Earnings Call: Q2 2018

Jul 31, 2018

Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 Akamai Technologies Incorporated Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Tom Barth, Head of Investor Relations. You may begin. Thank you very much, and good afternoon, and thank you for joining Akamai's Q2 2018 earnings conference call. Speaking today will be Tom Layton, Akamai's Chief Executive Officer and Jim Benson, Akamai's Chief Financial Officer. Before we get started, please note that today's comments include forward looking statements, including statements regarding revenue and earnings guidance. These forward looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these factors is contained in Akamai's filings with the SEC, including our annual report on Form 10 ks and quarterly reports on Form 10 Q. The forward looking statements included in this call represent the company's view on July 31, 2018. 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 in the financial portion of the Investor Relations section of akamai.com. And with that, let me turn the call over to Tom. Thanks, Tom, and thank you all for joining us today. Akamai delivered excellent results in the Q2. Revenue was $663,000,000 up 9% over Q2 of last year, with continued very strong performance for our security products and continued improvement in our media and carrier division. Q2 non GAAP EPS was $0.83 per diluted share, up 34% year over year. This very strong result was driven by our solid revenue growth, the impact of the cost reductions that we made in the 2 prior quarters and a lower tax rate. EBITDA margins in Q2 improved to 39% and non GAAP operating margins improved to 26%. We expect further improvements in margins by the end of the year as we realize the benefits of projects underway to improve our operational efficiency. And we're continuing our work to find a path to achieve non GAAP operating margins of 30% in 2020, while maintaining investment in the development of new products intended to fuel our future growth. Our security portfolio was again the fastest growing part of our business with Q2 revenue of $155,000,000 up 33% over Q2 of last year. We've been very pleased with the performance of our security business, which has received accolades from several leading analyst firms over the last few months. In April, Frost and Sullivan recognized Akamai for market leadership in bot risk management. And in May, they recognized us for market leadership and holistic web protection. In June, Forrester ranked Akamai highest among all competitors in web application firewalls. And we were the only company to receive Forrester's top score possible for 0 day attack capabilities. Also in June, IDC issued a new vendor profile of our security capabilities that said Akamai has had the strongest and broadest edge security offering for quite some time. And all this comes on top of Gartner's recognition last year of Akamai as a leader in its Magic Quadrant for web application firewalls. Our security products were an important contributor to the revenue in our Web Division in Q2. Overall, Web Division customers generated $351,000,000 in revenue in the 2nd quarter, up 11% over Q2 of last year. This is a little lower than what we'd like to see from the Web Division. And as we talked about during our Analyst Day last month, we've taken several steps to drive a stronger growth rate going forward. Most notably, we've added new leadership in global web sales, increased our inside sales and sales development functions to drive new customer acquisition, simplified our pricing and packaging bundles for multi product sales, focused effort on accelerating customer adoption of our mobile solutions, and we're improving our ability to cross sell our new products into the existing customer base. We continue to see strong traction for our new products in Q2, including mPulse, Image Manager, Bot Manager, Enterprise Threat Protector and Enterprise Application Access. Revenue from our new products exited the quarter with an annualized run rate of about $170,000,000 more than triple the run rate from Q2 of last year. Revenue for our Media and Carrier division in Q2 was $312,000,000 up 8% over Q2 of last year. This much improved performance is a result of our successful integration of Nominum and the work that we've been doing to improve our traffic share in the top 250 global media accounts. Traffic growth on the Akamai platform continued to accelerate in Q2 with especially strong growth in our OTT and gaming sectors. Downloads of the new Fortnite games set a record for a single video game release with over 22 terabits per second of traffic delivered for a single customer at the peak. I think it's worth noting that this customer moved from 1 of the world's largest cloud platform providers to Akamai in the months leading up to the release, not just because of our scale and global reach, although that's really important when you have a game of this size and an audience of this magnitude, but also because we achieved a 5 times reduction in error rates, which provided a much better experience for their end users. We also set traffic records for streaming the World Cup. Akamai served 55 broadcasters from around the world during the tournament and there were several days when our total World Cup traffic exceeded 20 terabits per second. To put this amount of traffic into context, 20 terabits per second is more than 10 times the aggregate border capacity of some major countries. On the other hand, it's not hard to imagine that the demand for online traffic someday could grow to a 1000 times this amount. Delivering traffic at scale is very hard to do and it's something that the Akamai Edge platform is uniquely good at. That's because we place our servers in thousands of locations close to end users, well beyond the bottlenecks in the core of the Internet where cloud data centers are typically located. The competitive takeaway of the Fortnite traffic I mentioned earlier and the well publicized failures of 2 of the world's largest cloud platforms during the World Cup provide strong proof points as to why we believe that Akamai's unique architecture is so important and also why we think it will become even more critical as traffic levels on the Internet increase. In summary, I'm very pleased with our results in Q2. We continue to see very strong performance in our security portfolio, improvement in our media and carrier division, improvement in our margins and very strong growth on the bottom line. Before turning the call over to Jim, I'd like to mention that Akamai has a significant milestone coming up in the next month. August 20 will be the 20th anniversary of our founding. It has certainly been an event for 20 years as we've grown from the early days as an MIT startup to become the world leader in content delivery, application performance and cloud security. And I want to thank all our employees for their sustained track record of innovation and hard work and also our customers for their partnership and trust. We've accomplished a lot together over the last 20 years, but I really do believe that the best is yet to come. In part, that's because I believe that Akamai's current business is very well positioned to benefit from major market tailwinds