Akamai Technologies, Inc. (AKAM) Q3 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Akamai Technologies, Inc. Earnings Conference Call. My name is Melanie, and I'll be your coordinator today. [Operator Instructions] I would now like to turn the call over to Ms. Natalie Temple, Investor Relations. Please proceed.

Good afternoon, and thank you for joining Akamai's Investor Conference Call to discuss our third quarter 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 October 27, 2010. Akamai disclaims any obligation to update these statements to reflect future events or circumstances. As a reminder, we will be referring to some non-GAAP financial metrics during today's call. A detailed reconciliation of GAAP and non-GAAP metrics can be found under the News & Events portion of the Investor Relations section of our website. Now let me turn the call over to Paul.

Thanks, Natalie, and thank you, all for joining us today. Akamai performed very well in Q3. Revenue growth accelerated for the fourth consecutive quarter, and we delivered strong results across the entire business. Revenue was a record, nearly $254 million, up 23% from the same period last year. We generated fully taxed normalized net income of $64 million, or $0.34 per diluted share. That was up 23% from Q3 of last year. Cash flow generation in Q3 was very strong with $118 million cash from operations in the quarter and $292 million year-to-date. We continue to leverage our profitability to make investments that are designed to help our customers expand their online businesses into the cloud. I'll be back in a few minutes to talk more about some of the key trends we're seeing in the marketplace but first, let me turn the call over to J.D. for details on Q3. J.D.?

