for the fourth quarter was $92 million, and for the full year we generated $343 million of cash from operations, or 43% of revenue. That’s up 45% from 2007.

At the end of Q4 we had $772 million in cash, cash equivalents, and marketable securities on the balance sheet. This balance included $250 million of AAA rated federally insured student loan auction rate securities, which we continued to treat as long-term investments in Q4 and we continue to value using a cash flow model for FAS 157.

In the fourth quarter, capital expenditures excluding equity compensation were $20.4 million and for the full year capital expenditures came in at a $115.4 million just under 15% of revenue excluding equity compensation.

Days sales outstanding for the quarter were 57 days, that’s down one day from the prior quarter. With these fourth quarter results we finished the year at $791 million in revenue, an increase of 24% over 2007.

For the year, revenue from sales outside North America grew 37% from 2007, increasing to 26% of our total revenue, while U.S. revenue grew 21%. Resellers accounted for 16% of our total revenue. Full year cash gross margin was 81%, down about a point from the prior year. GAAP gross margin came in at 72%, two points lower than 2007 levels.

Full year GAAP operating expenses were $356 million, including $11.5 million for depreciation, $13.9 million for amortization of intangible assets, $55.5 million for equity related compensation charges, and $2.5 million for restructuring related costs. We have detailed the full year breakdown of these items in the supplemental metric sheet on our website.

Excluding these charges, operating expenses for the full year were $272.6 million. Full year adjusted EBITDA margin was 47%, up 3 points from our 2007 margin level. GAAP net income was a $145.1 million or $0.79 of earnings per diluted share for 2008. Our normalized net income for the year, totaled $308.5 million or a $1.66 of earnings per diluted share. That’s a 26% increase over last year.

Overall, we were very pleased with our business performance in Q4 and in 2008. The macroeconomic environment has clearly worsened impacting all of our customers businesses, as well as our own. However we’ll continue to grow even in the phase of this downturn, the strong cash flow generation of our business model has allowed us to continue to invest in innovative new solutions that extend the value of our offerings and have become an increasingly important driver of our revenue and profit.

As we head into 2009, we remained very optimistic about the long-term growth prospects of the business on the Internet. And at the same time we are also pleased with the strength of our own business in the short-term coming out of a solid Q4. However it is still anybody’s guess as to when the global economy will recover, so we are taking a cautious approach to the year.

In this context we think it is prudent not to give full year guidance, as there is just too much macroeconomic uncertainty. For the near-term, in Q1 we are coming off our traditionally strongest quarter, where we saw holiday bursting in our e-commerce segment and in 2008, seasonally higher revenues from our new Advertising Decision Solutions offerings.

Given all that, we expect revenue of 205 to $212 million for Q1. At the midpoint this represents the 11% year-over-year growth and a slight sequential decline from Q4. We also have several significant operating expense items in Q1. As we do most years, including the payroll tax since 401 k match resets, as well as our annual sales trends.

In addition, we have a full quarters worth of Acerno expense in Q1, versus only two months in Q4 of last year. Taken together these items add up to about $7 million of sequential OpEx growth.

We expect these increases to be partially offset by the savings from our Q4 restructuring, where we reduced our headcount by about a 110 people generating an estimated $15 million of annualized savings.

At this revenue and given these expense items, we expect normalized earnings per share for the first quarter of $0.39 to $0.41. Underneath this we expect cash gross margin to be roughly consistent with Q4 levels and GAAP gross margins to decline by roughly a point primarily due to increased depreciation. We expect EBITDA margins to decrease by about 2 points from Q4 to about 45%.

We expect capital expenditures in the quarter excluding equity compensation to be in the range of 25 to $30 million coming off lighter than average Q4. Also on a couple of non-cash metrics for the full year, we expect equity compensation net of capitalization to remain roughly flat with 2000 levels and we expect amortization of intangibles to grow by about $3 million from 2008 driven by the Acerno acquisition.

Our very solid Q4 performance gives us good momentum as we head into 2009. And underneath our 2008 results, we’re pleased to see our strategic initiatives beginning to show results. As we brought our newer value-add solution, our profitability has improved even as growth has slowed in the volume driven areas such as digital media. Partly, as a result, we closed the year with EBITDA margins very close to the model we set out to achieve, well before we reached the billion dollars of revenue threshold.

Our focus on cost efficiency and scale can be seen in our Q4 gross margin performance where margins were basically flat on a year-over-year basis excluding acerno and we’ve continued to generate significant cash flow which has put us in a position to make both internal investments and timely strategic acquisitions to expand our portfolio. So, while we are cautious about the current macroeconomic conditions and how that will affect our clients in the near term, we believe our business is fundamentally stronger than ever and well positioned for the long-term. Now let me turn the call back over to Paul. Paul?

Paul Sagan

Thanks JD. Clearly we have good reason to be pleased with our record 2008 results. It’s important to note that our customers continued to invest in our online businesses and they recognized the critical role that Akamai plays in making the online businesses successful. There is no question in anyone’s mind that while the rate and pace might change businesses of all kinds are moving to leverage the Internet better, even amid the economic turmoil.