as large volumes of media move online, the scale and sophistication of cyber attacks grow and more applications move to mobile devices, we are near instant performance as the expectation. I'm also excited by our progress in the development of an entirely new generation of services to support our customers' future needs in the areas of blockchain, the Internet of Things and 0 Trust security architectures. Predicting the future is never easy, but as I look forward to the next 20 years, I see very bright prospects for Akamai and our shareholders. With that, I'll turn it over to Jim to review our financials and guidance for the rest of the year. Jim? Thank you, Tom, and good afternoon, everyone. As Tom outlined, Akamai delivered a strong second quarter on revenue, margins and earnings. Q2 revenue came in at the high end of our revised guidance range at $663,000,000 up 9% year over year or 8% in constant currency and up 10% in constant currency if you exclude the 6 large Internet platform customers. Notably, this is the 2nd straight quarter of double digit revenue growth outside the Internet platform giant. Revenue was solid across most of the business, highlighted by continued robust growth in our security solutions from both of our divisions and another quarter of strong traffic and revenue growth acceleration in our Media and Carrier division. Revenue from our Media and Carrier division customers was $312,000,000 in the 2nd quarter, up 8% year over year or 7% in constant currency and up a healthy 12% in constant excluding the large Internet platform customers. Revenue from Internet platform customers was $44,000,000 in the 2nd quarter, unchanged from Q1 levels. Q2 revenue outside these Internet giants was strong across all geographies and industry verticals, exceeding our projections for the quarter. Traffic growth accelerated for the 4th straight quarter and was particularly robust from our video delivery and gaming customers. And as Tom mentioned, we also had several notable events in the quarter that contributed to the strong traffic and revenue growth, with soccer and cricket events seeing record breaking online audiences. Our Media and Carrier division management team remains focused on capturing more traffic share and improving the quality of delivery for the top 250 media customers that account for most of our traffic and revenue. Because of these efforts over the past year, traffic growth continues to accelerate and we are seeing the associated revenue acceleration that we expected when we initiated these actions. Moving now to our Web division. Revenue for this set of customers was $351,000,000 up 11% year over year or 9% in constant currency. This growth rate came in a little bit below what we expect for this business due to some pricing compression within our delivery based performance solutions. We are confident in the web division growth strategy we outlined at our Analyst Day, specifically focusing on expanding the portfolio through new product development and acquisition, selling additional solutions into the installed base, simplified pricing and packaging bundles for multiproduct deployment and implementing go to market enhancements that we believe will accelerate new customer acquisition. And as Tom highlighted, we continue to see strong uptake in our new product areas in the first half of the year, namely Image Manager, Digital Performance Management and Bot Manager as well as strong growth in our core Kona and Prolexic cloud security solutions. We believe continued execution in all these areas will enable low double digit revenue growth in this division. Turning now to our results for our cloud security solutions. 2nd quarter revenue was $155,000,000 up 33% year over year or 31% in constant currency and yet another quarter of tremendous revenue growth in customer adoption for our cloud security solutions globally. We're particularly pleased with the recent uptick in security solutions purchased by our media customers. Entering the 3rd quarter, our cloud security business now has an annualized revenue run rate of roughly $640,000,000 and represents nearly a quarter of our total revenues. We believe security continues to present a significant growth opportunity for us and we plan to continue to invest in this area with a focus on further enhancing our product portfolio and extending our go to market capabilities. Moving on to our geographies. Sales in our international markets represented 38% of total revenue in Q2, up one point from Q2 Q1 levels. International revenue was $250,000,000 in the 2nd quarter, up 21% year over year or 18% in constant currency, driven by continued strong growth in our Asia Pacific region. Foreign exchange fluctuations had a negative impact on revenue of $5,000,000 on a sequential basis and a positive impact on revenue of $8,000,000 on a year over year basis. Revenue from our U. S. Market was $413,000,000 up 3% year over year and up 6% excluding our large Internet platform customers. Moving on to costs, cash gross margin was 77%, consistent with Q1 levels and up one point from the same period last year and in line with our guidance. We are pleased with our continued execution on our platform efficiency percent, roughly consistent with Q1 levels and slightly below our guidance as we introduced more capitalized software projects onto the platform throughout the quarter. Non GAAP cash operating expenses were $248,000,000 slightly below the low end of our guidance and down about $11,000,000 from Q1 levels due to continued traction with our operational efficiency efforts and the restructuring benefit from our Q1 reduction in force. Moving now to profitability. Adjusted EBITDA for the 2nd quarter was $262,000,000 up $6,000,000 from Q1 levels and up $40,000,000 or 18% from the same period last year. Our adjusted EBITDA margin came in as expected at 39%, a one point improvement over Q1 levels, primarily due to the strong revenue achievement and the additional operational efficiency gains I just mentioned. Non GAAP operating income for the 2nd quarter was $170,000,000 up $3,000,000 from Q1 levels and up $25,000,000 or 17% from the same period last year. Non GAAP operating margin came in at 26%, up 1 point from Q1 levels and at the high end of our guidance range. I am very pleased with the margin expansion we have seen as a result of our ongoing efficiency efforts, and we believe our continued hard work can drive further operating margin improvements. Capital expenditures in Q2, excluding equity compensation and capitalized interest expense, were $102,000,000 and below the low end of our guidance for the quarter, primarily due to the timing of some planned network investments and facility projects that shifted into Q3. Moving on to earnings, non GAAP net income was $143,000,000 or $0.83 of earnings per diluted share and coming in $0.02 above the high end of our guidance range, driven by slightly lower operating expenses and a lower tax rate. Taxes included in our non GAAP earnings were $33,000,000 based on a Q2 effective tax rate of 19%, which equates to a year to date effective tax rate of 19.5%. This tax rate is roughly 1 point lower than our guidance due to a higher mix of foreign earnings. Moving on to our GAAP earnings, there is a large and