Earnings Call: Q3 2019

Oct 28, 2019

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 Akamai Technologies Incorporated Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. Would now like to hand the conference over to your speaker today, Tom Roth, Head of Investor Relations. Sir, please begin. Thank you, Norma, and good afternoon and thank everyone for joining Akamai's Q3 2019 earnings conference call. Speaking today will be Tom Layton, 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 differ materially from those expressed or implied by such comments. Additional information concerning these factors is contained in Akamai's filings with the SEC, including our annual report on Form 10 ks and quarterly reports on Form 10 Q. The forward looking statements included in this call 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. Before I cover our financial results, I'd like to say a few words about the significance of this week in Internet history. 50 years ago, on October 29, 1969, the first message was transmitted over the Internet. The first message was supposed to be a login, but after the letters L and O reached Stanford from UCLA, the Internet crashed due to a memory overflow. It's stunning to think about how far the Internet has come from those humble beginnings. And I'm looking forward to joining the Internet's leading pioneers tomorrow at the Internet50 Conference at UCLA, where we'll celebrate 50 years of amazing innovation and I'll lead a discussion on the future of Internet security and privacy. This week also marks the 20th anniversary of Akamai's IPO on October 29, 1999. Like the Internet, Akamai has come a long way since our founding. During the 1st 10 years of our existence, we essentially created the CDN industry, where we're still the market leader by far. And over the last decade, we pioneered the creation of edge security services with industry leading products such as Kona Site Defender and Bot Manager. Our success over the past 20 years has been achieved through very hard work, tremendous innovation and the development of our unique Edge platform, with servers in nearly 4,000 locations across 1,000 cities and 137 countries. The breadth of our edge platform means that we're incredibly close to billions of end users. And being so close means that Akamai is in a unique position to provide the near instant response times, very high quality video experiences and market leading security services that our customers are demanding. As many of you know, there's been a lot of buzz lately about the importance of being at the edge. Gartner, Forrester, IDC and other leading analyst firms have all published reports explaining why the edge is so important for end user performance and security. This has not gone unnoticed by our competition, who are now trying to play up any connection they can make to the edge, no matter how slender, even when their platforms are really located in core data centers. They're now talking about how edge computing can be used for tasks such as locating nearby resources, supporting AB testing or enabling real time streaming. And they're talking about it in a way that suggests that these capabilities are somehow novel. Those of you who've been following Akamai for a while know that Akamai is the one company with a true edge platform and that we've been leading the way when it comes to edge services for nearly 2 decades. In fact, we launched the world's first suite of edge services 19 years ago in October of 2000. And 18 years ago, eWeek featured Akamai for its evolution into an ambitious provider of edge computing to large businesses. To be clear, edge computing is not new, at least it's not new for Akamai. We've had thousands of customers using our edge computing capabilities for well over a decade, and not just for locating nearby resources, supporting AV testing or enabling real time streaming. Akamai customers have long been using our edge computing capabilities for a wide variety of tasks that are helpful in managing a state of the art web presence. For example, tasks such as API governance, global traffic management and application load balancing, script management, user prioritization and waiting room, URL redirection and rewrites, phased code deployment, access control, field input validation, adaptive image and video optimization, proxy detection, watermarking, token authentication and revocation, content encryption, bot management, Web App Firewall, and more recently, IoT message broker and compute services and blockchain ledger updates. All of these capabilities and more are enabled through our platform's highly distributed design, which supports real time data processing and decision making close to the end user, so that every user can have a great experience without overloading expensive cloud data centers. To be clear, we don't take the competition lightly, but when it comes to edge capabilities, we believe that the others have a lot of catching up to do to match what we've been doing and doing profitably for a very long time. Turning now to our financial results. I'm pleased to report that Akamai delivered another quarter of excellent results in Q3, coming in above expectations on both the top and bottom lines. Revenue was $710,000,000 up 7% over last year in constant currency. Q3 non GAAP EPS was $1.10 per diluted share, up 18% in constant currency. Our very strong third quarter results were once again driven by the rapid growth of our cloud security and international businesses, strong growth in video, software and gaming download traffic and our continued focus on operational excellence. Our adjusted EBITDA margin in Q3 was 42%, up 1 point over Q3 of last year. Non GAAP operating margin was 29%, up 2 points over Q3 of last year. We've made excellent progress towards our goal of achieving non GAAP operating margins of 30% in 2020, as we continue to invest in innovation and new products with the goal of driving our future growth. Our security portfolio continued to be the fastest growing part of our business in Q3, achieving revenue of $216,000,000 up 29% year over year in constant currency. Bot Manager and our Enterprise Security solutions continued to lead the way in Q3 with revenue growing by more than 50% over Q3 of last year. In addition to selling our enterprise security services directly to major enterprises, we're also now equipping our carrier partners with services that they can sell to small and medium sized businesses to defend against malware and bot attacks. By embedding our technology into carrier products, such as the recently released Comcast Business Security Edge, we can efficiently reach a much larger number of enterprise customers. The success of our security products was again a key driver for growth in our web division, which delivered $390,000,000 of revenue in Q3, up 10% over Q3 of last year in constant currency. Our leadership in security also helped to limit customer churn to a 5 year low in Q3. Keeping customers happy is always job number 1, so we were very pleased to see such a strong result. Our Media and Carrier division also performed well in the 3rd quarter due to strong traffic growth for OTT video services and software and gaming downloads. Overall, we