Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly piece because he into standby while we allow other participants to join thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2019 Alkali technologies Inc. earnings Conference call. At this time, all participant lines aren't in listen only mode. After the speakers presentation. There will be a question answer session.
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Please be advised that today's conference is being recorded if you acquire any further assistance. Please press Star then zero I would now like the hand the conference over to your speaker today, our head of Investor Relations. Please go ahead.
Thank you and good afternoon, everyone. Thank you for joining optimize fourth quarter in fiscal year 2019 earnings conference call speaking today will be Tom late and 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 material differently from those expressed or implied by such statements.
Additional information concerning these factors is contained and optimize filings with the FCC, including our annual report on form 10-K, and quarterly reports on form 10-Q.
Forward looking statements included in this call represent the company's view on February 11 2020.
Hi, My disclaims any obligation to update these statements reflect future events or circumstances.
As a reminder, <unk>, referring to some non-GAAP financial metrics during today's call a detailed reconciliation of GAAP and non-GAAP metrics can be found under the financial portion of the Investor Relations section a block of my Dot com and with that let me. Please turn the call over to Tom. Thanks, Tom. Thank you all for joining us today.
I'll come I delivered excellent results in the fourth quarter revenue was $772 million up 8% over Q4 in 2018 and up 9% in constant currency. This very strong result was driven by the continued rapid growth of our security business.
Better than expected holiday commerce season, and substantial increases in traffic for our media customers.
Our non-GAAP operating margin in Q4 was 29% up one point over Q4 and 2018.
Q4, non GAPP <unk> dollar at 23 cents per diluted share up 15% year over year and up 16% in constant currency.
Excellent results were due to our strong revenue growth the benefit from cost reductions made over the past year and a lower tax rate.
For the full year, we exceeded our projections on both the top and bottom lines revenue was $2.89 billion up 8% over the prior year in constant currency.
We're especially pleased to report that we expanded non-GAAP operating margin to 29% in 2019 up substantially from 24% in 2017, and putting us very close to our target a 30% operating margin in 2020.
Non-GAAP EPS for 2019 was $4.49.
87 cents for 24% over 2018, we generated 1.1 billion in cash from operations last year.
In Q4, our security portfolio continued to be the fastest growing part of our business with revenue of $238 million up a very strong 29% year over year in constant currency.
Security revenue for the year was $849 million and represented 29% of our total revenue went 29 team.
We believed that our security business is poised to make aka my one of the very few publicly traded companies did generate more than a billion dollars in annual revenue from cyber security solutions.
In 2019 over 1500 enterprises relied on our market, leading Kona site defender and Bot manager solutions to defend against more than 46 billion malicious log in attempts and 6 billion web application attacks, an increase of 150% over 2018.
Both the services continued to be recognized as best in class by the leading analyst firms.
For example, last quarter and for the second year in a row outcome I was named as a leader in Gartners report on critical capabilities for cloud Web application firewall services and we received the highest scores in two key use cases.
Just last month Forrester named Dr., My as a leader in its new wave bought management competitive vendor evaluation.
They said ACA might leads the pack with robust attack response, and reporting capabilities and they called US the best fit for companies looking to support bots at the edge.
That's important because we believed that the edge is the only place where you can successfully defend against large scale bought attacks.
Last quarter Forrester also elevated OCC am I to the leaders category in its zero Trust extended platform way.
Awarding us the highest possible scores in five areas, including workforce security Zero Trust vision and strategy.
I'm, especially excited about our continued innovation and cyber security, which has resulted in the development of several new products that will leverage the strength of our edge platform and that we believe can drive continuing growth going forward.
These new products include secure web gateway identity cloud enterprise defender multifactor authentication and page integrity manager.
Page integrity manager addresses a new and rapidly growing attack that most organizations have no visibility into or defenses for leaving them exposed to data breaches and regulatory actions.
The challenge is the most of the content on a typical website or App today comes from third party software or scripts for things like ads analytics, social media and so on.
The problem with third party content is it it's hard to keep track of and to make sure that it's safe.
And increasingly it's not safe.
That's because attackers figured out that they don't have to steal personal information directly from the website instead they steal it from end users by using malware that they've inserted into the third party content.
Okay. My page integrity managers designed to protect our customers users from malware no matter, where it comes from and also to alert our customers when we find malware on their side or on sites that they linked to.
Initial customer interest in this new service has been very high and we're looking forward to exiting beta and selling this product more widely later in the year.
Our media and carrier Division also performed well in the fourth quarter due to strong demand for OTI video services and software and gaming downloads.
In Q4, we continue to grow traffic on our platform much faster than publish growth rates for the internet as a whole, meaning that we continued to gain traffic share and on December 3rd we set an incredible record for peak traffic and 2019 of 20 121 Terabits per second.
Demonstrating the enormous and unmatched scale of the aka my edge platform.
This record didn't last long, though as we've already delivered more traffic on multiple occasions. During the first five weeks of 2020.
In fact, I checked our traffic stats, just a few minutes ago and it looks like we're currently delivering about 140 terabits per second from the Akamai edge platform.
It's important to note that these traffic levels are not like the theoretical capacity that's some competitors in the marketplace claim.
Our numbers measure the actual traffic that we deliver on behalf of our customers.
It's also important to realize that the only way to really get anywhere close to optimize scale is by having a true edge platform.
That's because you need to be very close to end users in order to gain access to the last mile bandwidth necessary to deliver large amounts of traffic with great performance.
If you try to deliver content from the data centers at the core of the Internet you run into problems with performance in scale as the traffic gets clogs, an internet peering points before it reaches the last mile.
Delivering from the core is also more costly since you need to use expensive transit to reach end users. This is one reason why aka my is so much more profitable than the competition.