It’s true in commerce, B2B applications, online media, advertising, and even the new frontiers of quad computing where Akamai is already a player. In the e-commerce space for example, we still saw growth in online transactions in Q4, even in a difficult consumer spending environment.. Forrester estimates that U.S. online retail sales grew 13% in 2008 and projects a further 11% increase this year.

Our own retial index recorded that online retail traffic on Cyber Monday was up 39% from what was a very strong Q4 in 2007.

And e-commerce sites have continued to become more dynamic, immersive, and personalized. Our customers recognized that performance matters more than ever that try to differentiate themselves online. And that helps them to understand the value often adopt Akamai’s Dynamic Site Solutions.

In the world of advertising, we are witnessing a flight of marketing dollars to accountable media even with the recession battering traditional media volume and that’s nor more true then on the Internet where online add spending is focused on pay for performance solutions.

According to e-market our online advertising is a $23 billion market today in the U.S. alone and still less than 10% of the overall advertising spend. So, as marketers look for the most efficient ways to spend their media dollars, we believe they will increasingly turn to more targeted, accountable models.

Today e-market estimates that about $1 billion of online advertising revenue is behaviorally target, but that’s projected to grow almost nearly four fold to nearly $4 billion by 2011. That’s why we spent the last couple of years developing our Advertising Decision Solutions and why we bought Acerno last quarter. By combining Acerno’s targeting capabilities with our own, we are now able to offer businesses unique solution design to help them successfully drive their top line results.

In the applications space, we’re seeing continuing traction for our application performance solutions even some of the hardest in industry. One great example is in the financial services vertical, where we recently signed a deal for more than a $1 million a year with a major institution that recognizes the importance of improving the performance of its online applications.

We’ve continued to invest in security and availability capabilities to support application acceleration and we are focused on providing these solutions to industries where these concerns are paramount. At the same time, online audiences have continued to grow. We believe we are evolving toward a world where most consumers will access the Internet over very high speed connections capable of supporting Hi-Def video experiences. We are already getting glimpses of what usage of the Internet will be like in the years head. Excuse me, most recently for example, during the inauguration of President Obama, we registered $5.4 million visitors per minute on our net usage index for news.

That’s an incredible television site audience, and as we’ve learned in the past for the events such as March Madness, one year’s record usually gives away rapidly the event bigger peaks the next year. So it’s getting easier and easier to imagine a day when many of our media customers will expected to support online audiences present to compete with or even exceed the viewership they can generate over more traditional channels of distribution. Many of these clients are among our close to strategic relationships, some have been with us for our entire first decade in business.

One relationship with one of these partner is Apple, have been raising questions from many of you recently, as it seems to every year or two right around Groundhog Day. We continue to have a very close relationship with Apple including support for all of iTunes. Given our respect for our client’s confidentiality needs, we won’t be commenting further except to note that we recently extended our long-term relationship for another multi-year term. We are looking forward to supporting that creative uses of the Internet for a long time to come as we math out plans for a second decade of our partnership together. So as we look back on our strong results from last year, I believe our most important effort was continuing to the position that company for the future.

I want to thank everyone at Akamai for contributing to our record performance in 2008 and preparing Akamai for the next ten years. In addition to the growing revenue and earnings, and investing in new solutions, we took a hard look at our highest priority investment areas and committed to them for 2009.

At the same time, we took important steps to reduce expenses wherever possible. Never easy to see value colleagues leave the company but I think the actions we took last year, better position us for long-term success. We have a very strong balance sheet approaching $800 million of cash and equivalents and a senior management team that’s led this company through some very tough times before. We are not going to try to guess when the macroeconomic situation will recover, but we think that the long-term prospects for growth of online business remains very promising and we believe Akamai is uniquely positioned to capitalize on this opportunity.

Now JD and I will take your questions. I’d like to remind you to please keep your questions brief into the point and no more than one followup, so we can try to everybody in the queue on the call.

Thank you operator, the first question please.

Question-and-Answer Session

Operator

Our first question comes from the line of Mark Kelleher with Canaccord Adams. You may proceed.

J. Donald Sherman

Hi Mark.

Mark Kelleher – Canaccord Adams

Hi, hi guys, congratulations, another great quarter.

J. Donald Sherman

Thank you.

Mark Kelleher – Canaccord Adams

Sometimes you give us the percent of revenue that comes from that those value-added services, could you break that out?

Paul Sagan

Yeah we’ll do that on a periodic basis. We talked about it being 40% plus and when we are talking last quarter, I wouldn’t be surprised it by year-end with the acerno acquisition we are talking about that being 50%, but we’ll just break that on a periodic basis and on a quarterly basis what we are going to do now is talk about the verticals.

Mark Kelleher – Canaccord Adams

All right, then as a quick followup, can you tell us who is your competition there in the value-added services?

Paul Sagan

And where do you mean?

Mark Kelleher – Canaccord Adams

Specifically in the value-added services, who else is out there trying to do what you are doing, not in the CDN the other side?

Paul Sagan

Well I think we have a series of value-added services and a broad product portfolio. So, in the area of application acceleration we really run the only service model today people try to do this with hardware, but it doesn’t solve the network layer problem which is why we are so uniquely positioned to leverage the original Akamai investment in R&D and network to a whole new space. Even in the area of media, we have value-add from our rich media content tool to our download management and reporting capabilities. So, they are value-added solutions that we add to our customer bundles in virtually every market.