continue to grow traffic on our platform in Q3 faster than published growth rates for the Internet as a whole, meaning that we continued to gain traffic share. We set a new record for peak traffic on October 15 when we delivered 106 terabits per second. This is 66% larger than the peak we saw in Q3 of last year and is a strong proof point for the enormous capacity of the Akamai Edge platform. We believe that our ability to provide high quality performance at this scale gives us a strong competitive edge when it comes to delivering traffic for popular OTT services. On a typical day, we now deliver over 800,000 terabytes of content to end users. To put such a large number in context, 800,000 terabytes is about what is contained in 200,000,000 DVDs or 800,000,000,000 webpages, and we are now delivering this much traffic almost every day on the Akamai Edge platform. Before handing the call over to Ed, I'd like to say a few words about 3 recent acquisitions: cryptco, ChameleonX and Exida. Cryptco was a very small MIT based startup with some excellent technology for providing truly secure multi factor authentication or MFA. The technology is easy to use and has significant security advantages over traditional MFA solutions, which can be compromised by phishing attacks. We plan to integrate this technology into our portfolio of enterprise security solutions. ChameleonX is a small Israeli startup with some innovative technology for detecting when a website contains or links to malware that causes end user data to be compromised. Accidentally incorporating malware from third parties into a website or app is a major problem for enterprises that has already resulted in several large data breaches, which in turn can lead to very large financial penalties from regulators. Our goal in acquiring Chameleon X is to develop a service to stop these attacks. We expect the deal to close soon. Lastly, Exida is a leading provider of CDN and web security services in Latin America. They've been our largest reseller an important and fast growing region and they have a very talented sales force and professional services team. We've entered into an agreement to acquire Exida as part of our overall plan to grow our market presence throughout Latin America, including Brazil, Mexico, Argentina, Chile, Colombia and Peru. We expect the acquisition to close later in Q4. These three transactions will cost less than $50,000,000 combined. We view them as smart investments that we think will drive significant growth for Akamai in the future. In general, we plan to continue to be active in M and A, which is a key reason why we raised an additional $1,150,000,000 in convertible debt in August. Of course, we're always judicious in how we spend shareholder capital as we continue to search for compelling opportunities to accelerate profitable revenue growth. In summary, we're very pleased with the consistency of our results in the 1st 3 quarters of 2019. The impressive revenue growth of our security products, the high traffic growth in our CDN business, our strong growth and opportunity in international markets and our healthy operating margins achieved even as we continue to invest in innovation, new products and acquisitions with the goal of driving our future growth. We're especially pleased to have delivered these results the right way, as evidenced by Akavai being named last quarter to both the Dow Jones Sustainability Index and the Global FTSE For Good Index. And for that, I want to thank our hard working employees for helping Akamai to achieve such strong results and positive recognition. Now, I'll turn the call over to Ed to review our Q3 results and guidance for the remainder of the year. Ed? Thank you, Tom. As Tom outlined, Akamai delivered another excellent quarter in Q3. We were very pleased to exceed the high end of our guidance range on revenue, operating margin and earnings. Q3 revenue was $710,000,000 up 6% year over year or 7% in constant currency, driven by strong security growth and higher than expected video and software traffic. In addition, we didn't see the traditional slowdown in traffic during the summer months as we have seen in the past. Revenue from our web division was $390,000,000 up 9% year over year or 10% in constant currency. Revenue growth for this group of customers continued to be driven by our security business, where we saw strong performance across multiple security products in several key verticals, including financial services, commerce and high-tech. Revenue from our media and carrier division was $320,000,000 up 2% year over year or 3% in constant currency. The better than expected growth in Q3 came from continued momentum in security and higher than expected OTT video and software traffic as we gain share in several key customers during the quarter. Revenue from the Internet platform customers was $44,000,000 up 2% from the prior year. Security revenue for the Q3 was $216,000,000 up 28% year over year or 29% in constant currency. Sales in our international markets now represent 42% of total revenue in Q3, up 4 points from Q3 2018 and up 1 point from Q2 levels. International revenue was $297,000,000 up 15% year over year or 18% in constant currency. As Tom outlined earlier, we entered into an agreement in Q3 to acquire Exida as part of our overall plan to grow our market presence throughout Latin America. We are pleased with the traction we've seen from prior go to market investments overseas and expect the Exceeda acquisition once closed will help spur revenue growth internationally. Foreign exchange fluctuations had a negative impact of $2,000,000 on a sequential basis and negative $6,000,000 on a year over year basis. Finally, revenue from our U. S. Market was $413,000,000 relatively flat year over year. Moving now to costs. Cash gross margin was 78%, roughly flat with Q2 levels and up one point from the same period last year, primarily due to the continued execution of our platform efficiency initiatives. GAAP gross margin, which includes both depreciation and stock based compensation was 65%, down 1 point from Q2 levels. Non GAAP cash operating expenses were $250,000,000 down $4,000,000 from Q2 levels and favorable to our guidance due to our continued focus on operational efficiencies, savings generated through our enhanced procurement function and the timing of approximately $2,000,000 of costs related to our new headquarters shifting from Q3 to Q4. Now moving on to profitability, adjusted EBITDA was $301,000,000 up $8,000,000 from Q2 levels and up $27,000,000 or 10% from the same period in 2018. Our adjusted EBITDA margin was 42% consistent with Q2, up 1 point from Q3 2018 and above the high end of our guidance range. Non GAAP operating income was $208,000,000 up $4,000,000 from Q2 levels and up $27,000,000 or 15% from the same period last year. Non GAAP operating margin came in at 29% consistent with Q2 levels, up 2 points from Q3 of last year and above our guidance range. Capital expenditures in Q3 excluding equity compensation and capitalized interest expense were $154,000,000 This was below our guidance range due to lower than expected spend on our new headquarters as well as some costs related to network build out that