Thanks a lot. As Paul just highlighted, our business performed very well in the third quarter. We grew revenue $8 million sequentially and 23% year-over-year to $253.6 million, coming in just above our expected range for the quarter. We delivered solid growth across all of our key verticals. Media and Entertainment remained our fastest-growing vertical for the second quarter in a row. We, again, saw strong traffic growth, especially among the largest most strategic accounts. During the quarter, Media and Entertainment grew by 26% over Q3 of last year, and 6% over Q2 of this year. The E-Commerce revenue growth accelerated to 24% compared to Q3 of last year and grew 3% sequentially, driven by continuing adoption of our value-added solutions. With new product introductions in the mobile and online security markets in the past few months, we continued to add to our portfolio of solutions targeted at this customer base. Revenue from our high-tech customers grew 13% year-over-year, down 2% sequentially. We have a very strong software delivery business at the core of this vertical, and we also saw increased demand for Application Performance Solutions from Software-as-a-Service customers. Public sector revenue was up 28% from Q3 of last year and up 5% from last quarter, continuing the solid performance we've seen for the past several quarters from government contracts. Across-the-board, we are pleased with the continued growth of our value-added solutions. In Q3, 55% of our revenue came from value-added solutions, up from 50% in Q3 of 2009. And 78% of our customers are buying at least one of our value-added solutions. During the third quarter, sales outside North America represented 28% of total revenue, consistent with the prior quarter. International revenue grew 20% year-over-year and 3% sequentially. Foreign exchange had a negative impact on revenue of just over $1 million on a year-over-year basis but a positive sequential impact of about $2 million. Excluding the impact of currency, international revenue grew 22% on a year-over-year basis but declined 1% sequentially. Revenue from North America grew 24% year-over-year and was up 4%, sequentially. Resellers represented 18% of our total revenue, down a point from the prior quarter. As expected, cash gross margin of 81% was down a point from last quarter and from the same period last year. GAAP gross margin, which includes both depreciation and stock-based compensation, was 69% for the quarter, down two points from the prior quarter and down a point from last year. GAAP operating expenses were $116.7 million in the third quarter. These GAAP numbers include depreciation, amortization of intangible assets, stock-based compensation and restructuring charges. Excluding these non-cash charges, our operating expenses for the quarter were $90.6 million, up $2 million from Q2 and up 25% on a year-over-year basis as we continue to invest in the business. Adjusted EBITDA for the third quarter was $114.1 million, that's up 19% from the same period last year and up 2% from Q2 levels. Our adjusted EBITDA margin came in at 45%, consistent with our prior guidance, down a point from the same period last year and from the prior quarter. For the third quarter, total depreciation and amortization was $36.5 million. These charges include $28.3 million of network-related depreciation, $4 million of G&A depreciation and $4.1 million of amortization of intangible assets. Net interest income for the third quarter was $2.6 million, that's down slightly from second quarter levels and from Q3 of last year, despite a higher cash balance due to lower interest rates on our investments. Moving on to earnings, GAAP net income for the quarter was $39.7 million or $0.21 of earnings per diluted share. As a reminder, our GAAP net income includes several primarily non-cash items, including $20.4 million of stock-based compensation, including amortization of capitalized equity-based compensation, and $4.1 million from amortization of acquired intangible assets. As a reminder, this year, we are including GAAP taxes when we report our normalized earnings this quarter, although they are primarily non-cash. For Q3, that tax charge was $20.6 million based on a full year GAAP tax rate of about 37%. The supplemental metrics we posted in the Investor Relations section of our website provide the 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 third quarter was $64.2 million, up 23% from Q3 of last year, and down 1% from Q2. In the third quarter, we earned $0.34 per diluted share on a fully taxed normalized basis, coming in at the top end of our guidance range, as of $0.06 from Q3 of 2009 and consistent with Q2 of this year. And our weighted average diluted share count for the second quarter was 191.3 million shares. Cash generation continue to be very strong. Cash from operations for the third quarter was $118 million. Year-to-date, we've generated $292 million of cash from operations or 40% of revenue. At the end of Q3, we had $1.2 billion in cash, cash equivalents and marketable securities on the balance sheet. This balance includes $150 million of student loan-backed auction rate securities. As for our convertible bonds issued back in 2003, we recently notified the holders of our intent to call the bonds on December 15 of this year, the first opportunity to do so. As a result, we expect the remaining $59 million of those bonds to be converted to equity in Q4. The impact of this conversion is already reflected in our fully diluted share count, so we're pleased that we will be formally debt-free by the end of the year. Capital expenditures, excluding equity compensation, were $42 million as we continue to build our capacity to support the accelerating volume growth on our network. This number also reflects increased investment in capitalized software development. During the quarter, we spent $22.7 million on share repurchases, buying back about 522,000 shares at an average price of about $43.50. Since the beginning of our share repurchase program last year, we have spent $131.4 million, buying back a total of 5.2 million shares at an average price of just over $25. Finally, our days sales outstanding for the quarter were 58 days, consistent with Q2. We're very pleased with the accelerating growth we have seen during the first three quarters of the year, both in terms of traffic growth and value-added solution traction. We believe the industry trends underlying this growth remains strong, and we remain confident that these trends can continue. Q4, holiday seasonality also plays a role in our performance, particularly in online retail and advertising. As a result, the fourth quarter tends to be our strongest quarter, but also the most impacted by the external macroeconomic environment, which remains somewhat hard to predict. Given this, we're expecting Q4 revenue of $272 million to $285 million, a wider range than our normal guidance reflect this variability. If the holiday season is as strong as it was last year, we'd expect to be at or near the high-end of this range with 20% growth on a year-over-year basis. The online retail and advertising seasons are not as strong as they were last year and we would expect to be towards the lower end of the range. The midpoint of our revenue guidance translates into 10% sequential growth and 17% year-over-year growth. At current spot rates, foreign exchange should be roughly neutral on revenue growth on a year-over-year basis and provide a roughly $4 million benefit on a sequential basis. We expect gross margins to remain relatively stable with a bit of downward trending, driven by the seasonal growth in our Advertising Decision Solutions. Cash gross margins are expected to be in the range of 80% to 81%, and GAAP gross margins, including equity compensation, will remain around 59%. We're planning to continue investing in the business in the quarter, particularly in the areas of staffing and network capacity. With the normal expense items we see in Q4 such as year end commissions, we expect adjusted EBITDA to remain at about 45%, consistent with the prior quarter. At this level of revenue and with the investments we're planning, we expect to see fully taxed normalized EPS of $0.35 to $0.38 for the quarter, or 9% year-over-year growth at the midpoint of the guidance. This assumes a full year GAAP tax rate of about 35% or taxes of $21 million to $25 million in Q4. This is lower than the full year tax rate we have accrued for in Q3 as we expect the R&D tax credit to be reinstated in Q4. In CapEx, we expect to spend around $50 million in the quarter, excluding equity compensation. It takes our full year investments around 19% of revenues, reflecting our focus on investing to stay ahead of the growth that we expect in the network and making up for some lower spending in 2009. This investment would temporarily put us above the model levels we've previously discussed. However, we believe our long-term model goal of 13% to 16% of revenue still holds for CapEx. On a full year basis, even at the lower end of the guidance we're providing today, we expect to deliver on our goal to reach $1 billion in revenue for the year. With our Q4 guidance, this implies full year revenue in the range of $1,011,000,000 to $1,024,000,000, up 18% from last year at the midpoint; and normalized earnings per share of $1.38 to $1.41, up 15% at the midpoint. We think the momentum we've demonstrated in 2010, couple with making key investments in the year positions us very well for future growth. While it's still to early to predict 2011 performance and while we traditionally haven't done so at this point, we do believe that the current Street consensus of 15% top line growth is probably a conservative estimate. We look forward to having the opportunity to go into more details with you about the business and future trends in the industry at our upcoming Investor Summit later in the quarter. Now let me turn the call back over to Paul. Paul?

