Akamai Technologies Inc (AKAM) — Q2 2019 Earnings Call Transcript

Great. Thank you, and good afternoon and thank you for joining Akamai's second quarter 2019 earnings conference call. Speaking today will be Tom Leighton, Akamai's Chief Executive Officer; and Ed McGowan, 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 risk 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 July 30, 2019. 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 financial portion of the Investor Relations section of akamai.com. And with that, let me turn the call over to Tom.

Thanks, Tom, and thank you all for joining us today. Akamai delivered excellent results in the second quarter coming in above expectations on both the top and bottom lines. Revenue was $705 million, up 6% over Q2 of last year and up 8% in constant currency. Q2 non-GAAP EPS was $1.07 per diluted share, up 29% year-over-year and up 32% in constant currency. As has been the case in recent quarters, these very strong results were driven by the rapid growth of our cloud security and international businesses, strong traffic growth in our media business, and our continued focus on operational excellence. Our adjusted EBITDA margin in Q2 was 42%, up three points over Q2 of last year. Non-GAAP operating margin was 29%, also up three points over Q2 of last year. These results highlight the excellent progress that we've made towards our goal of achieving non-GAAP operating margins of 30% in 2020, while continuing to invest in innovation and new products to drive our future growth. Our security portfolio was again the fastest-growing part of our business in Q2, achieving revenue of $205 million, up 34% year-over-year at constant currency. Bot Manager continued to be our fastest selling new product in recent memory, with hundreds of customers and a revenue run rate now over $100 million per year. Bot Manager is designed to defend websites and applications from bot attacks of all kinds, including credential abuse, account takeover, and theft. It's been recognized as a market leader by top analyst firms such as Forrester and Frost & Sullivan and it's tightly integrated with another of our industry-leading security solutions Kona Site Defender. Kona Site Defender provides a Web Application Firewall or WAF service that is designed to protect websites and applications from downtime, defacement and corruption of content, insertion of malware, and theft of data. Kona has been recognized as a market leader by numerous analyst firms, including Gartner, Forrester, and IDC. In its research report on critical capabilities for cloud WAF, Gartner rated Akamai as the best among all vendors at protecting critical business applications and mobile applications. Akamai's leadership in WAF services is important, because having a state-of-the-art and well-managed Web app firewall is vital for any major enterprise doing business on the Internet. Well over 1,000 customers are using Kona Site Defender today generating more than $300 million per year in revenue. In addition to Bot Manager and Kona, we also have a third market-leading security product that's generating more than $100 million in annual revenue and that's Prolexic. Prolexic provides protection from DDoS attacks to hundreds of customers, including many of the world's largest financial institutions. As a result, Akamai's been recognized as a market leader in DDoS mitigation by analyst firms such as Forrester and IDC. As you can see from the customer accounts that I just provided, there's plenty of room for more adoption of Kona, Prolexic, and Bot Manager by our installed base customers. These products are also driving a lot of our new customer acquisition. We're also very excited about the growth potential of our two newest security offers, Akamai Identity Cloud and Akamai Enterprise Defender. Akamai Identity Cloud, which was formerly known as Janrain Identity Cloud, provides a complete suite of consumer identity and login management services. It's been recognized as the overall leader in the consumer identity and access management space by KuppingerCole, Europe's leading research firm in this area. Identity management was a key theme at our recent Edge World Customer Conference, where we were joined by a senior executive from Sanofi to explain why they selected Akamai Identity Cloud to manage identities across their global business. Sanofi is one of the world's largest pharmaceutical companies with operations in 170 countries and they chose Akamai Identity Cloud over the competition, in part because of its superior performance, enhanced security, and ease of use. Akamai Enterprise Defender, which we formally launched at Edge World in June, is designed to provide a robust zero trust solution to protect enterprise applications from unauthorized access and data breaches. It's comprised of our Enterprise Application Access, Enterprise Threat Protector, and Kona Site Defender products. These products become even more essential as major enterprises move their data into the cloud, where it can be more challenging to ensure that proper access controls are in place. It's still early days for zero trust, but already Akamai's enterprise security solutions are drawing attention in the marketplace. For example, Forrester cited Akamai as a powerhouse of capability in its report on zero trust providers. Gartner cited Akamai in its market guide for zero trust network access, recommending that enterprises phase out legacy VPN access for high-risk use cases and begin phasing in zero trust access. We're continuing to see significant customer wins at major enterprises like SKF. SKF is the world's largest manufacturer of bearings with 44,000 employees worldwide and they're now replacing their traditional VPN with our Enterprise Application Access solution. In addition to having great products, Akamai's security portfolio is supported by great people in our services and support organization. We've heard of many instances where a misconfigured or outdated product has been the root of a data breach, and this is an area where our hundreds of security experts can help. Akamai's substantial security expertise can make the difference between operating safely and suffering a devastating breach, especially as enterprises make greater use of public cloud infrastructure. Akamai has six security operation centers around the world where vulnerabilities and attacks are detected and mitigated by our security experts before they can cause harm. Well over 1,000 customers, including many large financial institutions, retailers, and media companies, now use our managed security services and this generates another $100 million plus in annual revenue for Akamai. Overall, we're very pleased with the success that we're having with our security portfolio and we believe that the best is yet to come. Our customers are now telling us that they see Akamai as more than just the world's largest CDN. Many view us as an Internet security partner and strategic adviser, whose cybersecurity capabilities work hand-in-hand with our delivery offerings. As a sign of this important evolution in our business, security accounted for 29% of our revenue in Q2, up from 23% a year ago. We believe that we're on track to achieve a $1 billion run rate for our security solutions in the next year. As measured by security revenue, Akamai is now one of the world's largest public cybersecurity companies and arguably the largest when it comes to providing cloud security services. Changing topics, I'd now like to say a few words about our Media business, which also performed well in the second quarter. We continue to grow traffic faster in Q2 than published growth rates for the Internet as a whole, which means that we continue to gain share. Online viewing of live sports in particular has grown dramatically this year. On July 9, the ICC's Cricket World Cup semifinal between India and New Zealand attracted over 25 million concurrent viewers to the Akamai platform. That's 36% more than our previous record set in May and it's triple the peak that we reached in May of last year. The growth in video traffic and the enormous scale provided by Akamai's unique Edge platform were major topics of interest at our customer conference. There was also substantial interest in how our Edge platform will provide even greater benefit to our customers as 5G becomes widespread. That's because 5G is expected to connect hundreds of millions of people and many billions of devices to the Internet. And once 5G is deployed at scale, it should vastly improve the bandwidth and latency in the last mile. But to take advantage of this capability and to not be overwhelmed by the resulting increase in traffic, you need servers close to the last mile at the Edge of the Internet and this is where Akamai really is unique with 4,000 points of presence in more than 1,000 cities across 140 countries. It's taken a while, but the industry has now come to recognize that having infrastructure at the Edge is critical for scale, performance, and security. Of course, now that leading analysts are talking about the importance of the Edge, several of our competitors are suddenly claiming to have Edge networks and Edge services too. But they aren't at the Edge at all. They're located in tangent data centers in the core of the Internet just as they've always been. Looking back at Q2, we're very pleased with our results and the strong momentum that we've established in the first half of the year. It's very good to see the impressive revenue growth for our security products, the high traffic growth in our CDN business, our strong growth and opportunity in international markets, and our continued robust operating margins. We're especially pleased that our non-GAAP EPS grew more than 30% in constant currency for the fifth consecutive quarter even while we continue to invest in innovation and new products to drive our future growth. In Q2, we also welcomed Madhu Ranganathan to our Board. Madhu has extensive financial experience at global software, networking, and services companies, and we're very pleased to have her join our Board's Audit and Finance Committees. Now we'll turn the call over to Ed to review our Q2 results and guidance for the remainder of the year. Ed?