shifted into Q4. Before I move on to earnings, one quick housekeeping item. During Q3, we started to recognize our share of earnings from our previously announced blockchain joint venture with Mitsubishi. Our share of the JV's earnings is a loss of $1,400,000 in Q3 and is reflected in our GAAP net income, but is excluded from our non GAAP results. GAAP net income for the Q3 was $138,000,000 or $0.84 of earnings per diluted share. Non GAAP net income was $181,000,000 or $1.10 of earnings per diluted share, up 17% year over year, up 18% in constant currency and $0.08 above the high end of our guidance range. Taxes included in our non GAAP earnings were $34,000,000 based on a Q3 effective tax rate of 16%. This rate is approximately 1 point lower than our guidance due to a higher percentage of foreign earnings. Now I'll discuss some balance sheet items. We continue to have a very strong balance sheet. As of September 30, our cash, cash equivalents and marketable securities totaled $2,300,000,000 up about $1,000,000,000 from the end of Q2. This increase was due to a $1,150,000,000 convertible debt offering we closed in August. This brought our total debt at the end of Q3 to $2,300,000,000 Now I'll review our use of capital. During the Q3, we spent $176,000,000 to repurchase shares, buying back approximately 2,000,000 shares. We ended Q3 with approximately $800,000,000 remaining on our previously announced share repurchase authorization. As Tom mentioned earlier, we plan to remain active and disciplined in pursuing additional M and A and our most recent debt offering further strengthens our balance sheet for additional strategic flexibility. 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 and A and continued share repurchases. In summary, we're very pleased with our Q3 results and remain confident in our ability to execute on our plans for the long term. I'd now like to provide Q4 guidance and an update to our 2019 guidance. As always, seasonality plays a large role in determining our financial performance for the Q4, driven by seasonal online retail activity for our e commerce customers, higher than normal traffic for our large media customers and a higher proportion of carrier software license deals that tend to be signed in the Q4. And finally, this year, we'll see the launch of 2 highly publicized offering OTT offerings in Q4. All these factors make the Q4 the hardest to predict. We also expect the potential for further foreign currency exchange headwinds in Q4 from the continued strengthening of the U. S. Dollar and the potential for additional currency volatility associated with Brexit. At the current spot rates, however, foreign exchange fluctuations are expected to have limited impact on Q4 compared to Q3 levels, but will have a negative impact of $2,000,000 year over year. Taking all these factors into account, we are projecting Q4 revenue in the range of $735,000,000 to $755,000,000 were up 3% to 6% in constant currency over Q4 2018. To frame this guidance, if the online holiday season and media traffic demand, including the OTT launches is exceptionally strong, we would expect to be near the higher end of the revenue range. If the online holiday season and media traffic demand is not as strong, then we would expect to be towards the lower end of the range. At these revenue levels, we expect cash gross margins to 78%. Q4 non GAAP operating expenses are projected to be $274,000,000 to $278,000,000 The increase in costs over Q3 levels is due to higher sales incentive compensation costs that we typically see in Q4, 2 months of operating costs associated with the Akcea acquisition, additional marketing expenses related to our Europe and Asia customer conferences and increased rent associated with the new headquarters building. Factoring in the cash gross margin and operating expense expectations I just provided, we anticipate Q4 EBITDA margins in the range of 41% to 42%. Now moving to depreciation, we expect non GAAP depreciation expense to be between $94,000,000 to $96,000,000 Factoring in this guidance, we expect non GAAP operating margin of approximately 28% to 29% for Q4. Moving on to CapEx. We expect to spend approximately $153,000,000 to $165,000,000 excluding equity compensation in the 4th quarter. This includes approximately $22,000,000 related to our new headquarters as well as continued network investments in anticipation of increased OTT traffic in 2020. And with the overall revenue and spend configuration I just outlined, we expect Q4 non GAAP EPS in the range of $1.10 to $1.15 or up 4% to 10% in constant currency. This EPS guidance assumes taxes of $35,000,000 to $37,000,000 based on an estimated quarterly non GAAP tax rate of approximately 16%. And it also reflects a fully diluted share count of approximately 164,000,000 shares. Looking ahead to the full year, we are raising both our revenue and EPS guidance. On the revenue side, we expect a range of $2,857,000,000 to $2,877,000,000 which is an increase of approximately $12,000,000 at the midpoint of the range compared to our previous guidance. For the full year, we anticipate adjusted EBITDA margins of 42%. We expect 2019 non GAAP operating margins of approximately 29%. We expect full year CapEx to be 21% of revenue and included in our 2019 CapEx spend is roughly $100,000,000 of one time costs related to the move into our new headquarters. Moving to EPS, we are increasing our non GAAP earnings per diluted share range to $4.36 to $4.42 for full year 2019, which is up $0.12 at the midpoint compared to our previous guidance. Our guidance assumes a non GAAP effective tax rate of 16%, a fully diluted share count of approximately 165,000,000 shares. In summary, we're very pleased with our business performance as well as our ability to again increase our guidance for the full year. Thank you. Tom and I would be happy to take your questions. Operator? Thank Our first question comes from Mark Mahaney with RBC Capital Markets. Your line is open. Thanks. Two questions. Ed, you talked about not seeing the typical slowdown in summer traffic that you have seen historically. Any thoughts on why that is? And then secondly, big picture question on the streaming opportunity. I know you've got 2 OTT launches. Just talk bigger picture. I think this is one of the biggest trends we're seeing now in video, music and in gaming too. Just talk about how well leveraged you think Akamai is against the streaming opportunity? Any other examples you could provide other than the 2 launches that are expected in November? Thank you very much. Sure. So Mark, this is Ed. Yes, the slowdown in traffic, typically in years we don't have events, whether it's an Olympics or a World Cup, we do tend to see traffic lighten up, especially in Europe during the summer months, usually last couple of weeks of July going through August. And we just didn't see that this year. And what was interesting is we did see relatively strong traffic in Europe and really across the board, in all different parts of the business, OTT, We saw it in gaming. We saw it in software downloads as well. So it was encouraging not to see that a slowdown and we had modeled in some of the slowdown provided our guidance last quarter. So that explains