Mark Kelleher - Canaccord Adams

Okay, thanks.

Paul Sagan

Thank you. Operator.

Operator

Our next question comes from the line of Mark Mahaney with Citi. You may proceed.

Paul Sagan - Citi

Hi, Mark.

J. Donald Sherman

Hi, Mark. Mark, are you there? Operator the next one.

Operator

Our next question comes from the line of Garrett Bekker with Bank of America. You may proceed.

Garrett Bekker – Bank of America

Hi, thanks for taking my question. Paul or JD, I just wanted - do you mentioned bursting in the quarter? I may have missed that.

J. Donald Sherman

We didn’t mention it and as usual, as you would expect, we saw higher than average bursting particularly in our commerce sector in Q4. It’s always hard to say exactly how much of that growth is bursting, but we saw a sort of 12% sequential growth in commerce and that’s an indication that we definitely saw some holiday bursting. I think we are roughly still, that 70:30 ground rule still holds. We get a little bit higher in a seasonally strong quarter, but overall we didn’t see anything extremely unusual. And I would also say what we saw in Q4 of ’07 where it was a really enormous online holiday season, there was certainly more bursting last year than there was in 2008.

Garrett Bekker – Bank of America

Great. Thanks that’s helpful. Then maybe just a high level one. It seems to me that there has been a little bit of an increase lately in some of the different methods in which people can get online videos, whether it’s to the voodoo box or to the Blockbuster announcing a new partnership, just wondering maybe you could give us our thoughts, could that potentially be a catalyst for this year or how are you thinking about that? Thanks.

J.Donald Sherman

No I think it’s more examples of what we’ve been talking about for several years which is we are really moving a world where television is over IP and lots of forms and you’re starting to see easier and easier ways for people to get that on the screen they want which is the wide screen in the home not the laptop, but they are all second, third fourth box solutions. We are into the point where your one set-top box does that for you that’s coming ultimately some of that capability maybe in the television or the screen itself. But these are all indicators that the right holders the content providers recognize that there are substantial audiences for them to find and monetize available over the Internet and mainly to reach them and we think many of those things will be certainly catalyst for growth because those companies as they understand the quality matters and the scale is difficult, but not impossible to achieve for them using centralized approaches, they come to Akamai because of our deep deployment in Edge ISPs. And so we think those are good drivers for us. How much impact that will have in ’09 versus two and three and five years down the road that’s a little hard to guess that that’s much dependent on end-user broadband connectivity as anything else but it’s an encouraging side.

Garrett Bekker – Bank of America

Great, thanks very much.

J. Donald Sherman

Thank you. Operator?

Operator

Our next question comes from the line of Michael Turtis with Raymond James. You may proceed.

Michael Turtis - Raymond James

Hey guys, good evening. Very strong quarter obviously in e-commerce, maybe going to help us understand the correlation between a couple of factors. It was a most of measurements of online business in the fourth quarter this year were pretty negative. I think e-commerce may have even be down on a year-over-year basis. So, what’s the correlation between the revenues for online business in general? And what happens with bandwidth, which may have driven your - since this prior your revenue this quarter and then your overall e-commerce revenues?

J. Donald Sherman

Well I think that actually there are different statistics out there and we quoted some, Forrester statistics that talked about year-over-year increase as in many of our customers I think had strong Q4, maybe not what they had hope to win, when they were planning off of’07, but still increases in very strong and clearly consumers where they are looking and browsing maybe a lower percentage converted to buyers and in the past they don’t really know that it might explain it partially because we saw and I talked about very strong traffic growth across and it was across a wide variety of customers. It was I mean just, sort of one niche product area or another. So I think, there is clearly a macro issue and consumer credit is a problem, but it’s a bigger problem in the malls if you will in physical stores than it is online and we’ve seen growth there and our customers are talking to us about their plans to try to expand their online commerce initiatives this year as well. So, I think if anything it propels people to move to the more efficient online selling model, customers like it. We think that’s good for us long-term. Given the macro uncertainty makes us harder to project where ’09 will be as why we are being much more conservative about trying to give guidance that far out, because I think that’s hard for someone to truly know. But I think we saw increases in Q4 certainly in our business and a lot of that translated to many of our customers. Now, a lot of those customers have hybrid models. They have got bricks and clicks and the brick and mortar is really hurting in a lot of cases and in - for some customers it is in the online to overcome their problem in their traditional model and I think that’s why we are seeing some of the business failures out there.

Michael Turtis - Raymond James

And so my followup questions. I think Paul you said 39% increase in total traffic you saw on Cyber Monday and is that an acceleration from last year and were those two numbers be representative of the traffic growth for e-commerce vertical overall this quarter versus last quarter?

Paul Sagan

So, that’s again that’s only retail index traffic it’s not overall network traffic. I think that a smaller increase year-over-year then ’06 to 7 we were giving you the ’07 to ’08. I don’t have the full month just by commerce customers, but it’s probably roughly indicative.

Michael Turtis - Raymond James

Okay, great. Thanks very much.

Paul Sagan

Thank you Michael.

Operator

Our next question comes from the line of Todd Raker with Deutsche Bank. You may proceed.

Paul Sagan

Hey, Todd.

