Akamai Technologies, Inc. (AKAM) Q4 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 Akamai Technologies, Inc. Earnings Conference Call. My name is Kathy, and I will be operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today's call, Ms. Natalie Temple, Investor Relations. Please proceed, ma'am.

Good afternoon, and thank you for joining Akamai's Investor Conference Call to discuss our fourth quarter and full year 2010 financial results. Speaking today will be Paul Sagan, Akamai's Chief Executive Officer; and J.D. Sherman, Akamai's Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements, including statements regarding revenue and earnings guidance. These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these factors is contained in Akamai's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking statements included in this call represent the company's view on February 9, 2011. Akamai disclaims any obligation to update these statements to reflect future events or circumstances. As a reminder, we will be referring to some non-GAAP financial metrics during today's call. A detailed reconciliation of GAAP and non-GAAP metrics can be found under the News & 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 Q4, posting another record quarter. We also achieved our goal, our top line goal of more than $1 billion in annual revenue, a major milestone for the company. Financial highlights the fourth quarter included revenue of $285 million, a 19% year-over-year increase and a 12% increase over the third quarter of 2010. Fully taxed normalized net income was $77 million, or $0.40 per diluted share, that's up 22% from Q4 of last year and up 19% sequentially. For the full year, we grew revenue, 19% year-over-year to $1,024,000,000, generated fully-taxed normalized net income of $272 million, or $1.43 per diluted share. That's an increase of 19% from 2009. We continued this strong cash flow generation. Full year, cash from operations coming in at just over $400 million. I'll be back in a few minutes to talk more about the trends we're seeing in the marketplace. But first, let me turn the call over to J.D. to review our results in detail. J.D.?