Of course, all the growing interest in the edge has led many vendors to play out any connection they can make to the edge no matter how tenuous.
But we believe that if you look carefully you will see that the others have a ton of catching up to do to match what akamai has been doing at the edge and doing profitably for a very long time.
We're excited by the opportunities in front of us as the OTI marketplace continues to develop and we believe that are unmatched global capacity physicians aka might very well for 2020 and beyond.
Overall, we're very pleased with our performance last year, we grew revenue and continued to expand our margins we grew non-GAAP EPS by 24%.
We developed innovative new technology that we believe will help drive future revenue growth.
And we delivered excellent value to our customers.
Want to thank all of optimize customers and especially our talented employees for helping us to deliver such great results in 2019.
As we enter a new decade, I'm very pleased to see aka my so well position for future growth as you'll soon here from Ed We expect to surpassed 3 billion in revenue in 2020 with over a billion of that total coming from our security business. We also expect to achieved non-GAAP operating margin of 30 per se.
And our non-GAAP EPS is projected to approach $5 per share.
These are exciting new thresholds for Akamai and I'll now turn the call over to add to provide further details.
Thank you Tom as Tom outlined on my delivered another great quarter in Q4.
We exceeded the high end of our guidance range on revenue and earnings.
Q4 revenue was $772 million up 8% year over year were 9% in constant currency driven by continued strong security growth and higher than expected holiday traffic in our media in commerce verticals.
As I mentioned on our last call holiday seasonality from E Commerce and traffic from our large media customers could play a large role in our Q4 performance and it did.
Revenue from our web division was $420 million.
Up 9% year over year.
9% in constant currency.
Revenue growth from this group of customers was again driven by our security business as well is higher than expected holiday it commerce traffic.
Revenue from our media and carrier Division was $353 million up 8% year over year and 8% in constant currency.
The better than expected growth in media came mainly from strong OTG video traffic.
Revenue from our Internet platform customers was $52 million up 20% for the prior year.
It is worth noting that Q4 benefited from approximately $6 million of events specific revenue that we do not expect to reoccur in Q1.
Security revenue across the company continued to be very strong and for the fourth quarter was $238 million up 29% year over year in 29% in constant currency.
Moving on to revenue by geography.
International revenue was $326 million in the fourth quarter up 17% year over year were 18% in constant currency.
Foreign exchange fluctuations had very little impact on revenue on a sequential basis, but had a negative impact of $3 million on a year over year basis.
Sales in our international markets represented 42% total revenue of three points from Q4, 2018, and consistent with Q3 levels.
Finally revenue from our us market was $446 million up 3% year over year.
Moving now to costs.
Cash gross margin was 78% roughly flat with Q3 levels, but down one point from the same period last year.
GAAP gross margin, which includes both depreciation and stock based compensation was 67% up two points from Q3 levels.
Non-GAAP cash operating expenses were $285 million up from Q3 levels and slightly higher than our guidance due primarily to higher commissions in employee bonus expense.
Now moving on to profitability.
Adjusted EBITDA was $319 million of $18 million from Q3 in up 6% from same period in 2018.
Our adjusted EBITDA margin was 41% in line with our guidance, but down one point from Q3 and down one point from Q4 2018.
Non-GAAP operating income was $222 million, a $14 million from Q3 levels in up $21 million or 10% from the same period last year.
Non-GAAP operating margin came in at 29% consistent with Q3 levels and up one point from Q4 last year.
Capital expenditures in Q4, excluding equity compensation and capitalized interest expense were $173 million. This was higher than our guidance range due to increased network investment in anticipation of continue demand from our OATI and gaming customers.
Moving on to earnings.
It is worth noting that our Q4 GAAP results include a 10 million dollar restructuring charge, we expect to record additional restructuring charge of approximately 4 million to $7 million in Q1 2020.
These charges are primarily related to reductions of approximately 1% of our global workforce is important to note. These restructuring actions are being taken to enable some rebalancing of our investments.
The best divest de investing in some areas and investing in others and to position the company to meet our long term goals, but continued growth in scale.
Also included in our restructuring charges are some small capitalized software impairments related to projects, we will no longer fuel provide adequate return on our investment.
Therefore, GAAP net income for the fourth quarter was $119 million were 73 cents earnings per diluted share.
Non-GAAP net income was $202 million $1.23 cents of earnings per diluted share up 15% year over year of 16% in constant currency and eight cents above the high end of our guidance range. This outperformance was driven by higher than expected revenue and a lower non-GAAP effect.
The tax rate due to higher than expected foreign earnings.
Taxes included in our non-GAAP earnings were $30 million based on a Q4 effective tax rate of 13%.
Now now I will discuss some balance sheet items, we continue to have a very strong balance sheet as of December 30, Onest, our cash cash equivalents and marketable securities totaled $2.4 billion. Our total debt at the end of Q4 was $2.3 billion unchanged from the end of Q3.
Now I will review our use of capital.
During the fourth quarter, we spent $43 million to repurchase shares buying back approximately 500000 shares.
We have approximately $765 million remaining on our previously announced share repurchase authorization.
Our plan for 2020 is to continue to leverage our share buyback program to fully offset dilution, resulting from equity compensation.
As we said in prior quarters, we plan to remain active but disciplined and pursuing additional M&A and we believe that our strong balance sheet provides us with strategic flexibility to take advantage of opportunities as they arise.
We also believe our capital allocation approach will allow us to continue to drive shareholder value through investing organically in the business pursuing M&A and continued Reis continued share repurchases.
In summary, we were very pleased with our Q4 in 2019 results and we remain confident in our ability to execute on our plans in 2020 and for the long term.
I'd now like to provide guidance for full year 2020, as well as for the first quarter.
Looking ahead to the full year, we expect revenue in the range of $3.055 billion to $3.105 billion.