Todd Raker – Deutsche Bank

Hey, guys. Nice quarter.

Paul Sagan

Thank you.

Todd Raker – Deutsche Bank

I was wondering if you guys could give us some inside terms of what you have seen in terms of traffic volumes versus pricing. Clearly everyone is very concerned about pricing and the competition, but I’m just curious, you can give us any sense, for the key drivers here?

Unidentified Company Representative

Todd, you got way out,

Unidentified Company Representative

We lost the second part of your question there Todd.

Todd Raker – Deutsche Bank

Yeah so, just trying to get a better sense for what’s going on there in terms of unit volumes versus pricing in the business?

Paul Sagan

Well I think I’ll comment first and then JD will. We don’t give out network traffic statistics in general. I think we are seeing a similar trend, which is our customers are very interested particularly, those who use large volumes in driving down unit pricing. We are very focused on driving down our own unit costs, that’s how we’ve been able to grow revenue drive down cost to our customers, but maintain very, very strong profit margins volume discounts are nothing new in our business and we continue to drive towards being able to provide them to our customers.

Todd Raker – Deutsche Bank

Yeah, I think qualitatively, the pricing environment that we find ourselves in a pretty similar has been consistent for the last 18 to 24 months. While we’ve had a lot of success doing is number one, driving our cost down and that’s allowed us to be very aggressive where it makes sense to win a big volume deal. And then number two, selling our value and selling our features and functionality and, basically getting more out of the deal and selling out performance selling DSA, selling APS, selling additional functionality. Combination of those two things are that basically been what’s offsetting the price declines.

Todd Raker from Deutsche Bank

Okay and then my followup. I was hopeful you guys could give us some sense for what acerno should look like here in Q1. Just to we get a better feel for the organic growth profile of the business?

Unidentified Company Representative

So, acerno as we’ve said in the whole Advertising Decision Solutions it’s going to be an even more seasonal business, but it’s not uncommon for ad spend to be approaching half in the fourth quarter in some businesses. We expected to be heavily weighted to Q4 which is where advertising dollars gets spent enlighted in Q1 and I think we’ll have a similar model for acerno going forward.

Todd Raker from Deutsche Bank

Okay, thanks.

Unidentified Company Representative

Thanks Todd.

Operator

Our next question comes from the line of Mark Mahaney with Citi. You may proceed.

Mark Mahaney – Citi

Great thanks. Two questions. Could you talk about the Advertising Decision Solutions segment, I know you just talked about acerno there, but just in the marketplace now what kind of traction you think you are seeing for an integrated product? And then secondly, just in terms of thinking to long-term EBITDA margins near term you’ve got these negative issues related to the acerno acquisition, but any particular reason post that integration, post the resurgence in growth that you will eventually get, as the recession fades at some point. Any particular reason why margins, EBITDA margins wouldn’t expand somewhat in the future? Thank you.

J. Donald Sherman

Maybe Mark I will take the second question first, and then let Paul answer your ADS question, we basically hit or very nearly hit the model we talk - our billion dollar model as we called it. In 2008, with revenue obviously on sort of an $800 million run rate. So, we kind of achieve that profitability level before we expect and I think that’s great and I still believe that our overall billion dollar model holds you. What we wanted to even as the business has slowed down a bit, is continue to invest and, we generally see that impact as we go from Q4, which has a lot of growth through Q1, but I think our long-term model generally still holds even with the addition of acerno which tends to have a bit of a lower margin profile at least as they are now. Our view is that that business will scale overtime as well.

Mark Mahaney – Citi

So, let me talk about the, what we call ADS business. So ADS Advertising Decision Solutions, but our ad business is very exciting to us because, we are not a new player in the advertising, the online advertising ecosystem. We have been delivering online ads for most major portals virtually all of the major ad networks for many, many years. The key for us was, how could we add a lot more value and hopefully earn more from our customers? And so we looked at, what could we build on our own and where could we either build partnerships or make acquisitions. And what we’ve seen is that, the spend whether it’s spent by an agency on behalf of a market or marketer, or the other end the publishers, everyone is trying to get audiences nod impression. How do I get the segments that I want that are going to be interested in buying my products or if as an audience how do I sell the segment to the right market or a customer? And we believe that we can take a variety of a technology that we built and combine it with acerno’s data co-op up and expertise and create a full suite that allows us to add value to all the players, whether they are publishers, advertisers or the ad networks. And we have products now, to partner with each one to raise the efficiency of their business and we hope then share with them. The obvious first synergy that we’ll try to exploit with the acerno is strength in e-commerce. Their business was built primarily on mid tier commerce customers and their data co-op data from those customers. We have a very strong practice in e-commerce particularly, in most of the e-tailing top 100. Our goal is to introduce the acerno products into those top tier customers which we hope will grow the acerno business, at the same time when we do that get some of those customers to join the data co-op and improve the overall performance of all of our ads business. So, we think it’s a very large market. As I said, over $10 billion spent or actually $20 billion spent on online advertising increasingly those dollars are only going to go to accountable media in that needs how do I find an audience not just make a random impression. And we think we have a great suite of service that’s now augmented by the acerno capabilities then we are having very exciting conversations with again all those layers of advertisers and agencies, the ad networks and the publishers, and we think there we’re going to be able to develop a very good business over the course of the next couple of years, even in this incredibly difficult general advertising marketplace.