Thanks, Paul. As Paul just highlighted, our business performed very well in the fourth quarter, and we grew revenue 19% year-over-year and 12% sequentially to $284.7 million, coming in at the top end of our guidance for the quarter. All of our key verticals saw a solid growth. As a reminder, we have begun to break out or revenue into five verticals with Commerce now split into Commerce B2C and Enterprise B2B. We saw a healthy online holiday season in our Commerce B2C vertical, as revenue grew 28% from Q3 and 21% from Q4 of last year. Contributing to the growth in this vertical was the seasonal strength in our Advertising Decision solutions business, as well as continued traction of our Dynamic Site solutions. Revenue from our enterprise B2B vertical grew 13% sequentially and 26% year-over-year as the applications continued to shift to the cloud, and we saw increased demand for optimization, performance and security solutions. Media and Entertainment delivered excellent growth, driven by continued adoption of online video at higher and higher quality level. During the quarter, Media and Entertainment revenue grew by 25% on a year-over-year basis and 10% sequentially. Revenue from our high-tech customers grew 4% sequentially and was roughly consistent with Q4 2009 levels. Underneath this, we continue to see strong penetration of our Application Performance Solutions, offsetting lower revenues for traditional software delivery. Public sector revenue grew 30% year-over-year and was down one point sequentially in Q4, continuing the solid performance we saw all year from our government business. We also experienced very strong growth for our value-added solutions. The percentage of our business attributable to these solutions increasing to 55% in Q4 from the prior year. While the percentage of total revenue for our value-added services didn't change as much as we anticipated. The good news is that this was primarily due to a return to solid growth in our Media Delivery business. During the fourth quarter, sales outside North America represented 27% of total revenue, down one point from the prior quarter and from Q4 of last year. International revenue grew 17% year-over-year, and 11% sequentially. Foreign exchange had a negative impact on revenue of about $1 million on a year-over-year basis and a positive sequential impact of about $3 million. Excluding the impact of currency, international revenue grew 18% on a year-over-year basis and 6% sequentially. Revenue from North America grew 20% year-over-year and was up 13% sequentially. Resellers represented 18% of total revenue, consistent with the prior quarter. Our cash gross margins for the quarter were 81%, consistent with last quarter, and down a point from the same period last year. GAAP gross margin, which includes both depreciation and stock-based compensation, was 70% for the quarter. Up one point from the prior quarter, and down two points from last year. GAAP operating expenses were $126 million in the fourth quarter. These GAAP numbers include depreciation, amortization of intangible assets, stock-based compensation and acquisition-related charges. Excluding these charges, our operating expenses for the quarter were $100.7 million, up about $10 million from Q3. Adjusted EBITDA for the fourth quarter was $129.2 million. That's up 16% from the same period last year, and up 13% from Q3 levels. Our adjusted EBITDA margin came in at 45%, consistent with the prior quarter, and down two points from the same period last year. The fourth quarter, total depreciation and amortization was $39.1 million. Charges include $30.8 million of network-related depreciation, $4 million of G&A depreciation, and $4.3 million amortization of intangible assets. Net interest income for the fourth quarter was $2.8 million. Moving on to earnings, GAAP net income for the fourth quarter was $52.5 million, or $0.27 of earnings per diluted share. The GAAP net income includes several primarily non-cash items, including $20.5 million of stock-based compensation, including amortization of capitalized equity-based compensation, and $4.3 million from amortization of acquired intangible assets. This year, we're including GAAP taxes when we report our normalized earnings this quarter, although they are primarily non-cash. Q4, that tax charge was $21.5 million based on a full year GAAP tax rate of about 35%. Supplemental metrics sheet posted in the Investor Relations section of our website provides a historical view of our normalized EPS on a fully taxed basis for comparison purposes. Based on this methodology, our fully-taxed normalized net income for the fourth quarter was $76.5 million, up 22% from Q4 of last year and up 19% from Q3. In fourth quarter, we earned $0.40 per diluted share on a fully-taxed normalized basis, and $0.02 above the high end of our guidance range. About $0.01 of that was due to a more favorable tax rate associated with the reinstatement of the R&D tax credit. $0.01 was due to slightly better margin performance. Our weighted average diluted share count for the fourth quarter was 191.8 million shares. Now let me review some balance sheet items. We generated $110.4 million in cash from operations in the fourth quarter. For the full year, we generated $402.5 million of cash from operations, or 39% of revenue. End of Q4, we had $1.24 billion in cash, cash equivalents and marketable securities on the balance sheet. Balance included $137 million of student loan-backed options and [ph] (22:34) securities. As expected, all of our remaining convertible bonds were converted to equity in Q4, leaving us formally debt-free at the end of 2010, another milestone for the company. Capital expenditures, including equity compensation, were $49 million in the quarter. Number