Q3 2019 Earnings Call
This time all participants are in listen only mode. After the speakers presentation Dopey a question answer session.
During the session no need to press star one on your telephone.
Please be advised to today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Tom <unk> box.
<unk> Investor Relations Sir please begin.
Thank you know and good afternoon, and thank you everyone for joining optimized third quarter 2019 earnings conference call.
Speaking today will be Tom latest optimize chief Executive Officer, and Ed Mcgarvey optimize 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 gone.
Additional information concerning these factors is contained in our mice filings with the FCC, including our annual report on Form 10-K , and quarterly reports on Form 10-Q .
The forward looking statements included in this call represent the company's view on October 28, 2019, Akamai disclaims any obligation to update these statements reflect future events or circumstances. As a reminder, we'll be referring to some non-GAAP financial metrics during today's call.
Detailed reconciliation of GAAP and non-GAAP metrics can be found or the financial portion of the Investor Relations section lock my Dot 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 see 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 log in.
After the letters L and Oh reach Stanford from you see else you see outlay, the internet crashed due to a memory overflow.
It's starting to think about how far the internet has come from those humble beginnings and I'm looking for joining the internet's, leading pioneers tomorrow at the Internet 50 conference at U.C.L.A., where it will celebrate 50 years of amazing innovation and I'll eat a discussion on the future of Internet security and privacy.
This week also marks the twentyth anniversary of optimize IPO on October 20 night 1999.
Like the Internet Akamai has come a long way since our founding.
During the first 10 years of our existence, we essentially created the CDN industry, where we're still in a 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, it's been achieved two very hard work tremendous innovation and the development of our unique edge platform, but servers in nearly 4000 locations across 1000 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 the dock them I 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 bugs lately about the importance of being at the edge Gartner Forrester I'd see and other leading analyst firms have all published reports explaining why the edge is so important for end users or performance and security.
This is 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 are 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 aka my for a while no that Akamai is the one company with a true edge platform.
And then we'd been leading the way when it comes to edge services for nearly two decades.
In fact, we launched the world's first suite of edge services 19 years ago in October of 2000.
And 18 years ago eat week featured aka my French evolution evolution into quote and ambitious provider of edge computing large businesses encore.
To be clear edge computing is not new at least is not new Frac am I.
We've had thousands of customers using our edge computing capabilities for well over a decade.
And not just for located nearby resources supporting AB testing for enabling real time streaming.
Okay. My 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 a P.I. governance.
Mobile traffic management, an application load balancing.
Script management user prioritization in waiting room.
You are rail redirection or re rights.
Phased co deployment.
Access control.
Field input validation.
Adaptive image and video optimization.
Proxy detection, watermarking token authentication or revocation content encryption <unk> management.
Web App firewall and more recently I O T message brokering compute services and block chain Ledger optics.
All of these capabilities and more are unable to our platforms highly distributed design, which supports real time data processing and decision, making close to the end user. So that every user could 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 educate 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 aka my delivered another quarter of excellent results in Q3 coming in above expectations on both the top and bottom lines.
Revenue was $710 million up 7% over last year in constant currency.
Q3, non-GAAP EPS was a dollar and 10 cents 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 one point over Q3 of last year.
non-GAAP operating margin was 29% up two 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 I knew products with a goal the driving our future growth.
Our security portfolio continued to be the fastest growing part of our business in Q3, achieving revenue of $216 million up 29% year over year in constant currency.
Bot manager and our enterprise security solutions continue 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, which services that they can sell to small and medium sized businesses to defend against malware and bought attacks.
By embedding our technology and the 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 million 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 five year low in Q3.
Keeping customers happy as always job number one and so we were very pleased to see such a strong result.
Our media and carrier Division also preferred performed well in the third quarter due to strong traffic growth for OTI T. 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 15th when we delivered 106 Terabits per second.
This is 66% larger than the peak we saw in Q3 of last year and it's a strong proof point for the enormous capacity of the OCC My 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 OTI T. services.
On a typical day, we now deliver over 800000 terabyte of content to end users.