Mark Mahaney - Citi

Thank you Paul, thank you JD.

Unidentified Company Representative

Thanks Mark.

Operator

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

David Hilal – FBR

Great. Thank you, my first question is on the, the verticals media and entertainment was down sequentially and I want to get some color on that and then I wanted to confirm that the acerno revenues, mostly you are all fall in the e-commerce vertical?

J. Donald Sherman

Yeah, David the statistics we gave you excluded the acerno revenues for this quarter. We kept that out separately. So all those statistics on the verticals excluded the
$7 million of acerno, which in truth yet when we roll that in and we are mostly at the beginning be a commerce vertical play. We did see media growth slightly down sequentially as you point out, sort of continuing a trend of slower media growth that we saw all through the year a bit slower in the fourth quarter than we saw in the first half and I think the trends really haven’t changed. We still continue to see traffic growth in that area not at the rate that we saw last year or certainly the prior year, but pricing continues to sort of decline at roughly the same rate that we’ve seen the past in that kind of an environment. Particularly in some of the areas where there is less value-added content or, business models are little bit more speculative, there is a lot of pressure too either pull back on your business model or get more aggressive on pricing.

David Hilal - FBR

For your comment JD on acerno I mean this metrics that you gave add up 212 of revenue, which is, what you did in the quarter so I would think acerno was included in this you are saying is not.

J. Donald Sherman

No acerno I don’t know that adds up 212 the acerno revenue and the numbers I quoted was excluded from the percentage growth.

David Hilal - FBR

Okay I will going to add your metric sheet which...

J. Donald Sherman

Okay we probably did include on our metric sheet…

David Hilal - FBR

Okay.

J. Donald Sherman

And it’s primarily, its primarily going to be in the commerce sector.

David Hilal – FBR

Okay great and then I just want to ask about CapEx I know you are not talking about the full year from a…

J. Donald Sherman

Right.

David Hilal – FBR

Kind of revenue side, but CapEx you have given kind of in the past always percent of RAS how you are building that out is there any reason to think that would differ from past guidance for calendar year ’09.

J. Donald Sherman

No I think, we’ve talked about this 13 to 16% range for the long time and we said as traffic accelerates we get to the high end of that range and its traffic growth, moderates a bit we get towards the low end. Down a little bit below 15% this year, that include some facilities work that we did now we respect all those be an equal we are all here without given any full year guidance that we again, we add or below that 15% a little bit. Whereas a lot of 13 to 16% range we are comfortable in terms of our business model that we have got the right level.

Unidentified Company Representative

It also point to understand that we do a lot to drive more out of our network and a lot of that is software not buying the hardware and some of that is step function as we release the functionalities so the years were we get more pick up or less under the our own development work as well on that that has some play in the CapEx spend.

David Hilal – FBR

Okay, thank you. Guys.

Unidentified Company Representative

Thanks David.

Operator

Our next question comes from the line of Katherine Egbert with Jefferies. You may proceed.

Katherine Egbert – Jefferies

Hi, good afternoon. If you’re not going to us some guidance of the year, can you circle back on the $1 billion, you’ve had said where we go particulars of the analyst day the basically that frame was pushed out by year is that still the case what you say?

Unidentified Company Representative

You know that said that will be for 2 year out guidance. I don’t know how to….

Katherine Egbert – Jefferies

I think can you can you still get to the $1 billion say in the next 2 years.

Unidentified Company Representative

It’s really…

Unidentified Company Representative

We have to tell us sort of way you thought about the economic environment.

Unidentified Company Representative

Yeah, I think we know how do it, while we don’t know its how bad and how long the recession is if you said this was a classic 18 month recession we knew by labor day this year it was ending I think we could lay out plans to know how to predict our growth we are living in a world were everyday the unemployment numbers get worse everyone says we haven’t seen the bottom as a credit situation only a few months has to weekend were people told me the banking system worldwide with literally going to collapse and I thinking in that kind of environment its pretty hard to look out that parts. So, we think we know what the billion dollar model looks like just a little harder to figure out your on growth on the way but we are extremely confident about the value that we provide to our customers and the long-term growth of the Internet, but we don’t know what some of hiccups are going to be generally out there so being a little bit more cautious about this year. So, I certainly can’t tell you what next year will be if you could tell me what the GDP and the world is going to be like then I can give you a that’s why I guess

Katherine Egbert –Jefferies

Okay I will you call on the followup with that and how that on the EBITDA margin on that longer-term plan and you are still think it can be high 40s?

Unidentified Company Representative

Yes.

Katherine Egbert –Jefferies

Okay. Great thank you. Good job.

Unidentified Company Representative

Thank you,

Unidentified Company Representative

Thanks

Unidentified Company Representative

Thanks.

Operator

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

Jeff Van Rhee – Craig-Hallum

Yeah, just two questions if you would one, given the conditions we are in and in kind of being a very unique environment and if you look at your mix of core CDN versus the value-added offerings, just for in, really difficult selling environment have you noticed any particular characteristics about the urgency and the willingness of customers to follow through on purchases of course CDN versus the value-added in any characteristics that you’ve observed and the ability to just get those deals done and what’s increasingly difficult obviously the value-add has been a big growth engine and certainly I think many of you are very curious to how recession resistant that components might be?

