Akamai Technologies Inc (AKAM) — Q4 2019 Earnings Call Transcript

Thank you, and good afternoon, everyone. Thank you for joining Akamai's Fourth Quarter and Fiscal Year 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 risks and uncertainties and involve a number of factors that could cause actual results to materialize differently 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 11, 2020. 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 please turn the call over to Tom.

Thanks, Tom, and thank you all for joining us today. Akamai delivered excellent results in the fourth quarter. Revenue was $772 million, up 8% over Q4 in 2018 and up 9% in constant currency. This very strong result was driven by the continued rapid growth of our security business, a better-than-expected holiday commerce season and substantial increases in traffic for our media customers. Our non-GAAP operating margin in Q4 was 29%, up 1 point over Q4 in 2018. Q4 non-GAAP EPS was $1.23 per diluted share, up 15% year-over-year and up 16% in constant currency. These excellent results were due to our strong revenue growth, the benefit from cost reductions made over the past year and a lower tax rate. For the full year, we exceeded our projections on both the top and bottom lines. Revenue was $2.89 billion, up 8% over the prior year in constant currency. We're especially pleased to report that we expanded non-GAAP operating margin to 29% in 2019, up substantially from 24% in 2017 and putting us very close to our target of 30% operating margin in 2020. Non-GAAP EPS for 2019 was $4.49, up $0.87 or 24% over 2018. We generated $1.1 billion in cash from operations last year. In Q4, our Security portfolio continued to be the fastest-growing part of our business, with revenue of $238 million, up a very strong 29% year-over-year in constant currency. Security revenue for the year was $849 million and represented 29% of our total revenue in 2019. We believe that our Security business is poised to make Akamai one of the very few publicly traded companies that generate more than $1 billion in annual revenue from cybersecurity solutions. In 2019, over 1,500 enterprises relied on our market-leading Kona Site Defender and Bot Manager solutions to defend against more than 46 billion malicious login attempts and 6 billion web application attacks, an increase of 150% over 2018. Both these services continue to be recognized as best-in-class by the leading analyst firms. For example, last quarter, and for the second year in a row, Akamai was named as a leader in Gartner's report on critical capabilities for cloud web application firewall services and we received the highest scores in two key use cases. Just last month, Forrester named Akamai as a leader in its New Wave Bot Management competitive vendor evaluation. They said, Akamai leads the pack with robust attack response and reporting capabilities, and they called us the best fit for companies looking to thwart bots at the edge. That's important because we believe that the edge is the only place where you can successfully defend against large-scale bot attacks. Last quarter, Forrester also elevated Akamai to the leaders category in its Zero Trust Extended platform wave, awarding us the highest possible scores in five areas, including workforce security, zero trust vision and strategy. I'm especially excited about our continued innovation in cybersecurity, which has resulted in the development of several new products that will leverage the strength of our edge platform and that we believe can drive continuing growth going forward. These new products include Secure Web Gateway, Identity Cloud, Enterprise Defender, Multi-Factor Authentication and Page Integrity Manager. Page Integrity Manager addresses a new and rapidly growing attack that most organizations have no visibility into or defenses for, leaving them exposed to data breaches and regulatory actions. The challenge is that most of the content on a typical website or app today comes from third-party software or scripts for things like ads, analytics, social media and so on. The problem with third-party content is that it's hard to keep track of and to make sure that it's safe. And increasingly, it's not safe. That's because attackers have figured out that they don't have to steal personal information directly from the website. Instead, they steal it from end users by using malware that they've inserted into the third-party content. Akamai Page Integrity Manager is designed to protect our customers' users from malware, no matter where it comes from, and also to alert our customers when we find malware on their site or on sites that they link to. Initial customer interest in this new service has been very high, and we're looking forward to exiting beta and selling this product more widely later in the year. Our Media and Carrier Division also performed well in the fourth quarter due to strong demand for OTT video services and software and gaming downloads. In Q4, we continued to grow traffic on our platform much faster than published growth rates for the Internet as a whole, meaning that we continue to gain traffic share. And on December 3, we set an incredible record for peak traffic in 2019 of 121 terabits per second, demonstrating the enormous and unmatched scale of the Akamai Edge platform. This record didn't last long though, as we've already delivered more traffic on multiple occasions during the first five weeks of 2020. In fact, I checked our traffic stats just a few minutes ago, and it looks like we're currently delivering about 140 terabits per second from the Akamai Edge platform. It's important to note that these traffic levels are not like the theoretical capacity that some competitors in the marketplace claim. Our numbers measure the actual traffic that we deliver on behalf of our customers. It's also important to realize that the only way to really get anywhere close to Akamai's scale is by having a true edge platform. That's because you need to be very close to end users in order to gain access to the last-mile bandwidth necessary to deliver large amounts of traffic with great performance. If you try to deliver content from the data centers at the core of the Internet, you run into problems with performance and scale as the traffic gets clogged at Internet peering points before it reaches the last mile. Delivering from the core is also more costly since you need to use expensive transit to reach end users. This is one reason why Akamai is so much more profitable than the competition. Of course, all the growing interest in the edge has led many vendors to play up any connection they can make to the edge, no matter how tenuous. But we believe that if you look carefully, you'll see that the others have a ton of catching up to do to match what Akamai has been doing at the edge and doing profitably for a very long time. We're excited by the opportunities in front of us as the OTT marketplace continues to develop, and we believe that our unmatched global capacity positions Akamai very well for 2020 and beyond. Overall, we're very pleased with our performance last year. We grew revenue and continued to expand our margins. We grew non-GAAP EPS by 24%. We developed innovative new technology that we believe will help drive future revenue growth, and we delivered excellent value to our customers. I want to thank all of Akamai's customers and especially our talented employees for helping us to deliver such great results in 2019. As we enter a new decade, I'm very pleased to see Akamai so well positioned for future growth. As you'll soon hear from Ed, we expect to surpass $3 billion in revenue in 2020, with over $1 billion of that total coming from our Security business. We also expect to achieve non-GAAP operating margin of 30%, and our non-GAAP EPS is projected to approach $5 per share. These are exciting new thresholds for Akamai, and I'll now turn the call over to Ed to provide further details. Ed?