Over $1 billion of that coming from our security business.
We expect we expect adjusted EBITDA margins of approximately 43%.
We expect non-GAAP operating margin of 30%.
We expect non-GAAP earnings per diluted share of $4 in 80 cents to $4.95. This was represents year over year growth of 7% to 10% in 9% to 12% on a constant currency basis.
This non-GAAP earnings guidance is based on a non-GAAP effective tax rate of approximately 15.5% to 16 in the half percent, we fully diluted share count of approximately 164 million shares.
Moving on to Capex full year Capex is expected to be 18% to 20% of revenue. We again expect full year capex to be higher than normal due to the continued investment in our network capacity.
Before I move on to Q1 guidance I thought it would be helpful to talk about how we see the year unfolding now highlight some key items that you may want to think about as you build your models.
In the first quarter, we typically see revenue step down sequentially as Q4, as our strongest seasonal quarter.
Q4, 2019 was a notably strong seasonal quarter. It also included some onetime event revenue, which I mentioned earlier.
On the expense side remember that Q1, our employee payroll taxes and form 10-K matching expense reset costs that will decline throughout the year.
In addition, we won't see the full benefit of the restructuring efforts mentioned earlier until Q2.
So we expect operating margins to be at the lowest level in Q1 and improved throughout the year.
As we look to Q2 and beyond there are few other factors to take into account.
In addition to more global expansion of existing OTI offerings that have been announced for later this year. We're aware of several new direct to consumer OTI to launches planned for late spring in early summer.
2020 also includes a summer Olympics in Q3, as well as the us presidential election cycle, which typically draws elevated traffic levels in Q3 in Q4.
Finally, we expect Q4 to once again, you are strongest seasonal quarter.
So with that as a guide I will provide specific Q1 guidance.
We are projecting Q1 revenue in the range of $741 million to $755 million or up 6% to 8% in constant currency over Q1 2019.
The current spot rates foreign exchange fluctuations are expected to having negative 1 million dollar impact on Q1 revenue compared to Q4 levels and having negative 5 million dollar impact on a year over year basis.
At these revenue levels, we expect cash gross margins of 77%.
Q1, non-GAAP operating expenses are projected to be $258 million to $262 million. The threeq decrease in cost over Q4 levels is due mostly to lower incentive compensation related expenses.
Factoring in the cash gross margin and operating expense expectations I just provided we anticipate Q1 EBITDA margins of approximately 42%.
Moving now to depreciation we expect non-GAAP depreciation expense to be between $97 million to $99 million and we expect non-GAAP operating margin of approximately 29% for Q1.
Moving on to Capex, we expect to expect to spend approximately $139 million to $149 million, excluding equity compensation in the first quarter.
This reflects the continued network invention investments I mentioned previously.
And with the overall revenue and spend configuration I just outlined we expect Q1 non-GAAP EPS in the range of $1.13 cents to $1.18 cents were up 5% to 9% in constant currency.
The Cps guidance assumes taxes of approximately $35 million based on an estimated quarterly non-GAAP tax rate of approximately 16% that also reflects a fully diluted share count approximately 164 million shares.
In summary, we're very pleased with our business performance and with our positioning as we look forward to 2020. Thank you, Tom and I would be happy to take your questions operator.
Thank you as a reminder to ask a question do we need to press Star then one on your telephone we'll have to your question. Please press the pound King.
Sam I'll be composite culinary roster.
Okay.
Our first question comes on the line of Sterling Auty with JP Morgan Your line is open.
Yes, Thanks, Hi, guys. So looking at the strengthen international revenue growth is it fair to look at the OTI T. launches as relying on aka my more for international distribution versus us or what else explains the real strength internationally.
Thanks Sterling this is Ed I'll take that one so illiterate in two ways first is the.
We recorded revenue where the customer is based so.
So to the extent that there's a us customer that has launched I'd be considered us revenue, but you bring up a really good point as these folks start to look internationally, we tend to get a greater share of that traffic as our international deployment is much greater than anyone on the international revenue growth, we're seeing very very strong.
If you remember a couple of years ago, we made significant investments in our go to market capabilities and also our network.
We're seeing great traction, especially in Asia Pacific and we recently closed on our acquisition with exceed and expect to see some some decent growth down there as well as sort of an underserved market.
Okay, and then maybe one follow up Thompson for you looking at some of the newer security specifically as WG and identity cloud how should we think about the ramp up those solutions within your security portfolio in context of that billion plus revenue guidance for 2020.
Yes, it's early days for both were just launching into the secure web gateway that will be part of enterprise Threatprotect or 3.0, we're really excited about that market.
But early days and we're just starting to get the bookings now so for that to be a major contributor you're looking at 2021 2022 identity cloud met plan. This year and that's already because of an acquisition farther along and we're excited about the potential there and.
In terms of privacy.
On regulation compliance as you know we've now got TCPA in effect in California. Other states are looking to put laws into place GDPR of course in Europe and.
I think enterprises are going to be looking for help in dealing with that.
So we're optimistic about the future growth there.
Got it thank you.
Thank you. Our next question comes from the line of Robert Kadmon with Guggenheim. Your line is now open.
Hi, Thanks for taking my question.
The from the the the segment breakout cloud versus CDN it seems like.
Our perspective, the CDN really outperformed in the quarter.
So I guess some of that was attributable to the since a 6 million of.
Of large and that platform.
Stuff specific events, but can you talk with a little more clarity about.
The additional outperformance in the quarter little more specifically.
Sure This is Ed.
I look at it through two lenses, one we talked about.
On the on the web side, the commerce traffic was much higher than we thought going into the quarter with the Thanksgiving holiday falling as late as a possibly could and fewer shopping days, we were expecting to see a little bit less traffic. We actually saw more so we're very happy with that and other media side. We saw strong ODC traffic, we saw that as you.