J. Donald Sherman

No, we certainly see and we’re talking about it with the field more often. A few anecdotes where a deal takes longer or get pushed, but we had very strong signings of quality deals in Q4. We didn’t ask people running for the door thing. I’m just not buying anything also, we are not a budget flush kind of spend I know as people have a little money at the end of a month or a quarter and they say ship me some products. But with, Akamai you are signing up for 12 more bills or 24 or 36 months of bills. So, if you sign up with us you’re spending the money later so you really have to be confident and we had very strong customer adds in Q4 and I think the quality of those adds was very strong I talked about the tremendous e-financial services vertical deal we signed, very recently. So even in, a really battered sector we’re seeing people invest and I think overall, we have to remember that the IT economy is what I don’t know trillion dollars or something. So even in a static or even a shrinking world there is a lot of wall expense for us to go after and what we a customer saying, I want to reduce my facilities, I want to reduce the number of data centers. I want to consolidate my utilization of what I’ve bought is unbelievably low. We come in with a – you don’t need to buy more data centers. You are effectively virtualizing part of your Internet infrastructure on Akamai and you are not building for peak and so, we can demonstrate a very strong ROI and so I think for people who are saying how do I do more for less or more for even the same spend. We got a very compelling answer and I think that that continues to translate particularly in the value-added services world where the business models are very strong because, they are often e-commerce or B2B and they are not just dependent on ad dollars or revenue per viewer, where business models can be more challenge. So we feel pretty good about it. We are still being very cautious in the current macroeconomic situation but we continue to have strong pipeline to have a lots of appointments and lots of people interested in the value-added services and we are going to continue to go full force after those opportunities.

Jeff Van Rhee - Craig-Hallum

Okay. And I guess just last then JD it seems to me other than when notes in front of me when we, when you acquired Acerno you had said something under $20 million or just under $20 million for ’09, maybe just refresh me if that is what you said, and then along those lines you certainly had outperformance this quarter relative to that expectations does that need any revisions in your expectations for ’09 relative to what you originally said?

J. Donald Sherman

Yeah we are really pleased with how they did, we did expected that their full year will be about $20 million and they – they…

Paul Sagan

In ‘08.

J. Donald Sherman

In ’08, that’s correct. No we didn’t give any ’09 number.

Jeff Van Rhee - Craig-Hallum

Okay.

J. Donald Sherman

They beat their number by a little bit. You recall, we gave I believe the range was 4 to $6 million of revenue for Acerno in the quarter. We signed the deal a bit quicker than we thought. We signed it at the very beginning in November, so we got two full months and then they performed better than their own plans and I think that that’s a really positive sign.

Jeff Van Rhee – Craig Hallum

Is there I mean, just one last followup, since we have no history, can you give us anything else on acerno, if it slightly outperform we got a baseline of ’08 but we don’t have good semblance of even a wide range of potential growth trajectory still there on to what’s a core business I think most have a pretty good handle around?

J. Donald Sherman

Well I think you just take that kind of guideline from ’08 and remember that this is going to be a very tough year for advertising overall and we’re optimistic but we are not going to give a specific guidance for it. But I wouldn’t run away with anything in the current environment, but we are going to push them hard to overperform internally

Jeff Van Rhee – Craig Hallum

Okay, thank you.

Operator

Our next question comes from the line of Tim Klasell with Thomas Weisel Partners. You may proceed.

Unidentified Company Representative

Tim, are you there?

Tim Klasell – Thomas Weisel Partners

Yes Good afternoon everybody. Sorry for that, most of my questions have been asked but and I would someone like to go into the contracts that you are signing, What’s your customers or the contract lengths are changing at all and I also recall maybe middle of last year lot more customers are going with sort of capacity type contracts are sort of totals bids type of contracts.

Unidentified Company Representative

The contract length seems to be pretty stable. In the enterprise they tend to sign a longer ones in general. So again, no running for the exit in the market. They have been very encouraged and most of the contracts are on a monthly committed basis occasionally quarterly and sometimes if you will a bucket of data delivery but those are still the exception.

Unidentified Company Representative

We have similar what we talked about last quarter. Roughly about a third of our revenue comes from period buckets or everyone else described a longer than monthly commit then about two-thirds comes from the traditional monthly to commit model.

Tim Klasell – Thomas Weisel Partners

Okay, great and then finally just a real quick one update on the ARPU. You gave us some details on the ARPUs by vertical at your Analyst Day, was there any substantial changes in there? Or are you seeing one grow at the expenses of the other?

Unidentified Company Representative

I haven’t looked that closely Tim, but I don’t expect in one quarter that we saw that significant move one way or the other.

Tim Klasell – Thomas Weisel Partners

Okay

Unidentified Company Representative

Obviously where we saw the slower growth within our large volume media and entertainment areas and then some high-tech areas. So, you tend to expect that that will be a bit more of a moderation and we continue to get great traction in commerce particularly selling in our new solutions. So, if any thing ARPUs are expanding in that area and sort of growing closer to where they are in the media and entertainment space.

Tim Klasell – Thomas Weisel Partners

Okay, great. Thanks a lot guys.