Thank you, Tom. As Tom outlined, Akamai delivered another great quarter in Q4. We exceeded the high end of our guidance range on revenue and earnings. Q4 revenue was $772 million, up 8% year-over-year or 9% in constant currency, driven by continued strong security growth and higher-than-expected holiday traffic in our media and commerce verticals. As I mentioned on our last call, holiday seasonality from e-commerce and traffic from our large media customers could play a large role in our Q4 performance, and it did. Revenue from our Web Division was $420 million, up 9% year-over-year and 9% in constant currency. Revenue growth from this group of customers was again driven by our Security business as well as higher-than-expected holiday e-commerce traffic. Revenue from our Media and Carrier Division was $353 million, up 8% year-over-year and 8% in constant currency. The better-than-expected growth in Media came mainly from strong OTT video traffic. Revenue from our Internet platform customers was $52 million, up 20% from the prior year. It is worth noting that Q4 benefited from approximately $6 million of event-specific revenue that we do not expect to reoccur in Q1. Security revenue across the company continued to be very strong, and for the fourth quarter, was $238 million, up 29% year-over-year and 29% in constant currency. Moving on to revenue by geography, international revenue was $326 million in the fourth quarter, up 17% year-over-year or 18% in constant currency. Foreign exchange fluctuations had very little impact on revenue on a sequential basis, but had a negative impact of $3 million on a year-over-year basis. Sales in our international markets represented 42% of total revenue, up 3 points from Q4 2018 and consistent with Q3 levels. Finally, revenue from our U.S. market was $446 million, up 3% year-over-year. Moving now to costs. Cash gross margin was 78%, roughly flat with Q3 levels but down 1 point from the same period last year. GAAP gross margin, which includes both depreciation and stock-based compensation, was 67%, up 2 points from Q3 levels. Non-GAAP cash operating expenses were $285 million, up from Q3 levels and slightly higher than our guidance due primarily to higher commissions and employee bonus expenses. Now moving on to profitability. Adjusted EBITDA was $319 million, up $18 million from Q3 and up 6% from the same period in 2018. Our adjusted EBITDA margin was 41%, in line with our guidance but down 1 point from Q3 and down 1 point from Q4 in 2018. Non-GAAP operating income was $222 million, up $14 million from Q3 levels and up $21 million or 10% from the same period last year. Non-GAAP operating margin came in at 29%, consistent with Q3 levels and up 1 point from Q4 last year. Capital expenditures in Q4, excluding equity compensation and capitalized interest expense, were $173 million. This was higher than our guidance range due to increased network investment in anticipation of continued demand from our OTT and gaming customers. Moving on to earnings. It is worth noting that our Q4 GAAP results include a $10 million restructuring charge, and we expect to record an additional restructuring charge of approximately $4 million to $7 million in Q1 of 2020. These charges are primarily related to reductions of approximately 1% of our global workforce. It is important to note, these restructuring actions are being taken to enable some rebalancing of our investments, de-investing in some areas and investing in others to position the company to meet our long-term goals of continued growth and scale. Also included in our restructuring charges are some small capitalized software impairments related to projects we no longer feel provide adequate return on our investment. Therefore, GAAP net income for the fourth quarter was $119 million or $0.73 of earnings per diluted share. Non-GAAP net income was $202 million or $1.23 of earnings per diluted share, up 15% year-over-year, up 16% in constant currency and $0.08 above the high end of our guidance range. This outperformance was driven by higher-than-expected revenue and a lower non-GAAP effective tax rate due to higher-than-expected foreign earnings. Taxes included in our non-GAAP earnings were $30 million based on a Q4 effective tax rate of 13%. Now I will discuss some balance sheet items. We continue to have a very strong balance sheet. As of December 31, our cash, cash equivalents and marketable securities totaled $2.4 billion. Our total debt at the end of Q4 was $2.3 billion, unchanged from the end of Q3. Now I will review our use of capital. During the fourth quarter, we spent $43 million to repurchase shares, buying back approximately 500,000 shares. We have approximately $765 million remaining on our previously announced share repurchase authorization. Our plan for 2020 is to continue to leverage our share buyback program to fully offset dilution resulting from equity compensation. As we said in prior quarters, we plan to remain active but disciplined in pursuing additional M&A, and we believe that our strong balance sheet provides us with strategic flexibility to take advantage of opportunities as they arise. We also believe our 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 Q4 and 2019 results, and we remain confident in our ability to execute on our plans in 2020 and for the long term. I'd now like to provide guidance for the full year 2020 as well as for the first quarter. Looking ahead to the full year, we expect revenue in the range of $3.055 billion to $3.105 billion, with over $1 billion of that coming from our Security business. We expect adjusted EBITDA margins of approximately 43%, and we expect non-GAAP operating margin of 30%. We expect non-GAAP earnings per diluted share of $4.80 to $4.95. This represents year-over-year growth of 7% to 10% and 9% to 12% on a constant currency basis. This non-GAAP earnings guidance is based on a non-GAAP effective tax rate of approximately 15.5% to 16.5% and a fully diluted share count of approximately 164 million shares. Moving on to CapEx. Full year CapEx is expected to be 18% to 20% of revenue. We again expect full year CapEx to be higher than normal due to the continued investment in our network capacity. Before I move on to Q1 guidance, I thought it would be helpful to talk about how we see the year unfolding. Now I will highlight some key items that you may want to think about as you build your models. In the first quarter, we typically see revenue step down sequentially as Q4 is our strongest seasonal quarter. Q4 2019 was a notably strong seasonal quarter. It also included some one-time event revenue, which I mentioned earlier. On the expense side, remember that in Q1, our employee payroll taxes and 401(k) matching expense reset, costs that will decline throughout the year. In addition, we won't see the full benefit of the restructuring efforts mentioned earlier until Q2. So we expect operating margins to be at the lowest level in Q1 and improved throughout the year. As we look to Q2 and beyond, there are a few other factors to take into account. In addition to more global expansion of existing OTT offerings that have been announced for later this year, we are aware of several new direct-to-consumer OTT launches planned for late spring and early summer. 2020 also includes a summer Olympics in Q3 as well as the U.S. presidential election cycle, which typically drives elevated traffic levels in Q3 and Q4. Finally, we expect Q4 to once again be our strongest seasonal quarter. So with that as a guide, I will provide specific Q1 guidance. We are projecting Q1 revenue in the range of $741 million to $755 million or up 6% to 8% in constant currency over Q1 2019. At current spot rates, foreign exchange fluctuations are expected to have a negative $1 million impact on Q1 revenue compared to Q4 levels and having a negative $5 million impact on a year-over-year basis. At these revenue levels, we expect cash gross margins of 77%. Q1 non-GAAP operating expenses are projected to be $258 million to $262 million. The decrease in cost over Q4 levels is due mostly to lower incentive compensation-related expenses. Factoring in the cash gross margin and operating expense expectations I just provided, we anticipate Q1 EBITDA margins of approximately 42%. Moving now to depreciation. We expect non-GAAP depreciation expense to be between $97 million to $99 million, and we expect non-GAAP operating margin of approximately 29% for Q1. Moving on to CapEx. We expect to spend approximately $139 million to $149 million, excluding equity compensation in the first quarter. This reflects the continued network investments I mentioned previously. And with the overall revenue and spend configuration I just outlined, we expect Q1 non-GAAP EPS in the range of $1.13 to $1.18 or up 5% to 9% in constant currency. This EPS guidance assumes taxes of approximately $35 million based on an estimated quarterly non-GAAP tax rate of approximately 16%. And it also reflects a fully diluted share count of approximately 164 million shares. In summary, we are very pleased with our business performance and with our positioning as we look forward to 2020. Thank you. Tom and I would be happy to take your questions.