some of the over performance. And then in terms of the streaming OTT launches, I think you had a couple of questions in there, how well leveraged are we? I think we're very well leveraged with the most publicized OTT offerings in the sense that we've got great customer relationships with the folks that are coming out with new services. We've built out a lot of capacity over the last couple of quarters here. That's why you've seen our CapEx be higher than normal. And that provides you a benefit when you're competing in a multi CDM world, having ample capacity, having capacity in the right areas, it's not just about having a total amount of capacity, but having capacity in the right operator networks, in the right cities, in the right locations around the world is critical. And also, we talked about earlier, we had gone through a number of pricing renewals throughout the year with a lot of these folks. So we believe we're well positioned to capture our fair share. Now most of these players are multi CDN and in some cases, some of them own their own CDNs. But again, we think we're well positioned and are continuing to build out for what we hope will be significant traffic. Thanks, Ed. Thank you. And our next question comes from Keith Weiss with Morgan Stanley. Your line is open. Excellent. I was hoping to sneak in 2 questions. 1 on the cloud security side of the equation, where it seems like traffic or growth continues to hold up really well. Some of those core components that we've been talking about for a while, including sort of bottleneck appear to be growing really well. I was hoping we could get an update on some of the newer acquired assets, some of the access stuff for January and which was acquired last year, just to get an update on that side of the equation. And then the second was, I was hoping just for a reminder, if you could talk to us about how we should expect the balance between U. S. Growth and international growth to trend into 2020. I know the U. S. Had some headwinds this year around some pricing events. And international has been remarkably strong growth throughout the entire year. Should we expect U. S. To sort of catch up to international? Or is there always going to be some further weights on the U. S. Business versus international that we should keep in mind? Yes, I'll take the first one. This is Tom. We're really excited about the security business. The flagship products there are Kona Site Defender, which provides the cloud based web app firewall solution that keeps sites from being taken over or corrupted or data being stolen and Prolexic, which stops the denial of service attacks that come at the IP or the routing layer. And that's those are the flagship products and we built a ton of capabilities on top of that. You mentioned Bot Manager, which is just doing incredibly well. We talked about growth more than 50% year over year. A bot manager stops the kinds of attacks where an adversary is trying to buy up all the inventory, could be an article of clothing, could be tickets to a sports event, stops the price scrapers, which can cause a lot of expense for the website, especially travel websites. And maybe most importantly, stops the account slippers. And this is the bots that are checking out stolen or guest credentials against your bank account to see if they got the right one, then they can drain your bank account. And we've had fabulous success in stopping those kinds of attacks. And that's, I think, a key reason why it's the revenue is growing so rapidly. And the best news there is we got a long way to go just in our existing base and of course, also signing up new customers. You mentioned Janrain, the acquisition we did at the beginning of the year for their identity cloud capabilities, which we're integrating into our platform. And I think one of the exciting use cases there is to help our customers manage user data, opt in requirements and to help them be compliant with the laws that are being passed all around the world. I think a lot of people are familiar with GDPR in Europe, especially now that some multi $100,000,000 fines have been issued. But you have a law coming into effect in California, CCPA on January 1. Most of our customers probably are not yet compliant. We can help with that. You'll have other states in the U. S. New York will be passing laws and many other countries around the world. And these laws are all a little bit different and our customers are going to need help making sure that they can be compliant. And I think we really can help using our identity cloud solution, which we're creating in part through the Janrain acquisition. We've talked about our enterprise security solutions and notion of 0 trust. I think there's a very exciting future there. We're seeing substantial customer wins there as people start embracing the 0 trust concept and methodology. Again, revenue is growing over 50% there as well. We talked about the new acquisitions. Page Integrity, which is the CamelionX acquisition, I think, is very important. This is where we stop things like MAGE Cart that have caused some large data breaches on famous websites. In turn, again, huge fines, multi $100,000,000 fines being imposed when those breaches have happened. And I think Akamai is in a fantastic position to protect our customers against those kinds of attacks. People don't think about it a lot today, but most of the content you get when you go to a website doesn't really start or originate at that website. It's 3rd party content, content used for marketing purposes, for performance management, advertising, all sorts of other things. And it turns out that that content can often have malware in it or that a website will link to a partner who provides these services and they will be compromised with malware and that results in the end user giving up their private data like a credit card. And Akamai is in a really good position to stop that and we'll be looking forward to introducing a product into the market next year, early next year, which we call Page Integrity Management. We talked about Crypto, another small acquisition, but with some really exciting technology around push based multifactor authentication. And the interesting thing there is what a lot of enterprises use for that today is vulnerable to phishing attacks. And people don't think about it a lot, but that's not very good. And with the integration of crypto is we're going to be able to stop those attacks for enterprise. So there's a lot of exciting innovation going on in cloud security at Akamai and we're looking forward to continued strong growth there. And Ed, I'll turn it over to you for the other question. Sure. Keith, your question was around U. S. Versus international growth. So let me tackle it this way. Let me just remind everybody on the U. S. Side, we have flat year over year and benefit challenge for us. And just as a reminder, that's where we have our Giant accounts. Those were down a couple of 1,000,000 quarter over quarter this quarter. And we also have the U. S. Commerce vertical in the U. S, number of bankruptcies this year, including a couple this quarter, so still a challenge area. And then also a lot of the repricings for consolidations