You mentioned, the with the Internet platforms that.
Vince specific revenue certainly help.
We also saw a very strong live sports, especially across Europe.
BJ did a lot better than we had expected in terms of traffic. The good gaming quarter software downloads were strong as well as new devices come online is a lot of firmware updates and things like that and just to sort of put it in context for you. The last week of the year was exceptionally strong you are normal traffic pattern, we tend to.
See our highest traffic levels on on Sundays on a recurring basis, we intend, sometimes can be 15% to 20% higher than what we normally see during the week and.
Between the day before Christmas and New year's Eve, we saw what I would refer to was eight Sundays in terms of elevated traffic, which is something that we typically don't see so a lot of factors that came into play here both in our web business as well as our media business.
Great. Thank you.
Thank you. Our next question comes from the line of James Phase with Piper Sandler. Your line is now open.
Hey, guys. Congrats on an awesome ended the year earnings success around the new.
Oh Gee service launches.
I guess first how are you thinking about enterprise security investments to get Standalone security sales really moving in 2020 and beyond.
Yes, so we have.
Both on.
The product and product support side and go to market with a sales specialist and experts in making enterprise security sales and a lot of attention on that we saw substantial increase in revenue and bookings this year.
Still still relatively small given the early days for zero Trust in some of the new products that were bringing out now in enterprise security and of course as you know our head of web sales is an expert in selling enterprise security services. So we've got a lot of expertise there and there are significant investment.
Because we'd like to see that business really ramp up on I think theres good potential for that.
Got it and then how do you plan on positioning the specifically to secure web gateway in that in that market. Given you do have a larger large competitor out there thats doing fairly well as walsum, most firewall vendors trying to move and third of oxy market.
Yes, Thats business, we want to go out and get and I think theres a lot of greenfield as well.
Those in terms of the cloud solution provider for secure web gateway pretty small total revenue relatively speaking to what could be and I think we're going to have a very competitive offer and when you combine it with the rest of optimize security business.
Were the larger player out there we are well known were trusted.
1500 major enterprises, using Kona site defender already.
And in some sense. This is a very natural partner to that to now protect the enterprise employee in the enterprise apps.
You know from importing malware just as we protect the public facing web sites from a tax from the outside so a lot of synergy with what we are the market leader at and we have a lot of trust among the major enterprise Csos out there in the buyers of functionality like secure web gateway So I.
Stick about our future there.
Thanks, Tom things up.
Thank you. Our next question comes from the line of Keith Weiss with Morgan Stanley. Your line is now open.
Excellent. Thank you guys first for taking the question.
And very nice quarter fairness.
And to a strong year for you guys.
As as we think about these investments you guys are making to sort of build that capacity and be able to handle the growing OTI to traffic I was wondering if I get it kind of your perspective on the durability of DCT revenues over time as some of these services become bigger and bigger is there a risk diesel starts as sort of.
Go more in house, and then in top of mind and into service is going to be more of a transitory.
Step for these companies or do you believe that this could be kind of durable. Good revenue for you guys over an extended period of time.
Thank you. This is that good question right now I would say certainly in the near term it looks like it's a nice durable revenue stream for us I encourage you to look at the platform customers, obviously had good stabilization and growth there it shows that even in the DIY world.
Theres still a place for Akamai and especially as these folks start to look to go global.
Thats, a big opportunity for us and.
It's possible you could see some of these folks take some of the.
Delivery in house themselves, but just in general most of the RTT folks out there today are going multi CDN and.
I think that there's going to be a place for us I don't think all of them. We'll go DIY as possible none of them do but if they do I think there's still a big place for us.
At the end of the day, our goal is to do a better job with quality. We've got incredible scale and also we got a great cost profile.
Which is.
Is unique and so I think we have a compelling value proposition and even to the extent folks do some DIY already where we're working environment, where traffic splitting as Ed said and going all DIY is incredibly risky for a business.
I have no fail over its not their core expertise and I don't think it makes a lot of sense for these folks.
Got it that's super helpful. Thanks Lucas.
Thank you. Our next question comes on the line of chains Green with William Blair. Your line is now open.
Thanks for taking the questions. Just one can you give us a little more color on the TG spacing pilots sort of manifest itself that you've seen so far in the numbers.
From a ramp up perspective as these guys set to launch more we'll see some more this spring and how that multi CDN strategy might work.
There are primary and secondary to that sort of the traffic into being split amongst two or three people.
That would be allowed to help and then just as we progress through the year, a little bit of color sort of on the margin progression as well and then obviously, there's the Olympics right in the summer so.
How does that impact the business as we've seen in past years. Thanks.
Okay bunch, Acos and hopefully we'll get to all of them here. So I'll start the last one would you talk about margin progression I made some comments earlier that Q1 lead you'll see the lowest.
Operating margin for the year, another will trend up and we guided to 30%.
In terms of the multi CDN environment.
I would say today most.
Big video players in most large software distributors do have a multi CDN strategy and it can vary in some cases will do 80, 90% in some cases, we might do 25%.
Usually what we find is as the needs for say in gaming capacity becomes a much bigger.
Requirement, we tend to get a lot more share.
We got a lot more share and when we perform better we get a lot more share as companies look to expand outside the U.S, it's a lot harder to.
Build out capacity and drive your cost down outside the U.S. were bandwidth is more expensive and.
A lot of those folks will look to us to take additional share in terms of how these things ramp typically.
When you see a launch you'll see a lot of promotion around initial launch a big spike and traffic, Minnesota levels off depending on promotions and things like that you'll see.
Traffic kind of go up and down depending on various promotions as well as you know different types of content certain shows a more popular than others et cetera, and then as they expand ex outside of into new markets that also is another big jump and traffic I think you also asked about the Olympics that'll be in Q3.