Thanks, J.D. As our Q3 results demonstrate, we've been seeing the benefits of more and more businesses of all kinds moving to the cloud. We're pleased with the growth this shift has brought to Akamai and we're very pleased that we'll hit our $1 billion revenue goal this year. To ensure that we remain well positioned to capture future opportunities for growth, we've made some significant investments in 2010, including $150 million in capital spending to expand our network by the end of the year, adding over 400 new employees overall this year, mainly focused on engineering and go-to-market role, and a strategic technology driven acquisition earlier in the year in the mobile market. These investments are targeted helping our customers grow their online businesses are using more and more of Akamai's shared services in the cloud. I wanted to take a couple of minutes to tell you about the Customer Conference we held earlier this month because the turnout was so strong and the feedback from clients was so positive. We had about 500 attendees, including representatives from more than 250 customer companies, 26 partners from our ecosystem and more than 25 countries. These attendees came together to talk about best practices for their online businesses to give us valuable feedback on how we can do even more to help them succeed. It was a great event. We're seeing incredible innovation from our customers as they leverage the cloud in new and exciting ways, as they innovate the performance, scale, reliability and the security that Akamai provides matters even more to their future success. Speaking with our retail customers, it's clear just how important Akamai services are to their businesses. Online e-commerce is growing to half a trillion dollars worldwide according to e-marketer, with about $150 billion of that in the U.S. alone. So today, 260 of the top 500 U.S. Internet retailers use Akamai. Looking at it another way, we estimate that around 2/3 of all that online commerce transactions in the U.S. happens over the Akamai network. Top retailers rely on us to accelerate and secure their transactions because they know that better performance like you get with Akamai Dynamic Site Accelerator translates into more revenue for them. The enterprise, today we measure the number of applications running across our network in the tens of thousands. Many of these applications are mission-critical functions that require performance, reliability and security levels that simply can't be delivered over the regular old public Internet without Akamai's Application Performance Solutions. The world is changing online as our customers innovate in their business' grow, stakes get higher for them, particularly around security. Unfortunately, with the amount of online activity increases, the number of threats to online assets is also going up. We believe a key part of smart defense for our customers on the Web is to take advantage of security in the cloud, by moving their perimeter defense as far from their data centers and their data. This is a principle behind our Web Application Firewall offering. This service is designed to detect and block attacks before they reach our customers' origin, because once that happens, it's often too late to stop them. Several clients spoken our comments about how they are taking advantage of the Web Application Firewall from Akamai to protect their online businesses. One in particular is Motorcycle SuperStore. They talk about choosing Web Application Firewall, in combination with our Dynamic Site Accelerator and Akamai's Site Shield to protect origin infrastructure. This helps them to comply with the evolving PCI requirements imposed on Internet retailers. Another important new area for us is Akamai's Edge Tokenization electronic security service. We unveiled this in Q3. This solution can significantly decrease PCI compliance and fraud costs for our commerce customers by reducing the amount of sensitive credit card information our retailer needs to handle online. Another focus area for many of our customers is mobile. The number of mobile devices continues to increase. Our customers want to make sure their businesses can easily reach users on these devices cost effectively and with high performance. Akamai helps by handling the complexity of optimizing how content is displayed on different devices. Hard Rock International, for example, base is very challenge and is using our mobile optimization service to deliver relative content from their main website to mobile users on their handheld. In online marketing, we continue to see advertisers demanding more effective and more accountable campaigns that can be delivered quickly and efficiently. This is why we launched our pixel-free advertising solution and why customers has diversed its Kroger and Boston Apparel are using this service from Akamai. Already in Q3, 30% of the revenue for our Advertising Decision Solutions comes from our pixel-free offering. In media, Akamai HD Network enable to deliver a TV-quality experiences to audiences rivaling the size of those for many TV shows. And audiences today expect a high level of quality on the Internet where they won't watch the programming. That is with many of our customers and comparisons have shown that user engagement is significantly higher when video quality of the Internet matches the quality on TV, and higher levels of engagement translate into more opportunity to monetize programming online. All of these examples demonstrate our commitment to expanding our portfolio of services to meet our clients' current and future needs. So in summary, I'm very pleased with our third quarter results. I'm very energized by the feedback we received from our clients at our Customer Conference, that came away from their more committed than ever to our strategy of helping clients accelerate the growth of their online businesses by leveraging Akamai's unique, highly distributed computing platform. As J.D. said, we're looking forward to talking more about our strategy at our upcoming Investor Summit here in Cambridge later this quarter. There we'll also have an opportunity to introduce many of you to our new President, Kenny. Now J.D. and I would like to take your questions. Operator, the first question please?

[Operator Instructions] Our first question comes from the line of Sterling Auty with JPMorgan. Sterling Auty - JP Morgan Chase & Co: I'm just wondering when you look at the value-added services business, there were some headlines from AT&T in partnership and some talk about Limelight. Can you just give us some color as to what you're seeing in the competitive landscape? And is there any actual change in the pricing dynamics in the value-added services part of your business?