To put such a large number in context 800000 terabyte is about what is contained in 200 million Dvds or 800 billion web pages.
And we are now delivering this much traffic almost every day on the aka my edge platform.
Before handing the call over to add I'd like to say a few words about three recent acquisitions crypto chameleon acts and exceed up.
Chris Co was a very small MIT based start up with some excellent technology for providing truly secure multi factor authentication or M.F. pay.
The technology is easy to use it has significant security advantages over traditional M.F. based solutions, which can be compromised by phishing attacks.
We plan to integrate this technology into our portfolio of enterprise security solutions.
Chameleon acts as a small Israeli start up 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 access to develop a service to stop these attacks, we expect the deal to close soon.
Lastly, exceed I guess, a leading provider of CDN and web security services in Latin America.
They've been our largest reseller in an important in fast growing region and they have a very talented salesforce and professional services team.
We've entered into an agreement to acquire exceed up 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 million combined.
We view them as smart investments that we think will drive significant growth rock am I in the future.
In general we plan to continue to be active in M&A, which is a key reason why we raised an additional $1.15 billion in convertible debt in August of course, we're always judicious in how we spend shareholder capital as we continue to search for a compelling opportunities to accelerate profitable revenue growth.
In summary, we're very pleased with the consistency of our results in the first three quarters of 29 team the impressive revenue growth of our security products. The high traffic growth in our CDN business, our strong growth an 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 occupy being named last quarter to both the Dow Jones sustainability index and the global foot see for good index and for that I want to thank our hard working employees for helping aka my to achieve such strong results and positive recognition.
Now I'll turn the call over to add to review, our Q3 results and guidance for the remainder of the year add Thank you Tom Tom outlined how come I delivered another excellent quarter in Q3.
We're very pleased to exceed the high end of our guidance range on revenue operating margin and earnings Q3 revenue was $710 million up 6% year over year were 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 million up 9% year over year were 10% in constant currency.
Revenue growth for this group of customers continue 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 in carrier Division was $320 million up 2% year over year were 3% in constant currency the better than expected growth. In Q3 came from continued momentum in security and higher than expected OTI to video and software traffic as we gained share in several key.
Customers during the quarter.
Revenue from the Internet platform customers was $44 million up 2% from the prior year.
Security revenue for the third quarter was $216 million up 28% year over year were 29% in constant currency.
Sales in our international markets now represent 42% of total revenue in Q3 up four points from Q3, 2018 and up one point from Q2 levels International revenue was $297 million up 15% year over year were 18% in constant currency.
As Tom outlined earlier, we entered into an agreement and Q3 to acquire exceeded as part of our overall plan to grow our market presence throughout Latin America.
We're pleased with the traction we've seen from prior go to market investments overseas.
I expect the exceed the acquisition once closed will help spur revenue growth internationally.
Foreign exchange fluctuations, having negative impact of $2 million on a sequential basis and negative $6 million on a year over year basis. Finally revenue from our U.S. market was $413 million relatively flat year over year [noise].
Moving now to costs.
Cash gross margin was 78% roughly flat with Q2, two levels and up one point from the same period last year, primarily due to the continued execution of our platform efficiency initiative initiatives.
GAAP gross margin, which includes both depreciation and stock based compensation was 65% down one point from Q2 levels.
non-GAAP cash operating expenses were $250 million down $4 million from Q2 levels and favorable to our guidance due to our continued focus on operational efficiencies savings generated through our enhance procurement function and the timing of approximately $2 million of costs related to our new headcount.
Orders shifting from Q3 Q4.
Now moving on to profitability adjusted EBITDA was $301 million of $8 million from Q2 levels and up $27 million or 10% from the same period in 2018.
Our adjusted EBITDA margin was 42% consistent with Q2 up one point from Q3, 2018 and above the high end of our guidance range.
non-GAAP operating income was $208 million up $4 million from Q2 levels and up $27 million or 15% from the same period last year.
non-GAAP operating margin came in at 29% consistent with Q2 levels up two points from Q3 of last year and above our guidance range.
Capital expenditures in Q3, excluding equity compensation and capitalized interest expense for $154 million.