includes both investment in the network, as well as capitalized software development. During the quarter, we spent $26.9 million on share repurchases, buying back about 560,000 shares at an average price of approximately $48. Beginning our share repurchase program in 2009, we have now spent $158.3 million buying back a total of 5.8 million shares at an average price of around $27.50. Finally, our days sales outstanding for the quarter were 53 days, and that's down five days from Q3. Our solid fourth quarter results, we finished our first $1 billion revenue year with a final tally at $1,024,000,000 in revenue, an increase of 19% over 2009. For the year, sales outside North America grew 18% in 2009. Constant-currency basis, sales outside North America grew 17% year-over-year, while U.S. revenue grew 19%. Resellers accounted for 18% of our total revenue for the full year. Looking at our performance by industry vertical for the year, e-commerce continued to show outstanding growth at 23% from 2009. Enterprise continued to see strong value-added traction growing 20% year-over-year. Media and Entertainment revenue rebounded dramatically, growing 21% compared to the prior year. High-tech revenue grew 8%, while the public sector grew 34% 2009. Full-year GAAP gross margin came in at 70%, down a point from 2009, and cash gross margin was 81%, also down a point from the prior year. Full year GAAP operating expenses were $465.9 million, including $16.1 million for depreciation, $16.7 million for amortization of intangible assets and $73.7 million for equity-related compensation charges. Including these non-cash charges, operating expenses for the full year were $359.9 million. Full-year adjusted EBITDA was $473.6 million, up 17% from 2009. Full year adjusted EBITDA was 46%, down a point from the prior year. GAAP net income for the year was $171.2 million, or $0.90 of earnings per diluted share for 2010. GAAP net income included $84 million of stock-based compensation expense, including amortization of capitalized equity-based compensation and $16.7 million of amortization of intangible assets. Excluding these items, our fully taxed normalized net income for the year was $271.7 million, or $1.43 of earnings per diluted share, up 19% from 2009. This number includes a full-year GAAP tax charge of $91.2 million based on a full-year GAAP tax rate of 35%. Overall, we were very pleased with how our business performed in 2010. Got strong traction for our value-added solutions across the board. We also saw sustained growth throughout the year in our volume business, particularly from our large media customers. And while delivering accelerating growth, we made key investments in our network and across our business. Truly, these investments will enable us to stay ahead of the demand we see from our enterprise-class customer base as their online businesses evolve. With solid Q4 and a strong 2010, we're optimistic about our long-term growth. Q1, we do expect to return to more normal seasonality for the business, different from what we saw last year when we were just beginning to see a recovery from a recession in our customer base, especially in media and entertainment. Last quarter, we had a strong holiday season in Commerce and Advertising solutions. As a result, we expect to see a sequential decline in revenue in Q1. In addition, we've closed some significant long-term renewals with top customers, particularly in media and entertainment. Over the past three to four months, we renewed long-term deals with eight of our top 10 media customers, including Netflix. We expect these contracts to drive significant growth later in the year, but they will represent a step down in revenue for Q1 due to normal renewal price adjustments. Regarding Netflix, we recently signed a multi-year agreement to continue to support their streaming needs in North America and international markets. As part of our new multi-year agreement, we expect to work closely with them to leverage our globally distributed network to their market expansion. Considering all these factors, we are expecting Q1 revenue of $265 million to $275 million, up 10% to 15% from Q1 of last year. At current spot rates, foreign exchange should be roughly neutral on a sequential basis, about a $2 million benefit on a year-to-year basis. We expect margins to remain relatively stable, with cash gross margins in the range of 80% to 81%. GAAP gross margins will be in the range of 68% to 69%, declining mostly due to increased depreciation from our 2010 investments. Expect operating expenses to decline sequentially, and adjusted EBITDA margins of 45% to 46%, roughly consistent with the prior quarter. At this level of revenue, we expect to see fully taxed normalized EPS of $0.35 to $0.37 for the quarter, or flat to $0.02 above Q1 last year. This assumes a full year GAAP tax rate in the range of 31% to 33%, or taxes of $19 million to $23 million in Q1. On CapEx, we expect to spend around $50 million in the quarter, excluding equity compensation. For the full year, we expect CapEx to be at the upper-end or slightly above our long-term model of 13% to 16% of revenue. As for our longer-term outlook, we plan to continue our practice of not giving specific guidance beyond the current quarter. We are maintaining our objective of 15% plus growth for the year. The seasonal step down of revenue in Q1, combined with the timing of a large number of renewals, achievement of that objective is dependent on an expected business growth in the back half of the year. Longer term, we think the traction we've demonstrated in 2010 coupled with the investments we've made positions us very well for growth in the second half of the year and beyond. Now let me turn the call back over to Paul.