Thank you, Tom. As Tom outlined, Akamai delivered another excellent quarter in Q2. We were very pleased to exceed the high end of our guidance range on revenue, operating margin, and earnings, and we remain confident in our ability to achieve our goal of 30% non-GAAP operating margins in 2020. Q2 revenue was $705 million, up 6% year-over-year or 8% in constant currency, driven by strong security growth and higher-than-expected OTT video traffic. Revenue from our Web division was $380 million, up 8% year-over-year or 10% in constant currency. Revenue growth for this group of customers continued to be driven by our strong security business where we saw strong performance across multiple security offerings including Bot Manager, Kona Site Defender, and Prolexic. In addition, we continue to see a very solid year-over-year growth in both the Asia Pacific region and in EMEA. Revenue from our Media and Carrier Division was $325 million, up 4% year-over-year or 6% in constant currency. The better-than-expected growth in Q2 came from continued very strong momentum in security and higher-than-expected OTT video traffic as we gain share in a few key customers during the quarter. Revenue from the Internet Platform Customers, which is included in our Media and Carrier Division, was $46 million, up 5% from the prior year. Q2 revenue from this group of customers was slightly ahead of our projections due to higher-than-expected download in video traffic. Turning now to our total company security products revenue. Security revenue for the second quarter was $205 million, up 32% year-over-year or 34% in constant currency. We are very pleased to see that our significant investments in security are paying off. Moving on to revenue by geography. Sales in our international markets continue to be strong and represented 41% of total revenue in Q2, up 3 points from Q2 2018 and consistent with Q1 levels. International revenue was $288 million in the second quarter, up 15% year-over-year or 20% in constant currency. We again saw strong growth in our Asia-Pacific region and continued steady results in our EMEA region. As Tom mentioned earlier, we have seen significant traction with our investments overseas and we plan to continue to invest internationally in order to take advantage of our unmatched global scale, reach, and product portfolio. Foreign exchange fluctuations had a negative impact on revenue of $2 million on a sequential basis and $11 million on a year-over-year basis. Finally, revenue from our U.S. market was $417 million, up 1% year-over-year, which is a two-point improvement from year-over-year growth in the first quarter. Moving on to costs. Cash gross margin was 77%, down 1 point from Q1 levels and consistent with the same period last year. GAAP gross margin, which includes both depreciation and stock-based compensation, was 66%, consistent with Q1 levels. Non-GAAP cash operating expenses were $254 million, up $1 million from Q1 levels and slightly below our guidance due to continued focus on operational efficiencies and some early returns from our enhanced procurement function we introduced earlier this year. Now moving on to profitability, adjusted EBITDA was $293 million, down $6 million from Q1 level but up $31 million or 12% from the same period in 2018. Our adjusted EBITDA margin was 42%, consistent with Q1, up 3 points from Q2 2018 and above the high end of our guidance range. Non-GAAP operating income was $204 million, down $5 million from Q1 levels but up $34 million or 20% from the same period last year. Non-GAAP operating margin came in at 29%, down 1 point from Q1 levels, up 3 points from Q2 last year, and above our guidance range. Capital expenditures in Q2, excluding equity compensation and capitalized interest expense, were $153 million. This was slightly below our guidance range due to some spend related to our new headquarters that shifted into Q3. Moving on to earnings, GAAP net income for the second quarter was $114 million or $0.69 of earnings per diluted share. Non-GAAP net income was $176 million or $1.07 of earnings per diluted share, up 29% year-over-year or up 32% in constant currency and $0.05 above the high end of our guidance range. Taxes included in our non-GAAP earnings were $34 million based on a Q2 effective tax rate of 16%. This effective tax rate is 1 point lower than our guidance due to a higher percentage of foreign earnings. Now, I will discuss some balance sheet items. We continue to have a very strong balance sheet. As of June 30, our cash, cash equivalents and marketable securities totaled $1.3 billion, up $109 million from the end of Q1, an increase driven by strong free cash flow of $185 million or 26% of revenue. Our total debt at the end of Q2 was $1.2 billion, reflecting the senior convertible notes that will be due in May of 2025. Now I will review our use of