that we talked about earlier in earlier quarters are in that area. But I think the question would be, how what do you have to believe to see growth accelerate in the U. S? And I lump it into 3 main categories. The first one, is what Mark mentioned earlier on his first question around OTT growth, but just traffic in general, we're seeing strong traffic in not only just streaming video, but also music, OTT, social, etcetera, gaming. Then also Janrain. Janrain is a new addition as Tom talked about. Don't have a ton of penetration yet in the U. S. So it's a new security product. And then security in general when you look at enterprise, which is really in the early days. Also new customer acquisitions. We've done a pretty nice job in the last couple of quarters of increasing our new customer acquisition and most of that's being led by security. So those would be the things you'd have to believe in order to start to see the U. S. Growth rate increasing as we go into the future. As far as international growth, that's been very strong as you pointed out. And a lot of that has to do with the fact that we've made some significant investments in GTM go to market the last couple of years and we're starting to see that pay off. Very strong growth in Asia across all of our products, including media, our web products as well as security, seeing very solid growth in EMEA. And then also Latin America and Middle East, we see a big opportunity to continue our growth as evidenced by our Exceed acquisition. Excellent. Super helpful. Thank you, guys. Thank you. Our next question comes from Will Power of Baird. Your line is open. Okay, great. Thanks. Yes, great to get to hear the commentary on the unexpected traffic in Q3, opportunities in Q4. I guess maybe just kind of following up, just kind of thinking about the media and carrier division, the revenue growth opportunity. We did still see the overall media growth decelerate a bit year over year, I think up 2%, maybe 3% constant currency. And it sounds like maybe love to give a little more color on this, how much of that's tied to the pricing renewals and what you're seeing on that front given the positive traffic commentary? And then how do we think about that into Q4? I mean is that can it start to inflect? Are you still going to have pricing renewal pressure? How do we think about that media revenue growth trajectory as we go into Q4 and then into 2020? Yes. Good question, Will. I'd say there's 2 factors when you look at kind of the year over year. One is we had a really strong year in media last year, so a little bit tougher comps. But really pricing is the main driver. As we've called out for the last several quarters, there was a number of very large renewals that we went through for consolidations that we hadn't seen of this magnitude in the industry. So that was something that definitely was making the growth comps much harder. In terms of pricing renewals going into Q4, we factored everything into our guidance. I think if you look at the OTT launches, we factored in some growth associated with that. Given that they're in November, there's just not a ton of time left in the quarter, so not a huge expectation there. And then with our giant customers, we had talked in the earlier quarter about the fact that we had a couple of renewals this quarter and we're expecting to be down $3,000,000 or $4,000,000 We actually are only down about $2,000,000 So did a little bit better there and we expect that to be up a couple of 1,000,000 next quarter. Okay. If I could maybe just squeeze one more in. Tom, gave a lot of great examples of some of the things you're doing on the edge today. As you look forward, what are some of the edge applications that get you most excited? Is there anything tied to 5 gs as an example? And what better positions you for those applications versus some of your competitors' reps? Yes. Pretty much everything all of everything we're doing involves edge computing in some way. Certainly, everything we're doing involves the edge and the edge enhances pretty much everything that we're doing. As we look towards 5 gs, I think that's really exciting in terms of enabling new kinds of applications around the Internet of Things. There's been a lot of buzz about IoT, but so far we haven't seen so many killer applications. But I think that could be in the process of changing. As we look across our customer base, I would say a lot of our customers in several different verticals are now engaged in projects involving IoT. Sensors in sneakers, sensors in clothing or sports equipment, sensors on price tags, obviously cars, obviously mobile devices and gaming, big IoT potential markets. And the reason I think 5 gs is helpful here is because it will allow many billions more of devices to connect. The latency will be much lower across the air than it is for 3 and 4 gs. And the throughput will be higher. So that means you get more devices can communicate more effectively and that's enabling, I think, for some of these at the same time, people are coming up with these IoT applications. And I think that could be very exciting. Now one of the nice things about 5 gs is that I think it makes it even more important that you have a real edge network and not an edge platform in name only, which we hear a lot from our competition. But a platform where you're really close to the last mile, you're deep inside the carriers and the cellular networks that are offering this capability. And Akamai is really unique in that context. And once the latency is lower in the last mile and you have higher throughput, now you really can take advantage of applications with low latency and high throughput if you really have an edge platform. And because there you have the capacity in the last mile and you're close to it, you have low latency. If you're trying to serve out of the core data centers, you're still going to have latency problems even when 5 gs comes and you're still going to have throughput problems even when you get better throughput in the last mile. And I think that's a key reason why you see Akamai being so much more successful in such a larger scale than some of these other companies that are serving out of core data centers at, of course, much lower volumes. And it's the Edge platform that makes the difference and that is our competitive a major competitive advantage. It really is the Edge. It's not just a marketing tool. Okay. Thank you. Thank you. And our next question comes from Sterling Auty of JPMorgan. Your line is open. Yes, thanks. Hi, guys. One question, one follow-up. So on the OTT, before we even get to these 2 couple of major launches, can you just set the context and give us an idea how big is OTT gotten within Media and Carrier or however you want to describe it? Have we gotten to the point that it's material even before these big launches? Okay. Hey, Sterling, this is Ed. Yes, so we've always talked about how video is our largest source of traffic and it's our fastest growing source of traffic. So OTT is a pretty big part of the media and carrier business today. We do a ton with live sports. Part of the strength we saw in Europe was as a result of folks that have sports rights. I didn't see any slowdown there and see the audience size is growing. We do several live television offerings, so linear television as well as a lot of video on demand. So it's been a very strong part of our business and continuing to grow. We're seeing some pretty good signs in terms of user adoption, bit rates increasing and traffic growing. All right, great. And then one follow-up would be, I can't remember if you touched on in your prepared remarks, but just the web performance has been an area that has kind of weighed on the company. But if I try to take a stab at what the security portion is and back that out, It looks like the web performance side is starting to stabilize. Is there any additional color you can give to is that really the case and what's driving maybe a little bit of improvement there? Yes. I'd say there's 2 things in the Web Performance business that is driving the performance that you're seeing. 