No changes that we've noticed in the areas you've talked about right now. We've embraced being in a competitive market for over a decade. And we know that in growth markets, especially in technology, they're really, really competitive. And I think what we've done is position Akamai as the innovator. We use our massively distributed network, our unique asset, and differentiate a technology in 10 years of development to have, we think, the most complete portfolio. And over and over again over the years, we've seen people try to take a single centralized network and extend it to reach users everywhere anytime with great performance. And we just don't believe that, that works. So in growth markets, there tends to be a lot of noise. Our markets have grown pretty dramatically over the decade as you know, now approaching $1 billion in revenue for Akamai this year. And so there's a lot of attention, a lot of people who have tried to come up with competitive offers. But in general, this less attributed network architecture is just base performance problems that they can't overcome regardless of the technology that they deploy, let alone, we don't believe they have the same kind of technology for, say, dynamic routing that Akamai can bring to the equation. So we think our Dynamic Site Acceleration capabilities are differentiated. We welcome the competition but we think that those solutions don't stand alone in the marketplace. Sterling Auty - JP Morgan Chase & Co: And maybe one follow up, in terms of the CapEx levels, investment this year, is that going to be necessary to be sustainable into 2011, or is there a point where you get a little bit of additional leverage? Because I want to think about how that flows through to the expense line as we think about 2011?

Yes, I think we're pretty comfortable that over sort of a sustained period of time, we'll be below that level and into our model range. It's tough to say exactly how rapidly we decline into that range. As long as traffic keeps accelerating, we're happy to keep investing to capture that traffic and support our customers. Now if you look over the last couple of years and the revenue to CapEx equation, we're right in the range. If you look over the last five years, you look over the history of the company. So I think going forward, you'll see it in that range how quickly, Sterling, it declines into that range, it's hard to stay.

Our next question comes from the line of David Hilal with FBR. David Hilal - FBR Capital Markets & Co.: Paul, could you talk a little bit about the security solutions and the success you might be having selling that into the commerce vertical? And I guess maybe specifically, when I think of kind of Edge Tokenization, what percent of the commerce base do you think are applicable customers for that type of solution?

I think what we're seeing is that it's more and more at stake and more, and more bad guys trying to take a piece of it and our customers are having to pay more and more attention to security online, because they just have more to protect. So you may recall, we started with DoS mitigation services for Denial of Service attacks which doesn't apply just to commerce sites but often to high-profile sizable of all kinds. We continue to offer those services and we added Web Application Firewall, which you can think of as effectively filtering traffic before we send it back to our customers' origin to run against their database and their applications there. They can apply their own rules to filter the traffic which is different than just filtering out a DoS threat as a series of actually legitimate request, and then we've taken that step further with Edge Tokenization. Now that service was just introduced. I'm sure you would assume we haven't installed that to a lot of people yet. We've been testing it, and now have really strong interest. And that probably applies to all of our commerce customers who are dealing with credit cards today, because the challenge is, they take the credit card number and they really don't want it. But if they don't have something that they can take to the bank to get paid, they can't get their money for having shipped the product. The way Edge Tokenization works is, since we interact at the Edge with their customer online, we can immediately and securely turn the credit card number into a random digit, which can be used by that merchant wants to go get paid. But if anyone ever stole that number, it's completely useless because it's not actually a person's credit card number. So you can think about that in terms of lowering the complex security, lowering the cost of PCI compliance and if we can help our customers lower their security costs as they get more secure, that means they can be more efficient with their customers. So I think this whole range of security and probably, more things that we can offer over the coming years from the cloud applied to a wide range of enterprises. But right now, they're dead thinner on what our commerce customers need today, I think will increasingly need over the next few years. And it's one of the things that are distributed deployed network is so good at because the shortest path there that reconnects to the end-user, that credit card number effectively can be destroyed then and there, it doesn't have to fit somewhere being vulnerable. David Hilal - FBR Capital Markets & Co.: And then the high-tech sector, that was down sequentially. Given kind of the proliferation of SaaS, I would think that'd just be a natural tailwind. So what would cause that business to be somewhat soft in the quarter?

So it was also down sequentially last Q3, so there's a little bit of seasonality there. A lot of that business -- still a majority of that business today is software download. A lot of it. So the antivirus guys that you upload -- or you download the new antivirus software when you log onto your laptops and that seasonal usage where we see that there. Certainly, the growing use of Software-as-a-Service in that vertical is a tailwind. And the share of Software-as-a-Service customers at that vertical is growing. And I think that's what's driving the year-over-year growth. And in fact, if you look at that vertical from Q2 to Q3, the year-over-year growth actually did accelerate. David Hilal - FBR Capital Markets & Co.: And then finally, on cash gross margin, so they were down a little bit. How much of that is due to M&E just doing really well, and it's kind of the cost of doing business in that high-volume sector, and just kind of a necessary part of the business? And then how do we think about it going forward for 2011?

Yes. I mean, if you look at the M&E vertical, in last Q3, that vertical was shrinking. I think it was shrinking 7% or 8%. And now it's growing 26%. That vertical, as we've talked about, has lower gross profit margin because it's just so heavily volume-oriented. On top of that, we're seeing the growth with our very largest customers, which is great news. They are our strategic customers, but we also have the most aggressive prices there. So a combination of those factors has put the downward pressure a little bit on our margins. But margins are still -- we've been in the 81% to 82% range for quite sometime. I think there's a natural balance going on with our value-added solutions and the volume-driven solutions.