capital. We continue to focus on the importance of returning capital to shareholders. During the second quarter, we spent $81 million on share repurchases buying back approximately 1.1 million shares. Our aim remains to fully offset our equity compensation dilution during 2019. We have approximately $1 million remaining on our previously announced share repurchase authorization. We intend to continue return a large percentage of free cash flow through share repurchases, balanced against preserving our flexibility for strategic opportunities. We believe our disciplined and balanced capital allocation approach will allow us to continue to drive shareholder value through investing organically in the business, pursuing M&A, and continued share repurchases. In summary, we are very pleased with our Q2 and first half results, and we remain confident in our ability to execute on our plans for the long term. I'd now like to provide Q3 guidance and update our previous 2019 guidance. Looking ahead to the third quarter, we are projecting another solid quarter on both the top and bottom lines. As a reminder, in Q3, we faced the normal summer month traffic seasonality, especially in our Media business. We expect further FX headwinds. At current spot rates, foreign exchange fluctuations are expected to have a negative impact of approximately $4 million to $5 million compared to Q3 of 2018, and a negative impact of approximately $1 million sequentially. Therefore, we are estimating Q3 revenues to be in the range of $692 million to $706 million, up 4% to 6% in constant currency over Q3 2018. It is worth noting that we renewed two of our Internet Platform Customers at the end of Q2. We expect our Internet platform accounts to decline in Q3 by approximately $4 million, which we have factored into our guidance. At these revenue levels, we expect cash gross margins of 77% to 78%. Q3 non-GAAP operating expenses are projected to be $257 million to $261 million. This uptick from second quarter spend levels is driven by the expiration of the Limelight patent royalty payments, higher expenses related to our new headquarters facility, and our annual employees' salary merit increase, which takes place at the beginning of Q3. Factoring in the cash gross margin and operating expense expectation I just provided, we anticipate Q3 EBITDA margins in the range of 40% to 41%. Moving now to depreciation, we expect non-GAAP depreciation expense to be between $89 million to $91 million. Factoring in this guidance, we expect non-GAAP operating margin of approximately 27% to 28% for Q3. Moving on to CapEx. We expect to spend approximately $170 million to $178 million excluding equity compensation in the third quarter. This includes approximately $31 million related to the continued build-out of our new headquarters as well as a more significant network investment in anticipation of increased OTT traffic in 2020. And with the overall revenue and spend configuration I just outlined, we expect Q3 non-GAAP EPS in the range of $0.98 to $1.02 or up 6% to 11% in constant currency. This EPS guidance assumes taxes of $32 million to $36 million based on an estimated quarterly non-GAAP tax rate of approximately 17%. It also reflects a fully diluted share count of 165 million shares. Looking ahead to the full-year, we are increasing both our revenue and EPS guidance. On the revenue side, we are increasing our range to $2.84 billion to $2.87 billion, which is an increase of approximately $15 million at the midpoint of the range compared to our previous guidance. As a reminder, Q4 tends to have the widest range of outcomes given the large role that holiday seasonality plays with both online retail activity for our e-commerce customers and traffic for our large media customers. For the full-year, we anticipate adjusted EBITDA margins of 41% to 42%. We expect 2019 non-GAAP operating margins of approximately 28% to 29%. Moving on to CapEx. Full-year, CapEx is expected to be 20% to 21% of revenue. Included in our CapEx spend is roughly $100 million of one-time costs related to the buildout of our new headquarters. Excluding this spend, we project the full year CapEx to be at the high end of our long-term model of 16% to 17% due to increased network build-out in anticipation of more significant OTT traffic in 2020. Moving on to EPS. We are increasing our non-GAAP earnings per diluted share range to $4.23 to $4.30 for the full year 2019, which is up $0.14 at the midpoint compared to our previous guidance. Our guidance assumes a non-GAAP effective tax rate of 16% to 17% and a fully diluted share count of approximately 165 million shares. In summary, we are pleased with our performance of the business in the first half of 2019 as well as our ability to again increase our guidance for the full year. Thank you. And Tom and I would be happy to take your questions.