And we talked about sort of the revenue progression as you think about how we go from Q1 into the back half a year the back half a year will be you'll start to see a step up in revenue as we get into OS assist us the strong Q3 with the Olympics as well as the beginning of the election and some OTI T. launches and then Q4 is obviously our strongest seasonal quarter.
Great. Thank you.
Thank you.
Next question comes on the line of Willpower with Baird. Your line is now open.
Great. Thanks, Yes, just say, yes, a couple of quick question. So great to see that continued security strength I Wonder if you could give us any further breakdown as to the sources of the upside there.
At 29% growth between Bot manager, where do you Dawson and then as you think about the guidance for 2020 I think you said you expect to see exceed $1 billion revenue I guess that leaves a lot to interpretation, but it would imply maybe something closer to low twentys, how should we think about that trajectory. There is it really draw.
With that matures mid twentys kind of.
Good place to be for growth.
Yes, so we're seeing very strong growth in laugh Ddas spot manager and also our managed security services.
The security attack landscape is moving so fast and the adversaries are so capable of that more and more you know leading enterprises are turning to us for our services support and as we talked about I think was the last call that all of these businesses are now more than $100 million a year for us and that's what's driving.
The bulk of the dollar growth right now.
And behind that we have the newer products that we talked about I listed the five of them coming tomorrow I have come to market in the last year are coming to market and I don't think they'll drive a ton of the growth next year, but thats what keeps the growth going I think beyond next year, we'll see upside in.
The products really take off for example page integrity, we could see some revenue that starts helping the growth by the end of the year, but those are really to keep a sustained over the longer haul Ed do you want out yes. So we didn't provide specific guides, but obviously if you get to exceed over 1 billion year above the 20% range I think thats.
A decent place to to peg the models for now and if you recall last year. We started the year thinking we do have in the mid Twentys and ended up at 30%. So I'm just plug it into the the 20% range and we'll continue to update you as we go.
Theres still lot of room to go in our installed base and only 55% of our customers today by security products, that's up about 7% from last year. So there's still a long way to go and only 28% of our customers are buying through a more so lot of room in the installed base and a lot of our new.
Security sales with customers are being led by security one.
Okay. Thank you.
Thank you. My next question comes from the line of Alex Henderson with Needham. Your line is now open great. Thank you very much I was hoping to ask a little bit of a question around the pricing environment.
Particularly as we've moved volumes out of the monolithic.
Web 2.0 customers into the splintering of a lot smaller customers, but still relative scale are you seeing some benefit from the relative pricing of between those two is that move in happens and then along the same lines.
How do we think about the initial.
Scramble among the various players to try to get share has pricing been more aggressive because of that less aggressive.
What are you seeing on the pricing front.
Yes. So this is that I'll take that one.
I've said this in the past the pricing market the pricing for high school high volume media tends to be pretty efficient and really it's volume that drives it and in terms of the pricing environment I Havent seen.
People get Super aggressive in terms of anything that's outside the norm when it comes to grabbing share and I would say at this point customers are really more interested in the quality.
The price because the pricing right now there's not a ton a differential between the different players at certain volume. It really just comes outperformance in terms of share.
Great and this sort of follow up on that would be obviously, there's a parsing of traffic.
Share out based on various geographies various cities and alike.
Over time, I would think there'll be a reshuffling as people either deliver good service you guys deliver high quality service somebody else might stumble how long process does that take is it a quarter or too.
Or is it much faster than that if there's quality issues.
Well it depends I mean, a lot of times, you can see share share shifts immediately.
Depends on how the customers actually load balancing traffic we've had.
Instances, where in the last couple of quarters in particular, where some of our competitors have stumbled in had significant trouble and we'll see a big shift of traffic move over to us in some cases that will stay for the long term in some cases as the company who's had trouble fixes their troubled will move back, but it can be pretty pretty quick and I can tell you that.
One of these media customers have gotten pretty sophisticated in terms of how their manage looking at quality and is a lot of different metrics that they measure and you're absolutely right to the extent that somebody is struggling.
In a particular city it could be the particular city on a particular, operator network or with a particular device type where they will shift share depending on who is performing better based on all sorts of different metrics that they're looking at.
Thank you very much.
Thank you. My next question comes from the line of Michael Turits with Raymond James Your line is now open.
Hey, guys getting everybody congrats good quarter.
First on the on the onetime event.
Can you tell us anything more about that the general nature of it I mean.
Equally you talk about one time events, not having that that could impact and it was it was it in the IP platform group could add obviously a big bump.
Yes, Michael this is that yes. They were in the IP platform, obviously was not a lot of customers assuming a two specific but in general.
Event, driven revenue, sometimes can be for or large scale launches or big.
Video events et cetera, where customers will come to us for a variety of different reasons. Some cases, it's for services or security or for capacity.
For delivery.
So just got to think about it in that in that light that its.
For specific events that were asked to.
Help out a couple of customers and we're happy to do it and we're always looking for that type of business, but you're right. I mean, if you look at it and the Grand scheme of things 6 million on a 772 million dollar quarters not all that.
Material, but certainly good business and will always have to take it.
And then I wanted to ask you about margins.
Obviously, you haven't given any guidance beyond the 30% EBIT, but what are what are the puts and takes and how do you think about it strategically at that point Theres. So many interesting places that you could invest.
It would hit the income statement, especially on the security side. So how do you think strategically about about that balance.
Yes, so we havent, we're not going to give guidance for 2021 or beyond at this point tender out we're focused on the 30% for this year and we always want to be as efficient as we can.
And it's across the across the board in decreasing the cost to serve traffic from our service through better software, we had a lot of people working on that.
You know, it's being efficient with where we allocate our head count dollars.