So looking at the strength in international revenue growth, is it fair to look at the OTT launches as relying on Akamai more for international distribution versus U.S.? Or what else explains the real strength internationally?

I'll address that in two parts. First, we recognize revenue based on the customer's location. So if a customer in the U.S. has a product launch, that counts as U.S. revenue. However, you make a valid point. As these companies expand internationally, we generally capture a larger share of that traffic since our international reach is significantly broader than anyone else's. We're experiencing strong growth in international revenue. A few years ago, we invested heavily in our go-to-market strategies and our network, and we're seeing excellent results, particularly in the Asia Pacific region. Additionally, we recently finalized our acquisition of Exceda, which we expect will contribute to growth in that underserved market.

Okay. And then maybe one follow-up, Tom, for you. Looking at some of the newer security, specifically SWG and Identity Cloud, how should we think about the ramp of those solutions within your Security portfolio in context of that $1 billion-plus revenue guidance for 2020?

Yes, it's early days for both. We're just launching the Secure Web Gateway. That will be part of Enterprise Threat Protector 3.0. We're really excited about that market. But early days, and we're just starting to get the bookings now. So for that to be a major contributor, you're looking at 2021, 2022. Identity Cloud met plan this year, and that's already, because of an acquisition, further along. And we're excited about the potential there in terms of privacy, regulatory compliance. As you know, we've now got CCPA in effect in California. Other states are looking to put laws into place. GDPR, of course, in Europe. And I think enterprises are going to be looking for help in dealing with that. So we're optimistic about the future growth there.