Sorry. Yeah, it was on mute. Can you guys update your guidance in terms of the CDN revenue growth and the Cloud Security revenue growth for this year? Then maybe if you could also just break down what the enterprise security is with the new business that would be great? Thanks.

Yes, so this is Ed. I'll take that. So for the cloud security business, we had previously guided to the mid-20% range. We now take that up to the mid to high 20% range. And the CDN will still be flattish for the year. So in enterprise security, we don't break out enterprise security as of now. That's still a pretty small percentage of our total security revenue. As it gets more material, we'll break that out.

And then I guess a second follow-up. You announced some new agreements with two of your IPC customers. Can you help us understand the changes in those agreements? And do you have any updates regarding the new streaming services that are launching in 2020? Thanks.

Sure. So with the Internet platform customers, I talked about having two customers that renewed. This is pretty standard. It's really just a contract that comes up for renewal. We're just negotiating pricing. I talked about how we expect to see those customers decline in Q3, but I do expect that group of customers to grow from Q3 levels into Q2. We will pick up a little bit more share with one of them and we expect to see pretty strong seasonality in Q4 with the rest of them. But again, that's pretty normal. So as you think about that group, those customers, the contracts come up for renewal, we'll have the price down. Generally, we get more traffic. But again, we'll be down $4 million roughly in Q3 and then up again in Q4. And in terms of the new streaming services, the best way to talk about this one is we talked earlier about how we had a number of customers that we're renewing in Q2, Q1, and Q2 that were large consolidations of the marketplace, some of whom have announced new streaming offerings. The good news is that's now behind us. So we've renewed all of those customers. And we talked a bit about updating our CapEx to build out in anticipation for what we expect to be some increase in demand. It's really hard to predict exactly how successful these launches will be. We'll have to wait and see. Tom and I talked about being cautious here and making sure that we build out and advance. So to the extent there is volume, we're there to take as much volume as we can. And to the extent that it doesn't pan out, our core traffic is growing, so we can just grow into that additional CapEx. I think we're really well prepared for it. We'll give you an update certainly on our Q4 call as we start to see some of this traffic come online in Q4. We'll get a better sense of what the next year looks like.

Great, thanks Ed.

Yeah, thanks. Hi guys. Wanted to see if you can give us an update on what's the early progress and traction with Janrain or now the Akamai Identity Solution?

Doing well and grew the quarter. It's still early days. We're integrating it with our Bot Manager Solution to provide a more comprehensive capability and understanding really who is logging in, making sure it's the person we expect, managing the user's data in a secure way so it can't be stolen. But I would say, early days, and looking positive.