You know, it's efficient in terms of our procurement functions.
So that's always a focus and we're going to do as well as we can do now you're right. There can be trade offs, we're making significant investments in the business, obviously capex to increase our scale advantage over the competition on a global basis.
You know, we're making a lot of investments in innovation, particularly in the security product area I mentioned before the landscape there moves so quickly and we're in great position, but we want to.
Stay ahead.
With the development of new capabilities, there and so as we see opportunities.
We do make investments.
To keep revenue growth being strong and hopefully make it better over time.
And there's a balance we want to be fiscally responsible we prove we can do that we've already grown our operating margin by five points over the last two to three years and we'll we'll take the staff with the another point this year.
At the same time, it's really important for us to be investing in innovation and new products to drive drive future growth.
Thanks, Tom Thanks.
Thanks, Michael.
Thank you. Our next question comes from the line of Brad Zelnick, what's kind of at least your line is now open.
Thanks, So much guys and congrats on a good quarter I wanted to ask.
Sort of a follow up to Alex Hendersons question, but really more from a different perspective, as we see the investments that you're making in capacity I wanted to ask more about kept your views on capacity in the overall market and how that's informs pricing across the industry. So as you look at capacity across the industry today and your own plans, how do you viewed level.
Capacity available in the market compared to demand.
Hey, Brad This is Ed yes, it's a good question I would say that you know Tom just talked about heading up a peak of 140 Terabits per second today, that's becoming more of a norm.
It seems that on Tuesdays tends to be the day that you see lots of software and gaming releases and.
It's more and more players now or have a much much bigger needs in terms of these big spikes and capacity and our day to day traffic continues to rise we've talked about that Sunday phenomenon.
I would say that you know our customers certainly are getting a lot more nervous about capacity and talking to us.
Way in advance of these.
Whether it's a new launch we're going into new geography, and certainly when they're doing new games.
Picking up the phone and talking to us about the concern about capacity, you've got folks spending hundreds of millions of dollars on rights for sporting events and hitting new peaks every year.
So it is becoming a bit over premium here now does that translate into per gigabyte pricing not always know.
But in some cases, you can get capacity reservation fees, where you can guarantee somebody a block of capacity and customers are in some cases willing to pay for that.
Excellent. Thanks, so much and if I could just follow up with went on security.
Any color that you can offer on your success selling security outside of your your existing customer base and and perhaps if you can touch on the the impact that your carrier partners are having on the security business this quarter and in any insight that you might have to what you're expecting out of them in 2020. Thanks. So much Nick yes, obviously most of our soon.
During the revenue.
As we've talked about products.
Like what happened Bot manager, which tend to be sold to our traditional base.
Due to loss prevention, particularly the prolexic capabilities can go more broadly anybody operating a datacenter that has critical capabilities and thats connected.
They have to worry about the das attacks and so we do pick up and expanded base. There I think going forward. The enterprise capabilities, you know the secure web gateway multifactor authentication.
Enterprise defender that brings us into a whole new scope.
Potential customers and verticals that we don't service a lot today and that's one reason, we're really excited about the enterprise security business has as a component.
You mentioned the carrier side, we do have great relationships as I, probably know with the world's major carriers pretty much all of them and we have developed security products that we.
Make available to them on a white label basis, and that's where they would then go and attack the small and medium business market. We talked about last time on the call. Our Sps service, which is a version of sort of a lower end of our enterprise security enterprise threatprotect or solution, but the carrier sell it under their own.
Brand and they go wide with it and that's a great model for US we don't even touched the customer there.
But it generates growing revenue so we do work with the carriers closely around our security solutions. Some of them also resell our regular enterprise class solutions as well.
Yeah, just to add on affected us about Fred just on the.
Impact for the quarter. There's one thing just to highlight that we did similar to last year. We had some license pull ins from Q1 about three or $4 million a security license sales to the carriers that we are expected in Q1 as in Q4. So just keep that in mind is your modeling out the security business in Q1.
Thanks, so much of a great. Thank guys.
Thank you for us.
Thank you. Our next question comes on the line of Heather Bellini with Goldman Sachs. Your line is now open.
Hi, This is Caroline on for have there on so given your acquisitions I've. Gen ran craft how do you guys see like you have a complete product set to be competitive the India.
Identity and zero Trustmark Annan, who do you typically compete against in those markets.
Yeah, I think we do and in fact, we've been.
Named as the leader there you look at the forest or Magic quadrant.
And as I mentioned in the prepared remarks, though the leader.
In our zero Trust strategy.
So.
I think we're really excited about it it's not just January and encrypt code, but now secure web gateway being added to enterprise Threatprotect or enterprise application access, which take issue out of the world, where you're getting network layer access which is leading to so many of the data breaches and now access is be controlled at the app layer and.
Once it's.
Our customers using that then we can actually apply our services like Kona site defender to scrub of all the traffic from quote unquote trusted devices that are internal to make sure. They are not spreading malware because it's so easy to get malware onto a device you don't want to spread within within an enterprise and you want to.
Make sure that the enterprise is an ex fill trading sensitive data to bought nets.
Those are the capabilities, we bring to market now with enterprise defender and I think Jan rain, and crypto add to that and make it even stronger.
Got it that's helpful. And then just really quickly on the Internet platform customers.
Could you remind us I've heard of the Internet platform customers are that might tend to drive some upside surprise and then how should we think about that revenue line trending going forward like should we expect any crime positively year over year versus prior years, where is declining.
Yes. So this is it I'll take the question. So in terms of the way to think about the model going forward obviously.
These customers are six of them and.
We have renewals from time to time, so I went out to the model that out at about 40 million a quarter roughly.
We'll be looking for upside obviously as we go but that's probably have a decent place to.