Our next question comes from the line of Michael Turits with Raymond James. Michael Turits - Raymond James & Associates: Back more on the margin side, why should -- I think you've mentioned it briefly, but why should the cash gross margin had down sequentially in the fourth quarter? I think pretty sure they were up last year in the fourth quarter. And then a follow up on David's question, what are your thoughts to where cash flows margins will go into next year?

Yes. I think the margins will be roughly stable. The one just sort of drag on a quarter-over-quarter basis in our Q4 is the Advertising Decision Solutions business, which has a lower margin on average than our overall business in the 50% range. So we do expect to get sequential growth out of our Advertising business, and that impacts the mix a little bit. Of course, if you go the other way with scale which to the extent we have a lot of growth in the quarter that will help offset that. As far as going forward, we haven't given any specific guidance going forward, certainly not the next year. Our long-term model does assume that the Media business continues to grow, and therefore, we see our cash gross margins tick down a little bit. But as we've talked about the nice thing about that is that business scales differently. And we think we can maintain our EBITDA margin in the 45% to 47% over long period of time, and that's our long-term model. Michael Turits - Raymond James & Associates: My follow up, J.D., I don't remember, did you guys mentioned anything about what the pricing environment is like?

Well, I think we got a question on the pricing environment as a value-added solution, and the answer was not very different. I would say that the same answer on the volume-driven side, it's very similar pricing environment to what we've seen for a while now.

Our next question comes from the line of Scott Kessler with Standard & Equity (sic) [Standard & Poor's Equity Research]. Scott Kessler - S&P Equity Research: So other expense was a lot more than we had projected. Can you provide...

Other what, Scott? Scott Kessler - S&P Equity Research: The other expense item.

You mean operating expenses? Scott Kessler - S&P Equity Research: Yes, it was $1.4 million, which...

I'm not sure exactly what you projected, but one of the things about foreign exchange is it obviously drives the benefit sequentially to our revenue, but it also causes us an impact in the operating expenses and the revaluation of some of the balance sheet items. So we've got $2 million benefit on revenue but almost over $1 million impact on the revaluations of the balance sheet items. So that's what's driven that. Scott Kessler - S&P Equity Research: Just impact the hedging program essentially?

We don't have a hedging program as of today, so... Scott Kessler - S&P Equity Research: So it's basically just the impact of FoRex on your model as it appears the way you've presented it?

Sure. All of our assets overseas such as accounts receivable gets revalued based on the dollar. Scott Kessler - S&P Equity Research: And the second question I had is, when you think about your verticals and obviously, there are a lot of puts and takes, but I've been taking a lot about public sector, which is a place that you guys have been focusing on and having some success. Can you give us a sense of where those revenues are coming from in the context of domestic, international or, say, Federal versus state, or anything along those lines that can give us some insight as to really where these revenues are coming from?

Sure. It has been a very good vertical for us not just for stable and growing business with great long-term clients but also frankly, where we've developed some of our newest service because there's some pretty critical needs there and pretty creative customers. By and large, it is domestic U.S. and by and large of that, it is Federal national business, both if public facings G2C agencies or the military, we just talk about all the branches of the military, for example, use our services. So I'd say, weighted U.S. and weighted Federal. Certainly, I think there's a lot of need for performance enhancement at the state-level. The state has just been reeling so much in the last few years. I think they're stuck in keeping inefficient processes rather than being able to invest in some of the new automation and Web services they might be better off using long term.

Our next question comes from the line of Mike Olson with Piper Jaffray.

As we talk to some of your customers, we hear a lot of them using Akamai for more important components of their content delivery, but then using lower tier providers for less critical things. It's capturing some of that lower tiered business of potential growth opportunity, or is it lower margin revenue that would ultimately be detrimental to the model, or how do you think about that?

Well, Mike, you probably always heard us talking about our main competitor is first, do-it-yourself. Our customers are big sophisticated businesses and Internet is a portion of their IT, so they always have capacity to run a website. And we certainly don't tell people that you can't run a website without our help. So the hurdle is what high-value and where do we demonstrate value, and then we have to compete with do-it-yourself, with managed service providers and with point competitors who try to be, say, just in the CDN in the niche or a vertical. So that's a constant for us and we don't provide the basic services. We don't do ISP services, we don't do hosting. So some of that base capacity which frankly is low margin to no-margin business isn't where we focus. And I think there's always that middle ground where we might be able to help somebody in the context to have a bigger relationship. We might take on a little more than we might normally going after a greenfield opportunity. But that's a pretty constant evaluation we do, and our goal is to have premium high-performance, always available, highly secure services with the best companies online, with the best business models see the value in and want to invest in using.