And then, one follow-up on the media side, I think there is a comment about gaining share in some key customers. Is there some additional color that you can give us on that front?

Yeah. Sure Sterling. Yeah during the quarter we actually and with some of our U.S. customers were able to pick up additional share. In the Media space, the share shifts based on number of factors. One of which is better performance. And the Media team's done a great job of really focusing with some of those large customers on improving performance specifically for the use type that they have, whether it be live video or video that's on various devices, so that we can pick up some additional share. So we were pretty happy to see that, that part of what put us over the range for the quarter.

Great, thank you so much for taking my question. I had two if I may. First one was going to be, you obviously mentioned the growth with the Internet Platform Customers on that CDN side. I'm just wondering if you could talk a little bit about the trends in the business ex-the big 5. With that segment being down, I think it was 2% year-over-year this quarter and down 2% last quarter. Is there anything you can give us color on, about how we should expect the balance of that business ex the big 5 to trend? And then, just had a follow-up on the Janrain question. Was wondering who you're typically seeing in competitive RFPs with them? And if there's any update on revenue contribution if it did better than your expectations for the quarter. Thank you.

Sure, Heather, I'll address the first question regarding the business excluding the large players. You're right that it declined by 1% or 2% this quarter, which was anticipated. We previously mentioned that we had significant media customers whose contracts were being renewed in the first and second quarters, so this outcome aligns with our expectations. As we enter a seasonally slower quarter, we expect the numbers to remain relatively flat but could potentially increase by 1% or 2% in the fourth quarter due to our strong seasonal performance. Another perspective to consider is what could serve as a catalyst to boost that business. Looking at 2020, there are several factors to consider, such as an even year bringing more traffic due to events like the Olympics and the presidential election. Additionally, the number of over-the-top (OTT) offerings may play a role. In this segment, traffic growth can counterbalance pricing declines, which is essentially how it works. When there's an increase in traffic, we typically observe a rise in growth rates. That's the trend we will be monitoring.

Yeah. And in terms of Janrain, the large majority of our prospects were competing with a homegrown solution or do-it-yourself. And the challenge they're seeing is they grow their business of scaling the homegrown solution, getting performance out of it. It can be hard to use and security is a big deal. And you're dealing with very personal user data. And so security is really important there. When we do see a competitor come into the account typically it would be Gigya, we'd see and occasionally Okta. Okta really works more on the enterprise side of the house. But they do have some capability on the consumer side. And I would say most often it's a do-it-yourself solution that the customer has. And the revenue question, yeah our revenue there is in line with expectations.

Great, thank you so much.

Thanks guys. Tom any more color on edge-based compute? Do customers understand how unique your infrastructure is? And are they starting to utilize it or maybe what applications or just any other color? When it might really start to take off? Thanks.

We have been involved in edge computing for nearly 20 years. At our Edge World Customer Conference, we highlighted our new Edge Worker solution, which enhances capabilities beyond Edge side and includes cloudlet integration. We also showcased our IoT Edge Connect solution, which offers message broker support and computing at the Edge model for IoT. Interest in this area is growing, particularly as IoT applications become more prevalent. Our customers have been buzzing about their IoT projects, including clothing and sneaker companies discussing the integration of sensors into their products. Airline customers are exploring ways to sense passenger arrivals at airports to provide automatic flight updates. Retailers are tagging items for sale to improve tracking and enable automated checkouts. I believe that 5G will significantly support these applications. Edge computing plays a crucial role, especially since data processing often needs to occur at a large scale, and low latency is critical for devices such as gaming consoles and automobiles connected to the Internet of Things. People are increasingly recognizing the significance of our Edge platform, not just for content delivery but also for computing and security.

Thank you. This is Sanjit Singh for Keith. And congrats on the great security results this quarter. I actually had a question on the OTT business. I was wondering if you give us a sense of how your typical OTT deal is structured in terms of are those typically single-source, dual source, or triple sourced? And then in terms of thinking about how is revenue contracted, is that going to be a pure function of subscribers or are there sort of minimum contracts associated with some of these streaming services that are being launched in the coming months?

Sure. So I'll take that one, Tom. There really is no typical deal, they're all pretty unique. Most customers in the large OTT space do use multiple sources whether they do it themselves or have multiple CDNs. Your typical contract, if there is such a thing, really depends. I mean, typically we'll sign up for anywhere from one year to two years contract length, volume-based pricing based on the traffic that comes over the network when it comes into delivery. All of our other services whether it's security, professional services, etc. are priced in a different manner. And in terms of the, I guess, the volume commitment, that can vary as well. And that also is a factor in terms of the unit pricing. In this world, we're trying to get as much share as you possibly can given the fact that we've got the most amount of capacity and we've got capacity in all the right places around the world. We typically do pretty well in a multi-CDN environment in terms of getting share. That's basically the way those OTT contracts work.