This was below our guidance range due to lower than expected spend hard on our new headquarters as well as some costs related to network buildout that shifted into Q4.
Before I'm going to earnings one quick housekeeping item.
During Q3, we started to recognize our share of earnings from our previously announced block chain joint venture with Mitsubishi.
Our share of the Jvs earnings is a loss of $1.4 million in Q3 and is reflected in our GAAP net income, but is excluded from our non-GAAP results.
GAAP net income for the third quarter was $138 million or 84 cents earnings per diluted share.
non-GAAP net income was $181 million or $1.10 cents of earnings per diluted share up 17% year over year up 18% in constant currency and eight cents above the high end of our guidance range.
Taxes included in our non-GAAP earnings were $34 million based on a Q3 effective tax rate of 16%. This rate is approximately one point lower than our guidance due to higher 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 thirtyth, our cash cash equivalents marketable securities totaled $2.3 billion up about $1 billion from the end of Q2.
This increase was due to a 1.15 billion dollar convertible debt offering we closed in August .
This brought our total debt at the end of Q3 to $2.3 billion.
Now I'll review, our use of capital during the third quarter, we spent $176 million to repurchase shares buying back approximately 2 million shares.
We ended Q3 with approximately $800 $800 million remaining on our previously announced share repurchase authorization.
As Tom mentioned earlier, we plan to remain active and disciplined in pursuing additional M&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&A and continued share repurchases in summary, we're very pleased with our Q3 results 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 fourth quarter.
Driven by seasonal online retail activity.
For our ecommerce 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 fourth quarter and finally this year, we'll see the launch of two highly publicized offering OTI t. offerings in Q4.
All these factors make the fourth quarter the hardest to predict.
We also expect the potential for further 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 we'll have a negative impact of $2 million year over year.
Taking all these factors into account, we're projecting Q4 revenue in the range of $735 million to $755 million were up 3% to 6% in constant currency over Q4 2018.
To frame this guidance.
If the online holiday season immediate traffic demand, including the O. Tucci OTI to launch is exceptionally strong.
Expect to be near the higher end of the revenue range. If the online holiday season, and media traffic demand is not as strong and we would expect to be towards the lower end of the range.
At these revenue levels, we expect cash gross margins 78%.
Q4, non-GAAP operating expenses are projected to be.
$274 million to $278 million the increase in costs over Q3 levels is due to.
Higher sales incentive compensation costs that we typically seen in Q4.
Two months of operating costs associated with the exceed acquisition.
Additional marketing expenses related to our Europe , and Asia customer conferences and increased rent associated with the new headquarters Bill.
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 million to $96 million factoring in this guidance, we expect non-GAAP operating margin of approximately 28% to 29% for Q4.
Moving onto Capex, we expect to spend approximately $153 million to $165 million, excluding equity compensation in the fourth quarter.
This includes approximately $22 million related to our new headquarters as well as continued network and vis investments in anticipation of increased OTI traffic in 2020.
And with the overall revenue and spend configuration I just outlined we expect Q4 non-GAAP EPS in the range of one dollar in 10 cents to $1.15 cents were up 4% to 10% in constant currency.
EPS guidance assumes taxes of $35 million to $37 million based on an estimated quarterly non-GAAP tax rate of approximately 16% and it also reflects a fully diluted share count of approximately 164 million shares.
Looking ahead to the full year, we're raising both our revenue and EPS guidance on the revenue side, we expect a range of $2.857 billion to $2.877 billion, which is an increase of approximately $12 million at the midpoint of the range compared to our previous guidance for the.
Full year, we anticipate adjusted EBITDA margins of 42%.
We expect 29 2019, non-GAAP operating margins of approximately 29%.
We expect full year capex to be 21% of revenue.
And included in our 29 2019, Capex spend is roughly $100 million of onetime costs related to the move into our new headquarters.
Moving to EPS.
We are increasing our our non-GAAP earnings per diluted share range to $4.36 to $4.42 for full year 2019, which is up 12 cents at the midpoint compared to our previous guidance.
Our guidance assumes a non-GAAP effective tax rate of 16% they fully diluted share count of approximately 165 million 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 you.