I would also add on that one, Mike, that we've seen a lot of the growth of that kind of content that you referenced becoming more and more important over time as businesses get more and more profitable online. I think the trend we're seeing in the media space is some of those business models start to take hold.

And would you be willing to share what you expect VAS will be as a percent of revenue in 2011?

Well, certainly, my guess is it's going to continue to grow, even in this year where our Media business which is largely volume driven has accelerated to be in our fastest growing vertical outside of public sector. We've seen it go from 50% to 55%. So I think there is really strong momentum there, number one. Number two, that's where you're seeing us make some of our strategic investments and strategic acquisitions. So I won't pick a number but I do think we'll see a positive trend. And I said in the fourth quarter, I wouldn't be surprised. Earlier in the year, I said, in this fourth quarter, I wouldn't be surprised. If we're close to 60%. We'll see about that given the strength of the volume business but we're certainly heading in that direction.

Our next question comes the line of Jennifer Swanson with Morgan Stanley.

I just wanted to drill into the commentary around calendar '11 and I know you're probably not going to give us a lot of detail at this point. But I was sort of curious as you think about 15% being a conservative target for next year? As you look at the different components of the business, media versus commerce versus application acceleration within high-tech, where do you kind of see the biggest opportunities that give you comfort that, that 15% is conservative?

So I think, and we're not going to be specific because frankly, our crystal ball isn't that precise at this point. We see opportunity in all of them and pretty balanced and what's a little hard to predict is the rate and pace. And you've heard us talk about on video, if 1% of video in the home is where we are today, there's a lot more opportunities for growth and we think the growth rate is accelerating the same with the growth in the online advertising space. We're just being an explosion of interest among commerce customers here and across-the-board. And the guys lower on the list are getting bigger. So someone who is maybe Internet retailer are 300 to 400 with two small five years ago is a great target today. So really, across-the-board, we see opportunity and we've been growing it greater than that rate this year. So we think it's a conservative lower-end only because we got passed the worst of 2008, 2009 and our performance is significantly better than that now. So we don't see any reason we shouldn't be able to have a strong year next year. That's not to predict that it will be exactly as good or better than this year. It's too early to know. But that 15% range, which is where the Street seem to be, seem to us just to be a pretty conservative number based on what we've seen so far. And we don't think any of the verticals should fall out of bed and they all have potential for us.

I would just add, if you look at our business by value-added solutions versus the volume-driven solution, this year and even last year, our value-added solutions have been growing at a pretty close to a 30% clip. That part of our business was 30% grower. What's really changed for us in 2010 versus 2009 is that the volume-driven solutions that return to growth after being flat to actually slightly down in the prior year. So as I think forward in 2011, I'm very confident that we'll see continued growth in the value-added solutions. We're very focused on that with our investments. The more of a wild card where you need a crystal ball is what happens around the volumes stuff.

Our next question comes from the line of Tim Klasell with Stifel, Nicolaus. Tim Klasell - Stifel, Nicolaus & Co., Inc.: First on the value-added services, can you give us a color or any particular services, or verticals that are driving that growth?

I think it's across-the-board, enterprise, SaaS, commerce. Clearly, strong commerce interest and some strong new deals through the summer. But also just enterprise across-the-board, interest in the new security services, interest on in mobile as well, and just real strength in the portfolio of Dynamic Accelerator Services offers from Akamai. Tim Klasell - Stifel, Nicolaus & Co., Inc.: On the extra CapEx that you're spending, is there any particular area, I know three years ago, you spend a lot on storage or is it just sort of across-the-board?

It's network build out, which still includes storage, particularly driven by what we see in the media vertical and then delivery capacity, servers in the network, both standing capability and existing regions and continuing to build out more capacity in markets that might have been smaller outside the U.S. previously and are continuing to grow, too.

Our next question comes from the line of Phil Winslow with Crédit Suisse.

This is Siti Panigrahi for Phil Winslow. I wanted to ask about the pricing in public sector, if there have been any changes with other IT vendors working at tougher selling environment? Also, how do you think about the growth of this business over the next 12 to 15 months?

Well, the pricing in the public sector, very consistent. They're great customers. Obviously, we have to describe to the rules of selling to the Federal government around the pricing standards and contract standards now that all vendors have to pay. But we believe what we offer there is very differentiated, particularly with the security aspects we offer, and that is a big concern in the public sector space. So great market for us, and we'll look for ways to continue our growth there. And I really don't have much more color than we have on the last question from Jennifer around expectations for 2011. And I think we've really said about what the ought to say and notice on growth trends for the next 15 months.

So just follow up, on High-Tech business, did you guys say what's the mix between the SaaS-related revenue versus traditional software download?

The last time I looked about 60% of that vertical was driven by volume-driven stuff, and 40% was driven on the value-added side. So it's not purely straight software downloading SaaS. A lot of our big software download customers are DSA customers and APS customers. But I think the key driver on the sort of 40% value will be SaaS.