Put a market ascend and in terms of the customers. It's the Jain internet platforms, its apple to Apple Microsoft Google.
Facebook Amazon Netflix is in fact group of customers.
Got it thank you.
Thank you. Our next question comes from the line of Tim Horan with Oppenheimer. Your line is now open.
Thanks, guys on Tom you kind of interesting how you have such peaks and utilization on the network in Sundays, and Tuesdays and different days a week.
There are ways to kind of smooth that utilization out because essentially almost zero marginal cost networks or you're not using an all that much and I guess, what some of these new products that you have on on enterprise and security do they do they leverage the network in unique ways that you can have unique products and services first anyone out there. Thanks, yes.
Really two questions there.
And the second one on how to security mesh with a platform and getting leverage that's a great question, because we get fantastic leverage of our edge platform with security in the same servers and equipment and bandwidth and call low that's used to deliver these fabulous amounts of traffic that say.
Sure and expense is used to absorb these gigantic attacks and optimize unique in being able to absorb and defend against these giant attacks and that's because we have this fabulous amounts of capacity. So we get great financial leverage and infrastructure leverage with our edge network.
Okay.
And also the edge is really important as we've talked about for delivering traffic if you're not at the edge you don't get access to the bandwidth you need to give high performance delivery of video or software and being at the edge is we need to be to absorb all the attack traffic right as its coming onto the Internet if you wait and try to do.
To the datacenter youre going to get overwhelmed and it doesn't doesn't work.
So really strong leverage there now in terms of the network peaks.
You know, they're not it's not wildly different not you know I look at it now and you look our traffic charged in the minimum at night under lease day of the week is sort of what the peak was across the entire platform a couple of years ago.
So it's not huge differences in the peaks in the troughs.
And you can never make it totally flat because it's our customers that are driving that and when they want to distributed new game and they want everybody to get a quick or there is a live event or you've got people home and watching narrow TT, while we got to supply the capacity fat. So I don't think your adversely a world where its exam.
Actually the same amount of traffic every hour of the day everyday of the weak but were pretty good shape. There when you look at the the traffic plots.
Great and how unique do you think your infrastructure still lives at this point I mean, there's lot of people building CDN Cindy have cdns a lot of the Hyperscalers building out Cdns, yes, just any any thoughts on what you're seeing out there.
Yes, we are very unique.
And you can see it in so many ways.
Part of the uniqueness is that we really are an edge platform. Now. These days edge has become a buzz word and so everybody says they're an edge network. It's just not true and the way you can measure that is is how many distinct locations do they have servers.
And were 4000 places we're in INO 1000 different cities were in over 1500 networks nobody.
Yes anywhere close to that and so thats, one way or unique you can also see it in the scale of our business you know the traffic levels that were serving you can see it in the security business you know.
Who is out there with our kind of security revenue in a real cloud service. If you can't find really anything close to that and it's because again of the edge platform and all the technology and we built on top of it now you're right. There's a lot of cdns more and more hours dozens of cdns around the world.
But they are tiny in comparison in terms of what they can do and I think you have to look beyond the marketing the buzz words to see what are they really doing what are they really capable of what are their where their servers really located and also take a hard look at the financials. You know are are they profitable or are they try.
And to buy some revenue.
Do they have a scalable model.
No that some day really is going to be profitable and I think it really it's important to take a close look because there's just a lot of high but a lot of bosnians big Ipos and it's it's not real.
We are unique.
Thank you.
Thank you. Our next question comes from the line of Colby Synesael with Cowen and company. Your line is now open.
Hi, This is Michael on for Colby.
How should we be thinking about the level of M&A could do while still being able to achieve year or 30% operating margin target. Thank you.
Yeah, our plan is to achieve 30%.
This year and.
We're always looking for good acquisitions that can help us.
Provide more value to our customers and to grow revenue and of course, we're very disciplined buyers.
So it's not that we're doing a lot of deals and we're very careful before we do larger deals and as we look at the year ahead, we expect to do some deals and we expect to hit 30% operating margins.
Perfect. Thank you.
Thank you. Our next question comes from the line of Brandon This fall with Keybanc. Your line is now open.
Great. Thank you for taking my question.
One for Ed one for Tom I think Ed.
When it really the puts and takes in your guidance for 2020 does it specifically embed that you capture a certain percentage of traffic from.
Nivo TT services, and then maybe for Tom along those lines.
Hi, how are you going to measure the company's success in what seems to be a growing OTI team Arctic. Thanks.
The first one so we included in our guidance that we will participate in a lot of the LTE services that are coming to market in some that are expanding.
It's really hard to call how successful these will be I mean, we have conversations with customers. We know what their plans are we make sure we build our capacity to.
Be able to capture as much as the the traffic that we can but it really does come down to end consumer demand comes down two hours watched.
How active the subscribers are comes down a bit rate, so really hard to tell but we've got some models from the past that we use and try to leverage but you really don't know until you get a few months months under your belt exactly how big and successful these will be but we do the best we can to try to bacon.
Option for.
Good level of success.
And to your second question, obviously, you measure success in terms of revenue margin and profit and the growth of those metrics.
And at a different level and strategically we measured in terms of share.
Scale.
Performance and reliability and you know our goal is to grow our share have even more massive scale to be continue our reliability I think already today, where the go to player. If you ask any of the big LTT guys.
And we want to grow that further.
And we are making investments and you've seen in the Capex for example.
Let's see it is easily in terms of the opex in the salaries in the people that are working on making the performance even better in the reliability even better.
Because we're making the bad that OTI usage is going to grow a lot over the next several years and that as that happens we want to capture a lot of that on akamine to do it profitably we worry a lot about cost, making our capex be a lot more cost efficient to run so we get a lot more.
Bits per second out of each dollar of CPQ.