Understood. Then maybe a follow-up question on the topic of taking share. I think for a number of years now what we're used to is when big contracts come up for renewal that gives an opportunity for Akamai to take share. But that results in a little bit of a revenue headwind. I mean in the near term are there any initiatives, you guys described this a little bit at the investor meeting a couple of months ago, any initiatives to sort of smooth that cadence out? I think you have zero coverage out there, but what are the things that could be done to maybe create less of a revenue headwind when some of these contracts can't get repriced? And anything that can be done on that side of the house?

Yes, great question. So I think one of the things that we've seen and the Media team has done a great job here of selling security. It was a vertical where we didn't have a lot of security penetration. And we've seen enormous growth in our security business across many sell verticals within the media space whether it's your OTT video space, your publishers, your gaming customers, etc. So what does that fill in some of the hole in terms of the revenue decline? Because obviously, you'd take a price decline and then traffic will ramp over time. Generally, as I talked in the earlier question around commitments sometimes getting larger commitments to get guaranteed share is a way to also offset some of the revenue declines.

Great. Thank you. Just looking at the difference in growth rates across the different geographies. Obviously, the U.S. has been much slower for some time now relative to various international geographies. Is the slower growth in the U.S. really just a function of the maturity of the business model in this market, or is it really a reflection of just a greater level of competition that you're seeing? And I'm speaking ex the big 6. And then secondly, as it relates to the big 6, I had in my notes that you were expecting one price renewal in the second quarter. I could have had that wrong. And I think you said that there were two. Just what that is that the backdrop, are there any other large big six price renewals that you are anticipating for the remainder of this year? Thank you.

Let's address the last question first. Regarding the price renewals, we didn't specifically mention the big six price renewals because we want to avoid singling out those six customers. We mentioned that several consolidations we referred to at the beginning of the year were up for renewal in the first and second quarters, and we've now completed the one remaining in the second quarter. Regarding the big six, any expected activity has been incorporated into our guidance. While I don't want to provide details on specific revenue timing, I did mention that we experienced declining revenue this quarter due to the renewals completed in the second quarter, but we anticipate growth in the fourth quarter. For the U.S. growth question, it's important to note that the U.S. commerce retail vertical, which is significant for us, is currently facing macroeconomic pressures, impacting our growth rate. Additionally, the renewals I mentioned in Media are also experiencing some price pressures during the first half of the year, which further affects our growth. Comparatively, last year’s first quarter had the Olympics, which didn't occur this year and contributed to some softness. We also had a very strong performance from Nominum in the first quarter of last year that hasn’t been repeated this year, which aligns with our expectations for the second quarter. It's essential to consider these factors. Although you excluded the giants from your question, they are part of the U.S. market, so any pressure there will affect our overall U.S. growth rate.

Excellent. Thank you so much for taking the questions. I've got two. First, what's giving you the incremental confidence from three months ago to tick up your CapEx into the back half of the year ahead of the OTT traffic you're expecting next year? And while I don't expect you'll provide guidance for next year, how would you frame the opportunity you're playing for in CDN? Perhaps your view of what the dollar market growth opportunity looks like?

Yes, hey Brad. Yes, I don't want to provide specific guidance. The only reason I don't want to do that is just that it's somewhat out of our control the user adoption. Obviously, very, very powerful brands, which gives us confidence to say that we believe that there'll be some significant traffic to gain. We have good relationships with all the players that are announcing OTT offerings. We can't control the timing, we can't control the user adoption. So it's hard for us to sit here and say that there's a big number because it becomes somewhat binary. If I call out a big number in traffic for next year for one or two of those and it doesn't show up it's hard to make it out. So we'll update you in Q4 and much better view of guidance on revenue. On the CapEx side, it's a more simple calculation for us. As we look at planning out for our network build we've got a core business is growing fairly nicely from a traffic perspective. And strategically we want to be positioned to be able to take as much traffic as possible. If these services do take off and are widely successful, we are in a much better position because we have the largest network. We have the most capacity. We have capacity in the right locations. So strategically it makes sense for us to do that. As I mentioned, if we're wrong and the traffic doesn't really materialize, we can grow into it and take our CapEx down for the next year so. Now as we talked about it as a team we thought it was the right bet to make to position us for that growth. And again, I just don't want to speculate right now until we start to see some of that traffic exactly how big that will be.

That's fair and I appreciate the color. And Ed it's good to hear today's commentary recommitting to 30% operating margins in 2020. But as we look beyond 2020, how do you think about the margin potential of the business? And is there any reason Akamai can't get back to the mid-30s type op margins where it was a decade or so ago?