noteworthy item excluded from our non GAAP results, but impacting our Q2 GAAP results that I'd like to provide some color on. We were proud to endow the Akamai Foundation with a one time $50,000,000 grant in the 2nd quarter. The associated $50,000,000 charge is classified as an operating expense in the G and A line of our GAAP P and L. We believe this one time endowment is important for several reasons because it, 1, solidifies our ongoing commitment to support STEM initiatives for underrepresented population in the technology industry today 2, enables consistency in charitable giving from 1 year to the next regardless of fluctuations in economic cycles or annual profits and 3, is reflective of our values and we believe initiatives like this have a very positive impact in employee recruiting and retention efforts And lastly, it resonates with investors' corporate responsibility expectations. Factoring in this one time GAAP only item, GAAP net income for the Q2 was $43,000,000 or $0.25 of earnings per diluted share. Now I'll review our use of capital. In May, we closed a $1,150,000,000 convertible debt offering concurrent with a $500,000,000 revolving credit facility, further strengthening our balance sheet for additional strategic flexibility. We believe these cost effective transactions will support our overall operating cash requirements as well as previously announced capital return initiatives, while at the same time maintain our ongoing strategic flexibility to be opportunistic with M and A. We continue to focus on the importance of returning capital to our shareholders. During the quarter, we spent $166,000,000 on share repurchases, buying back roughly 2,200,000 shares. As I mentioned last quarter, we plan to spend our current share repurchase authorization of $750,000,000 by the end of 2018. Given our strong balance sheet and cash generation, beyond 2018, we intend to continue our share repurchase activity, but at a lower spend level and with the objective to offset dilution from our equity compensation plans and at times to opportunistically repurchase more shares depending upon business and market conditions. As always, our overall aim is to deploy our capital to achieve favorable returns for our investors in a manner that we believe is in the long term interest of the company and our shareholders. In summary, our Q2 top and bottom line results met or exceeded the high end of our guidance. We continue to see a robust pipeline of innovation across the company, and we believe we are making good progress on our operational efficiency and margin expansion efforts. Looking ahead to Q3, we are expecting another solid quarter on the top and bottom lines. As we outlined at our Analyst Day in June, the strengthening of the U. S. Dollar over the last several months continues to negatively impact our revenues. In fact, these foreign exchange headwinds have worsened by a couple of $1,000,000 just since that event. At current spot rates, foreign exchange fluctuations are expected to have a negative impact on Q3 revenue of over $6,000,000 compared to Q2 levels and a $5,000,000 impact year on year. Taking into account these foreign exchange headwinds, combined with typical summer traffic seasonality, which has historically resulted in sequential declines in our media business, we are projecting Q3 revenue in the range of 6.56 dollars to $668,000,000 At these revenue levels, we expect cash gross margins of roughly 78% and GAAP gross margins of 65%, both up from Q2 levels. Q3 non GAAP operating expenses are projected to be $249,000,000 to $254,000,000 up modestly from Q2 levels and reflecting the seasonality of our annual merit increases. Factoring in the cash gross margin and operating expense expectations I just provided, we anticipate Q3 EBITDA margins of 39% to 40%, consistent to slightly up from Q2 levels. Moving now to depreciation, we expect non GAAP depreciation expense to be between 93 $1,000,000 to $96,000,000 Factoring in this depreciation guidance, we expect non GAAP operating margins of 25% to 26 percent for Q3, roughly consistent with Q2 levels. And with the overall revenue and spend configuration I just outlined, we expect Q3 non GAAP EPS in the range of $0.80 to $0.86 This EPS guidance assumes an estimated quarterly non GAAP tax rate of roughly 20%. This guidance also reflects a fully diluted share count of 169,000,000 shares. On CapEx, we expect to spend $115,000,000 to $125,000,000 excluding equity compensation in the quarter. This is an uptick from Q2 levels, primarily due to facility build outs in Bangalore, Costa Rica and the early phases of our new Cambridge We expect increased facility related spend for our new Cambridge headquarters to continue into Q4 2019. Looking to the full year, we are anticipating revenue of $2,680,000,000 to $2,705,000,000 up $5,000,000 in the low end of the range. EBITDA and non GAAP operating margins of 39% to 40% and 25% to 26% respectively. And factoring in these revenue and margin levels in a non GAAP effective tax rate of roughly 20%, we anticipate non GAAP earnings per diluted share of $3.26 to $3.38 for full year 2018. And at the midpoint, this is an increase of $0.07 from our prior guidance. As a helpful reference, we will post our Q3 and full year 2018 guidance ranges on the Investor Relations section of our website after this call. In closing, we are very optimistic about the opportunities ahead for Akamai. We are confident in our ability to continue innovating to drive further revenue growth, while at the same time driving margin and earnings expansion for 2018 and beyond, which we believe will add significant shareholder value over both the near term and long term. Thank you. And Tom and I would like to take your questions. Operator? You. Our first question comes from Brad Zelnick of Credit Suisse. Your line is now open. Great. Thanks so much for taking the question. I wanted to ask specifically on the Media division relating back to the pricing actions and contract restructuring in media from a year ago, concentrating more on the top 250. Where are we in terms of the benefit? How much longer should we expect that, that lasts? And how much of the traffic this quarter would you describe as being more event related versus predictable and ongoing? It's a good question, Brad. So as you as we talked about for the last several quarters, we really initiated a much more aggressive posture around going after traffic share. And that began in late Q2 of last year. And as you can imagine, some of that meant opening up contracts earlier. Some of it meant that we applied some more creative pricing for contracts that were coming up for renewal. But I would say, largely speaking, that we've anniversaried a lot of that. And so you're going to have renewals every quarter. But most of the actions that we were going to take, we've already taken over the last year. And so I think what you're in for now is a continued focus on us maintaining traffic share. And obviously, there's new customers to be had. And where we can grab more traffic share from customers, we're certainly doing that. But I would say the bulk of those actions are completed and now we're back into business as usual, which is basically ongoing renewals that happen every quarter. Thanks. That's