Unidentified Company Representative

Thank you, so lets keep the questions tight we’ll get everybody in before the hour is up please

Operator

Our next question comes from the line of Rob Sanderson with Broadpoint AmTech. You may proceed.

Unidentified Company Representative

Hi Rob.

Rob Sanderson –Broadpoint AmTech

Yes. Thank you very much hi, good job in the quarter guys. My questions are related to pricing strategy, particularly in the non value-added products. Does it your, the balance of price versus share of change at all in an economic recession, as your customer’s IRR is on their planned projects are perhaps harder to achieve and your competitors are likely to get weaker. So it does that balance – do you look at that little different given the macro environment?

Unidentified Company Representative

You know I think we understand some of our customers are under more pressure than others. We try to work with them with suitable solutions in their industry. I think one of the strengths that we have with our balance sheet and having the lowest cost infrastructure is that we could be flexible to meet our customer’s needs and we always half or 10 years and we expect to continue to be, our customers are also concerned about viability of their suppliers and I think we’re the premier brand and that resonates well with many of them.

Rob Sanderson –Broadpoint AmTech

Just looking at the growth in the revenue per customer, it’s been on a steady decline obviously from great growth, but now starting to really, low single-digits, what should we think - how should we think about that up in the year completely for the new year or what do you expect on the revenue per customer front?

J. Donald Sherman

Well I think, that heavily influenced by what we’ve seen in the media and entertainment area. So that’s gotten into moderate, but we still think that a significant source of our growth is going to be selling into our customers new services and solutions. And as well, I think that if you look our longer term in the media and entertainment industry, it’s still have to say that that’s going to be a rapidly growing opportunity. So we’ll have to see how that plays out and a lot of that depends on what the macroeconomic conditions looks like. The other thing I should also mentioned is, we gave you the numbers without Acerno obviously this quarter. We will roll Acerno in short-term that will have an adjustment downward of our ARPU because the average ARPU of an Acerno customer is lower than ours. The long-term we think that’s an additional opportunity to grow ARPU with additional features and functionality and solutions into our customer base.

Rob Sanderson - Broadpoint AmTech

Okay, thank you gentlemen.

J. Donald Sherman

Thank you operator

Operator

Our next question comes from the line of Richard Fetyko with MCF. You may proceed.

Richard Fetyko – MCF

Hey guys, just to curious about your cash position and whether you are going to be acquisitive this year and what sort of areas or directions we should be considering acquisitions?

J. Donald Sherman

Well as they say cash is king especially in this environment and I think this is one of the reasons we built it up and it allowed us for example to make the Acerno acquisition in Q4, it was very strategic and then we basically replaced almost all that cash in the same quarter, which is the strength of the business models. So, we are going to continue to be opportunistic and look my guess is that over the next year or two prices will be very attractive. We just have to find the right additions to our portfolio and we’ll wait and we find the right thing in the past you have seen us do multiple deals in one year and some years not it all. And we’ll just take it one case at a time.

Richard Fetyko – MCF

But thanks for that, just curious is there any specific direction is it more – are you more focused on the value-added services or would you consider buying a competitor and then media and entertainment sort of mass volume download business as well.

Unidentified Company Representative

We will look at anything that we think it will be smart for our business and drive long-term growth and obviously shareholder value but beyond that I’m not going to speculate.

Richard Fetyko – MCF

Okay, thanks.

Unidentified Company Representative

Operator

Operator

Our next question comes from the line of Donna Jaegers with Davidson. You may proceed.

Donna Jaegers – Davidson.

Hi, thanks for taking my question. Any update on the auction rate securities and working towards to the settlements to get those to be closer to cash?

Unidentified Company Representative

We actually did close on a settlement with one of our fund managers that restore liquidity of about $75 million of our auction rate security portfolio. Basically, we’ve agree if those things are still liquidated by 2010 no buy it back and in the meantime though set of a credit line and no net cost if we want to drive down that on the full $75 million so that for part, we’ve sort of restored liquidity for that – for the reminder – the remaining $175 million or so on our balance sheet and that’s still remains pretty liquid. Our view is we will hold that until the market – the liquidity returns the market or we can find the solutions but certainly we are not having a major liquidity need that we have to rush and to something that doesn't make sense.

Donna Jaegers – Davidson

Is there a chance that you could go back to there of your suppliers for that, for pieces of that $175 million that still remaining?

J. Donald Sherman

Yeah I think we will work with and we have a new possible to - because we obviously when we are investing our money here and earning 3% interest that's not a great exciting use of our - our money. We want to be able use that investment business that we are working every avenue we can restore liquidity to that.

Donna Jaegers – Davidson

Great thank JD.

J. Donald Sherman

Okay.

Operator

Our next question comes from the line of Chad Bartley with Pacific Crest. You may proceed.

Unidentified Company Representative

Chad

Donna Jaegers with Davidson

Hey, thank you. A couple of questions on the restructuring, have you already reduce the headcount by the entire 110 employees in Q1 should we see kind of full benefit of that annualized $15 million in saving and then as you look how should we expect that the headcount stay roughly flat with that Q4 ’08 level?

Unidentified Company Representative

We took out about 80% already 5% and the rest will come out this quarter. We expect, I know as people who are all notified and they are adjusting transition so there is no over hang in the company everybody understands what’s going on.