Our next question comes from the line of Derek Bingham with Goldman Sachs.

J.D., a question for you on the investments that are required to kind of go after the enterprise opportunities. Could you just give us an update on kind of where we are in that investment phase versus when you get to kind of more of a harvesting mode?

Yes. I think we're probably a long way hopefully from the harvesting mode when we're talking about getting into the enterprise and cloud computing. I think in terms of characterizing those investments, it really comes in two flavors: one is innovation and then the second is supporting enterprise-class customers. Because obviously, as these guys move more and more mission-critical applications over the Internet and count on Akamai, they expect a higher level of service. The good news is they were also willing to pay for that higher level of service, and so I think that works out to be a really great investment. So where you're seeing the investments from us on the go-to-market side, both in sales, industry-driven sales and on the support side and also, the investments we're making in engineering, almost all of our incremental spend in the engineering organization as well as the acquisitions we've made is focused in that space.

My follow-up is related to that, on the international space, it looks like if I'm looking at it right, the mix of the international business has been pretty stable for a good while now, and so just curious kind of what your thoughts on what's happening in the international market, if there's a time that you foresee when that's going to start to kind of pickup and become a greater percentage of your mix?

Well, I think there's always a potential for that. There's just more users of the Internet and more business on a global basis. But we've also talked many times about the development and acceptance of outsourced Internet services. It lags internationally. And frankly, we've had such great growth domestically that international has to run even harder. And believe me, I tell the teams that and they say, "Oh great, if you have guys that just slow down, we'd look better." And I said, "It doesn't work that way, unfortunately." So I think there's even more opportunity internationally, and I think we're well positioned in most of the promising markets to go after either directly or through some great partners. And I would expect long term, international will contribute a bigger percentage to the business as well channels. And as long as we keep finding as much opportunity in our first market in North America, we may see this pretty stable balance growth.

Our next question comes from the line of Katherine Egbert with Jefferies. Katherine Egbert - Jefferies & Company, Inc.: So you had a large receivable from a customer last quarter, was all that collected this quarter?

It sure was. Katherine Egbert - Jefferies & Company, Inc.: And that was a one-time event, right?

It was not a one-time revenue thing, Katherine. That's revenue that we'll recognize over several periods going forward. But the receivable was all collected. Katherine Egbert - Jefferies & Company, Inc.: And then with David Kenny coming on you, he's got an interesting background. He was obviously at a French company and he's also from the advertising area. Can we expect more solutions that maybe cater more to an international audience or perhaps, a more advertising-centric?

Well, I don't wanted to track all from David's global experience and I'm thrilled to have him here as an executive. But I just should remind anyone who doesn't know, he's a Boston-based guy. He was then with and CEO of Digitas headquartered in Boston, and one of the companies that really revolutionized online marketing and Digitas was sold to Publicis. And so then he was part of a giant global company based in France and he knows how to speak French in addition to English. He is a great executive across-the-board as a strategic thinker and operator and understand, really, all aspects of how companies have leveraged online to grow their business. So you certainly going to bring what's top of mind in his expertise from the advertising and marketing world. He's certainly going to bring his expertise about growing global markets. I think in his last role at VivaKi [ph] and responsibility to businesses in over 100 countries. And so I think really, part of the response to your question and Derek's previously, he, too, asks what's helping us figure out how to grow even more internationally. But he is a balanced executive with responsibility for operations across-the-board. He truly understands how the cloud is going to revolutionize businesses not just media, not just international business.

Our next question comes from the line of Mark Mahaney with Citigroup.

Just wanted to follow up on Derek's question about international. And are there still certain products that you want to rollout in those markets? Do you think there is still a little bit of macro pressure there that maybe is not here? The international growth rate you have is pretty good, you would expect it to be higher than the U.S. at some point? Is it just a matter of product cycles?

Well, first, I think that there is -- particularly in Europe, there is a macro pressure. The economies there were hit pretty hard and demonstrated less growth than some of the Asian markets. So I think there is just a macro piece. And then it's not as much new product development in some ways, it's customization and localization that takes along. Some of that is the basic walking and tackling of translation and training people to sell the same thing in different language, and some of it is just allowing people to customize the functionality on the network to do something that may apply more in the specific and often smaller than U.S. market, overseas.

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

The CapEx number is again, you bump them last quarter from 16 to 17 and now we're going to 19. I'm just curious, at the sort of the delta there, what is it in the last quarter or two that's really led to the incremental investment? We can see the outperformance here, you've been on the high-end of the range, doesn't put up good numbers and good guidance. But it seems like what you're doing here on the CapEx side is really pointing to something we're not necessarily seeing. Can you put that in a context of what specific capabilities or what specific verticals, or what's new with that very kind of the leading edge of that delta?