helpful. And I just had one more follow-up on the Web Division where you've spoken about several initiatives to help drive growth into double digits going forward. And some of them seemed like go to market and go to market leadership. Some of them seemed around pricing and packaging. Can you maybe just expound a bit more on pricing and packaging and innovation? What specifically is there to be done? And how do you think that going to play out? Yes. I mean, I can let me offer some comments, and then if Tom has anything else he can offer. Obviously, what we have been doing, and we shared this at the Analyst Day, company has done a fantastic job of introducing new products and developing new products. And so we've already been doing a fair amount of that. And we talked about the new products that we've introduced in the last 18 months, actually generating an annualized revenue run rate now of almost $170,000,000 So there's been a lot of work on the, call it, the development side. And you're right, there's certainly been work on the go to market side because you got to develop products, you have to sell them. The sales force has done a very good job of selling these new products into the installed base. We have more work to do there, but I'd say good early signs. And the comments around pricing and packaging are less about we're going to do something like on the media business where we effectively went in and we creatively priced it, grab more traffic share. The web division is not about traffic share. The Web Division is about bookings. What we mean by that is packaging offering so we can bundle some of our solutions around security and performance in other areas in a much simpler way for customers to consume so they can buy multiple products from Akamai as opposed to buying individual products a la carte, bundling products to make it easier for customers to buy more of our portfolio. So there's more creative things that we're doing there, which makes they're really more packaging and promotional related activities, really to introduce the customer to more of what Akamai has to offer. And Tom, I don't know if there's anything else you'd add. I think you characterized it well. And our ability to package together the world's leading capabilities with the world's leading performance is very powerful. And that helps us retain and grow the web customer base. It's the person who owns the website needs it to be secured, needs to be fast. And if they can go to one vendor and get the best of both, that's just an incredibly powerful combination. Thanks very much for the color. Thank you. And our next question comes from Michael Turits of Raymond James. Your line is now open. Hey, guys. Good evening. First of all, I'd like to congratulate Akamai and of course Tom and the founders on that 20 year anniversary. It's I hate to admit how many of the years those years I've actually been following the company, but it's a big number. Anyway, congratulations. Two questions. One, maybe you could parse for us the drivers of the traffic acceleration in the quarter. How much of it do you think was wallet share versus organic customer growth in traffic? And where do you think that do those trends continue or do those both flatten out at this point? Yes. I think it's both. We are, I believe, increasing traffic share and you can see that from the rate of traffic growth, which has accelerated now for 4 straight quarters, well beyond any published estimates of Internet traffic growth. And that means that we're gaining share. And we see that at times when there's big events, when companies turn to Akamai, of course, to do that. And in the cases when they don't, there can be failures and other things happen, poor quality, which helps Akamai gain share. So it's at the same time, there is more viewing online. When you look at the aggregate traffic levels for events like the World Cup, far more viewing online than 4 years ago. You look at the big gaming downloads like Fortnite, much larger traffic levels than you would see for gaming downloads even a year ago. So it's a combination of both. The tide is rising as a whole and there's a potential for a lot more of that as we've talked about. And I think we're gaining share at the same time. So it sounded, Jim, like you were saying that you were kind of focused on maintaining share. So of that component of acceleration that had to do with more share gains, should we be less focused on that at this point? Yes. I mean, obviously, as you can imagine, for customers that multi source, we're always looking to maximize our share. So with the chance to maximize more share, we're certainly going to do that. So we're not content maintaining share with the customer that is splitting their traffic. We've made a fair bit of headway on that and we'll continue to work on that with customers. So I don't want you to think that it's job over that maintaining share what we're looking for. We're always striving to maximize as much share. What I was trying to imply is that the work that we began late last Q2, we've largely gone through most of those customers and we've made great traction. And that traction actually is now manifesting itself in the performance that you're seeing that the revenue growth outside of the Internet platform customers grew 12% in the Media and Carrier division. This is really a function of what we said was going to happen when we embarked on these efforts. And so we executed well, and we're actually seeing the benefit of that now in revenue acceleration. Great. Thanks, Tom. Thanks, Jim. Thank you. And our next question comes from Colby Synesael of Cowen and Company. Your line is now open. Great. I think in your remarks you noted that you continue to be interested in potentially bolting on via M and A to the security business both from a technology and a go to market perspective. I was just wondering if you could add some more color around what you're thinking potentially from a go to market, obviously not companies, but what exactly it is you're looking for? And my understanding is those types of companies are relatively expensive. Should we be preparing for a transaction that could ultimately end up being dilutive to the company in the near term? And then secondly, as it relates to the Web Division, you mentioned a lot of different Yes. So, in Yes. So in terms of M and A and security, that's an area where we're always looking for acquisitions. We've done several over the last few years. You're correct that often the companies that we would look at have pretty wild valuation sometimes and you're not going to see us do anything foolish. So when we make acquisitions, we're very disciplined and we've been really happy with the acquisitions we've done, particularly in the security space. Now in terms of boosting our go to market presence, I think that's of more interest on the enterprise security side. And it's a factor that we think about when we look at potential acquisitions. That said, we're getting very good traction now with our enterprise security sales. Q2 was very strong there and growing. So it's not something that it's a have to do, but if we can find an acquisition that makes sense financially, can add product capabilities for our customers, having an improved