Thanks, J.D. Our Q4 results were a strong finish to 2010. $1 billion in annual revenue put Akamai in elite company, with only about a dozen public software companies in the U.S. at this size. I want to take a moment to thank all of our employees worldwide for their efforts to get us to this milestone. Our 2010 performance was bolstered by the continuing shift of IT investments moving to the cloud. Our portfolio of value-added services that leverage Akamai's unique ability to offer enterprises scale, security and performance from our globally distributed cloud infrastructure grew at about 30%. At the same time, we benefited from a significant recovery in online media, which returned to double-digit growth last year. As media and entertainment companies saw recovery in their businesses as the recession began to fade, they put more resources into their online efforts, often relying on the Akamai network for scale and quality delivery of their digital assets. Over the long term, we believe media traffic on the Internet can grow 100-fold, requiring the mass of scale that Akamai can provide. This growth will play out over several years. After a bounce-back year for media in 2010, we expect traffic growth to return to more moderate levels this year. We remain very positive about Akamai's prospects as we head into 2011, and we're setting our sights on the next goal - $5 billion in annual revenue. We outlined this objective at our investor day in December. For those of you who weren't able to join us, I encourage you to watch the replay of our webcast. You'll find it on the investor page of our website. We saw last year enterprises are working to shift more and more of their computing needs on to the Internet and into the cloud, often in hybrid and public cloud environments. As they do, Akamai's ability to improve the performance and security of their business applications is clear and demonstrable across many different industries. In addition to selling our Dynamic Site and Application Acceleration services directly to leading enterprises, we're partnering with some of the leading technology firms to create joint offers. Latest example is our new relationship with RackSpace. We were pleased to announce last quarter. RackSpace is embedding Akamai's Technology into their cloud infrastructure of services, provide improved application performance and availability, lower support costs and enhanced security. Another example is our long-standing relationship with IBM. Last year, we jointly announced that our Web application acceleration solution was WebSphere-ready, supporting IBM's growing WebSphere customer base. We continue to work very closely with IBM and other major players around their cloud strategies. Another great example of a shift to the cloud is our work with the U.S. Treasury Department, which is now utilizing a public cloud infrastructure for its sites. That's a first for cabinet-level agency in Washington. Akamai's Dynamic Site Acceleration (sic) [Accelerator] solution is providing the performance, reliability and security they require. Security is a top concern of every CIO looking to leverage to the cloud. They simply cannot sacrifice confidence that their applications data are safe as they transition to the Internet. Because of that worry, we've seen more and more customers deploying Akamai Site Shield solution to provide an enhanced layer of protection from within our cloud near where attacks may originate, rather than trying to rely on traditional security measures at a customer's data center. Akamai Site Shield capability helps us to protect sites from attacks that have unfortunately, become all too common on the Internet and are growing by the day. Same time that the threats are increasing, the stakes are growing larger. Over the holiday season, we saw elevated levels of attacks on many e-commerce customers. Five sites in particular experienced attack traffic that was up to 10,000x normal, above normal. Because they were using Akamai's cloud security services, these retailers were able to keep their website up and functioning, saving an estimated $15 million or more in possible lost revenue. Another trend we've been seeing is a fundamental shift in consumer behavior to embrace mobile computing over smartphones and tablets. Our most recent State of the Internet report showed that the average monthly volume of content downloaded from the Akamai network, the mobile devices doubled in a year. We believe this trend will likely accelerate. Customers are looking for ways to provide an optimized experience for the content and applications on a variety of mobile devices. One example from the recent shopping season is ALDO Shoes, which began using our mobile site transformation service to meet customer demand for mobile shopping. In addition to online retailers, we expect to see customers in other verticals focus on mobile computing in the cloud in coming years as well, and we're investing to meet their needs. Finally, in digital media, we’ve continued to see strong growth in traffic volumes as more and more high-quality and long-form entertainment keeps moving online. Increasingly, it's getting easier and easier for consumers to access digital video over the Internet, and watch it right on their large screen TVs at home, as well as their PCs and mobile devices. The recent consumer electronics show, major content producers were talking about their plans to make more content accessible whenever, wherever and on whatever screens the consumer wants. At the same time, the device manufacturers and service providers are building in more ease-of-use capabilities to link the Internet to over-the-top devices and ultimately, on to everyone's big screen TV. We believe our unique and globally distributed conservative network architecture is optimally suited to provide the quality, security and scale necessary to reach ever larger online audiences. One example that we look forward to every year is March Madness on demand which this year will be delivered online for the first time using Akamai HD Network. So with all these opportunities in front of us, we feel very positive about the progress in investments we made last year, and about Akamai's prospects for 2011 and the years to come. Now, J.D. and I would be happy to take your questions. Operator, the first question please?