Am I to ask a question your press star one on your telephone to attract your question. Please press the pound key to prevent any background noise. We ask that you placed your line on mute. Once your question has stated.
Our first question comes from Mark Mahaney RBC capital markets. Your line is open.
Thanks two questions.
Ed you talked about not seeing the typical slowed down into 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 got to key launches just talk bigger picture I think this is the one of the biggest trends we're seeing now in video music and in gaming to just talk about how well leveraged.
You think akamai is against the streaming opportunity any other examples you could provide other than the two launches that are expected in November . Thank you very much.
Sure. So mark this is that the slowdown and traffic typically in years, we don't have events, whether it's an Olympics are a world Cup, we do tend to see traffic lighten up, especially in Europe . During the summer months, usually last couple of weeks. The July going through August and we just didn't see that this year and what was interesting as we did see relatively.
The strong traffic in Europe , and really across the board.
In all different parts of the business MTT, we start and gaming we start in software downloads as well. So it was encouraging not to see that a slowdown and we had model than some of the slowdown provided our guidance last quarter.
Playing some of the over performance and then in terms of the streaming OTI to launch as I get a couple of questions in there how well leveraged our week.
We're very well leveraged with the most publicized OTI t. offerings in the sense that we've got great customer relationships with.
The folks that are coming out with new services, we build out a lot of capacity over the last couple of quarters hits wasting our capex be higher than the normal and that provide you a benefit when you're competing in a multi CDN world having.
Ample capacity and 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 and the right cities.
In the right locations around the World is is critical.
It also we talked about earlier, we had gone through a number of pricing renewal 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 these players are multi CDN and some in some cases.
Some of them on their own Cdns, but again, we think we're well positioned to them.
Continuing to build out for but we hope will be significant traffic.
Thanks, Ed.
Thank you.
And our next question comes from Keith Weiss with more Morgan Stanley . Your line is open.
Excellent.
Hoping to sneak in two questions.
One on the cloud security side equation, where it seems like traffic.
Gross continues to hold up really well.
Some of this core components that we've been talking around about for a while including sort of bottleneck appear to be growing really well I was hoping we can get an update on some of the newer.
Acquired assets some of the access stuff or on January one, which was acquired last year, just give an update on that side of equation and then the second was spun just for reminder, if you could talk to us about how we should expect to the balance between us growth in international growth to trend into 2020, I know the U.S. had some headwinds this year.
Sure around some pricing events and.
International has been remarkably strong growth throughout the entire year.
Should we expect us to sort of catch up to international or is there are always going to be some further weights on us 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 you know the flagship products. They 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 comment the IP or the routing layer.
And that's those are the flagship products we built.
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 in bot manager.
Stops the kinds of attacks where.
And 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.
Okay, and because a lot of expense for the web site, especially travel websites and maybe most importantly stops the account staffer and this is the bonds that are checking out stolen or gas credentials against your bank account to see us. They got the right one than 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 its growth the revenues growing so rapidly the best news there as we had a long way to go just in our existing base and of course.
Also signing up new customers, you mentioned Jan ranging acquisition, we did at the beginning of the year for their identity cloud capabilities, which were integrating into our platform 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 , and especially now that some multi hundred million dollar finds had been issued but you have a law coming into effect in California, CCP a on January .
One.
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 little bit different.
And our customers you're 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 generate acquisition.
We talked about our enterprise security solutions, a notion of zero Trust I think theres, a very exciting future. There, we're seeing substantial customer wins, there as people start embracing the zero Trust.
Concept and methodology again revenues growing over 50% there as well.
We talked about the new acquisitions.
Hedge integrity, which is the chameleon ex acquisition I think is very important this is where we stop things like major card that have caused some large data breaches on famous web sites. In turn you know again huge finds multi hundred million dollar finds being imposed when those breaches breaches have happened and.
I think optimizing a fantastic position to protect our customers against those kinds of attacks.
People don't think about a lot today, but.
Most of the content you get when you go to our website doesn't really start or originate at that website is third party content.
Content use for marketing purposes for performance management advertising all sorts of other things.