go to market presence is just a plus there. And Jim, do you want to take the second question? Yes. I mean, Colby, I think obviously the web division is a bookings driven business that we talked about at the Analyst Day. And so it's a business that is going to take a while to move up or down, to be frank. And we're just a tick below the double digits that is our objective for this division. So it's very possible you're back to double digit growth in Q3 to be very frank. I mean, I think we're going to be in that range of high single digits to low double digits here in the near term. I think all the efforts that we outlined between adding more products, penetrating more of these products into our installed base, better packaging and pricing, enterprise license agreements. And one thing we didn't really comment on, specifically at least in the Q and A is really making concerted effort to do more in new customer acquisition. We've done a very good job as a company of selling more into our installed base. We have work to do around new customer acquisition and we saw some early progress on that in Q2. And certainly our new web sales leader, Scott Lovett, this is a big priority for him to get the new customer acquisition engine moving. And I think all those areas are going to really be the catalyst that drives the company to maintain double digit growth in the division. Great. Thank you. Thank you. And our next question comes from Mark Mahaney of RBC Capital Markets. Your line is now open. Thanks. You talked about in the web division seeing some pricing compression and all the offsets you had against that. Could you spend a little bit of time on that pricing compression? What are the drivers of that? Is that cyclical, structural, competitive and the likelihood of that pricing compression staying there for the foreseeable future? Thanks a lot. Yes. No, it's a good question. I mean, I think we've talked about the in the Web Performance product area before that certainly when offerings come up for renewal, customers always expect the price of technology to go down. And it's varied based on customers that push a lot of traffic versus customers that don't. It varies based on customers that see a lot of value in the performance sensitivity of their traffic. And so it's not new. I would say what's heightened is there are certain industry verticals. A notable industry vertical where pricing pressure is pronounced is in commerce or retail. As you can imagine, that's an industry phenomena that there are some large disruptive players in the retail space. And many of our customers are competing with them. And when they're looking at their P and L, they're looking at areas that they can go reduce cost. And so we've not seen really any increase in churn. As a matter of fact, churn is actually at a low for the company. So we're not losing customers at all. It's just in the web performance space, there are certain verticals with retailcommerce being a big one that customers are very, very price sensitive, because they their business models depend upon being competitive against some of these large players. And so I don't expect that to abate, to be frank. I think we're going to continue to see that. I think the strategy that we've been embarking on is the right strategy, which is new product penetration, broadening your products and then penetrating your products into the installed base and getting more traction on new customers. So that's really the recipe for improving performance. I don't think you're going to see the web performance area though abate as far as the pricing competitiveness. Okay. Thank you, Jim. And congratulations, Tom. That's a hell of an accomplishment 20 years. Thank you. Thank you. Thank you. And our next question comes from Heather Bellini of Goldman Sachs. Your line is now open. Great. Thank you. I just wanted to follow-up on Mark's question a little bit, in regards to the pricing pressure that you mentioned in the Performance Solutions Group. I was just wondering what how do we think about the level of price declines you saw in the quarter versus say the average over the last 3 to 4 quarters? And how do we think of the headwind going forward? And how do we think about the headwind to revenue in second half '18 and looking beyond in 2019? Thank you. Yes. As a follow on to what Mark said, I would say that you've probably seen it uptick a bit here over the last, call it, 6 to 9 months. But as I said before, the Web Performance products, we've always kind of had that depending upon the nature of the customer. And so you can kind of view it as it's already in our run rate. So the fact that we grew about 9.5% constant currency in Q2, I don't expect it to worsen in the sense that I think it's already embedded in the run rate. I think the work we have ahead is to continue to make traction in the areas that I outlined. Those traction in the areas outlined and we've already made traction in those areas are really going to be what is the catalyst to get us to maintain double digit growth. Is web performance, going to get worse? I know it's going to get worse. I think we're seeing pricing sensitivity with particular verticals. I think that, that will remain. And I think the areas that we're doing and I think some of the pricing and packaging is a good way to offset that where you can sell your web performance product, you can sell digital performance management, you can sell image manager, you can sell security. A lot of the things that Tom talked about that actually makes you much stickier with customers and actually allow you to maintain more value with those customers for the entire kind of all the solutions that you're selling them. Okay. So you don't see it spreading beyond the retail customers? Is that what you're saying? Or are you saying the level of pricing for everybody is the pricing pressure has gone up a little bit across the board? No. As I said, it's more pronounced in certain verticals than I specifically comment on the retail vertical because I think it's a notable vertical, where we're seeing it. But I think in general, the price of technology comes down. Customers expect better value for the offerings that they get. And so what we're doing is, we are accommodating that, but at the same time, we are leveraging selling them more products. And so we're able to retain more value with the customer and actually have more products when the sales cycle is completed. Great. Thank you. Thank you. And our next question comes from Vijay Bhagavath of Deutsche Bank. Your line is now open. Yes, thanks. Hey, good afternoon. My question Tom is on the U. S. Business has been underperforming low single digit. The overseas business is outperforming. What are your thoughts on what business Well, of course, the U. S. Business includes the giant platform, cloud platform companies, which helps depress the growth rate there. And we made a lot of investments overseas, and particularly in APJ have a lot of success, overseas revenue growing at a very good clip. There's a lot of people and major businesses there, a lot of potential to grow further. And Jim, would you like to add anything to that? No, I don't think so. I do think that you what you outlined is right, that you've made a lot of investments. We're