So I think I'd say, first, a lot of that is around capacity for the volume business but also, expansion of our services and performance services worldwide and getting closer to end-users. But I think one other thing to really think about, and I would just underscore the point that J.D. made before which is, we gave you a long-term model, and if you look at the last couple of years at the last five years, we're really right inside that model. And sometimes our spending has been lumpy and sometimes it's been low, and now it's been a little higher. But I think overall, it's very consistent and we still believe that you can use those long-term models as a long-term guide on the business.

The other thing I would just add to that is, if we're ever going to err on our CapEx, we're going to err on the side of buying it too soon rather than too late. So worst-case here is the traffic and the growth doesn't materialized quite as fast as we thought, we're pretty confident we can manage that and manage within the range.

Our next question comes from the line of Richard Fetyko with Merriman Capital. Richard Fetyko - Merriman Curhan Ford & Co.: Just curious on the value-added services side, if you could give us any sort of breakdown of the revenues by product or perhaps a ranking of the revenues by product? Which product is the first in your top three products are the most bought or the first ones to be bought versus the follow-on products? And if there's any revenue concentration around any specific value-added services product?

Sure, Richard, the single largest product is Dynamic Site Accelerator, which applies most directly to the commerce customers, which is a vertical that is one of our strongest and most mature vertical. We're also seeing Application Performance Solutions start to grow prior the fastest growing of our value-added solutions as we get more and more into the enterprise and as these enterprises start to move more and more applications into the cloud. So that's our fastest growing. Between the two of those, it's probably covers 2/3 of the revenue. And of course, we also have our Advertising Decision Solutions as well as some of the custom solutions that we do for the public sector, as well as some of our largest customers. Richard Fetyko - Merriman Curhan Ford & Co.: And then a follow up I guess would be sounds like the APS is growing fast. And do you think that any other sort of product categories will emerge as significant categories over time like the security types of products that you mentioned earlier in the call?

Yes, I think the security products and things in the area protecting data and protecting websites in using the capability in the cloud to stop attacks before they get anywhere close to your data is another big opportunity for us. I think the other thing that does new solutions bring is, it really bolster DSA and APS. They enable customers who, without those securities solutions or without the mobile solutions couldn't extend their applications out into the cloud. And so I think in addition to driving revenue on their own, those products help us broaden our solutions set and grow the sort of core products as well.

Our next question comes from the line of Kerry Rice with Wedbush.

Most of my questions have been answered, but as you think about value-added services and the suite of services you offer, is there anything out there kind of beyond the security products you announced that you would like to add, or that you're thinking about, or kind of strategic to kind of a long-term focus on that? And then my follow-up question is, give us some sense of how churn was in the quarter? Was it a little better or worse than last quarter?

So on the first one, frankly, I don't think I want to say more about our future roadmap. I think we've got great opportunity in the services we have there. I think we've talked about in enhancing the efficiency of advertising and improving security or some fairly broad interesting new categories across on the value-added side. And beyond that, I think we do a lot of product development in collaboration with our customers. But beyond that, I'd like to wait and surprise the market with it as we quote [ph]. And we talked about mobile, too, and that's another one where we now have offers and I think we can build on top.

On churn, Kerry, a couple of quarters ago, I guess, sort of return to the normal levels we've seen for a long time, and it's been pretty stable at that level.

And our last question comes from the line of Donna Jaegers with D.A. Davidson. Donna Jaegers - D.A. Davidson & Co.: On Velocitude and some of your mobile offerings, can you talk a little about what you're seeing there and what else do you -- what other products -- the timing of other products perhaps?

Well, I think what we're seeing first is real interest in how they optimize their performance to mobile users. And I think what people don't understand often is, how much the Internet itself makes performance a problem. People say, there's just not a lot of bandwidth in that wireless last mile, if you will, so that's the best it gets. And actually, it gets worse because the Internet, because the way the protocols work and the way mobile and sites work, any retransmit problem, any packet loss in the wireless network, then it's susceptible to the Internet latency on top of it. So we're working on driving off like deeper into partnerships with wireless network, so that we can help make sure we take any of the latency of the Internet out of the equation, so that all you have to do is optimize, if you will, the mobile lap mile. And then with our customers, we're working on things like capability we got through Velocitude to do content transformation. So they don't have to think about rebuilding their website for 500 different devices. They can think about having a website and functionality. And then in our network, repurpose that content, reform that content, so it displays correctly on each of so many different kinds of devices. So we're going to push there. You can then think about commerce online, security online in a range of taking our core capability and extending them to the mobile capabilities that we have. In terms of Velocitude, specifically, that's basically been integrated as you know, it was primarily technology buy because it was a very young company. We have had lots of activity with our customers, we have had some early upsells and signing of new customers. A number of our commerce customers want to adapt really quickly, so we'd be ready for the Q4 selling season, and some of those are already up. And we look forward over the next few years to really growing that part of the business as well. And I think that about covers it. We thank you all for tuning in, and we'll see you in about another 13 weeks after we wrap up the year.

Hopefully with the Investor Day in the first week of December.

Good point, in person here in Massachusetts. Thank you very much. Bye.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.