And it turns out that you know that that content can often have malware in it or that a website will linked to a partner who provides these services and they will be compromise with malware and that results in the end user giving up their private data like a credit card and optimizing a really good position to stop that and we'll be looking forward to introduce.
Seeing a product into the market next year early next year, which we call page integrity management.
We talked about Krecko, another small acquisition, but with some really exciting technology around pushed based multifactor authentication and the interesting thing there is what a lot of enterprise is used for that today is vulnerable to phishing attacks and that people don't think about it a lot, but that's that's not very good and with.
The integration of critical as 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.
Ill turn it over to you for the other question or Keith Your question was around US first international growth. So let me tackle it this way let me just remind everybody on the U.S. side, we have.
Year over year and benefit challenge for US just as a reminder, that's where we have our giant accounts those were down a couple of million quarter over quarter. This quarter. We also the U.S. commerce vertical in the us.
Number of bankruptcies this year, including a couple this quarter, so still a challenge area and 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 us add woven into three main categories. The first one.
As.
Mark mentioned earlier on his first question around LTT growth, but just traffic in general we're seeing strong traffic and.
Not only just streaming video, but also music RTT, social et cetera gaming.
Then also generating Gen rain is a new addition, as Tom talked about.
I'll have account 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 and also new customer acquisitions, we've done a pretty nice job last couple of quarters with increasing our new customer acquisition and most of that's being led by security.
So those would be the things would have to believe in order to start to see the us growth rate increasing as we go into the future and 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 our web products as well as security.
Being very solid growth in EMEA, and then also Latin American Middle East, we see a big opportunity to continue our growth as evidenced by our exceed acquisition.
Hi, some super helpful. Thank you guys.
Thank you.
Your next question comes from Willpower of Baird. Your line is open.
Okay, great. Thanks.
Yes, no great gets you hear the commentary on the.
Third, especially traffic in Q3 opportunities in Q4, I guess, maybe just kind of following up just kind of thinking about the media.
In carrier Division and the revenue growth opportunity would it still see the overall media revenue growth decelerate that year over year, I think up 2% or 3% constant currency.
It sounds like maybe we'd love to get a little more color on those how much that's tied to the pricing renewals, what you're seeing on that front given.
Given the positive traffic commentary and then how do we think about that into Q4 images that can start to us like are you still going to have pricing renewal process here.
I think what that media revenue growth trajectory as we go into Q4 and that into 2020.
Yes, good question well.
I'd say, there's two factors when you looked at kind of the year over year. One is we had a really strong year in media last year, so little bit tougher comps were really pricing is the main driver.
We've called out for the last several quarters there was a number of.
Very large renewals that we went through.
For consolidations, we haven't seen of this magnitude in the industry. So that was something that definitely was was making the growth cost much harder.
In terms of pricing renewals going into Q4, we factored everything into our guidance I think if you look at the OTI T. launches, we factored in some growth associated with that.
Given that they are in November this is not a ton of time left in the quarter, so not a huge expectation there.
And then with our joining customers we have talked in the earlier.
Quarter about the fact that we had a couple of renewals. This quarter were expected to be down three or 4 million, we actually were only down about two so.
But better there and we expect that to be a couple of million next quarter.
Okay, if I could maybe to squeeze one more time you gave a lot of great. Examples of some of the things you're doing on the edge. Today you look forward what are some of the edge applications that that gets you. Most excited is there anything tied to Fiveg as an example, yeah what better positions you for those that those.
Locations versus some of your competitors perhaps.
Yes.
Pretty much everything all over.
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 you know as we look towards Fiveg, you know I think thats really exciting in terms of enabling new kinds of applications around the internet of things I spent a lot of buzz about aiotv, but so far we havent 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 aiotv sensors in sneakers sensors in clothing or sports equipment sensors on price tags, obviously cars, obviously mobile devices and gaming big.
Ian.
Potential markets and the reason I think Fiveg is helpful. Here is because it will allow many billions more devices to connect.
The latency will be much lower across the air than it is for three and Fourg.