getting good traction in the overseas markets that I think the U. S. Market grew kind of outside the Internet giants. I think we said it grew in the kind of the mid single digits. I think we can do better than that, Vijay, to be frank. And I think that obviously there's some work to be done there. As Tom said that the overall growth is impacted by the Giants, but some of the areas that we've seen slowing in the Web division has come from our kind of U. S. Market. And there's a lot of work to try to improve on the growth rate in the U. S. Thanks. A quick follow on, Jim, in terms of OpEx efficiencies, anything we could expect on that front through year end like any consultant activities, cost cutting initiatives? Thanks. Yes. I mean, it's ongoing, right? So there's work that we've been doing. We did a restructuring in Q4 and another restructuring in Q1. We've seen the benefit of that, you saw it over the last couple of quarters. There's a bunch of areas we're doing to drive further efficiency. I think I said in the last call that this is a company that we're not in any level of distress. We want to make sure that our operational efficiency actions are very measured and that we're doing things that allow us to better scale costs going forward. This isn't just reducing costs. This is about being able to scale costs as the business grows. And so there's a bunch of areas that we've done that with. We outlined some of them is areas around facilities that we closed, we've got some third party spend reduction initiatives. We have had a consultant to help us identify areas. So that work is underway. We're kind of at the first phase of that effort and now we're in the next phase, which is trying to go operationalize these actions. Operationalizing these actions mean standardizing processes in certain areas, automation in certain areas. And as I mentioned at the Analyst Day, we'll probably make some investments here in the near term. So we're going to see margin expansion for the company throughout this year, and you'll probably see modest margin expansion in 2019, but it won't be significant in 2019, largely because we're going to make some structural investments that are going to help the company better scale. But I think we're on a good path. I think the work that we're doing is very measured, very responsible and really keeping in mind making sure that we take the right actions, while at the same time investing in the areas that are going to drive revenue growth for the company. Thanks. Very helpful. Thank you. And our next question comes from James Fish of Piper Jaffray. Your line is now open. Hey guys, thanks for the questions I guess just maybe how much is OTT traffic now as a percentage after this quarter? And can you just clarify what the pricing discount of OTT traffic is compared to sort of the average Internet traffic that hits Akamai's network today? Yes. OTT traffic is the largest source of traffic for us and it's approximately half of our total traffic. And the pricing depends on the volume of traffic from any given customer and the major broadcasters and media folks tend to push a lot of the traffic and they would get the most competitive and lowest pricing per bit because of the volume discounts. Okay. And then maybe just to go back to some prior questions here. Just on the comments around the web pricing, that was primarily due to essentially the cloud service provider competitors or was that due to any private competitors out there like a Cloudflare or Fastly? Well, no, as Jim mentioned, the customers themselves demand lower pricing. That's very common in technology. Some of the customers themselves are under competitive pressure from cloud giants. And we always had a wide variety of competitors. You have the cloud giants, some of them have been in the business of delivery now for over a decade. You've got startups and you've got the CDNs that have been in business for well over a decade. A wide variety of competitors there and I don't think there's been any fundamental change in that landscape. Great. Thanks for the color. Thank you. And our next question comes from Sterling Auty of JPMorgan. Your line is now open. Hey, guys. This is actually Ugam Kamath on for Sterling. So in your prepared remarks, you mentioned about traffic, which is accelerating and OTT and others being really streamed across your network. And in the past, you mentioned that when traffic accelerate, it takes about 6 to 9 months before it actually manifests into revenue. So seeing this particular traffic acceleration in 2Q and if it is secular, should we think about that revenue in the media should actually grow at the healthy clip and after 2 or 3 quarters? Yes, this is Jim. Really what we were referring to is when we go through a pricing renewal with a customer, which is effectively what we began late Q2 last year and aggressively going after share. When you do that, when you're repricing a customer, the comment about 6 to 9 months is usually when you reprice a customer and you drop prices for them to a certain magnitude, it usually takes 6 to 9 months to see revenue acceleration from that. So we're already seeing that. It's not necessarily a case where traffic accelerates and then you see revenue growth. It's really coupled with a renewal. But we're pretty bullish in the media business that we've done good work. Obviously, the media business is certainly more variable in the web division, set of customers because it's traffic based and traffic is not linear. Secular trends would suggest traffic is going to continue to grow rapidly. But from 1 quarter to the next traffic grows more rapidly, either more gaming release or less gaming releases, sporting events or less sporting events, things of that nature, less seasonal viewing in the summer, more seasonal viewing in the winter. So I think in general, the media business, there's a lot of things that drive traffic volumes, and we're very bullish about the prospects of traffic volumes long term. Quarter to quarter, you're going to see variability. And we're pretty optimistic in the near term from the actions that we've taken that we're doing all the right things, which is focusing on the right set of customers, trying to maximize share. And one thing that I want to make sure didn't get lost is one of the things that the media sales team did a great job of in the first half of the year is selling security now to our media customers, where I would say, we've done a good job in the past of selling security to our web customers. They've done a very good job now of not just selling media products to media customers, but also selling our security products to media customers. So again, they're buying more of the portfolio. So good progress in media overall. And just as a follow-up, you mentioned about the renewal. So let me hit on that. So any of the top 6 Internet platform quarters or something? Yes. We don't comment specifically on renewals every quarter. As you can imagine that 25% of our customers roughly renew every quarter. That includes these large Internet platform customers. So there's nothing notable here in the near term, but just understand that these large customers renew on a periodic basis and there's nothing imminent here. Awesome. Thank you, guys. Thank