1 is obviously security. You're right to point out that's been the primary driver. But also we're seeing really strong growth internationally, both in Europe and Asia. So it's U. S. Has really been the problem for us in terms of the U. S. Commerce vertical. So we're not ready to declare victory there yet. There's still some room to go there. And as I had mentioned, there was a couple of bankruptcies this quarter. It's been probably over 10 so far this year. So still a troubled vertical for us. So until that really stabilizes, I think it's tough say that we're completely out of the woods on that part of the business. But again, we're seeing really strong security and web performance in Europe and Asia has been pretty strong for us. Great. Thank you. Thank you. Our next question comes from Michael Turos with Raymond James. Your line is open. Hey, guys. Good evening. Tom, I wanted to ask you about another area of security that you didn't mention. I think that you talked about launching a secure web gateway at your conference this summer. So does that put you into competition with some of the other network security providers that are looking to do security from the Internet like Zscaler or Palo Alto? And how are you going about that? Yes. Secure Web Gateway is an important component in our Enterprise Threat Protector solution. And yes, we are in competition with I would say the largest competitors are the traditional ways of doing things where you have a secure web gateway that's a piece of hardware that you operate in a data center or there's a cloud instance of it and you operate it there. The legacy way of would be would be our largest competitor, I think, in the future way of doing things. And we do compete actively with Zscaler, both for enterprise threat protector, which includes a secure web gateway and also enterprise application access, which is where you're providing the access or authenticating enterprise employees and devices to get them access. And we compete very successfully. Big advantages that Akamai has are our enterprise platform. We have a much larger cloud security business overall. And so we're already engaged and trusted by the CSOs in the large enterprise organizations. We have our Kona Site Defender service, which I think is critical for really providing enterprise security and 0 trust. And the competition that you mentioned doesn't have anything like that. And I would say, lastly, performance matters for enterprises. And one of the big challenges with enterprise security that often keeps them from using products from some of the companies you mentioned is that when you turn it on, including a secure web gateway, it destroys your performance to the point where the employees object and especially if you're a global company and you don't want to use it. And of course, that's a problem. With Akamai being a performance company, when you turn on our security products, your performance gets better. In fact, we recently had some major customer wins where performance was identified by the customers, a reason that they chose us over the competition. So they get great Akamai security, but now their enterprise apps get faster for employees instead of slower. So yes, we're competing against those companies and I think successfully. Okay. And then just to add a few on how far are we in terms of having built out the capacity we need for those launches and into 2020? And obviously, you haven't given guidance yet, but are we at the point where next year we can start to get back to the long term range for CapEx both on a network basis and also whether or not there's any HQ left over? Yes. So just on the HQ, we'll be moving into our HQ later this week. So there won't be anything material related to the HQ from a CapEx perspective next year, at least we don't anticipate anything. And then on the build out, we've been building out in advance as we've talked about. And I think really what it's going to depend on is how much demand do we see. To the extent that we see significant demand, we may build a little bit more in the first half of the year to be prepared for that. But we have made pretty significant investments. And I would expect us to be giving guidance, but towards the higher end of our long term range for CapEx here for the next several quarters. Okay, great. Thanks a lot. Thank you. And our next question comes from Brad Zelnick of Credit Suisse. Your line is open. Thank you so much and congrats on a nice quarter, particularly in security. I wanted to follow-up on one of Michael Turits' question as it relates to enterprise security and specifically competing with the likes of a Zscaler or a Palo Alto, which by the way both of those companies their go to market slightly differs from one another. And I wanted to ask more about your routes to market for enterprise security. And appreciating you've spoken a bit to this in the past. You've got strong carriers carrier relationships more broadly across Akamai. You've got the traditional security VAR channel. Can you talk a little bit about how the go to market strategy is evolving as you continue to pick up steam in enterprise security? Yes, sure. Usually with new products, especially if they're new to the industry, which they often are with Akamai, we'll go direct first through betas and really get the product development established market traction and then it quickly extends to our channel. In the area of enterprise security, there I think we have even greater channel adoption and potential. I talked earlier about Comcast Businesses' new security edge product. May see it advertised on TV. That's Akamai underneath and it provides a version of our enterprise threat protector product that we talked about just a minute ago for small and medium businesses that Comcast Business sells to small and medium businesses. So I think you'll see us on the enterprise security side make even greater use of the channel than we already do with all of our other products. And in many cases, you'll see our products be white labeled. And so you wouldn't initially know it's Akamai, but it's Akamai underneath. Thanks, Tom. If I could just follow-up, particularly on M and A, it's nice to see not only the innovation you've been able to acquire, but what sounds like very efficient use of capital. As we look forward, how should we