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 I O T applications I think that can be very exciting now what are the nice things about fiveg is that I think it it makes it even more importantly, you have a real edge network.
Okay, and not Nada and edge platform, a name only which we hear a lot from our competition, but you know a platform where you're really close to the last mile. Your deep inside the carriers in the cellular networks that are offering this capability and lack of my as really unique.
Text and once the latency is lower in the last mile and you have higher throughput.
So now what you really can take advantage of applications with low latency and high throughput. If you really have an edge platform and because there is 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 datacenters, you're still going to have latency problems, even when fiveg.
And you're still going to have throughput problems you know, even when you get better throughput in the last mile and I think that's a key reason why you CEOC am I 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 a difference and that is our competitive a major competitive advantage. It really is the edge, it's not just the marketing tool.
Okay. Thank you.
Thank you.
Next question comes from Sterling Auty of JP Morgan Your line is open.
Yes, Thanks, Hi, guys. One question one follow up so on.
Before we even get to these two couple of major launches can you just set the context and give us an idea how big is OTI key within median carrier or however, you want to describe it with regards to the point that it's material even before these big launches.
Okay Sterling this is that.
Yes, so we've always talked about how video is our largest source of traffic and.
Fastest growing source of traffic. So TT is a pretty big part of the median carrier business today, we do a ton with live sports.
Part of the strength, we saw in Europe was 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 for 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.
Rates increasing traffic growing.
Alright, Great and then one follow up would be.
I can't I can't remember if you touched on your prepared remarks, but just the web performance has been an area that is kind of weighed on the company, but if I try to take a stab at what the security portion is backed that out it looks like the web performance side, it's starting to stabilize is there any additional color you can give too.
Is that really the case and what's driving maybe a little bit of improvement there.
Yes, I just two things in the web performance business that is.
Driving the performance of you're saying one is obviously security that you're right to point out that fund the primary driver, but also we're seeing really strong growth internationally, both in Europe and Asia.
So.
It's us 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 this filled some room to go there and as I had mentioned there was a couple of bankruptcies this quarters than probably over 10, so far this year.
So still a troubled vertical for us so until that really.
Stabilizes I think it's tough to 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 Lewis with Raymond James Your line is open.
Hey, guys paving.
Tom I want to ask you about another in security that you Didnt mentioned I think that you talked about launching a secure web gateway.
At your conference. This summer so does that puts you into competition with some of the other network security providers that are looking to do security from from the Internet Legacies Keller Palo Alto and how are you going about that.
Yes secure web gateway is an important component in our.
Enterprise Threatprotect or solution and yet we are in competition with I would say the largest competitors or their traditional ways of doing things.
There you have a secure web gateway, that's a piece of heart for hardware that you operate in a datacenter or you know there's a cloud instance of it and you operate at there the legacy way of doing things are their traditional way of doing things as our largest competitor.
These scalar.
I would be our our largest competitor I think in the future way of doing things.
And we do compete actively was the scale are both for enterprise Threatprotect or which includes a secure web gateway and also enterprise application access, which is where you're providing the access.
Syndicating enterprise employees and devices to get them access.
We compete very successfully big advantage as an OCC my has 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 zero Trust and the competition.
You mentioned doesn't have anything like that and I would say lastly.
For mens matters for enterprises, and what are the big challenges with enterprise security that often keeps them from using products from some of the company's you mentioned is that when you turn it on.
Including a secure web gateway it destroys your performance to the point, where 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 occupy 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. The reason that they chose us over the competition. So they get great optimized secure.
Already but now they're 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 a.
View on how far are we in terms of having built out the capacity we need.
For those launches and ended 2020, and obviously haven't given guidance yet but are we the point where it next year, we can start to get back to the long term range for Capex both.
Both on the network basis, and also whether or not there is a HQ leftover.
Yes, so just on the HQ, we'll be moving into our HQ.
Later this week.
So there wont be anything material relates to the HQ from a capex perspective next year, because we don't anticipate anything.
And then on the the build out we've been building out in advance as we've talked about I think really what is going to depend on is how much demand do we see to the extent that we see significant demand remain.