It appears that in the segment comparison of cloud and CDN, the CDN significantly outperformed during the quarter. I understand there was $6 million related to large Internet platform events. Could you provide more clarity on the reasons for the additional outperformance this quarter?

Yes, sure. This is Ed. I look at it through two lenses. One, we talked about on the web side, the commerce traffic was much higher than we thought going into the quarter with the Thanksgiving holiday falling as late as it possibly could and fewer shopping days. We were expecting to see a little bit less traffic, we actually saw more. So we're very happy with that. And then on the media side, we saw a strong OTT traffic. We saw that, as you mentioned, with the Internet platforms, that event-specific revenue certainly helped. We also saw a very strong live sports, especially across Europe. APJ did a lot better than we had expected in terms of traffic. A good gaming quarter. Software downloads were strong as well as new devices come online. There's a lot of firmware updates and things like that. And just to sort of put it in context for you, the last week of the year was exceptionally strong. On our normal traffic pattern, we tend to see our highest traffic levels on Sundays on a recurring basis. We tend sometimes could be 15% to 20% higher than we normally see during the week. And between the day before Christmas and New Year's Eve, we saw what I would refer to as eight Sundays in terms of elevated traffic, which is something that we typically don't see. So a lot of factors that came into play here, both in our Web business as well as our Media business.

Congrats on an awesome end of the year and success around the new OTT service launches. I guess, first, how are you thinking about enterprise security investments to get stand-alone security sales really moving in 2020 and beyond?

Yes. So we have both on the product and product support side and go-to-market with sales specialists and experts in making enterprise security sales, a lot of attention on that. We saw a substantial increase in revenue and bookings this year. Still relatively small, given the early days for Zero Trust and some of the new products that we're bringing out now in enterprise security. And of course, as you know, our head of web sales is an expert in selling enterprise security services. So we've got a lot of expertise there, and there's significant investment because we'd like to see that business really ramp up. And I think there's good potential for that.

Got it. And then how do you plan on positioning the Secure Web Gateway in that market, given you have a large competitor out there that's doing fairly well as well as some of the firewall vendors trying to move into the proxy market?

Yes, that's the business we want to pursue. I believe there is a lot of opportunity in this area. In terms of the cloud solution provider for Secure Web Gateway, the total revenue is relatively small compared to the potential. I think we will have a very competitive offering. When combined with the rest of Akamai's security business, we are the largest player in the market. We are well-known and trusted. We already have 1,500 major enterprises using Kona Site Defender. This partnership is a natural fit to protect enterprise employees and applications from malware, just as we safeguard public-facing websites against external attacks. There is significant synergy with our leadership in the market, and we have built a strong level of trust among major enterprise CSOs and buyers of services like Secure Web Gateway. Therefore, I am optimistic about our future in this area.

As we think about these investments you guys are making to sort of build out capacity and be able to handle the growing OTT traffic, I was wondering if I get kind of your perspective on the durability of these OTT revenues over time. As some of these services become bigger and bigger, is there a risk that these will start to sort of go more in-house in Akamai and then the services are going to be more of a transitory step for these OTT companies? Or do you believe that this could be kind of a durable good revenue for you guys over an extended period of time?

Keith, this is Ed. Good question. Right now, I would say, certainly, in the near term, it looks like it's a nice durable revenue stream for us. I'd encourage you to look at the platform customers. Obviously, we had good stabilization and growth there and it shows that even in the DIY world, there's still a place for Akamai and especially as these folks start to look to go global, that's a big opportunity for us. And it's possible you could see some of these folks take some of the delivery in-house themselves. But just in general, most of the OTT folks out there today are going multi-CDN and I think that there's going to be a place for us. I don't think all of them will go DIY. It's possible that none of them do. But if they do, I think there's still a big place for us.

At the end of the day, our goal is to do a better job with quality. We've got incredible scale. And also, we've got a great cost profile, which is unique. And so I think we have a compelling value proposition. And even to the extent folks do some DIY already, we're working in an environment with traffic splitting, as Ed said. And going all DIY is incredibly risky for a business. You have no failover, it's not their core expertise. And I don't think it makes a lot of sense for these folks.

Can you provide more details about the OTT space and how it's reflected in the numbers as more companies launch this spring? How does the multi CDN strategy function, with potential primary and secondary options? Is the traffic distributed among two or three providers? That would be very helpful. Additionally, as we move through the year, could you share insights on margin progression? Also, considering the upcoming Olympics in December, how might that influence the business based on past experiences?

Sure, I'll start with the last point you mentioned about margin progression. I previously indicated that Q1 is likely to show the lowest operating margin for the year, with an expected increase, guiding towards 30%. Regarding the multi-CDN environment, most major video players and large software distributors currently utilize a multi-CDN strategy, which can vary widely. For example, we might handle 80% or 90% traffic for some, while for others, it could be as low as 25%. Generally, in sectors like gaming where capacity needs increase significantly, we gain a larger market share, especially when we demonstrate better performance. As companies expand outside the U.S., they also seek to partner with us to enhance their market presence, as building capacity and controlling costs can be more challenging internationally due to higher bandwidth expenses. In regard to launches, we typically observe an initial spike in traffic due to promotions, which then stabilizes. Traffic may fluctuate based on promotions and the popularity of different content, with some shows attracting more viewers than others. Additionally, entering new markets can result in significant traffic increases. You also inquired about the Olympics, which will occur in Q3. As we transition from Q1 into the latter half of the year, we anticipate revenue growth, particularly with a strong Q3 fueled by the Olympics, the start of the election season, and new OTT launches. Q4 is expected to be our peak seasonal quarter.