Donna Jaegers with Davidson

Okay.

Unidentified Company Representative

And then we will get that.

Unidentified Company Representative

And then we did, you should just remember we didn’t say we would take some of the savings and invest back into the business and it would be possible that we would end ’09 with more heads than we go into ’08.

Donna Jaegers with Davidson

So there is some flexibility there I think at one point you said you would invest all of the savings now, are you saying not necessarily 100% of the savings but certain amount of that.

Unidentified Company Representative

I think your products we are taken is sort of a updated investment approach. We’ve – we want to continue to invest in the business then we are going to do it over, on a quarter-by-quarter basis and see how things go. But, we are very confident in the long-term direction that we are going in, and we think that some of the investments that we are making are the right ones for the long-term. So you will see, this make investment we – we, that was really the reason why we took the restructuring to put ourselves in a position to do that.

Donna Jaegers with Davidson

Okay thank you guys.

Unidentified Company Representative

Okay, Don.

Operator

Our next question comes from the line of Scott Kessler with Standard & Poor's Equity. You may proceed.

Scott Kessler – Standard & Poor's Equity Research

Thanks a lot. The tax rate in Q4 seem to according to my calculations fall, I am assuming that has some with the R&D tax credit I am wondering if you could talk a little bit about the tax rate in Q4 as well as what you are looking for from 2009 and I have a follow-up thanks.

Unidentified Company Representative

Okay sure Scott, the tax rate was lower in Q4 because you catching up for the full year or we end up 38% the R&D tax credit was part of it and other part of it is a equity compensation on the GAAP books FAS 123R is different from a timing perspective then, your tax books and so about to be around last year we ended 41% this year 48%, but nothings fundamentally change here on the tax rate.

Scott Kessler – Standard & Poor's Equity Research

Okay and any thoughts of our 2009 and so we expect kind of consistency.

Unidentified Company Representative

Filing in 40% is a reasonable assumption and maybe plus or minus, a couple of point.

Scott Kessler – Standard & Poor's Equity Research

Okay and my second question, there has been a lot of a…

Unidentified Company Representative

Yeah, we entering to the next one, we are not going to get everybody in. So operator next question, sorry one question and one follow-up we said we done in an hour

Operator

Our next question comes from the line of Steven Freitas with BMO Capital Markets. You may proceed.

Steven Freitas – BMO Capital Markets

Hi, good afternoon. And maybe done against this quarter.

Unidentified Company Representative

Thanks.

Unidentified Company Representative

Thank you.

Steven Freitas – BMO Capital Markets

I just wondering if auction rate specifics on the dynamics side of the house but I swearing if you could I will talk a little bit about your rate of growth and the application performance solutions or has there any meaningful change, and the reasons I asked that some of the equipment based tenders, we are facing some deceleration there and I would that, the resolution with lower upfront cost kind of periodical model and maybe holding up a little bit better in this environment.

Unidentified Company Representative

I think that is a major selling plan and when we are selling it is you know you turned that into an operating expense that, you spend the money while you are earnings payback and therefore were a little bit as Paul mentioned before a little bit insulated from the budget plus or the IT budget have been absolutely cut because we are more on a subscription pay service. There are anecdotal IT budgets are definitely being cut, there is no question about that so, there is – we have anecdotal situations were, sales cycles have done pushed out longer but we still think fundamentally, we are getting attractions and as nice to see it get attraction in industries which are really, having a very tough time and making significant cutbacks on their IT investment but still investing in their online application and you didn’t occupied to solve a problem that they really can’t on their own.

Unidentified Company Representative

I also think that our customers see that our solutions work They have invested in a lot of hardware and a lot of optimization in the data center and then their traffic hits the internet and the hardware doesn’t do any good and so, I think what they really seeing is they may have reach the limit what optimization in the data center behind the firewall can do and this network layers we can have it with their queue alert and the Akamai acceleration services take that away the minute they turn it on and they get long-term recurring benefit from using the service. So I think that’s helping to peddle that business for us.

Steven Freitas – BMO Capital Markets

And any benefit from the partnership with Citrix, so far.

Unidentified Company Representative

I don’t think this is the time sorry but about the specific channel partners but we continue to try to develop channel outlets for that service.

Steven Freitas – BMO Capital Markets

Okay, fair enough. Thank you.

Unidentified Company Representative

Thanks operator one last question.

Operator

Our first question comes from the line of Derek Bingham with Goldman Sachs. You may proceed.

Derek Bingham – Goldman Sachs

Hi, this is [Geo John] on behalf of Derek Bingham. Could you give some color on the pricing of the bandwidth in the quarter? Was there any change in pricing and any change in pricing expected to going forward?

Unidentified Company Representative

We continue to drive down the cost of acquiring network capacity that's a combination of bandwidth we acquired through a 1000 different partnerships, approximately, as well as the efficiency that we drive in our software. We think with the lowest cost provider and it gives us the real strategic advantage with our clients. But as we don't sell bandwidth, we’re really not a bandwidth so I think that, that's probably a question on a macro sense better address of those people and that in the whole thing [I’m nearing in bandwidth]. Anyway, thank you all for calling. It’s a great year, we are looking forward to ’09 and we appreciate you tuning in and we will talk to you again in another three months bye.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.