you. And our next question comes from James Breen of William Blair. Your line is now open. Thanks for taking the question. Just looking at the guidance and what implies for the Q4, what gives you confidence on the cost side in terms of moving EPS and the margins up to a little bit higher range? And then secondly, if I missed it, just talk about the buyback in the quarter and how much stock you bought back? Thanks. Yes. On the Q4 margins, Jim, as you can imagine, some of what it's going to be is that seasonally, you get a big increase in revenue in Q3 to Q4. So we'll probably see based on our guidance, the implied Q4 sequential growth is, I think, roughly 6%. All the work we're doing on operational efficiency, you're not going to see a 6% growth in operating expenses. You're not going to see a 6% growth in our cost of goods sold. So you're going to get some natural lift just because of seasonality of more revenue combined with the operational efficiency actions that we're taking. So that's going to really be the catalyst. I would say Q4's margins going to be higher than probably the run rate lead exiting the year, because obviously you don't see the same growth Q4 to Q1. But what gives us confidence is the actions we're taking, we have good line of sight to them for the back half of the year. We have good confidence that we're going to see have a solid Q3 and a strong Q4 based on the guidance. So we feel pretty bullish about that. And on the buyback, I think we spent about $166,000,000 in buyback for Q1. I think we spent about $20,000,000 in Q1. So we spent, call it, dollars 190,000,000 or so for the half. And we'll spend the remainder to achieve our $750,000,000 in Q3 and Q4. So there's just over 500,000,000 left in the buyback. And then just one question on the guidance. What kind of assumptions you're making around FX, as you're looking toward the full year guidance? Thanks. Yes. So something I made on FX is that I think I shared with you guys at the Analyst Day what the impact was. From the Analyst Day to today, for the full year, FX is worsened by about $3,000,000 to $4,000,000 a couple of $1,000,000 in Q3, a couple of $1,000,000 in Q4. So call it the total from the last time we guided it, it's we provided you a guidance I think at our Analyst Day in June, it's worth $504,000,000 Great. Thanks. Thank you. And our next question comes from Keith Weiss of Morgan Stanley. Your line is now open. Excellent. Thank you guys for taking the question. I hate to beat a dead horse here, but I feel like I kind of lost a thread on sort of what you guys are trying to get across on the Web business. So you called out that the Web business performance was worse than expected. But then you're saying that competitive environment hasn't really changed, so that's not sort of a part of it that the new solutions, a lot of that that goes into Web Performance guys are selling really well and they're ahead of your expectations. And but the answer is packaging and pricing. So can you just like pull it all together for us? Like what's the main message that you're trying to give us in terms of what's been negatively impacting the Web Performance business and what's going to change on a going forward basis? Yes, I think you got the points right there. And it's good to keep in mind that we've got a lot of the revenue in the web division is performance and is traffic delivery sensitive. And so that's where you see the price compression, which is a natural phenomenon. And really important to remember, Jim mentioned this, that our churn is very low. And in Q2, in fact, is one of the lowest quarters we've had in a long time. So it's not a situation where we're losing customers to any kind of competitor out there. There's just natural price pressure against the delivery products in the web division for those customers. Now, you also noted very correctly, we're doing a great job with the new products and selling those, ramping the revenue from that up quickly. We're doing a fantastic job on the security products, growing well over 30% and now at a pretty significant amount of revenue. And so that is driving the growth of the division and becoming an increasing part of the product mix, which is why we're optimistic about the future of web division growth, while we're dealing with some of the natural price compression in the delivery based products in the division. Jim, do you want to add that? No, I think you all end it well. So we weren't trying to imply, Keith, that there isn't competitive pressures in the business. As Tom outlined, there are. I think the question that someone asked is, are we seeing this from the large cloud platform players? And I think what Tom was trying to outline is, we see competition across those guys, startups and then CDNs that have been around for a while. So it's we're seeing it in that space and we're seeing it notably in verticals that are particularly price sensitive given kind of some of the industry dynamics. And so it's really a combination of all of those factors that you're starting to see maybe more pricing compression in that business than maybe we've seen in the past. And again, we outlined all the things that we have been doing and will continue to do to drive the business forward so that we can maintain double digit growth in the Web division. Got it. That's helpful. And then Jim, one for you. In terms of the EPS guide, I think we added like $0.06 between the Analyst Day and today despite the fact like you're saying that FX is moving against you guys a little bit. Can you pinpoint for us sort of where the increased efficiencies versus the Analyst Day come into that EPS line? Yes. I mean, we're going to probably going to do a little bit better on gross margins than what we had outlined at the Analyst Day. We're continuing to do a I highlighted that in my comments about continued progress around the platform efficiency initiative. So probably do a little bit better on gross margins than we had outlined. And again, we continue to drive very purposefully operating expenses. So probably notably cost of goods sold and then called secondarily probably efficiencies within operating expenses. And in particular, just making sure that areas that we're investing in are pretty prescriptive. And then the areas that we're scaling back on, whether they be third party spend and other areas that you get more visibility to that every day as you go through kind of inspecting that in more detail. Got it. Thank you, guys. Thank you. And our next question comes from Tim Horan of Oppenheimer. Your line is now open. And Tim, if your phone is on mute, please unmute. And our next question comes from Suneet Sinha of B. Riley. Your line is now open. Yes, thank you. A couple of questions. So let's talk about the traffic acceleration, revenue acceleration. As you'd indicated previously in response to a question, traffic accelerates, revenue starts to accelerate. But these would you say that these are annual contracts? I'm just trying to figure out at what point do you breakeven on these contracts, obviously, for the 1st couple of quarters? And my second is on the topic of performance and you're seeing the price impression. Can you help us think about the exposure that you have in the retail segment? I