Yes, I have a couple of quick questions. It's great to see the continued strength in security. Could you provide a further breakdown of the sources contributing to the 29% growth in Bot Manager, WAF, and DDoS? Additionally, regarding your guidance for 2020, I believe you mentioned expectations to exceed $1 billion in revenue. This seems open to interpretation, but it might suggest growth closer to the low 20s. How should we view that trajectory? Does growth really drop that much, or is mid-20s a better target for growth?

We are experiencing significant growth in WAF, DDoS, Bot Manager, and our managed security services. The security threat landscape is evolving rapidly, and skilled adversaries are prompting more leading enterprises to seek our support. As mentioned in our previous call, all these business units are now generating over $100 million a year for us, which is a key factor driving our growth. Additionally, we have introduced five new products over the past year, which may not contribute heavily to next year's growth, but they will help sustain our growth trajectory in the future. There is potential for upside, especially if products like Page Integrity gain traction, possibly contributing to revenue by the end of the year, though they are designed for long-term sustainability. Ed, would you like to add anything?

Yes. So we didn't provide specific guidance, but obviously, if you get to exceed over $1 billion and you're about the 20% range, I think that's probably a decent place to peg the models for now. And if you recall last year, we started the year thinking we'd do it in the mid-20s and ended up at 30%. So I was just pegging it in the 20% range, and we'll continue to update you as we go. There's still a lot of room to go in our installed base. Only 55% of our customers today buy security products. That's up about 7% from last year. So there's still a long way to go. And only 28% of our customers are buying two or more. So a lot of room in the installed base and a lot of our new security sales of customers are being led by security first.

I was hoping to ask a little bit of a question around the pricing environment, particularly as we've moved volumes out of the monolithic web 2.0 customers into the splintering of a lot of smaller customers, but still relative scale. Are you seeing some benefit from the relative pricing between those two as that movement happens? And then along the same lines, how do we think about the initial scramble among the various players to try to get share? Has pricing been more aggressive because of that, less aggressive? What are you seeing on the pricing front?

Yes, so this is Ed. I'll take that one. I've said this in the past that the pricing market, the pricing for high-volume media tends to be pretty efficient, and really, it's volume that drives it. And in terms of the pricing environment, I haven't seen people get super aggressive in terms of anything that's outside the norm when it comes to grabbing share. And I would say, at this point, customers are really more interested in the quality than the price because the pricing right now, and there's not a ton of differential between the different players at certain volumes, it really just comes down performance in terms of share.

Great. And just sort of follow-up on that would be, obviously, there's a parsing of traffic share out based on various geographies, various cities and the like. Over time, I would think that there will be a reshuffling as people either deliver good service. You guys deliver high-quality service, somebody else might stumble. How long a process does that take? Is it a quarter or two? Or is it much faster than that, if there's quality issues?

Well, it depends. I mean, a lot of times, you can see share shifts immediately. It depends on how the customers actually load balancing traffic. We've had instances where, in the last couple of quarters, in particular, where some of our competitors have stumbled and had significant trouble, and we'll see a big shift of traffic move over to us. In some cases, that will stay for the long term. In some cases, as the company who's had trouble fixes their trouble, it will move back. But it can be pretty quick. And I can tell you that a lot of these media customers have gotten pretty sophisticated in terms of how they're looking at quality, and there's a lot of different metrics that they measure. And you're absolutely right. To the extent that somebody is struggling in a particular city, it could be in a particular city on a particular operator network or with a particular device type, where they'll shift share depending on who's performing better based on all sorts of different metrics that they're looking at.

Congrats on the good quarter. First, on the one-time event, could you tell us anything more about the general nature of it? I mean, frequently, you talk about one-time events not having that big an impact. And was it in the IP platform group because they had obviously had a big bump.

Yes, Michael, this is Ed. Yes, they were in the IP platform. Obviously, there's not a lot of customers that sort of want to get too specific. But in general, event-driven revenue sometimes can be for our large-scale launches or big video events, etc., where customers will come to us for a variety of different reasons. In some cases, it's for services or security or for capacity or for delivery. So just kind of think about it in that light that it's for specific events that we were asked to help out a couple of customers, and we're happy to do it, and we're always looking for that type of business. But you're right. I mean, if you look at it in the grand scheme of things, $6 million on a $772 million quarter is not all that material. But certainly, a good business, and we're always happy to take it.

And then I wanted to ask you about margins. Obviously, you haven't given any guidance beyond the 30% EBIT. But what are the puts and takes? And how do you think about it strategically at that point? There are so many interesting places that you could invest that would hit the income statement, especially on the security side. So how do you think strategically about that balance?