contemplate the possibility of Akamai making a larger acquisition in security? Now you've got a lot of cash on hand. And what directions might you look to build out the portfolio or rather than sharing your blueprints with us, are there any is there anywhere sacred where you absolutely wouldn't go? Thank you. Yes. Obviously, we're going to be very judicious with anything that's a larger acquisition. It's not impossible we do something larger. In the area of security, valuations are pretty high today. And you're not going to see us do anything wacky in terms of the financials. We're very happy with our own capabilities where we see good technology that makes sense financially, we're going to buy it and then we're going to develop it and bring it to market. And now with a security business that's at our scale, we're in a really good position to do that. In terms of direction, I think you'll see us continue to work in the mold that we've been working in. Things that are natural adjacencies for us that complement our portfolio, that work that really benefit well from having a true edge platform, that will be synergistic with our customer base. And now that we're in enterprise security, I think that now extends to most major enterprises. Those are the areas where we'd be looking for. Obviously, we care a lot about security and that's broadly construed everything from protecting websites, for protecting applications, protecting data centers, protecting identity, user information, we're now protecting enterprises. So I think building out in that area is obviously of interest. And as you saw, we are purchasing Exida, which is a leader in a different geography where we want to see a lot more growth in our traditional businesses, content delivery and to some extent, web security. So I think what you've seen us do is a good blueprint for what's coming. There will be acquisitions. They'll fit well and benefit from the Akamai Edge platform and they'll be synergistic. They're not going to be nutty in terms of cost for things, given some of the valuations out there. It's very helpful. Thank you so much. Thank you. And our next question comes from Lee Krowl of B. Riley FBR. Your line is open. Great. Thank you for taking my questions. Two quick questions. First, could you maybe provide us a little more commentary around the churn statements you kind of made in the prepared remarks. Curious if that's a function of bundling or maybe just better customer retention from a customer service standpoint? And then secondly, perhaps if you could maybe quantify both the revenue and OpEx associated with the 3 acquisitions you did in the quarter, maybe in Q3 and perhaps more on annual run rate beyond Q4? Thanks. Yes. I think the record low churn over the past 5 years, there's a lot of factors to that. It's the combination of products, which make a big difference to customers to get performance and security in a single platform, in a single offer that matters. It's the great quality that we provide both in terms of enhancing the performance of an application and the security that really works. So the services are really strong and much better than you can get anywhere else on the market. And the great people with our services and support. And we find, especially in the area of security with the attack vectors changing so rapidly that our customers, which are major enterprises, they want to have an expert that they can talk to, that they trust in and can be engaged with them to make sure they stay ahead of the attacks, because the attack environment is changing so rapidly out there. And so our services professionals are highly desired by our enterprise customers. And I think all those things put together have helped reduce what was already a very low churn rate. So it was low to start with. It's not a situation where we had any kind of churn problem. It's always been low single digits and now even better. And Ed, do you want to talk about the revenue on the acquisitions? Yes, sure. So the ChameleonX and Crypto acquisitions are immaterial. We're actually just going to absorb the headcount into our normal hiring plan. So no real impact on OpEx. As far as revenue goes, we're going to be integrating those into our products. So don't expect any material revenue here, certainly in Q4 and in 2020. As far as Xceda goes, we talked about Q4 being about $2,000,000 of revenue and about $0.01 dilutive as we go through the integration. And then what we've talked about in our press release we issued when we announced the deal about $15,000,000 of revenue for 2020, actually about $0.01 or $0.02 accretive to next year. Got it. Thank you. Thank you. And our next question comes from Alex Henderson with Needham. Your line is open. Great. Thank you very much. So I was hoping you could talk a little bit about 2 things. 1, the sequential increase in OpEx is a little steeper. I was wondering if you could give us a little bit of a waterfall of what's embedded in that than what we've modeled? And then the second one is on the international side. Obviously, you're getting some benefit from the Web 2.0 growth internationally versus a decline domestically. But can you talk about the split between domestic growth in security versus international? Is international security growing faster than domestic? And how do you see that playing out over the next year? And then one last thing, if I could throw it in. Isn't 2020 going to be a much stronger year given that the election year, Olympics year and all that sort of stuff? Can you talk a little bit about how you're feeling about 2020 versus 2019 as a full year? Thanks. Sure. I'll take those. So first, I'll start with the sequential increase in OpEx. I talked in my prepared remarks that there's a number of things that factor into it. First thing is historically in Q4, we tend to see a pretty big jump in our sales incentive compensation plans related to folks hitting accelerators. And this year we're having a good year. So we're anticipating a number of folks tripping into accelerators. The other thing I talked about a couple of $1,000,000 of OpEx related to our building that pushed from Q3 to Q4. And then there's also rent expense with the new building. So we'll be moving in. I mentioned we'll be moving at the end of this week. So we have additional rent costs that go into the building as well. Those are the main drivers in terms of the sequential uptick in operating expenses. And also we have our customer conference for Europe and Asia. We had our U. S. Conference earlier on in the year. In terms of the international versus the U. S. Growth rates, we don't break those out, but it's safe to say that both of those are very strong and pretty similar, probably a little bit faster in international, especially in Asia. And then your question on 2020 being a stronger year, we've talked about on some of our earlier calls as we think about 2020. 