[Operator Instructions] Our first question comes from the line of Mark Kelleher of Daughtry and Company. Mark Kelleher - Dougherty & Company LLC: I had one quick number question, J.D., I think I might have missed it. Did you give out the new customers, new recurring customers in the quarter?

We didn’t. I think it's on the press release. And off the top of my head, I don't even know the number, because -- I'm seeing, it's 45, is the answer. Mark Kelleher - Dougherty & Company LLC: I was wondering about the value-added services side, that's 55% for the last four quarters really. Do you think that, that really begins to make a move next year? And what particular services would be driving that within that segment?

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

Our next question comes from the line of David Hilal of FBR Capital Markets.

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

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

Just as a quick follow-up, are these customers continuing to leverage multiple vendors for their content delivery needs?

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

Our next question comes from the line of Mark Mahaney of Citi.

This Neil on behalf of Paul (sic) [Mark]. A question in terms of the Enterprise business. We saw a nice acceleration there. Was that primarily through the value-added services side? And then on the mobile front, are we starting to see a tipping point where more commerce companies are using your mobile solution and even more media companies are now starting to think about streaming mobile through Akamai?

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

I think your first question, Neil, was on the commerce vertical, is that right? And advertising in particular?

Yes, commerce and the enterprise side.

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

Our next question comes from the line of Phil Winslow of Credit Suisse. Philip Winslow - Crédit Suisse AG: I just had a quick question about CapEx. J.D. you mentioned that we'd be towards the upper-end or potentially, slightly above the long-term range as a percentage of revenue. It is the sort of the second year in a row of that. How should we think about this? Is this just volume trends? You have obviously near term sort of outpacing the pricing that you all are receiving or is it just simply so much volume growth versus something else in the business?

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

Our next question comes from the line of Todd Raker of Deutsche Bank.

So just kind of digging into some of the prior questions here, if you look at the top 10 media deals, can you give us a sense in terms of what you're seeing on average in terms of unit growth versus kind of pricing degradation? And it sounds like you guys clearly expect the dynamic to improve over time here. Just kind of compare and contrast that through some of the cycles we've seen historically.

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

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

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

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

Our next question comes from the line of Ed Maguire of CLSA. Edward Maguire - Credit Agricole Securities (USA) Inc.: On your high-tech vertical, could you comment about the mix of volume versus value-added services there? That's been one of the verticals that hasn't had as strong growth as some of the others. And what you might expect going forward.

Well, I think we're still in a transition there. There's a lot of traditional packaged software that continues to get updated online, and we still see packaged software businesses that haven't even moved online together. We think the even more exciting though opportunity is this mix or the move to software as a service and software coming from the cloud and being provided to end users effectively where people rent. They don't buy licenses and install it on their own boxes. They're renting functionality by the seat [ph] (48:42) deep. And I think maybe J.D. can add a little more color about this mix.

Yes, I think that vertical, which is a very strong vertical for us and we have a great market position in, has a big legacy business of delivering those software downloads, and still about 60% ballpark of that vertical comes from that business. That part of the business is not really growing like we're seeing the volumes grow on the media side. So as it moderates -- and actually, we saw some declines in the revenue in the back half of year, where it's being offset by a growing APS business there. And that's how you're getting the balance where you're getting. Edward Maguire - Credit Agricole Securities (USA) Inc.: And just a follow-up question, more housekeeping on the balance sheet. There was a pretty big hit on the provision for deferred income taxes. J.D., what they expect next year terms of the deferred or tax management implications for operating cash flow?

So basically, next year we'll be a full cash taxpayer. This year, we were still -- a vast majority of our GAAP tax bill is non-cash and they're using up our NOLs. Next year, we're basically through our NOLs, and we’ll be a full cash tax payer. And as I'd mentioned, we think the rate depends on a lot of factors obviously but the rate should be somewhere in the 31% to 33% range for the year.

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

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

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

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

A question on the cash gross margin line, J.D., is this kind of 80% to 81% for everything you can tell or what you're expecting in the ongoing mix, volume versus VAS? Is that kind of the range you're expecting for the year? I mean, anything else we should be thinking about?

Yes. We haven't given any guidance for the full year on that. I mean we've been in the 81% to 82% range for three or four years now, so I wouldn't expect any major shifts one where or the other unless -- I think if the Media business really takes off, there may be some downward pressure on that, which would be actually a positive. If the media business doesn't, it'll be upward pressure frankly. And that would be a negative ironically. So I don't see any major shifts. We're still that 80% to 81% that we guided for the first quarter but still above our long-term model. We have a long-term model that suggests we should level off in the 77% to 79% range. But we've overachieved on that model largely based on the success of our value-added solutions.

And then just a follow up on investments. As you're thinking about some of the younger value-added services that you've got or either your outdoor that you had in mind to launch, is there a requirement for a path of increased OpEx either on the Sales and Marketing line or the R&D line in the early part of the year to kind of prime the pump or grow those young businesses?