Yes. So we haven't. We're not going to give guidance for 2021 or beyond at this point. And we're focused on the 30% for this year. And we always want to be as efficient as we can. And it's across the board in decreasing the cost to serve traffic from our servers through better software. We had a lot of people working on that. It's being efficient with where we allocate our headcount dollars. It's efficient in terms of our procurement functions. So that's always a focus, and we're going to do as well as we can do. Now you're right, there can be trade-offs. We're making significant investments in the business. Obviously, CapEx to increase our scale advantage over the competition on a global basis. We're making a lot of investments in innovation, particularly in the security product area. As I mentioned before, the landscape there moves so quickly, and we're in a great position, but we want to stay ahead with the development of new capabilities there. And so as we see opportunities, we do make investments to keep revenue growth being strong and hopefully make it better over time. And there's a balance. We want to be fiscally responsible. We proved we can do that. We've already grown our operating margin by 5 points over the last 2 to 3 years, and we'll take the step with another point this year. At the same time, it's really important for us to be investing in innovation or new products to drive future growth.

I wanted to ask sort of a follow-up to Alex Henderson's question, but really more from a different perspective. As we see the investments that you're making in capacity, I wanted to ask more about your views on capacity in the overall market and how that's informed pricing across the industry. So as you look at capacity across the industry today in your own plans, how do you view the level of capacity available in the market compared to demand?

Hey, Brad, this is Ed. Yes, that's a good question. I would say that Tom just talked about hitting a peak of 140 terabits per second today. That's becoming more of a norm. It seems that on Tuesdays tends to be the day that you see lots of software and gaming releases. And it's more and more players now are having much, much bigger needs in terms of these big spikes in capacity, and our day-to-day traffic continues to rise. I talked about that Sunday phenomenon. I would say that our customers certainly are getting a lot more nervous about capacity and talking to us way in advance of these, whether it's a new launch or going into a new geography. And certainly, when they're doing new games, picking up the phone and talking to us about the concern about capacity. You've got folks spending hundreds of millions of dollars on rights for sporting events and hitting new peaks every year. So it is becoming a bit of a premium here. Now does it translate into per-gigabyte pricing? Not always, no. But in some cases, you can get capacity reservation fees, where you can guarantee somebody a block of capacity. And customers are, in some cases, willing to pay for that.

Excellent. And if I could just follow-up with one on security. Any color that you can offer on your success selling security outside of your existing customer base? And perhaps if you can touch on the impact that your carrier partners are having on the security business this quarter, and any insight that you might have to what you're expecting out of them in 2020.

Yes. Obviously, most of our security revenue, as we talk about products like WAF and Bot Manager, which tend to be sold to our traditional base. DDoS prevention, particularly the Prolexic capabilities, can go more broadly. Anybody operating a data center that has critical capabilities and that's connected, they got to worry about DDoS attacks and so we do pick up an expanded base there. I think going forward, the enterprise capabilities, the Secure Web Gateway, Multi-Factor Authentication, Enterprise Defender, that brings us into a whole new scope of potential customers and verticals that we don't service a lot today. And that's one reason you're really excited about the enterprise security business as a component. Mentioned the carrier side, we do have great relationships, as I probably know, with the world's major carriers, pretty much all of them. And we have developed security products that we make available to them on a white label basis. And that's where they would then go and attack the small and medium business market. We talked about last time on the call, our SPS service, which is a version of sort of a lower end of our enterprise security, Enterprise Threat Protector solution. But the carriers sell it under their own brand and they go live with it. And that's a great model for us. We don't even touch the customer there, but it generates growing revenue. So we do work with the carriers closely around our security solutions. Some of them also resell our regular enterprise-class solutions as well.

Yes. To add to your question, Brad, regarding the impact for the quarter, I want to highlight that, similar to last year, we experienced some licensed pull-ins from Q1 amounting to about $3 million or $4 million in security license sales to the carriers that were expected in Q1 but were realized in Q4. Keep that in mind as you model the security business for Q1.

This is Caroline on for Heather. So given your acquisitions of Janrain and KryptCo, do you guys feel like you have a complete product set to be competitive in the identity and zero trust market? And do you typically compete against in those markets?

Yes, we believe we do have a complete product set. In fact, we've been recognized as the leader in this area according to the Forrester Magic Quadrant, particularly in our Zero Trust strategy. We are very enthusiastic about this. It's not just about Janrain and KryptCo, but also the addition of Secure Web Gateway to Enterprise Threat Protector and Enterprise Application Access, which enables network layer access and addresses many data breaches by controlling access at the application layer. Once a customer utilizes this, we can implement our services, such as Kona Site Defender, to filter all traffic from trusted internal devices, preventing the spread of malware within the enterprise. It's crucial to ensure that enterprises do not unintentionally exfiltrate sensitive data to botnets. These are the capabilities we now offer with Enterprise Defender, and the inclusion of Janrain and KryptCo further strengthens our position.

Got it. That's helpful. And then just really quickly on the Internet platform customers. Could you remind us of who the big Internet platform customers are that might tend to drive some upside surprise? And then how should we think about that revenue line trending going forward? Like should we expect it to be growing positively year-over-year versus in prior years where it was declining?