Yes, we're not going to give guidance beyond 2020 or a 30% operating margin. We also always want to operate as efficiently as we can and there are certainly scenarios where the margins could increase beyond 30%. But we're not going to give any comments on that today.

Fair enough. Thanks so much.

Hey, thanks for the question and for the great quarter. As I look at your Q3 forecast for revenue, it shows a sequential decline, but Akamai has not experienced a sequential decrease from Q2 to Q3 in the past. Could you explain that to us?

Sure. So one of the items is the fact that you have the giants, the Internet Platform Customers that are down will be down about $4 million sequential so you take that into consideration. Now the other thing is the FX headwinds, we're expecting at least another $1 million of headwind there. That's something just to dig in a little bit on the FX side, you've got about 40% of our business is outside the U.S. and not all of that is in non-U.S. dollar now maybe of that is. And we've got if you think about our major currencies, you've got the euro, the yen and the pound as the three big ones. And there's obviously a lot of pressure, especially in the pound. So, some FX headwinds there. And then the other thing, if you remember from last Q3, we had the World Cup. So that added some extra dollars into Q3 of last year. So you factor all that together, you can see why we're still guiding to at the midpoint down slightly at the high end roughly flat.

Got you. And then one more for Tom probably, maybe could you talk about how the new online gaming streaming services that are coming out, can you about how Akamai can monetize on that traffic, and what needs to be done from a tech perspective in order to deliver that traffic with nearly zero latency given the nature of online gaming?

Well, yeah, you'd have to be delivering it from the Edge that's where we're located. So, we're in good position to help with that. And I think we have a great relationship with a lot of the gaming companies. I think in terms of Google's service, they probably do it themselves. We've really been having discussions about that capability for probably over a decade now with some of the world's largest gaming companies. And the challenge, I think, for them is the economics. In terms of who's paying for the CPU, who's paying for the bandwidth, who's paying for the co-lo. Now, Akamai can certainly handle the streaming with very low latency and at scale, and do a really good job of it. So if this does take off, that's a source of increased traffic for Akamai, which is a good thing.

Great. Thanks. Great quarter, guys.

Thanks.

Thanks.

Great. Two questions please. I know a couple have already asked about Janrain, but just to nail the point down. You're still expecting about $20 million in revenue from that this year, and the contribution in the June quarter was roughly $4 million to $5 million. Is that correct?

That's correct, Mark. It was about $5.5 million for the quarter, and we're still expecting approximately $20 million for the whole year.

Tom, you mentioned 5G earlier. Could you elaborate on that, particularly regarding when it might become significant in the field and when you anticipate it could have a material impact? I understand the Akamai perspective on needing servers at the Edge, and this could really usher in a new era of even more advanced applications than we are currently aware of, with IoT likely taking the lead. When do you think Akamai can deliver material new wins or increase business with existing customers? Any additional insights on this would be appreciated. Thank you.

Yeah. I think it'll be gradual. And to coincide with the gradual deployment of 5G around the world, basically the way to think of 5G is it increases the throughput at the last mile and it decreases the latency. Now increasing the throughput, and also it gets more people connected. Now doing that increases the demand for traffic, and that's just existing business growing faster because of 5G. Having in addition the decreased latency and the better scale in terms of how many connections can be supported, does help to enable IoT kinds of applications, and that's where I think you can see things that maybe we haven't even thought about yet in terms of IoT. To this point IoT has been a little bit of a buzzword. And I think just judging from what I see in the customer base, that's going to start to get more real. You need to take advantage of that low latency that means you got to have servers at the Edge where Akamai is. And so, we're in a great position especially with our IoT Edge Connect platform to support those applications at scale with low latency and to offer Compute at the Edge. So, I think it will be not all at once. It will be sort of a steady growth both for our organic business and for new applications in our IoT Edge Connect platform, that's now just a question in early days.

Great. Thanks. Thanks for taking my questions, guys. A few for me. On the retail commerce side of the business, could you talk about the dynamics in that space, particularly the competitive landscape? And then, just some thoughts maybe on how you see growth rates trending over the next few years.

There's definitely a lot of competition in the CDN market, which has always been the case. The significant change is that our customers are feeling pressure, especially from Amazon, which puts them in a tougher position. This impacts their business and consequently affects our revenue, particularly as retail is a key sector for Akamai. However, they continue to require our services; they need top performance, security, and prefer those as a bundled offering, which benefits us. This is why our churn rate remains exceptionally low. Even though some customers are facing financial difficulties, we experience minimal loss to our numerous competitors seeking to capture that business. A very high percentage of major retailers rely on Akamai, and all signs suggest this reliance will persist, although their businesses are under strain, which in turn affects our revenue.