So I'll answer it and Paul can add color since he gets to decide mostly what we spend with my assistance. I think clearly, we're going to continue to invest in primarily, in two areas. One, in innovation, particular in engineering around our network et cetera. And second, in go to market, I think what you're seeing us do and what you've seen us successfully do in building a value-added solution portfolio is bring new products to market and continue to enhance them, and we'll continue to do that. And then in addition, you've heard us talk about expanding the sales force outside of the U.S. You've heard us talk about establishing partnerships to go to market with in joint offers. And you'll see us invest in those areas as well. So last year, we added somewhere around 450 people to the business, largely in those two areas. We'll certainly be continuing to invest in 2011, probably not quite at that level of growth because we think a lot of the investments we've already made will start to pay off. But we think there's tremendous opportunity. And then also, we continue to look for acquisitions as well.

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

Our next question comes from the line of Mike Turits of Raymond James. Michael Turits - Raymond James & Associates: I'm just trying to understand the seasonality into the first quarter where you have down 5%. I don't think -- it's certainly has been a long time since you actually had that much down in the first quarter. As I look at it, Commerce is typically down 5%. So how should I think about what's actually happened? So is it that commerce is down about the same amount as usual, or more? And it's just that media and entertainment is now down because of the reset on the renewals? Because typically, media continues to go up sequentially. I'm trying to understand the dynamics here.

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

Yes. So I think just to put maybe a little bit finer point on that, I think there are three things that factor into that, Michael. The first is, our Advertising business is bigger this year than it was last year. So we'll see more of a sequential drop off there and it will impact the business more from a seasonality standpoint. The second, as you pointed out and as we pointed out, the renewals stacked up a bit on us in the media and entertainment space, and so that media growth that you see from a sequential standpoint, we don't expect to see in Q1. And then the third is, we're in a -- rather than a snapback recovery mode, we're in a more normal, if you can call it that, environment. So for those three reasons, we think that we can expect to see a bit of a sequential down tick on the revenue. Michael Turits - Raymond James & Associates: So just a follow-up on the volume growth side. J.D., I'm wondering, you said volume growth looked really good and on the other hand, you said, I think Paul said and you sort of just alluded to now that volume growth might be more normal. So is this -- up until now, each quarter for quite a while, you've said that volume growth rates and bandwidth have been accelerating. So are we now at the point where volume growth is beginning to decelerate? Even though it's another snap back given some of the larger trends on video, et cetera, I guess I'm surprised to see that decelerate in a lower growth rate.

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

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

It's Saurabh sitting in for Jeff. I had two quick questions. First on the value-add side, could you give us some more color around competition in that space? We're picking up more and more instance of new competition like Cotendo partnering with AT&T, or Limelight coming out with value-added solutions? Could you just give us some color on what you're seeing? Has anything changed?

You said you had two questions and I'm having a hard time hearing you so why don't you state the second question in case we lose your connection, and we'll answer them both.

So the first one is on value-added and competition. The second one is around renewals. You've talked about 8 out of your top 10 customers on the media side renewing. Could you give us some sense of how much in terms of revenues this is and how often these types of contracts come up for renewals, typically?

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

Our next question comes from the line of Chad Bartley of Pacific Crest.

First on value-added services growth, if I'm doing the math correct, it looks like about 35% growth in the first three quarters of the year. It slowed down to about 22% growth in the fourth quarter. So why did you see that deceleration? And should we expect that type of growth going forward? And then I'll hold my follow-up.

So I'll try to answer that question. I think the growth is a little bit higher. I think I had 24% or 25%, and certainly with the slowdown from a growth that we saw at the beginning of the year, still really solid growth and I think we expect that going forward. A lot if it was just probably just wraparound comparison-type analysis. I think we're still pretty pleased with the sequential growth we saw in that area. So, I don't think we're seeing a major slowdown or deceleration there. And I think the progress in terms of selling in the sales force and driving it through new partnerships is pretty good.

And then on the flip side of that, growth in the rest of the business showed a pretty big acceleration, maybe 16%, 17%. What sort of growth is realistic there going forward, particularly given some of the pricing pressure on those renewals so we should see a slowdown? But is that still a growth business or what sort of color can you give us?