Yes. So this is Ed. I'll take that question. So in terms of the way to think about the model going forward, obviously, with these customers, there are 6 of them and we have renewals from time to time. So I would sort of model that out at about $40 million a quarter roughly. We'll be looking for upside, obviously, as we go, but that's probably a decent place to put a mark in the sand. And in terms of the customers, it's the giant Internet platforms, it's Apple, Microsoft, Google, Facebook, Amazon and Netflix is in that group of customers.

Tom, it's interesting to see the peaks in network utilization on Sundays and Tuesdays and on different days of the week. Are there ways to balance that utilization? Essentially, there's almost no marginal cost since the network is available and not fully utilized. With some of your new products focused on enterprise and security, do they take advantage of the network in unique ways to offer distinctive products and services compared to competitors?

Yes. So surely, you have two questions there. And the second one on how does security mesh with the platform in getting leverage. That's a great question because we get fantastic leverage of our edge platform with security. The same servers and equipment and bandwidth and colo that's used to deliver these fabulous amounts of traffic, that same infrastructure and expense is used to absorb these gigantic attacks. And Akamai is unique in being able to absorb and defend against these giant attacks. And that's because we have fabulous amounts of capacity. So we get great financial leverage and infrastructure leverage with our edge network. And also, the edge is really important, as we've talked about, for delivering traffic. If you're not at the edge, you don't get access to the bandwidth that you need to give high-performance delivery of video or software. And being at the edge is where you need to be to absorb all the attack traffic right as it's coming on to the Internet. If you wait and try to do it at the data center, you're going to get overwhelmed and it doesn't work. So really strong leverage there. In terms of network peaks, there isn't a significant difference. When I examine our traffic charge now, the lowest point at night on the slowest day of the week is similar to what the peak was across the entire platform a few years ago. The discrepancies between peaks and troughs aren't substantial. It's impossible to maintain a perfectly flat traffic flow because our customers drive that variation. Whether it's when they launch a new game and want rapid distribution, during a live event, or when people are home in the evening streaming content, we must provide the necessary capacity. Therefore, I don't anticipate a scenario where traffic remains constant every hour or day. Overall, we are in a solid position when reviewing the traffic trends.

Great. And how unique do you think your infrastructure still is at this point? I mean, there's a lot of people building CDNs and said they have CDNs, a lot of the hyperscalers building out CDNs. Just any thoughts on what you're seeing out there?

Yes, we are very unique, and this is evident in various ways. One aspect of our uniqueness is that we truly operate an edge platform. Nowadays, "edge" is often just a buzzword, and many claim to have an edge network, but that's not accurate. You can measure this by looking at the number of distinct locations where they have servers. We are present in 4,000 locations across 1,000 cities and over 1,500 networks. No one else comes close to that. Another indication of our uniqueness is the scale of our business, the levels of traffic we handle, and our robust security operations. Few can match our security revenue in the cloud service space. This stems from our edge platform and the advanced technology we've developed. While there are many CDNs emerging globally, they are relatively small in comparison to our capabilities. It's crucial to look beyond marketing claims and buzzwords to understand their true operations and server locations. It's also important to examine their financial health. Are they profitable, or are they simply buying revenue? Do they have a scalable model that will eventually lead to profitability? A close analysis is vital because there is significant hype and excitement driven by some major IPOs, but much of it is not substantive. We genuinely stand out.

This is Michael on for Colby. How should we be thinking about the level of M&A you could do while still being able to achieve your 30% operating margin target?

Yes, our plan is to achieve 30% this year. And we're always looking for good acquisitions that can help us provide more value to our customers and to grow revenue. And of course, we're very disciplined buyers. So it's not that we're doing a lot of deals and we're very careful before we do larger deals. And as we look at the year ahead, we expect to do some deals, and we expect to hit 30% operating margins.

Great. One for Ed, one for Tom. I think, Ed, what are really the puts and takes in your guidance for 2020, does it specifically embed that you capture a certain percentage of traffic from new OTT services? And then maybe for Tom, along those lines, how are you going to measure the company's success in what seems to be a growing OTT market?

The first one. So we included in our guidance that we will participate in a lot of the OTT services that are coming to market, and some that are expanding. It's really hard to call how successful these will be. I mean, we have conversations with the customers. We know what their plans are. We make sure we build our capacity to be able to capture as much of the traffic that we can. But it really does come down to end consumer demand. It comes down to hours watched, how active the subscribers are, comes down to bit rate. So really hard to tell, but we've got some models from the past that we use and try to leverage. But you really don't know until you get a few months under your belt exactly how big and successful these will be. But we do the best we can to try to bake in an assumption for a good level of success.

Yes. To address your second question, we evaluate success based on revenue, margins, profits, and the growth of these metrics on different levels. Strategically, we assess it through our market share, scale, performance, and reliability. Our aim is to increase our market share, achieve even greater scale, and maintain our reliability. Currently, we are recognized as the preferred option among major OTT players, and we intend to expand that position further. We are making investments reflected in our capital expenditures. While these investments may not be obvious in operational expenditures and staff salaries focused on enhancing performance and reliability, we believe that OTT usage will experience significant growth in the coming years. As this demand increases, we aim to capture a substantial portion of it on Akamai while ensuring profitability. We are particularly concerned with cost-effectiveness, striving to make our capital expenditures much more efficient to generate higher throughput per dollar spent on CPU. Our strategy centers on enhancing our capacity, reliability, scale, and market share to ultimately increase revenue, profits, and margins.