If I could just add something on this in terms of your question around growth, Tom mentioned the pressure will still continue on the core business on the delivery business. But the Web team's done a great job of going in and selling security similar to what I talked about with the Media team and should see some of these price declines our security revenue in the commerce space is growing, which is great. So taking the pressure on the acceleration business, but augmenting some of that in the security side.

Hey, guys. Thanks for taking my questions. Two quick ones. First wanted to start on live video the record I think you said with the concurrent viewership at India-New Zealand match is as painful is that memory might be really impressive. Just help me understand, what's driving some of this international traffic growth and maybe thinking from a financial perspective given that a lot of the viewership for these types of things might be in emerging markets, should we expect that to be a little bit of a drag on ARPU, or is that less sensitive from kind of a pricing perspective and then I've got a follow-up on the zero trust side.

Sure. I'll take the last part of that question in terms of the size of the traffic. One of the things as you go into some of these emerging markets, you mentioned cricket, there's been some forces in the market that have enabled much better quality video access to millions of users and that's a great trend for us. In terms of the price sensitivity, we've talked about before in the Media market, really it is a pretty efficient market around volumes. So we don't notice anything specific relative to emerging markets having lower prices because of our emerging markets or whatnot it really is a function of volume. And what's driving those volumes is you've got lots and lots of people consuming media, the teams have done a good job of gaining some customers in some of these countries outside the U.S. that are big traffic pushers you think about cricket not a big support here in the U.S. but very big internationally. We tend to go after whoever has rights for a live video. And like I said earlier, we've got the best platform the best technology and capacity in the right places. So good business for us.

Got it. Thanks. That's helpful. And then just on the zero trust side, I mean I think we all get that it's a big opportunity. And clearly, the way the talk is going when it comes to security. Can you just maybe help us understand or remind us your kind of differentiation on the zero trust side just given that every single security vendor out there says they have something in zero trust? Thanks.

Yes. It has started to become a buzzword, with many claiming to offer it even when they don't. With Akamai's solution, we operate at the application layer rather than the network layer, which is a significant differentiator. In traditional methods that work at the network layer, once access is granted, users can navigate anywhere. Many companies offer additional equipment for network segmentation, but that brings its own challenges and added complexity. Our application layer approach, which we provide as a service rather than through hardware sales, allows us to position ourselves between the device, the user, and the application just like we do with public-facing applications. We utilize Kona Site Defender to verify that the user genuinely has access to the specific application rather than the entire corporate network, ensuring they do not directly interact with enterprise applications or data. All interactions route through us where we filter and protect the data. This capability is not available with other vendors, making us unique, especially since there is no true competitor to Kona Site Defender, especially for enterprise applications. Additionally, our Edge platform offers significant scalability, which is crucial for handling large-scale attacks. Our Bot Manager allows us to gain insights into the entities trying to access applications and monitor their other activities, such as detecting HVAC systems that may be leaking sensitive corporate information, as we track device actions within the enterprise for safety. Our solution is genuinely unique and distinguishes us from others discussing zero trust.

Great. That’s really helpful. Thank you.

Operator, we have time for one more question, please.

Hi. Thanks for taking the question. You mentioned getting guaranteed commitments as a way of offsetting the revenue decline. Just wondering if you could describe how that's trended over the past year what you're thinking about for the back half to the year? And then 2020 in particular around the forthcoming OTT launches?

Yes. So we're not going to give specific guidance for 2020. But in terms of how it's going with the revenue commitments it varies by customer. What that does, it enables us to one have more confidence in going out and building ahead of plan. Customers vary from customer to customer in terms of how much they're willing to commit. Sometimes we get a percentage of traffic, sometimes its $1 commitment, etc. But it's always something that we try to get as part of our sales when we can.

Okay. And then just curious if you could highlight the primary drivers of the margin upside, rank order those and what do you think might drive upside the back half?

Yes. Sure. So you're talking about the margin upside for the quarter we just delivered correct? Yes, as I mentioned in my prepared remarks, part of that is our operational efficiency. I talked a little about the good returns we are beginning to see from our procurement function. We have significantly enhanced that area and are starting to see the results of our efforts. In general, we are also investing in IT efficiencies to scale our general and administrative operations and manage our headcount more effectively. This is what we experience in terms of turnover.

Yeah, great. Thank you, Ken and thank you everyone for joining us this evening. In closing, we will be presenting at some Investor Conferences and events throughout the quarter. Details of these can be found on the Investor Relations section of akamai.com. Thank you for joining us and have a wonderful evening.