guess that's the retail and e commerce that kind of pointed that out. And I imagine it's probably a big piece, but can you help us think about what sort of exposure you have there? Yes. I mean, Suneet, you broke up a little bit to be frank. I think I got the 2 questions, I believe, which is you were wondering about traffic and revenue acceleration and kind of the contract period that we have with customers. It varies. There are some customers that are annual. There are some customers that are multi year. There's no one equation that I could give you that ties traffic and revenue acceleration with a contract cycle. I can tell you that certainly when we go through pricing renewals, we have traffic in mind when we're giving them a price point. And we have value in mind around what the margin profile is that we're looking to garner from the customer over the period. And we're not just looking necessarily at the year, if they happen to have an annual contract. You're looking at a customer over multiple years because you want to make sure you are the provider of choice, not just for their current traffic, but going forward. So I can't really give you an equation there other than to say you're starting to see progress in the Media division. You're starting to see growth acceleration. It grew 4% in Q1. Media and carrier grew 7% in Q2. So we're making very, very good progress. And as I said, the media business has variability to it. So sometimes you have to be careful when you try to build an equation into it because a lot of things can affect traffic. And relative to performance pricing, there's not much more I can offer than what I already shared, which is it is a fact that the web performance delivery products, as Tom outlined, we are seeing some pricing compression there. And we outlined some of the things that are driving that. It depends upon the vertical, depends upon the customer, depends upon the type of traffic that is being served, whether it's really performance sensitive traffic or whether it's traffic that is maybe less performance sensitive. So all those variables come to play. I think it's fair to say that the Web Performance business is not like the Media business in some regards. It is certainly a more bookings oriented business that does have a traffic component to it. But it certainly is something that the customer values based on the performance acceleration that is being given for whatever their traffic profile is. But there's not much more I can offer on on I guess just one, Jim, on the CapEx side for the year and into next year, you commented on the Cambridge facility. Just maybe a little expansion on how much of an upward bias that's going to put, what the numbers are around the Cambridge facility and what kind of upward pressure that means next year? And then second, within the web division as well, you commented on the cross sell as one of the key initiatives. Are there any what's the key metric that you're watching there that we should sort of use as the yardstick to see if you're making progress on the cross sell? So on the CapEx front that we've just begun, so the Cambridge actually the CapEx uptick in Q3 is not just our Cambridge headquarters. There's actually some work that we're doing for Bangalore, which is a large center for us in Costa Rica, which is not a large center of excellence for us. Our relative to headquarters in particular, we're just at the early phases of the project, and it will continue throughout 2019. You'll actually see the bigger impact on CapEx in 2019 and it will grow. Our CapEx as a percent of revenue model is about 15% to 17%. We'll be a little bit above that, more than likely in 2019 as a result of the Cambridge headquarter building. I don't want to provide a specific number because there's a range that, that could be and there's a bunch of things that could affect that. But the way you should think about it is it will probably be a bit above the high end of our long term model, but it's only one time. And you'll start to it will go down again in 2020. Yes. In terms of the second question, customers that buy more than one product is really important for us. We do a lot better in those accounts, of course. And for example, customers that would buy acceleration product and then combine it with Image Manager, digital performance management, one of our security solutions, for example, the KonaSight Defender platform or the Prolexic platform. We're now packaging those together. And then as we go forward, as I mentioned, we're starting to get some pretty strong traction with our enterprise security products, and we'll probably talk a lot more about that on the next recall. But that will become a factor as well. We're also looking at enterprise license agreements where you get the whole package and we've had some really outstanding recent success there. So it's the keeping track of what the customers are buying in aggregate and it's beneficial for us when customers use more of the Akamai platform and they buy some of our other market leading capabilities. Operator, I think we have time for one more question. Thank you. And our last question comes from Brandon Nispel of KeyBanc Capital Markets. Your line is now open. Hi, great. Thanks for squeezing me in. I'm curious, how would you guys characterize growth from your existing customer base over the last year versus maybe new customers in the last year? Is there anything that you can quantify for us? I know you had mentioned Epic Games as a new customer. And then on a housekeeping basis, what was the contribution from Nominum in the quarter? Thanks. So it's hard to give you a specific on growth from existing customers versus new. I would tell you that we've done a better job over the last couple of years in aggregate in selling more to our installed base set of customers. That's fair. We are working hard to get more of a new customer traction. And actually, that's much more of a web division phenomena that even though we certainly are acquiring new customers in media, that is a less track a less customer acquisition intensive kind of division. We've had some notable wins there for it, obviously, Epic being 1. But in the Web division, we've actually made good progress. Been an area that we've struggled in the past. We made very good progress in the Q2. And we're optimistic that some of the go to market changes that we've made are going to show continued new customer improvements in the back half of the year. And relative to Nominum, we're not specifically calling out what the revenue contribution is. We've kind of embedded those offerings into our core offerings with our recursive DNS business. So I think that what we said at the time of the acquisition was that the business was a $30,000,000 to $40,000,000 annualized business. So you can kind of generally think that's roughly the contribution that you're getting on an annual basis. Thanks, Jim. Okay. Well, I guess in closing, I want to again thank everyone for joining us today. We will be presenting at several investor conferences in August September and details of those can be found on the Investor Relations section of akamai.com and we wish you all a wonderful evening. Thank you very much. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.