So you know strategically it's about increasing our capacity reliability scale and share with the goal of generating more revenue profit and of course margins.
Maybe if I could just follow up on.
His comments.
And it sounds like you are definitely including.
Traffic from some New Ltd services is your expectation include that you capture.
What would be are typical video traffic share in the market or something more or less than that thanks.
Yes, I think I would say, it's the typical typical share that we're expecting.
Obviously, we're going to do our best to get as much as we can but.
In terms of modeling perspective, you just put in what do you think.
This is a normal share based on the phone the various customers.
Okay. Thank you.
Thank you. Our next question comes from the line of Ricci Eluvia.
The A. Davidson your line open.
Hey, guys. Thank you so much for taking my questions quick quick ones one for Tom one for add some on the just wanted to maybe get your perspective generations. You know about a year. Since you closed the acquisition wanted to get a sense for how it performed relative to your expectations and how you're thinking about.
That product as a driver within your security business men and just two questions on on margins wanted to understand.
You probably saw a lot of strengthened GTN internationally worn understand what the maybe gross margin implications of both of those are.
As they become an increasing mix. Thanks.
Yes. This is Tom I'll take the first one yes, we made our revenue plan on Jan range. This year, we're doing well with the integration.
I think as we look forward, we're excited about the potential.
For helping major enterprises comply with the increasing and more diverse regulations that are being passed a lot of our customers do business across many states and countries and it's harder and harder for them with marginally their homegrown solutions to keep up with compliance now that's up.
New.
Industry really and so that'll take some time to develop.
But I think has exciting potential for the future and Ed you want to take the margin yeah sure. So in terms of margins. Obviously, you know the OTI C media business as a lower margin than say our security business. So as the mix shifts you can get a slight movement I think were.
You're talking about being down about a point year on year, but nothing is really more in the round.
And then in terms of international.
One of the things that we did several years ago that was really smart as we made a significant investment in our carrier relationships and Tom talked about being in thousands of locations and thousands of cities around the world.
By having so much traffic we've got a lot we provide a lot of value to the carrier so.
We get generally very favorable economics, and some of the hard to reach places that tend to be really expensive. So the margin internationally in most places is pretty decent for us.
So as you again, just the way to think about it is your media business is going to be slightly lower on the gross margin line you security businesses, the offset that.
Great. That's helpful. Thank you guys.
Thank you. Our next question comes from the line of Lee crowded with B. Riley FBR. Your line is now open.
Great. Thanks for taking my questions in the hats off on the good execution.
Two quick questions.
Just from a from multi CDN approach.
Geographically speaking with the rollout of some of these though TT streaming launches just given your guys is scale relative to your competitors do you kind of anticipate that.
With your scale, you could perhaps garner more share and some of these services go internationally just based on your ability to execute and provide capacity, where perhaps your peers cannot.
Yes that is the plan.
That's what we've been talking about is to leverage our massive edge platform.
That exists all around the world we're in a thousand different cities and several of these ltd businesses our global in nature.
And so it is our goal to leverage the scale underperformance in our reliability, that's established there to gain share.
Just to just to have a little bit and like I said, we spent a lot of time investing with our relationships with the carriers around the world. There are some really challenging places to build out capacity Latin American particulars is one that's a very challenging and we see no outsize share in countries like the Philippines, Indonesia across the Middle East and India again.
Is that are little bit harder for some of our competitors.
Just to get to and also it requires an investment in people to be able to grown establish those relationships and build out the capacity. So I think we're very smart in our approach in terms of our investments we're continuing to invest in a lot of what we're doing with our Capex is we're building.
More and more capacity outside the U.S.
Got it and then the second question more of a housekeeping question, but are there any anticipated major renewals in 2020.
So there's always going to be lots of renewals throughout the year and but I did last quarter I will do this last year excuse me and I'll do again. This year is I'll call out if theres anything going into a quarter that needs to be highlighted but we've factored that into our guidance. Yes. One of the nice things is that we're much more diverse and our customer base now.
We don't have customers that account for 10% or more of our revenue in fact UK.
The the Giants, there and they're all like two or 3% at most so there is much less impact to our business now giant customer as a major repricing.
Operator, we have time for one more question.
Our next question comes on the line as Jeff Van Rhee with Craig <unk>. Your line is now open.
Great just maybe two quick ones from me first on the on the network utilization how is the target utilization rate changed over the last three years with respect to the overall network utilization and I think that particularly in light of multi CDN are switching strategy is becoming easier and then the second question shift gears over to sales if you would and I'm just curious going into 20, how did you.
Tweak.
The copper sales structure approaches, namely what particular behaviors new behaviors did you try to incent looking for what changed there.
Yes, I don't know that Theres, a fundamental change in network utilization strategy.
I think there is we do as Ed mentioned in many cases get reservation fees.
The capacity on the occupy platform is enormous but it's not infinite and we want customers to understand that if they may need to have large amounts of capacity, we need to have that conversation upfront.
And plan for it and it Doesnt, we're not going is going to sit and not have traffic and all of us on take as somebody else falls over and so I think with almost all the major customers out there we have a very strong relationship we have a large fraction of the traffic and we have an understanding of what more we might take in the event they have.
Problems with other vendors if theyre doing.
Traffic splitting add you want to talk about yes, you'll see on the sales compensation, there's really no major change this year, we've talked about.
Two years ago, we've made some big changes in the in the media world have them focus on gaining share and and selling security, but in terms of the tweaks, we're making to the comp plans. This year, there's nothing really major to call out.
Okay. Thanks for taking my question.
Thank you, Jeff and closing will be presenting at several investor conferences and events throughout the rest of the first quarter details of these can be found on the Investor Relations section of ACA that occupied dotcom, we want to thank you for joining us to have a wonderful evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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