Bill a little bit more in the first half of the year to to be prepared for that but we have made pretty significant investments now expect us to be.
Giving guidance, but towards the higher end to the 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 in congrats on a nice quarter, particularly at security I wanted to follow up on one of Michael Turits. His question as it relates to enterprise security and specifically competing with the likes of as the scale or or or 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 really carrier relationships more broadly across sockets why you've got the traditional security var channel can you talk a little bit about how the the go to market strata.
She is evolving as you continue to pick up steam in enterprise security.
Yes, sure you know usually with new products, especially if there are new to the industry, which they often our with akamai.
We'll go direct first through beta as and really get the product development established market traction and then it quickly extends to our channel in the area of enterprise security.
No 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 takamine.
Underneath and it provides a version of our enterprise threatprotect or product that we talked about just a minute ago.
For small and medium businesses.
That Comcast business sales 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 label that so you Wouldnt initially no its optimized but at top of my underneath.
Thanks, Tom if I could just follow up particularly on M&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 akamine, making a larger acquisition and 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.
Hi, Yes, obviously, we're going to be very judicious.
With anything Thats, a larger acquisition.
It's not impossible, we do something larger in the area security valuations are pretty high today and.
Going to see us do anything wacky in terms of the financials.
We're very happy with our 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 and bring it to market and now with our security business that said our scale. We're in a really good position to do that in terms of direction I think you'll.
He is continue to work in the mall 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 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 zita, which is a leader in a different geography, where we want to see a lot more growth in you know in our traditional businesses content delivery in to some extent.
Security, So I think what you've seen us do is a good blueprint for what's coming.
There will be acquisitions that fit well and benefit from the optimal edge platform and they'll be synergistic, they're not going to be not a 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 leak foul 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 you've maybe quantify both revenue and opex associated with the three acquisitions you did in the quarter, maybe in Q3, and perhaps more on annual run rate beyond beyond Q4. Thanks.
Yes, I think the the record low churn over the past five years so.
A lot of factors to that as the combination of products.
Which make a big difference to customers to get performance and security.
A single platform in a single offer that matters. Its the great quality that we provide both in terms of enhancing the performance of an application and the security that really work. 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.
And to make sure. They stay ahead of the attacks cause the attack.
No environment is changing so rapidly out there.
And so our services professionals are highly desired by our enterprise customers I think all those things put together have helped reduce what was already a very low churn rate.
So it was slow to start with its not a situation, where we had any kind of churn problem. It's always been low single digits.
And now not even better.
Do you want to talk about the revenue on the acquisitions, yes sure. So the the camilli next and Cracow acquisitions are immaterial.
We're actually going to absorb the head count into our normal hiring plan. So no real impact on Opex as far as revenue going to be integrating those into our products I don't expect any material revenue here certainly in Q4 in 2020 as far as exceeded goes we talked about Q4 being about $2 million of of revenue and about it.
Any 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 million of revenue for 2020 actually about a penny or two accretive.
Last year.
Got it thank you.
Thank you.
Our next question comes from Alex Henderson with Needham Your line is open.
Great. Thank you very much Hum. So I was hoping you could talk a little bit about a two things one.
The sequential increase in Opex as a little steeper I was wondering if you give us a little bit.
Waterfall, what's embedded in that.
And what we've modeled and then the second one is on the international side obviously.
Getting some benefit from the web 2.0 growth internationally versus the decline domestically, but can you talk about the split between domestic growth in security versus international is international security growing.
So then.
<expletive> and how do you see that playing out over the next year and then one last thing if I go through it in just 2020 going to be.
Stronger year, given the election year Olympics here and all that sort of stuff can talk about.
How you're feeling about 2020 versus 29 came into full year. Thanks.
Sure I'll take I'll take those so first we'll start with a sequential increase and Opex I talk to my.
Prepare for prepared remarks that theres, a number of things the factor into a 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 million dollars of Opex is related to our building that pushed from Q3 to Q4.
And then there's also rent expense for the Newbuildings will be moving and I've 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 and operating expenses and also we have our.
Customer conference for Europe , and Asia, We had our US conference earlier on in the year.