So we are really pleased with the growth on that side of the business in Q4. I think there is tremendous amount of growth, particularly with media. And we saw -- the volume of solutions are basically -- you can put them in to three basic buckets plus storage. You have Media Delivery, Software Delivery and Web Page, or Web Object Delivery. I don't expect a lot of growth on the Software Delivery or the Web Object Delivery but Media Delivery had a tremendous amount of growth. As I mentioned, it's driven largely by some of the big customers in media and entertainment. We did see a bunch of renewals and I think that's actually -- in the short term, going to bring down revenue but for the long term it's very positive because our biggest customers are stepping up to larger deals and longer-term commits. So I think we'll see a lot of growth there. As for projecting whether 16% or 17% is a good rage for 2011, I don't want to go there and get myself into more specific guidance.

Our next question comes from the line of Katherine Egbert of Jefferies. Katherine Egbert - Jefferies & Company, Inc.: J.D. just to follow up on what you just said, I mean it seems that with less competitors than ever, why are you signing long-term deals with discounts? Why not hold people to shorter-term deals where you can get more pricing integrity?

Katherine, this is Paul. Let me just take that. Our goal is to create long-term relationships with our customers. We always believe we're going to be in a competitive marketplace. I'm not sure I'd agree that there are more or less competitors than ever before. If we start with our customers have a great deal of capacity particularly at scale on their own, not just in media but they’re big companies with big IT and enterprise IT departments. So we have to earn our keep every day. And then there lots of other players who are offering solutions and trying to claim even if they're not as good, maybe they're cheaper. So our goal is always to do a great job and to build long-term relationships with customers. Some of them now have gone on for over 12 years and continue to grow. And our goal is to do business with every customer for another 12 years. And so if they want to make a long-term commitment, we are more than happy to make one back. And I think that is always good business. I think it would be a horrible sign to say to somebody that, I want to work with you for years to come. For us to say, well, I'm not so sure, we'll take your business for a little while and get back to you. That's not how you build good partnerships. And our goal is always to say to somebody, "How about longer not shorter?" Katherine Egbert - Jefferies & Company, Inc.: And then if my math is right, it looks like there's 45 net new customers added sequentially, which is the lowest it's been, and certainly low for a Q4. Is there anything unusual in the demand environment, or did the churn rate go up somehow?

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

Your next question comes from the Sterling Auty of JPMorgan. Sterling Auty - JP Morgan Chase & Co: So on the renewals that you did, can you give us a sense of what the average contract length on those renewals were?

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

In fact, the latest data as we've gone from an average of 18 to 19 months, which means we're signing more two-year deals or longer than one-year deals. We don't count event contracts in our customer account. So we're continuing to see -- I think frankly that's a sign of the value we bring to our customers. But also, they're coming out of the recession and being willing to do what enterprises would do, which is traditionally strike longer-term deals. Two years ago, they were unsure of their future, and they were trying to cut deals as short as possible. In fact, often renegotiate any vendor relationship they could have, not just in IT. But stairs, food, you name it. Now we're seeing people getting back to normal and understanding that there is a cost to doing contracts. There's a cost to the bid and buying process and so if they know what they want to do, it makes sense to get a good price and lock it in and make a commitment and move on to the next thing. So we continue to see longer contracts and I think that's a great sign for our business and maybe you for at least the tech economy overall. Sterling Auty - JP Morgan Chase & Co: The ramp in the back half of the year, what gives you the visibility into? In other words, is it just that you expect the buyers to continue on at constant rates that you're seeing now and just takes a couple of quarters to offset the initial price discount on the new contracts? Does there have to be any acceleration or is there any kind of guaranteed minimum or maybe an increase in the number of services that will help that?

That's a piece of it. It's also because we're in the recurring revenue business. We know that especially if the economy stays strong and turns stays low, we'll add more customers month-by-month on top and you get the month-over-month impact. And also the seasonality we believe is pretty typical of our business of Commerce being stronger in the back and Advertising being much stronger in the back, and we've got another year to continue to add value before we go to market, or if you will, that business comes in, in late Q3 and Q4. So I think it's really a return to the normal state of the business that we saw outside of the pits of the recession and the sort of rapid recovery that we fortunately benefited from four and five quarters ago. So I think it's just more typical of the pattern we've seen in our business and allows for growth going forward and stronger growth in the back half.

All right, everybody. Thank you for calling in. we've reached the end of our hour. We look forward to talking to you again in another three months. Bye.

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