And maybe if I could just follow-up on Ed's comments. Ed, it sounds like you are definitely including traffic from some new OTT services. Does your expectation include that you capture what would be your typical video traffic share in the market or something more or less than that?

Yes, I think I would say it's the typical share that were expected. But obviously, we're going to do our best to get as much as we can. But in terms of modeling perspective, you just put in what you think is a normal share based on the various customers.

I wanted to ask Tom for his perspective on Janrain about a year after you completed the acquisition. I’m interested in how its performance aligns with your expectations and how you view that product as a contributor to your Security business. I also have some questions regarding margins. I'm curious about the strength you observed in OTT and internationally, and I’d like to know the potential gross margin implications as those areas become a larger part of the mix.

Yes, this is Tom. I'll take the first one. Yes, we made our revenue plan on Janrain this year. We're doing well with the integration. I think as we look forward, we're excited about the potential for helping major enterprises comply with the increasing and more diverse regulations that are being passed. A lot of our customers do business across many states and countries. And it's harder and harder for them, with largely their homegrown solutions, to keep up with compliance. Now that's a new industry, really. And so that will take some time to develop. But I think has exciting potential for the future. And Ed, do you want to take the margin?

Yes, in terms of margins, the OTT media business has lower margins compared to our Security business. As the mix shifts, there may be a slight change. We’ve mentioned being down about 1 point year-on-year, but it’s more of a broader perspective. A few years ago, we made a wise decision to invest significantly in our carrier relationships. Tom mentioned our presence in thousands of locations and cities worldwide. With the high traffic we generate, we deliver substantial value to the carriers, allowing us to secure favorable economics in challenging and often expensive areas. Therefore, the margin internationally is generally decent for us. To summarize, the media business will likely have slightly lower gross margins, but the security business will balance that out.

Great. Hats off on the good execution. Two quick questions. Just from a multi-CDN approach. Geographically speaking, with the rollout of some of these OTT streaming launches, just given your guidance of scale relative to your competitors, do you kind of anticipate that with your scale, you could perhaps garner more share as some of these services go internationally, just based on your ability to execute and provide capacity where perhaps your peers cannot?

Yes, that is the plan. And that's what we've been talking about is to leverage our massive edge platform that exists all around the world. We're in 1,000 different cities and several of these OTT businesses are global in nature. And so it is our goal to leverage the scale and the performance and our reliability that's established there to gain share.

Yes, so just to add a little bit here, like I said, we spent a lot of time investing with our relationships with the carriers around the world. And there are some really challenging places to build out capacity. Latin America, in particular, is one that's very challenging. And we see outsized share in countries like the Philippines, Indonesia, across the Middle East and India, again, areas that are a little bit harder for some of our competitors to get to. And also, it requires an investment in people to be able to go out, establish those relationships and build out the capacity. So I think we're very smart in our approach in terms of our investments, and we're continuing to invest, and a lot of what we're doing with our CapEx is we're building more and more capacity outside the U.S.

There will always be numerous renewals throughout the year. As I did last quarter and last year, I will highlight anything that needs attention going into a quarter, but we've included that in our guidance.

Yes. And one of the nice things is that we're much more diverse in our customer base now. We don't have customers that account for 10% or more of our revenue. In fact, you take the giants there, and they're all like 2% or 3% at most. So there's much less impact to our business now if a giant customer has a major repricing.

Operator, we have time for one more question.

Great. Just maybe two quick ones for me. First, on the network utilization, how has the target utilization rate changed over the last three years with respect to the overall network utilization? And I think of that, particularly in light of multi-CDN, our switching strategy is becoming easier. And then the second question, shift gears over to sales, if you would. And I'm just curious, going into '20, how did you tweak the comp or sales structure approaches? Namely what particular behaviors, new behaviors did you try to incent? Looking for what changed there.

Yes, I don't believe there has been a fundamental change in our network utilization strategy. As Ed mentioned, in many instances, we receive reservation fees. While the capacity on the Akamai platform is vast, it isn't limitless. We want our customers to be aware that if they expect to need significant capacity, we should discuss that in advance and plan accordingly. We won't simply wait for traffic to come in suddenly because another provider fails. With most of our major customers, we maintain strong relationships, handle a significant portion of their traffic, and have a clear understanding of how much more we can accommodate if they encounter issues with other vendors or if they are splitting traffic. Ed, would you like to discuss the sales compensation?

Yes, on the sales compensation, there's really no major change this year. We had talked about two years ago, we have made some big changes in the media world to help them focus on gaining share and selling security. But in terms of the tweak we're making to the comp plans this year, there's nothing really major to call out.

Thank you, Jeff. In closing, we will be presenting at several investor conferences and events throughout the rest of the first quarter. Details of these can be found on the Investor Relations section of akamai.com. We want to thank you for joining us, and have a wonderful evening.