In terms of the international versus the us growth rates, we don't break those out but it's it's safe to say the both of those are very strong.
Pretty similar probably little bit faster and 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 isn't even year and even years, we do tend to have.
More events.
Next year, we have the Olympics as well as the presidential left at the presidential election.
If I look back to 2016, the last election, we did see nice uptick in traffic and typically with events like the Olympics that tend to go over several weeks, we do get.
Some 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 is couple of 42 launches coming here.
In the next month as well as a few that our rumored to be coming in.
Early 2020, and those will help our growth rate in 2020 as well.
Thats clear insight 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, eventually squeezing me in here.
Just quickly last quarter, you guys actually gave us greater clarity into security business around customers across kind of a three main solutions of wet feed Austin bought management.
Any chance, we can get an update on those customer counts again, and also what percentage of customers have one 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 better using both laughing details can you maybe go into why that is.
Hi, Yes, we didn't get the exact counts last quarter just wanted to give some kind of idea would probably do that on an annual basis give you updates there, but probably not every quarter we are seeing.
Fantastic growth and security.
And we gave some of the highlights on this call.
Penetration I.
I think we have a lot of room for growth in the existing base.
Because there's several different security capabilities, and I think but 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 delisting 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.
As customers with Prolexic and Kona, maybe now Kona site defender also provides style service capabilities at the application layer Prolexic us 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 the website.
If you just have a website just have web traffic then you wouldn't need Prolexic, you would simply be using Kona site defender and all the capabilities built on top of that.
And so that may be why.
You are looking at smaller dual penetration is there sort of.
Different situations that you'd use the Matt.
Got it that makes sense I'll I'll pass it on thanks.
Thank you.
And then next question comes from Jeff Van Rhee with Craig Hallum. Your line is open.
Great just two quick cleanup swear me then.
Yes, I think you commented on the network build in some of the Capex. It pushed to Q4, just curious if that was in response to some variability in terms of demand forecast, maybe LTT or from others that drove the push and then the second for me. The I think last quarter, you commented on CD and cloud security CDN flattish and cloud security I think you bumped to mid.
Hi, Twentys versus prior being mid Twentys just comfortable if those are both the right way to think about that.
Sure I'll take the pump on the network build side it really wasn't a reflection of demand is really just the timing of the capex.
When it actually right and when we report 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 on security, obviously had a good quarter here and securities would probably closer to the high.
Twentys for security for the year and still flattish on the CDN side.
Awesome. 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&A, how should we be thinking about the level of M&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.
I don't see anything at this point that would change that.
And were very conscious of operating margin as we make acquisitions and questions 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 mid 30% operating margins next year.
Great. Thank you.
Thank you and our next question comes from Tim Horan Oppenheimer. Your line is open.
Thanks, you're basically already yet your margin kind of goals here.
Do you think given the ship business the security on all the products that margins can kind of the continue the trend up for a couple of years.
We're not making guidance for margins past 2020, as I mentioned were committed to let 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 were 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 you know that is very helpful for us because that's a very high margin business kind of course that the.
Same time, as we make acquisitions and increase our investment for building innovative new security products that adds a lot of R&D opex.
So that you have had the attention there and right now we're planning to operate at 30, and if we change that for the future will certainly lesser now.
Operator.
Sure Yes.
I'm sorry go ahead.
That's right do you think we've seen lastly, a secular shift and seasonality here given that the basis. So much larger all or what do you think caused this summer and if you have you seen on the last couple of years.
Yes, so as I talked about earlier is that Tim.
This was kind of unusual year terms of what we saw for traffic hopefully that's a trend that continues always Q4 is always the biggest seasonal quarter. You know 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 will last few years I've seen a really big uptick in seasonality.
Related to media some of it has to do with lots of new devices coming online and 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 fourth quarter 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 you know I would be expecting.
So as I think about a normal Q3 without events that that would be your seasonally slower quarter. In Q4 is always going to be your 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 and closing will be presenting at several investor conferences and events throughout the fourth quarter. Both the U.S. in Europe details of these can be found in the Investor Relations section of OCC My Dot 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.