2020 is an even year and an even year as we do tend to have more events. And next year we have the Olympics as well as the presidential election. And if I look back to 2016, the last election, we did see a nice additional revenue. Usually there you're signing up a number of rights holders across the world. So it does tend to be a decent event, nothing overly material, but a decent event that adds to the growth rate. And then as we've talked about, obviously, there's a couple of OTT launches coming here in the next month as well as a few that are rumored to be coming in early 2020 and those will help our growth rate in 2020 as well. That's clear and concise. Thank you very much. Thank you. Thank you. And our next question comes from James Fish of Piper Jaffray. Your line is open. Hey guys, great quarter and thanks for squeezing me in here. Just quickly, last quarter you guys actually gave us greater clarity in the security business around customers across kind of the 3 main solutions of WAF, DDoS and Bot Management. Any chance we can get an update on those customer accounts again? And also what percentage of customers have 1 or more security solutions versus kind of standalone? And if I can sneak in one more, it doesn't seem like you guys have many customers actually that are using both WAF and DDoS. Can you maybe go into why that is? Yes. We didn't give the exact counts last quarter. I just wanted to give some kind of idea. We'll probably do that on an annual basis, give you updates there, but probably not every quarter. We are seeing fantastic growth in security, and we gave some of the highlights on this call. Penetration, I think we have a lot of room for growth in the existing base, because there's several different security capabilities. And I think now over half the customers have at least one, but our preferred model would be to have several of the security products into all the accounts. So plenty of room for growth in the existing base. I can also add that we're seeing very strong growth of new customers and that's being led by security. And then I think the third question was customers with Prolexic and Kona maybe. Now Kona Site Defender also provides style of service capabilities at the application layer. Prolexic is sort of specialized in that it does denial of service at the routing or IP layer and that really is for protecting data centers that have other things going on besides a website. If you just have a website, just have web traffic, then you wouldn't need ProLaxec. You would simply be using Kona Site Defender and all the capabilities built on top of that. And so that may be why you're looking at a smaller dual penetration. There are sort of different situations that you'd use them in. Got it. That makes sense. I'll pass it on. Thanks. Thank you. And our next question comes from Jeff Van Rhee of Craig Hallum. Your line is open. Great. Just two quick cleanups for me then. I think you had commented on the network build and some of the CapEx that pushed to Q4. Just curious if that was in response to some variability in terms of demand forecast, maybe on OTT or from others that drove the push? And then the second, for me, I think last quarter you commented on CDN and cloud security and said CDN flattish and cloud security, I think you bumped to mid to high 20s versus prior being mid-20s. Just, comfortable if those are both the right way to think about that? Sure. I'll take the pump. On the network build side, really wasn't a reflection of demand. It was really just the timing of the CapEx in terms of when it actually arrived and when we recorded the CapEx. So nothing there from a demand perspective literally just a timing issue. And then on the CDN being flattish for the year in the guide on security, obviously, had a good quarter here in security. So probably closer to the high 20s for security for the year and still flattish on the CDN side. Awesome. Great. Thank you. Thank you. And our next question comes from Colby Synesael with Cowen and Company. Your line is open. Great. This is John on for Colby. Thanks for sneaking me in. Just a follow-up on M and A. How should we be thinking about the level of M and A you could do next year and still be able to achieve your 30% operating margin target? Thank you. Yes. We're committed to doing 30% next year, and I don't see anything at this point that would change that. And we're very conscious of operating margins. We make acquisitions. And of course, as you've seen, we're continuing to make acquisitions. So it's not that we're not going to move forward on deals that we think make a lot of sense that can help our customers, but we're planning to meet 30% operating margins next year. Great. Thank you. Thank you. And our next question comes from Tim Horan of Oppenheimer. Your line is open. Thanks. You're basically already at your margin kind of goals here. Do you think given the shift in business to security and other products that margins can kind of continue to trend up for a couple of years? We're not making guidance for margins past 2020. As I mentioned, we're committed to delivering 30% next year. And when we get to the beginning of next year, we'll see what we're thinking about in terms of the future. But we're also heavily focused on revenue growth. I think 30% is a good place for the company to operate. If we can do better, we're certainly going to do that. And I think you're on a good point that as security grows as a fraction of our overall revenue, that is very helpful for us because that's a very high margin business. Now, of course, at the same time, as we make acquisitions and increase our investment for building innovative new security products, that adds a lot of R and D OpEx. So you have the tension there. And right now, we're planning to operate at 30. And if we change that for the future, we'll certainly let you know. Operator, if time is more Yes. Oh, I'm sorry. Go ahead. No, that's right, Tom. Do you think we've seen a lot of the effect of a shift in seasonality here, given that the base is so much larger? Or what do you think caused it this summer? And have you seen that in the last couple of years? Yes. So as I talked about earlier, this is Ed, Tim. This was kind of an unusual year in terms of what we saw for traffic. Hopefully that's a trend that continues. Always Q4 is always the biggest seasonal quarter. We talk a lot about I think most people think about the online shopping season and that is a factor for us. But also we over the last few years have seen a really big uptick in seasonality related to media. Some of it has to do with lots of new devices coming online and a lot of firmware updates as well as sometimes you'll see some video packages that are bundled in with various hardware platforms and things like that. Also you tend to see in the Q4 a lot of the gaming publishers try to get new game launches out. So I think we'll always have seasonality in the business as far as Q3 goes. I would be expecting as I think about a normal Q3 without events that would be your seasonally slower quarter and Q4 is always going to be your biggest quarter for traffic. And I'll turn the call back over to management. Okay. Well, great. Well, thank you, everyone for joining us this evening. In closing, we'll be presenting at several investor conferences and events throughout the Q4 in both the U. S. And Europe. Details of these can be found in the Investor Relations section of akamai.com. Thank you for joining us and have a great evening. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.